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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K405
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED: OCTOBER 31, 1999
OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 0-19330
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SPECIAL DEVICES, INCORPORATED
(Exact name of Registrant as specified in its charter)
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DELAWARE 95-3008754
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
14370 WHITE SAGE ROAD, MOORPARK, CALIFORNIA 93021
(Address of principal executive offices) (Zip Code)
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(805) 553-1200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
NONE
Securities registered pursuant to Section 12 (g) of the Act:
11 3/8% SENIOR SUBORDINATED NOTES DUE 2008
GUARANTEES OF 11 3/8% SENIOR SUBORDINATED NOTES DUE 2008
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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 the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
As of January 28, 2000, the number of outstanding shares of the Registrant's
common stock was 3,706,889.
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SPECIAL DEVICES, INCORPORATED
INDEX TO ANNUAL REPORT ON FORM 10-K
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PAGE
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 13
PART II
Item 5. Market for the Registrant's Common Equity and Related 13
Stockholder Matters.........................................
Item 6. Selected Consolidated Financial Data........................ 14
Item 7. Management's Discussion and Analysis of Financial Condition 15
and Results of Operations...................................
Item 7A. Quantitative and Qualitative Disclosures about Market 20
Risks.......................................................
Item 8. Financial Statements and Supplementary Data................. 20
Item 9. Changes in and Disagreements with Accountants on Accounting 20
and Financial Disclosure....................................
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 21
Item 11. Executive Compensation...................................... 26
Item 12. Security Ownership of Certain Beneficial Owners and 30
Management..................................................
Item 13. Certain Relationships and Related Transactions.............. 32
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 34
8-K.........................................................
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NOTE CONCERNING FORWARD-LOOKING INFORMATION
This report contains certain forward-looking statements and information
relating to our business that are based on the beliefs of management as well as
assumptions made by and information currently available to management. The words
"anticipates," "believes," "estimates," "expects," "plans," "intends" and
similar expressions, as they relate to our operations, are intended to identify
forward-looking statements. Such statements reflect our current views with
respect to future events and are subject to certain risks, uncertainties and
assumptions that could cause actual results to differ materially from those
expressed in any forward-looking statement. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated or expected. We do not intend to update these
forward-looking statements.
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PART I
ITEM 1. BUSINESS
In this report, the "Company," "we," "us" and "our" refer to Special
Devices, Incorporated and its wholly owned subsidiary, unless the context
requires otherwise.
OVERVIEW
We are a leading designer and manufacturer of highly reliable precision
engineered pyrotechnic devices. These devices are used predominantly in vehicle
airbag and other automotive safety systems as well as in various aerospace
applications. Our primary products are initiators, which function like an
"electrical match" to ignite the gas generating charge in an automotive airbag
system or to provide precision ignitions in aerospace-related products. In
manufacturing our products, which utilize pyrotechnic materials, we ensure safe
handling and processing by following strict safety procedures that we have
developed for nearly 40 years.
We have two divisions: an Automotive Products Division and an Aerospace
Division.
- We believe that our Automotive Products Division is the world's largest
supplier of initiators sold to leading domestic and foreign automotive
airbag system manufacturers. Those manufacturers use our product in the
assembly of integrated airbag safety systems, which they then sell to
automobile original equipment manufacturers ("OEM's").
- Our Aerospace Division supplies initiators and other advanced
pyrotechnic products to aerospace companies. Those companies, in turn,
use our products in a variety of applications including tactical
missile systems, spacecraft launch vehicles and military aircraft crew
safety systems.
Our principal executive offices are located at 14370 White Sage Road,
Moorpark, California 93021 and our phone number is (805) 553-1200.
HISTORY
Special Devices, Incorporated was founded in the late 1950s in Pacoima,
California to manufacture pyrotechnics for motion picture special effects
applications. In 1960, we constructed a new facility in Newhall, California for
the production of military pyrotechnic devices.
During the 1980s, increased defense spending and a broadening of our product
lines allowed us to become a leading manufacturer of high-reliability initiators
for weapons systems and safe and arm-fire devices. By the end of the 1980s, the
decline of the Cold War and rising budget deficits were placing downward
pressure on defense spending. At the same time Congress passed legislation
mandating the increased use of airbags in passenger cars and automotive
OEMs were beginning to market the superior safety of cars equipped with airbags.
As a result, we decided to maintain our aerospace business and aggressively
penetrate the automotive market. In 1989, we signed a five-year contract to
supply initiators to TRW, Inc., one of the leading manufacturers of automotive
airbags. Through the 1990s, we gained additional airbag customers and
established our position as a leading supplier of initiators and pyrotechnic
devices to the world automotive and aerospace markets.
To accommodate our growth, we constructed during fiscal 1998 and fiscal 1999
a new, state-of-the-art facility in Moorpark, California. We vacated our Newhall
facility and relocated to Moorpark during the first nine months of fiscal 1999.
In December 1998, we consummated a recapitalization (the "Recapitalization")
in which all shares of our common stock, other than those retained by certain
members of management and certain other stockholders (the "Continuing
Stockholders"), were converted into the right to receive $34 per share in cash.
The Continuing Stockholders retained approximately 41.3% of our common equity
while new investors acquired the balance of our equity interests.
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In connection with the Recapitalization, we delisted our common stock from
the Nasdaq Stock Market, and accordingly filed for deregistration with the
Securities and Exchange Commission ("SEC").
In July 1999, we entered into a Contribution, License and Lease Agreement
with McCormick Selph, Inc. ("MSI"), an affiliate of our controlling stockholder,
pursuant to which the Company received certain assets and licensed the
intellectual property comprising the micro gas generator ("MGG") automotive
product line. MGG units are used by the automotive industry in seat belt
pretensioner applications.
AUTOMOTIVE PRODUCTS DIVISION
GENERAL
Our Automotive Products Division was created in 1989 after the United States
government adopted regulations requiring the installation of airbags and other
crash protection systems in all new passenger automobiles. Since that time,
demand for our initiators has grown rapidly. We attribute this growth in large
part to the continuing evolution of automotive safety standards and increased
customer preferences for airbag-related safety options. We expect continued
growth in the demand for our products as the number of airbag-equipped vehicles
increases, the number of airbags per vehicle grows, and our customers implement
new technologies. These new technologies include seat belt pretensioners and
"smart" airbag systems, both of which we expect will require new types of
initiators and sometimes more than one initiator per product.
The Automotive Products division accounted for 75%, 79%, and 80% of our net
sales during fiscal years 1999, 1998, and 1997, respectively.
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 1989 for sale in the United States to have automatic frontal crash
protection systems for the driver and front passenger. Beginning in 1994 similar
requirements for light trucks and vans went into effect. Airbags and automatic
seat belts were the two initial means of compliance with these regulations.
In 1994, these 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 1996 to August 1997 for sale in the United States, and in 100% of
passenger automobiles manufactured on or after September 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 1997 to August 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 1998 for sale in the United States. In addition to these
requirements, automobile OEM's have recently introduced other safety restraint
devices, including side airbags, head protection airbags and seat belt
pretensioners.
In response to concerns over injuries caused by airbag deployment for out of
position occupants (primarily children and infants), research is ongoing to
develop "smart" airbag systems. The first generation of these systems, which
deploys an airbag at lower forces, has been introduced. The next generation
systems will have the ability to detect weight and position of the occupant.
Most of these new systems have "dual chambers," each of which requires an
initiator. Research and development is currently in process for rear seat airbag
systems.
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Automotive airbag systems consist of six basic components: sensors, a
diagnostic and firing module, an initiator (the product we manufacture), a
combustion chamber, gas generator and a specially treated fabric bag. Once the
sensors detect an impact of sufficient severity, the diagnostic and firing
module transmits an electrical charge to the initiator. The initiator then
fires, igniting the gas generator in the combustion chamber which burns very
rapidly, producing a gas which inflates the bag. The entire process takes
approximately 40 milliseconds. The diagnostic module also tests the initiator
each time the automobile is started.
PRODUCTS
We believe we are the world's largest supplier of airbag initiators and
micro gas generators. Initiators and micro gas generators are devices that
receive a low-energy electrical signal from an electronic firing module and
convert that signal to a high-energy output by a thermal reaction of compacted
pyrotechnic materials. In the event of an automobile accident, airbag initiators
activate inflators, which in turn inflate an airbag. Micro gas generators are
initiators used in seat belt pretensioning devices, which take dangerous slack
out of seat belts in the event of an accident.
The Automotive Products Division currently produces over 125 different
airbag initiators for foreign and domestic manufacturers of inflators. We also
began manufacturing micro gas generators in 1999 and have a variety of other
initiator products that are currently at various stages of the qualification
process. In order to maintain our leadership position in the industry, we are in
the process of developing "smart" initiator technologies that will be used in
new, integrated occupant protection systems.
CUSTOMERS
Currently, the major domestic manufacturers of airbag inflators are Autoliv
ASP Incorporated, TRW, BAICO (owned by Atlantic Research Corporation), Inflation
Systems Incorporated (owned by Takata), and OEA, Inc., each of whom, except for
OEA, Inc., incorporates our initiators in certain of its airbag systems or
sub-systems. Breed Technologies also manufactures inflators but filed for
bankruptcy in the fall of 1999. This had a minimal effect on us as Breed's
demand for our products was nominal. 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 like us, and the manufacturers concentrate on the
design, assembly, testing and qualification of the airbag systems.
The major non-U.S. manufacturers of inflators are TRW (Europe), Autoliv
(Europe), Daicel Chemical Industries (Japan) and Takata (Japan). We sell our
products on a limited basis to these manufacturers.
Customers providing more than 10% of our consolidated sales for the fiscal
year ended October 31, 1999 include TRW (36.4%) and Autoliv (24.3%). The loss of
either of these two customers would have a material adverse effect on the
automotive segment of our business.
BACKLOG
The majority of sales for the Automotive Products Division are achieved
under long-term agreements specifying minimum customer requirements to be
supplied by us during the term of the agreements. Purchase order releases 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 the next 12-month
period.
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COMPETITORS
There are two major suppliers of airbag initiators in the United States, the
Company and OEA. We believe we hold the largest share of the domestic airbag
initiator market. In addition, we have identified four major suppliers of airbag
initiators in Europe and one major supplier of initiators in Japan.
Other companies may choose to enter the automotive initiator market in the
future. However, a new entrant would need to achieve high sales volumes of
relatively low-priced units in order to recover significant start up-costs,
including those relating to equipment outlays. In addition, each automotive
initiator platform must pass numerous tests established by automobile OEM's and
airbag system manufacturers. These testing phases typically take approximately
12 to 18 months to complete and are very expensive. We believe a new entrant
would require many years and significant up-front expenditures to replicate the
qualification and testing required to successfully market the mix of products
that we offer.
SALES AND MARKETING
The Automotive Products Division's management, engineers and personnel
maintain close contact with each customer and monitor developments in the
automotive industry and safety restraint markets. Recent efforts have focused on
the status of products such as side and rear seat airbag systems, seat belt
pretensioners and "smart" airbag systems.
For new programs, the Automotive Products Division generally receives a
request for quote from its customers. High volume production quotes are handled
by program management. Spot buys and prototype production quotes are handled by
contract management. We respond to customer inquiries with price quotes,
configuration confirmation and prospective shipping dates. Lot acceptance
testing results are available upon request for confirmed orders. When supplied
with specific performance parameters, performance data is also supplied to
customers.
AEROSPACE DIVISION
GENERAL
Our Aerospace Division has been designing and manufacturing products for the
aerospace industry for nearly 40 years. Its customers are primarily the United
States government and its prime contractors. The Aerospace Division's products
include state-of-the-art initiators and mechanical devices that incorporate
these initiators such as explosive bolts, cutters, actuators, valves, pin
pullers and safe and arm devices. Our wholly owned subsidiary,
Scot, Incorporated ("Scot"), designs and manufactures devices for launch
vehicles and aircraft egress applications as well as sophisticated test products
such as parachute release and oxygen mask testers.
The Aerospace Division accounted for 25%, 21%, and 20% of our net sales
during fiscal years 1999, 1998, and 1997, respectively.
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, launch vehicles and aircraft crew safety systems.
PRODUCTS
The Aerospace Division, like the Automotive Products Division, designs and
manufactures highly reliable initiators and other pyrotechnic devices. These
products are used to ignite larger pyrotechnic charges, such as rocket
propellant, or to activate mechanical devices. Missiles, other weapon systems
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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.
Our products include state-of-the-art initiators and mechanical devices that
incorporate these initiators such as explosive bolts, cutters, actuators,
valves, pin pullers and arm-fire devices used in tactical missile systems and
cutters and gas generators used in military aircraft escape and safety systems
employed by the F-15, F-16, F-18, AV-8B, T-38, T-45, T-48 and B-2 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. In addition, during fiscal 1999, the Aerospace Division began delivery
of a portable oxygen flow/communications tester used by U.S. Air Force pilots,
completed production of a proprietary bomb ejector, developed a stage separation
system for launch vehicle applications and qualified numerous devices used in
tactical missiles.
Each of the devices manufactured by the Aerospace Division is a component in
a larger product of its customer. As a result, we and our competitors must
respond to specification requirements by devoting significant engineering,
development and testing resources.
Although we have few patents, there are practical barriers to entry for
potential new competitors. Each of our 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.
CUSTOMERS
The end user of the Aerospace Division's products is generally the United
States government. In most cases, we are a subcontractor to the non-governmental
prime contractor or other subcontractor of the project.
The current trend of the Aerospace Division'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. We expect to continue as a
supplier to our current customers.
No program of the Aerospace Division accounted for more than 10% of our net
sales during any of the three fiscal years ended October 31, 1999.
BACKLOG
The Aerospace Division's backlog was $43.7 million at October 31, 1999,
compared to $34.5 million at October 31, 1998. Backlog includes the remaining
contract amount for units yet to be shipped for signed contracts (excluding
renewals or extensions which are at the discretion of the customer) 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, 1999, we expect that approximately $8.1 million
will be delivered beyond fiscal 2000.
COMPETITORS
During the bid process for the initial contract for a program, the Aerospace
Division competes with several firms, some with greater financial resources than
we have. Once the initial contract is awarded, contracts for additional
quantities are generally entered into on a negotiated price basis and are not
competitively bid.
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In recent years, the number of our competitors has decreased through both
attrition and acquisitions by the remaining companies. We have identified nine
competitors in the aerospace pyrotechnic market, and we do not believe that any
one company dominates the market.
SALES AND MARKETING
Marketing efforts for the Aerospace Division are focused on identifying
emerging new programs, that have long-term production potential and the prime
contractors or subcontractors who are likely to receive contracts for such
programs. We have a team of individuals whose duties include identifying and
pursuing new program opportunities, customers, potential teaming arrangements
and new business development strategies.
For new programs, the Aerospace Division generally receives a request for
bids from its customer. We respond to customer inquiries with quotations and
extensive cost, technical and management proposals. In some cases, we will
provide prototype hardware for the customer's evaluation prior to source
selection. We believe that customers award contracts based upon the technical
proposals submitted, which include design innovation, analysis and compliance
with specifications, in addition to pricing.
Many contracts with respect to United States government programs involving
amounts in excess of $500,000 are subject to audit by the United States
government. Most of our contracts with respect to United States government
programs are subject to unilateral termination at the government's convenience.
GENERAL BUSINESS MATTERS
MANUFACTURING
GENERAL. Our production process consists of fabricating and assembling
hardware components and separately preparing the pyrotechnic charge. Production
of the electro-mechanical 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 in order to obtain the lowest possible
theoretical failure rates. After assembly, the products are functionally tested
on a sample basis as required by each customer or the applicable contract.
We manufacture the pyrotechnic charge from raw generic chemicals. These
chemicals are readily available from a variety of suppliers, and we have handled
and processed these fuels and oxidizers for nearly 40 years. Some of the
pyrotechnic fuels are delivered to us in bulk in a wet and non-volatile form. We
dry the pyrotechnic fuels before use. These fuels are then mixed with oxidizers
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.
While both the Automotive Products Division and the Aerospace Division
manufacture similar pyrotechnic products, each division's manufacturing process
is unique. Because the Automotive Products Division must produce large
quantities of highly reliable products at high speeds, automation and process
engineering are as important to us as product design. We have a staff of highly
trained automation engineers, technicians and operators whose goal is to
maximize yield and product quality. In contrast, the Aerospace Division
manufactures primarily engineered-to-order products pursuant to custom
specifications. Lead times typically range between six to nine months in order
to satisfy the highly technical nature and intense product testing required
prior to product shipment. As a result, the Aerospace Division produces a wider
variety of products at significantly lower volumes than the Automotive Products
Division. However, these products typically generate higher gross margins.
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QUALITY CONTROL. Each type of initiator manufactured by the Automotive
Products Division must qualify for use by passing numerous tests established by
the automobile and airbag system manufacturers. The initial test phase is design
validation, which is 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 product validation, which is intended to demonstrate
that we have the management, personnel, equipment and facilities to manufacture
the initiator in production quantities to design specifications. The design
validation and product validation qualification phases must be repeated for each
new initiator design. The product validation qualification phase must also be
repeated for each facility at which initiators are produced. These initial
qualification procedures are very costly and time consuming. The product
validation 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.
Products manufactured by the Aerospace Division also 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 our
facilities to monitor quality assurance.
RISK MANAGEMENT AND INSURANCE
The drying, sifting, mixing and processing of pyrotechnic materials involves
certain risks and potential liabilities. Our safety and health programs provide
specialized training to employees working with pyrotechnic materials.
Pyrotechnic chemicals generally are delivered to us and are stored in a
non-volatile form. The pyrotechnic materials are then dried, sifted and blended
in a separate building specially designed for these operations. Work stations
are designed to shield employees from any accidental explosion. Furthermore, our
machines are designed so that an accidental explosion will be contained in a
protective enclosure to minimize damage.
Transportation of pyrotechnic materials also involves certain risks and
potential liabilities. An accidental explosion which occurred in February 1999
in connection with the transportation of pyrotechnic materials at our former
Newhall facility is under investigation by the Occupational Safety and Health
Administration of the State of California. See "Legal Proceedings." The Company
has filed a claim with its insurance carriers for damage to personal property,
buildings, and business interruption resulting from the accident.
We maintain a liability insurance program covering a number of risks. Our
insurance program includes comprehensive general liability and products
liability coverage in the amount of $100 million for the Aerospace Division,
including Scot, and $102 million for the Automotive Products Division. We also
have 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 our
comprehensive general liability insurance policy.
We are engaged in a business which could expose us to possible claims for
injury resulting from the failure of products sold by us, notably initiators for
airbag systems. We have received one product liability claim in fiscal 1999, but
have been indemnified by Daimler Chrysler, who also is named in the complaint.
Daimler Chrysler is vigorously defending the claim and is paying all costs
associated with the defense. We maintain product liability insurance coverage as
described above. However, there can be no assurance that other claims will not
arise in the future and that the proceeds of our insurance policies will be
sufficient to pay future claims or that we will be able to maintain the same
level of insurance.
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GOVERNMENT REGULATION
As a contractor and subcontractor of the United States government, we are
subject to various laws and regulations more restrictive than those applicable
to non-government contractors. We are subject to periodic audits to confirm
compliance with these 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. As of the date hereof, we know of two
pending preliminary inquiries regarding compliance with government policies by
the Aerospace Division. At this point, given the limited information about the
government's investigations available to us, we are unable to predict or assess
the likelihood of an unfavorable outcome, or predict the amount of potential
liabilities. See "Legal Proceedings."
ENVIRONMENTAL REGULATION
We use various hazardous materials in our manufacturing processes, including
organic solvents and pyrotechnic materials. Our operations are subject to
numerous federal, state and local laws, regulations and permit requirements
relating to the handling, storage and disposal of those substances, including
the Clean Water Act, the Clean Air Act, the Resource Conservation and Recovery
Act, the Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA), and the Occupational Safety and Health Act. We believe that we are in
substantial compliance with applicable laws and regulations and that we have
obtained or are in the process of obtaining necessary permits. While compliance
with such laws and regulations has the effect of increasing costs of operations,
these costs must also be incurred by our competitors and, therefore, they do not
materially adversely affect our competitive position. Under certain
environmental laws, a current or previous owner of real property, and parties
that generate or transport hazardous substances that are disposed of at real
property, may be liable for the costs of investigating and remediating such
substances on or under the property. CERCLA and similar state laws impose
liability on a joint and several basis, regardless of whether the owner,
operator, or other responsible party was at fault for the presence of such
hazardous substances.
In connection with our relocation of operations from Newhall to Moorpark, we
may be required to conduct environmental investigations at the Newhall site. Due
to the site's history of industrial use by multiple parties, it is possible that
such investigations will reveal the presence of hazardous substances in soil
and/or groundwater, which could require remediation. We cannot determine whether
the remedial costs we may be required to incur at Newhall, if any, will be
material. Such costs that may be incurred in connection with the Newhall cleanup
may be shared with other responsible parties, although this cannot be
guaranteed.
To date, our efforts to ensure compliance with applicable environmental laws
have not had a material adverse effect on our financial condition, results of
operations or competitive position. Furthermore, although no assurances can be
given, we do not believe that future compliance with existing environmental laws
will have such a material adverse effect or require material expenditures in the
future. However, certain aspects of our past compliance with applicable
environmental regulations are under investigation, and there can be no assurance
that these matters will not have a material adverse effect upon us, our
operations, or our financial condition. See "Legal Proceedings."
EMPLOYEES
At October 31, 1999, we had approximately 622 full-time employees in
Moorpark, California, approximately 466 full-time employees in Mesa, Arizona,
approximately 77 full-time employees in Downers Grove, Illinois, approximately
48 full-time employees in Hollister, California and one full-time employee in
Ogden, Utah. None of our employees is represented by a collective bargaining
unit. We consider our relationship with our employees to be good.
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INTELLECTUAL PROPERTY
In November 1990, we entered into the DBS License Agreement pursuant to
which we granted Davey Bickford Smith ("DBS") a license to:
- use all patented and non-patented technical information, know-how, data,
systems, programs and specifications (collectively, "Technology") used in
the manufacture of initiators or incorporated in initiators (whether such
Technology is owned by us or developed by us subsequently) and
- distribute initiators using the Technology worldwide, provided that DBS
may not sell such initiators to TRW or its affiliates in the U.S.
Until December 31, 1998, DBS was required to pay royalties to us under the
agreement. From and after January 1, 1999, DBS is no longer obligated to pay
royalties to us, and DBS is entitled to continue using the Technology
perpetually on a royalty-free basis. As DBS failed to meet certain distribution
requirements by December 31, 1998, we have the right to license the Technology
to third parties. To date, DBS has not manufactured or distributed any products
under the DBS License Agreement. Significant competition from DBS in Europe or
the U.S. could have a material adverse effect on us.
ITEM 2. PROPERTIES
Our corporate headquarters are located in the City of Moorpark, located in
Ventura County, north of Los Angeles. The Moorpark facility, which was completed
during fiscal 1999 and is owned by us, consists of six buildings which cover
approximately 170,000 square feet. This facility is located on 280 acres of land
and is used by both the Automotive Products Division and the Aerospace Division.
We have an additional facility in Mesa, Arizona on approximately 21 acres of
land used for our Automotive Products Division. The Mesa facility is owned by us
and consists of several buildings aggregating approximately 60,000 square feet,
including a second blending facility and an approximately 12,000-square-foot
warehouse.
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.
In May 1997, we signed a seven year lease for an approximate 25,000 square
foot building in Moorpark, California, for the glass seal operation of the
Automotive Products Division. Monthly rental expense as of October 31, 1999 was
approximately $14,000, with annual increases equal to the change in the Consumer
Price Index.
In July 1999, we entered into a Contribution, License and Lease Agreement
with McCormick Selph, Inc., an affiliate of the Company's controlling
stockholder, in Hollister, California. We are leasing a portion of this building
at $14,000 per month.
ITEM 3. LEGAL PROCEEDINGS
EPA MATTERS. In August 1999, representatives of the Department of Toxic
Substances Control of the California Environmental Protection Agency ("Cal EPA")
conducted an inspection of our former Newhall facility. Following the
inspection, Cal EPA issued a notice of violations ("NOV") indicating that there
had been unauthorized burning and treatment of hazardous waste at the facility.
Management immediately complied with the NOV requirements and directed that an
environmental audit of all of our facilities be undertaken. In September 1999, a
federal grand jury issued subpoenas requesting copies of documents relating to
the handling, generation, storage, and transportation of
11
<PAGE>
hazardous waste and hazardous materials at our Newhall, Moorpark, and Mesa
facilities, as well as copies of documents related to other health and safety
issues.
We are cooperating fully with federal and state authorities in connection
with these matters. In light of their preliminary nature, however, and the fact
that our environmental audit is ongoing, we are unable to predict their outcome.
These matters have disrupted the conduct of our business and could result in
civil and/or criminal liabilities and penalties, including fines and remediation
costs. Accordingly, there can be no assurance that these matters will not have a
material adverse effect upon us, our operations, or our financial condition.
OSHA MATTERS. In February 1999, an accidental explosion occurred at our
Newhall facility, resulting in the death of one employee. A transport vehicle
was heavily damaged by the explosion, while nearby buildings sustained only
minor damage that was quickly repaired. We suspended all production at Newhall
for four days to conduct a thorough investigation of the accident along with the
Occupational Safety and Health Administration of the State of California
("OSHA"). We also suspended the blending of pyrotechnic powders for
approximately two weeks. We resumed full production at Newhall on March 4, 1999.
The Newhall facility was vacated upon completion of the move to the new Moorpark
facility in July 1999. OSHA's investigation of the accident was concluded during
the fiscal third quarter, resulting in the issuance on August 16, 1999, of
citations for alleged safety violations and fines aggregating approximately
$20,000. We appealed the citations as lacking in factual basis. The appeal is
pending. Because the accident resulted in a fatality, OSHA's Bureau of
Investigation is required to conduct its own investigation to determine whether
to refer the matter to the Distrct Attorney's Office for Los Angeles County. At
this point, given the limited information available regarding the Bureau of
Investigation's inquiry, it is impossible to predict or assess the likelihood of
an unfavorable outcome or predict the amount of potential liabilities.
STOCKHOLDER LITIGATION. Four purported stockholder class action lawsuits
were filed in the Delaware Court of Chancery challenging the Recapitalization.
On June 22, 1998, David Finkelstein filed a purported stockholder class action
lawsuit against J. Nelson Hoffman, Robert S. Ritchie, Jack B. Watson, Thomas F.
Treinen, Walter Neubauer, Samuel Levin, Donald A. Benedix, John M. Cuthbert, the
Company and J.F. Lehman & Company. Also on June 22, 1998, a purported
stockholder class action complaint was filed by Harbor Finance Partners against
Messrs. Treinen, Hoffman, Ritchie, Watson, Levin, Bendix, Cuthbert, as well as
the Company. Finally, on June 25, 1998, a purported stockholder class action
lawsuit was filed by Timothy Hawkins against Messrs. Hoffman, Watson, Treinen,
Levin, Bendix, Cuthbert, as well as the Company and J.F. Lehman & Company. Each
of these three lawsuits charges the individual defendants with breaching their
fiduciary duties to the public stockholders of the Company by allegedly failing
to obtain adequate consideration for the Recapitalization. The complaints
allege, among other things, that the terms of the Recapitalization are unfair,
that the defendants failed to consider other potential purchasers of the
Company, and that the individual defendants favored their own interest at the
expense of the stockholders. On August 21, 1998, David Finkelstein, the
plaintiff in one of the derivative lawsuits, filed an amended class action
complaint against the same defendants as the original complaint which charges
the individual defendants with failing to disclose material information in the
original proxy statements, including, among other things, the failure to
disclose third quarter financial statements, information concerning the
projections made available to bidders and the firm which rendered a fairness
opinion in connection with the Recapitalization, the interest of certain persons
in the equity of the continuing entity as well as breaching their fiduciary
duties to the public stockholders of the Company by allegedly failing to obtain
adequate consideration for the Recapitalization.
On November 30, 1998, a fourth purported stockholder class action lawsuit
was filed in the Delaware Court of Chancery challenging the Recapitalization.
The lawsuit, filed by Paul Packer, purportedly on behalf of himself and other
stockholders of the Company as of October 15, 1998, was brought against J.
Nelson Hoffman, Jack B. Watson, Thomas F. Treinen, Samuel Levin, Donald A.
12
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Bendix, John M. Cuthbert, Robert S. Ritchie and the Company. The lawsuit
essentially charges the individual defendants with breaching their fiduciary
duties to the public stockholders of the Company by allegedly failing to obtain
adequate consideration for the Recapitalization. The complaint alleges, among
other things, that the terms of the Recapitalization were unfair, that the
consideration paid to the public stockholders of the Company was unfair,
inadequate and substantially below the fair market value of the Company, that
the individual defendants failed to take steps to enhance the Company's value,
that they failed to effectively expose the Company in the marketplace, and that
they favored their own interests at the expense of the public stockholders.
The plaintiffs and defendants agreed in the first three purported class
actions to enter into a memorandum of understanding, evidencing the parties'
agreement on the material terms of a settlement of the litigation before the
fourth lawsuit was filed. Since then, we and our counsel have had discussions
with counsel for the plaintiffs in all of these actions and it is possible that
the actions will still be settled. Any settlement will be subject to approval by
the Delaware Court of Chancery. No trial date has been set for any of the four
lawsuits and the defendants have not yet filed responsive pleadings. Management
disputes all of the plaintiffs' material allegations and believes that this
litigation is without merit. At this preliminary stage, we are not in a position
to evaluate the likely outcome of this litigation nor the terms of any possible
settlement.
There has been little activity in any of these stockholder lawsuits during
the past year.
DEPARTMENT OF DEFENSE. Our Aerospace Division is under investigation by the
Defense Criminal Investigative Service ("DCIS") of the Office of the Inspector
General, Department of Defense. The DCIS is currently investigating allegations
that involve deviating from contractual requirements relating to the use of
organic sealants. We dispute the government's interpretation of the contracts as
precluding the use of such sealants. This matter has been under investigation
for approximately two years with little change in status. If the matter is
referred to the U.S. Attorney's Office for a prospective opinion, one potential
consequence of criminal charges being filed is the possibility that our defense
operations would be suspended or debarred from military or government sales. At
this point, given the limited information about the government's investigation
available to counsel, it is not possible to predict or assess the likelihood of
an unfavorable outcome or predict the amount of potential liabilities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 27, 1999, by written consent, holders of 58.7% of the issued and
outstanding shares of the Company's common stock voted to remove
Messrs. Cuthbert, Treinen, and Watson as directors.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As a result of the Recapitalization, our common equity is no longer traded
publicly on the NASDAQ. See public filing form 15-12G dated January 19, 1999.
13
<PAGE>
ITEM 6. SELECTED CONSOLIDATED 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, 1999. The financial data
for the fiscal year ended October 31, 1999 is derived from the Consolidated
Financial Statements of the Company, which consolidated statements have been
audited by PricewaterhouseCoopers LLP, independent accountants. The financial
data for the four fiscal years ended October 31, 1998 is also derived from the
Consolidated Financial Statements of the Company, which consolidated statements
have been audited by KPMG LLP, independent accountants. 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>
FOR THE YEARS ENDED OCTOBER 31
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Income statement data:
Net sales:
Automotive................................ $71,253 $80,235 $111,930 $135,235 $124,552
Aerospace................................. 29,339 24,247 28,572 35,303 41,947
------- ------- -------- -------- --------
Total................................... 100,592 104,482 140,502 170,538 166,499
Cost of sales:
Automotive................................ 63,241 68,513 93,159 110,284 110,555
Aerospace................................. 19,730 15,815 19,394 21,326 25,169
------- ------- -------- -------- --------
Total................................... 82,971 84,328 112,553 131,610 135,724
Gross profit:
Automotive................................ 8,012 11,722 18,771 24,951 13,998
Aerospace................................. 9,609 8,432 9,178 13,977 16,777
------- ------- -------- -------- --------
Total................................... 17,621 20,154 27,949 38,928 30,775
Operating expenses:
Automotive................................ 3,412 3,477 5,123 6,460 9,971
Aerospace................................. 4,270 4,633 5,599 6,564 6,992
Environmental and other investigation
costs................................... -- -- -- -- 11,117
------- ------- -------- -------- --------
Total................................... 7,682 8,110 10,722 13,024 28,079
Earnings (loss) from operations:
Automotive................................ 4,600 8,245 13,648 18,492 4,028
Aerospace................................. 5,339 3,799 3,579 7,413 9,785
Corporate................................. -- -- -- -- (11,117)
------- ------- -------- -------- --------
Total................................... 9,939 12,044 17,227 25,905 2,696
Other income (expense), net................. (639) 129 111 (48) (33,570)
------- ------- -------- -------- --------
Earnings (loss) before income taxes......... 9,300 12,173 17,338 25,857 (30,874)
Income tax provision (benefit).............. 3,720 4,725 6,660 10,410 (10,608)
------- ------- -------- -------- --------
Net earnings (loss)......................... $ 5,580 $ 7,448 $ 10,678 $ 15,447 $(20,266)
======= ======= ======== ======== ========
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
OCTOBER 31
------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance Sheet Data:
Current assets............................................ $43,407 $ 39,179 $ 55,274
Total assets.............................................. $99,824 $124,619 $155,652
Current liabilities....................................... $13,271 $ 23,508 $ 45,072
Long-term debt, less current portion...................... $ 2,057 $ 416 $168,600
Stockholders' equity (deficit)............................ $81,357 $ 97,280 $(88,531)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and our consolidated financial statements
and the notes thereto included elsewhere in this report.
RESULTS OF OPERATIONS
The following table is derived from the Company's statements of operations
data and sets forth, for the periods indicated, certain statement of operations
data as a percentage of net sales.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
OCTOBER 31
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Automotive Products Division
Net sales................................................. 100.0% 100.0% 100.0%
Cost of sales............................................. 83.2 81.6 88.8
----- ----- -----
Gross profit.............................................. 16.8 18.5 11.2
Operating expenses........................................ 4.6 4.8 8.0
----- ----- -----
Earnings from operations.................................. 12.2% 13.7% 3.2%
===== ===== =====
Aerospace Division
Net sales................................................. 100.0% 100.0% 100.0%
Cost of sales............................................. 67.9 60.4 60.0
----- ----- -----
Gross profit.............................................. 32.1 39.6 40.0
Operating expenses........................................ 19.6 18.6 16.7
----- ----- -----
Earnings from operations.................................. 12.5% 21.0% 23.3%
===== ===== =====
</TABLE>
FISCAL 1999 COMPARED TO FISCAL 1998
NET SALES
Consolidated net sales for fiscal 1999 were $166.5 million, compared to net
sales of $170.5 million for fiscal 1998. Net sales for the Automotive Products
Division in fiscal 1999 decreased 7.9% to $124.6 million from $135.2 million in
fiscal 1998 primarily due to contractual price decreases, and the inability to
offset these price decreases with increased initiator unit production due to the
disruptions caused by moving certain manufacturing operations from Newhall to
Moorpark. Net sales for the Aerospace Division in fiscal 1999 increased 18.8% to
$41.9 million from $35.3 million in fiscal 1998 primarily due to increased
shipments of products used on several missile programs and deliveries related to
bomb ejector programs.
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<PAGE>
GROSS PROFIT
Consolidated gross profit for fiscal 1999 was $30.8 million, compared with
consolidated gross profit for fiscal 1998 of $38.9 million, a decrease of
$8.1 million or 20.9%. Gross profit for the Automotive Products Division for
fiscal 1999 was $14.0 million, or 11.2% of division net sales, compared with
gross profit for fiscal 1998 of $25.0 million, or 18.5% of division net sales.
The decrease in gross profit for the Automotive Products Division was due to
unit price concessions made to the Company's leading automotive customers, the
inefficiencies inherent during the six months required to move certain
manufacturing operations from Newhall to Moorpark, approximately $2.3 million in
adjustments to inventory and certain receivables, and the disruptions associated
with the internal investigation and compliance audit in connection with the Cal
EPA and other investigations in the fourth quarter of fiscal 1999. See "Legal
Proceedings."
Gross profit for the Aerospace Division for fiscal 1999 was $16.8 million,
or 40.0% of division net sales, compared with gross profit for fiscal 1998 of
$14.0 million, or 39.6% of division net sales. The increase in gross profit of
$2.8 million was due to increased net sales during fiscal 1999, while the
increase in gross profit as a percentage of division sales was due to changes in
product mix.
OPERATING EXPENSES
Consolidated operating expense for fiscal 1999 (excluding expenses related
to environmental and other investigations) was $17.0 million, compared with
consolidated operating expense for fiscal 1998 of $13.0 million, an increase of
$4.0 million or 30.2%. Operating expenses for the Automotive Products Division
for fiscal 1999 were $10.0 million, or 8.0% of division net sales, compared with
operating expenses for fiscal 1998 of $6.5 million, or 4.8% of division net
sales. The increase in operating expenses for the Automotive Products Division
on both an absolute and percentage basis was due to redundant costs incurred
during the Moorpark move as well as increased marketing and general and
administrative costs related to staffing additions.
Operating expenses for the Aerospace Division for fiscal 1999 were
$7.0 million, or 16.7% of division net sales, compared with operating expenses
for fiscal 1998 of $6.6 million, or 18.6% of division net sales. The increase in
operating expenses of $0.4 million was due primarily to increases in performance
bonuses, although operating expenses as a percentage of division net sales
decreased due to the absorption of relatively stable general and administrative
expenses over greater net sales.
EXPENSES RELATED TO GOVERNMENT INVESTIGATIONS
Expenses related to the Cal EPA and other investigations aggregated
$11.1 million in fiscal 1999, while no such expenses were incurred in fiscal
1998. The $11.1 million represents legal, consulting and other related costs
incurred during the fourth quarter of fiscal 1999 as well as an allowance for
estimated costs in connection with this matter. See "Legal Proceedings."
OTHER INCOME AND EXPENSE
Interest expense for fiscal 1999 was $16.6 million, compared with fiscal
1998 interest expense of $0.2 million. The increase was the result of increased
debt outstanding resulting from the Recapitalization. Other expenses of
$17.0 million in fiscal 1999 were due to certain costs and management fees
incurred in connection with the Recapitalization.
FISCAL 1998 COMPARED TO FISCAL 1997
NET SALES
Consolidated net sales for fiscal 1998 were $170.5 million, compared to net
sales of $140.5 million in fiscal 1997. Net sales for the Automotive Products
Division in fiscal 1998 increased 20.8% to
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<PAGE>
$135.2 million from $111.9 million in fiscal 1997 primarily due to a 43.9%
increase in units shipped during fiscal 1998. The increase in units shipped
resulted primarily from increased shipments to Autoliv under terms of a supplier
agreement partially offset by the UAW strike at General Motors and continued
weaknesses in the Asian market. Net sales for the Aerospace Division in fiscal
1998 increased 23.6% to $35.3 million from $28.6 million in fiscal 1997. The
increase was primarily attributed to a contract for production of a proprietary
bomb ejector, which began in fiscal 1998, and also due to increased demand for
products used in commercial satellite launch vehicles.
GROSS PROFIT
Consolidated gross profit for fiscal 1998 was $38.9 million, compared with
consolidated gross profit for fiscal 1997 of $27.9 million, an increase of
$11.0 million or 39.4%. Gross profit for the Automotive Products Division for
fiscal 1998 was $25.0 million, or 18.4% of division net sales, compared with
gross profit for fiscal 1997 of $18.8 million, or 16.8% of division net sales.
The increase in gross profit for the Automotive Products Division was due to
efficiencies related to volume increases, improvements in automated machine
yields and other manufacturing efficiencies.
Gross profit for the Aerospace Division for fiscal 1998 was $14.0 million,
or 39.6% of division net sales, compared with gross profit for fiscal 1997 of
$9.2 million, or 32.1% of division net sales. The increase in gross profit for
the Aerospace Division was due to changes in the mix of products shipped
compared to fiscal 1997 and the absorption of relatively stable overhead
expenses over greater net sales in fiscal 1998.
OPERATING EXPENSES
Consolidated operating expense for fiscal 1998 was $13.0 million, compared
to $10.7 million in fiscal 1997. Operating expenses for the Automotive Products
Division were $6.5 million, compared to $5.1 million in fiscal 1997. The
increase of 26.1% is primarily attributable to higher labor costs, and, to a
lesser extent, increases in the corporate allocation. Operating expenses for the
Aerospace Division were $6.6 million, compared to $5.6 million in fiscal 1997.
The increase of 17.2% was primarily attributable to increases in performance
bonuses and corporate allocations.
OTHER INCOME AND EXPENSE
Interest income was $0.1 million for fiscal 1998, compared to $0.4 million
in fiscal 1997. The decrease is primarily attributable to lower average amounts
invested in interest-bearing securities during the year. Interest expense was
$0.2 million in fiscal 1998, compared to $0.3 million in fiscal 1997. The
decrease is attributable to lower average debt balances resulting from scheduled
monthly principal payments, and to the assumption by the buyer of debt relating
to the sale of an airplane which we previously owned.
LIQUIDITY AND CAPITAL RESOURCES
The Recapitalization had a substantial impact on the Company's capital
structure. The recapitalized Company is significantly more highly leveraged and,
accordingly, the Recapitalization resulted in substantial changes to the
Company's debt-to-equity ratio and its debt service requirements.
As part of the Recapitalization, the Company entered into a credit facility
(the "New Credit Facility") with a syndicate of banks (the "Banks") which
consists of a $25.0 million revolving credit facility (the "Revolving Credit
Facility") and a $70.0 million senior term loan (the "Senior Term Loan"). The
Senior Term Loan was fully drawn at the closing date of the Recapitalization. In
addition, as part of the Recapitalization, the Company issued $100.0 million of
11 3/8% Senior Subordinated Notes due 2008 (the "Notes").
17
<PAGE>
The Revolving Credit Facility bears interest at the Banks Base Rate plus an
applicable margin (an effective rate of 10.00% at October 31, 1999). The Company
has the option of converting all or a portion of the balance outstanding under
the Revolving Credit Facility to a Eurodollar Loan, for one, two, three or six
month periods, to bear interest at the Eurodollar Rate plus an applicable margin
(an effective rate of 8.1% at October 31, 1999). The Senior Term Loan is a seven
year loan which bears interest at the Eurodollar Rate plus an applicable margin
(an effective rate of 9.5% at October 31, 1999).
The Company's principal sources of liquidity are cash flow from operations
and borrowings under the Revolving Credit Facility. The Company's principal uses
of cash are debt service requirements, capital expenditures, research and
development and working capital.
Working capital requirements increased in fiscal 1999 compared to fiscal
1998 to service the Company's new long-term debt incurred in connection with the
Recapitalization, to support increases in accounts receivable and inventories,
and to finance the investment in new production equipment which is expected to
be installed in fiscal 2000. As of October 31, 1999, the Company had
$5.9 million outstanding under the Revolving Credit Facility together with $2.3
million in outstanding letters of credit; accordingly $11.8 million was
available under the Revolving Credit Facility at October 31, 1999. The Company
believes that it can meet its expected working capital requirements for the
foreseeable future from cash from operations and borrowings under the Revolving
Credit Facility.
The agreement governing the New Credit Facility contains customary
covenants, including restrictions on the incurrence of debt, the sale of assets,
mergers, acquisitions and other business combinations, voluntary prepayment of
other debt of the Company, transactions with affiliates, repurchase or
redemption of stock from stockholders, and various financial covenants,
including covenants requiring the maintenance of minimum interest coverage,
maximum debt to earnings before interest, taxes, depreciation and amortization
(EBITDA) ratios, and minimum consolidated EBITDA.
On July 14, 1999, the Company and the Banks entered into the First Amendment
to the New Credit Facility pursuant to which the Company increased the Maximum
Swingline Amount (as defined therein) to $3.0 million from $1.0 million while
not increasing the total amount of borrowings available under the Revolving
Credit Facility. The Swingline requires no notification to the Banks with
respect to either borrowings or repayments.
On August 20, 1999, the Company notified the Banks of the Company's
potential noncompliance with certain environmental covenants in connection with
the Cal EPA investigation (the "Environmental Noncompliance"). See "Legal
Proceedings." On September 14, 1999, the Company and the Banks entered into a
Waiver and Modification to the New Credit Facility pursuant to which the Banks
waived any Default or Event of Default arising from such Environmental
Noncompliance until such time as the Banks or the Company determine that the
Environmental Noncompliance has had, or could reasonably be expected to have, a
materially adverse effect on the Company. The Waiver and Modification to the New
Credit Facility has also temporarily limited the maximum borrowings under the
Revolving Credit Facility to $20.0 million.
As of October 31, 1999, the Company was not in compliance with certain
financial covenants contained in the New Credit Facility. On January 26, 2000,
the Company entered into a Second Amendment and Waiver to the New Credit
Facility pursuant to which, among other things, certain financial covenants were
amended, and the Company received a waiver for past noncompliance with its
financial covenants.
Substantially all of the Company's assets are pledged as collateral under
the New Credit Facility. As required under the terms of the New Credit Facility,
effective March 16, 1999, the Company entered into an interest rate protection
agreement. The terms of the agreement relate to the notional amount of
$35.0 million of the total $70.0 million original principal amount. This
agreement set the
18
<PAGE>
rate at 5.42% plus 175 basis points, requiring quarterly interest payments
starting June 17, 1999 through March 17, 2001.
Our ability to make scheduled payments of principal of, or to pay the
interest on, or to refinance, our debt, or to fund planned capital expenditures
and research and development expense, will depend on our future performance,
which, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control. While management believes that we will be able to meet our liquidity
needs, there can be no assurance that our business will generate sufficient cash
flow from operations or that future borrowings will be available under the
Revolving Credit Facility in an amount sufficient to enable us to service our
debt, or to fund our other liquidity needs.
CAPITAL CALL AGREEMENT
In connection with amending the New Credit Facility on January 26, 2000, the
Company and its controlling stockholder entered into a capital call agreement
(the "Capital Call Agreement") with the Banks. The Capital Call Agreement
requires the controlling stockholder to make a capital contribution to the
Company upon the occurrence of certain events, including the failure to comply
with certain financial covenants contained in the New Credit Facility. Upon
receipt of any such contribution, the Company is obligated to repay outstanding
term loans under the New Credit Facility.
SEASONALITY
The airbag manufacturers' requirements for the Company's initiators are
dependent on the requirements of automobile manufacturers. The Company believes
that the airbag initiator market in the United States has become, and will for
the foreseeable future remain, closely tied with the seasonal fluctuations of
the automotive market. This trend may be offset partially as new applications
for airbags and initiators, such as airbags for side-impact protection and seat
belt pretensioners, are installed by automobile manufacturers.
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. Historically, during the past several years, customer shipments have
been greater in the second half of the Company's fiscal year.
YEAR 2000 COMPLIANCE
During fiscal 1999, the Company established and implemented a comprehensive
Y2K transition plan. To-date, we have not experienced any material disruptions
to business operations.
COMPREHENSIVE INCOME
On November 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," issued by the
Financial Accounting Standards Board (the "FASB"). SFAS No. 130 establishes
standards for reporting and presentation of comprehensive income and its
components in a full set of financial statements. The statement requires only
additional disclosures in the financial statements; it does not affect the
Company's financial position or results of operations. There is no difference
between the net loss and comprehensive income for the Company for the year ended
October 31, 1999.
19
<PAGE>
STARTUP ACTIVITIES
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Cost of Startup
Activities." This SOP requires that costs incurred during start-up activities,
including organization costs, be expensed as incurred. SOP 98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998. Initial
application of the SOP should be as of the beginning of the fiscal year in which
the SOP is first adopted and should be reported as a cumulative effect of a
change in accounting principle. We believe that the adoption of SOP 98-5 will
not have a material impact on our consolidated financial statements.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 modifies the accounting for
derivative and hedging activities and is effective for fiscal years beginning
after December 15, 1999. We believe that the adoption of SFAS No. 133 will not
have a material impact on our financial reporting.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company has only limited involvement in derivative financial instruments
and does not hold or issue them for trading purposes. Certain amounts borrowed
under the Company's New Credit Facility are at variable rates and the Company is
thus subject to market risk resulting from interest rate fluctuations. The
Company has entered into an interest rate swap arrangement to alter interest
rate exposure, as described below. This arrangement allows the Company to raise
long-term borrowings at floating rates and effectively swap them into fixed
rates that are lower than those available to the Company if fixed rate
borrowings were made directly. Under interest rate swaps, the Company agrees
with another party to exchange, at specified intervals, the difference between
fixed-rate and floating-rate amounts calculated by reference to an agreed
notional principal amount.
In March 1999, as required under the New Credit Facility, the Company
entered into an interest rate swap agreement with the agent under the New Credit
Facility. Under the swap agreement, which is in the notional principal amount of
$35 million, the Company is required to pay a fixed rate of 5.42% to the agent
on each March 17, June 17, September 17 and December 17, commencing on June 17,
1999. On those same dates, the Company will receive a floating-rate payment from
the agent based on the three-month LIBOR rate. The swap agreement terminates on
March 7, 2001.
The Company also is exposed to market risks related to fluctuations in
interest rates on the Notes issued in December 1998. For fixed rate debt such as
the Notes, changes in interest rates generally affect the fair value of the debt
instrument. The Company does not have an obligation to repay the Notes prior to
maturity in December 2008 and, as a result, interest-rate risk and changes in
fair value should not have a significant impact on the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements required in response to this Item are
listed under Item 14(a) of Part IV of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As reported in a Form 8-K filed on September 3, 1999, upon recommendation of
the Audit Committee, the Board of Directors engaged PricewaterhouseCoopers LLP
as independent accountants in place of KPMG LLP.
20
<PAGE>
KPMG LLP's reports on the financial statements for the two most recent
fiscal years ended October 31, 1997 and 1998 did not contain an adverse opinion,
disclaimer of opinion, or qualification or modification as to audit scope or
accounting principles. Furthermore, during the two most recent fiscal years and
through August 27, 1999 (the date of dismissal), there have been no
disagreements with KPMG LLP on any matter of accounting principles or practices,
financial statement disclosure or auditing scope and procedures, which
disagreements, if not resolved to the satisfaction of KPMG LLP, would have
caused that firm to make reference to the subject matter of such disagreements
in connection with their reports.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and position of each of our
directors and executive officers. All of our officers are elected annually and
serve at the discretion of the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ---- -------- ------------------------------------------------------------
<S> <C> <C>
Dr. John F. Lehman............. 56 Chairman of the Board of Directors
Thomas W. Cresante............. 52 Director, President and Chief Executive Officer
Joseph A. Stroud............... 44 Director, Executive Vice President, Chief Financial Officer,
Assistant Secretary
George A. Sawyer............... 67 Director, Secretary
Oliver C. Boileau, Jr.......... 71 Director
Donald Glickman................ 65 Director
William Paul................... 62 Director
Thomas G. Pownall.............. 76 Director
Gary A. Binning................ 40 Director
Randy H. Brinkley.............. 56 Director
Keith E. Oster................. 37 Director
Sabra Bennett.................. 49 Vice President - Human Resources
Andrew G. Bonas................ 39 Vice President - Aerospace Division
Thomas R. Cessario............. 45 Vice President - Environmental, Health and Safety
Herbert G. Chick............... 56 Vice President - Finance
Gary T. Smith.................. 41 Vice President - Automotive Products Division
John J. Walsh.................. 41 Vice President - Strategic Marketing and Programs
Patrick Carroll................ 56 Vice President - General Manager, Hollister
Alan S. Fabian................. 49 Vice President - General Manager, Mesa
Robert McSweeney............... 37 Vice President - General Manager, Moorpark
James O. Moore................. 57 Vice President - General Manager, Scot
</TABLE>
DR. JOHN F. LEHMAN, who became a director of the Company upon consummation
of the Recapitalization and Chairman of the Company in June 1999, is a Managing
General Partner of J.F. Lehman and Company. Prior to founding J.F. Lehman &
Company, Dr. Lehman was an investment banker with PaineWebber Incorporated and
served as a Managing Director in Corporate Finance. Dr. Lehman served for six
years as Secretary of the Navy, was a member of the National Security Council
Staff, served as a delegate to the Mutual Balanced Force Reductions negotiations
and was the Deputy Director of the Arms Control and Disarmament Agency.
Dr. Lehman served as Chairman of the Board of Directors of Sperry Marine, Inc.,
and is a member of the Board of Directors of Elgar Holdings, Inc., Ball
Corporation, ISO Inc., McCormick Selph Holdings, Inc. and Burke
Industries, Inc. and is Chairman of the Princess Grace Foundation, a director of
OpSail Foundation and a Trustee of LaSalle College High School.
THOMAS W. CRESANTE became a director, President and Chief Executive Officer
of the Company in October 1999. Prior to joining the Company, Mr. Cresante was
general manager with ITT Hancock
21
<PAGE>
Hardware Division from 1984 thru 1987, at which time he was named Vice President
of Manufacturing for its Hardware and Seating Division. Mr. Cresante joined TRW
Inflatable Restraints Division in 1990 as the Vice President of Operations.
During his tenure with TRW, two of his startup facilities were named as "10 Best
Plants in the U.S." by Industry Week Magazine. In early 1996, Mr. Cresante
joined Allied Signal Aerospace as the Vice President of Operations and later
that year was named President of Allied Signal Safety Restraints Systems.
Mr. Cresante returned to Arizona in 1997 as the Executive Vice President and
Chief Operating Officer for Safety Components International, Inc.
JOSEPH A. STROUD, who became a director of the Company upon consummation of
the Recapitalization and Executive Vice President and Chief Financial Officer in
June 1999, is a General Partner of J.F. Lehman & Company. Mr. Stroud has been
affiliated with J.F. Lehman & Company since 1992 and formally joined the firm in
1996. Prior to joining J.F. Lehman & Company, Mr. Stroud was the Chief Financial
Officer of Sperry Marine Inc. from 1993 until the company was purchased by
Litton Industries, Inc. in 1996. From 1989 to 1993, Mr. Stroud was Chief
Financial Officer of the Accudyne and Kilgore Corporations. Mr. Stroud is
currently a director of Elgar Holdings, Inc., Burke Industries, Inc. and
McCormick Selph Holdings, Inc.
GEORGE A. SAWYER is currently a director and Secretary of the Company and
also served as Chairman of the Board from December 1998 to May 1999 and interim
Chief Executive Officer from May 1999 to October 1999. Mr. Sawyer is also a
co-founder and Managing General Partner of J.F. Lehman & Company. From 1993 to
1995, Mr. Sawyer served as the President and Chief Executive Officer of Sperry
Marine Inc. Prior thereto, Mr. Sawyer held a number of prominent positions in
private industry and in the United States government, including serving as the
President of John J. McMullen Associates, the President and Chief Operating
Officer of TRE Corporation, Executive Vice President and Director of General
Dynamics Corporation, the Vice President of International Operations for Bechtel
Corporation and the Assistant Secretary of the Navy for Shipbuilding and
Logistics under Dr. Lehman. Mr. Sawyer is currently Chairman of Burke
Industries, Inc. and a director of Elgar Holdings, Inc. and McCormick Selph
Holdings, Inc. He also serves on the Board of Trustees of Webb Institute and is
on the Board of Managers of the American Bureau of Shipping.
OLIVER C. BOILEAU, JR. became a director of the Company upon consummation of
the Recapitalization. He joined The Boeing Company in 1953 as a research
engineer and progressed through several technical and management positions and
was named Vice President in 1968 and then President of Boeing Aerospace in 1973.
In 1980, he joined General Dynamics Corporation as President and a member of the
Board of Directors. In January 1988, Mr. Boileau was promoted to Vice Chairman.
He retired in May 1988. Mr. Boileau joined Northrop Grumman Corporation in
December 1989 as President and General Manager of the B-2 Division. He also
served as President and Chief Operating Officer of the Grumman Corporation, a
subsidiary of Northrop Grumman, and as a member of the Board of Directors of
Northrop Grumman. Mr. Boileau retired from Northrop Grumman in 1995. He is an
Honorary Fellow of the American Institute of Aeronautics and Astronautics, a
member of the National Academy of Engineering, the Board of Trustees of St.
Louis University and the Massachusetts Institute of Technology--Lincoln
Laboratory Advisory Board. Mr. Boileau is also director of Burke
Industries, Inc. and Elgar Holdings, Inc.
DONALD GLICKMAN, who became a director of the Company upon consummation of
the Recapitalization, is a Managing General Partner of J.F. Lehman & Company.
Prior to joining J.F. Lehman & Company, Mr. Glickman was a principal of the
Peter J. Solomon Company, a Managing Director of Shearson Lehman Brothers
Merchant Banking Group and Senior Vice President and Regional Head of The First
National Bank of Chicago. Mr. Glickman served as an armored calvary officer in
the Seventh U.S. Army. Mr. Glickman is currently Chairman of Elgar
Holdings, Inc. and a director of the MacNeal-Schwendler Corporation, General
Aluminum Corporation, Monroe Muffler Brake, Inc., McCormick Selph
Holdings, Inc. and Burke Industries, Inc. He is also a trustee of MassMutual
Corporate Investors, MassMutual Participation Investors and Wolf Trap Foundation
for the Performing Arts.
22
<PAGE>
WILLIAM PAUL became a director of the Company upon consummation of the
Recapitalization. Mr. Paul began his career with United Technologies Corporation
("UTC") at its Sikorsky Aircraft division in 1955. Mr. Paul progressed through a
succession of several technical and managerial positions while at Sikorsky
Aircraft, including Vice President of Engineering and Programs and Executive
Vice President and Chief Operating Officer, and in 1983 was named President and
Chief Executive Officer of Sikorsky Aircraft. In 1994, Mr. Paul was appointed
the Executive Vice President of UTC, Chairman of UTC's international operations
and became a member of UTC's Management Executive Committee. Mr. Paul retired
from these positions in 1997 but remains a consultant to UTC. Mr. Paul is a
Fellow of the American Institute of Aeronautics and a Fellow of the Royal
Aeronautical Society. Mr. Paul is also a director of Elgar Holdings, Inc.
THOMAS G. POWNALL, who became a director of the Company upon consummation of
the Recapitalization, is a member of the investment advisory board of
J.F. Lehman & Company. Mr. Pownall was Chairman of the Board of Directors from
1983 until 1992 and Chief Executive Officer of Martin Marietta Corporation
("Martin Marietta") from 1982 until 1988. Mr. Pownall joined Martin Marietta in
1963 as Vice President of its Aerospace Advanced Planning Unit, became President
of Aerospace Operations and, in succession, Vice President, then President and
Chief Operating Officer of Martin Marietta. Mr. Pownall is also a director of
The Titan Corporation, Burke Industries, Inc., Elgar Holdings, Inc., Director
Emeritus of Sundstrand Corporation and serves on the advisory board of Ferris,
Baker Watts Incorporated. He is also a director of the U.S. Naval Academy
Foundation and the Naval Academy Endowment Trust and a trustee of Salem-Teikyo
University.
GARY A. BINNING became a director of the Company in September 1999.
Mr. Binning is currently the Managing Partner of Paribas Principal Partners, the
U.S. private equity arm of Banque Paribas ("Paribas"), which he co-founded in
1997. Prior to his current position at Paribas, Mr. Binning was a Managing
Director in the merchant banking group of Banque Paribas specializing in
financing and investing in leveraged buyouts for five years. Mr. Binning
currently serves on the Board of Directors of Atlantic Coast Fire
Protection, Inc., Collins and Aikman Floorcoverings, Inc., Key Plastics, Inc.,
Polaris Pool Systems, Inc., Stauber Performance Ingredients, Inc. and Transport
Labor Contract Leasing, Inc.
RANDY H. BRINKLEY became a director of the Company in September 1999.
Currently, Mr. Brinkley serves as a Senior Vice President of Programs for Hughes
Space and Communications Company ("HSC"), the world's largest manufacturer of
commercial communication satellites. Before joining HSC in 1999, Mr. Brinkley
spent seven years as a senior executive at the National Aeronautics and Space
Administration, including positions as Program Manager for the International
Space Station and Mission Director of the Hubble Space Telescope repair mission.
From 1990 to 1992, Mr. Brinkley managed research and development activities for
advanced aircraft systems and technologies at the McDonnell Douglas Corporation.
Prior thereto, Mr. Brinkley served in the U.S. Marine Corps for 25 years before
retiring as a Colonel.
KEITH E. OSTER, who became a director of the Company upon consummation of
the Recapitalization, is a General Partner of J.F. Lehman & Company. Prior to
joining J.F. Lehman & Company in 1992, Mr. Oster was with the Carlyle Group,
where he was responsible for analyzing acquisition opportunities and arranging
debt financing, and was a Senior Financial Analyst with Prudential-Bache Capital
Funding, working in the Mergers, Acquisitions and Leveraged Buyouts Department.
Mr. Oster is currently a director of Burke Industries, Inc., McCormick Selph
Holdings Inc. and Elgar Holdings, Inc.
SABRA BENNETT, Vice President - Human Resources, is responsible for the
overall human resource functions at the Company. Ms. Bennett joined the Company
in 1995 as the Director of Human Resources. In 1998, Ms. Bennett was promoted to
her current position. Prior to joining the Company, Ms. Bennett worked as a
Human Resources Manager, Personnel Representative and Staffing Representative
from 1972 to 1995 for GTE Corporation. Ms. Bennett has a degree in Business
Administration from the University of Redlands.
23
<PAGE>
ANDREW G. BONAS, Vice President - Aerospace Division, is responsible for
managing the day-to-day operations of the Company's Aerospace Division.
Mr. Bonas joined the Company in April 1999 in his current position. Prior to
joining the Company, Mr. Bonas worked in product design for TRW's Vehicle Safety
Systems. Starting with TRW in 1988, Mr. Bonas worked as a New Product Team
Leader, a Product Design and Development Engineering Manager and a Senior
Engineer. From 1983 to 1988, Mr. Bonas worked in various engineering roles with
two different manufacturing companies producing pyrotechnic devices. Mr. Bonas
holds a degree in Mechanical Engineering from Pennsylvania State University and
a Master of Business Administration from the University of Phoenix.
THOMAS R. CESSARIO, Vice President - Environment, Health and Safety, is
responsible for all matters regarding environmental, health and safety issues at
the Company. Mr. Cessario joined the Company in November 1999 in his current
position. Prior to joining the Company, Mr. Cessario was the Corporate Director
of Safety, Health and Environment from 1997 to 1999 for Irex Construction
Engineering Corporation. From 1992 to 1997, Mr. Cessario worked in a similar
position with Rollins Environmental, Inc. Mr. Cessario worked as a Division
Manager of Safety, Health and Environment from 1983 to 1992 for Thiokol
Corporation. Mr. Cessario has Bachelor of Science from West Virginia University
as well as a Master of Safety and Industrial Hygiene and a Master of Operations
from Wilmington College.
HERBERT G. CHICK, Vice President - Finance, is responsible for managing the
day-to-day financial operations of the Company. Mr. Chick joined the Company in
August 1999 in his current position. Prior to joining the Company, Mr. Chick was
the Senior Vice President and Chief Financial Officer for the Passenger Systems
division of Rockwell International Corporation from 1996 to 1999. Prior thereto,
Mr. Chick worked as a self-employed consultant from 1993 to 1996. From 1986 to
1993, Mr. Chick held a variety of positions, including Chief Financial Officer,
at a number of manufacturing firms. Mr. Chick has a degree in Aerospace
Engineering from the Georgia Institute of Technology and a Master of Business
Administration from University of California, Los Angeles.
GARY T. SMITH, Vice President - Automotive Products Division, is responsible
for managing the day-to-day operations of the Company's Automotive Products
Division. Mr. Smith joined the Company in January 1995 as a Senior Project
Engineer. Mr. Smith was promoted in 1996 to Engineering Supervisor, in 1997 to
Manufacturing Manager, in 1998 to General Manager and in 1999 to his current
position. Prior to joining the Company, Mr. Smith worked from 1984 to 1995 for
Barry Controls Aerospace in a variety of positions, including Senior Project
Leader, Business Unit Leader and a Project Engineer. Mr. Smith holds a degree in
Mechanical Engineering and studied Applied Mechanics in graduate school at
California State University at Northridge.
JOHN J. WALSH, Vice President - Strategic Marketing and Programs, is
responsible for overall marketing and program management functions at the
Company. Mr. Walsh joined the Company in May 1999 in his current position. Prior
to joining the Company, Mr. Walsh was the Director of Sales and Marketing,
Aerospace from 1996 to 1999 and the Director of Aerospace, Defense and Specialty
Products from 1994 to 1996 for The Ensign-Bickford Company. Mr. Walsh worked as
a Product Section Manager and a Business Development Manager from 1986 to 1993
for Thiokol Corporation. From 1977 to 1986, Mr. Walsh worked in various
engineering roles for two different aerospace manufacturing firms. Mr. Walsh has
a degree in Guidance and Control Engineering from Purdue University and a Master
of Business Administration from St. Joseph's University.
PATRICK CARROLL, Vice President - General Manager, Hollister, is responsible
for the day-to-day facility operations and general management of the Company's
Hollister, California facility. Mr. Carroll joined the Company in 1999 when the
Company acquired the Micro Gas Generator product line. Prior to the acquisition,
Mr. Carroll worked for two years as the General Manager of Commercial Operations
for McCormick Selph Ordnance Products, a business unit of Teledyne Ryan
Aeronautical. Prior thereto, Mr. Carroll worked for FMC Corporation from 1970 to
1997, most recently as General Manager of the Corporate Technology Center and
Director of Corporate Research and Development.
24
<PAGE>
Mr. Carroll has a degree in Mechanical Engineering and Master of Mechanical
Engineering from Pennsylvania State University and an Executive Master of
Business Administration from Stanford University.
ALAN S. FABIAN, Vice President - General Manager, Mesa, is responsible for
the day-to-day facilities operations and general management of the Company's
Mesa, Arizona facility. Mr. Fabian joined the Company as a plant manager in
1995. Mr. Fabian was promoted to General Manager in 1997 and to Vice President
in 1999. Prior to joining the Company, Mr. Fabian was the Vice President of
Operations from 1990 to 1995 for Power Convertibles Corporation. Mr. Fabian has
a degree in Engineering from Oakland University and a Master of Industrial
Engineering from Wayne State University.
ROBERT MCSWEENEY, Vice President - General Manager, Moorpark, is responsible
for the day-to-day facility operations and general management of the Company's
Moorpark, California facility. Mr. McSweeney joined the Company in 1995 as a
Supervisor and Project Engineer. Mr. McSweeney was promoted to Manufacturing
Engineer Manager in 1996, Plant Manger in 1998 and Vice President in 1999. Prior
to joining the Company, Mr. McSweeney worked as a Manufacturing Engineering
Supervisor from 1992 to 1995 for the Fluid Controls Division of BW/IP
International. Mr. McSweeney has a degree in Mechanical Engineering from the
University of Santa Clara and a Master of Business Administration from Loyola
Marymount University.
JAMES O. MOORE, Vice President - General Manager, Scot, Inc., is responsible
for the day-to-day facilities operations and general management of Scot, Inc., a
subsidiary of the Company. Mr. Moore joined the Company in 1998 in his current
position. Prior to joining the Company, Mr. Moore worked as the Director of
Pressure Control Equipment from 1996 to 1998 for Hydril Company. From 1989 to
1996, Mr. Moore was a General Manager for Grimes Aerospace Company. Mr. Moore
worked for General Electric Corporation from 1966 to 1989, most recently as a
Facilities Manager. Mr. Moore has a degree in Mechanical Engineering from Purdue
University.
COMMITTEES OF THE BOARD OF DIRECTORS
EXECUTIVE COMMITTEE. The Executive Committee of the Board of Directors is
comprised of Messrs. Lehman, Sawyer, Glickman, Paul and Cresante. The Executive
Committee's main function is to expedite the decision-making process on certain
matters.
AUDIT COMMITTEE. The Audit Committee of the Board of Directors is comprised
of Messrs. Paul, Glickman, Oster, Binning and Boileau. The Audit Committee makes
recommendations concerning the engagement of independent public accountants,
reviews with the independent public accountants the scope and results of the
audit engagement, approves professional services provided by the independent
public accountants, reviews the independence of the independent public
accountants, considers the range of audit and non-audit fees and reviews the
adequacy of the Company's internal accounting controls.
COMPENSATION COMMITTEE. The Compensation Committee of the Board of
Directors is comprised of Messrs. Lehman, Sawyer, Glickman, Stroud, Pownall and
Cresante. The Compensation Committee makes recommendations concerning the
salaries and incentive compensation of employees and consultants to the Company,
and oversees and administers certain of the Company's stock option plans.
STOCK OPTION COMMITTEE. The Stock Option Committee of the Board of
Directors is comprised of Messrs. Lehman, Sawyer, Glickman, Stroud, and Pownall.
The Stock Option Committee is responsible for the administration of the
Company's 1999 Stock Option Plan.
25
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Compensation. Set forth below is information concerning the annual and
long-term compensation for services in all capacities to the Company for fiscal
1999, 1998 and 1997, of those persons (collectively, the "Named Executive
Officers") who were, during fiscal 1999, (i) the Chief Executive Officer and
(ii) the other most highly compensated executive officers receiving compensation
of $100,000 or more from the Company or one of its subsidiaries.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION ------------
------------------- SECURITIES ALL OTHER
SALARY BONUS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) OPTIONS ($)
- --------------------------- -------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Thomas W. Cresante........................ 1999 $ 32,934 -- 111,200(1) --
President and Chief Executive 1998 -- -- -- --
Officer (October 1999 to date) 1997 -- -- -- --
George A. Sawyer.......................... 1999 57,982 -- -- 14,000(2)
President and Chief Executive Officer 1998 -- -- -- --
(June 1999--September 1999) 1997 -- -- -- --
John M. Cuthbert.......................... 1999 217,679 35,000 -- 1,741,524(2)(6)
President and Chief Executive Officer 1998 211,598 34,660 -- 2,917(2)
(December 1998--June 1999) 1997 177,162 13,158 150,000(3) 2,656(2)
Thomas F. Treinen......................... 1999 30,962 27,000 -- 464(2)
President and Chief Executive Officer 1998 225,680 72,542 -- 3,449(2)
(1976--December 1998) 1997 221,667 27,465 -- 3,353(2)
Samuel Levin (7).......................... 1999 215,208 167,820 -- 205,160(2)(6)
President--Scot, Incorporated 1998 206,766 437,901 -- 4,000(2)
(1992--December 1999) 1997 187,500 105,019 10,000(4) 9,918(2)
Alan S. Fabian............................ 1999 144,776 30,000 18,000(5) 112,500(2)(6)
Vice President--General Manager, Mesa 1998 122,281 13,141 -- --
1997 119,238 4,315 -- --
Gary T. Smith............................. 1999 156,928 30,000 20,000(5) 97,475(2)(6)
Vice President--Automotive Products 1998 93,938 17,889 -- --
Division 1997 87,844 8,978 -- --
Thomas J. Treinen (8)..................... 1999 123,307 24,036 -- 528,864(2)(6)
Vice President--Administration/Business 1998 109,828 18,740 -- 2,678(2)
Systems 1997 103,248 8,491 -- 2,560(2)
John T. Vinke............................. 1999 167,137 -- -- 684,299(2)(6)
Executive Vice President and Chief 1998 131,304 29,096 -- 772(2)
Financial Officer 1997 118,938 12,149 25,000(3) 716(2)
(April 1994--June 1999)
Robert S. Ritchie......................... 1999 120,797 40,000 -- 552,000(2)(6)
Vice President--Aerospace Division 1998 149,365 58,642 -- 2,062(2)
(1990--July 1999) 1997 138,263 13,365 30,000(3) 2,200(2)
</TABLE>
- ------------------------
(1) Options granted pursuant to the 1999 Stock Option Plan adopted by the Board
of Directors on June 3, 1999, as authorized by the Stock Option Committee of
the Board of Directors on October 12, 1999.
(2) Consists of matching contributions by the Company under its 401(k) plan,
which was adopted in Fiscal 1994, or its non-qualified deferred compensation
plan, which was adopted in Fiscal 1995, certain life insurance premiums as
well as certain directors fees.
26
<PAGE>
(3) Options granted by the Compensation Committee of the Board of Directors on
December 30, 1996 and ratified by the stockholders at the Company's 1997
annual meeting. All grants were at the market price of the Common Stock
($17.00) on the date of grant.
(4) Granted pursuant to the Company's Amended and Restated 1991 Stock Incentive
Plan at the market price of the Common Stock on the date of grant.
(5) Options granted pursuant to the 1999 Stock Option Plan adopted by the Board
of Directors on June 3, 1999, as authorized by the Stock Option Committee of
the Board of Directors on June 21, 1999.
(6) Includes the compensation component of the consideration paid for certain
stock options in connection with the Recapitalization.
(7) Mr. Levin retired from his position in December 1999 and is now a consultant
to the Company. (See "Employment and Consulting Agreements.")
(8) Mr. Treinen was terminated from his position in December 1999.
OPTIONS GRANTED IN FISCAL 1999
The following table summarizes options granted in fiscal 1999 to the Named
Executive Officers:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS
OPTIONS GRANTED TO EXERCISE
GRANTED EMPLOYEES PRICE PER EXPIRATION
NAME (#) IN FISCAL 1999 SHARE DATE
---- ---------- -------------- --------- ----------
<S> <C> <C> <C> <C>
Thomas W. Cresante................................. 111,200 30.6% $50.00 10/11/09
George A. Sawyer................................... 0 0.0% $50.00 --
John M. Cuthbert................................... 0 0.0% $50.00 --
Thomas F. Treinen.................................. 0 0.0% $50.00 --
Samuel Levin....................................... 0 0.0% $50.00 --
Alan S. Fabian..................................... 18,000 5.0% $50.00 6/22/09
Gary T. Smith...................................... 20,000 5.5% $50.00 6/22/09
Thomas J. Treinen.................................. 5,000 1.4% $50.00 1/12/00
John T. Vinke...................................... 0 0.0% $50.00 --
Robert S. Ritchie.................................. 0 0.0% $50.00 --
</TABLE>
27
<PAGE>
AGGREGATE OPTION PURCHASES IN FISCAL 1999 AND FISCAL 1999 YEAR END OPTION VALUES
The following table summarizes information with respect to all options held
by the Named Executive Officers exercisable within 60 days of October 31, 1999:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT FISCAL
SHARES AT FISCAL YEAR END YEAR END ($)
ACQUIRED ON (#) EXERCISABLE/ EXERCISABLE/
NAME EXERCISE VALUE REALIZED UNEXERCISABLE UNEXERCISABLE(1)
---- ----------- -------------- ------------------- --------------------
<S> <C> <C> <C> <C>
Thomas W. Cresante................ 0 $ 0 0/111,200 $0/$0
George A. Sawyer.................. 0 $ 0 0/0 $0/$0
John M. Cuthbert.................. 102,400 $1,739,000 50,000/0 $850,000/$0
Thomas F. Treinen................. 0 $ 0 0/0 $0/$0
Samuel Levin...................... 11,250 $ 187,500 2,250/1,500 $38,250/$25,500
Alan S. Fabian.................... 10,000 $ 112,500 4,500/13,500 $0/$0
Gary T. Smith..................... 8,000 $ 95,000 5,000/15,000 $0/$0
Thomas J. Treinen................. 28,000 $ 527,500 5,750/6,750 $76,500/$51,000
John T. Vinke..................... 34,000 $ 683,750 7,500/0 $127,500/$0
Robert S. Ritchie................. 30,500 $ 551,250 4,500/3,000 $76,500/$51,000
</TABLE>
(1) There is no public market for our Common Stock. The Company estimates the
market value for its common stock is approximately $34.00 per share.
BONUS AND INCENTIVE PLANS
Since March 1998, the Company has maintained two short-term incentive plans
for the benefit of all regular, full time employees of the Automotive Products
Division and the Aerospace Division, respectively (collectively, the "Bonus
Plans"), and a Management Incentive Plan for certain members of management from
both divisions (the "Management Plan"). The Bonus Plans permit the Company to
pay employees quarterly bonuses based on employment level, the attainment of
certain pre-established financial performance criteria, and the attainment of
certain pre-established individual goals. The Management Plan bonuses are paid
annually, based upon the attainment of certain pre-established Company and
division financial performance criteria. The Bonus Plans and the Management Plan
are administered by a committee of the Board of Directors, which has full power
and authority to determine the terms and conditions of awards under the Bonus
Plans and the Management Plan.
BENEFIT PLANS
The Company also maintains various qualified and non-qualified benefit plans
for its employees, including a 401(k) profit sharing plan and an insured
deferred compensation plan for certain highly compensated employees. The Company
reserves the right to add, amend, change, tie off and/or terminate any or all
qualified or nonqualified benefit plans at any time and to alter, amend, add to
and/or restrict employee participation to the extent permitted by applicable
federal or state law or regulation.
COMPENSATION OF DIRECTORS
None of the directors of the Company who are employees of the Company
receive any compensation directly for their service on the Board of Directors.
All other directors receive $2,000 per meeting and $20,000 per annum for their
services.
28
<PAGE>
EMPLOYMENT AND CONSULTING AGREEMENTS
THOMAS W. CRESANTE. On October 1, 1999, the Company entered into an
employment agreement with Mr. Cresante. The employment agreement has an initial
term of two years and provides for an automatic one-year renewal at the end of
the initial term and each renewal term until terminated upon written notice. The
Company will pay Mr. Cresante a base salary of $342,500 per year, subject to
annual review by the Company's Board of Directors. In addition, Mr. Cresante is
eligible to receive at least 60% of his annual base salary in bonus compensation
based upon set performance standards. Pursuant to the employment agreement, Mr.
Cresante is eligible to receive options to purchase up to 3% of the Company's
common stock at an exercise price of $50.00 per share. Mr. Cresante is also
required by the employment agreement to purchase 5,875 shares of the Company's
common stock at a price of $34.00 per share no later than January 31, 2000. The
employment agreement provides that the Company may terminate Mr. Cresante's
employment for cause (as defined in the employment agreement). If the Company
terminates Mr. Cresante's employment other than for cause or disability,
Mr. Cresante will be entitled to receive an amount equal to the balance payable
under the employment agreement or twelve months salary, depending on when the
agreement is terminated.
SAMUEL LEVIN. Mr. Levin's employment agreement, pursuant to which he
retired as President of Scot, Incorporated on December 31, 1999, provides for a
consulting term beginning on January 1, 2000 and ending on December 31, 2000,
during which period Mr. Levin will receive a payment of $50,000, payable in
equal monthly installments. In the event Mr. Levin provides more than eight
hours of service in any month during this period, he shall be paid at the rate
of $1,000 a day. During fiscal 1999, Scot entered into a Noncompetition
Agreement with Mr. Levin, pursuant to which Mr. Levin has agreed not to compete
with Scot or the Company until November 30, 2001. In consideration of
Mr. Levin's agreement not to compete with Scot or the Company, Scot has agreed
to pay an aggregate of $890,000 to Mr. Levin, of which $570,000 was paid on
November 30, 1999, $185,000 will be paid on November 30, 2000, and $135,000 will
be paid on November 30, 2001.
29
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of October 31, 1999, ownership of the
Company's common stock by (i) the stockholders known to us to be the beneficial
owners of more than five percent of the outstanding shares of common stock,
(ii) each director, (iii) each named executive officer and (iv) all directors
and executive officers as a group:
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY PERCENT OF CLASS
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(2) OUTSTANDING(3)
- --------------------------------------- ---------------- ----------------
<S> <C> <C>
JFL Co-Invest Partners I, L.P............................... 1,173,499(4) 31.7%
2001 Jefferson Davis Highway, Suite 607
Arlington, Virginia 22202
J.F. Lehman & Company....................................... 735,294(4)(5) 19.8%
450 Park Avenue
New York, New York 10022
J.F. Lehman Equity Investors I, L.P......................... 679,442(4) 18.3%
2001 Jefferson Davis Highway, Suite 607
Arlington, Virginia 22202
Neubauer Family Trust....................................... 1,096,522(6) 29.6%
Ordnance Products, Inc.
16207 Carmenita Rd.
Cerritos, CA 90703
Paribas Principal Inc....................................... 323,529 8.7%
787 Fifth Avenue
New York, New York 10019
Treinen Family Trust........................................ 433,897(7) 11.7%
10457 Laramie Ave.
Chatsworth, CA 91311
Oliver C. Boileau, Jr....................................... --(8) --
Gary A. Binning............................................. 323,529(9) 8.7%
John F. Lehman.............................................. 2,588,235(4)(10) 69.8%
Donald Glickman............................................. 2,588,235(4)(10) 69.8%
George A. Sawyer............................................ 2,588,235(4)(10) 69.8%
Joseph A. Stroud............................................ 2,588,235(4)(10) 69.8%
Keith E. Oster.............................................. 2,588,235(4)(10) 69.8%
William Paul................................................ --(11) --
Thomas G. Pownall........................................... --(12) --
Thomas W. Cresante.......................................... --(13) --
Alan S. Fabian.............................................. 4,500(13) *
Thomas J. Treinen........................................... 5,750(13) *
Gary T. Smith............................................... 5,000(13) *
John M. Cuthbert............................................ 50,000(13) 1.3%
Robert S. Ritchie........................................... 4,500(13) *
Samuel Levin................................................ 2,250(13) *
John T. Vinke............................................... 7,500(13) *
Directors and Executive Officers as a Group................. 2,991,264 79.0%
</TABLE>
- ------------------------
* Indicates ownership of less than one percent of outstanding shares.
(1) Unless indicated otherwise, the address of the beneficial owner listed
above is c/o Special Devices, Incorporated, 14370 White Sage Road,
Moorpark, California 93021.
30
<PAGE>
(2) As used in this table, beneficial ownership means the sole or shared power
to vote, or to direct the voting of a security, or the sole or shared power
to dispose, or direct the disposition of, a security. However, under
California law, personal property owned by a married person may be
community property that either spouse may manage and control. The Company
has no information as to whether any shares shown in this table are subject
to California community property law.
(3) Computed based upon the total number of shares of Common Stock outstanding
and the number of shares of Common Stock underlying options or warrants
held by that person exercisable within 60 days of October 31, 1999. In
accordance with Rule 13(d)-3 of the Exchange Act, any Common Stock that
will not be outstanding within 60 days of October 31, 1999 that is subject
to options or warrants exercisable within 60 days of October 31, 1999 is
deemed to be outstanding for the purpose of computing the percentage of
outstanding shares of the Common Stock owned by the person holding such
options or warrants, but is not deemed to be outstanding for the purpose of
computing the percentage of outstanding shares of the Common Stock owned by
any other person.
(4) JFL Co-Invest Partners I, L.P. is a Delaware limited liability company that
is an affiliate of J.F. Lehman Equity Investors I, L.P. and J.F. Lehman &
Company. Each of Messrs. Lehman, Glickman, Sawyer, Oster, and Stroud,
either directly (whether through ownership interest or position) or through
one or more intermediaries, may be deemed to control JFL Co-Invest
Partners I, L.P., J.F. Lehman Equity Investors I, L.P. and J.F. Lehman &
Company. J.F. Lehman Investors I, L.P. and J.F. Lehman & Company may be
deemed to control the voting and disposition of the shares of the Common
Stock owned by JFL Co-Invest Partners I, L.P. Accordingly, for certain
purposes, Messrs. Lehman, Glickman, Sawyer, Oster and Stroud may be deemed
to be beneficial owners of the shares of Common Stock owned by JFL
Co-Invest Partners I, L.P.
(5) Represents 735,294 shares owned by the Neubauer and Treinen Family Trusts
that J.F. Lehman & Company has the right to vote under an irrevocable
voting power and has the right to acquire at any time prior to
December 15, 2002.
(6) Includes 367,647 shares as to which Mr. Neubauer has granted
J.F. Lehman & Company an irrevocable voting proxy and which J.F. Lehman &
Company has the right to acquire at any time prior to December 15, 2002.
(7) All of such shares are owned by the Treinen Family Trust dated December 2,
1981, as restated on November 3, 1986, under which Mr. Treinen is the sole
trustee and has sole voting and investment power. Includes 367,647 shares
as to which Mr. Treinen has granted J.F. Lehman & Company an irrevocable
voting proxy and which J.F. Lehman & Company has the right to acquire at
any time prior to December 15, 2002.
(8) Mr. Boileau is a member of a limited partnership of J.F. Lehman Equity
Investors I, L.P. The address for Mr. Boileau is 202 North Brentwood
Boulevard, Apt. 3A, St. Louis, Missouri 63105.
(9) As an affiliate of Paribas, Mr. Binning may be deemed to control the shares
of Common Stock owned by Paribas Principal, Inc. Accordingly, Mr. Binning
may be deemed to be beneficial owner of the shares of Common Stock owned by
Paribas Principal, Inc. reflected above. The address for Mr. Binning is c/o
Paribas Principal, Inc., 787 Fifth Avenue, New York, New York 10019.
(10) The address of Messrs. Lehman, Glickman, Sawyer, Oster and Stroud is 2001
Jefferson Davis Highway, Suite 607, Arlington, Virginia 22202.
(11) Mr. Paul is a member of a limited partnership of J.F. Lehman Equity
Investors I, L.P. The address for Mr. Paul is 21 Springwood Drive,
Trumbull, Connecticut 06611.
31
<PAGE>
(12) Mr. Pownall is a member of a limited partnership of J.F. Lehman Equity
Investors I, L.P. and is on the investment advisory board of
J.F. Lehman & Company. The address for Mr. Pownall is 1800 K Street, N.W.,
Suite 724, Washington, D.C. 20006.
(13) Includes options exercisable within 60 days of October 31, 1999 for
50,000, 2,250, 4,500, 5,000, 5,750, 7,500 and 4,500 shares for
Messrs. Cuthbert, Levin, Fabian, Smith, Thomas J. Treinen, Vinke and
Ritchie, respectively.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCKHOLDERS AGREEMENT
Upon consummation of the Recapitalization, the Company entered into a
Stockholders Agreement with JFL Equity Investors I, L.P., JFL Co-Invest
Partners I, L.P., Paribas Principal, Inc., the Treinen Family Trust and the
Neubauer Family Trust (collectively, the "Stockholders") and J.F. Lehman &
Company. Among other things, the Stockholders Agreement provides that each
Stockholder will vote all of its Common Stock to elect as directors the 11
persons designated as directors by JFL Equity Investors I, L.P. and the one
person designated as a director by Paribus Principal Inc. The Stockholders
Agreement contains customary restrictions on transfer, rights of first offer,
preemptive rights, tag-along and drag-along rights. The Stockholders Agreement
will terminate upon the earlier of:
- the tenth anniversary of the Stockholders Agreement,
- the date when all Stockholders and their transferees cease to hold any
Securities (as defined under the Stockholders Agreement),
- the date when all Securities have been sold in a registered public
offering or distributed to the public pursuant to Rule 144 under the
Securities Act, or
- the date when Securities at an aggregate offering price of at least
$20,000,000 are sold in a registered public offering.
The Stockholders Agreement will terminate with respect to any Stockholder
once that Stockholder ceases to hold any Securities. The Stockholders Agreement
will terminate with respect to any Securities once those Securities have been
sold in a registered public offering or distributed to the public pursuant to
Rule 144 under the Securities Act.
ROLLOVER STOCKHOLDERS AGREEMENT
Upon consummation of the Recapitalization, the Company entered into a
Rollover Stockholders Agreement with J.F. Lehman & Company, and the Treinen and
Neubauer family trusts. The Rollover Stockholders Agreement provides that the
Neubauer and Treinen family trusts and their respective transferees will have
the right under certain circumstances to require the Company to purchase all or
any portion of the Additional Rollover Shares (as defined in the Rollover
Stockholders Agreement) at the Call Price (as defined in the Rollover
Stockholders Agreement). The Rollover Stockholders Agreement also provides that
J.F. Lehman & Company will have the right for a specified period to purchase any
or all of the Additional Rollover Shares held by the Neubauer and Treinen family
trusts at the Call Price. J.F. Lehman & Company has an irrevocable proxy to vote
all of the Additional Rollover Shares it has a right to acquire.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Registration Rights Agreement entered into upon consummation
of the Recapitalization, J.F. Lehman Equity Investors I, L.P., JFL Co-Invest
Partners I, L.P., Paribas Principal, Inc., the Treinen Family Trust and the
Neubauer Family Trust and any of their direct or indirect
32
<PAGE>
transferees have certain demand and piggyback registration rights, on customary
terms, with respect to the Common Stock held by such entities and persons.
MGG CONTRIBUTION, LICENSE AND LEASE
In July 1999, the Company entered into a Contribution, License and Lease
Agreement with McCormick Selph, Inc. ("MSI"), an affiliate of our controlling
stockholder, pursuant to which the Company received certain assets and licensed
the intellectual property comprising the micro gas generator ("MGG") automotive
product line. MGG units are used by the automotive industry in seat belt
pretentioner applications. Under the terms of the agreement, MSI licensed to the
Company on a perpetual, non-exclusive basis, the intellectual property rights to
produce MGG units, and leased to the Company the portion of the premises in
Hollister, California where the tangible MGG assets are located. The Company is
obligated to pay MSI $14,000 per month for the leased premises. As consideration
for the licensed intellectual property, the Company is obligated to pay a
royalty of $0.25 per MGG unit produced and sold by the Company. The Company's
obligation to pay the royalty will arise once it has commenced production of MGG
units at one of its facilities (which is expected to occur by September 30,
2000) and will terminate no later than July 16, 2003. Finally, during the term
of the lease, MSI has agreed to provide the Company with certain materials and
manpower resources to enable the Company to produce MGG units at the Hollister
facility. In exchange for such materials and services, the Company has agreed to
pay MSI $36,000 per month.
33
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
(a)(1) FINANCIAL STATEMENTS
Report of Independent Accountants........................... F-1
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets at October 31, 1998 and 1999.... F-3
Consolidated Statements of Operations for each of the three
years ended October 31, 1999.............................. F-4
Consolidated Statements of Stockholders' Equity for each of
the three years ended October 31, 1999.................... F-5
Consolidated Statements of Cash Flows for each of the three
years ended October 31, 1999.............................. F-6
Notes to Consolidated Financial Statements.................. F-7
(a)(2) FINANCIAL STATEMENT SCHEDULES
All other financial statement schedules have been omitted as
they are not applicable, not material or the required
information is included in the Consolidated Financial
Statement or Notes thereto.
(a)(3) EXHIBITS
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
1.1(k) Purchase Agreement, dated as of December 11, 1998, among SDI
Acquisition Corp. and BT Alex. Brown Incorporated and
Paribas Corporation.
2.1(a) Amended and Restated Agreement and Plan of Merger, dated as
of June 19, 1998, between the Company and SDI Acquisition
Corp.
2.2(b) Amendment No. 1, dated as of October 27, 1998, to the
Amended and Restated Agreement and Plan of Merger between
the Company and SDI Acquisition Corp.
2.3(c) Guaranty Agreement, dated as of June 19, 1998, between J.F.
Lehman Equity Investors I, L.P. and the Company
3.1(k) Certificate of Incorporation of the Company
3.2(k) Bylaws of the Company
3.3(k) Certificate of Incorporation of Scot, Incorporated
3.4(k) By laws of Scot, Incorporated
4.1(k) Indenture, dated as of December 15, 1998, among SDI
Acquisition Corp., the Guarantors named therein and United
States Trust Company of New York, as Trustee.
4.2(k) First Supplemental Indenture, dated as of December 15, 1998,
among the Company, the Guarantors named therein and the
United States Trust Company of New York, as Trustee.
4.3(k) Form of 11 3/8% Senior Subordinated Note due 2008, Series A
(see Exhibit A of the First Supplemental Indenture in
Exhibit 4.2).
4.4(k) Form of 11 3/8% Senior Subordinated Note due 2008, Series B
(see Exhibit B of the First Supplemental Indenture in
Exhibit 4.2).
4.5(k) Registration Rights Agreement, dated as of December 15,
1998, among SDI Acquisition Corp., as Issuer and BT Alex.
Brown Incorporated and Paribas Corporation as Initial
Purchasers.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.1(k) Assumption Agreement, dated as of December 15, 1998, by the
Company and Scot, Incorporated, assuming, among other
things, the obligations of SDI Acquisition Corp. under the
Purchase Agreement and the Registration Rights Agreement
10.2(k) Credit Agreement, dated as of December 15, 1998, among the
Company, various banks and Bankers Trust Company, as Lead
Arranger and Administrative Agent.
10.3(k) Security Agreement, dated as of December 15, 1998, by the
Company and Scot, Incorporated in favor of Bankers Trust
Company.
10.4(k) Pledge Agreement, dated as of December 15, 1998, by the
Company and Scot, Incorporated in favor of Bankers Trust
Company.
10.5(k) Subsidiaries Guarantee, dated as of December 15, 1998, by
Scot, Incorporated in favor of Bankers Trust Company.
10.6(k) Management Agreement, dated as of December 15, 1998, between
the Company and J.F. Lehman & Company
10.7(k) Management Services Agreement, dated as of December 15,
1998, between the Company and J.F. Lehman & Company
10.8(k) Subscription Agreement, dated as of September 7, 1998, among
the Company, Paribas Principal Inc., J.F. Lehman Equity
Investors I, L.P. and JFL Co-Invest Partners I, L.P.
10.9(k) Amendment No. 1 to Subscription Agreement, dated as of
December 3, 1998, among the Company, Paribas Principal Inc.,
J.F. Lehman Equity Investors I, L.P. and JFL Co-Invest
Partners I, L.P.
10.10(k) Amendment No. 2 to Subscription Agreement, dated as of
December 15, 1998, among the Company, Paribas Principal
Inc., J.F. Lehman Equity Investors I, L.P. and JFL Co-
Invest Partners I, L.P.
10.11(k) Stockholders Agreement, dated as of December 15, 1998, among
the Company, J.F. Lehman & Co., J.F. Lehman Equity Investors
I, L.P., JFL Co-Invest Partners I, L.P., the Neubauer Family
Trust, by Walter Neubauer trustee, and the Treinen Family
Trust, by Thomas F. Treinen trustee.
10.12(k) Pledge Agreement, dated as of December 15, 1998, between the
Neubauer Family Trust, by Walter Neubauer, trustee and J.F.
Lehman & Company.
10.13(k) Rollover Stockholders Agreement, dated as of December 15,
1998, among the Company, J.F. Lehman & Co., the Neubauer
Family Trust, by Walter Neubauer trustee, and the Treinen
Family Trust, by Thomas F. Treinen trustee.
10.14(k) Pledge Agreement, dated as of December 15, 1998, between
Thomas Treinen Family Trust, by Thomas F. Treinen, trustee
and J.F. Lehman & Company.
10.15(k) Registration Rights Agreement, dated as of December 15,
1998, among the Company, J.F. Lehman Equity Investors I,
L.P., JFL Co-Invest Partners I, L.P., Paribas Principal
Inc., the Neubauer Family Trust, by Walter Neubauer trustee,
and the Treinen Family Trust, by Thomas F. Treinen trustee.
10.16(d) Lease dated May 1, 1991 between the Company and Placerita
Land and Farming Company.
10.17(d) Letter Agreement dated June 8, 1990 between the Company and
Hermetic Seal Corporation.
10.18(d) Master Purchase Agreement, dated May 15, 1990, between the
Company and TRW Inc. (confidential treatment granted as to
part).
10.19(d) Technology License Agreement dated November 7, 1990 between
the Company and Davey Bickford Smith.
10.20(e) Amended and Restated 1991 Stock Incentive Plan of the
Company
10.21(d) Special Devices, Incorporated 401(k) Plan.
10.22(e) First Amendment to Master Purchase Agreement, dated February
25, 1993, between the Company and TRW, Inc. (confidential
treatment granted as to part).
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.23(f) Letter Agreement, dated November 30, 1994 between the
Company and Hermetic Seal Corporation (confidential
treatment granted as to part).
10.24(f) Employment Agreement dated September 7, 1994, between the
Company, Scot, Incorporated and Samuel Levin.
10.25(g) Second Amendment to Master Purchase Agreement, dated March
8, 1995, between the Company and TRW, Inc. (confidential
treatment granted as to part).
10.26(h) Supply Agreement dated as of November 14, 1995 between the
Company and Autoliv International, Inc. (confidential
treatment requested as to part).
10.27(i) Development Agreement, dated August 28, 1996, between
Company and the City of Moorpark.
10.28(j) Purchase Agreement, dated September 30, 1997, between the
Company and Hermetic Seal Corporation (confidential
treatment requested as to part).
10.29 Employment Agreement dated October 1, 1999 between the
Company and Thomas W. Cresante.
10.30 Non-competition Agreement, dated July 29, 1999, between
Scot, Incorporated and Samuel Levin.
10.31 1999 Stock Option Plan dated June 23, 1999.
10.32 Contribution, License, and Lease Agreement between McCormick
Selph, Inc. and the Company dated May 17, 1999.
10.33 Capital Call Agreement dated January 26, 2000 among the
Company, various banks, and Bankers Trust Company as
Administrative Agent.
10.34 Second Amendment to Credit Agreement, dated January 26, 2000
among the Company, various banks, and Bankers Trust Company,
as Lead Arranger or Administrative Agent.
12.1(k) Statement of Computation of Ratios of Earnings to Fixed
Charges
21.1(k) Subsidiaries of the Company
25.1(k) Form T-1 Statement of Eligibility of United States Trust
Company of New York to act as trustee under the Indenture
27 Financial Data Schedules
</TABLE>
- ------------------------
(a) Previously filed as Appendix A to the Company's Proxy Statement on Schedule
14A filed with the Commission on August 18, 1998 and incorporated by
reference herein.
(b) Previously filed as Appendix B to the Company's Proxy Statement on Schedule
14A filed with the Commission on December 10, 1998 and incorporated by
reference herein.
(c) Previously filed as Exhibit 2.3 to the Company's Current Report on Form 8-K
filed with the Commission on July 10, 1998 and incorporated by reference
herein.
(d) Previously filed as an exhibit to Registration Statement on Form S-1 (File
No. 33-40903) and incorporated herein by reference.
(e) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended October 31, 1994 and incorporated herein by
reference.
(f) 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.
(g) Previously filed as an exhibit to Registration Statement on Form S-1 (File
No. 33-89902) and incorporated herein by reference.
(h) 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.
(i) Previously filed as an exhibit to Annual Report on Form 10-K for the fiscal
year ended October 31, 1996 and incorporated herein by reference.
(j) Previously filed as an exhibit to Annual Report on Form 10-K for the fiscal
year ended October 31, 1997 and incorporated herein by reference.
(k) Previously filed as an exhibit to Registration Statement on Form S-4 (File
No. 333-75869) and incorporated herein by reference.
36
<PAGE>
(b) REPORTS ON FORM 8-K
On August 27, 1999, Special Devices, Incorporated (the "Company") dismissed
KPMG LLP as its independent accountants and appointed PricewaterhouseCoopers LLP
as auditors for the Company as of August 27, 1999. The Audit Committee of the
Company's Board of Directors recommended the change in independent accountants
and the change was approved by the Board of Directors. See Form 8-K filed
September 3, 1999.
Effective October 1, 1999, Thomas W. Cresante became the new Chief Executive
Officer of Special Devices, Incorporated, replacing George A. Sawyer, a director
of the Company who served as President and Chief Executive Officer on an interim
basis. Mr. Cresante has entered into a two-year employment agreement with the
Company. Mr. Sawyer, who stepped down as President and Chief Executive Officer
of the Company on October 1, 1999, will remain on the Board of Directors. See
Form 8-K filed September 22, 1999.
37
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Special Devices, Incorporated:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity, and cash flows
present fairly, in all material respects, the financial position of Special
Devices, Incorporated and its subsidiary at October 31, 1999, and the results of
their operations and their cash flows for the fiscal year then ended in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Los Angeles, California
January 26, 2000
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Special Devices, Incorporated:
We have audited the accompanying consolidated balance sheet of Special
Devices, Incorporated and subsidiary as of October 31, 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the two-year period ended October 31, 1998. 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 principals 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, 1998, and the results of
their operations and their cash flows for each of the years in the two-year
period ended October 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Los Angeles, California
December 9, 1998
F-2
<PAGE>
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 31
-------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,248 $ 448
Accounts receivable, net of allowance for doubtful
accounts of $385 in 1998 and $352 in 1999............... 19,410 26,675
Inventories............................................... 16,609 17,833
Deferred tax assets....................................... 1,366 4,883
Prepaid expenses and other current assets................. 546 1,171
Income taxes receivable................................... -- 4,264
-------- --------
Total current assets.................................. 39,179 55,274
-------- --------
Property, plant and equipment, at cost......................
Land...................................................... 1,611 4,227
Building and improvements................................. 9,332 36,923
Furniture, fixtures and computer equipment................ 3,338 5,815
Machinery and equipment................................... 59,483 79,209
Transportation equipment.................................. 331 484
Leasehold improvements.................................... 3,929 237
Construction in progress (includes land and related costs
of $25,562 in 1998 and $468 in 1999).................... 38,236 4,203
-------- --------
Gross property, plant, and equipment.................. 116,260 131,098
Less accumulated depreciation & amortization.......... (31,489) (41,016)
-------- --------
Net property, plant and equipment..................... 84,771 90,082
Other assets, net of accumulated amortization............... 669 10,296
-------- --------
$124,619 $155,652
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 9,360 $ 16,574
Accounts payable to related parties....................... 270 --
Accrued liabilities....................................... 7,178 12,281
Accrued environmental and other investigation costs....... -- 9,617
Income taxes payable...................................... 4,590 --
Current portion of long-term debt......................... 2,110 6,600
-------- --------
Total current liabilities............................... 23,508 45,072
Deferred income taxes....................................... 3,415 2,331
Long-term debt, net of current portion...................... 416 168,600
Other long-term liability................................... -- 555
-------- --------
Total liabilities....................................... 27,339 216,558
-------- --------
Redeemable common stock..................................... -- 27,625
Stockholder's equity (deficit):
Preferred stock $.01 par value, 2,000,000 shares
authorized; no shares issued and outstanding in 1998 and
1999.................................................... -- --
Common stock, $.01 par value, 20,000,000 shares
authorized; 7,809,881 and 3,706,889 shares issued and
outstanding in 1998 and 1999, respectively.............. 78 30
Additional paid-in capital................................ 51,364 74,587
Retained earnings (deficit)............................... 45,838 (163,148)
-------- --------
Total stockholders' equity (deficit).................... 97,280 (88,531)
-------- --------
$124,619 $155,652
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED OCTOBER 31
---------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Net sales................................................... $ 140,502 $ 170,538 $ 166,499
Cost of sales............................................... 112,553 131,610 135,724
--------- --------- ---------
Gross profit............................................ 27,949 38,928 30,775
--------- --------- ---------
Operating expenses.......................................... 10,722 13,023 16,962
Environmental and other investigation costs................. -- -- 11,117
--------- --------- ---------
Total operating expenses.................................... 10,722 13,023 28,079
--------- --------- ---------
Earnings from operations................................ 17,227 25,905 2,696
--------- --------- ---------
Other (expense) income:
Interest expense.......................................... (258) (156) (16,605)
Interest income........................................... 369 108 3
Management fees........................................... -- -- (788)
Recapitalization costs.................................... -- -- (16,180)
--------- --------- ---------
Total other (expense) income............................ 111 (48) (33,570)
--------- --------- ---------
Earnings (loss) before income taxes..................... 17,338 25,857 (30,874)
Income tax provision (benefit).............................. 6,660 10,410 (10,608)
--------- --------- ---------
Net earnings (loss)....................................... $ 10,678 $ 15,447 $ (20,266)
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
--------------------- PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY (DEFICIT)
---------- -------- ----------- --------- -----------------
<S> <C> <C> <C> <C> <C>
Balance, October 31, 1996.............. 7,675,535 $ 77 $ 49,911 $ 19,713 $ 69,701
Issuance of common stock on exercise of
stock options........................ 95,632 1 977 -- 978
Net earnings........................... -- -- -- 10,678 10,678
---------- -------- -------- --------- ---------
Balance, October 31, 1997.............. 7,771,167 78 50,888 30,391 81,357
Issuance of common stock on exercise of
stock options........................ 38,634 -- 476 -- 476
Net earnings........................... -- -- -- 15,447 15,447
---------- -------- -------- --------- ---------
Balance, October 31, 1998.............. 7,809,801 78 51,364 45,838 97,280
Record acquisition transaction......... (3,367,618) (41) 22,562 (163,727) (141,206)
Record redeemable common stock......... (735,294) (7) (24,993) (25,000)
Contributed assets..................... -- -- 3,286 -- 3,286
Accreted put premium on redeemable
common stock......................... -- -- (2,625) -- (2,625)
Net loss............................... -- -- -- (20,266) (20,266)
---------- -------- -------- --------- ---------
Balance, October 31, 1999.............. 3,706,889 $ 30 $ 74,587 $(163,148) $ (88,531)
========== ======== ======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED OCTOBER 31
-------------------------------
1997 1998 1999
-------- -------- ---------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net earnings (loss)....................................... $ 10,678 $ 15,447 $ (20,266)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization........................... 6,377 8,520 15,110
Deferred income taxes................................... 50 (100) (4,601)
Changes in assets and liabilities:
Accounts receivable..................................... (5,530) (1,218) (7,324)
Inventories............................................. 3,744 (2,054) (1,578)
Prepaid expenses and other current assets and income
taxes receivable...................................... (102) (42) (4,889)
Other assets............................................ 53 (520) (1,548)
Accounts payable, accounts payable to related parties
and accrued liabilities............................... 3,987 5,740 21,664
Other long-term liability............................... -- -- 555
Income taxes payable.................................... (733) 3,332 (4,590)
-------- -------- ---------
Net cash provided by (used in) operating activities..... 18,524 29,105 (7,467)
-------- -------- ---------
Cash Flows From Investing Activities:
Purchases of property, plant and equipment.............. (22,544) (38,523) (16,046)
Sales of marketable securities.......................... 3,950 6,750 --
-------- -------- ---------
Net cash used in investing activities................... (18,594) (31,773) (16,046)
-------- -------- ---------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock.................. 978 476 --
Proceeds from issuance of long-term debt................ -- -- 170,000
Repurchase of common stock.............................. -- -- (41)
Recapitalization costs.................................. -- -- (141,165)
Payment of deferred financing fees...................... -- -- (8,815)
Net borrowings under revolving line of credit........... 750 1,300 5,900
Repayment of long-term debt............................. (1,835) (275) (3,166)
-------- -------- ---------
Net cash provided by (used in) financing activities..... (107) 1,501 22,713
-------- -------- ---------
Net decrease in cash........................................ (177) (1,167) (800)
Cash at beginning of year................................... 2,592 2,415 1,248
-------- -------- ---------
Cash at end of year......................................... $ 2,415 $ 1,248 $ 448
======== ======== =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest (net of amounts capitalized in 1997 and
1998)................................................. $ 269 $ 156 $ 11,181
Income taxes............................................ 7,200 7,178 5,349
Non-cash financing activities:
Assignment of note payable.............................. $ 530 -- --
Long-term debt assumed by buyer on sale of aircraft..... -- $ 1,500 --
Issuance of redeemable common stock..................... -- -- $ 27,625
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY OPERATIONS
Special Devices, Incorporated, a Delaware corporation, and its wholly owned
subsidiary, Scot, Incorporated ("Scot"), collectively referred to as "the
Company," is a leading designer and manufacturer of highly reliable precision
engineered pyrotechnic devices. These devices are used predominantly in vehicle
airbag and other automotive safety systems as well as in various aerospace
applications. Our primary products are initiators, which function like an
"electrical match" to ignite the gas generating charge in an automotive airbag
system or to provide precision ignitions in aerospace-related products. In
manufacturing our products, which utilize pyrotechnic materials, we ensure safe
handling and processing by following strict safety procedures that we have
developed for nearly 40 years.
On December 15, 1998, the Company consummated a series of transactions
accounted for as a recapitalization (the "Recapitalization") whereby affiliates
of J.F. Lehman and Company ("J.F. Lehman") obtained a controlling interest in
the Company. As a result of the Recapitalization the Company delisted its common
stock from the Nasdaq Stock Market, and accordingly filed for deregistration
with the Securities and Exchange Commission.
In connection with the Recapitalization all shares of the Company's Common
Stock, other than those retained by certain members of management and certain
other stockholders (the "Continuing Stockholders"), were converted into the
right to receive $34 per share in cash. The Continuing Stockholders retained
approximately 41.3% of the common equity of the Company while new investors
acquired the balance of the equity interests in the Company.
The Company has the right with respect to certain of the outstanding shares
of common stock held by the Continuing Stockholders (additional rollover shares)
to acquire all or any portion of such shares prior to December 31, 2002. The
owners of the additional rollover shares under certain conditions have the right
to require the Company to purchase all or a portion of the additional rollover
shares at a price per share equal to the call price. Accordingly, the additional
rollover shares have been recorded as redeemable common stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company.
All material intercompany accounts and transactions have been eliminated.
F-7
<PAGE>
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 primarily recognized when products are
shipped. The Aerospace Division manufactures products under fixed price,
long-term contracts directly for the U.S. Department of Defense, their prime
contractors and commercial companies. The contracts vary in length, but
generally are completed within 12 to 24 months. Sales under long-term production
contracts are recognized as units are shipped or, in some cases, when accepted
by the customer; sales under significant engineering contracts are recognized
under the percentage of completion method.
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 amounts reported in the financial statements and the
accompanying notes. 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 (excluding short-term borrowings) approximate the fair
values due to the relatively short maturities of these instruments.
At October 31, 1999, the Company estimated the fair value of its total debt,
including short-term borrowings, to be approximately $145,200,000.
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.
F-8
<PAGE>
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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 following are the lives used
in determining depreciation rates of various assets:
<TABLE>
<S> <C>
Buildings and improvements.................................. 25-39 years
Machinery and equipment..................................... 8 years
Furniture, fixtures and computer equipment.................. 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 the statement of operations.
Interest costs incurred during the period of construction of plant and
equipment are capitalized. The interest costs capitalized were $101,000,
$112,600 and $0 in 1997, 1998 and 1999, respectively.
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
On November 1, 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." 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 requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of SFAS No. 121 did not have a material impact on the Company's
financial position, results of operations, or liquidity.
F-9
<PAGE>
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
On November 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. The statement requires only additional disclosures in the
financial statements; it does not affect the Company's financial position or
results of operations. There is no difference between the net loss and
comprehensive income for the Company for the year ended October 31, 1999.
STOCK-BASED COMPENSATION
On November 1, 1997, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which encourages, but does not require, companies to
record as compensation expense over the vesting period the fair value of all
stock-based awards on the date of grant. The Company has chosen to continue to
account for stock-based compensation using the intrinsic value method prescribed
in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, compensation expense for
stock options is measured as the excess, if any, of the estimate of the market
value of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS No. 133 is effective for all fiscal years
beginning after December 15, 1999. Management believes that the adoption of SFAS
No. 133 will not have a material impact on the Company's financial reporting.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Cost of Startup
Activities." This SOP requires that costs incurred during start-up activities,
including organization costs, be expensed as incurred. SOP 98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998. Initial
application of the SOP should be as of the beginning of the fiscal year in which
the SOP is first adopted and should be reported as a cumulative effect of a
change in accounting principle. The Company will adopt SOP 98-5 in the first
quarter of Fiscal 2000. The Company believes that the adoption of SOP 98-5 will
not have a material impact on its consolidated financial statements.
NON-COMPETE AGREEMENTS
In July 1999, we entered into non-compete agreements with three former
officers of Scot, Incorporated (two of whom retired in December 1999) totaling
$1,825,000. The non-compete agreements expire November 30, 2001, and are being
amortized on the straight-line method.
F-10
<PAGE>
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER
Certain items in prior year and quarterly financial statements have been
reclassified to conform to the 1999 presentation.
3. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following components:
<TABLE>
<CAPTION>
OCTOBER 31
-------------------------
1998 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Commercial customers............................... $ 13,591 $ 17,872
U.S. Government.................................... 2,273 3,018
U.S. Government subcontractors..................... 3,931 6,137
----------- -----------
19,795 27,027
Less allowance for doubtful accounts............... 385 352
----------- -----------
$ 19,410 $ 26,675
=========== ===========
</TABLE>
The following is activity relating to the allowance for doubtful accounts
(in thousands):
<TABLE>
<S> <C>
Balance at October 31, 1996................................. $156
Additions charged to expense................................ 208
Write-offs.................................................. (320)
----
Balance at October 31, 1997................................. 44
Additions charged to expense................................ 510
Write-offs.................................................. (169)
----
Balance at October 31, 1998................................. 385
Additions charged to expense................................ 360
Write-offs.................................................. (393)
----
Balance at October 31, 1999................................. $352
====
</TABLE>
F-11
<PAGE>
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVENTORIES
Inventories and inventoried costs relating to long-term contracts consist of
the following components:
<TABLE>
<CAPTION>
OCTOBER 31
-------------------------
1998 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Raw materials and component parts.................. $ 6,294 $ 6,695
Work in process.................................... 3,678 4,126
Finished goods..................................... 1,651 916
Inventoried costs relating to long term contracts,
net of amounts attributed to revenues recognized
to date.......................................... 6,810 6,598
----------- -----------
18,433 18,335
Less progress payments related to long-term
contracts........................................ 1,824 502
----------- -----------
$ 16,609 $ 17,833
=========== ===========
</TABLE>
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 components:
<TABLE>
<CAPTION>
OCTOBER 31
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Senior term loan........................................... $ 476 $ 69,300
Bank revolver.............................................. 2,050 5,900
Senior subordinated notes.................................. -- 100,000
----- --------
2,526 175,200
Less current portion....................................... 2,110 6,600
----- --------
$ 416 $168,600
===== ========
</TABLE>
As part of the Recapitalization, the Company issued $100,000,000 of Senior
Subordinated Notes. The Notes are due in December 2008, and bear interest at
11 3/8%. Interest is payable semi-annually in June and December.
The Notes are noncollateralized obligations of the Company and are
subordinate to its obligations under the New Credit Facility. The Notes are
fully and unconditionally guaranteed, jointly and severally, on an
noncollateralized, senior subordinated basis by Scot (the "Subsidiary
Guarantor").
F-12
<PAGE>
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LONG-TERM DEBT (CONTINUED)
As part of the Recapitalization, the Company entered into a new credit
facility (the "New Credit Facility") with a syndicate of banks ("the Banks"),
which consists of a $25,000,000 Revolving Credit Facility ("the Revolver") and a
$70,000,000 Senior Term Loan.
The Revolver bears interest at the Banks Base Rate plus an applicable margin
(an effective rate of 10.0% at October 31, 1999). The Company has the option of
converting all or a portion of the balance outstanding under the Revolver to a
Eurodollar Loan, for one, two, three or six month periods, to bear interest at
the Eurodollar Rate plus an applicable margin (an effective rate of 8.1% at
October 31, 1999). At October 31, 1999, $5,900,000 was outstanding under the
Revolver and this amount has been classified as current. Also at October 31,
1999, the Company had $2,321,000 of letters of credit outstanding under the
Revolver, which reduces the amount of additional borrowings available. The total
amount available under the Revolver at October 31, 1999 was $11,779,000. The
Senior Term Loan is a seven year loan which bears interest at the Eurodollar
Rate plus an applicable margin (an effective rate of 9.5% at October 31, 1999).
The New Credit Facility contains several financial and operating covenants which
the Company must meet on a quarterly basis.
On July 14, 1999, the Company and the Banks entered into the First Amendment
to the New Credit Facility pursuant to which the Company increased the Maximum
Swingline Amount (as defined) to $3,000,000 from $1,000,000 while not increasing
the total amount of borrowings available under the Revolver.
On August 20, 1999, the Company notified the Banks of the Company's
potential noncompliance with certain environmental covenants in connection with
an investigation by the California Environmental Protection Agency (the
"Environmental Noncompliance"). On September 14, 1999, the Company and the Banks
entered into a Waiver and Modification to the New Credit Facility pursuant to
which the Banks waived any Default or Event of Default (as defined) arising from
such Environmental Noncompliance until such time as the Banks or the Company
determine that the Environmental Noncompliance has had, or could reasonably be
expected to have, a materially adverse effect on the Company. The Waiver and
Modification to the New Credit Facility also temporarily limited the maximum
borrowings under the Revolver to $20,000,000.
As of October 31, 1999, the Company was not in compliance with certain
financial covenants contained in the New Credit Facility. On January 26, 2000,
the Company entered into a Second Amendment and Waiver to the New Credit
Facility pursuant to which, among other things, certain financial covenants were
amended, and the Company received a waiver for past noncompliance with its
financial covenants. In connection with amending the New Credit Facility on
January 26, 2000, the Company and its controlling stockholder entered into a
capital call agreement (the "Capital Call Agreement") with the Banks. The
Capital Call Agreement requires the controlling stockholder to make a capital
contribution to the Company upon the occurrence of certain events, including the
failure to comply with certain financial covenants contained in the New Credit
Facility. Upon receipt of any such contribution, the Company is obligated to
repay outstanding term loans under the New Credit Facility.
F-13
<PAGE>
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT (CONTINUED)
Substantially all of the Company's assets are pledged as collateral under
the New Credit Facility. As required under the terms of the New Credit Facility,
effective March 16, 1999, the Company entered into an interest rate protection
agreement. The terms of the agreement relate to the notional amount of
$35,000,000 of the total $70,000,000 original principal amount. This agreement
set the rate at 5.42% plus 175 basis points, requiring quarterly interest
payments starting June 17, 1999 through March 17, 2001.
The following are the remaining principal payments under the Senior Term
Loan:
<TABLE>
<CAPTION>
FOR THE YEARS ENDING OCTOBER 31 AMOUNT
- ------------------------------- --------------
(IN THOUSANDS)
<S> <C>
2000........................................................ $ 700
2001........................................................ 700
2002........................................................ 10,000
2003........................................................ 16,700
2004........................................................ 18,000
Thereafter.................................................. 23,200
-------
$69,300
=======
</TABLE>
At October 31, 1998, $2,050,000, was outstanding under a credit agreement,
which was paid in full on December 15, 1998 in connection with the
Recapitalization. This credit agreement was then terminated. In addition, at
October 31, 1998, the Company had outstanding approximately $3,518,000 of
performance bonds collateralized by standby letters of credit.
Also at October 31, 1998, Scot had a term loan with a bank, collateralized
by certain real property of Scot. The principal balance outstanding at
October 31, 1998, was $475,687. The loan was repaid in full on December 15,
1998.
F-14
<PAGE>
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
The income tax provision (benefit) consists of the following components:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED OCTOBER 31
---------------------------------
1997 1998 1999
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................... $5,343 $ 8,492 $ (6,007)
State..................................................... 1,267 2,018 --
------ -------- --------
$6,610 $ 10,510 $ (6,007)
------ -------- --------
Deferred:
Federal................................................... $ 77 $ (96) $ (3,446)
State..................................................... (27) (4) (1,155)
------ -------- --------
$ 50 $ (100) $ (4,601)
------ -------- --------
Total:
Federal................................................... $5,420 $ 8,396 $ (9,453)
State..................................................... 1,240 2,014 (1,155)
------ -------- --------
$6,660 $ 10,410 $(10,608)
====== ======== ========
</TABLE>
The following are temporary differences which give rise to deferred tax
assets and liabilities:
<TABLE>
<CAPTION>
OCTOBER 31
---------------------
1998 1999
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Noncurrent deferred tax assets (liabilities):
Depreciation......................................... $(3,415) $ (3,309)
State net operating losses........................... -- 666
Alternative minimum tax credit....................... -- 312
------- ---------
(3,415) (2,331)
------- ---------
Current deferred tax assets:
Allowance for doubtful accounts...................... 117 156
Inventories.......................................... 472 508
Vacation............................................. 451 527
State income taxes................................... 326 --
Other accruals....................................... -- 3,692
------- ---------
1,366 4,883
------- ---------
Net deferred tax asset (liability)..................... $(2,049) $ 2,552
======= =========
</TABLE>
Management believes that it is more likely than not that future operations
will generate sufficient taxable income to realize the net deferred tax assets.
F-15
<PAGE>
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
The following are the reasons the income tax provision (benefit) differs
from the amount that would have resulted by applying the Federal statutory rates
during such periods to the earnings (loss) before income taxes:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED OCTOBER 31
------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax provision (benefit) at Federal
statutory rates................................ $5,522 $ 9,050 $(10,497)
State income taxes............................... 806 1,312 (1,155)
Recapitalization costs not deductible for tax
purposes....................................... -- -- 2,075
Decrease in tax reserves......................... -- -- (1,000)
Other............................................ 332 48 (31)
------ ------- --------
$6,660 $10,410 $(10,608)
====== ======= ========
</TABLE>
Of the total recapitalization costs of $16,180,000, approximately $6,100,000
consists of certain fees related to the Recapitalization that may not be
deductible for income tax purposes.
The state net operating losses begin to expire in 2005. The alternative
minimum tax credit carries forward indefinitely.
F-16
<PAGE>
SPECIAL DEVICES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. 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, 1998 and 1999, no shares of Preferred Stock were issued or
outstanding.
STOCK OPTIONS AND GRANTS
The Company's Amended and Restated 1991 Stock Incentive Plan (the "1991
Plan") is administered by a committee of the Board of Directors which determines
the amount, type, terms and conditions of the awards made pursuant to the Plan.
The Plan provides for issuance of restricted stock, grants of incentive and
non-qualified stock options, stock appreciation rights and performance share
awards. There are 560,000 shares of Common Stock reserved for issuance under the
1991 Plan.
Pursuant to the 1991 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.
In December 1996, 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, options to purchase
130,000 shares were granted which vest ratably over 5 years from the grant date,
and options to purchase 312,000 shares vest ratably over a period ranging from 5
to 8 years from the grant date. The grants for the latter 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 earnings
levels. The options were granted at the fair market value of the stock on the
grant date, which was $17.00 per share.
In June, 1999, the Company adopted the 1999 Stock Option Plan (the "Plan"),
which provides for the issuance of up to 370,000 shares of common stock pursuant
to awards granted under the Plan. All options have been granted at an exercise
price of $50.00 per share. Options vest ratably over four years and expire on
the tenth anniversary of the date of grant.
In accordance with APB Opinion No. 25, no compensation expense has been
charged to earnings in any of the three years ended October 31, 1999. Had
compensation expense for the Company's stock-based compensation plans been
determined consistent with SFAS No. 123, the Company's net earnings (loss) would
have been adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED OCTOBER 31
---------------------------------
1997 1998 1999
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net earnings (loss)............... As reported $10,678 $ 15,447 $(20,266)
Pro forma 9,415 14,548 (21,976)
</TABLE>
F-17
<PAGE>
SPECIAL DEVICES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1997, 1998, and 1999, respectively: risk-free interest rates of
6.12%, 5.68% and 6.02%; dividend yields of 0% for all three years; and a
weighted-average expected life of the option of 9.2 years for all three years.
The following table summarizes stock option activity for the three years
ended October 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
1991 STOCK AVERAGE 1996 AVERAGE 1999 STOCK AVERAGE
OPTION PLAN EXERCISE PRICE SPECIAL GRANT EXERCISE PRICE OPTION PLAN EXERCISE PRICE
----------- -------------- ------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Shares authorized......... 560,000 442,000 370,000
======= ======= =======
Shares under option:
Outstanding at October 31,
1996.................... 319,710 -- --
Granted................. 33,000 $17.07 442,000 $17.00 -- --
Exercised............... 95,632 $10.85 -- -- -- --
Forfeited............... 10,672 $12.54 -- -- -- --
------- ------- -------
Shares under option:
Outstanding at October 31,
1997.................... 246,406 442,000 --
Granted................. 25,500 $23.80 -- -- -- --
Exercised............... 38,634 $12.30 -- -- -- --
Forfeited............... 1,200 $17.75 -- -- -- --
------- ------- -------
Shares under option:
Outstanding at October 31,
1998.................... 232,072 442,000 --
Granted................. -- -- -- -- 363,200 $50.00
Exercised............... 228,072 $17.75 344,425 $17.00 -- --
Forfeited............... -- -- -- $ -- 7,000 $50.00
------- ------- -------
Outstanding at October 31,
1999.................... 4,000 97,575 356,200
======= ======= =======
Weighted average fair
value of options granted
during the year:........
1997.................... $ 9.19 $ 9.16 --
1998.................... $12.32 -- --
1999.................... -- -- $ 4.80
Options exercisable:
At October 31, 1997..... 129,209 58,000 --
At October 31, 1998..... 119,212 338,000 --
At October 31, 1999..... 4,000 73,530 --
</TABLE>
F-18
<PAGE>
SPECIAL DEVICES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options outstanding
at October 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------
WEIGHTED AVERAGE OPTIONS EXERCISABLE
--------------------- ------------------------------------
AVERAGE EXERCISABLE NUMBER NUMBER WEIGHTED
AT RANGE OF OUTSTANDING AT REMAINING EXERCISE EXERCISABLE AT AVERAGE EXERCISE
EXERCISE PRICE OCTOBER 31, 1999 LIFE PRICE OCTOBER 31, 1999 PRICE
- ------------------- ----------------- ---------- -------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$17.00-$17.75...... 101,575 7.2 $17.51 77,530 $17.04
$50.00............. 356,200 9.8 50.00 -- --
------- ------ ------- ------
457,775 9.2 $42.74 77,530 $17.04
======= ====== ======= ======
</TABLE>
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Registration Rights Agreement entered into upon consummation
of the Recapitalization, J.F. Lehman Equity Investors I, L.P., JFL Co-Invest
Partners I, L.P., Paribas Principal, Inc., the Treinen Family Trust and the
Neubauer Family Trust and any of their direct or indirect transferees have
certain demand and piggyback registration rights, on customary terms, with
respect to the Common Stock held by such entities and persons.
8. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan that provides eligible employees the
opportunity to make tax deferred contributions to a retirement trust account in
amounts up to 20% of their gross wages. The Company can elect to make matching
contributions in amounts that can change from year to year. During the last
three fiscal years the Company matched 30% of an employee's deferral up to the
first 5% of each participating employee's deferral. Employees vest immediately
in the Company's matching contributions. The Company's matching contributions
aggregated approximately $242,000, $244,000 and $332,000 in 1997, 1998 and 1999,
respectively.
9. RELATED PARTY TRANSACTIONS
MANAGEMENT AGREEMENTS WITH J.F. LEHMAN
Pursuant to the terms of a ten-year Management Agreement and a ten-year
Management Services Agreement (together, the "Management Agreements") we entered
into with J.F. Lehman upon consummation of the Recapitalization, we paid
J.F. Lehman a transaction fee of $3,000,000 for its efforts in connection with
the Recapitalization. In addition, we agreed to pay J.F. Lehman an annual
management fee equal to $900,000, payable in advance on a quarterly basis.
COMPONENT PURCHASES
The Company purchased materials from two corporations owned by one of its
stockholders. During the years ended October 31, 1997, 1998 and 1999,
$3,460,000, $720,000 and $4,498,000, respectively, of materials were purchased
from such stockholder's corporations. At October 31, 1998 and 1999, $270,000 and
$203,000, respectively, were owed to the corporations owned by this stockholder.
F-19
<PAGE>
SPECIAL DEVICES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTY TRANSACTIONS (CONTINUED)
MGG CONTRIBUTION, LICENSE AND LEASE AGREEMENT
In July 1999, the Company entered into a Contribution, License and Lease
Agreement with McCormick Selph, Inc. ("MSI"), an affiliate of the Company's
controlling stockholder, pursuant to which the Company received certain assets
and licensed the intellectual property comprising the micro gas generator
("MGG") automotive product line. MGG units are used by the automotive industry
in seat belt pretentioner applications. Under the terms of the agreement, MSI
licensed to the Company on a perpetual, non-exclusive basis, the intellectual
property rights to produce MGG units, and leased to the Company the portion of
the premises in Hollister, California where the tangible MGG assets are located.
The Company is obligated to pay MSI $14,000 per month for the leased premises.
As consideration for the licensed intellectual property, the Company is
obligated to pay a royalty of $0.25 per MGG unit produced and sold by the
Company. The Company's obligation to pay the royalty will arise once it has
commenced production of MGG units at one of its facilities (which is expected to
occur by September 30, 2000) and will terminate no later than July 16, 2003.
Finally, during the term of the lease, MSI has agreed to provide the Company
with certain materials and manpower resources to enable the Company to produce
MGG units at the Hollister facility. In exchange for such materials and
services, the Company has agreed to pay MSI $36,000 per month.
10. MAJOR CUSTOMERS
The following are accounts receivable from, and sales to, customers which
exceeded 10% of total accounts receivable and net sales:
<TABLE>
<CAPTION>
OCTOBER 31
-----------------------------------------
1998 1999
------------------- -------------------
$ % $ %
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Accounts Receivable:
TRW, Incorporated............................. $3,847 19.4% -- --
Autoliv....................................... 5,710 28.9% $2,673 9.9%
Atlantic Research Corporation................. -- -- 8,796 32.5%
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED OCTOBER 31
---------------------------------------------------------------
1997 1998 1999
------------------- ------------------- -------------------
$ % $ % $ %
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Sales:
TRW, Incorporated............ $68,987 49.1% $67,704 39.7% $60,606 36.4%
Autoliv...................... 28,943 20.6% 42,464 24.9% 40,459 24.3%
Atlantic Research
Corporation................ -- -- 19,271 11.3% -- --
</TABLE>
F-20
<PAGE>
SPECIAL DEVICES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for 1998 and 1999:
<TABLE>
<CAPTION>
1998 QUARTER ENDED
---------------------------------------------------------
FEBRUARY 1 MAY 3 AUGUST 2 OCTOBER 31 FULL YEAR
---------- -------- -------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales......................................... $40,732 $45,114 $43,400 $41,292 $170,538
Gross profit...................................... 8,209 10,146 10,503 10,070 38,928
Earnings from operations.......................... 5,546 6,944 7,305 6,110 25,905
Net earnings...................................... 3,387 4,048 4,394 3,618 15,447
</TABLE>
<TABLE>
<CAPTION>
1999 QUARTER ENDED
---------------------------------------------------------
JANUARY 31 MAY 2 AUGUST 1 OCTOBER 31 FULL YEAR
---------- -------- -------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales......................................... $ 37,716 $42,442 $42,775 $43,566 $166,499
Gross profit...................................... 6,992 7,217 9,811 6,755 30,775
Earnings (loss) from operations................... (11,222) 2,958 6,213 4,747 2,696
Net earnings (loss)............................... (10,379) (1,861) 1,143 (9,169) (20,266)
</TABLE>
12. 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 U.S. Department of Defense and their prime
contractors. In the automotive industry, the Company produces airbag initiators
under trade terms for commercial companies.
Each division is allocated administrative operating expenses incurred by the
Company (which are not attributable to a particular division) on an equitable
basis (e.g., sales and headcount) to fairly reflect the benefit received by each
operating division. In 1997 the allocation was made at 35% to the Aerospace
Division and 65% to the Automotive Products Division. In 1998 the allocation was
made at 40% to the Aerospace Division and 60% to the Automotive Products
Division. In 1999 the allocation was made at 21% to the Aerospace Division and
79% to the Automotive Products Division. Administrative operating expenses
amounted to approximately $3,874,000, $3,928,000 and $6,858,000 in 1997, 1998
and 1999, respectively.
The Company operates entirely within the United States and has no
intersegment sales. Corporate assets are primarily cash, prepaid expenses and
other assets.
F-21
<PAGE>
SPECIAL DEVICES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INDUSTRY SEGMENT INFORMATION (CONTINUED)
Financial information for these segments is summarized in the table below:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales:
Automotive Products....................................... $111,930 $135,235 $124,552
Aerospace................................................. 28,572 35,303 41,947
-------- -------- --------
Total net sales......................................... $140,502 $170,538 $166,499
======== ======== ========
Earnings (losses) from operations:
Automotive Products....................................... $ 13,648 $ 18,492 $ 4,028
Aerospace................................................. 3,579 7,413 9,785
Corporate................................................. -- -- (11,117)
-------- -------- --------
Total earnings (losses) from operations................. $ 17,227 $ 25,905 $ 2,696
======== ======== ========
Depreciation and amortization:
Automotive Products....................................... $ 5,593 $ 7,601 $ 12,626
Aerospace................................................. 518 592 1,393
Corporate................................................. 266 327 1,091
-------- -------- --------
Total depreciation and amortization..................... $ 6,377 $ 8,520 $ 15,110
======== ======== ========
Capital expenditures:
Automotive Products....................................... $ 10,911 $ 21,204 $ 12,969
Aerospace................................................. 681 1,270 320
Corporate................................................. 10,952 16,049 2,757
-------- -------- --------
Total capital expenditures.............................. $ 22,544 $ 38,523 $ 16,046
======== ======== ========
Identifiable assets:
Automotive Products....................................... $ 53,997 $ 69,295 $ 78,674
Aerospace................................................. 18,422 21,737 27,667
Corporate................................................. 27,405 33,587 49,311
-------- -------- --------
Total identifiable assets............................... $ 99,824 $124,619 $155,652
======== ======== ========
</TABLE>
F-22
<PAGE>
SPECIAL DEVICES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SCOT, INCORPORATED
Sections 13 and 15(d) of the Securities Exchange Act of 1934 require
presentation of the following audited summarized financial information of the
Subsidiary Guarantor. The Company has elected not to present separate financial
statements and other disclosures concerning the Subsidiary Guarantor because
management believes such information is not material to investors. There are no
significant contractual restrictions on distributions from the Subsidiary
Guarantor to the Company.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED OCTOBER 31
------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
INCOME STATEMENT
Net sales................................................... $11,658 $17,272 $23,722
Gross profit................................................ 4,961 8,930 11,838
Income from continuing operations........................... 2,259 4,704 7,085
Net earnings................................................ 1,391 2,801 6,820
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31
------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET
Current assets.............................................. $ 6,688 $ 6,749 $ 6,979
Non-current assets.......................................... 2,998 3,414 4,722
Current liabilities......................................... 1,312 3,125 4,415
Non-current liabilities..................................... 475 416 555
</TABLE>
14. COMMITMENTS AND CONTINGENCIES
LEASES
LAND AND BUILDINGS
In 1997, the Company signed a 7-year lease for an approximate 25,000 square
foot building in Moorpark, California, for its glass-sealing division. Monthly
rental expense as of October 31, 1999 was approximately $14,000 per month with
annual increases equal to the change in the Consumer Price Index.
OTHER OPERATING LEASES
Rental expense for non-cancelable operating leases for each of the fiscal
years ended October 31, 1997, 1998, and 1999 were approximately $286,000,
$236,000 and $252,000 respectively.
F-23
<PAGE>
SPECIAL DEVICES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The following are future minimum lease payments under non-cancelable
operating leases:
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
For The Years Ending October 31
2000...................................................... $ 270
2001...................................................... 259
2002...................................................... 242
2003...................................................... 183
2004...................................................... 110
-------
Total minimum lease payments.............................. $ 1,064
=======
</TABLE>
OTHER MATTERS
EPA MATTERS. In August 1999, representatives of the Department of Toxic
Substances Control of the California Environmental Protection Agency ("Cal EPA")
conducted an inspection of the Company's former Newhall facility. Following the
inspection, Cal EPA issued a notice of violations ("NOV") indicating that there
had been unauthorized burning and treatment of hazardous waste at the facility.
Management immediately complied with the NOV requirements and directed that an
environmental audit of all facilities be undertaken. In September 1999, a
federal grand jury issued subpoenas requesting copies of documents relating to
the handling, generation, storage, and transportation of hazardous waste and
hazardous materials at our Newhall, Moorpark, and Mesa facilities, as well as
copies of documents related to other health and safety issues.
The Company is cooperating fully with federal and state authorities in
connection with these matters. In light of their preliminary nature, however,
and the fact that the Company's environmental audit is ongoing, the Company is
unable to predict their outcome. These matters have disrupted the conduct of the
Company's business and could result in civil and/or criminal liabilities and
penalties, including fines and remediation costs. Accordingly, there can be no
assurance that these matters will not have a material adverse effect upon the
Company's financial condition or results of operations.
OSHA MATTERS. In February 1999, an accidental explosion occurred at the
Company's Newhall facility, resulting in the death of one employee. A transport
vehicle was heavily damaged by the explosion, while nearby buildings sustained
only minor damage that was quickly repaired. The Company suspended all
production at Newhall for four days to conduct a thorough investigation of the
accident along with the Occupational Safety and Health Administration of the
State of California ("OSHA"). The Company also suspended the blending of
pyrotechnic powders for approximately two weeks. We resumed full production at
Newhall on March 4, 1999. The Newhall facility was vacated upon completion of
the move to the new Moorpark facility in July 1999. OSHA's investigation of the
accident was concluded during the fiscal third quarter, resulting in the
issuance on August 16, 1999, of citations for alleged safety violations and
fines aggregating approximately $20,000. The Company appealed the citations as
lacking in factual basis. The appeal is pending. Because the accident resulted
in a fatality, OSHA's Bureau of Investigation is required to conduct its own
investigation to determine whether to refer the matter to the Distrct Attorney's
Office for Los Angeles County. At this point, given the limited information
available regarding the Bureau of Investigation's inquiry, it is impossible to
predict or assess the likelihood of an unfavorable outcome or predict the amount
of potential liabilities.
F-24
<PAGE>
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
Moorpark, State of California, on the 28th day of January 2000.
<TABLE>
<S> <C> <C>
SPECIAL DEVICES, INCORPORATED
By: /s/ THOMAS W. CRESANTE
-----------------------------------------
Thomas W. Cresante
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ THOMAS W. CRESANTE
------------------------------------------- Director, President and Chief January 28, 2000
Thomas W. Cresante Executive Officer
/s/ DR. JOHN F. LEHMAN
------------------------------------------- Chairman of the Board of January 28, 2000
Dr. John F. Lehman Directors
Director, Executive Vice
/s/ JOSEPH STROUD President and Chief
------------------------------------------- Financial Officer, January 28, 2000
Joseph Stroud Assistant Secretary
/s/ GEORGE SAWYER
------------------------------------------- Director and Secretary January 28, 2000
George Sawyer
/s/ OLIVER C. BOILEAU, JR.
------------------------------------------- Director January 28, 2000
Oliver C. Boileau, Jr.
/s/ DONALD GLICKMAN
------------------------------------------- Director January 28, 2000
Donald Glickman
/s/ WILLIAM PAUL
------------------------------------------- Director January 28, 2000
William Paul
/s/ THOMAS G. POWNALL
------------------------------------------- Director January 28, 2000
Thomas G. Pownall
/s/ GARY BINNING
------------------------------------------- Director January 28, 2000
Gary Binning
/s/ RANDY BRINKLEY
------------------------------------------- Director January 28, 2000
Randy Brinkley
/s/ KEITH OSTER
------------------------------------------- Director January 28, 2000
Keith Oster
</TABLE>
<PAGE>
EXHIBIT 10.29
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into on October 1,
1999 by and between Thomas W. Cresante, an individual ("Executive"), and Special
Devices, Incorporated, a Delaware corporation (the "Company").
1. EMPLOYMENT BY THE COMPANY AND TERM.
(a) FULL TIME AND BEST EFFORTS. Subject to the terms set forth
herein, the Company agrees to employ Executive as Chief Executive Officer, and
in such other executive capacities as may be requested from time to time by the
Company's Board of Directors (the "Board") or a duly authorized committee
thereof, and Executive hereby accepts such employment. Executive shall render
such other services for the Company and corporations controlled by, under common
control with or controlling, directly or indirectly, the Company, and to
successor entities and assignees of the Company ("Company's Affiliates") as the
Company may from time to time reasonably request and as shall be consistent with
the duties Executive is to perform for the Company and with Executive's
experience. During the Term (as defined below), Executive will devote his full
business time and use his best efforts to advance the business and welfare of
the Company, and will not engage in any other employment or business activities
for any direct or indirect remuneration that would be directly harmful or
detrimental to, or that may compete with, the business and affairs of the
Company, or that would interfere with his duties hereunder.
(b) DUTIES. Executive shall serve in an executive capacity and
shall perform such duties as are customarily associated with his position,
consistent with the Bylaws of the Company and as reasonably required by the
Company's Board.
(c) COMPANY POLICIES. The employment relationship between the
parties shall be governed by the general employment policies and practices of
the Company, including but not limited to those relating to protection of
confidential information and assignment of inventions, except that when the
terms of this Agreement differ from or are in conflict with the Company's
general employment policies or practices, this Agreement shall control.
(d) TERM. This agreement shall be effective as of the date
hereof for an initial term of two years. Upon expiration of the initial term or
any renewal term, this agreement shall be automatically renewed for one year
unless terminated by either party upon written notice at least ninety days prior
to the expiration of the current term.
2. COMPENSATION AND BENEFITS.
(a) BASE SALARY. Executive shall receive for services to be
rendered hereunder a salary at the rate of $342,500 per year payable at least as
frequently as monthly and subject to payroll deductions as may be necessary or
customary in respect of the Company's salaried
1
<PAGE>
employees (the "Base Salary"). The Base Salary will be reviewed by and shall be
subject to adjustment at the sole discretion of the Board each year during the
Term.
(b) PARTICIPATION IN BENEFIT PLANS. During the Term, Executive
shall be entitled to participate in any group insurance, hospitalization,
medical, dental, health, accident, disability, retirement or similar plan or
program of the Company now existing or established hereafter to the extent that
he is eligible under the general provisions thereof. The Company may, in its
sole discretion and from time to time, amend, eliminate or establish additional
benefit programs, as it deems appropriate. Executive shall also participate in
all fringe benefits offered by the Company to any of its executives at such
executives' level.
(c) VACATION. Executive shall be entitled to such vacation
time as mutually and reasonably agreeable to the Company and Executive.
(d) BONUSES. During each year of the Term, Executive shall be
eligible to receive at least 60% of Executive's annual Base Salary in bonus
compensation if the Company's EBITDA for that year equals the EBITDA target for
that year as set by the Board, and if the Company's EBITDA for that year exceeds
the EBITDA target for that year by an amount set by the Board, Executive shall
be eligible to receive up to 100% of Executive's annual Base Salary in bonus
compensation.
(e) OPTIONS. Executive shall be eligible to receive options to
purchase up to 3% of the current outstanding amount of the Company's common
stock at a exercise price of $50 per share, subject to vesting and other
provisions set forth in the Company's 1999 Incentive Stock Option Plan. Further,
in the event of change in control, all unexercised options will be fully vested.
(f) DIRECT INVESTMENT. Subject to the provisions of the
Company's Shareholders Agreement, dated December 15, 1998, Executive shall
purchase 5,875 shares of the Company's common stock at a price per share of
$34.00, prior to January 31, 2000. This right is further subject to Executive
becoming a party to the Company's Shareholders Agreement.
(g) TERM LIFE INSURANCE; DISABILITY. During the Term, the
Company shall procure and pay for a total of $750,000 in term life insurance
covering the Executive's life, for the benefit of such beneficiaries as
Executive shall designate, and a disability insurance policy.
3. REASONABLE BUSINESS EXPENSES AND SUPPORT.
(a) Executive shall be reimbursed for documented and
reasonable business expenses in connection with the performance of his duties
hereunder, including appropriate professional fees and dues. Executive shall be
furnished reasonable office space, assistance, including an administrative
assistant, and facilities. The Company will provide Executive with the use of a
company car of his choosing. The Company will also pay for Executive's
membership in one club as reasonably approved by the Company.
2
<PAGE>
(b) The Company will reimburse the Executive for direct
out-of-pocket relocation expenses. The Company will also pay for temporary
living accommodations prior to relocation.
4. TERMINATION OF EMPLOYMENT. The date on which Executive's
employment by the Company ceases, under any of the following circumstances,
shall be defined herein as the "Termination Date."
(a) TERMINATION FOR CAUSE.
(i) TERMINATION; PAYMENT OF ACCRUED SALARY AND VACATION.
The Board may terminate Executive's employment with the Company at any time for
"Cause" (as defined below), immediately upon notice to Executive of the
circumstances leading to such termination for Cause. In the event that
Executive's employment is terminated for Cause, Executive shall receive payment
for all accrued salary through the Termination Date, which in this event shall
be the date upon which notice of termination is given. The Company shall have no
further obligation to pay severance of any kind whether under this Agreement or
otherwise nor to make any payment in lieu of notice.
(ii) DEFINITION OF CAUSE. "CAUSE" means the
occurrence or existence of any of the following with respect to Executive, as
determined in good faith by a majority of the directors of the Board: (a) a
material breach by Executive of any of his material obligations hereunder which
remains uncured after the lapse of 10 days following the date that the Company
has given Executive written notice thereof; (b) a material breach by the
Executive of his duty not to engage in any transaction that represents, directly
or indirectly, self-dealing with the Company or any of its Affiliates which has
not been approved by a majority of the disinterested directors of the Board or
of the terms of his employment, if in any such case such material breach remains
uncured after the lapse of 10 days following the date that the Company has given
the Executive written notice thereof; (c) the repeated material breach by the
Executive of any material duty referred to in clause (a) or (b) above as to
which at least two (2) written notices have been given pursuant to such clause
(a) or (b); (d) any act of misappropriation, embezzlement, intentional fraud or
similar conduct involving the Company or any of its Affiliates; (e) the
conviction or the plea of NOLO CONTENDERE or the equivalent in respect of a
felony involving moral turpitude; (f) intentional infliction of any damage of a
material nature to any property of the Company or any of its Affiliates; or (i)
the abuse of any controlled substance (including prescription drugs) or the
abuse of alcohol or any other non-controlled substance which, in any case
described in this clause, the Board reasonably determines renders the Executive
unfit to serve in his capacity as an officer or employee of the Company or its
Affiliates.
(b) TERMINATION UPON DISABILITY. The Company may terminate
Executive's employment in the event Executive suffers a disability that renders
Executive unable to perform the essential functions of his position, even with
reasonable accommodation, for sixty (60) consecutive days or for ninety (90)
days within any one hundred eighty (180) day period. After the Termination Date,
which in this event shall be the date upon which notice of termination is given,
no further compensation will be payable under this Agreement except that
Executive shall
3
<PAGE>
receive the accrued portion of any salary and bonus hereunder through the
Termination Date, less standard withholdings for tax and social security
purposes, payable, in the case of a bonus, upon such date or over such period of
time which is in accordance with the applicable bonus plan.
(c) TERMINATION WITHOUT CAUSE. The Company may terminate
Executive's employment at any time for other than Cause or disability, pursuant
to the following termination payment requirements:
(i) TERMINATION PAYMENTS DURING THE TERM. In the event
that Executive's employment is terminated by the Company without Cause, the
Company shall pay the Executive the balance due under his contract, less
standard withholdings for tax and social security purposes, over the remaining
term in monthly PRO RATA payments commencing as of the Termination Date. If this
Agreement is not renewed beyond the Term by the parties hereto or if the
Agreement is Terminated by the Company during the last 12 months of the term,
the Company shall pay the Executive a severance of base salary plus target bonus
for one year payable in (12) equal installments commencing on the first day of
the month following termination. In addition all vested options shall be
exercisable in accordance with the terms of the Company's 1999 Incentive Stock
Option Plan.
(ii) The Company shall not be obligated to pay any
termination payments under 3(c)(i) above if Executive breaches the provisions of
Sections 5, 6 or 7 below.
(d) BENEFITS UPON TERMINATION. All benefits provided under
Section 2 hereof shall be extended, at Executive's election and cost, to the
extent permitted by the Company's insurance policies and benefit plans, for one
year after Executive's Termination Date, except (a) as required by law (e.g.,
COBRA health insurance continuation election) or (b) in the event of a
termination described in Section 4(a).
(e) TERMINATION UPON DEATH. If Executive dies prior to the
expiration of the Term, the Company shall (i) continue coverage of Executive's
dependents (if any) under all benefit plans or programs of the type provided
under Section 2 hereof for a period of six (6) months, and (ii) pay to
Executive's estate the accrued portion of any salary and bonus at target through
the Termination Date, less standard withholdings for tax and social security
purposes.
(f) DUTY TO MITIGATE; TERMINATION OF SEVERANCE BENEFITS.
Executive agrees that upon any termination pursuant to Section 4(c) hereof,
Executive shall have a duty to mitigate his damages hereunder. Executive further
agrees that if, at any time following such a termination but prior to the
expiration of the period during which monthly severance benefits are to be paid
by the Company with respect to such termination, Executive secures employment,
such monthly severance benefits shall be reduced by the amount of monthly
compensation Executive is to receive from such new employment.
5. PROPRIETARY INFORMATION OBLIGATIONS. During the Term,
Executive will have access to and become acquainted with the Company's and the
Company's Affiliates' confidential and proprietary information, including, but
not limited to, information or plans
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regarding the Company's and the Company's Affiliates' customer relationships,
personnel, or sales, marketing, and financial operations and methods; trade
secrets; formulas; devices; secret inventions; processes; and other compilations
of information, records, and specifications (collectively "Proprietary
Information"). Executive shall not disclose any of the Company's or the
Company's Affiliates' Proprietary Information directly or indirectly, or use it
in any way, either during the Term or at any time thereafter, except as required
in the course of his employment for the Company or as authorized in writing by
the Company. All files, records, documents, computer-recorded information,
drawings, specifications, equipment and similar items relating to the business
of the Company or the Company's Affiliates, whether prepared by Executive or
otherwise coming into his possession, shall remain the exclusive property of the
Company or the Company's Affiliates, as the case may be, and shall not be
removed from the premises of the Company under any circumstances whatsoever
without the prior written consent of the Company, except when (and only for the
period) necessary to carry out Executive's duties hereunder, and if removed
shall be immediately returned to the Company upon any termination of his
employment. Notwithstanding the foregoing, Proprietary Information shall not
include (i) information which is or becomes generally public knowledge or public
except through disclosure by the Executive in violation of this Agreement and
(ii) information that may be required to be disclosed by applicable law.
6. NONINTERFERENCE. Executive agrees that during the Term and for a
period of eighteen months after termination of this Agreement, he agrees that he
will not interfere with the business of the Company or any Company Affiliate by
directly or indirectly soliciting, attempting to solicit, inducing, or otherwise
causing any employee of the Company or any Company Affiliate to terminate his or
her employment in order to become an employee, consultant or independent
contractor to or for any other employer.
7. NONCOMPETITION. Executive agrees that during the Term and for a
period of two years after the termination of this Agreement, he will not,
without the prior consent of the Company, directly or indirectly, have an
interest in, be employed by, or be connected with, as an employee, consultant,
officer, director, partner, stockholder or joint venturer, in any person or
entity owning, managing, controlling, operating or otherwise participating or
assisting in any business which is in competition with the business of the
Company; PROVIDED, HOWEVER, that the foregoing shall not prevent the Executive
from being a stockholder of less than 1% of the issued and outstanding
securities of any class of a corporation listed on a national securities
exchange or designated as national market system securities on an interdealer
quotation system by the National Association of Securities Dealers, Inc.
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8. MISCELLANEOUS.
(a) NOTICES. Any notices provided hereunder must be in
writing and shall be deemed effective upon the earlier of
two days following personal delivery (including personal
delivery by telecopy or telex), or the fourth day after
mailing by first class mail to the recipient at the address
indicated below:
(b) JURISDICTION. This agreement shall be governed and
interpreted in accordance with the laws of Delaware.
To the Company:
Special Devices, Incorporated
14370 White Sage Road
Moorpark, CA 93021
Attn.: George A. Sawyer
Telecopier No.: 805-553-1208
With a copy to:
Gibson, Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, California 90071-3197
Attention: Kenneth M. Doran, Esq.
Telecopier:(213) 229-7000
To Executive:
Mr. Thomas W. Cresante
8656 E. Larkspur Drive
Scottsdale, AZ 85260
Telecopier No.: 480-951-3289
or to such other address or to the attention of such other person as the
recipient party will have specified by prior written notice to the sending
party.
(b) SEVERABILITY. Any provision of this Agreement which is
deemed invalid, illegal or unenforceable in any jurisdiction shall, as to that
jurisdiction and subject to this paragraph be ineffective to the extent of such
invalidity, illegality or unenforceability, without affecting in any way the
remaining provisions hereof in such jurisdiction or rendering that or any other
provisions of this Agreement invalid, illegal, or unenforceable in any other
jurisdiction. If any covenant should be deemed invalid, illegal or unenforceable
because its scope is considered excessive, such covenant shall be modified so
that the scope of the covenant is reduced only to the minimum extent necessary
to render the modified covenant valid, legal and enforceable.
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(c) ENTIRE AGREEMENT. This document constitutes the final,
complete, and exclusive embodiment of the entire agreement and understanding
between the parties related to the subject matter hereof and supersedes and
preempts any prior or contemporaneous understandings, agreements, or
representations by or between the parties, written or oral.
(d) COUNTERPARTS. This Agreement may be executed on separate
counterparts, any one of which need not contain signatures of more than one
party, but all of which taken together will constitute one and the same
agreement.
(e) SUCCESSORS AND ASSIGNS. This Agreement is intended to bind
and inure to the benefit of and be enforceable by Executive and the Company, and
their respective successors and assigns, except that Executive may not assign
any of his duties hereunder and he may not assign any of his rights hereunder
without the prior written consent of the Company.
(f) AMENDMENTS. No amendments or other modifications to this
Agreement may be made except by a writing signed by both parties. No amendment
or waiver of this Agreement requires the consent of any individual, partnership,
corporation or other entity not a party to this Agreement. Nothing in this
Agreement, express or implied, is intended to confer upon any third person any
rights or remedies under or by reason of this Agreement.
(g) CHOICE OF LAW. All questions concerning the construction,
validity and interpretation of this Agreement will be governed by the laws of
the State of Delaware without giving effect to principles of conflicts of law.
9. ARBITRATION.
(a) Any disputes or claims arising out of or concerning the
Executive's employment or termination by the Company, whether arising under
theories of liability or damages based upon contract, tort or statute, shall be
determined exclusively by arbitration before a single arbitrator in accordance
with the employment arbitration rules of the American Arbitration Association,
except as modified by this Agreement. The arbitrator's decision shall be final
and binding on both parties. Judgment upon the award rendered by the arbitrator
may be entered in any court of competent jurisdiction. In recognition of the
fact that resolution of any disputes or claims in the courts is rarely timely or
cost effective for either party, the Company and Executive enter this mutual
agreement to arbitrate in order to gain the benefits of a speedy, impartial and
cost-effective dispute resolution procedure.
(b) Any arbitration shall be held in the Executive's place of
employment with the Company. The arbitrator shall be an attorney with
substantial experience in employment matters, selected by the parties
alternately striking names from a list of five such persons provided by the
American Arbitration Association (AAA) office located nearest to the place of
employment, following a request by the party seeking arbitration for a list of
five such attorneys with substantial professional experience in employment
matters. If either party fails to strike names from the list, the arbitrator
shall be selected from the list by the other party.
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(c) Each party shall have the right to take the depositions of
a maximum of three individuals, as deemed appropriate by such party. Each party
shall also have the right to propound requests for production of documents to
any party and the right to subpoena documents and witnesses for the arbitration.
Additional discovery may be made only where the arbitrator selected so orders
upon a showing of substantial need. The arbitrator shall have the authority to
entertain a motion to dismiss and/or a motion for summary judgment by any party
and shall apply the standards governing such motions under the Federal Rules of
Civil Procedure.
(d) The Company and Executive agree that they will attempt,
and they intend that they and the arbitrator should use their best efforts in
that attempt, to conclude the arbitration proceeding and have a final decision
from the arbitrator within one hundred twenty (120) days from the date of
selection of the arbitrator; PROVIDED, HOWEVER, that the arbitrator shall be
entitled to extend such 120-day period for a total of two one hundred twenty
(120) day periods. The arbitrator shall immediately deliver a written award with
respect to the dispute to each of the parties, who shall promptly act in
accordance therewith.
(e) The Company shall pay the fees and expenses of the
arbitrator. Each party shall pay its own attorney fees and costs including,
without limitation, fees and costs of any experts. However, attorney fees and
costs incurred by the party that prevails in any such arbitration commenced
pursuant to this Section 9 or any judicial action or proceeding seeking to
enforce the agreement to arbitrate disputes as set forth in this Section 9 or
seeking to enforce any order or award of any arbitration commenced pursuant to
this Section 9 may be assessed against the party or parties that do not prevail
in such arbitration in such manner as the arbitrator or the court in such
judicial action, as the case may be, may determine to be appropriate under the
circumstances. Any controversy over whether a dispute is an arbitrable dispute
or as to the interpretation or enforceability of this paragraph with respect to
such arbitration shall be determined by the arbitrator.
(f) In a contractual claim under this Agreement, the
arbitrator shall have no authority to add, delete or modify any term of this
Agreement.
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IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date it is last executed below by either party.
SPECIAL DEVICES, INCORPORATED
By: [ILLEGIBLE]
------------------------------------
Title: Chief Executive Officer
September 16, 1999
EXECUTIVE
/s/Thomas W. Cresante
--------------------------------------
Thomas W. Cresante
September 16, 1999
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Exhibit 10.30
NON-COMPETITION AGREEMENT
NON-COMPETITION AGREEMENT (this "Agreement"), dated as of July 29, 1999, by
and between Samuel Levin, an individual (the "Executive"), and Scot
Incorporated, a Delaware corporation (the "Company").
RECITALS
WHEREAS, the parties hereto recognize and agree that the non-competition
covenants in this Agreement are necessary, among other things, to protect the
value of the business engaged in by the Company and Special Devices,
Incorporated, a Delaware corporation and the sole stockholder of the Company
("SDI").
NOW, THEREFORE, in consideration of the foregoing recital, the terms and
provisions herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. COVENANT NOT TO COMPETE.
(a) In consideration of, among other things, the payments set forth in
Section 2 of this Agreement, for the period commencing on the date hereof and
extending until November 30, 2001, the Executive will not, voluntarily or
involuntarily, for any reason whatsoever, directly or indirectly, individually
or on behalf of persons not now parties to this Agreement, or as a partner,
stockholder, director, officer, principal, agent, or in any other capacity or
relationship, for his own account or for the benefit of any other person, firm,
corporation, partnership, association or other entity:
(i) compete in the Business (as defined below) with the Company or SDI
or any of their successors or assigns, within the United States of America
or the European Community (the "Territory");
(ii) engage in the business of owning or managing any company that
engages in the Business or any other operation that sells products that
compete with the products produced by the Business within the Territory;
PROVIDED, HOWEVER, that the ownership of less than 2% of the outstanding
shares of any class of capital stock of a publicly-held corporation shall
not be deemed to be a violation of this Section 1(a);
(iii) solicit for employment or hire any of the officers or directors
or other persons currently employed by the Company or SDI or those persons
that are in the future employed by the Company or SDI or any of their
successors or assigns.
(b) For the purposes of this Section 1, the term "Business" shall mean each
type of business conducted by the Company or SDI as of the date hereof.
(c) During the term of this Agreement, the Executive will not, directly or
indirectly, approach or seek Business from any Customer (as defined below),
refer Business from any Customer to any enterprise or business or be paid
commissions based on Business-
<PAGE>
related sales received from any Customer by any enterprise or business. For
purposes of this Section 1, the term "Customer" means any person, firm,
corporation, partnership, association or other entity to which the Company or
SDI or any of their successors or assigns, provided goods or services during the
36-month period prior to the time at which any determination shall be made that
any such person, firm, corporation, partnership, association or other entity is
a Customer.
(d) The Executive acknowledges that the restrictions imposed by this
Agreement are fully understood by him and are fair and reasonable.
(e) The Executive expressly agrees that the character, duration and
geographical scope of the provisions set forth in this Agreement are reasonable
in light of the circumstances as they exist on the date hereof. Should a
decision, however, be made at a later date by a court of competent jurisdiction
that the character, duration or geographical scope of such provisions is
unreasonable, then it is the intention and the agreement of the parties hereto
that this Agreement shall be construed by the court in such a manner as to
impose only those restrictions on the Executive's conduct that are reasonable in
light of the circumstances and as are necessary to assure the Company and SDI
the benefits of this Agreement. If, in any judicial proceeding, a court shall
refuse to enforce all of the separate covenants deemed included herein because
taken together they are more extensive than necessary to assure to the Company
or SDI the intended benefits of this Agreement, it is expressly understood and
agreed by the parties hereto that the provisions of this Agreement that, if
eliminated, would permit the remaining separate provisions to be enforced in
such proceeding, shall be deemed eliminated, for the purposes of such
proceeding, from this Agreement.
(f) Notwithstanding the restrictions set forth in this Section 1, Executive
may from time to time perform consulting services for various entities owned or
controlled by J.F. Lehman Equity Investors I, L.P. on terms mutually agreeable
to both parties.
2. CONSIDERATION.
(a) In consideration of the Executive's promises in Section 1 hereof, the
Company shall pay an aggregate of $890,000 to the Executive, of which $570,000
will be payable on November 30, 1999, $185,000 will be payable on November 30,
2000 and $135,000 will be payable on November 30, 2001 (each such installment to
be paid without accrual of interest).
(b) Whenever any payments are to be made to the Executive under this
Agreement the Company, in its discretion, may require the Executive to remit to
the Company, or may withhold from such payment, all or any part of the amount
determined in the Company's discretion to be sufficient to satisfy federal,
state and local withholding tax obligations which the Company or its counsel
determine may arise from any payment to the Executive pursuant to this
Agreement.
3. SPECIFIC PERFORMANCE.
The Company, SDI and the Executive recognize that the covenants to be
performed under this Agreement by the Executive are special, unique and of
extraordinary
2
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character, and that in the event of the breach by the Executive of the terms and
conditions of this Agreement, the Company or SDI will be entitled to institute
and prosecute proceedings in any court of competent jurisdiction, either at law
or in equity, to obtain damages for any breach of this Agreement, to enforce the
specific performance thereof by the Executive or to enjoin the Executive from
breaching the provisions of Section 1 or any other provision of this Agreement.
Nothing contained in this Section 3 shall be construed to prevent the Company or
SDI from seeking such other remedy in the courts, in case of any breach of this
Agreement by the Executive, as the Company or SDI may elect.
4. ASSIGNABILITY.
The rights and obligations of the Company and SDI under this Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
the Company and SDI. The Executive's rights and obligations hereunder may not be
assigned or alienated and any attempt to do so by the Executive will be void.
5. NOTICES.
Any notices provided hereunder must be in writing and shall be deemed
effective upon the earlier of personal delivery (including personal delivery by
telecopy or telex) or the third day after mailing by first class mail to the
recipient at the address indicated below:
To the Company:
Scot, Incorporated
2525 Curtiss Street
Downers Grove, Illinois 60515
Attention: Chief Financial Officer
Facsimile: (708) 969-4719
With copies to:
Special Devices, Incorporated
14370 White Sage Road
Moorpark, CA 93021
Attention: Chief Financial Officer
Facsimile: (805) 553-1200
Gibson, Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, California 90071
Attention: Kenneth M. Doran
Facsimile: (213) 229-7537
3
<PAGE>
To Executive:
Mr. Samuel Levin
2539 Osage Dr.
Glenview, Illinois 60025
With a copy to:
Kelly Olson, Michod, Rogan & Siepke
181 West Madison St.
Chicago, Illinois 60602
Attention: Charles L. Michod, Jr.
Facsimile: (312) 236-6706
or to such other address or to the attention of such other person as the
recipient party will have specified by prior written notice to the sending
party.
6. ARBITRATION.
(a) Any controversy, claim or dispute between the parties directly or
indirectly concerning this Agreement or the breach hereof or the subject matter
hereof, including questions concerning the scope and applicability of this
Clause (i), shall be finally settled by arbitration before one arbitrator held
in Chicago, Illinois, in accordance with the rules of commercial arbitration
then followed by the American Arbitration Association or any successor to the
functions thereof. The arbitrator shall have the right and authority to
determine how his or her decision or determination as to each issue or matter in
dispute may be implemented or enforced. Any decision or award of the arbitrator
shall be final and conclusive on the parties to this Agreement, and there shall
be no appeal therefrom other than for gross negligence or willful misconduct on
the part of the arbitrator. The prevailing party in any such dispute shall be
entitled to reimbursement of reasonable attorneys' fees and disbursements from
the non-prevailing party.
(b) The parties hereto agree that an action to compel arbitration pursuant
to this Agreement may be brought in any court and in connection therewith the
laws of the State of Illinois shall control. Application may also be made to
such court for confirmation of any decision or award of the arbitrator, for an
order of enforcement and for any other remedies that may be necessary to
effectuate such decision or award. The parties hereto hereby consent to the
jurisdiction or the arbitrator and of such court and waive any objection to the
jurisdiction of such arbitrator and court.
(c) Notwithstanding the foregoing provisions of this Clause (i), however,
nothing contained herein shall require arbitration of any issue arising under
this Agreement for which injunctive relief is successfully sought by any party
hereto.
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<PAGE>
7. MISCELLANEOUS.
(a) GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the internal, substantive laws of the State of
Illinois, without giving effect to the conflict of laws rules thereof.
(b) AMENDMENT; WAIVER. No amendment or modification of this Agreement shall
be binding unless it is in writing signed by the parties hereto. The waiver by
any party to this Agreement of a breach of any provision hereof by any other
party shall not be construed as a waiver of any subsequent breach by any party.
(c) ENTIRE AGREEMENT. This Agreement represents the entire agreement
between the parties with respect to the subject matter of this Agreement.
(d) BINDING EFFECT. This Agreement shall be binding upon and shall inure to
the benefit of the parties hereto and, to the extent expressly provided herein,
to their respective successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement.
(e) SEVERABILITY OF PROVISIONS. If any provision of this Agreement
otherwise is deemed to be invalid or unenforceable or is prohibited by the laws
of the state or jurisdiction where it is to be performed, this Agreement shall
be considered divisible as to such provision and such provision shall be
inoperative in such state or jurisdiction and shall not be part of the
consideration moving from either of the parties to the other. The remaining
provisions of this Agreement shall be valid and binding and of like effect as
though such provision were not included.
(f) CAPTIONS. The captions used herein are for ease of reference only and
shall not define or limit the provisions hereof.
(g) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but of which taken
together shall constitute one and the same agreement.
5
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of July 29, 1999.
/s/ Samuel Levin
----------------------------------------
Samuel Levin
Scot Incorporated
----------------------------------------
By:
Title:
6
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EXHIBIT 10.31
SPECIAL DEVICES, INCORPORATED
1999 STOCK OPTION PLAN
1. PURPOSE. This Stock Option Plan (the "Plan") is intended as an incentive
to encourage stock ownership by officers and directors and executive and
professional employees of Special Devices, Incorporated (the "Company") and its
Parent and Subsidiary corporations so that they may acquire or increase their
equity interest in the success of the Company and its Parents and Subsidiaries,
and to encourage them to remain in the service of the Company or of its Parents
or Subsidiaries. Each option granted under this Plan will be designated as
either an "Incentive Stock Option" or a "Nonqualified Stock Option." It is
intended that each option designated as an Incentive Stock Option granted under
this Plan will qualify as an incentive stock option within the meaning of
Section 422(b) of the Code.
2. DEFINITIONS.
2.1 "BOARD OF DIRECTORS" means the board of directors of the Company.
2.2 "CHANGE IN CONTROL" shall mean the happening of any of the
following:
2.2.1 any person who is not a stockholder of the Company or of any
Parent on the date of adoption of this Plan (or group of such persons acting in
concert) acquires, during any period of twelve consecutive calendar months,
stock of the Company or of a Parent representing a majority of the voting power
of all stock of the Company or any Parent having the right to vote for the
election of directors;
2.2.2 the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than (i) a merger
or consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than eighty percent (80%) of the combined voting power of
the voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation or (ii) a merger or consolidation
effected to implement a Recapitalization of the Company;
2.2.3 the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets or any transaction
having a similar effect; or
2.2.4 if the Company enters into an agreement with an unrelated
party for the sale of all or substantially all of the assets or outstanding
stock of a Subsidiary (or a transaction having a similar effect), or any other
event occurs by reason of which a Subsidiary ceases to be a Subsidiary of the
Company, a Change in Control shall be deemed to have occurred with respect to
those Employees who are then employed by such Subsidiary.
2.3 "CHANGE IN CONTROL DATE" shall mean the earliest date on which
one of the events described in the definition of "Change in Control" occurs, as
determined by the Board of Directors, in its sole discretion, provided that, if
Section 2.2.4 of the definition of
<PAGE>
SPECIAL DEVICES, INCORPORATED
1999 STOCK OPTION PLAN
Page 2
"Change of Control" applies, the Change in Control Date shall be deemed to be
the date of the agreement, provided that the transaction does close.
2.4 "CHANGE IN CONTROL PRICE" shall mean the highest fair market
value, or the highest price paid or offered in any bona fide transaction related
to a Change in Control of the Company, at any time during the sixty (60) days
preceding the Change in Control Date.
2.5 "CODE" means the Internal Revenue Code of 1986, as amended.
2.6 "COMPANY" means Special Devices, Incorporated, a Delaware
corporation.
2.7 "EMPLOYEE" means any bona fide full or part time common law
employee of the Company or of any Parent or Subsidiary of the Company.
2.8 "INCENTIVE STOCK OPTION" means an Option granted pursuant to
this Plan intended to qualify and designated as an incentive stock option within
the meaning of Section 422 of the Code.
2.9 "NONQUALIFIED STOCK OPTION" means any Option granted pursuant to
this Plan other than an Incentive Stock Option.
2.10 "OPTION" or "STOCK OPTION" means any stock option granted
pursuant to this Plan.
2.11 "OPTIONEE" means any individual to whom an Option is granted
pursuant to this Plan.
2.12 "PARENT" means, at the time of granting any Option, any
corporation (other than the Company) in an unbroken chain of corporations ending
with the Company if each of the corporations other than the Company owns stock
possessing fifty percent (50%) or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.
2.13 "PLAN" means the Special Devices, Incorporated 1999 Stock Option
Plan.
2.14 "RECAPITALIZATION" means any reorganization, merger or other
subdivision, consolidation, recapitalization, reclassification, stock split,
combination of shares, issuance of warrants, stock dividend or similar event
with respect to or affecting the common stock of the Company, par value one cent
($.01) per share.
2.15 "STOCK OPTION COMMITTEE" means the committee appointed to
administer the Plan pursuant to Article 7 herein, if such committee is
appointed.
<PAGE>
SPECIAL DEVICES, INCORPORATED
1999 STOCK OPTION PLAN
Page 3
2.16 "SUBSIDIARY" means, at the time of granting any Option, any
corporation (other than the Company) in an unbroken chain of corporations
beginning with the Company if each of the corporations other than the last
corporation in the unbroken chain owns stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
2.17 "TEN PERCENT SHAREHOLDER" means any person who owns (or is
considered by reason of Section 425(d) of the Code to own) stock possessing more
than ten percent (10%) of the total combined voting power of all classes of
stock of the Company or of any Parent or Subsidiary of the Company.
3. ELIGIBILITY.The persons who shall be eligible to receive Options shall be
such officers, directors and executive and professional employees of the Company
or its Parent or Subsidiary corporations as the Board of Directors shall select
from time to time. An Optionee may hold more than one Option, but only on the
terms and subject to the restrictions hereafter set forth.
4. STOCK. The stock subject to the Options shall be shares of the Company's
authorized but unissued or reacquired common stock, par value one cent ($.01)
per share, hereafter sometimes called Stock. The aggregate number of shares
which may be issued under Options shall not exceed three hundred seventy
thousand (370,000) shares of Stock. The limitation established by the preceding
sentence shall be subject to adjustment as provided in Section 5.12 of the Plan.
If any outstanding Option for any reason expires or is terminated, the shares of
Stock allocable to the unexercised portion of such Option may again be subjected
to an Option under the Plan.
5. TERMS AND CONDITIONS
5.1 OPTION AGREEMENT. Stock Options granted pursuant to the Plan
shall be authorized by the Board of Directors and shall be evidenced by
agreements in such form as the Board of Directors shall from time to time
approve, which agreements shall comply with and be subject to the terms and
conditions set forth in this Article 5. The agreements shall not impose upon the
Company or its Parents or Subsidiaries any obligation to retain the Optionee in
their employ for any period.
5.2 NUMBER OF SHARES. Each Option shall state the number of shares of
Stock to which it pertains.
5.3 OPTION PRICE. Each Option shall state the option price, which
in the case of an Incentive Stock Option shall be not less than (i) one hundred
percent (100%) of the fair market value of the shares of Stock on the date of
the granting of the Option if the Optionee is not a Ten Percent Shareholder, or
(ii) one hundred ten percent (110%) of the fair market value
<PAGE>
SPECIAL DEVICES, INCORPORATED
1999 STOCK OPTION PLAN
Page 4
of the shares of Stock on the date of the granting of the Option if the Optionee
is a Ten Percent Shareholder. The fair market value of the shares of Stock shall
be determined pursuant to Section 7.2.
5.4 MEDIUM AND TIME OF PAYMENT. The option price shall be payable
upon the exercise of the Option and may be paid in cash or by good check. At the
sole option of the Company, if approved by the Board of Directors, a portion of
the purchase price may be paid by delivery of shares of Stock previously owned
by the Optionee, duly endorsed for transfer to the Company, with a fair market
value (as determined by the Board of Directors) on the date of delivery equal to
the option price, or by delivery of a recourse promissory note bearing interest
at such rate, on such other terms and in form and with security satisfactory to
the Company, or any combination of the foregoing approved by the Board of
Directors. Exercise of an Option shall not be effective until the Company has
received written notice of exercise, specifying the number of whole and
fractional shares of Stock to be purchased, accompanied by payment in full of
the aggregate option price of the number of shares purchased.
5.5 TERM OF OPTIONS. Each Option, by its terms, shall not be
exercisable after the expiration of ten years from the date the Option is
granted, provided, however, that any Incentive Stock Option granted to a Ten
Percent Shareholder, by its terms, shall not be exercisable after the expiration
of five years from the date the Option is granted. Any Option may provide that
it will expire within a shorter period than the maximum permitted hereby.
5.6 INSTALLMENTS. Each Option shall be exercisable on such dates
and in such amounts (subject to the other provisions hereof) as shall be
determined by the Board of Directors. It is not required that each Option have
the same installment provisions. In its sole discretion, the Board of Directors
may accelerate the exercise date of part or all of any Option.
5.7 TRANSFERABILITY. Each Option, by its terms, shall not be
transferable by the individual to whom granted otherwise than by will or the
laws of descent and distribution, and shall be exercisable, during the
Optionee's lifetime, only by the Optionee.
5.8 LIMITS ON EXERCISE. Each Option shall be subject to the
requirement that, if at any time the Board of Directors, in its discretion,
shall determine that the listing, registration, or qualification of the shares
subject to such Option upon any securities exchange or under any state or
federal law, or the consent or approval of any government regulatory body, is
necessary or desirable as a condition of, or in connection with, the granting of
such Option, or the issue or purchase of shares thereunder, such Option may not
be exercised in whole or in part unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free of
any conditions not acceptable to the Board of Directors.
5.9 LIMIT ON OPTIONS. An Option shall not be an Incentive Stock
Option to the extent that the aggregate fair market value of stock with respect
to which such Option is
<PAGE>
SPECIAL DEVICES, INCORPORATED
1999 STOCK OPTION PLAN
Page 5
exercisable for the first time by any individual during any calendar year
(taking into account all Incentive Stock Options simultaneously or previously
granted under all stock option plans of the Company and its Parents and
Subsidiaries) exceeds One Hundred Thousand Dollars ($100,000).
5.10 TERMINATION OF EMPLOYMENT. Each Option by its terms shall not
be exercisable after thirty (30) days after the termination of employment of the
individual to whom the Option was granted, unless such termination was a result
of the death or disability of the employee, and may provide that it shall not be
exercisable after the date of termination of employment of the individual to
whom the Option was granted.
5.11 EXPIRATION OF PLAN. No Option shall be granted under this Plan
more than ten years from the date on which this Plan was adopted or approved by
the stockholders of the Company, whichever is earlier. No Option granted under
this Plan shall be valid unless the Plan is approved by the stockholders of the
Company within twelve (12) months before or after its adoption by the Board of
Directors.
5.12 RECAPITALIZATION. Upon any Recapitalization, the Board of
Directors shall make an appropriate and equitable adjustment in the number and
kind of securities with respect to which rights may be granted under this Plan
and the price at which such securities may be purchased, and an appropriate and
equitable adjustment in the number and kind of securities that may be purchased
under each outstanding Option and the price at which shares may be purchased
under each such Option.
The grant of an Option pursuant to the Plan shall not affect in any way
the right or power of the Company to make or authorize any adjustments,
recapitalizations, reorganizations, or other changes in the Company's capital
structure or business, any merger or consolidation, any issuance of bonds,
debentures, preferred shares or common shares, the dissolution or liquidation of
the Company, any sale or transfer of all or any part of the Company's assets or
business, or any other act, whether or not similar to the events described
above.
5.13 RIGHTS AS A STOCKHOLDER. An Optionee or a transferee of an
Option shall have no rights as a stockholder with respect to any shares covered
by the Option until the date of the issuance of a stock certificate for such
shares. No adjustment shall be made for dividends (ordinary or extraordinary,
whether in cash, securities or other property) or distributions or other rights
for which the record date is prior to the date such stock certificate is issued,
except as provided in Section 5.12 hereof.
5.14 MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS. Subject to the
terms and conditions and within the limitations of the Plan, the Board of
Directors may modify, extend or renew outstanding Options granted under the
Plan, or accept the surrender of outstanding Options (to the extent not
theretofore exercised) and authorize the granting of
<PAGE>
SPECIAL DEVICES, INCORPORATED
1999 STOCK OPTION PLAN
Page 6
new Options in substitution therefor (to the extent not theretofore exercised).
Notwithstanding the foregoing, no modification of an Option shall, without the
consent of the Optionee, alter or impair any rights or obligations under any
Option theretofore granted under the Plan.
5.15 INVESTMENT PURPOSE. Each Option under the Plan shall be
granted on the condition that the purchases of stock thereunder shall be for
investment purposes, and not with a view to resale or distribution unless the
stock subject to such Option is registered under the Securities Act of 1933, as
amended, and any applicable state securities laws, or a resale of such stock
without such registration would otherwise be permissible. Each person exercising
an Option must represent that such condition is fulfilled, unless in the opinion
of counsel for the Company such condition is not required under the Securities
Act of 1933 or any other applicable law, regulation, or rule of any governmental
agency.
5.16 WITHHOLDING TAXES. Whenever under the Plan shares are to be
issued or cash is to be paid in satisfaction of Options, the Company shall have
the right to require the recipient to remit to the Company an amount sufficient
to satisfy federal, state and local withholding tax requirements prior to the
delivery of any certificate or certificates for such shares or payment of such
cash.
5.17 TERMINATION OF OPTIONS. Each Option, by its terms, shall
reserve to the Company the right to terminate the Option, in connection with a
Change in Control for a payment in cash equal to the difference between the
exercise price for the shares of Stock subject to the Option and the Change in
Control Price of such Stock.
5.18 OTHER PROVISIONS. The Option agreements authorized under the
Plan shall contain such other provisions, including, without limitation, such
rights of redemption, purchase and first refusal, and such other restrictions
upon the exercise of Options or the transfer of the Stock issued upon exercise,
as the Board of Directors of the Company shall deem advisable. Any Incentive
Stock Option agreement shall contain such limitations and restrictions upon the
exercise of the Option as shall be necessary in order that such Option will be
an "Incentive Stock Option" as defined in Section 422 of the Code.
6. EXERCISE OF OPTIONS
6.1 STOCK TRANSFER BOOKS. Notwithstanding any other provision of this
Plan or of any Option, no stock shall be issued by the Company while its stock
transfer books are closed.
6.2 SECURITIES LAWS. Notwithstanding any other provision of this
Plan or of any Option, no Option shall be exercisable, and no stock shall be
issued upon the exercise of any Option, if such exercise or such issuance of
stock would result in any violation of law or the imposition on the Company of a
requirement that it commence filing periodic reports under the Securities
Exchange Act of 1934 or any similar provision of law.
<PAGE>
SPECIAL DEVICES, INCORPORATED
1999 STOCK OPTION PLAN
Page 7
7. ADMINISTRATION
7.1 ADMINISTRATION BY BOARD OF DIRECTORS. The Plan shall be
administered by the Board of Directors. The interpretation and construction by
the Board of Directors of any provisions of the Plan or of any Option granted
under it shall be final. The Board of Directors shall have the authority to
appoint a Stock Option Committee to assume the duties and responsibilities of
administering the Plan. The Stock Option Committee, if such be established by
the Board of Directors, shall be composed of no less than three (3) persons (who
shall be members of the Board of Directors), each of whom shall be a
"disinterested person" as defined herein, and such Stock Option Committee shall
have the same power, authority and rights in the administration of the Plan as
the Board of Directors. No director shall be liable for any action or
determination made in good faith with respect to the Plan or any Option granted
under it.
The Board of Directors shall determine from time to time the
persons who shall receive Options hereunder; provided, however, Options may be
granted hereunder only to persons who, at the time of the grant thereof, are
officers, directors or key employees of the Company and its Parents and
Subsidiaries, except as otherwise provided in this Plan; provided, further, that
any decision to award Options hereunder to any person or the determination of
the maximum number of shares of Stock (as hereinafter defined) which may be
subject to Options granted to any such director, employee or officer shall be
made by either (i) the Board of Directors, all of the directors of which and all
of the directors acting in such matter shall be disinterested persons as defined
herein, or (ii) the Stock Option Committee appointed by the Board of Directors
pursuant to this section. For purposes of this Plan, "disinterested person"
shall mean a director who is not, during the one year prior to service as an
administrator of the Plan, or during such service, granted or awarded equity
securities pursuant to the Plan or any other plan of the Company or any of its
Parents or Subsidiaries entitling the participants therein to acquire stock,
stock options or stock appreciation rights of the Company or any of its Parents
or Subsidiaries.
7.2 DETERMINATION OF FAIR MARKET VALUE. For the purpose of granting
Incentive Stock Options, the Board of Directors shall determine the fair market
value of the Stock of the Company as follows:
7.2.1 If the Company's Stock is traded on any recognized stock
exchange or exchanges, such fair market value shall be deemed to be the highest
closing price of the Stock on such stock exchange or exchanges on the day the
Option is granted or if no sale of the Company's Stock shall have been made on
any stock exchange on that day, on the next preceding day on which there was a
sale of such stock.
7.2.2 During such time as the Stock is not listed on an
established exchange, but is actively traded on the over-the-counter market, the
fair market value per
<PAGE>
SPECIAL DEVICES, INCORPORATED
1999 STOCK OPTION PLAN
Page 8
share shall be the mean between dealer "bid" and "ask" prices of the Stock in
the over-the-counter market on the day the Option is granted, as reported by the
National Association of Securities Dealers, Inc.
7.2.3 During such time as the Company's Stock is neither listed
on any recognized exchange nor actively traded over-the-counter, the fair market
value shall be determined in good faith by the Board of Directors. In making
such determination, the Board of Directors may (but shall not be required to)
rely on the opinions of one or more qualified, independent appraisers.
7.3 INDEMNIFICATION. In addition to such other rights of
indemnification as they may have as directors or as members of the Stock Option
Committee, the members of the Board of Directors shall be indemnified by the
Company against the reasonable expenses, including attorneys' fees actually and
necessarily incurred in connection with the defense of any action, suit or
proceeding, or in connection with any appeal therein, to which they or any of
them may be a party by reason of any action taken or failure to act under or in
connection with the Plan or any Option granted hereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is approved
by independent legal counsel selected by the Company) or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that such Board or Stock Option Committee member is liable for
negligence or misconduct in the performance of his duties; provided that within
sixty (60) days after institution of any such action, suit or proceeding a Board
or Stock Option Committee member shall in writing offer the Company the
opportunity, at its own expense, to handle and defend the same.
8. AMENDMENT AND TERMINATION
8.1 AMENDMENT. The Board of Directors of the Company may, insofar
as permitted by law, from time to time, with respect to any shares at the time
not subject to Options, suspend or discontinue the Plan or revise or amend it in
any respect whatsoever except that, without approval of the stockholders, no
such revision or amendment shall change the number of shares subject to the
Plan, change the designation of the class of employees eligible to receive
Options or decrease the price at which Incentive Stock Options may be granted,
materially increase the benefits accruing to participants under the Plan,
materially increase the number of securities which may be issued under the Plan,
or materially modify the requirements as to eligibility for participation in the
Plan.
<PAGE>
SPECIAL DEVICES, INCORPORATED
1999 STOCK OPTION PLAN
Page 9
9. MISCELLANEOUS
9.1 GOVERNING LAW. This Plan shall be governed by, and construed in
accordance with, the laws of the State of Delaware.
9.2 CONSTRUCTION. In the event any parts of this Plan are found to
be void, the remaining provisions of this Plan shall nevertheless be binding
with the same effect as though the void parts were deleted.
9.3 APPLICATION OF FUNDS. The proceeds received by the Company from
the sale of Stock pursuant to Options will be used for general corporate
purposes.
9.4 NO OBLIGATION TO EXERCISE OPTION. The grant of an Option shall
impose no obligation upon the Optionee to exercise such Option.
9.5 APPROVAL OF STOCKHOLDERS. The Plan shall take effect immediately
upon adoption by the Board of Directors. However, if this Plan is not approved
by the stockholders of the Company within the period beginning twelve (12)
months before and ending twelve (12) months after the date the Plan is adopted
by the Board of Directors, no Options granted hereunder shall constitute
Incentive Stock Options.
SPECIAL DEVICES, INCORPORATED
By:
-------------------------------
George A. Sawyer
President and Chief Executive Officer
Dated: June 23, 1999
ATTEST:
- ------------------------
Keith Oster, Secretary
<PAGE>
EXHIBIT 10.32
NOTE: THE ORIGINAL TEMPLATE, (NORMAL) COULD NOT BE FOUND. DOCUMENT HAS BEEN
ATTACHED TO BLANK.DOT TEMPLATE.
AMENDED AND RESTATED
ASSET PURCHASE AND SALE AGREEMENT
BY AND BETWEEN
TELEDYNE INDUSTRIES, INC.
AND
J.F. LEHMAN EQUITY INVESTORS I, L.P.
DATED AS OF MAY 17, 1999
<PAGE>
CONFIDENTIAL
AMENDED AND RESTATED
ASSET PURCHASE AND SALE AGREEMENT
THIS AMENDED AND RESTATED ASSET PURCHASE AND SALE AGREEMENT ("AGREEMENT"),
is dated and entered into as of May 17, 1999, by and among Teledyne Industries,
Inc., a California corporation (the "SELLER"), and J.F. Lehman Equity Investors
I, L.P., a Delaware limited partnership (the "PURCHASER"), with reference to the
following:
RECITALS
A. The Seller, through the McCormick Selph Ordnance business unit
("MCCORMICK SELPH") of its Teledyne Ryan Aeronautical division, is the owner of
certain assets more particularly described in this Agreement used by McCormick
Selph in the manufacture and distribution of advanced controlled pyrotechnic
components and systems for the aerospace industry and automotive safety products
for use in connection with airbags and seat belt safety systems (the "BUSINESS")
at the McCormick Selph facility located in Hollister, California (the
"FACILITY").
B. The Purchaser wishes to purchase the Business and certain of
the assets of McCormick Selph used in the Business, and the Seller is willing to
sell the Business and such assets of McCormick Selph, on the terms and
conditions set forth herein.
C. The Purchaser and the Seller are parties to an Asset Purchase
and Sale Agreement dated as of May 12, 1999 (the "Original Purchase Agreement")
with respect to the Business.
NOW, THEREFORE, in consideration of the foregoing and of the
mutual representations, warranties, covenants, agreements, terms and conditions
set forth below, the receipt and adequacy of which are hereby acknowledged, the
parties, intending to be legally bound, hereby amend and restate the Original
Purchase Agreement and agree as follows:
SECTION 1: DEFINITIONS. For purposes of this Agreement, the following terms
have the meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the
regulations promulgated under the United States Securities Exchange Act of 1934,
as amended.
"Agreement" means this Asset Purchase and Sale Agreement, as the
same may be amended from time to time in accordance with the terms hereof.
"Ancillary Agreements" means, collectively, the Assignment
Agreement, the Assumption Agreement, the Bill of Sale and the Deed.
<PAGE>
"Arbitrator" has the meaning set forth in Section 2.5(c).
"Assignment Agreement" has the meaning set forth in Section 3.3.
"Assumed Contracts" has the meaning set forth in Section 2.3(a).
"Assumed Obligations" has the meaning set forth in Section
2.3(a).
"Assumption Agreement" has the meaning set forth in Section 3.3.
"Bid" has the meaning set forth in Section 4.19(d).
"Bill of Sale" has the meaning set forth in Section 3.3.
"Business" has the meaning set forth in the Recitals to this
Agreement.
"Cap" has the meaning set forth in Section 10.2(c).
"Cash" means cash on hand or in banks and cash equivalents,
marketable securities and short-term investments.
"CERCLA" means the United States Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended.
"Closing" has the meaning set forth in Section 3.1.
"Closing Date" has the meaning set forth in Section 3.2.
"Closing Statement" has the meaning set forth in section 2.5(b).
"COBRA Provisions" has the meaning set forth in Section 8(c).
"Code" means the United States Internal Revenue Code of 1986, as
amended.
"Competing Entity" has the meaning set forth in Section 7.5(a).
"Confidentiality Agreement" means the confidentiality letter
agreement dated October 2, 1998 from the Purchaser to Lincoln Partners LLC, on
behalf of Allegheny Teledyne Incorporated.
"Contracts" has the meaning set forth in Section 2.1(d).
"Deed" has the meaning set forth in Section 3.3.
"Disclosure Schedules" means, collectively, the various Schedules
referred to in this Agreement.
"Employee Benefit Plan" means an Employee Pension Benefit Plan or
an Employee Welfare Benefit Plan, where no distinction is required by the
context in which the term is used.
"Employee Pension Benefit Plan" has the meaning set forth in
Section 3(2) of ERISA.
"Employee Welfare Benefit Plan" has the meaning set forth in
Section 3(1) of ERISA.
"Employees" means all of the Seller's employees who are actively
employed on a full-time basis in connection with the Business on the Closing
Date, including those employees who are on temporary leave for purposes of jury
duty, vacation, annual military duty, short term
2
<PAGE>
disability, workers' compensation or sick leave. Employees on short term
disability will be deemed to be Employees only at such time, if any, as such
employees are reinstated or reemployed by the Purchaser after the Closing Date.
Seller's employees on long term disability shall not be deemed to be Employees
for purposes of this definition.
"Environmental Condition" means (a) any condition arising out of
any Release of Hazardous Materials from or onto the Owned Real Property in
connection with the Business, (b) any condition at any third party location
arising out of any Release of Hazardous Materials which the Business generated,
(c) any violation by the Business of any Environmental Permit or of any
Environmental Law or (d) any condition at the Owned Real Property requiring
investigation or remediation under any Environmental Law.
"Environmental Law" means any Law relating to the protection of
the air, surface water, groundwater or land, and/or governing the handling, use,
generation, treatment, storage or disposal of Hazardous Materials, but not
including any Law relating to matters administered by the Occupational Safety
and Health Administration or by any state equivalent thereof.
"Environmental Losses" has the meaning set forth in Section
10.6(a).
"Environmental Permit" means each permit, license, order,
variance, registration or other authorization of any federal, state, or local
governmental agency issued, approved or required to be obtained under any
Environmental Law.
"Equipment" has the meaning set forth in Section 2.1(a).
"ERISA" means the United States Employee Retirement Income
Security Act of 1974, as amended.
"Excluded Assets" has the meaning set forth in Section 2.2.
"Excluded Liabilities" has the meaning set forth in Section
2.3(b).
"Facility" has the meaning set forth in the Recitals to the
Agreement.
"Final Net Working Capital Amount" has the meaning set forth in
Section 2.5(a).
"Financial Statements" has the meaning set forth in Section 4.4.
"Government Contract" has the meaning set forth in Section
4.19(d).
"Governmental Entity" means any government or any governmental
agency, bureau, board, commission, department or political subdivision, whether
federal, state or local, domestic or foreign.
"Hart-Scott-Rodino Act" means the United States Hart-Scott-Rodino
Antitrust Improvement Act of 1976, as amended.
"Hazardous Materials" means each and every element, compound,
chemical mixture, contaminant, pollutant, material, waste or other substance
which is defined, determined or identified as hazardous or toxic under
Environmental Law or the Release of which is prohibited under any Environmental
Law. Without limiting the generality of the foregoing, the term will include (a)
"hazardous substances" as defined in CERCLA, (b) "extremely hazardous
substances" as defined in Title III of the United States Superfund Amendments
and Reauthorization Act, each as amended, and regulations promulgated
thereunder, (c) "hazardous waste" as defined in the United States Resource
Conservation and Recovery Act of 1976, as
3
<PAGE>
amended, and regulations promulgated thereunder, (d) "hazardous materials" as
defined in the United States Hazardous Materials Transportation Act, as amended,
and regulations promulgated thereunder and (e) "chemical substance or mixture"
as defined in the United States Toxic Substances Control Act, as amended, and
regulations promulgated thereunder.
"Indemnified Party" has the meaning set forth in Section 10.4.
"Indemnifying Party" has the meaning set forth in Section 10.4.
"Intellectual Property" has the meaning set forth in Section
4.10.
"Inventories" has the meaning set forth in Section 2.1(b).
"Knowledge" as applied to the Seller means the actual conscious
knowledge of the members of the management of McCormick Selph or the Seller
identified on Schedule 1.1 of the Disclosure Schedules.
"Law" means any federal, state or local, domestic or foreign,
constitutional provision, statute, law, common law, rule, regulation, Permit,
decree, injunction, judgment, order or legally binding ruling, determination,
finding or writ of any Governmental Entity enacted as of the date hereof.
"Lien" means any lien, mortgage, pledge, security interest,
charge, claim or other encumbrance.
"Losses" has the meaning set forth in Section 10.2(a).
"McCormick Selph" has the meaning set forth in the Recitals to
this Agreement.
"Net Working Capital" means the difference between the sum of (a)
prepaid expenses, deposits, accounts receivable (less reserves), inventory (less
reserves) and other current assets of the Business included in the Purchased
Assets and (b) accounts payable, accrued expenses and other current liabilities
included in the Assumed Obligations all as determined in accordance with
generally accepted United States accounting principles ("GAAP") in a manner
consistent with the historic accounting principles of the Business, subject to
Section 6.3 hereof and Schedules 2.5 and 4.4. Working Capital shall be
determined without giving effect to the transactions contemplated by this
Agreement.
"Owned Real Property" has the meaning set forth in Section
2.1(g).
"Paying Party" has the meaning set forth in Section 8.2(d).
"Perchlorate-TCE Condition" shall mean any Environmental
Condition resulting from the presence at the Owned Real Property of perchlorate
and/or trichloroethylene, and any degradation products thereof, in the soil or
groundwater at levels above the applicable remediation action levels in effect
at the Closing Date under applicable Environmental Laws or that forms the basis
of any third party claim made under Environmental Laws.
"Permit" means any license, permit, franchise, certificate of
authority or order, certificate of occupancy, building, safety and fire and
health approval, or any waiver of the foregoing, issued by any Governmental
Entity.
"Permitted Lien" means (a) any Lien for Taxes, assessments or
governmental charges or claims that are not yet delinquent, (b) any mechanics',
materialmens' or similar Liens with respect to amounts that are not yet
delinquent, (c) any purchase money Lien or any Lien
4
<PAGE>
securing rental payments under capital lease arrangements, (d) in the case of
the Owned Real Property, (i) utility and other easements, building and other
restrictions, and other non-monetary charges and encumbrances of record, or in
each case, if not of record, that do not (either individually or in the
aggregate) materially interfere with or detract from the use, marketability or
value of the Owned Real Property and (ii) provisions of any zoning or building
Laws or any similar Laws and (e) the Liens set forth on Schedule 1.2 of the
Disclosure Schedules.
"Person" means an individual, a partnership, a corporation, a
limited liability company or partnership, an association, a joint stock company,
a trust, a joint venture, an unincorporated organization or a Governmental
Entity.
"Personal Injury" means any illness, disability, injury or death.
"Prepaid Items" has the meaning set forth in Section 2.1(i).
"Purchase Price" has the meaning set forth in Section 2.4(a).
"Purchased Assets" has the meaning set forth in Section 2.1.
"Purchaser" has the meaning set forth in the Preamble to this
Agreement.
"Purchaser Indemnified Parties" has the meaning set forth in
Section 10.2(a).
"Reference Net Working Capital Amount" has the meaning set forth
in Section 2.5(a), determined pursuant to the reference statement attached
hereto as Schedule 2.5 (a) of the Disclosure Schedules.
"Release" means any spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, dumping,
discarding, burying, abandoning or disposing into the environment.
"Requester" has the meaning set forth in Section 7.3(h).
"Schedule" means, unless the context otherwise requires, the
referenced Schedule included in the Disclosure Schedules.
"Seller" has the meaning set forth in the Preamble to this
Agreement.
"Seller Indemnified Parties" has the meaning set forth in Section
10.3(a).
"Seller Plans" has the meaning set forth in Section 4.12.
"Tax" means any federal, state, local or foreign net income,
gross income, gross receipts, sales, use, ad valorem, transfer, franchise,
profits, license, lease, service, service use, withholding, payroll, employment,
excise, severance, stamp, occupation, premium, property, windfall profits,
customs, duties or other tax, fee, assessment or charge, including any related
interest, penalty or addition thereto.
"Tax Return" means any return, declaration, report, claim for
refund or information return or statement relating to Taxes, including any
schedule or attachment thereto.
"Transferred Employees" has the meaning set forth in Section
8(b).
"US Dollars" and "US$" and "$" means the lawful currency of the
United States of America.
"U.S. Government" has the meaning set forth in Section 4.19(d).
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"WARN Act" means the United States Federal Worker Adjustment and
Retraining Notification Act, as amended.
SECTION 2: THE TRANSACTION.
2.1 Sale and Purchase of Assets. At the Closing, the Seller will
sell, transfer, assign, convey, set over and deliver to the Purchaser, and the
Purchaser will purchase, acquire and accept from the Seller all right, title and
interest of the Seller in and to all of the assets, rights and properties of
McCormick Selph, other than the Excluded Assets, that are owned or leased by the
Seller primarily in connection with the conduct of the Business (collectively,
the "PURCHASED ASSETS") including, without limitation, the following assets,
rights and properties owned or leased by the Seller as of the Closing Date and
primarily associated with the Business:
(a) all machinery, equipment, motor vehicles, tools, dies,
spare parts, furniture and fixtures, leasehold improvements, automobiles,
trucks, non-inventoried supplies and other miscellaneous tangible personal
property related to, used or held for use in connection with the Business as of
the Closing Date including those assets listed on Schedule 2.1(a) that are not
located at the Facility (collectively the "EQUIPMENT");
(b) all inventories of raw materials, work in process,
finished products, goods, spare parts, replacement and component parts, and
office, packaging and other supplies located at the Facility (collectively, the
"INVENTORIES");
(c) all accounts and notes receivable and other current
assets (other than the Inventories) of the Business, including without
limitation all trade and other debts owed to the Seller in connection with the
operation of the Business prior to the Closing Date;
(d) the benefit of (but subject to the burden of) all
contracts, agreements, leases, commitments, instruments, guaranties, bids,
orders and proposals to which the Seller is a party primarily in connection with
the Business as of the Closing Date, including the Assumed Contracts, but
excluding all corporate-wide purchasing arrangements which relate generally to
the Business and other divisions or business units of the Seller or any of its
Affiliates and any other arrangements with other divisions or business units of
the Seller or any of its Affiliates. Schedule 2.1(d) to this Agreement contains
a complete list of all such contracts and other agreements to be transferred to
the Purchaser hereunder (collectively, the "CONTRACTS");
(e) to the extent legally assignable, all Permits held by
the Seller in connection with the Business as of the Closing Date;
(f) all books, records (other than personnel records unless
consented to by the relevant Employees), ledgers, files, documents,
correspondence, lists, plats, drawings, creative materials, advertising and
promotional materials, studies, reports and other printed or written materials
used or held for use by the Seller primarily in connection with the Business
which are material to continuing the operation of the Business as a going
concern;
(g) the real property owned by the Seller described on
Schedule 4.8 of the Disclosure Schedules, together with all buildings,
structures, improvements and fixtures and fittings located on or attached to
such real property, and all rights appurtenant thereto (the "OWNED REAL
PROPERTY");
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(h) Intellectual Property used by the Seller and relating
primarily to the Business, including the Seller's right to use the name
"McCormick Selph" and the patents identified on Schedule 4.10;
(i) all prepaid items, deposits and other similar rights to
future services or goods of the Seller relating to the Business (the prepaid
items, deposits and other similar items to be conveyed to the Purchaser pursuant
hereto are hereinafter collectively referred to as the "PREPAID ITEMS");
(j) all rights of the Seller relating to the Business under
express or implied warranties from suppliers with respect to the Purchased
Assets to the extent the same are assignable; and
(k) all other assets, whether tangible or intangible real or
personal which exist on the Closing Date and which are primarily used in the
Business.
2.2 Excluded Assets. Notwithstanding the provisions of Section
2.1, the Purchased Assets will not include any assets not used primarily in the
operation of the Business, including, without limitation, any of the following
assets, rights or properties (collectively, the "EXCLUDED ASSETS"):
(a) any and all assets, rights and properties of the Seller
or any of its Affiliates other than those used by McCormick Selph in connection
with the operation of the Business;
(b) any assets located at the Facility which are not owned
by the Seller and are identified on Schedule 2.2(b) of the Disclosure Schedules;
(c) any Cash of the Seller or any of its Affiliates,
including all bank accounts;
(d) any rights or claims of the Seller or any of its
Affiliates with respect to any Tax refund, carryback or carryforward or other
credits to the Seller for periods ending prior to the Closing Date;
(e) any property, casualty, workers' compensation or other
insurance policy or related insurance services contract relating to the Seller
or any of its Affiliates, and any rights of the Seller or any of its Affiliates
under any such insurance policy or contract, including, but not limited to,
rights to any cancellation value and any payments under such policies related to
claims made in connection with the 1998 explosion at the Facility;
(f) any rights of the Seller under this Agreement, the
Ancillary Agreements or under any other agreement between the Seller and the
Purchaser;
(g) all "Teledyne," "Allegheny Teledyne," "Teledyne Ryan
Aeronautical" and "Ryan Aeronautical" marks, including any and all trademarks or
service marks, trade names, registered and unregistered designs, slogans or
other like property relating to or including the names "Teledyne," "Allegheny
Teledyne," "Teledyne Ryan Aeronautical" and "Ryan Aeronautical," the marks
Teledyne, Allegheny Teledyne, Teledyne Ryan Aeronautical, Ryan Aeronautical and
any derivative thereof and the Teledyne, Allegheny Teledyne, Teledyne Ryan
Aeronautical and Ryan Aeronautical logos or any derivatives thereof and any and
all related trade dress; the Seller's proprietary computer programs or other
software, including but
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not limited to the Seller's proprietary data bases (including environmental
databases), accounting and reporting formats, systems and procedures which are
not used primarily in the Business; and any documents or information which are
subject to the attorney-client or work product privilege;
(h) proprietary or confidential non-technical business
information, books, files, papers, records, data and policies of the Seller or
any of its Affiliates that do not relate primarily to the Business, including
proprietary business management software used by the Seller or any of its
Affiliates other than the Business, such as the Teledyne corporate directories,
management procedures and guidelines, proprietary data bases, accounting and
financial reporting formats, systems and procedures, instructions and
organization manuals;
(i) any claim, cause of action, suit, judgment, demand or
right of any nature against third parties to the extent relating to any Excluded
Liability or Excluded Asset and all attorney-client, work product and other
legal privileges of the Seller related thereto;
(j) any pension assets attributable to Employees or any
former employee of the Seller under any Seller Plans; and
(k) the consideration to be paid to the Seller pursuant to
this Agreement.
2.3. Assumption of Obligations.
(a) At the Closing the Purchaser will assume and become
responsible for, and will thereafter pay, perform and discharge when due, the
following specified liabilities and obligations, whether accrued, absolute,
contingent or otherwise, known or unknown (collectively, the "ASSUMED
OBLIGATIONS"):
(i) those liabilities and obligations of the Seller
arising on or after the Closing Date with respect to the Contracts listed on
Schedule 2.3(a)(i) (the "ASSUMED CONTRACTS");
(ii) those liabilities and obligations of the Seller
with respect to the Employees which the Purchaser has expressly agreed to assume
pursuant to this Agreement (including liability for accrued vacation to the
extent reflected on the Closing Statement), provided that the Purchaser shall
have no liability with respect to severance payments, if any, which may be due
and payable by the Seller or Allegheny Teledyne Incorporated to Patrick J.
Carroll;
(iii) all product warranty obligations with respect to
products manufactured or sold by Seller in connection with the Business, subject
to Section 7.6 hereof;
(iv) any claims for any commission or other
remuneration payable or alleged to be payable to any broker, agent or other
intermediary who acted for Purchaser in connection with the transactions
contemplated by this Agreement;
(v) all accounts payable, accrued liabilities, accrued
expenses and capital lease obligations of the Seller to the extent reflected in
the Closing Statement; and
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(vi) all other debts, liabilities and obligations
arising out of or relating to events or transactions on or after the Closing
Date in connection with the operation of the Business by the Purchaser or use of
the Purchased Assets by the Purchaser.
(b) Except as otherwise expressly provided in Section 2.3(a)
of this Agreement, the Purchaser does not assume, agree to perform or discharge,
indemnify the Seller against or otherwise have any responsibility for any other
liabilities or obligations of the Seller, fixed or contingent and whether
arising prior to, on or after the Closing Date (the "EXCLUDED LIABILITIES").
Without limiting the generality of the foregoing, the Purchaser shall not be
deemed to have assumed any of the following, all of which are Excluded
Liabilities:
(i) any liabilities or obligations of the Seller under
the Seller Plans except those assumed pursuant to this Agreement;
(ii) any liabilities or obligations of the Seller
with respect to Taxes;
(iii) any liability or obligation of the Seller
arising out of (x) any litigation that is pending or threatened
as of the Closing Date (whether or not set forth on Schedule
4.11) or (y) any litigation arising from any negligent, reckless
or unlawful action or inaction of the Seller prior to the Closing
Date;
(iv) any liabilities or obligations arising out of
defects or alleged defects in or damages to persons or property
arising out of defects in products manufactured or sold by the
Seller prior to the Closing Date (whether or not set forth on
Schedule 4.21) exclusive of warranty obligations under
2.3(a)(iii) hereof;
(v) any other liabilities or obligations of the
Seller existing on the Closing Date which should have been
accrued on the Closing Statement in accordance with the
accounting principles utilized in preparing such Closing
Statement but which were not so accrued;
(vi) except as assumed pursuant to Sections 2.3(a)
(i) and (ii) hereof, any liability or obligation of the Seller to
any employee or former employee of the Seller on account of the
Seller's employment or termination of employment of that person
on or prior to the Closing Date and severance payments, if any,
which may be due and payable by the Seller or Allegheny Teledyne
Incorporated to Patrick J. Carroll;
(vii) any liabilities or obligations (whether
absolute, contingent or otherwise) relating to workers'
compensation claims made by any employee of the Business (whether
filed or presented prior to the Closing Date) in connection with
claims arising before the Closing Date; and
(viii) any liabilities or obligations (whether
absolute, contingent or otherwise) arising out of any violation
of any
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Environmental Law or Environmental Permit or arising out of the
presence of Hazardous Materials or the existence of an
Environmental Condition at any present or former facility owned,
leased or operated in connection with the Business, or arising
solely from the Release of Hazardous Materials by Seller that
injures, or allegedly injures or otherwise exposes any person,
including current and former employees, at any present or former
facility owned, leased or operated in connection with the
Business, or arising solely from the Release of Hazardous
Materials by Seller attributable to the operation of the Business
that affects, or allegedly affects, any third-party property not
owned, leased, or operated by Seller or that injures, or
allegedly injures or otherwise exposes, any person at such
third-party properties, or arising solely from the Release of any
Hazardous Materials at any third-party property at which Seller
arranged for the disposal of any Hazardous Materials in each case
to the extent existing prior to the Closing Date, whether or not
listed on Schedule 4.14;
(ix) any liabilities or obligations arising out (a)
any violation or breach by the Seller of any Government Contract,
or (b) any violation by Seller of any Law applicable to any
Government Contract or Bid, in each case occurring prior to the
Closing Date, in each case whether or not listed on Schedule
4.19; and
(x) any liabilities or obligations arising out of
the payment by the Seller in connection with the Business (a) of
funds for unlawful contributions, gifts, entertainment or other
unlawful expenses, including but not limited unlawful expenses
related to political activity, or (b) of funds for any unlawful
payment to foreign or domestic government officials or employees
or to foreign or domestic political parties or campaigns or
violation of any provision of the Foreign Corrupt Practices Act
of 1977, as amended, in each case occurring prior to the Closing
Date, in each case whether or not listed on Schedule 4.20.
(c) Liability for Releases of Hazardous Materials by both
the Seller and the Purchaser shall be equitably allocated between the parties.
2.4 Determination and Payment of Consideration.
(a) In consideration of the sale and transfer of the
Purchased Assets to the Purchaser and the other undertakings of the Seller
hereunder, the Purchaser shall (i) pay the sum of Thirty Nine Million Dollars
($39,000,000) (the "PURCHASE PRICE") to the Seller at the Closing in immediately
available funds by wire transfer to a bank account specified by the Seller and
(ii) assume the Assumed Obligations.
(b) The Purchase Price payable by the Purchaser at the
Closing will be subject to adjustment as provided in Section 2.5.
2.5 Purchase Price Adjustment.
(a) The Purchase Price will be subject to adjustment upward
or downward, as the case may be, following the Closing, in the amount of the
difference, if any, between (i) $7,670,000, the estimated Net Working Capital as
of January 3, 1999 (the "REFERENCE NET WORKING CAPITAL AMOUNT") and (ii) the Net
Working Capital as of the Closing
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Date as finally determined in accordance with the procedures specified below
(the "FINAL NET WORKING CAPITAL AMOUNT").
(b) Promptly after the Closing Date, Purchaser will prepare
and present to the Seller a statement in reasonable detail of the Net Working
Capital of the Business as of the Closing Date (the "CLOSING STATEMENT"). The
Closing Statement shall be delivered to the Seller no later than 30 days after
the Closing Date. The Purchase Price adjustment shall be made on the basis of
the Closing Statement.
(c) The Seller will deliver to the Purchaser a statement of
any objections relating to the Closing Statement and the related Purchase Price
adjustment, if any, as soon as practicable, but in any event not later than 30
days after the date of the delivery of the Closing Statement. The Purchaser and
the Seller shall cooperate and negotiate in good faith to reconcile any
disputes. In the event of any dispute or any failure to reach agreement with
respect to the objections of the Seller relating to the Closing Statement and
any related Purchase Price adjustment within 30 days after the date of delivery
by Seller to the Purchaser of Seller's statement of objections, the items in
dispute (and no other items) will be submitted to, and the amount of such
Purchase Price adjustment will be determined by, arbitration by Arthur Andersen,
LLP (the "ARBITRATOR"), certified public accountants. The Arbitrator will
deliver its written decision regarding any disputed items to both parties within
30 days after the submission of such dispute to the Arbitrator. The
determination of the Arbitrator will be in all respects final, binding and
conclusive on the parties hereto.
(d) Net Working Capital shall be deemed to have been finally
determined upon the first to occur of (i) acceptance of the Closing Statement,
(ii) the Seller's failure to object thereto within 30 days of receipt thereof,
(iii) resolution by mutual agreement of the parties after notice of a
disagreement or (iv) notification by the Arbitrator of its final determination
thereof.
(e) If the Final Net Working Capital Amount is greater than
the Reference Net Working Capital Amount, the Purchase Price will be increased
and Purchaser will pay the Seller the amount of such excess plus interest on
such excess from the Closing Date to the date of payment at a rate of interest
equal to the prime rate announced by PNC Bank as in effect from time to time. If
the Final Net Working Capital Amount is less than the Reference Net Working
Capital Amount, the Purchase Price payable will be decreased and the Seller will
pay the Purchaser the amount of such decrease plus interest on such decrease
from the Closing Date to the date of payment at a rate of interest equal to the
prime rate announced by PNC Bank as in effect from time to time.
(f) To the extent that any amounts payable under this
Section 2.5 are not affected by objections of the Seller, such amounts will be
paid by wire transfer of immediately available US Dollars not more than 30 days
after delivery of the Closing Statement to the Seller. To the extent that any
amounts payable under this Section 2.5 are affected by objections of the Seller,
such amounts will be paid by wire transfer of immediately available funds not
more than five days after the mutual agreement of the Purchaser and the Seller
or the final determination of the Arbitrator, as the case may be. The provisions
of this Section 2.5 will survive the Closing.
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SECTION 3: CLOSING AND CLOSING DATE.
3.1. Closing. Subject to the provisions of Section 11, the
consummation of the transactions contemplated by this Agreement (the "CLOSING")
will take place at the offices of Gibson Dunn & Crutcher, LLP, Los Angeles,
California or, if specified by Purchaser at least three business days prior to
Closing, a location in New York, New York, at 10:00 a.m. local time, on June 24,
1999 or at such other place or on such other date as the Purchaser and the
Seller may agree. The Closing will be deemed effective as of 11:59 p.m.
Pittsburgh, Pennsylvania time, on the day before the Closing Date.
3.2. Closing Date. The date on which the Closing actually takes
place is referred to in this Agreement as the "CLOSING DATE."
3.3. Deliveries at the Closing. (a) At the Closing, (i) the
Seller will deliver to the Purchaser the various certificates, instruments and
documents referred to in Section 9.1, (ii) the Purchaser will deliver to the
Seller the various certificates, instruments and documents referred to in
Section 9.2, (iii) the Seller will execute, acknowledge (if appropriate) and
deliver, or cause to be executed, acknowledged (if appropriate) and delivered,
to the Purchaser (1) a Bill of Sale (the "BILL OF Sale") in the form attached to
this Agreement as Exhibit A, (2) a special warranty deed for the Owned Real
Property (the "DEED"), in the form attached to this Agreement as Exhibit B, (3)
an Assignment Agreement for Patents (the "ASSIGNMENT AGREEMENT") in the form
attached to this Agreement as Exhibit C, and (4) such other instruments of sale,
transfer, conveyance, and assignment as the Purchaser and its counsel may
reasonably request in form reasonably satisfactory to the Seller and the
Purchaser or as required by applicable Governmental Entities, (iv) the Purchaser
will execute, acknowledge and deliver to the Seller an Assumption Agreement (the
"ASSUMPTION AGREEMENT") in the form attached to this Agreement as Exhibit D, and
such other instruments of assumption as the Seller and its counsel reasonably
may request in form reasonably satisfactory to the Seller and the Purchaser or
as required by applicable Governmental Entities and (v) the Purchaser will
deliver to the Seller the Purchase Price as specified in Section 2.4 and the
Purchaser's share of any recording and filing fees required to be paid by the
Purchaser pursuant to Section 12.3.
(b) The Seller will deliver to the Purchaser all of the
Purchased Assets which are capable of transfer by delivery whereupon the title
thereto will pass to the Purchaser by such delivery.
(c) The Seller will deliver to the Purchaser the books and
records referred to in Section 2.2(e) above.
3.4. Allocation of Value. The Purchaser and the Seller hereby
agree that Exhibit E attached to this Agreement reflects the allocation of the
Purchase Price to the Purchased Assets and that such allocation shall be used by
the Purchaser and the Seller in preparing their respective Tax Returns and
neither the Purchaser nor the Seller shall dispute such allocation in connection
with any audit or other proceeding.
SECTION 4: REPRESENTATIONS AND WARRANTIES OF THE SELLER. The Seller
represents and warrants to the Purchaser as follows:
4.1. Organization of the Seller. The Seller is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California and is licensed or qualified to transact business as a foreign
corporation, and is in good standing, under the laws of
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all states in the United States where the Business would require it to be so
licensed or qualified except where the failure to be so licensed or qualified
would not have a material adverse effect on the Business.
4.2. Authorization of Transaction. The Seller has full corporate
power and authority and has taken all requisite corporate action to enable it to
execute and deliver this Agreement and each of the Ancillary Agreements to which
it is a party and to perform its obligations hereunder and thereunder. This
Agreement constitutes, and each of the Ancillary Agreements when executed and
delivered by the Seller will constitute, the valid and legally binding
obligation of the Seller enforceable against the Seller in accordance with their
respective terms and conditions, subject to bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and similar Laws now or hereafter in
effect relating to creditors' and landlords' rights and general principles of
equity, including commercial reasonableness, good faith and fair dealing.
4.3 Noncontravention; Consents. Neither the execution and
delivery of this Agreement or any of the Ancillary Agreements by the Seller, nor
the consummation by the Seller of the transactions contemplated hereby or
thereby, will violate any provision of the charter or bylaws of the Seller or
any Law to which the Seller is subject, except violations of Law which would not
have a material adverse effect on the Business or Seller's ability to consummate
the transactions contemplated by the Agreement. Except (i) as set forth on
Schedule 4.3 of the Disclosure Schedules, and (ii) consents which may be
required for the assignment of certain of the Contracts, neither the execution
and delivery of this Agreement or any of the Ancillary Agreements by the Seller,
nor the consummation by the Seller of the transactions contemplated hereby or
thereby, will constitute a violation of, constitute or create a default under or
result in the creation or imposition of any Lien upon any of the Purchased
Assets pursuant to any agreement or commitment to which the Seller is a party or
by which the Seller or any of the Purchased Assets is bound. As of the Closing
Date, except as set forth on Schedule 4.3 of the Disclosure Schedules, the
Seller will have given all required notices and obtained all material licenses,
permits, consents, approvals, authorizations, and orders of Governmental
Entities as are required in order to enable the Seller to perform its
obligations under this Agreement and each of the Ancillary Agreements.
4.4 Business Financial Statements. Set forth as Schedule 4.4 of
the Disclosure Schedules are correct and complete copies of the unaudited
balance sheet of the Business for the fiscal years ended as of December 28, 1997
and January 3, 1999 and the related statements of income for said periods (the
"FINANCIAL STATEMENTS"). Except as expressly provided in Section 6.3 or on
Schedule 4.4, the Financial Statements were prepared in accordance with GAAP,
consistently applied, and were derived in all material respects from the books
and records of the Business.
4.5. Subsequent Events. Since January 3, 1999, except as set
forth on Schedule 4.5 of the Disclosure Schedules, there has not been any
material adverse change in the business, financial condition, operations or
results of operations, assets or liabilities of the Business. Without limiting
the generality of the foregoing, since such date and in each case in connection
with the Purchased Assets and the Assumed Obligations, except as contemplated by
the Agreement:
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(a) the Seller has not sold, leased, transferred or assigned
any of the assets, tangible or intangible, of the Business, other than in the
ordinary course of business and on a basis consistent with past practice;
(b) the Seller has not experienced any casualty damage,
destruction or loss (whether or not covered by insurance) to its property in
excess of $25,000 affecting any of the Purchased Assets used in the operations
of the Business as presently conducted;
(c) the Seller has not (i) entered into any employment,
deferred compensation or other similar agreement or arrangement with any of its
Employees or (ii) increased the compensation, bonus or other benefits payable to
any of its Employees, other than in the ordinary course of business and
consistent with past practice or as required by Law; and
(d) there has not been, with respect to the Business, any
(i) transaction by the Seller other than in the ordinary course of business and
consistent with past practice; (ii) mortgage, pledge or subjection to lien,
charge or encumbrance of any kind, of any of the Purchased Assets, except for
liens for Taxes not yet due and payable or being contested in good faith; or
(iii) alteration in the manner of keeping the Seller's books, accounts or
records, or in the accounting practices therein reflected, relating to or
affecting the Business.
4.6. Tax Matters.
(a) There are no Liens (other than Permitted Liens) on any
of the Purchased Assets that arose in connection with any failure or alleged
failure to pay any Tax.
(b) The Seller with respect to the Business has withheld and
paid all material Taxes required to have been withheld and paid in connection
with amounts paid or owing to any employee, independent contractor, creditor or
other party.
(c) To the Seller's Knowledge, there is no dispute or claim
concerning any Tax liability of the Seller with respect to the Business that
constitutes an Assumed Obligation.
4.7. Contracts.
(a) Except for the Contracts listed on Schedule 4.7 of the
Disclosure Schedules and the contracts and agreements of the Seller in
connection with the Business constituting Excluded Assets, the Seller with
respect to the Business has no liabilities or obligations under, and is not
otherwise bound by, any executory written (i) mortgage, indenture, note,
installment obligation or other instrument relating to the borrowing of money,
(ii) guarantee of any obligation, (iii) letter of credit, bond or other
indemnity (excluding endorsements of instruments for collection in the ordinary
course of the operation of the Business), (iv) agreement requiring the payment
by the Seller of more than $25,000 in any 12-month period for the purchase or
lease of any machinery, equipment or other capital assets, (v) collective
bargaining agreement, employment, international sales agent, representative or
consulting agreement or agreement providing for severance payments or other
additional similar rights or benefits (whether or not optional) in the event of
the sale of the Business, (vi) joint venture agreement, (vii) agreement
requiring the payment by the Seller with respect to the Business to any Person
(other than any division, unit or Affiliate of the Seller) of more than $25,000
in any 12-month period for the purchase of goods or services, or (viii)
agreement requiring the payment to the Seller by any Person (other than any
division, unit or Affiliate of the
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Seller) of more than $25,000 in any 12-month period for the sale of goods or
services provided by the Business.
(b) The Seller has delivered or made available to the
Purchaser correct and complete copies of each written agreement listed on
Schedule 4.7 of the Disclosure Schedules.
(c) Each Contract listed on Schedule 4.7 of the Disclosure
Schedules is, to the Seller's Knowledge, a valid, binding and enforceable
obligation of the other party or parties thereto (subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
similar Laws affecting creditors' or landlords' rights and remedies generally
and subject as to enforceability to general principles of equity, including
principles of commercial reasonableness, good faith and fair dealing) and is in
full force and effect.
4.8. Owned Real Property. Schedule 4.8 of the Disclosure
Schedules lists and describes in reasonable detail the Owned Real Property. With
respect to the Owned Real Property, except as set forth on Schedule 4.8 of the
Disclosure Schedules:
(i) the Seller has good and valid title to such parcel,
free and clear of any Lien (other than Permitted Liens);
(ii) the Seller has not received written notice of any
condemnation proceedings, lawsuits or administrative actions relating to such
property, including any proposed special assessment or any proposed material
change in property tax, land use, or zoning laws affecting the Owned Real
Property;
(iii) the Seller has not received written notice that
the use or occupancy of such property violates any covenants, conditions or
restrictions that encumber such property, or that any such property is subject
to any restriction for which any Permits necessary to the current use thereof
have not been obtained;
(iv) there are no leases, subleases, licenses,
concessions or other agreements granting to any Person the right of use or
occupancy of any portion of the Owned Real Property; and
(v) the current use of the Owned Real Property by
Seller is in material compliance with all applicable zoning laws, covenants,
conditions and restrictions which encumber the Owned Real Property (whether or
not such covenants, conditions, or restrictions are set forth on Schedule 4.8).
4.9. Title. The Seller has and will convey to the Purchaser on
the Closing Date good and marketable title to all the Purchased Assets (other
than the Owned Real Property, as to which representations and warranties are
made pursuant to Section 4.8, and the Intellectual Property, as to which
representations and warranties are made pursuant to Section 4.10) free and clear
of all Liens (other than Permitted Liens).
4.10. Intellectual Property. Schedule 4.10 of the Disclosure
Schedules identifies all issued patents, patent applications, registered
trademarks, trademark registration applications, registered service marks,
and service mark registration applications forming a part of the Purchased
Assets in the United States Patent and Trademark Office or any state patent
or trademark registry, all material trade names used
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primarily by the Business and all material license agreements relating
primarily to the Business (the "INTELLECTUAL PROPERTY"). With respect to
each item of Intellectual Property required to be identified in Schedule
4.10 of the Disclosure Schedules and any trade secrets or know-how relating
primarily to the Business, no action, suit, proceeding, hearing,
investigation, charge, complaint, claim or demand is pending or, to the
Seller' Knowledge, threatened with challenges the legality, validity,
enforceability, use or ownership of the item. The Seller has not received
any written notice that the Seller is infringing upon the intellectual
property rights of others in connection with the Business or the Seller's
operation of the Business.
4.11. Litigation. Except as set forth on Schedule 4.11 of the
Disclosure Schedules, the Seller in connection with the Business is not (a)
subject to any unsatisfied judgment, order, decree, stipulation, injunction or
criminal charge or (b) a party to or, to the Seller's Knowledge, threatened to
be made a party to any complaint, action, suit, criminal charge, proceeding,
hearing or investigation of or in any court or quasi-judicial or administrative
agency of any Governmental Entity. There are no judicial or administrative
actions, proceedings or investigations pending or, to the Seller's Knowledge,
threatened that question the validity of this Agreement or any of the Ancillary
Agreements or any action taken or to be taken by the Seller in connection with
this Agreement or any of the Ancillary Agreements or that, if adversely
determined, would have a material adverse effect upon the Seller's ability to
enter into or perform its obligations under this Agreement or any of the
Ancillary Agreements to which it is a party.
4.12. Employee Benefits. Schedule 4.12 of the Disclosure
Schedules sets forth and identifies a complete and correct list of all Employee
Pension Benefit Plans, material Employee Welfare Benefit Plans and any other
material employee benefit arrangements or payroll practices (including
employment agreements and severance agreements) maintained by the Seller or to
which the Seller contributes or has any existing liability, in each case with
respect to any Employees (or, if the Seller has any existing liability, former
employees) of the Seller who are employed in connection with the Business
(collectively, the "SELLER PLANS").
4.13. Labor Relations.
(a) Except as set forth on Schedule 4.13 of the Disclosure
Schedules, there are no disputes, claims or actions pending or, to the Seller's
Knowledge, threatened between the Seller and any employee of the Business or any
labor or other collective bargaining unit representing any employee of the
Business, in each case that could reasonably be expected to result in a labor
strike, slow-down or work stoppage.
(b) The Seller has complied in all material respects with
all applicable Laws relating to the employment and termination of labor,
including those related to wages, hours, collective bargaining, workplace safety
and health (including without limitation the rules and regulations of the
Occupational Safety and Health Administration and any state equivalent thereof),
immigration and the payment and withholding of taxes and other sums as required
by appropriate governmental authorities. Except as set forth on Schedule 4.13,
there is no (i) unfair labor practice complaint against the Seller pending
before the National Labor Relations Board or any state or local agency or, to
the Seller's Knowledge, any threatened complaint; (ii) pending representation
question respecting the employees of the Business; or (iii) pending or, to the
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Seller's Knowledge, threatened claim against the Seller regarding the discharge
or dismissal of any employee of the Business.
4.14. Environmental Matters. Except as set forth on Schedule 4.14
of the Disclosure Schedules, (a) there exists no material fact, condition or
occurrence concerning the Seller's compliance with or remediation obligations
under Environmental Laws or Environmental Permits relating to the Business; (b)
no unresolved complaint, notice of violation, citation, summons or order has
been issued or filed alleging any violation by the Seller of any Environmental
Law or Environmental Permit that is reasonably expected to have a material
adverse effect on the operations or financial condition of the Business; and (c)
the operation of the Business at the Facility by the Seller is and has been, for
the past three years, in compliance in all material respects with applicable
Environmental Laws. No Hazardous Material has been treated or stored on the
Owned Real Property except in material compliance with applicable Environmental
Laws. Except as disclosed on Schedule 4.14 or as permitted by applicable
Environmental Laws, no (A) Environmental Conditions, (B) asbestos-containing
materials or (C) polychlorinated biphenyls exist at the Facility, in each case,
that would reasonably be expected to have a material adverse effect on the
operations or financial condition of the Business. Except as disclosed on
Schedule 4.14, in each case, in connection with the operation of the Business,
(a) the Seller is not subject to liability under any Environmental Law for any
Hazardous Material disposal or contamination on any third party property; (b)
the Seller is not subject to any proceedings, actions, orders, decrees,
injunctions or other claims, or to the Knowledge of the Seller, any threatened
actions or claims, relating to liability under any Environmental Law; and (c)
the Seller has not assumed by agreement any liability for cleanup, compliance or
required capital expenditures pursuant to any Environmental Law. The Seller has
made available to Purchaser copies of all material environmental assessments,
audits and studies in its possession or reasonably available to it relating to
the Business or the Owned Real Property. There is no claim pending or, to the
Seller's Knowledge, threatened, for any Personal Injury or property damage
arising out of any exposure prior to the Closing to any Hazardous Materials
present at the Facility or Released from the Facility.
4.15. Legal Compliance. Except (a) with respect to compliance
with Environmental Law (which is governed by Section 4.14 above) and (b) as set
forth on Schedule 4.15 of the Disclosure Schedules, the operations of the
Business are in material compliance with all Laws applicable to the Business.
Except as set forth on Schedule 4.15 of the Disclosure Schedules, the Seller has
not received any notification of any asserted present or past failure by the
Seller to materially comply with any such Law, which has not been resolved.
4.16. Permits. The Seller holds all material Permits that are
required by any Government Entity to permit it to operate the Business and the
Purchased Assets as they are presently operated. Each such material Permit is
listed on Schedule 4.16 of the Disclosure Schedules.
4.17. Adequacy and Completeness of Purchased Assets. Except as
set forth on Schedule 4.17, the Purchased Assets including, without limitation,
the Permits and Intellectual Property, being sold or assigned to the Purchaser
pursuant to this Agreement are sufficient in all material respects for the
Purchaser to continue to operate the Business in the manner heretofore conducted
by the Seller, and the Seller has no Knowledge of any facts which can reasonably
be expected to give rise to an impediment to such operation of the Business
except as have been
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disclosed in this Agreement or the Schedules hereto or as may arise from general
economic conditions or conditions affecting the Business' industry generally.
4.18. Customers and Suppliers. Schedule 4.18 lists the ten
largest customers of the Business and the ten largest suppliers of the Business
for the fiscal year ended January 3, 1999. Except as set forth on Schedule 4.18,
to Seller's Knowledge, since January 3, 1999, there has been no material adverse
change in the business relationship of the Business with any customer or
supplier named on Schedule 4.18. Except as set forth on Schedule 4.18, to
Seller's Knowledge and other than in the ordinary course of business, no
customer or supplier named on Schedule 4.18 has threatened or expressed an
intention to reduce materially the volume of its purchases from or sales to the
Business or otherwise materially, adversely modify its business relationship
with the Business.
4.19. Government Contracts.
(a) With respect to each Government Contract or Bid (in each
case as defined below) to which the Seller is a party and which relates to the
Business, to the Seller's Knowledge, (i) the Seller has fully complied with all
material terms and conditions and all applicable requirements of statute, rule,
regulation or order; (ii) no notice has been received alleging that the Seller
is in breach or violation of any statutory, regulatory or contractual
requirement; (iii) no written notice of termination for convenience, termination
for default, cure notice or show-cause notice has been received by the Seller;
and (iv) other than in the ordinary course of business, no money due to the
Seller has been (or has been threatened to be) withheld or set off.
(b) Except as set forth on Schedule 4.19, none of the Seller
nor any of the Seller's directors or officers or, to the Seller's Knowledge, any
employees, agents or consultants is (or for the last three years has been) (i)
under administrative, civil or criminal investigation, indictment or
information, or audit by the U.S. Government with respect to any alleged
irregularity, misstatement or omission regarding a Government Contract or Bid
relating to the Business; or (ii) suspended or debarred from doing business with
the U.S. Government or declared nonresponsible or ineligible for government
contracting. The Seller has not made, within the past three years, a voluntary
disclosure under the Department of Defense Voluntary Disclosure Program to the
U.S. Government with respect to any alleged irregularity, misstatement or
omission arising under or relating to any Government Contract or Bid relating to
the Business. To the Seller's Knowledge, there are no circumstances that would
warrant Department of Defense suspension or debarment proceedings or the finding
of nonresponsibility or ineligibility on the part of the Business.
(c) To the Seller's Knowledge, neither the U.S. Government
nor any prime contractor, subcontractor or vendor is asserting (or during the
last three years has asserted) in writing any claim or is initiating (or during
the last three years has the Seller initiated) any dispute proceeding against
the Seller relating to Government Contracts or Bids involving the Business, nor
is the Seller asserting (or during the last three years has the Seller asserted)
any claim or is initiating (or during the last three years has the Seller
initiated) any dispute proceeding directly or indirectly against any such party
concerning any Government Contract or Bid.
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(d) For purposes of this Section 4.19 the following terms
shall have the meanings set forth below:
(i) "BID" means any outstanding quotation bid or
proposal by the Seller which, if accepted or awarded, would lead to a contract
with the U.S. Government or a prime contractor or a higher tier subcontractor to
the U.S. Government, for the design, manufacture or sale of products or the
provision of services by the Business directly or indirectly to the U.S.
Government.
(ii) "GOVERNMENT CONTRACT" means any prime contract,
subcontract, teaming agreement or arrangement, joint venture, basic ordering
agreement, letter contract, purchase order, delivery order, change order,
arrangement or other commitment of any kind relating to the Business between the
Seller and (A) the U.S. Government, (B) any prime contractor to the U.S.
Government or (C) any subcontractor with respect to any contract described in
clause (A) or (B).
(iii) "U.S. GOVERNMENT" means the United States
government including any and all agencies commissions, branches,
instrumentalities and departments thereof.
4.20. Certain Business Practices. To the Seller's Knowledge, none
of the Seller, any of its affiliates or any directors, officers, agents or
employees of the Seller or any of its affiliates has, within the past three
years, in each case in connection with the Business, (i) used any funds for
unlawful contributions, gifts, entertainment or other unlawful expenses,
including but not limited to unlawful expenses related to political activity, or
(ii) made any unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns or violated
any provision of the Foreign Corrupt Practices Act of 1977, as amended.
4.21. Product Liability. Except as set forth on Schedule 4.21, no
action, suit, arbitration or other proceeding or claim, demand, demand letter,
lien or notice of noncompliance or violation has been asserted in writing
against the Seller for Personal Injury and, to Seller's Knowledge, no event or
circumstance has occurred that could reasonably be expected to constitute the
basis of any claim against the Seller for injury to any person or any property
suffered as a result of the manufacture, distribution or sale of any product or
material by the Seller in connection with the Business, including any claim
arising out of the allegedly defective or unsafe nature of any such product or
material, other than any claim (i) which would not have a material adverse
effect on the Business or (ii) which is within the scope and limits of coverage
of a policy of insurance covering the Business.
4.22. Inventory. Except for the excess or obsolete (unapplied)
work in process and raw materials inventory of the Business previously
identified by the Seller, as to which no representation is made, the quantities
of Inventory maintained by the Business are reasonable in the present
circumstances of the Business.
4.23. Accounts Receivable. The accounts receivable of the
Business included in the Purchased Assets arose out of or will have arisen out
of sales of inventory in the ordinary course of business and are collectable in
the ordinary course of Business in accordance with their respective terms, net
of any reserve for doubtful accounts.
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4.24. Brokers' Fees. The Seller has no liability or obligation to
pay any fees or commissions to any broker, finder or agent with respect to the
transactions contemplated by this Agreement for which the Purchaser could become
liable or obligated.
4.25. LIMITED WARRANTIES. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED
IN THIS SECTION 4, THE SELLER MAKES NO REPRESENTATION OR WARRANTY WHATSOEVER TO
THE PURCHASER, EXPRESS, IMPLIED OR STATUTORY, CONCERNING THE PURCHASED ASSETS,
THE ASSUMED OBLIGATIONS, THE FACILITY OR THE BUSINESS. WITHOUT LIMITING THE
GENERALITY OF THE FOREGOING, THE SELLER MAKES NO REPRESENTATION OR WARRANTY AS
TO VALUE, QUALITY, QUANTITY, CONDITION, MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE, WORKING ORDER, COMPLIANCE WITH LAW, THE FUTURE PROFITABILITY
OF CONTRACTS OR COMMITMENTS, OR ANY PROJECTED FINANCIAL STATEMENTS OR OTHER
PROJECTED FINANCIAL INFORMATION, PROSPECTS OR FUTURE RESULTS OF OPERATIONS OF
THE BUSINESS. ANY WARRANTIES OTHER THAN THOSE EXPRESSLY PROVIDED FOR IN THIS
SECTION 4, WHETHER EXPRESS, IMPLIED OR STATUTORY, WRITTEN OR ORAL, ARE HEREBY
EXPRESSLY DISCLAIMED. THE PURCHASER ACKNOWLEDGES THAT IT HAS HAD AN OPPORTUNITY
TO INSPECT THE PURCHASED ASSETS.
SECTION 5: REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The
Purchaser represents and warrants to the Seller as follows:
5.1. Organization of the Purchaser. The Purchaser is a limited
partnership duly organized, validly existing and in good standing under the laws
of the State of Delaware. At the Closing, the Purchaser shall be duly organized,
validly existing and in good standing under the laws of its jurisdiction of
formation, and if such jurisdiction is not California, shall be licensed or
qualified to transact business as a foreign entity, and shall be in good
standing as such a foreign entity under the laws of the State of California.
5.2. Authorization of Transaction. The Purchaser has full power
and authority under Delaware laws governing limited partnerships and has taken
all requisite partnership action to enable it to execute and deliver this
Agreement and each of the Ancillary Agreements to which it is a party and to
perform its obligations hereunder and thereunder. This Agreement constitutes,
and each of the Ancillary Agreements when executed and delivered by the
Purchaser will constitute, the valid and legally binding obligation of the
Purchaser enforceable against the Purchaser in accordance with their respective
terms and conditions, subject to bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar Laws now or hereafter in effect relating
to creditors' and landlords' rights and general principles of equity, including
commercial reasonableness, good faith and fair dealing .
5.3. Noncontravention; Consents. Neither the execution and the
delivery of this Agreement or any of the Ancillary Agreements by the Purchaser,
nor the consummation by the Purchaser of the transactions contemplated hereby or
thereby, will violate any provision of the limited partnership agreement or any
other governing instrument of the Purchaser or any Law to which the Purchaser is
subject. Neither the execution and delivery of this Agreement or any of the
Ancillary Agreements by the Purchaser, nor the consummation by the Purchaser of
the transactions contemplated hereby or thereby, will constitute a violation of
or constitute or create
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a default under, any agreement or commitment to which the Purchaser is a party
or by which the Purchaser or any of its properties are bound or to which the
Purchaser of any of such properties are subject. As of the Closing Date, the
Purchaser will have given all required notices and obtained all licenses,
Permits, consents, approvals, authorizations and orders of Governmental Entities
as are required in order to enable the Purchaser to perform its obligations
under this Agreement and each of the Ancillary Agreements.
5.4. Litigation. There are no judicial or administrative actions,
proceedings or investigations pending or, to the Purchaser's knowledge,
threatened that question the validity of this Agreement or any of the Ancillary
Agreements or any action taken or to be taken by the Purchaser in connection
with this Agreement or any of the Ancillary Agreements or that, if adversely
determined, would have a material adverse effect upon the Purchaser's ability to
enter into or perform its obligations under this Agreement or any of the
Ancillary Agreements to which it is a party.
5.5. Brokers' Fees. The Purchaser has no liability or obligation
to pay any fees or commissions to any broker, finder or agent with respect to
the transactions contemplated by this Agreement for which the Seller could
become liable or obligated.
5.6 Financing. The Purchaser has cash resources or available
financing of $32,500,000 available to it and is highly confident of raising on a
timely basis the additional $6,500,000 necessary to consummate on a timely basis
the transactions contemplated by this Agreement.
SECTION 6: PRE-CLOSING COVENANTS. Between the date hereof and the
Closing:
6.1. General. Each of the parties will use its best efforts to
take all action and to do all things necessary, proper or advisable to
consummate and make effective the transactions contemplated by this Agreement
(including satisfying the closing conditions set forth in Section 9).
6.2. Notices and Consents. The Seller will prior to the Closing
Date give all notices to third parties and will use its reasonable efforts at
its expense to obtain all third party approvals, consents, novations and waivers
that are required to be obtained by the Seller in connection with the
transactions contemplated by this Agreement; provided that the Seller will not
be obligated hereunder to pay any consideration to the third party from whom
such approval, consent, novation or waiver is requested. The Purchaser hereby
agrees to cooperate with the Seller in its efforts to obtain such third party
consents and where necessary will give or procure the giving of security to a
contracting third party in order to obtain such approval, consent, novation or
waiver. On or before May 20, 1999, the Seller and the Purchaser will file a
Notification and Report Form and related material with the Federal Trade
Commission and the Antitrust Division of the United Stated Department of Justice
under the Hart-Scott-Rodino Act. The parties will use their best efforts to
obtain early termination of the applicable waiting period or otherwise obtain
clearance to consummate the transactions contemplated by this Agreement and will
make all further filings pursuant thereto that may be necessary, proper or
advisable. If prior to Closing KPMG Peat Marwick, in its due diligence on behalf
of the Purchaser, identifies any deviations from GAAP in the Financial
Statements (other than those identified in Item 2 of Schedule 4.4), the
Purchaser shall promptly notify the Seller of such deviations. If prior to
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Closing the Purchaser encounters difficulty in raising the $6,500,000 referred
to in Section 5.6 hereof, the Purchaser will promptly notify the Seller.
6.3. Carry on in Regular Course. The Seller will carry on the
operations of the Business substantially in the same manner as heretofore
conducted. The Seller will not make or institute any material change in the
methods of manufacture, management, accounting or operation of the Business,
except that the Purchaser acknowledges that the Seller may adjust the reserve
created in connection with the 1998 explosion that occurred at the Facility. The
Purchaser further acknowledges that the Seller liquidated the warranty reserve
in 1998 and notwithstanding any provision in this Agreement to the contrary,
will not be required to implement a warranty reserve prior to or in connection
with this Agreement, including the Closing Statement.
6.4. Contracts and Commitments. The Seller in connection with the
Business will not enter into any material contract or commitment or engage in
any transaction, including any contract, commitment or engagement with any other
division, unit or Affiliate of the Seller, or effect any change to any program,
not in the usual and ordinary course of business and consistent with the past
operation of the Business. The Seller will extend existing open purchase orders
with Autoliv ASP (such purchase orders, as extended, referred to herein as the
"AUTOLIV PURCHASE ORDERS") for the purchase of RDC and HACN through June 30,
2000, which Autoliv Purchase Orders shall be deemed to be Assumed Contracts and
shall upon execution be deemed added to Schedule 2.3(a)(i) and Schedule 4.7. The
Seller will enter into an exclusive International Sales Representative Agreement
(the "TELEDYNE JAPAN AGREEMENT") with Teledyne Japan Kabushiki Kaisha ("TELEDYNE
JAPAN") which will formally document and provide for the continuation of the
existing relationship between Teledyne Japan and the Seller with respect to the
Business for a period of two years, which Teledyne Japan Agreement shall be
deemed to be an Assumed Contract and shall upon execution be deemed added to
Schedule 2.3(a)(i) and Schedule 4.7.
6.5. Sale of Capital Assets. Other than pursuant to this
Agreement and the sale or disposition of excess or obsolete equipment in the
usual and ordinary course of business consistent with the past operation of the
Business, the Seller will not sell or otherwise dispose of any capital asset
relating to the Business.
6.6. Access. The Seller will permit representatives of the
Purchaser to have access at reasonable times to the Purchased Assets, the
Employees and, after coordination with and approval by the Seller, the material
customers, distributors and suppliers of the Business. The Purchaser agrees that
it will use all reasonable efforts to schedule its review of such items and
meetings with such persons at such times which are not disruptive to the
operations of the Business. Prior to the Closing Date, the Purchaser will be
permitted to complete, at the sole cost and expense of the Purchaser, a Phase I
environmental study of the Owned Real Property; provided, however, that no such
Phase I or other environmental review by the Purchaser will involve sampling,
Phase II testing or invasive investigatory work without prior written consent of
the Seller. The Purchaser will deliver to the Seller a copy of any Phase I or
other third party report generated by any permitted environmental investigation.
The Purchaser will treat any environmental review of the Owned Real Property as
confidential information.
6.7. Tax Matters. No new elections with respect to Taxes, or
any changes in current elections with respect to Taxes, affecting the Business
and the Assumed Obligations will
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be made by the Seller after the date of this Agreement without the prior written
consent of the Purchaser. The Seller will furnish the Purchaser, at the
Purchaser's request, an affidavit stating, under penalty of perjury, the
Seller's United States taxpayer identification number and that the Seller is not
a foreign person, pursuant to Section 1445(b)(2) of the Code.
6.8. Notice of Developments; Disclosure Schedules; Updating
Disclosure Schedules.
(a) Each party will give prompt written notice to the other
of any development occurring on or after the signing of this Agreement affecting
the ability or obligation of the parties to consummate the transactions
contemplated by this Agreement or any of the Ancillary Agreements. Except as
provided in Section 6.8(c), no such written notice of a development will be
deemed to have amended the Disclosure Schedules, to have qualified the
representations and warranties contained herein or to have cured any
misrepresentation or breach of warranty that otherwise might have existed
hereunder by reason of such material development.
(b) Complete copies of the Disclosure Schedules referred
herein are being delivered simultaneously with the execution of this Agreement.
(c) The Seller will deliver to the Purchaser prior to the
Closing Date a written update or supplement to the Disclosure Schedules
reflecting events occurring and contracts and agreements from the date of this
Agreement through the Closing Date. To the extent that such updated or
supplemental Disclosure Schedules reflect matters or events (i) which
constitute, and which are identified specifically as, Excluded Assets or
Excluded Liabilities or (ii) which have occurred after the date of this
Agreement in the ordinary course of business of the Business at the Facility,
which do not constitute a violation of any of Seller's covenants set forth in
Section 6 and which do not in the reasonable judgment of the Purchaser,
represent a material adverse change in the business, financial condition,
operations or results of operations of the Business at the Facility, then the
Disclosure Schedules shall be deemed to be amended as of the Closing Date to
include the information set forth on such updated or supplemental Disclosure
Schedules. To the extent that such updated or supplemental Disclosure Schedules
reflect matters or events which have occurred after the date of this Agreement
and which in the reasonable judgment of Purchaser, represent a material adverse
change in the business, financial condition, operations or results of operations
of the Business at the Facility, then (i) the parties will negotiate in good
faith during the seven-day period immediately after delivery of the update or
supplemental Disclosure Schedules to determine the consequences of such
disclosures, (ii) the Disclosure Schedules will be amended only to the extent
that the parties mutually agree as a result of such negotiation and (iii) the
Purchaser may elect to terminate this Agreement after the expiration of such
seven-day period, in which event the Seller and the Purchaser will have no
liability to the other as a result of such termination, except that in such case
and provided that the Seller's or McCormick Selph's management identified on
Schedule 1.1 had actual conscious knowledge as of the date of this Agreement of
the facts added to the updated or supplemented Disclosure Schedules representing
such material adverse change in the business, financial condition, operations or
results of operations of the Business at the Facility, the Seller shall promptly
after receipt of an itemized invoice reimburse the Purchaser for reasonable
out-of-pocket expenses incurred by the Purchaser in connection with the
transactions contemplated by
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this Agreement and paid to outside attorneys, accountants, environmental
consultants and insurance consultants and the Hart-Scott-Rodino filing fee, up
to $250,000 in the aggregate.
6.9. Year 2000. The Seller shall continue its reasonable efforts
and make reasonable expenditures intended to cause computer systems used by the
Seller in the Business to be Year 2000 compliant, provided that the Seller shall
be obligated only to make expenditures of $200,000 for such purposes between the
date of this Agreement and the Closing, provided further, that to the extent
that such expenditures between the date of this Agreement and the Closing are
less than $200,000, the Purchaser will be entitled to a purchase price reduction
at the Closing equal to the difference between $200,000 and the amount of such
expenditures. The Purchaser understands and agrees that the Seller makes no
representations or warranties, express or implied, as to Year 2000 compliance or
readiness of the Business (including any products of the Business) or of any of
the Purchased Assets and that the Seller expressly disclaims and denies any
implication of any such representation or warranty that might arise from any
provisions of this Agreement, including but not limited to this Section 6.9, as
a matter of law or otherwise.
SECTION 7: POST-CLOSING COVENANTS. The parties agree as follows with
respect to the period following the Closing Date:
7.1. General. In case at any time after the Closing Date any
further action is necessary or desirable to carry out the purposes of this
Agreement, each of the parties will take such further action (including the
execution and delivery of such further instruments and documents) as the other
party reasonably may request, at the sole cost and expense of the requesting
party (unless the requesting party is entitled to indemnification therefor under
Section 10 of this Agreement).
7.2. Post-Closing Consents; Nonassignable Contracts.
(a) The Seller will use its reasonable efforts after the
Closing Date to obtain all third party approvals, consents, novations and
waivers that are not obtained prior to the Closing Date and that are required in
connection with the transactions contemplated by this Agreement; provided that
the Seller will not be obligated hereunder to pay any consideration to the third
party from whom such approval, consent, novation or waiver is required. The
Purchaser hereby agrees to cooperate with the Seller in its efforts to obtain
such third party approvals, consents, novations and waivers and where necessary
will give or procure the giving of security to obtain such third party approval,
consent, novation or waiver.
(b) To the extent that any Contract is not capable of being
transferred by the Seller to the Purchaser pursuant to this Agreement without
the consent of a third party and such consent is not obtained prior to Closing,
or if such transfer or attempted transfer would constitute a breach or a
violation of any Law, nothing in this Agreement will constitute a transfer or an
attempted transfer thereof. A true and complete listing of the material
Contracts that require consent of a third party to be transferred is set forth
on Schedule 7.2(b) hereto.
(c) In the event that any required consent is not obtained
on or prior to the Closing Date, the Seller will, subject to Section 7.2(b), use
its reasonable efforts to (i) provide to the Purchaser the benefits of the
applicable Contract, (ii) cooperate in any reasonable and lawful arrangement
designed to provide such benefits to the Purchaser and (iii) enforce at the
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request and expense of the Purchaser and for the account of the Purchaser, any
rights of the Seller arising from any such Contract (including the right to
elect to terminate such Contract in accordance with the terms thereof upon the
request of the Purchaser).
(d) The Purchaser will perform the obligations arising under
all Contracts referred to in Section 7.2(b) for the benefit of the Seller and
the other party or parties thereto, except for any obligation under such
Contract that constitutes an Excluded Liability.
(e) After the Closing, the Seller, at the reasonable request
of the Purchaser, shall promptly execute and deliver to the Purchaser all such
further assignments, bills of sale, endorsements and other documents in form and
substances satisfactory to the Purchaser and its counsel as the Purchaser may
reasonably request in order to (i) vest in the Purchaser title to and possession
of the Purchased Assets and (ii) otherwise carry out or evidence the terms of
this Agreement.
7.3. Litigation Support; Tax Return Preparation; Records
Retention; Transitional Services.
(a) In the event and for so long as any party is actively
investigating, contesting, defending against or prosecuting any charge,
complaint, action, suit, contract appeal, proceeding, hearing, investigation,
claim, demand or audit (including routine audits and contract close-outs) in
connection with (i) any transaction contemplated under this Agreement or (ii)
any fact, situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act or transaction on or prior
to the Closing Date involving the Business, the other party will cooperate with
the contesting or defending party and its counsel in the contest or defense,
make available its personnel and provide such testimony and access to its books
and records as may be reasonably necessary in connection with the contest or
defense.
(b) The Seller and the Purchaser will each provide the other
party with such assistance as may reasonably be requested in connection with the
preparation of any Tax Return, audit or other examination by any taxing
authority or judicial or administrative proceeding relating to liability for
Taxes and will provide to the other party all records and other information
which may be relevant to any such Tax Return, audit or examination, proceeding
or determination and with any final determination of any such audit or
examination, proceeding or determination that affects any amount required to be
shown on any Tax Return of the other party for any period.
(c) The Purchaser will cause appropriate Employees of the
Business to prepare usual and customary tax return packages with respect to the
tax periods beginning January 1, 1999 and ending as of the Closing Date. Such
tax return packages will be delivered to the Seller not later than sixty days
following the Closing Date.
(d) The Seller and the Purchaser agree that the Purchaser
has purchased substantially all of the property used in the Business, and in
connection therewith the Purchaser will employ individuals who immediately
before the Closing Date were employed in such trade or business by the Seller.
Accordingly, provided that the Seller provides the Purchaser with all necessary
payroll records for the calendar year which includes the Closing Date, the
Purchaser will furnish a Form W-2 to each employee employed by the Purchaser who
had been employed by the Seller, disclosing all wages and other compensation
paid for such
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calendar year, and taxes withheld therefrom, and the Seller will be relieved of
the responsibility to do so.
(e) The Purchaser will provide reasonable assistance to the
Seller in connection with any Tax audits or other administrative or judicial
proceedings involving the Business and affecting such income Tax Returns or
declarations for any period all or any portion of which is prior to the Closing
Date, including the participation of the then current personnel of the Purchaser
in such audits and proceedings. The Purchaser will not, without the prior
written consent of the Seller, or except as required by Law, initiate any
contract or voluntarily enter into any agreements with, or volunteer any
information to, any taxing authorities with regard to specific items on such Tax
Returns or declarations.
(f) The Purchaser will, subject to Section 2.1(f), maintain
all original books, records, files, documents, papers and agreements pertaining
to the Purchased Assets, the Assumed Obligations or otherwise relating to the
Business as conducted before the Closing Date for at least seven years following
the Closing Date or such longer period as may be required by Law. Seller agrees
that it will maintain all original books, records, files, documents, papers and
agreements relating to any of the Purchased Assets or Assumed Obligations which
are not included in the Purchased Assets for at least seven years following the
Closing Date or such longer period as may be required by Law. Each of the Seller
and the Purchaser agree that before destroying or discarding any materials
required to be retained pursuant to this Section 7.3(f), it will notify the
other in writing (which notice will include a description of the materials to be
destroyed or discarded) and such other party may, at its expense, remove or make
copies of such materials within 90 days following the date of such written
notice. In the event the other party has not removed such materials within such
90-day period, the party desiring to destroy or discard such materials may
proceed with such action without any liability to the other.
(g) After the Closing Date the Purchaser will provide
services, assistance and reasonable cooperation to the Seller in connection
with:
(i) the completion and delivery of the financial
statements and the general ledger of the Business as of the Closing Date to the
Seller;
(ii) the preparation of quarterly, semi-annual and
annual reports required to be prepared by the Seller (either by Law or in
accordance with the Seller's internal reporting systems and procedures) in
connection with the operation of the Business prior to the Closing Date and with
the transactions provided for herein;
(iii) the preparation of audit information packages
required to be prepared by the Seller (either by Law or in accordance with the
Seller's internal reporting systems and procedures) in connection with the
operation of the Business prior to the Closing Date, the transactions provided
for in this Agreement and the Seller's year-end financial audit;
(iv) the Seller's administration of the Excluded
Liabilities; and
(v) such other services as the Seller may reasonably
request incidental to the orderly transfer of the Business and the Purchased
Assets to the Purchaser.
(h) If a request is made by a party (the "REQUESTER")
pursuant to this Section 7.3, the Requester shall reimburse the complying party
for all reasonable expenses
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including any reasonable personnel expenses, incurred to comply with such
request. Furthermore, the Seller shall reimburse the Purchaser for all
reasonable out of pocket expenses incurred by the Purchaser to comply with
paragraphs (c) through (g) above.
7.4. Signage and Labels. The Purchaser will remove the Seller's
names from all exterior signs located at the Owned Real Property as soon as
practicable but in any event within two months after the Closing Date. The
Purchaser may use the Seller's name on finished goods inventory which
constitutes part of the Purchased Assets but will change or otherwise replace
the stamps and dies bearing the Seller's name as soon as reasonably practicable
after the Closing Date but in any event within six months of the Closing Date.
The Purchaser may not use publicly any business records described in Section
2.1(f) without first removing therefrom or obliterating all portrayals or
references to any of the Seller's trade names, trademarks or service marks or
other intangible property contained in such records, unless the Seller consents
to such usage.
7.5. Covenant Not to Compete.
(a) For a period of three (3) years after the Closing Date,
without the prior written consent of the Purchaser none of the Seller nor any of
its Affiliates will directly or indirectly (whether through any partnership of
which it is a member, through any trust in which it is a beneficiary or trustee
or through a corporation or other association in which it has any interest,
legal or equitable, or in any other capacity whatsoever) engage in the
manufacture or sale of products of the type now made and sold by the Business in
any county or any other political subdivision of any state of the United States
of America or of any other country in the world where the Seller conducted the
Business as of the Closing Date; provided, however, that the foregoing
restriction shall not prevent Seller and/or any of its Affiliates from (i)
acquiring or holding an interest of less than 10% of the outstanding equity
securities of any competing business (a "COMPETING ENTITY") whose equity
securities are listed on a national securities exchange, quoted on the NASDAQ
NMS or trade in the over-the-counter market, (ii) making or maintaining an
investment in any Competing Entity if the assets used by such Competing Entity
in the activity competitive with the Business constitute less than 20% in value
of the assets of such Competing Entity and the revenue derived from carrying on
the activity competitive with the Business constitutes less than 30% of the
revenues of the Competing Entity (calculated in each case on a consolidated
basis), (iii) making an acquisition of assets (and following such acquisition
carrying on the business and activities associated with the assets acquired) if
the portion of assets used in carrying on the activity competitive with the
Business constitutes less than 20% in value of the assets acquired and the
revenue associated with such competitive activity constitutes less than 30% in
value of the revenue derived from all of the assets acquired (calculated in each
case on a consolidated basis), or (iv) manufacturing, selling or distributing
(a) electronics that control or are otherwise used in pyrotechnic components and
systems, or (b) similar products, but only to the extent such products use
electronic and not pyrotechnic devices (other than expended unit indicators or
thermal batteries, all of which Seller shall be permitted to manufacture, sell
and/or distribute).
(b) During the term of this covenant not to compete, the
Seller agrees further that it shall not (i) solicit, directly or indirectly, any
person employed in the Business (other than John Kemble to whom the Seller has
offered employment) or (ii) attempt to induce any such employee or leave such
employment; provided, however, that the foregoing restrictions shall not
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prohibit the Seller from advertising open positions in newspapers, trade
journals, on the internet and in media of general circulation and hiring any
individual who responds to such general solicitation.
(c) The parties hereto agree that the duration and area for
which the covenant not to compete set forth in this Section 7.5 is to be
effective are reasonable. In the event that any court determines that the time
period or the area or both of them, are unreasonable and that such covenant is
to that extent unenforceable, the parties hereto agree that the covenant shall
remain in full force and effect for the greatest time period and in the greatest
area that would not render it unenforceable. The parties intend that this
covenant shall be deemed to be a series of separate covenants one for each and
every county of each and every state of the United States of America and each
and every political subdivision of each and every country outside the United
States of America where this covenant is intended to be effective. The parties
hereto agree that damages are an inadequate remedy for any breach of this
covenant and that the Purchaser shall, whether or not it is pursuing any
potential remedies at law, be entitled to equitable relief in the form of
preliminary and permanent injunctions without bond or other security upon any
actual or threatened breach of this covenant.
7.6. Warranty Obligations. The Purchaser will use its best
efforts to perform the work necessary to fulfill contractual warranty
obligations with respect to the products manufactured and sold by the Seller in
connection with the Business prior to the Closing Date in an efficient and
workmanlike manner from and after the Closing Date; provided, however, that the
Seller shall reimburse the Purchaser for the actual out-of-pocket costs incurred
by the Purchaser and Purchaser's overhead directly related to fulfilling such
warranty obligations. For purposes of this Agreement, Seller's contractual
warranty obligations will include contractual warranty obligations to Autoliv
ASP with respect to micro gas generators sold by the Seller to Autoliv ASP.
Payments by the Seller shall be made on a quarterly basis against a reasonably
detailed Purchaser invoice within 45 days after such invoice is received by the
Seller; provided, however, the Purchaser agrees that it shall not invoice the
Seller for reimbursement under this Section 7.6 unless the aggregate amount
under any invoice to be reimbursed (in respect of one or more claims) exceeds
$10,000. Payment by the Seller under this Section 7.6 shall be counted against
and reduce the Larger Cap under Section 10.2(b).
7.7 Transition Services. The Seller will offer to Purchaser, at
Purchaser's expense as set below, the following transitional services for the
periods following Closing as set forth below:
(a) The Seller will offer to the Purchaser for a period of
up to six months following the Closing Date purchasing and accounts payable
services with respect to the Business (excluding distribution of accounts
payable checks) with such services to be substantially of the type, nature and
extent provided by Teledyne Ryan Aeronautical ("TRA") to the Business
immediately prior to Closing, and the Purchaser shall pay to the Seller $10,000
per month for such services, with payment due within thirty days of the end of
each one month period following the Closing Date. The Purchaser will establish
and fund checking accounts in its name upon which such checks will be drawn.
(b) The Seller will offer to the Purchaser for a period of
up to three months following the Closing Date payroll processing services with
respect to the Business as the interface to external ADP payroll processing and
maintenance of the benefits portion of the
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payroll function of the Business with such services to be substantially of the
type, nature and extent provided by TRA to the Business immediately prior to
Closing and Purchaser shall pay to the Seller $6,000 per month for such
services, with payment due within thirty days of the end of each one month
period following the Closing Date. The Purchaser will establish and fund
checking accounts in its name upon which such checks will be drawn.
(c) The Seller will offer to the Purchaser for a period of
up to three months following the Closing Date internet access in connection with
the operation of the Business with such services to be substantially of the
type, nature and extent provided by TRA to the Business immediately prior to
Closing and Purchaser shall pay to the Seller $1,000 per month for such
services, with payment due within thirty days of the end of each one month
period following the Closing Date.
(d) The Purchaser will give written notice to the Seller at
least five business days prior to the end of each monthly service period if
services under any of Section 7.7(a), Section 7.7(b) or Section 7.7(c) are not
to be continued during the next succeeding monthly period.
(e) To the extent that any third party license or consent is
required to permit the Seller to provide any of the transition services under
any of Section 7.7(a), Section 7.7(b) or Section 7.7(c), the Seller shall use
its best efforts to obtain such licenses or consents and all costs of such
licenses or consents shall be borne by the Purchaser in addition to the payments
described above in this Section 7.7
(f) The Purchaser acknowledges that the Seller may sell TRA
and that the transition services identified in this Section 7.7 may be provided
by a Person or Persons other than TRA. Consequently, the Purchaser undertakes to
use its best efforts to bring the services provided under this Section 7.7
in-house or otherwise outsource them as soon as practicable after the Closing
Date. In no event shall the Seller be required to provide transition services
identified in this Section 7.7 beyond the respective periods specified in
Sections 7.7(a), (b) and (c). The Purchaser acknowledges and agrees that
employees of the Purchaser shall not have access to any system of the Seller (or
any other Person providing transition services) to the extent that information
of the Business is not segregated from information of the Seller (or other
Person providing transition services). Nothing in this Section 7.7 shall be
construed to require that the Seller (or any other Person providing transition
services) maintain any person in its employ.
SECTION 8: EMPLOYEE BENEFITS.
(a) Except as set forth on Schedule 8(a) on or prior to the
Closing Date, the Purchaser shall make offers of employment, effective as of the
Closing Date, to all salaried and hourly Employees of the Business. Schedule
8(a) of the Disclosure Schedules sets forth a list of Employees of the Business
as of the date hereof. The Purchaser and the Seller acknowledge that the Seller
has offered continued employment to John Kemble and, if such offer of employment
is accepted by Mr. Kemble on or prior to the Closing Date, the Purchaser shall
have no obligation to offer him employment.
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(b) Except as may otherwise be expressly provided in this
subparagraph (b), the employees accepting offers of employment (the "TRANSFERRED
EMPLOYEES") shall be treated as newly hired employees of the Purchaser:
(i) The Purchaser shall provide such Transferred
Employees with substantially comparable wages and the benefits described on a
schedule to be delivered by the Purchaser to the Seller on or before June 15,
1999.
(ii) The Transferred Employees shall be eligible to
participate in all employee benefit plans in which similarly situated employees
of the Purchaser participate, and the Purchaser and such plans shall recognize
such Transferred Employees' service with the Seller prior to the Closing Date
for purposes of eligibility and vesting (but not for benefit accrual except that
the Purchaser will recognize accrued vacation as of the Closing Date with
respect to the Transferred Employees) under the Purchaser's said plans.
(iii) The eligibility of Transferred Employees to
participate in the Purchaser's health and life plans shall not be delayed or
limited in any way by pre-existing conditions. All claims incurred with regard
to any Transferred Employee before the Closing Date and which are covered under
the applicable health, life or accidental death and dismemberment plans of the
Seller shall be payable under the terms of the applicable plan of the Seller.
All other claims incurred with regard to any Transferred Employee and which are
covered under the applicable health, life or accidental death or dismemberment
plans of the Purchaser shall be payable under the terms of the applicable plan
of the Purchaser.
(iv) For purposes of the COBRA health continuation of
coverage provisions (hereafter referred to as the "COBRA PROVISIONS") contained
in Section 4980 (f) of the Code and in Section 601 through 608 of ERISA, the
Transferred Employees shall be considered to have undergone a termination of
employment with the Seller. It is the understanding and intention of the Seller
and the Purchaser that no group health plan maintained by the Purchaser shall
constitute a successor plan to any of the Seller's group health plans and the
Purchaser is not a successor employer with respect to any of the Seller's group
health plans and the Seller is not a predecessor employer with respect to the
Purchaser's group health plans, within the meaning of the COBRA Provisions. It
is the further understanding and intention of the Seller and the Purchaser,
however, that the health plan coverage to be afforded to the Transferred
Employees pursuant to Section 8(b)(iii) shall be coverage that, pursuant to
Section 602(2)(D)(i) of ERISA, terminates any continuation coverage rights the
Transferred Employees might otherwise have under the COBRA Provisions as a
result of termination of employment with the Seller.
SECTION 9: CLOSING CONDITIONS.
9.1. Conditions to Obligation of the Purchaser. The obligation of
the Purchaser to consummate the transactions to be performed by it in connection
with the Closing is subject to satisfaction of the following conditions:
(a) the representations and warranties set forth in Section
4 will be true and correct in all material respects at and as of the Closing
Date:
(b) the Seller will have performed and complied with all of
its covenants hereunder in all material respects through the Closing;
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(c) there will not be any action, suit or proceeding pending
or threatened before any Governmental Entity or before any arbitrator wherein an
unfavorable injunction, judgment, order, decree, ruling or charge would (i)
prevent consummation of any of the transactions contemplated by this Agreement
or any Ancillary Agreement, or (ii) cause any of the transactions contemplated
by this Agreement or Ancillary Agreement to be rescinded following consummation;
(d) all applicable waiting periods (and any extension
thereof) under the Hart-Scott-Rodino Act will have expired or otherwise been
terminated without the objection of any of the relevant federal authorities;
(e) the Seller will have delivered to the Purchaser a
certificate to the effect that each of the conditions specified above are
satisfied in all respects;
(f) the Seller will have executed and delivered to the
Purchaser the documents identified in Section 3.3;
(g) the Seller and Teledyne Japan will have entered into the
Teledyne Japan Agreement; and
(h) the Seller shall have entered into the Autoliv Purchase
Orders.
The Purchaser may waive any condition specified in this Section 9.1, other
than Section 9.1(d), if it executes a writing so stating at or prior to the
Closing.
9.2. Conditions to Obligation of the Seller. The obligation of
the Seller to consummate the transactions to be performed by it in connection
with the Closing is subject to satisfaction of the following conditions:
(a) the representations and warranties set forth in Section
5 will be true and correct in all material respects at and as of the Closing
Date;
(b) the Purchaser will have performed and complied with all
of its covenants hereunder in all material respects through the Closing;
(c) there will not be any action, suit or proceeding pending
or threatened before any Governmental Entity or before any arbitrator wherein an
unfavorable injunction, judgment, order, decree, ruling or charge would (i)
prevent the consummation of any of the transactions contemplated by this
Agreement or any Ancillary Agreement or (ii) cause any of the transactions
contemplated by this Agreement or any Ancillary Agreement to be rescinded
following consummation.
(d) the Purchaser will have delivered to the Seller a
certificate to the effect that each of the conditions specified above is
satisfied in all respects;
(e) all applicable waiting periods (and any extensions
thereof) under the Hart-Scott-Rodino Act will have expired or otherwise been
terminated without the objection of any of the relevant federal authorities;
(f) the Purchaser will have executed and delivered to the
Seller the documents identified in Section 3.3; and
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(g) the Purchaser will have delivered to the Seller the
Purchase Price.
The Seller may waive any conditions specified in this Section 9.2, other
than Section 9.2(e), if it executes a writing so stating at or prior to the
Closing.
SECTION 10: REMEDIES FOR BREACHES OF THIS AGREEMENT.
10.1. Survival. Except as otherwise provided herein, all of the
representations and warranties contained in this Agreement or in any certificate
delivered pursuant to this Agreement relating to the representations and
warranties contained in this Agreement will survive the Closing and continue in
full force and effect for a period of eighteen (18) months after the Closing
Date, provided, however, that (a) the representations and warranties contained
in Sections 4.6, 4.19, 4.20 and 4.21 shall survive until the expiration of the
applicable statutes of limitations; and (b) the representations and warranties
contained in Section 4.2 shall survive indefinitely. Notwithstanding the
foregoing, (i) any claims based on fraud or fraudulent misrepresentation shall
survive indefinitely, and (ii) any agreements and covenants herein which by the
terms of this Agreement survive shall survive as provided in this Agreement.
10.2. Indemnification Provisions for Benefit of the Purchaser.
(a) In the event the Seller breaches any of its
representations, warranties or covenants contained in this Agreement and
provided that the Purchaser within the applicable survival period makes a
written claim for indemnification against the Seller setting forth in reasonable
detail the circumstances regarding the claim and, if ascertainable, an estimate
of the amount thereof, then the Seller agrees to indemnify, defend and hold the
Purchaser harmless from and against the entirety of any losses, expenses
(including reasonable attorneys' fees and expenses), costs, damages, fines,
penalties and other liabilities (collectively, "LOSSES") the Purchaser or any of
its Affiliates, or any of their respective directors, officers, employees,
agents or representatives (collectively, the "PURCHASER INDEMNIFIED PARTIES"),
suffer to the extent such Losses result from, arise out of or are caused by such
breach.
(b) The Seller further agrees to indemnify, defend and hold
the Purchaser Indemnified Parties harmless from and against any Losses the
Purchaser Indemnified Parties suffer to the extent such Losses result from,
arise out of, or are caused by any Excluded Liability (which, in the context of
Losses arising under Environmental Law shall include, among other Losses subject
to Section 10.6, the necessary and reasonable costs of remediation and
compliance under any Environmental Law or in connection with any Hazardous
Materials); provided, however, that the Seller will not have any obligation to
indemnify the Purchaser Indemnified Parties with respect to any such Losses
arising (i) from breaches of Sections 4.19, 4.20 or 4.21, (ii) under
Environmental Law or (iii) from Excluded Liabilities to the extent such
aggregate Losses, together with the Losses subject to indemnification pursuant
to Section 10.2(a) above, exceed 50 percent of the Purchase Price (the "LARGER
CAP"). Seller's indemnification obligations under this Section 10.2(b) shall
survive until the expiration of the applicable statute of limitations with
respect to Excluded Liabilities, other than with respect to Losses which are
Environmental Losses, as to which the survival period is limited to the five
year period set forth in Section 10.6(g).
(c) The Seller will not have any obligation to indemnify the
Purchaser Indemnified Parties from and against any Losses (i) until the
Purchaser Indemnified Parties have suffered Losses by reason of all such
breaches which exceed, in the aggregate, one percent (1%)
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of the Purchase Price (the "THRESHOLD"), after which point the Seller will be
obligated to indemnify the Purchaser from and against all Losses suffered by the
Purchaser Indemnified Parties relating back to the first dollar of such Losses,
provided, however, that Purchaser Indemnified Parties shall have no right to
indemnification with respect to any individual Loss which is less than $5,000
(the "Individual Loss Deductible") and no such Loss shall be taken into account
in determining whether or the extent to which the 1% of the Purchase Price
threshold has been exceeded, or (ii) to the extent the Losses the Purchaser
Indemnified Parties have suffered exceed, in the aggregate, an amount equal to
$7,500,000 (the "CAP") after which point the Seller will have no obligation to
indemnify the Purchaser Indemnified Parties from and against further Losses in
excess of such amount except as provided in Section 10.2(b). Notwithstanding the
foregoing, (i) the Cap shall not apply to any claims based on fraud or
fraudulent misrepresentation, and (ii) the Threshold shall not apply to Losses
to the extent such Losses result from, arise out of, or are caused by Excluded
Liabilities, provided, however, that the Individual Loss Deductible shall apply
to Losses described in this subpart (ii).
(d) The foregoing provisions of Section 10.2 shall not
govern, limit or restrict Taxes in any respect. The Seller shall indemnify the
Purchaser for any Taxes of the Business for periods up to and including the
Closing Date that may become liabilities of the Purchaser by operation of law or
otherwise. This indemnification obligation and the representations of the Seller
in Section 4.6 shall survive until the expiration of the applicable statute of
limitation.
10.3. Indemnification Provisions for Benefit of the Seller.
(a) In the event the Purchaser breaches any of its
representations, warranties or covenants contained in this Agreement or in any
certificate delivered by the Purchaser pursuant to this Agreement and provided
that the Seller makes a written claim for indemnification against the Purchaser
setting forth in reasonable detail the circumstances regarding the claim and, if
ascertainable, an estimate of the amount thereof, then the Purchaser agrees to
indemnify, defend and hold the Seller harmless from and against the entirety of
any Losses the Seller or any of its Affiliates, or any of their respective
directors, officers, employees, agents or representatives (collectively, the
"SELLER INDEMNIFIED PARTIES"), suffer to the extent such Losses result from,
arise out of or are caused by such breach.
(b) The Purchaser further agrees to indemnify, defend and
hold the Seller harmless from and against the entirety of any Losses the Seller
Indemnified Parties suffer to the extent such Losses result from, arise out of
or are caused by any Assumed Obligations.
(c) The Purchaser further agrees to indemnify, defend and
hold the Seller harmless from and against the entirety of any Losses the Seller
Indemnified Parties suffer to the extent such Losses result from, arise out of
or are caused by the operation of the Business or use of the Purchased Assets
after the Closing Date.
(d) The Purchaser will not have any obligation to indemnify
the Seller Indemnified Parties from and against any Losses (i) until the Seller
Indemnified Parties have suffered Losses by reasons of all such breaches which
exceed, in the aggregate, one percent (1%) of the Purchase Price, after which
point the Purchaser will be obligated to indemnify the Seller from and against
all Losses suffered by the Seller Indemnified Parties relating back to the first
dollar of such Losses; provided, however, that Seller shall have no right to
indemnification with
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respect to any individual Loss which is less than $5,000 and no such Loss shall
be taken into account in determining whether or the extent to which the 1% of
the Purchase Price threshold has been exceeded, or (ii) to the extent the Losses
the Seller Indemnified Parties have suffered exceed, in the aggregate, 50
percent of the Purchase Price, after which point the Purchaser will have no
obligation to indemnify the Seller Indemnified Parties from and against further
Losses in excess of such amount. Notwithstanding the foregoing, the limitations
set forth above shall not apply to any claims based on fraud or fraudulent
misrepresentation.
10.4. Matters Involving Third Parties. If any third party
notifies any party hereto (the "INDEMNIFIED PARTY") with respect to any matter
which may give rise to a claim for indemnification against the other party
hereto (the "INDEMNIFYING Party") under this Section 10, then the Indemnified
Party will notify the Indemnifying Party thereof promptly and in any event
within 10 days after receiving any written notice from a third party; provided
that no delay on the part of the Indemnified Party in notifying the Indemnifying
Party will relieve the Indemnifying Party from any obligation hereunder unless,
and then solely to the extent that, the Indemnifying Party is prejudiced
thereby. Once the Indemnified Party has given notice of the matter to the
Indemnifying Party, the Indemnified Party may defend against the matter in any
manner it reasonably may deem appropriate. In the event the Indemnifying Party
notifies the Indemnified Party within 10 days after the date the Indemnified
Party has given notice of the matter that the Indemnifying Party is assuming the
defense of such matter (a) the Indemnifying Party will defend the Indemnified
Party against the matter with counsel of its choice reasonably satisfactory to
the Indemnified Party, (b) the Indemnified Party may retain separate counsel at
its sole cost and expense (except that the Indemnifying Party will be
responsible for the fees and expenses of such separate co-counsel to the extent
the Indemnified Party reasonably concludes in good faith that the Indemnified
Party has defenses available to it that may conflict with those of the
Indemnifying Party), (c) the Indemnified Party will not consent to the entry of
a judgment or enter into any settlement with respect to the matter without the
written consent of the Indemnifying Party (not to be withheld or delayed
unreasonably) and (d) the Indemnifying Party will not consent to the entry of a
judgment with respect to the matter or enter into any settlement which does not
include a provision whereby the plaintiff or claimant in the matter releases the
Indemnified Party from all liability with respect thereto, without the written
consent of the Indemnified Party (not to be withheld or delayed unreasonably).
10.5. Indemnification Limitations. Neither party hereto will be
liable to the other hereunder for any punitive or consequential incidental
damages (including loss of revenue or income, business interruption, cost of
capital or loss of business reputation or opportunity) relating to any claim for
which either such party may be entitled to recover under this Agreement (other
than indemnification of amounts paid or payable to third parties in respect of
any third party claim for which indemnification hereunder is required). Neither
the Purchaser nor the Seller will file or otherwise commence any other action,
suit or proceeding against the other in respect of this Agreement or the
transactions contemplated hereby unless (a) such party notifies the other of its
intent to do so and (b) a period commencing with such notice and expiring on the
earlier of the date on which a meeting between officers of the Purchaser and the
Seller has been completed and 30 days after the date of such notice. Such
officers will meet at a mutually convenient time and location during such 30-day
period for the purpose of attempting to resolve in good faith the claims
described in such notice. No claim for the recovery of Losses based upon breach
of any representation, warranty, covenant or agreement may be asserted by Seller
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Indemnified Parties or Purchaser Indemnified Parties against the Purchaser or
the Seller, as the case may be if any of the Seller Indemnified Parties or the
Purchaser Indemnified Parties, as the case may be, had actual conscious
knowledge of such breach on or before the Closing Date as a result of the review
of a written document.
10.6 Indemnification for Environmental Matters.
(a) With respect to any Losses relating to or arising from
any Environmental Law for which the Purchaser seeks indemnity ("ENVIRONMENTAL
LOSSES"), the Purchaser shall provide notice to the Seller pursuant to Section
12.9 hereof specifying in reasonable detail, to the extent known, the nature of
the Environmental Losses and, if the Losses relate to remedial liability, the
estimated amount to remediate the condition giving rise to the Environmental
Losses, to the extent it is then quantifiable (which estimate shall not be
conclusive of the final amount of any Environmental Losses).
(b) The Seller shall have the right to control and
investigate and/or remediate any condition giving rise to a claim or demand for
indemnification by the Purchaser under this Agreement with respect to any
Environmental Losses; provided, however, that if after written notice and a
reasonable opportunity to cure the Seller does not exercise such right, the
Purchaser may exercise such right. The Seller and its employees, contractors,
representatives and agents shall have reasonable access at reasonable times to
the Facility for the purpose of conducting any investigation and/or remediation,
including any sampling or monitoring required to be performed by the Seller
after the Closing Date. The Seller shall use all reasonable efforts to minimize
disruption to the Business as a result of conducting any such investigation or
remediation. The Seller shall undertake reasonable consultation with the
Purchaser with respect to matters materially affecting the Purchaser.
(c) The Purchaser shall use reasonable efforts to cooperate
with the Seller to minimize costs with respect to Environmental Losses. Nothing
in this Agreement shall require the Seller to perform any environmental
remediation activities or other environmental testing, sampling or monitoring
activities beyond the minimum required by applicable Environmental Laws to
permit the use of the Owned Real Property consistent with its current use, which
may include leaving Hazardous Materials in place or the use of deed
restrictions.
(d) The Purchaser and the Seller shall give prompt written
notice to each other of any report or other document submitted, whether
voluntarily or by requirement of a Government Entity, to a Governmental Entity
which describes any Environmental Condition existing prior to the Closing Date.
To the extent reasonably possible in the circumstances, the Seller or the
Purchaser, as the case may be, shall have the right to review and comment upon
any submission to a Governmental Entity which describes or addresses any
Environmental Condition for which the Purchaser or the Seller, as the case may
be, is claiming indemnification hereunder (and the parties will cooperate with
each other in responding to such requests, including making available all
relevant records in their possession or under their control), and the relevant
party shall revise such submission in accordance with the Seller's or
Purchaser's reasonable comments thereon. To the extent reasonably possible in
the circumstances, the parties shall give each other prompt written notice of,
and the Seller or the Purchaser, as the case may be, and/or its representatives
shall have the right to participate in, any phone call or meeting with any
Governmental Entity at which any Environmental Condition for which the Purchaser
or the
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Seller, as the case may be, is claiming indemnification hereunder is to be
discussed or addressed in any manner.
(e) The Seller shall not have any obligation to indemnify
any Purchaser Indemnified Party from and against (i) any Environmental Losses
arising from or related to a use of the Facility that is not substantially a
continuation of the operation of the Business as conducted on the Closing Date
or any business currently operated by the Purchaser, or (ii) any change in the
use of the Owned Real Property from industrial use or (iii) any Environmental
Losses arising from a more stringent change in any Environmental Law from that
which is in effect on the date hereof. Notwithstanding anything to the contrary
contained herein, the Seller will not have any obligation to indemnify the
Purchaser Indemnified Parties from and against any Environmental Losses (i)
which are not asserted by a third party, or (ii) arising with respect to any
release of a Hazardous Material by the Purchaser, to the extent resulting from
any act or knowing failure to act of the Purchaser, its employees, contractors,
representatives or agents to further cause or exacerbate the leaking, migration
or release of any Hazardous Materials at the Facility. The Seller will not have
any obligation to indemnify the Purchaser with respect to ongoing operation,
maintenance, monitoring or reporting costs incurred in connection with any
remediation performed by the Seller for which the Purchaser seeks indemnity
unless such remediation is required by Environmental Law or by a Governmental
Entity. The Purchaser acknowledges that nothing contained herein absolves it of
any obligation under any Environmental Law for Environmental Losses with respect
to violations of Environmental Laws by the Purchaser, its employees,
contractors, representatives or agents.
(f) If the Purchaser undertakes environmental remediation
activities or other environmental testing, sampling or monitoring activities
which are not required by a Governmental Entity or Environmental Law or in
response to a third party claim asserting liability for an Environmental
Condition at the Facility arising from acts, events or circumstances existing or
occurring prior to the Closing, subject to the limitations contained in Section
10.2(c), the Seller shall only be obligated to indemnify the Purchaser in
respect of 50 cents out of each dollar of such Environmental Losses, to the
extent such Environmental Losses do not exceed $500,000; thereafter, the Seller
shall be liable for such Environmental Losses, subject to the limitations of
this Section 10.
(g) Notwithstanding anything in this Section 10 to the
contrary, the Seller's indemnification obligations with respect to Environmental
Losses under this Section 10.6 or otherwise, shall automatically terminate on
the fifth anniversary of the Closing Date except to the extent of and with
respect to claims for indemnification properly made in accordance with this
Section 10 prior to such fifth anniversary.
(h) Notwithstanding anything in this Agreement to the
contrary (including Section 10.6(g)), Seller's indemnification obligations with
respect to Environmental Losses resulting from the Perchlorate-TCE Condition
shall not be subject to the limitations set forth in Section 10.2(b), Section
10.2(c) or Section 10.6(g). To the extent that any remediation is necessary with
respect to the Perchlorate-TCE Condition, such remediation shall performed in
accordance with the other provisions of this Section 10.6.
10.7. EXCLUSIVE REMEDY. THE INDEMNIFICATION PROVISIONS CONTAINED IN THIS
SECTION 10 WILL CONSTITUTE THE SOLE AND EXCLUSIVE RECOURSE AND REMEDY OF THE
PARTIES FOR MONETARY DAMAGES WITH
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RESPECT TO ANY BREACH OF ANY OF THE REPRESENTATIONS, WARRANTIES OR COVENANTS
CONTAINED IN THIS AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS OR WITH RESPECT
TO ANY LOSSES RESULTING FROM, ARISING OUT OF, OR CAUSED BY EXCLUDED LIABILITIES.
THE PROVISIONS OF THIS SECTION 10 WILL NOT RESTRICT THE RIGHT OF ANY PARTY TO
SEEK SPECIFIC PERFORMANCE OR OTHER EQUITABLE REMEDIES IN CONNECTION WITH ANY
BREACH OF ANY OF THE COVENANTS CONTAINED IN THIS AGREEMENT OR ANY OF THE
ANCILLARY AGREEMENTS. THE PURCHASER ACKNOWLEDGES THAT IT HAS NO RIGHT TO RESCIND
THIS AGREEMENT EITHER FOR A BREACH OF CONTRACT OR FOR NEGLIGENT OR INNOCENT
MISREPRESENTATION. NOTWITHSTANDING ANY OTHER PROVISIONS OF THE AGREEMENT, THE
PROVISIONS OF THIS SECTION 10.7 SHALL NOT APPLY TO EXCLUDE OR LIMIT THE
LIABILITY OF THE SELLER TO THE EXTENT THAT ANY CLAIM ARISES BY REASON OF ANY
FRAUD OR FRAUDULENT MISREPRESENTATION OF ANY PARTY.
10.8 Minimizing Losses. Each party agrees to use all commercially
reasonable efforts to minimize all Losses for which it may seek indemnification
from the other party pursuant to this Section 10, and to minimize the amount of
such indemnification obligation by reasonably pursuing the maximum possible
insurance recovery or recovery from other available sources with respect to such
Losses and nothing herein will in any way diminish each party's common law duty
to mitigate its Loss.
SECTION 11: TERMINATION.
11.1. Termination of Agreement. The parties may terminate this
Agreement as provided below:
(a) the parties may terminate this Agreement by mutual
written consent at any time prior to the Closing;
(b) the Purchaser may terminate this Agreement by giving
written notice to the Seller at any time prior to the Closing if the Closing has
not occurred on or before the later of (i) June 30, 1999 and (ii) the fifth full
business day after expiration or termination of the waiting period under the
Hart-Scott-Rodino Act, unless (x) failure results primarily from the Purchaser
itself breaching any representation, warranty or covenant contained in this
Agreement, or unless an extension is mutually agreeable to the Seller and the
Purchaser; and
(c) the Seller may terminate this Agreement by giving
written notice to the Purchaser at any time prior to the Closing if the Closing
has not occurred on or before the later of (i) June 30, 1999 and (ii) the fifth
full business day after expiration or termination of the waiting period under
the Hart-Scott-Rodino Act, unless (x) the failure results primarily from the
Seller itself breaching any representation, warranty or covenant contained in
this Agreement, or unless an extension is mutually agreeable to the Seller and
the Purchaser.
11.2. Effect of Termination. If any party terminates this
Agreement pursuant to Section 11.1, all obligations of the parties hereunder
will terminate without liability of any party to the other party (except,
subject to the provisions of Section 11.3, for any liability of any party then
in breach; it being understood and agreed that upon any termination of this
Agreement pursuant to Section 11.1(d) the Seller shall not be deemed to be in
breach of this Agreement);
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provided that the provisions of Sections 12.1 and 12.3 of this Agreement and the
Confidentiality Agreement will survive termination and remain in full force and
effect thereafter.
11.3 Liquidated Damages in Certain Cases. In the event that the
Purchaser fails to consummate the acquisition of the Business as contemplated
herein in a timely manner notwithstanding its contractual obligations to do so
pursuant to the terms hereof (whether or not such failure is in whole or part a
result of the Purchaser's inability to raise the $6,500,000 in funds referred to
in Section 5.6), the Purchaser will pay to the Seller an amount equal to
$4,000,000 as liquidated damages, provided that the Purchaser's failure to
perform is not attributable, in whole or part, to Seller's failure to perform
its obligations hereunder. The parties acknowledge and agree that in the case of
such a termination the calculation of the Seller's damages would be difficult or
impossible and that payment of such amount represents reasonable liquidated
damages. In the case of any termination of this Agreement pursuant to this
Section 11.3, all obligations of the parties hereunder will terminate without
liability of any party to the other party; provided that the provisions of
Sections 12.1 and 12.3 of this Agreement and the Confidentiality Agreement will
survive termination and remain in full force and effect thereafter.
SECTION 12: MISCELLANEOUS.
12.1. Press Releases and Announcements. No party will issue any
press release or announcement relating to the subject matter of this Agreement
prior to the Closing Date without the prior approval of the other party;
provided that any party may make any public disclosure it believes in good faith
is required by Law or the rules of any national securities exchange or any
automated inter-dealer quotation system on which the securities of either party
(or any Affiliate thereof) are listed or admitted for trading (in which case the
disclosing party will advise the other party at least one business day prior to
making such disclosure).
12.2 Proration of Expenses and Prepaid Items. All accrued
expenses and prepaid items associated with the Purchased Assets, such as
deposits, advance payments, electricity, gas, water, sewer, telephone, property
taxes, security services and similar items, shall be prorated between the
Purchaser and the Seller as of the Closing Date.
12.3. Expenses; Transfer Taxes. Each of the parties hereto will
bear all legal, accounting, investment banking and other expenses incurred by it
or on its behalf in connection with the transactions contemplated by this
Agreement, whether or not such transactions are consummated. The Seller will pay
and hold the Purchaser harmless from payment of all taxes, recording and filing
fees applicable to the transfer of the Purchased Assets to the Purchaser.
12.4. Consent to Amendments. The provisions of this Agreement may
be amended or waived only by a written agreement executed and delivered by the
Seller and the Purchaser. No other course of dealing between the parties to this
Agreement or any delay in exercising any rights hereunder will operate as a
waiver of any rights of such parties.
12.5. Successors and Assigns. No party hereto may assign or
delegate any of such party's rights or obligations under or in connection with
this Agreement without the written consent of the other party hereto, provided
that the Purchaser upon written notice to the Seller not less than three
business days prior to Closing may assign or delegate its rights and obligations
under this Agreement to one or more Affiliates of the Purchaser, provided
further, however, such assignment or delegation shall not release the Purchaser
of any of its obligations
38
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hereunder (including but not limited to the Purchaser's indemnification
obligations under Section 10 of this Agreement). Except as otherwise expressly
provided herein, all covenants and agreements contained in this Agreement by or
on behalf of any of the parties hereto will be binding upon and enforceable
against the respective successors and assigns of such party and will be
enforceable by and will inure to the benefit of the respective successors and
permitted assigns of such party.
12.6. Severability. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable Law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable Law, such provision will be ineffective only to
the extent of such prohibition of invalidity, without invalidating the remainder
of this Agreement.
12.7. Counterparts. This Agreement may be executed simultaneously
in two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together will constitute
one and the same Agreement.
12.8. Descriptive Headings. The descriptive headings of this
Agreement are inserted for convenience only and do not constitute a part of this
Agreement.
12.9. Notices. All notices, demands or other communications to be
given or delivered under or by reason of the provisions of this Agreement will
be in writing and will be deemed to have been given when delivered personally to
the recipient or when sent to the recipient by telecopy (receipt confirmed), one
business day after the date when sent to the recipient by reputable express
courier service (charges prepaid) or two business days after the date when
mailed to the recipient by certified or registered mail, return receipt
requested and postage prepaid. Such notices, demands and other communications
will be sent to the Purchaser and the Seller at the respective address indicated
below:
If to the Purchaser:
J.F. Lehman Equity Investors I, L.P.
c/o J.F. Lehman & Company
450 Park Avenue, Sixth Floor
New York, NY 10022
Attention: Donald Glickman
Telephone: (212) 634-1160
Telecopier: (212) 634-1155
With a copy to:
Gibson Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, California 90071
Attention: Kenneth M. Doran
Telephone: (213) 229-7000
Telecopier: (213) 229-7520
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If to the Seller:
Teledyne Industries, Inc.
c/o Allegheny Teledyne Incorporated
1000 Six PPG Place
Pittsburgh, Pennsylvania 15222
Attention: Jon D. Walton
Senior Vice President, General Counsel and Secretary
Telephone: (412) 394-2836
Facsimile: (412) 394-3010
12.10. No Third-Party Beneficiaries. This Agreement will not
confer any rights or remedies upon any Person other than the parties hereto and
their respective successors and permitted assigns.
12.11. Entire Agreement. This Agreement, and the documents
referred to in it, constitute the entire Agreement and understanding of the
parties and supersede any previous agreement between the parties relating to the
subject matter of this Agreement. Each of the parties acknowledges and agrees
that in entering into this Agreement, and the documents referred to in it, it
does not rely on, and shall have no remedy in respect of any statement,
representation, warranty or understanding (whether negligently or innocently
made) of any person (whether party to this Agreement or not) other than as
expressly set out in this Agreement. The only remedy available to it for breach
of the warranties shall be for breach of contract under the terms of this
Agreement. Nothing in this sub-clause shall, however, operate to limit or
exclude any liability for fraud.
12.12. Construction. The language used in this Agreement will be
deemed to be the language chosen by the parties to express their mutual intent
and no rule of strict construction will be applied against any party. The use of
the word "including" in this Agreement means "including without limitation" and
is intended by the parties to be by way of example rather than limitation.
12.13. Incorporation of Exhibits and Schedules. The Exhibits and
Schedules identified in this Agreement are incorporated herein by reference and
made a part hereof.
12.14. Bulk Transfer Laws. The Purchaser acknowledges that the
Seller will not comply with the provisions of any bulk transfer laws of any
jurisdiction in connection with the transactions contemplated by this Agreement.
The Seller hereby covenants and agrees to indemnify and hold the Purchaser
harmless from and against any and all liabilities other than Assumed Liabilities
which the Purchaser may incur as a result of any failure to comply with any
applicable bulk transfer laws in connection with this Agreement.
12.15. WARN Act. The Purchaser represents and warrants to the
Seller that the Purchaser will continue to operate the Business for the period
immediately following the Closing Date and the Purchaser will be solely liable
for any and all obligations and liabilities arising under the WARN Act with
respect to consummation of the transactions contemplated by this Agreement. The
Purchaser shall comply with all requirements of the WARN Act in connection with
any discharge or lay off of Employees employed in the Business effected after
the Closing Date.
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12.16. GOVERNING LAW. WITH RESPECT TO THE SELLER AND THE
PURCHASER, ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY AND
INTERPRETATION OF THIS AGREEMENT AND THE EXHIBITS AND SCHEDULES HERETO WILL BE
GOVERNED BY THE INTERNAL LAW, AND NOT THE LAW OF CONFLICTS, OF THE STATE OF
DELAWARE.
12.17. TIME IS OF THE ESSENCE. With regard to all dates and time
periods set forth in this Agreement, time is of the essence.
12.18. Arbitration. Any dispute under this Agreement which is not
settled by mutual agreement among the parties hereto shall be finally settled by
binding arbitration conducted by and in accordance with the rules then in effect
of the American Arbitration Association. The costs of the arbitration, including
administrative and arbitrators' fees, shall be shared equally by the parties.
Each party shall bear its own costs and attorneys' and witnesses' fees. The
arbitration panel shall render its decision upon the basis of written
submissions by the parties and any written responses thereto. The award rendered
by the arbitration panel, as set forth in writing with the reasons therefor, may
include an allocation among the parties of the costs (including legal fees) of
the arbitration in such a manner as the arbitration panel deems to be equitable.
The arbitration shall be held in New Castle County, Delaware.
[REST OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF the parties hereto have executed and delivered this
Agreement on the date first written above.
TELEDYNE INDUSTRIES, INC.
By:________________________
Name:_________________________
Title:__________________________
J.F. LEHMAN EQUITY INVESTORS I, L.P.
By: JFL INVESTORS, L.L.C.,
its sole General Partner
By: ___________________________
Donald Glickman
Title: Managing Member
42
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Section 1: Definitions............................................................................................1
Section 2: The Transaction........................................................................................6
2.1 Sale and Purchase of Assets..............................................................................6
2.2 Excluded Assets..........................................................................................7
2.3. Assumption of Obligations...............................................................................8
2.4 Determination and Payment of Consideration..............................................................10
2.5 Purchase Price Adjustment...............................................................................10
Section 3: Closing and Closing Date..............................................................................12
3.1. Closing................................................................................................12
3.2. Closing Date...........................................................................................12
3.3. Deliveries at the Closing..............................................................................12
3.4. Allocation of Value....................................................................................12
Section 4: Representations and Warranties of the Seller..........................................................13
4.1. Organization of the Seller.............................................................................13
4.2. Authorization of Transaction...........................................................................13
4.3 Noncontravention; Consents..............................................................................13
4.4 Business Financial Statements...........................................................................13
4.5. Subsequent Events......................................................................................14
4.6. Tax Matters............................................................................................14
4.7. Contracts..............................................................................................14
4.8. Owned Real Property....................................................................................15
4.9. Title..................................................................................................15
</TABLE>
<PAGE>
<TABLE>
<S> <C>
4.10. Intellectual Property.................................................................................15
4.11. Litigation............................................................................................16
4.12. Employee Benefits.....................................................................................16
4.13. Labor Relations.......................................................................................16
4.14. Environmental Matters.................................................................................17
4.15. Legal Compliance......................................................................................17
4.16. Permits...............................................................................................17
4.17. Adequacy and Completeness of Purchased Assets........................................................17
4.18. Customers and Suppliers...............................................................................18
4.19. Government Contracts..................................................................................18
4.20. Certain Business Practices............................................................................19
4.21. Product Liability.....................................................................................19
4.22. Inventory.............................................................................................19
4.23. Accounts Receivable...................................................................................19
4.24. Brokers' Fees.........................................................................................20
4.25. LIMITED WARRANTIES....................................................................................20
Section 5: Representations and Warranties of the Purchaser.......................................................20
5.1. Organization of the Purchaser..........................................................................20
5.2. Authorization of Transaction...........................................................................20
5.3. Noncontravention; Consents.............................................................................20
5.4. Litigation.............................................................................................21
5.5. Brokers' Fees..........................................................................................21
5.6 Financing...............................................................................................21
Section 6: Pre-Closing Covenants.................................................................................21
6.1. General................................................................................................21
</TABLE>
<PAGE>
<TABLE>
<S> <C>
6.2. Notices and Consents...................................................................................21
6.3. Carry on in Regular Course.............................................................................22
6.4. Contracts and Commitments..............................................................................22
6.5. Sale of Capital Assets.................................................................................22
6.6. Access.................................................................................................22
6.7. Tax Matters............................................................................................22
6.8. Notice of Developments; Disclosure Schedules; Updating Disclosure Schedules............................23
6.9. Year 2000..............................................................................................24
Section 7: Post-Closing Covenants................................................................................24
7.1. General................................................................................................24
7.2. Post-Closing Consents; Nonassignable Contracts.........................................................24
7.3. Litigation Support; Tax Return Preparation; Records Retention; Transitional Services...................25
7.4. Signage and Labels.....................................................................................27
7.5. Covenant Not to Compete................................................................................27
7.6. Warranty Obligations...................................................................................28
7.7 Transition Services.....................................................................................28
Section 8: Employee Benefits.....................................................................................29
Section 9: Closing Conditions....................................................................................30
9.1. Conditions to Obligation of the Purchaser..............................................................30
9.2. Conditions to Obligation of the Seller.................................................................31
Section 10: Remedies for Breaches of this Agreement..............................................................32
10.1. Survival..............................................................................................32
10.2. Indemnification Provisions for Benefit of the Purchaser...............................................32
10.3. Indemnification Provisions for Benefit of the Seller..................................................33
10.4. Matters Involving Third Parties.......................................................................34
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.5. Indemnification Limitations...........................................................................34
10.6 Indemnification for Environmental Matters..............................................................35
10.7. EXCLUSIVE REMEDY......................................................................................36
10.8 Minimizing Losses......................................................................................37
Section 11: Termination..........................................................................................37
11.1. Termination of Agreement..............................................................................37
11.2. Effect of Termination.................................................................................37
11.3 Liquidated Damages in Certain Cases....................................................................38
Section 12: Miscellaneous........................................................................................38
12.1. Press Releases and Announcements......................................................................38
12.2 Proration of Expenses and Prepaid Items................................................................38
12.3. Expenses; Transfer Taxes..............................................................................38
12.4. Consent to Amendments.................................................................................38
12.5. Successors and Assigns................................................................................38
12.6. Severability..........................................................................................39
12.7. Counterparts..........................................................................................39
12.8. Descriptive Headings..................................................................................39
12.9. Notices...............................................................................................39
12.10. No Third-Party Beneficiaries.........................................................................40
12.11. Entire Agreement.....................................................................................40
12.12. Construction.........................................................................................40
12.13. Incorporation of Exhibits and Schedules..............................................................40
12.14. Bulk Transfer Laws...................................................................................40
12.15. WARN Act.............................................................................................40
12.16. GOVERNING LAW........................................................................................41
</TABLE>
<PAGE>
<TABLE>
<S> <C>
12.17. TIME IS OF THE ESSENCE...............................................................................41
12.18. Arbitration..........................................................................................41
</TABLE>
<PAGE>
LIST OF EXHIBITS AND SCHEDULES
<TABLE>
<S> <C>
Exhibit A: Form of Bill of Sale
Exhibit B: Form of Deed
Exhibit C: Form of Assignment Agreement of Patents
Exhibit D: Form of Assignment and Assumption Agreement
Exhibit E: Allocation of Purchase Price
Schedule 1.1: Persons with Knowledge
Schedule 1.2: Permitted Liens
Schedule 2.1(a): Purchased Assets Not At Facility
Schedule 2.1(d): Contracts to be Transferred
Schedule 2.2(b): Certain Excluded Assets
Schedule 2.3(a)(i): Assumed Contracts
Schedule 2.5(a): Reference Statement
Schedule 4.3: Required Consents
Schedule 4.4: Financial Statements
Schedule 4.5: Material Adverse Changes
Schedule 4.7: Contracts
Schedule 4.8: Owned Real Property
Schedule 4.10: Intellectual Property
Schedule 4.11: Litigation
Schedule 4.12: Employee Benefits
Schedule 4.13: Labor Relations
Schedule 4.14: Environmental Matters
Schedule 4.15: Legal Compliance
Schedule 4.16: Permits
Schedule 4.17 Adequacy and Completeness of Purchased Assets
Schedule 4.18: Customers and Suppliers
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Schedule 4.19 Government Contracts
Schedule 4.21: Product Liability
Schedule 7.2(b): Contracts Requiring Third Party Consent to Transfer
Schedule 8(a): Employees of Business
</TABLE>
<PAGE>
EXHIBIT 10.33
CAPITAL CALL AGREEMENT
CAPITAL CALL AGREEMENT (as amended, supplemented or modified from time to
time, this "Agreement"), dated as of January 26, 2000, made by and among J.F.
Lehman Equity Investors I, L.P., a Delaware limited partnership (the
"Contributor"), Special Devices, Incorporated, a Delaware corporation (the
"Borrower"), and Bankers Trust Company, as Administrative Agent (the
"Administrative Agent") for the benefit of the various lenders (the "Banks")
from time to time party to the Credit Agreement referred to below. Except as
otherwise defined herein, all capitalized terms used herein and defined in the
Credit Agreement are used herein as therein defined.
W I T N E S S E T H :
WHEREAS, the Borrower, the Banks and the Administrative Agent have entered
into a Credit Agreement, dated as of December 15, 1998 (as amended, modified or
supplemented from time to time, the "Credit Agreement");
WHEREAS, on the date hereof, the Contributor owns a substantial economic
interest and voting interest in the Borrower's capital stock;
WHEREAS, it is a condition precedent to the effectiveness of the Second
Amendment, dated as of January 26, 2000, to the Credit Agreement (the "Second
Amendment") that the Contributor and the Borrower shall have executed and
delivered this Agreement; and
WHEREAS, the Contributor and the Borrower will obtain benefits as a result
of the effectiveness of the Second Amendment and, accordingly, desire to execute
and deliver this Agreement in order to satisfy the condition described in the
immediately preceding paragraph;
NOW, THEREFORE, it is agreed:
1. CERTAIN DEFINED TERMS. As used herein, the following terms shall have
the following meanings:
"Administrative Agent" shall have the meaning provided in the first
paragraph of this Agreement.
"Agreement" shall have the meaning provided in the first paragraph of this
Agreement.
"Banks" shall have the meaning provided in the first paragraph of this
Agreement.
"Borrower" shall have the meaning provided in the first paragraph of this
Agreement.
<PAGE>
"Capital Call Amount" shall mean (i) in the case of a Capital Call Event of
the type described in clause (i) or (ii) of the definition thereof, $7,500,000,
and (ii) in the case of a Capital Call Event of the type described in clause
(iii) of the definition thereof, an amount equal to the lesser of (A) $7,500,000
and (B) that minimum amount necessary to repay outstanding Term Loans such that
the Leverage Ratio on the last day of the Test Period ending closest to January
31, 2001 would have been reduced to 5.00:1.00.
"Capital Call Event" shall mean the first to occur of (i) an Event of
Default under Section 10.01 of the Credit Agreement, (ii) an Event of Default
under Section 10.05 of the Credit Agreement, and (iii) the Leverage Ratio on the
last day of the Test Period ending closest to January 31, 2001 being greater
than 5.00:1.00; it being understood and agreed, however, that if the Leverage
Ratio on the last day of the Test Period ending closest to January 31, 2001 is
less than or equal to 5.00:1.00 (without giving effect to the contribution of
the Capital Call Amount), then a Capital Call Event shall not thereafter occur
and this Agreement shall be terminated in accordance with Section 15(i) hereof.
"Contributor" shall have the meaning provided in the first paragraph of
this Agreement.
"Credit Agreement" shall have the meaning provided in the first recital of
this Agreement.
"Investment" shall mean a cash equity capital contribution to the Borrower
by the Contributor.
"Proportionate Share" of each Bank at any time shall mean a fraction (x)
the numerator of which is the aggregate outstanding principal amount of all Term
Loans of such Bank at such time and (y) the denominator of which is the
aggregate outstanding principal amount of all Term Loans of all the Banks at
such time.
2. REQUIRED CONTRIBUTIONS TO THE BORROWER; ETC. (a) The Contributor hereby
absolutely, irrevocably and unconditionally agrees that if any Capital Call
Event shall have occurred, the Contributor will, as soon as practicable
thereafter, but in any event within 30 days thereafter, make an Investment in
the Borrower in an aggregate amount equal to the Capital Call Amount; PROVIDED
that to the extent such Capital Call Event arises because of an Event of Default
under Section 10.05 of the Credit Agreement or if any such Investment in the
Borrower cannot be made for any reason whatsoever, then (in either case) the
Contributor's Investment shall instead be made by means of the purchase by the
Contributor from each of the Banks of a subordinated participation in such
Banks' outstanding Term Loans, PRO RATA among the Banks based on their
respective Proportionate Shares at such time, with such participations to be
evidenced by a subordinated participation agreement in form and substance
reasonably satisfactory to the Administrative Agent.
(b) The Borrower hereby acknowledges, confirms and agrees that immediately
upon receipt of the Capital Call Amount it shall apply such amounts as a
mandatory repayment
2
<PAGE>
of Term Loans in accordance with the provisions of Sections 4.02(f), (h) and (i)
of the Credit Agreement.
3. PAYMENTS. All payments required to be made pursuant to this Agreement
shall be made in Dollars and in immediately available funds, and shall be made
on the same basis as provided in Sections 4.03 and 4.04 of the Credit Agreement.
4. OBLIGATIONS INDEPENDENT. The obligations of the Contributor hereunder
are independent of the obligations of any Subsidiary Guarantor, the Borrower or
any other Person, and a separate action or actions maybe brought and prosecuted
against the Contributor whether or not an action is brought against any
Subsidiary Guarantor, the Borrower or any other Person and whether or not any
Subsidiary Guarantor, the Borrower or any other Person shall be joined in any
such action or actions. The Contributor waives, to the fullest extent permitted
by law, the benefit of statute of limitations affecting its liability hereunder
or the enforcement hereof.
5. CERTAIN WAIVERS BY THE CONTRIBUTOR. The Contributor hereby waives notice
of acceptance of this Agreement and notice of any liability to which it may
apply, and waives presentment, demand of payment, protest, notice of dishonor,
or nonpayment of any such liability, suit or taking of other action by the
Borrower, the Administrative Agent or any Bank against, and any other notice to,
the Contributor or any other Person liable thereon.
6. ACTIONS RELATING TO OBLIGATIONS UNDER CREDIT AGREEMENT. The
Administrative Agent or the Banks (or any of the Banks) may in accordance with
the terms of the Credit Agreement (except as shall be required by applicable
statute and cannot be waived) at any time and from time to time without the
consent of, or notice to, the Contributor, without incurring responsibility to
the Contributor, without impairing or releasing the obligations of the
Contributor hereunder, upon or without any terms or conditions and in whole or
in part:
(a) change the manner, place or terms of payment of, and/or change or
extend the time of payment of, renew, alter or increase any of the Obligations,
any security therefor, or any liability incurred directly or indirectly in
respect thereof;
(b) take and hold security for the payment of the Obligations and sell,
exchange, release, impair, surrender, realize upon or otherwise deal with in any
manner and in any order any property by whomsoever at any time pledged or
mortgaged to secure, or howsoever securing, the Obligations or any liabilities
(including any of those hereunder) incurred directly or indirectly in respect
thereof or hereof, and/or any offset thereagainst;
(c) exercise or refrain from exercising any rights against the Borrower,
any other Credit Party or others or otherwise act or refrain from acting;
(d) settle or compromise any of the Obligations, any security therefor or
any liability (including any of those hereunder) incurred directly or indirectly
in respect thereof or hereof, and may subordinate the payment of all or any part
thereof to the payment of any liability (whether due or not) of the Borrower to
creditors of the Borrower other than the Secured Creditors;
3
<PAGE>
(e) except as otherwise expressly provided herein, apply any sums by
whomsoever paid or howsoever realized to any liability or liabilities of the
Borrower to the Administrative Agent or the Banks regardless of what liability
or liabilities of the Contributor or the Borrower remain unpaid;
(f) release or substitute any one or more endorsers, guarantors, Credit
Parties or other obligors;
(g) consent to or waive any breach of, or any act, omission or default
under, any of the Credit Documents or any of the instruments or agreements
referred to therein, or otherwise amend, modify or supplement any of the Credit
Documents or any of such other instruments or agreements;
(h) act or fail to act in any manner referred to in this Agreement which
may deprive the Contributor of any right to subrogation against the Borrower to
recover any payments made pursuant to this Agreement;
(i) pursue its rights and remedies under this Agreement and/or under any
guaranty of all or any part of the Obligations in whatever order, or
collectively, and the Administrative Agent and the Banks shall be entitled to
the Contributor's performance hereunder, notwithstanding any action taken (or
not taken) by the Administrative Agent and the Banks to enforce any of its
rights or remedies against the Contributor or any other Person, for all or any
part of the Obligations or any payment received under this Agreement or any
other such guaranty; and/or
(j) take any other action which would, under otherwise applicable
principles of common law, give rise to a legal or equitable discharge of the
Contributor from its liabilities under this Agreement.
7. INVALIDITY, ETC., OF OBLIGATIONS. No invalidity, irregularity or
unenforceability of all or any of the Loans and/or any of the other Obligations
or of any security therefor shall affect, impair or be a defense to this
Agreement, and the obligations of the Contributor hereunder shall be absolute
and unconditional notwithstanding the occurrence of any event or the existence
of any circumstance, including, without limitation, any bankruptcy or insolvency
proceeding with respect to the Contributor, the Borrower or any of its
Subsidiaries or any event or circumstance which would constitute a legal or
equitable discharge, except payment in full in cash of all Obligations in
accordance with the Credit Agreement.
8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. In order to induce the Banks
to enter into the Second Amendment, the Contributor makes the following
representations, warranties and agreements:
(i) The Contributor is a duly organized and validly existing limited
partnership in good standing under the laws of the State of Delaware and has the
power and authority to own its property and assets and to transact the business
in which it is engaged and presently proposes to engage.
4
<PAGE>
(ii) The Contributor has the power and authority to execute, deliver and
perform the terms and provisions of this Agreement and has taken all necessary
action to authorize the execution, delivery and performance by it of this
Agreement. The Contributor has duly executed and delivered this Agreement, and
this Agreement constitutes its legal, valid and binding obligation enforceable
against it in accordance with its terms, except to the extent that the
enforceability hereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws generally affecting creditors'
rights and by equitable principles (regardless of whether enforcement is sought
in equity or at law).
(iii) Neither the execution, delivery or performance by the Contributor of
this Agreement, nor compliance by it with the terms and provisions hereof, nor
the consummation of the transactions contemplated herein, (x) will contravene
any provision of any applicable law, statute, rule or regulation or any
applicable order, writ, injunction or decree of any court or governmental
instrumentality, (y) will conflict with or result in any breach of any of the
terms, covenants, conditions or provisions of, or constitute a default under, or
result in the creation or imposition of (or the obligation to create or impose)
any Lien upon any of the property or assets of the Contributor pursuant to the
terms of any indenture, mortgage, deed of trust, credit agreement, loan
agreement or any other material agreement, contract or instrument to which the
Contributor is a party or by which it or any of its property or assets is bound
or to which it may be subject or (z) will violate any provision of any of the
organizational documents of the Contributor.
(iv) No order, consent, approval, license, authorization or validation of,
or filing, recording or registration with, or exemption by, any governmental or
public body or authority, or any subdivision thereof, is required to authorize,
or is required in connection with, (x) the execution, delivery and performance
of this Agreement or (y) the legality, validity, binding effect or
enforceability of this Agreement.
(v) There are no actions, suits or proceedings pending or, to the knowledge
of the Contributor, threatened (x) with respect to this Agreement or (y) that
could reasonably be expected to (I) materially and adversely effect the
business, operations, property, assets, liabilities or condition (financial or
otherwise) of the Contributor or (II) have a material adverse effect on the
rights or remedies of the Banks or the Administrative Agent hereunder or on the
ability of the Contributor to perform its obligations to the Banks or the
Administrative Agent hereunder.
(vi) The Contributor is in compliance with all applicable statutes,
regulations and orders of, and all applicable restrictions imposed by, all
governmental bodies, domestic or foreign, in respect of the conduct of its
business and the ownership of its property, except to the extent that any
non-compliance, either individually or in the aggregate, could not reasonably be
expected to (x) materially and adversely effect the business, operations,
property, assets, liabilities or condition (financial or otherwise) of the
Contributor or (y) have a material adverse effect on the rights or remedies of
the Banks or the Administrative Agent hereunder or on the ability of the
Contributor to perform its obligations to the Banks or the Administrative Agent
hereunder.
5
<PAGE>
(vii) The Contributor or the general partner thereof has the right to call
cash capital contributions from the partners of the Contributor in amounts, and
at times, sufficient to fund in a timely manner all obligations of the
Contributor under this Agreement.
9. MAINTAIN ABILITY TO FUND OBLIGATIONS. The Contributor and the general
partner thereof agrees to take all action as may be necessary so that, at all
times prior to the satisfaction and release of all obligations of the
Contributor under this Agreement pursuant to Section 15 hereof, the Contributor
and/or the general partner thereof shall have the right to call cash capital
contributions from the partners of the Contributor in amounts, and at times,
sufficient to fund in a timely manner all obligations of the Contributor under
this Agreement.
10. CAPITAL CALL EVENT OF DEFAULT. The following shall constitute a
"Capital Call Event of Default":
The Contributor shall commence a voluntary case concerning itself under
Title 11 of the United States Code entitled "Bankruptcy," as now or hereafter in
effect, or any successor thereto (the "Bankruptcy Code"); or an involuntary case
is commenced against the Contributor, and the petition is not controverted
within 10 days, or is not dismissed within 60 days, after commencement of the
case; or a custodian (as defined in the Bankruptcy Code) is appointed for, or
takes charge of, all or substantially all of the property of the Contributor, or
the Contributor commences any other proceeding under any reorganization,
arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or
liquidation or similar law of any jurisdiction whether now or hereafter in
effect relating to the Contributor, or there is commenced against the
Contributor any such proceeding which remains undismissed for a period of 60
days, or the Contributor is adjudicated insolvent or bankrupt; or any order of
relief or other order approving any such case or proceeding is entered; or the
Contributor suffers any appointment of any custodian or the like for it or any
substantial part of its property to continue undischarged or unstayed for a
period of 60 days; or the Contributor makes a general assignment for the benefit
of creditors; or any partnership action is taken by the Contributor for the
purpose of effecting any of the foregoing.
11. WAIVERS OF FAILURES; DELAYS; ETC. No failure or delay on the part of
the Administrative Agent, any Bank, the Contributor, the Borrower or any
other Credit Party in exercising any right, power or privilege hereunder and
no course of dealing between the Contributor, the Administrative Agent, any
Bank, the Borrower or any other Credit Party shall operate as a waiver
thereof; nor shall any single or partial exercise of any right, power or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights, powers and
remedies herein expressly provided are cumulative and not exclusive of any
rights, powers or remedies which the Administrative Agent or any Bank would
otherwise have. No notice to or demand on the Contributor in any case shall
entitle the Contributor to any other further notice or demand in similar or
other circumstances or constitute a waiver of the rights of the
Administrative Agent or any Bank to any other or further action in any
circumstances without notice or demand.
6
<PAGE>
12. BENEFIT OF AGREEMENT. This Agreement shall be binding upon the
Contributor and the Borrower, and their successors and assigns (including,
without limitation, any executors or administrators) and shall inure to the
benefit of the Administrative Agent and the Banks and their successors and
assigns. The Contributor and the Borrower acknowledges and agrees that this
Agreement is made for the benefit of the Administrative Agent and the Banks and
that the Administrative Agent and/or the Banks may enforce all of the
obligations of the Contributor and the Borrower hereunder directly against them.
Neither the Contributor nor the Borrower may assign any of its rights or
obligations hereunder without the consent of the Required Banks.
13. AMENDMENTS; WAIVERS. Neither this Agreement nor any provision hereof
may be changed, modified, amended or waived except with the written consent of
the Contributor, the Borrower and the Administrative Agent (acting with the
consent of the Required Banks).
14. NOTICES. All notices and other communication hereunder shall be made at
the addresses, in the manner and with the effect provided in Section 13.03 of
the Credit Agreement, provided that, for this purpose, the address of the
Contributor shall be the address specified opposite its signature below.
15. TERMINATION OF AGREEMENT. This Agreement shall terminate and be of no
further force and effect (except to the extent any party's obligations, if any,
arising prior to such time hereunder have not theretofore been fulfilled) upon
the earlier of (i) the date on which the Administrative Agent gives written
notice to the Contributor and the Borrower that their obligations under this
Agreement have been fulfilled or terminated and (ii) the date occurring prior to
a Capital Call Event on which the aggregate outstanding principal amount of all
Term Loans is less than $40,000,000.
16. GOVERNING LAW; SUBMISSION TO JURISDICTION; VENUE; WAIVER OF JURY TRIAL.
(a) THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE CONTRIBUTOR, THE
BORROWER, THE ADMINISTRATIVE AGENT AND THE BANKS HEREUNDER SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK, WITHOUT REGARD
TO PRINCIPLES OF CONFLICT OF LAWS.
(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT MAY BE
BROUGHT IN THE COURTS OF THE STATE OF NEW YORK WHICH ARE LOCATED IN THE CITY OF
NEW YORK AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE
CONTRIBUTOR AND THE BORROWER HEREBY IRREVOCABLY ACCEPTS FOR ITSELF AND IN
RESPECT OF ITS PROPERTY, UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID
COURTS WITH RESPECT TO ANY SUCH ACTION OR PROCEEDING. EACH OF THE CONTRIBUTOR
AND THE BORROWER HEREBY FURTHER IRREVOCABLY WAIVES ANY CLAIM THAT ANY SUCH
COURTS LACK JURISDICTION OVER SUCH PERSON, AND AGREES NOT TO PLEAD OR CLAIM, IN
ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT BROUGHT IN ANY OF
THE AFORESAID
7
<PAGE>
COURTS, THAT ANY SUCH COURT LACKS JURISDICTION OVER SUCH PERSON. EACH OF THE
CONTRIBUTOR AND THE BORROWER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS IN
ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPES THEREOF BY REGISTERED OR
CERTIFIED MAIL, POSTAGE PREPAID, TO SUCH PERSON, AT ITS ADDRESS FOR NOTICES
PURSUANT TO SECTION 13.03 OF THE CREDIT AGREEMENT OR AS SET FORTH OPPOSITE ITS
SIGNATURE BELOW, AS THE CASE MAY BE, SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS
AFTER SUCH MAILING. EACH OF THE CONTRIBUTOR AND THE BORROWER HEREBY IRREVOCABLY
WAIVES ANY OBJECTION TO SUCH SERVICE OF PROCESS AND FURTHER IRREVOCABLY WAIVES
AND AGREES NOT TO PLEAD OR CLAIM IN ANY ACTION OR PROCEEDING COMMENCED HEREUNDER
THAT SERVICE OF PROCESS WAS IN ANY WAY INVALID OR INEFFECTIVE. NOTHING HEREIN
SHALL AFFECT THE RIGHT OF THE ADMINISTRATIVE AGENT, ANY BANK OR THE HOLDER OF
ANY NOTE TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE
LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE CONTRIBUTOR OR THE BORROWER
IN ANY OTHER JURISDICTION.
(c) EACH OF THE CONTRIBUTOR AND THE BORROWER HEREBY IRREVOCABLY WAIVES ANY
OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF
THE AFORESAID ACTIONS OR PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS
AGREEMENT BROUGHT IN THE COURTS REFERRED TO IN CLAUSE (B) ABOVE AND HEREBY
FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT
THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN
AN INCONVENIENT FORUM. EACH CONTRIBUTOR AND THE BORROWER FURTHER IRREVOCABLY
WAIVES ANY RIGHT IT MAY HAVE TO TRIAL BY JURY IN ANY COURT OR JURISDICTION,
INCLUDING, WITHOUT LIMITATION, THOSE REFERRED TO IN CLAUSE (B) ABOVE, IN RESPECT
OF ANY MATTER ARISING OUT OF OR RELATING TO THIS AGREEMENT.
17. COSTS OF ENFORCEMENT; INDEMNITY. (a) The Contributor hereby agrees to
pay all out-of-pocket costs and expenses of the Administrative Agent and each
Bank in connection with the enforcement of this Agreement and the Contributor
hereby agrees to pay all out-of-pocket costs and expenses of the Administrative
Agent in connection with any amendment, waiver or consent relating hereto
(including, without limitation, in each case, the reasonable fees and
disbursements of counsel employed by the Administrative Agent and each Bank, as
the case may be).
(b) The Contributor hereby agrees to indemnify and hold the Administrative
Agent and each Bank free and harmless from and against all loss, cost, damage,
and expense, by reason of the inaccuracy costs, which it shall at any time have
actually sustained by reason of the inaccuracy or breach of any of the foregoing
representations, warranties and covenants.
8
<PAGE>
18. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the different parties hereto on separate counterparts, each
of which when so executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. A set of counterparts
executed by all the parties hereto shall be lodged with the Contributor, the
Borrower and the Administrative Agent.
19. HEADINGS DESCRIPTIVE. The headings of the several sections and
subsections of this Agreement are inserted for convenience only and shall not in
any way affect the meaning or construction of any provision of this Agreement.
* * *
9
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed and delivered as of the date first above written.
Address:
450 Park Avenue J.F. LEHMAN EQUITY INVESTORS I, L.P.
Sixth Floor
New York, New York 10022 By: J.F.L. Investors, L.L.C.,
Telephone: (212) 634-0100 its general partner
Telecopier: (212) 634-1155
Attention: Donald Glickman By:____________________________
Name:
Title:
SPECIAL DEVICES, INCORPORATED
By:____________________________
Name:
Title:
Accepted and Agreed to:
BANKERS TRUST COMPANY,
as Administrative Agent for the Banks
By: ___________________________________
Name:
Title:
<PAGE>
EXHIBIT 10.34
SECOND AMENDMENT TO CREDIT AGREEMENT
SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as of
January 26, 2000, among SPECIAL DEVICES, INCORPORATED, a corporation organized
under the laws of the State of Delaware (the "Borrower"), the lenders party to
the Credit Agreement referred to below (collectively, the "Banks") and BANKERS
TRUST COMPANY, as Administrative Agent. All capitalized terms used herein and
not otherwise defined shall have the respective meanings provided such terms in
the Credit Agreement.
W I T N E S S E T H :
WHEREAS, the Borrower, the Banks and the Administrative Agent are parties
to a Credit Agreement, dated as of December 15, 1998 (as in effect on the date
hereof, the "Credit Agreement"); and
WHEREAS, the parties hereto have agreed to amend the Credit Agreement as
herein provided;
NOW, THEREFORE, it is agreed:
I. AMENDMENTS TO CREDIT AGREEMENT.
1. Section 4.02(f) of the Credit Agreement is hereby amended by inserting
the following parenthetical at the end thereof:
"(it being understood and agreed that, in any event and notwithstanding
anything to the contrary contained above in this Section 4.02(f), 100% of
the Capital Call Amount paid to the Borrower pursuant to the Capital Call
Agreement shall be applied as a mandatory repayment of outstanding Term
Loans as provided in Sections 4.02(h) and (i))".
2. Section 9.02(xii) of the Credit Agreement is hereby amended by inserting
the following text immediately before the first word of such Section:
"with the prior written consent of the Required Banks,".
3. Section 9.03 of the Credit Agreement is hereby amended by (i) deleting
the word "and" appearing at the end of clause (iv) thereof, (ii) deleting the
period appearing at the end of clause (v) thereof and inserting "; and" in lieu
thereof and (iii) inserting the following new clause (vi) at the end thereof:
"(vi) the Borrower may pay a cash Dividend in that amount, if any,
equal to the cash capital contribution actually made to the Borrower
pursuant to the Capital Call Agreement so long as (i) the cash proceeds
from such capital contribution were applied to repay outstanding Term Loans
as required by Section
<PAGE>
4.02(f), (ii) the Borrower's Leverage Ratio at all times during two
consecutive Test Periods ending after the date of such capital contribution
and on and prior to the date of such Dividend was less than 4.00:1.00 and
(iii) no Default or Event of Default then exists or would result
therefrom."
4. The table appearing in Section 9.08 of the Credit Agreement is hereby
deleted and the following new table is inserted in lieu thereof:
<TABLE>
<CAPTION>
"FISCAL QUARTER
ENDING CLOSEST TO RATIO
----------------- -----
<S> <C>
January 31, 2000 1.40:1.00
April 30, 2000 1.50:1.00
July 31, 2000 1.60:1.00
October 31, 2000 1.75:1.00
January 31, 2001 1.85:1.00
April 30, 2001 2.00:1.00
July 31, 2001 2.00:1.00
October 31, 2001 2.00:1.00
January 31, 2002
and the last day of each
fiscal quarter thereafter 3.00:1.00".
</TABLE>
5. The table appearing in Section 9.09 of the Credit Agreement is hereby
deleted and the following new table is inserted in lieu thereof:
<TABLE>
<CAPTION>
"PERIOD RATIO
------- -----
<S> <C>
January 26, 2000 through and including the date immediately
preceding the last day of the Borrower's fiscal quarter ending
closest to January 31, 2000 6.40:1.00
The last day of the Borrower's fiscal quarter ending closest
to January 31, 2000 through and including the date immediately
preceding the last day of the Borrower's fiscal quarter ending
closest to April 30, 2000 6.40:1.00
The last day of the Borrower's fiscal quarter ending closest
to April 30, 2000 through and including the date immediately
preceding the last day of the Borrower's fiscal quarter
ending closest to July 31, 2000 6.00:1.00
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
The last day of the Borrower's fiscal quarter ending closest
to July 31, 2000 through and including the date immediately
preceding the last day of the Borrower's fiscal quarter
ending closest to October 31, 2000 6.00:1.00
The last day of the Borrower's fiscal quarter ending closest
to October 31, 2000 through and including the date immediately
preceding the last day of the Borrower's fiscal quarter
ending closest to January 31, 2001 5.00:1.00
The last day of the Borrower's fiscal quarter ending closest
to January 31, 2001 through and including the date immediately
preceding the last day of the Borrower's fiscal quarter
ending closest to April 30, 2001 4.75:1.00
The last day of the Borrower's fiscal quarter ending closet to
April 30, 2001 through and including the date immediately
preceding the last day of the Borrower's fiscal quarter
ending closest to July 31, 2001 4.75:1.00
The last day of the Borrower's fiscal quarter ending closest
to July 31, 2001 through and including the date immediately
preceding the last day of the Borrower's fiscal quarter
ending closest to October 31, 2001 4.50:1.00
The last day of the Borrower's fiscal quarter ending closest
to October 31, 2001 through and including the date immediately
preceding the last day of the Borrower's fiscal quarter
ending closest to January 31, 2002 4.50:1.00
Thereafter 3.00:1.00".
</TABLE>
6. The table appearing in Section 9.10 of the Credit Agreement is hereby
deleted and the following new table is inserted in lieu thereof:
3
<PAGE>
<TABLE>
<CAPTION>
"FISCAL QUARTER
ENDING CLOSEST TO AMOUNT
----------------- ------
<S> <C>
January 31, 2000 $28,500,000
April 30, 2000 $30,000,000
July 31, 2000 $30,000,000
October 31, 2000 $35,000,000
January 31, 2001 $35,000,000
April 30, 2001 $36,000,000
July 31, 2001 $37,000,000
October 31, 2001 $38,000,000
January 31, 2002 $48,000,000
April 30, 2002 $49,000,000
July 31, 2002 $51,000,000
October 31, 2002
and the last day of each
fiscal quarter thereafter $53,000,000".
</TABLE>
7. Section 10 of the Credit Agreement is hereby amended by (i) inserting
the word "or" at the end of Section 10.10 thereof and (ii) inserting the
following new Section 10.11 immediately following such Section 10.10:
"10.11 CAPITAL CALL AGREEMENT. (a) The Capital Call Agreement or any
provision thereof shall cease to be in full force and effect, or JFL Equity
or any Person acting by or on behalf of JFL Equity shall deny or disaffirm
its obligations under the Capital Call Agreement or JFL Equity or any
Person acting on or behalf of JFL Equity shall default in the due
performance or observance of any term, covenant or agreement on its part to
be performed or observed pursuant to the Capital Call Agreement or a
Capital Call Event of Default under, and as defined in, the Capital Call
Agreement shall occur; or
(b) Any representation, warranty or statement made (or deemed made) by
JFL Equity in the Capital Call Agreement shall prove to be untrue in any
material respect on the date as of which made or deemed made;".
8. The definition of "Consolidated EBITDA" appearing in Section 11.01 of
the Credit Agreement is hereby deleted and the following new definition is
inserted in lieu thereof:
"Consolidated EBITDA" shall mean, for any period, Consolidated EBIT
for such period, adjusted by (x) adding thereto (without duplication) (i)
the amount of all amortization, depreciation and other non-cash expenses or
non-cash charges that were deducted in arriving at Consolidated EBIT for
such period (including amortization of goodwill, the non-cash costs of
agreements evidencing Interest Rate Protection Agreements, Other Hedging
Agreements, license agreements and non-competition
4
<PAGE>
agreements, and the non-cash amortization of Capitalized Lease Obligations,
managements fees and organization costs), but excluding, however, any
non-cash expenses or non-cash charges associated with any asset
write-downs, (ii) unrealized non-cash gains and losses from hedging,
foreign currency or commodities translations and transactions that were
deducted in arriving at Consolidated EBIT for such period and (iii) up to
(I) $1,700,000 of inventory write-downs, (II) $11,300,000 of legal,
consulting and other expenses relating to the environmental investigations
at the Borrower's facilities and (III) $638,700 relating to the write-off
of a receivable, in each case (in the case of this clause (iii)) to the
extent that such charges were incurred in the Borrower's fiscal quarter
ended October 31, 1999 and were deducted in arriving at Consolidated EBIT
for such period and (y) subtracting therefrom any cash expenses, cash
charges or cash payments arising from any non-cash expenses, non-cash
charges or unrealized non-cash gains or losses that were deducted in
arriving at Consolidated EBIT in a previous period.
9. The definitions of "Applicable Base Rate Margin" and "Applicable
Eurodollar Rate Margin" appearing in Section 11.01 of the Credit Agreement are
deleted and the following new definitions are inserted in lieu thereof:
"Applicable Base Rate Margin" shall mean, (i) in the case of Revolving
Loans and Swingline Loans, 2.00% and (ii) in the case of Term Loans, 2.50%.
"Applicable Eurodollar Rate Margin" shall mean, (i) in the case of
Revolving Loans, 3.00% and (ii) in the case of Term Loans, 3.50%.
10. The definition of "Credit Documents" appearing in Section 11.01 of the
Credit Agreement is hereby amended by inserting the text", the Capital Call
Agreement" immediately after the words "the Subsidiaries Guaranty" appearing
therein.
11. Section 11.01 of the Credit Agreement is hereby further amended by
inserting the following new definitions in the appropriate alphabetical order:
"Capital Call Agreement" shall mean the Capital Call Agreement, dated
as of January 26, 2000, among JFL Equity, the Borrower and the
Administrative Agent, as amended, modified or supplemented from time to
time in accordance with the terms thereof and hereof.
"Capital Call Amount" shall have the meaning provided in the Capital
Call Agreement.
12. The Banks hereby waive any Default or Event of Default that has arisen
(i) under Sections 9.08 and 9.10 of the Credit Agreement for the Test Period
ended closest to October 31, 1999 and (ii) under Section 9.09 of the Credit
Agreement for the period from and after October 31, 1999 through but not
including the Second Amendment Effective Date (as defined below).
5
<PAGE>
II. MISCELLANEOUS.
1. In order to induce the Banks to enter into this Amendment, the Borrower
hereby represents and warrants that (i) all representations, warranties and
agreements contained in Section 7 of the Credit Agreement are true and correct
in all material respects on and as of the Second Amendment Effective Date
(unless such representations and warranties relate to a specific earlier date,
in which case such representations and warranties shall be true and correct as
of such earlier date) and (ii) there exists no Default or Event of Default on
the Second Amendment Effective Date, in each case after giving effect to this
Amendment (but otherwise taking into account the provisions of Section 1 of Part
I of the Waiver and Modification to Credit Agreement, dated as of September 14,
1999).
2. This Amendment is limited as specified and shall not constitute a
modification, acceptance or waiver of any other provision of the Credit
Agreement or any other Credit Document.
3. This Amendment may be executed in any number of counterparts and by the
different parties hereto on separate counterparts, each of which counterparts
when executed and delivered shall be an original, but all of which shall
together constitute one and the same instrument. A complete set of counterparts
shall be lodged with the Borrower and the Administrative Agent.
4. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER
SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF
NEW YORK.
5. This Amendment shall become effective on the date (the "Second Amendment
Effective Date") when (i) each Credit Party and the Required Banks shall have
signed a counterpart hereof (whether the same or different counterparts) and
shall have delivered (including, without limitation, by way of facsimile
transmission) the same to the Administrative Agent at the Notice Office, (ii)
JFL Equity and the Borrower shall have entered into the Capital Call Agreement
in the form attached hereto and (iii) the Borrower shall have paid to the
Administrative Agent for the account of each Bank which has executed a
counterpart hereof and delivered the same to the Administrative Agent at the
Notice Office on or prior to 5:30 P.M. (New York time) on January 26, 2000, an
amendment fee equal to 0.25% of the sum of such Bank's (I) outstanding Term
Loans and (II) Revolving Loan Commitment at such time. This Amendment and the
agreements contained herein shall be binding on the successors and assigns of
the parties hereto.
6. From and after the Second Amendment Effective Date, all references in
the Credit Agreement and the other Credit Documents to the Credit Agreement
shall be deemed to be references to the Credit Agreement as amended hereby.
* * *
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
officers to execute and deliver this Amendment as of the date first above
written.
SPECIAL DEVICES, INCORPORATED
By: __________________________
Name:
Title:
<PAGE>
BANKERS TRUST COMPANY,
Individually and as Administrative Agent
By: __________________________
Name:
Title:
<PAGE>
BANKBOSTON, N.A.
By: __________________________
Name:
Title:
<PAGE>
THE BANK OF NOVA SCOTIA
By: __________________________
Name:
Title:
<PAGE>
CITY NATIONAL BANK
By: __________________________
Name:
Title:
<PAGE>
FIRST UNION NATIONAL BANK
By: __________________________
Name:
Title:
<PAGE>
GENERAL ELECTRIC CAPITAL CORPORATION
By: __________________________
Name:
Title:
<PAGE>
MORGAN STANLEY DEAN WITTER
PRIME INCOME TRUST
By: __________________________
Name:
Title:
<PAGE>
NATIONAL CITY BANK
By: __________________________
Name:
Title:
<PAGE>
PARIBAS
By: __________________________
Name:
Title:
<PAGE>
KZH STERLING LLC
By: __________________________
Name:
Title:
<PAGE>
UNION BANK OF CALIFORNIA, N.A.
By: __________________________
Name:
Title:
<PAGE>
Acknowledged and Agreed:
SCOT, INCORPORATED
By:__________________________
Name:
Title:
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> OCT-31-1999
<CASH> 447,655
<SECURITIES> 0
<RECEIVABLES> 27,026,820
<ALLOWANCES> 351,734
<INVENTORY> 17,833,487
<CURRENT-ASSETS> 55,274,000
<PP&E> 131,098,203
<DEPRECIATION> 41,016,389
<TOTAL-ASSETS> 151,387,861
<CURRENT-LIABILITIES> 45,072,000
<BONDS> 171,486,000
0
0
<COMMON> 27,654,713
<OTHER-SE> (88,531,493)
<TOTAL-LIABILITY-AND-EQUITY> 155,652,000
<SALES> 166,499,101
<TOTAL-REVENUES> 166,499,101
<CGS> 135,723,989
<TOTAL-COSTS> 45,828,000
<OTHER-EXPENSES> 1,566,175
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,823,864
<INCOME-PRETAX> 30,874,451
<INCOME-TAX> 10,608,000
<INCOME-CONTINUING> 2,695,925
<DISCONTINUED> 0
<EXTRAORDINARY> 16,180,337
<CHANGES> 0
<NET-INCOME> (20,266,451)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
