<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended MARCH 31, 1999 or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to _________
Commission file number 1-12410
SIMULA, INC.
(Exact Name of Registrant as Specified in Its Charter)
ARIZONA 86-0320129
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2700 NORTH CENTRAL AVENUE, SUITE 1000, PHOENIX, ARIZONA 85004
(Address of Principal Executive Offices) (Zip Code)
(602) 631-4005
(Registrant's Telephone Number, Including Area Code)
________________________________________________________________________________
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports)
Yes X No _____
(2) has been subject to such filing requirements for the past 90 days.
Yes X No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at March 31, 1999
Common Stock, $.01 par value 9,967,752
<PAGE> 2
SIMULA, INC.
INDEX
PART I - FINANCIAL INFORMATION
PAGE
Item 1 - Financial Statements
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998..................................2
Consolidated Statements of Operations
Three Months Ended March 31, 1999 and 1998.......................3
Consolidated Statement of Shareholders' Equity
Three Months Ended March 31, 1999................................4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998.......................5
Notes to Interim Consolidated Financial Statements ...............6 - 8
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition...............9 - 14
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports.................................................15
SIGNATURES....................................................................16
1
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SIMULA, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,741,158 $ 933,462
Contract and trade receivables - Net 31,109,651 27,113,757
Inventories 27,468,796 26,021,433
Deferred income taxes 3,173,000 3,173,000
Prepaid expenses and other 769,351 601,614
Net current assets of discontinued operations 6,628,576 4,580,773
------------- -------------
Total current assets 71,890,532 62,424,039
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Net 21,159,705 21,494,535
DEFERRED INCOME TAXES 20,226,000 20,550,000
DEFERRED FINANCING COSTS 2,765,909 2,627,765
INTANGIBLES - Net 3,444,161 3,452,402
OTHER ASSETS 557,564 430,340
------------- -------------
TOTAL $ 120,043,871 $ 110,979,081
============= =============
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 20,100,000 $ 16,900,000
Trade accounts payable 9,505,540 11,028,062
Other accrued liabilities 7,320,930 7,496,841
Advances on contracts 2,769,644 2,220,737
Current portion of long-term debt 7,146,603 7,530,222
------------- -------------
Total current liabilities 46,842,717 45,175,862
LONG-TERM DEBT - Less current portion 46,924,996 47,233,558
------------- -------------
Total liabilities 93,767,713 92,409,420
------------- -------------
REDEEMABLE CONVERTIBLE 6% SERIES A PREFERRED STOCK,
$.05 par value - issued 7,500 shares 7,500,000
-------------
SHAREHOLDERS' EQUITY
Preferred stock, $.05 par value - authorized
50,000,000 shares; issued 7,500 shares redeemable convertible
6% series A preferred stock
Common stock, $.01 par value - authorized 50,000,000
shares; issued 9,967,752 and 9,915,391 99,678 99,154
Additional paid-in capital 51,980,117 51,742,593
Accumulated deficit (32,968,302) (33,452,571)
Accumulated other comprehensive income (335,335) 180,485
------------- -------------
Total shareholders' equity 18,776,158 18,569,661
------------- -------------
TOTAL $ 120,043,871 $ 110,979,081
============= =============
</TABLE>
See notes to consolidated financial statements
2
<PAGE> 4
SIMULA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenue $ 31,928,262 $ 22,542,178
Cost of revenue 23,414,109 16,615,993
------------ ------------
Gross margin 8,514,153 5,926,185
Administrative expenses 6,049,844 4,397,242
------------ ------------
Operating income 2,464,309 1,528,943
Interest expense (1,667,072) (1,208,826)
Interest income 11,032 62,562
------------ ------------
Income before taxes and discontinued operations 808,269 382,679
Income tax expense (324,000) (154,000)
------------ ------------
Income from continuing operations 484,269 228,679
Discontinued operations:
Loss from discontinued operations, net of tax (223,978)
------------ ------------
Net income $ 484,269 $ 4,701
============ ============
Income (loss) per common share - basic:
Income from continuing operations $ 0.05 $ 0.02
Discontinued operations:
Loss from discontinued operations, net of tax (0.02)
------------ ------------
Net income $ 0.05 $ --
============ ============
Income (loss) per common share - assuming dilution:
Income from continuing operations $ 0.05 $ 0.02
Discontinued operations:
Loss from discontinued operations, net of tax (0.02)
------------ ------------
Net income $ 0.05 $ --
============ ============
</TABLE>
See notes to consolidated financial statements
3
<PAGE> 5
SIMULA, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Stock Paid-in Accumulated Comprehensive Shareholders' Comprehensive
Shares Amount Capital Deficit Income Equity Income
--------- --------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1999 9,915,391 $ 99,154 $ 51,742,593 $(33,452,571) $ 180,485 $ 18,569,661
Net earnings (loss) 484,269 484,269 $ 484,269
Issuance of common shares 52,361 524 237,524 238,048
Currency translation adjustment (515,820) (515,820) (515,820)
--------- --------- ------------ ------------ ------------ ------------ ------------
BALANCE, March 31, 1999 9,967,752 $ 99,678 $ 51,980,117 $(32,968,302) $ (335,335) $ 18,776,158 $ (31,551)
========= ========= ============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 6
SIMULA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows used for operating activities:
Net income $ 484,269 $ 4,701
Adjustment to reconcile net income to net cash used by operating activities:
Depreciation and amortization 1,377,693 1,075,460
Deferred income taxes 324,000 4,000
Currency translation adjustment (515,820) 176,467
Changes in net assets and liabilities:
Contract and trade receivables - net of advances (3,446,987) (443,730)
Inventories (1,447,363) (1,238,899)
Prepaid expenses and other (167,737) 9,159
Other assets (127,224) 155,268
Net assets of discontinued operations (2,047,803) (841,773)
Trade accounts payable (1,522,522) (3,394,148)
Other accrued liabilities (175,911) (201,981)
------------ ------------
Net cash used by operating activities (7,265,405) (4,695,476)
------------ ------------
Cash flows used by investing activities:
Purchase of property and equipment (693,815) (1,265,610)
Costs incurred to obtain intangibles (478,951) (52,499)
------------ ------------
Net cash used in investing activities (1,172,766) (1,318,109)
------------ ------------
Cash flows from financing activities:
Net borrowings under line of credit 3,200,000 3,700,000
Principal payments under other debt arrangements (692,181) (575,964)
Issuance of common shares 238,048 273,551
Issuance of preferred shares 7,500,000
------------ ------------
Net cash provided by financing activities 10,245,867 3,397,587
------------ ------------
Net (decrease) increase in cash and cash equivalents 1,807,696 (2,615,998)
Cash and cash equivalents at beginning of period 933,462 9,367,031
------------ ------------
Cash and cash equivalents at end of period $ 2,741,158 $ 6,751,033
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 2,276,540 $ 1,856,849
============ ============
Taxes paid $ 9,900
============
</TABLE>
See notes to consolidated financial statements
5
<PAGE> 7
SIMULA, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION:
The accompanying interim consolidated financial statements of Simula, Inc.
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles
for complete financial statements. In the opinion of Management, all
adjustments and reclassifications considered necessary for a fair and
comparable presentation have been included and are of a normal recurring
nature. Operating results for the three months ended March 31, 1999 are
not necessarily indicative of the results that may be expected for the
year ending December 31, 1999.
NOTE 2 - INVENTORIES:
At March 31, 1999 and December 31, 1998, inventories consisted of the
following.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Raw materials $16,124,851 $15,581,952
Work in process 9,574,033 9,077,849
Finished goods 1,769,912 1,361,632
----------- -----------
Total inventories $27,468,796 $26,021,433
=========== ===========
</TABLE>
Inventories included in net current assets of discontinued operations at
March 31, 1999 and December 31, 1998 were $6,641,602 and $6,198,387,
respectively, and consisted mainly of raw materials.
NOTE 3 - DEBT:
The Company's Senior Credit Agreement, as amended by the Modification
Agreement executed in February 1999, provided for a revolving line of
credit up to the lesser of $26,000,000 or the Revolving Line of Credit
Borrowing Base (as defined) until July 31, 1999 or the date in which the
outstanding principal balance is reduced below $20,000,000 from proceeds
received from the issuance of junior capital, at which time the revolving
line of credit is adjusted to the lesser of $20,000,000 or the Revolving
Line of Credit Borrowing Base (as defined). In April 1999, the Senior
Credit Agreement was amended to increase the Revolving Line of Credit to
the lesser of $23,000,000 or the Revolving Line of Credit Borrowing Base
(as defined).
NOTE 4 - REDEEMABLE CONVERTIBLE PREFERRED STOCK:
On March 29, 1999, the Company completed a private placement to an
accredited investor of $7.5 million of the Company's Series A Convertible
Preferred Stock (the "Series A"). Under the terms of this offering the
Series A bears a dividend rate of 6% per annum payable quarterly in cash,
or in stock that will be valued at 90% of fair market value at the time of
payment. The Series A may be converted into shares of the Company's Common
Stock at any time at 101% of the average closing price of any 15 out of
the 30 consecutive trading days preceding conversion, up to a specified
maximum conversion price (the "Conversion Cap"). The Conversion Cap for
the first twelve months is $8.60 per share and is subject to an annual
adjustment to the lesser of the then existing Conversion Cap or 130% of
the average of the closing bid prices for 20 consecutive trading days
immediately preceding the annual adjustment anniversary date. Conversion
of the Series A is limited to 10% of the initial amount per month,
accumulating monthly up to a maximum of 30% of the accumulated convertible
amount in any month. The Company may require the conversion of the Series
A if the market price of the Company's Common Stock exceeds the Conversion
Cap by at least 50% for at least 20 consecutive trading days, subject to
the same conversion limitations imposed upon the Series A holders.
Series A Preferred Stock is subject to a mandatory redemption of the
remaining outstanding shares on May 1, 2004 at which time the Company is
required to redeem all such shares at the greater of 130% of the preferred
stock stated value plus accrued and unpaid dividends, or the average of
the closing bid prices on the ten consecutive trading days immediately
preceding the redemption date. The holders of the Company's Series A
Preferred Stock have the option to require the Company to redeem all or a
portion of the Series A Preferred Stock at a redemption price equal to
105% of the preferred stock stated value plus accrued and unpaid dividends
if the Company consolidates or merges with or into another company.
6
<PAGE> 8
SIMULA, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - DISCONTINUED OPERATIONS:
In 1998, the Company's board of directors adopted a plan to dispose of its
rail and mass transit seating operations. Accordingly, the operating
results of these rail and mass transit operations, including a provision
for estimated loss upon disposition, have been segregated from continuing
operations and are reported as discontinued operations. Due to the
subjective nature of estimated future operations and incremental costs of
disposal, it is reasonably possible that these estimates may change in the
future. Future changes in estimates will be included in the consolidated
statement of operations in the reporting period determined.
Revenues for the rail and mass transit operations were $3,632,789 and
$5,460,524 for the three months ended March 31, 1999 and 1998,
respectively. Interest expense has been allocated to discontinued
operations based on the ratio of the discontinued operations' net assets
to consolidated net assets. General corporate administrative expenses are
not allocated to discontinued operations.
NOTE 6 - SEGMENT REPORTING
The Company is a holding company for wholly owned subsidiaries which
operate in two business segments. The Commercial Transportation Products
segment includes operations which primarily manufacture seating systems
for domestic and foreign passenger airlines and includes operations
encompassing inflatable restraints and related technology for automobiles.
The Government and Defense segment includes operations that design and
manufacture crash resistant components, energy absorbing devices,
ballistic armor and composites principally in connection with branches of
the United States armed forces procurement. The remaining segment,
entitled Other, represents general corporate operations.
For the three month period ended March 31, 1999 and 1998 inter-segment
sales were insignificant and total intercompany sales of $1,570,060 and
$1,042,308, respectively, have been eliminated.
<TABLE>
<CAPTION>
1999
--------------------------------------------------------
Commercial
Transportation Government
Products and Defense Other Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Contract revenue $11,486,941 $11,486,941
Product sales:
Airline seat systems $12,913,286 12,913,286
Automotive safety systems 7,039,742 7,039,742
Other 317,604 317,604
Technology sales and royalties 170,689 170,689
----------- ----------- ----------- -----------
Total revenue $20,123,717 $11,804,545 $ -- $31,928,262
=========== =========== =========== ===========
Operating (loss) income $ 598,311 $ 2,385,447 $ (519,449) $ 2,464,309
</TABLE>
7
<PAGE> 9
SIMULA, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1998
--------------------------------------------------------
Commercial
Transportation Government
Products and Defense Other Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Contract revenue $ 7,933,642 $ 7,933,642
Product sales:
Airline seat systems $ 9,481,159 9,481,159
Automotive safety systems 4,906,964 4,906,964
Other 205,360 $ 15,053 220,413
Technology sales and royalties --
----------- ----------- ----------- -----------
Total revenue $14,388,123 $ 8,139,002 $ 15,053 $22,542,178
=========== =========== =========== ===========
Operating (loss) income $ 1,686,051 $ 146,485 $ (303,593) $ 1,528,943
</TABLE>
NOTE 7 - EARNINGS PER SHARE:
The following is a reconciliation of the numerators and denominators of
basic and diluted per share computations. For the three month period ended
March 31, 1999 and 1998, the effects of 2,253,390 total shares to be
issued upon conversion of the 8% Notes and the 10% Notes were not used for
computing dilutive earnings per share because the result would be
anti-dilutive.
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Income from continuing operations $ 484,269 $ 228,679
Discontinued operations:
Loss from discontinued operations, net of tax (223,978)
------------ ------------
Net income $ 484,269 $ 4,701
============ ============
Basic weighted average shares outstanding 9,919,221 9,851,392
Effect of dilutive securities 108,301 280,071
------------ ------------
Diluted weighted average shares outstanding 10,027,522 10,131,463
============ ============
Basic per share amounts:
Income from continuing operations $ 0.05 $ 0.02
Discontinued operations:
Loss from discontinued operations, net of tax -- (0.02)
------------ ------------
Net income $ 0.05 --
============ ============
Diluted per share amounts:
Income from continuing operations $ 0.05 $ 0.02
Discontinued operations:
Loss from discontinued operations, net of tax -- (0.02)
------------ ------------
Net income $ 0.05 $ --
============ ============
</TABLE>
8
<PAGE> 10
SIMULA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
GENERAL - The following discussion and analysis provides information that
management of Simula, Inc. (the "Company") believes is relevant to an assessment
and understanding of the Company's results of operations and financial condition
for the three month period ended March 31, 1999 compared to the same periods in
1998. This discussion should be read in conjunction with the Interim
Consolidated Financial Statements and the Notes thereto included elsewhere in
this Form 10-Q. This Form 10-Q contains certain forward-looking statements and
information. The cautionary statements contained below should be read as being
applicable to all related forward-looking statements wherever they appear. See
"Forward Looking Information and Risks of the Business."
OVERVIEW
The Company designs and manufactures occupant safety systems and devices
engineered to safeguard human life in a wide range of air, ground, and sea
transportation vehicles. Utilizing its substantial proprietary technology in
energy-absorbing seating, inflatable restraints, and composite materials, the
Company focuses on reducing injury and increasing survivability in vehicle and
aircraft crashes.
Since its founding in 1975, the Company's historic business has been as a
government and defense contractor. Additionally, commencing with acquisitions
and commercial products development since 1993, the Company has become the
largest North American-based supplier of seating systems for rail and other mass
transit vehicles and a successful new entrant in the manufacture of new
commercial airliner seating and inflatable restraints for automobiles. Utilizing
its proprietary safety technology, the Company has introduced crashworthy
systems for a variety of vehicles and aircraft including its 16g commercial
airliner passenger seat ("16g Seat") and various inflatable restraint systems
for automobiles including the Inflatable Tubular Structure ("ITS") (TM).
Management made a strategic decision to enter the commercial aircraft
seating market to bring its proprietary energy-absorbing technologies to a new
industry and take advantage of positive industry trends in 1993. To implement
its decision, the Company completed three acquisitions that allowed it to
develop the necessary infrastructure to support future growth. In August 1993,
the Company acquired Airline Interiors, Inc. (the "Airline Acquisition"), which
was primarily involved with the refurbishment, reupholstery, reconditioning, and
reconfiguring of existing passenger seats. The Airline Acquisition provided
certain FAA certifications, enhanced the Company's management team and customer
base, and provided substantial assembly capacity. During 1994, the Company
acquired Coach & Car Equipment Corporation ("Coach and Car") and Artcraft
Industries Corp. ("Artcraft"). The acquisitions of Coach and Car and Artcraft
are collectively referred to as the 1994 Acquisitions. The 1994 Acquisitions'
existing operations included providing a majority of all manufacturing and
refurbishment of rail and mass transit seating systems in North America. The
1994 Acquisitions provided the Company with substantial large-scale
manufacturing capacity and synergies utilized in the production of its 16g Seat
for airliners.
In 1994, the Company made a strategic decision to enter the inflatable
restraint market for automobiles utilizing its proprietary technology, the ITS.
Through 1996, the Company completed its development of this technology and
start-up of its manufacturing facilities. In 1997, the Company began
manufacturing the ITS for sale to BMW, a major European automobile manufacturer,
which began including it in certain models of its automobiles in 1997.
To continue it's strategic plan, in 1998 the Company adopted a plan to
sell its rail and mass transit seating operations at Coach and Car and Artcraft.
Because the Company's commercial airliner seating operation moved into a new
significantly larger facility in July 1998 and has established substantial
production, the rail operations are no longer required to demonstrate the
Company's production capabilities to current and potential airliner seating
customers. In addition, the larger airliner seating manufacturing facility
reduced the synergies achieved previously with the mass rail and transit seating
operation. The sale of these businesses will provide cash that will be used to
repay outstanding indebtedness. The company has initiated an active marketing
plan and anticipates it will sell these operations as ongoing businesses. These
companies will continue their marketing, sales and manufacturing activities as
the company prepares them for sale. The company's rail and mass transit seating
operations are reported as discontinued operations.
Simula's revenue has historically been derived from three sources: sales
of Company manufactured products; contract research and development for third
parties; and technology sales and royalties. A substantial portion of its
current revenue from the government and defense segment is accounted for under
the percentage of completion method of accounting. Under this method, revenue is
recorded as production progresses so that revenue less costs incurred to date
9
<PAGE> 11
SIMULA, INC.
yields the percentage of gross margin estimated for each contract. Overall gross
margin percentages can increase or decrease based upon changes in estimated
gross margin percentages over the lives of individual contracts.
The Company is a holding company for wholly owned subsidiaries which operate in
two business segments. The Commercial Transportation Products segment
includes operations which primarily manufacture seating systems for domestic and
foreign passenger airlines and operations producing inflatable restraints and
related safety technologies for automobiles. The Government and Defense segment
includes operations that design and manufacture crash resistant seats and
components, energy absorbing devices, and ballistic armor, principally in
connection with United States armed forces procurement. The remaining segment,
entitled Other, represents general corporate operations.
RESULTS FROM CONTINUING OPERATIONS
Three Months Ended March 31, 1999 Compared to 1998:
Revenue for the three months ended March 31, 1999 increased 42% to $31.9
million from $22.5 million for the comparable period in 1998. Commercial
Transportation Products revenue increased 40% to $20.1 million from $14.4
million due to increased deliveries of ITS and 16g Seats. Government and Defense
revenue increased 45% to $11.8 million from $8.1 million primarily due to the
timing of material costs incurred on contracts.
Gross margin for the three months ended March 31, 1999 increased 44% to
$8.5 million from $5.9 million for the comparable period in 1998. Commercial
Transportation Products gross margin increased 39% to $5.2 million from $3.7
million. Government and Defense gross margin increased 52% to $3.3 million from
$2.2 million. The increase in gross margin was due to the increase in revenue
noted above. Gross margin as a percent of sales for the three months ended March
31, 1999 remained consistent with the comparable period in 1998 in each of the
Company's segments.
Administrative expenses for the three months ended March 31, 1999
increased 38% to $6.0 million from $4.4 million for the comparable period in
1998. Commercial Transportation Products administrative expenses increased 38%
to $2.8 million from $2.0 million and is attributable to increased support
structure required to support revenue growth. Administrative expenses as a
percentage of sales was 13.9% for the three month period ended March 31, 1999 as
compared to 14.1% in the comparable 1998 period. Government and Defense
administrative expenses increased 34% to $2.7 million from $2.1 million. This
increase is attributable to parachute pre-production costs and an increase in
internally funded research and development as compared to the comparable period
in 1998. Administrative expenses as a percentage of sales was 23.3% for the
three month period ended March 31, 1999 as compared to 25.2% in the comparable
1998 period.
Interest expense increased 38% to $1.7 million for the three months ended
March 31, 1999 from $1.2 million for the comparable period in 1998. The increase
in interest expense is primarily attributable to increased outstanding
borrowing.
The effective income tax rate for the three month periods ended March 31,
1999 and 1998 approximated the Company's combined statutory rate of 40%.
DISCONTINUED OPERATIONS
In 1998, the Company's board of directors adopted a plan to dispose of its
rail and mass transit seating operations. Accordingly, the operating results of
these rail and mass transit operations, including a provision for estimated loss
upon disposition, have been segregated from continuing operations and are
reported as discontinued operations. Due to the subjective nature of estimated
future operations and incremental costs of disposal, it is reasonably possible
that these estimates may change in the future. Future changes in estimates will
be included in the consolidated statement of operations in the reporting period
determined.
Revenues for the rail and mass transit operations were $3,632,789 and
$5,460,524 for the three months ended March 31, 1999 and 1998, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity is greatly impacted by the nature of the billing
provisions under its contracts. Generally, in the early period of contracts,
cash expenditures and accrued profits are greater than allowed billings while
contract completion results in billing previously unbilled costs and profits.
Contract and trade receivables, net of advances on contracts, increased
approximately $3.5 million for the three months ended March 31, 1999 due
principally to the throughput on certain Government and Defense contracts and
increased receivables from 16g Seat and ITS sales.
10
<PAGE> 12
SIMULA, INC.
Operating activities required the use of $7.3 million of cash during the
three months ended March 31, 1999, compared to the use of $4.7 million of cash
during the same period in 1998. Cash used by operating activities in the 1999
period was primarily used to increase accounts receivable (discussed above) and
inventories, reduce trade accounts payable and funding of discontinued
operations current operating losses and increase in net assets. The increase in
inventories was primarily due to an increase in 16g Seat inventory necessary to
support anticipated future deliveries.
Investing activities required the use of $1.2 million of cash during
the three months ended March 31, 1998 for the purchase of various production
equipment and the capitalization of financing costs related to the Senior Credit
Agreement.
Financing activities provided $10.2 million of cash during the three
months ended March 31, 1999 from $7.5 million received for the issuance of
redeemable preferred stock and $3.2 million in net borrowings under the
Company's line of credit partially offset by principal payments under other debt
arrangements for scheduled principal reductions.
In April 1999, the Senior Credit Agreement was amended to reduce the
Company's revolving line of credit from the lesser of $26 million or the
Revolving Line of Credit Borrowing Base (as defined) to the lesser of $23
million or the Revolving Line of Credit Borrowing Base (as defined). At March
31, 1999, under the line of credit the Company had available borrowing of $23
million and outstanding borrowing of $20.1 million.
The Company believes it has sufficient manufacturing capacity in place at
March 31, 1999 to meet its foreseeable delivery requirements. The Company's
ability to fund working capital requirements during the next year will be
dependent upon improved cash flow from operating units, the proceeds received
from the sale of its discontinued operations, and a real estate sale and
leaseback transaction to repay indebtedness and increase availability of funds
under its Senior Credit Agreement. The Company may also, however, seek to obtain
additional capital should demand for its products exceed current capacity. The
raising of additional capital in public markets will be primarily dependent upon
prevailing market conditions and demand for the Company's technologies and
products.
INFLATION
The Company does not believe that it is significantly impacted by
inflation.
RESEARCH AND DEVELOPMENT
The Company's research and development occurs under fixed-price,
government-funded contracts and Company-sponsored efforts. Historically,
research and development efforts have fluctuated based upon available
government-funded contracts and available Company funding. The Company
anticipates that future fluctuations may also occur as a result of efforts to
expand its inflatable restraint, commercial airliner and helicopter seating, and
other technologies.
SEASONALITY
The Company does not believe that it is currently significantly impacted
by seasonal factors.
YEAR 2000 MATTERS
Background
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define an applicable year. Any computer programs
or equipment that have time-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions in commerce, including
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
The Company employs a number of information technology ("IT") systems in
its operations, including computer networking systems, hardware and software,
financial systems, and other similar systems. The Company also employs a number
of non-IT devices such as building security and safety devices, and other
devices containing embedded electronic circuits. Both IT systems and non-IT
devices are subject to potential failure due to the Year 2000 issue.
11
<PAGE> 13
SIMULA, INC.
The Company's Year 2000 Plan
In 1996, the Company initiated a plan for the conversion from existing
accounting software to new state-of-the-art, Year 2000-compliant, manufacturing
and accounting systems at each of its operating companies. That conversion is
part of an overall plan (the "Year 2000 Plan") the Company has developed to
achieve Year 2000 readiness. The Year 2000 Plan is intended to remediate the
Year 2000 issue in all categories of systems and electronic devices in use by
the Company, including IT and non-IT devices, so that the Company may continue
its operations without interruption or with minimal disruption. The Year 2000
Plan also includes communication with critical third parties such as customers,
vendors and other business partners to determine the expected degree of Year
2000 compliance of those parties and to monitor their progress toward Year 2000
readiness. The Year 2000 Plan includes the following phases: 1) assessment, 2)
remediation, 3) testing, and 4) implementation.
The Company is in the assessment phase with regard to its state of
readiness relative to non-IT devices containing embedded circuitry. The Company
is in the process of communicating with the manufacturers of non-IT devices
containing embedded circuitry and to date has fully assessed (confirmed that
such devices are Year 2000 compliant or upgraded the devices as needed)
approximately 40% of such devices.
The Company is also in the assessment phase with regard to third parties
with which the Company has a material relationship. In connection with this
assessment, the Company has been appointing a Year 2000 Program Manager at each
of its subsidiaries, and has made or is making written inquiries of its
customers and suppliers. This process is not yet complete. While the Company has
not been made aware of any problems that would materially impact the Company's
operations, there can be no assurance that one or more material third parties
will not have Year 2000 problems that materially impact the Company's business
in some fashion. Various agencies of the U.S. government and military branches
of the U.S. armed forces are significant customers of the Company. As of the
date of this report, the Company has received conflicting data as to the state
of any of such customers' Year 2000 readiness. Therefore, the Company is unsure
at this time the extent, if any, that any entity of the U.S. government with
whom the Company has a material relationship will have internal Year 2000 issues
which may materially impact the Company's business.
The Company continues to be in the remediation phase with regard to its IT
systems. As of the date of this report, the Company has one subsidiary using
accounting and manufacturing systems significantly affected by the Year 2000
issue. The remediation of these systems is more than 50% complete and the
Company estimates it will complete the conversion to new, Year 2000-compliant,
manufacturing and accounting software by August 1999.
Selection of a remediation tool set for desktop personal computers and
servers was completed in February 1999, and the implementation of such tool is
continuing and is expected to be completed by June 30, 1999.
In addition to the internal assessment and remediation efforts being
conducted by the Company pursuant to the Year 2000 Plan as described above, the
Company has engaged the services of a third party consultant to review Year 2000
matters on a subsidiary-by-subsidiary basis. The consultant commenced work in
January 1999.
Costs
The Company has incurred significant costs in connection with its
conversion, beginning in 1996, to the state-of-the-art manufacturing and
accounting systems discussed above. An incidental benefit of this conversion is
that such systems are Year 2000-compliant.
In addition to the foregoing, the costs associated with the Company's Year
2000 Plan, including the on-going systems conversions described above, are
expensed as incurred and to date have not been, and are not anticipated to be,
material to the Company's financial position or results of operations.
Risks of Year 2000 Failure
The failure on any party's part to correct a material Year 2000 problem
could result in an interruption in, or a failure of, certain normal business
activities or operations. Such failures could materially and adversely affect
the Company's results of operations, liquidity and financial condition. The
Company has not developed a formal written contingency plan for dealing with
potential Year 2000 issues in general. The risks associated with each particular
system not being Year 2000 compliant are analyzed in connection with the
Company's assessment of Year 2000 issues as described above, and contingency
plans will be effected by the Company on a case-by-case basis as the need
arises.
12
<PAGE> 14
SIMULA, INC.
Due to the general uncertainty inherent in the Year 2000 issue, resulting
in large part from the uncertainty of the Year 2000 readiness of material third
party suppliers and customers, the Company is unsure at this time the extent, if
any, that it might be materially adversely impacted by Year 2000 issues.
Readers are cautioned that forward-looking statements contained in this
Year 2000 discussion should be read in conjunction with the Company's
disclosures under the heading "Forward Looking Information and Risks of the
Business" below.
FORWARD LOOKING INFORMATION AND RISKS OF THE BUSINESS
Commencing in fiscal 1997, the Company entered large scale production of
the ITS and 16g Seat. Significant investments to transition to high volume
manufacturing for these products were also made in 1997, which affected
earnings. The Company began to realize significant revenues from the
introduction of these products in 1997, which has continued in 1998 and is
anticipated to continue in 1999. Growth in the automotive safety business should
result from increased production volumes. However, auto industry customary price
will reduce operating margins. If disputes with first tier suppliers reduce
production levels this business could be impacted. Improved financial
performance in the airline seating business is expected but will be dependent on
improvements in manufacturing efficiencies, materials cost reductions, better
delivery records and customer satisfaction, and continued sales. It is estimated
that the airline seating business should achieve break even results in 1999.
During 1999, the government and defense business of the Company is expected to
show growth in revenues and operating income.
Projected operating results and capital needs will be affected by a wide
variety of factors which could adversely impact revenues, profitability and cash
flows. The Company's liquidity and available working capital will be dependent
upon improved cash flow from operating units, the availability of sales proceeds
from discontinued operations, and a real estate sale and leaseback transaction
to repay indebtedness and increase availability of funds under its bank credit
agreement. Factors and risks that may affect results include those described in
the Company's registration statements and periodic reports filed with the U.S.
Securities and Exchange Commission. In addition, other factors include, but are
not limited to, manufacturing capacity and yield; costs of labor, raw materials,
supplies, and equipment; reliability of vendor base; contract mix and shifting
production and delivery schedules; amount of resources committed to independent
research and development from time to time; success in building strategic
alliances with large prime contractors and first tier suppliers to OEMs; the
level of orders which are received and can be shipped and invoiced in a quarter;
customer order patterns and seasonality; the cyclical nature of the industries
and markets addressed by the Company's products; the level and makeup of
military expenditures; technological changes; increased costs attributable to
changes in government regulations and certifications for transport vehicles;
competition and competitive pressures on pricing; and economic conditions in the
United States and worldwide markets served by the Company.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In February 1998, the Company filed a complaint in United States District
Court for the District of Arizona against Autoliv, Inc., seeking injunctive
relief from alleged anti-competitive acts and practices by Autoliv. The
complaint alleges numerous unlawful actions taken by Autoliv in connection with
a license from the Company to market and distribute the Company's ITS(R). The
legal action asserts that Autoliv has suppressed technology and is unlawfully
interfering with the Company's rights to market the ITS(R) and related products
to other first tier automotive safety equipment suppliers and to automobile
manufacturers. In 1998, the District Court stayed the proceedings and ruled that
the dispute between the parties was a contractual one and was subject to
arbitration pursuant to a contract provision. The Company disagreed and appealed
the order to the United States Court of Appeals for the Ninth Circuit. In April
1999, this Court ruled that the proper jurisdiction for this dispute is
arbitration. The District Court did not rule on the merits of the Company's
claims.
On November 3, 1998, the Company filed a separate complaint against
Autoliv in the United States District Court for the District of Delaware seeking
injunctive relief and damages for patent infringement. The Company's complaint
alleges that Autoliv developed, offered, and sold a side impact head protection
device in the United States that infringes the patent that Simula owns for the
ITS(R). The Company became aware of the potential infringement in early October
1998 as Autoliv introduced this device into production automobiles being offered
for the first time in the United States. This litigation is pending.
13
<PAGE> 15
SIMULA, INC.
In addition, the Company is involved in other litigation in the ordinary
course of business from time to time. The Company presently is not a party to
any threatened or pending litigation, the negative outcome of which would be
material to the Company.
14
<PAGE> 16
ITEM 6. EXHIBITS AND REPORTS.
(a) The following Exhibits are included pursuant to Item 601 of Regulation S-K.
No. Description Reference
3.1 Articles of Incorporation of Simula, Inc., as amended
and restated............................................. (4)
3.2 Bylaws of Simula, Inc., as amended and restated.......... (1)
4.2 Indenture dated December 17, 1993, as amended............ (2)
4.5 Supplemental Indenture No. 2 dated September 12, 1996,
entered into in connection with the Company's issuance
of Series C 10% Senior Subordinated Convertible Notes.... (6)
4.6 Supplemental Indenture No. 3, effective March 14, 1997,
amending the Indenture of Simula, Inc. dated December 17,
1993..................................................... (7)
4.7 Indenture dated April 1, 1997, in connection with the
Company's issuance of the 8% Senior Subordinated
Convertible Notes due May 1, 2004........ (7)
*4.8 Certificate of Designation, Preferences, Rights and
Privileges of the Company's $7,500,000 Series A Preferred
Stock....................................................
10.11 1992 Stock Option Plan, as amended effective September 15,
1998..................................................... (10)
10.12 1992 Restricted Stock Plan............................... (1)
10.21 1994 Stock Option Plan, as amended effective September 15,
1998..................................................... (10)
10.24 Senior Credit Agreement with Bank One, Arizona, N.A. and
Imperial Bank, Arizona dated November 6, 1998............ (10)
10.25 Modification Agreement with Bank One, Arizona, N.A. and
Imperial Bank, Arizona dated February 12, 1999........... (11)
10.26 Simula, Inc. Employee Stock Purchase Plan................ (4)
10.29 Form of Change of Control Agreements, as amended and
restated, between the Company and Donald W. Townsend,
Bradley P. Forst and James A. Saunders................... (9)
10.30 Form of Employment Agreements between the Company and
Donald W. Townsend, Bradley P. Forst and James A.
Saunders................................................. (8)
*10.31 Modification Agreement No. 2 with Bank One, Arizona, N.A.
and Imperial Bank, Arizona dated April 28, 1999..........
*10.32 Form of Employment Agreement between the Company and
James C. Dodd............................................
*10.33 Form of Change of Control Agreement between the Company
and James C. Dodd........................................
18. Preference Letter re: change in accounting principles.... (5)
21. Subsidiaries of the Company.............................. (8)
24. Powers of Attorney - Directors........................... (8)(11)
*27. Financial Data Schedule
- ----------
* Filed herewith.
(1) Filed with Registration Statement on Form S-18, No. 33-46152-LA, under the
Securities Act of 1933, effective April 13, 1992.
(2) Filed with Registration Statement on Form SB-2, No. 33-61028 under the
Securities Act of 1933, effective December 10, 1993.
(3) Filed with Registration Statement on Form SB-2, No. 33-87582, under the
Securities Act of 1933, effective December 28, 1994.
(4) Filed with Definitive Proxy on May 14, 1996, for the Company's Annual
Meeting of Shareholders held on June 20, 1996.
(5) Filed with report on Form 10-Q/A for the quarter ended June 30, 1996.
(6) Filed with report on Form 10-K for the year ended December 31, 1996.
(7) Filed with registration Statement on Form S-3, No. 333-13499, under the
Securities Act of 1993, effective April 24, 1997.
(8) Filed with report on Form 10-K for the year ended December 31, 1997.
(9) Filed with report on Form 10-Q for the quarter ended March 31, 1998.
(10) Filed with report on Form 10-Q for the quarter ended September 30, 1998.
(11) Filed with report on Form 10-K for the year ended December 31, 1998.
15
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q for the quarter ended March
31, 1999 to be signed on its behalf by the undersigned thereunto duly
authorized.
SIMULA, INC.
DATE: May 14, 1999 *
--------------------------------
DONALD W. TOWNSEND
President
Chief Executive Officer
/s/ James C. Dodd
--------------------------------
JAMES C. DODD
Executive Vice President
Chief Financial Officer
*By: /s/ Bradley P. Forst
--------------------------------
Bradley P. Forst
Attorney-in-Fact
16
<PAGE> 18
EXHIBIT INDEX
No. Description Reference
3.1 Articles of Incorporation of Simula, Inc., as amended
and restated............................................. (4)
3.2 Bylaws of Simula, Inc., as amended and restated.......... (1)
4.2 Indenture dated December 17, 1993, as amended............ (2)
4.5 Supplemental Indenture No. 2 dated September 12, 1996,
entered into in connection with the Company's issuance
of Series C 10% Senior Subordinated Convertible Notes.... (6)
4.6 Supplemental Indenture No.3, effective March 14, 1997,
amending the Indenture of Simula, Inc. dated December 17,
1993..................................................... (7)
4.7 Indenture dated April 1, 1997, in connection with the
Company's issuance of the 8% Senior Subordinated
Convertible Notes due May 1, 2004........ (7)
*4.8 Certificate of Designation, Preferences, Rights and
Priviledges of the $7,500,000 Series A Preferred Stock...
10.11 1992 Stock Option Plan, as amended effective September 15,
1998..................................................... (10)
10.12 1992 Restricted Stock Plan............................... (1)
10.21 1994 Stock Option Plan, as amended effective September 15,
1998..................................................... (10)
10.24 Senior Credit Agreement with Bank One, Arizona, N.A. and
Imperial Bank, Arizona dated November 6, 1998............ (10)
10.25 Modification Agreement with Bank One, Arizona, N.A. and
Imperial Bank, Arizona dated February 12, 1999........... (11)
10.26 Simula, Inc. Employee Stock Purchase Plan................ (4)
10.29 Form of Change of Control Agreements, as amended and
restated, between the Company and Donald W. Townsend,
Bradley P. Forst, James A. Saunders, Donald Rutter, and
Randall L. Taylor........................................ (9)
10.30 Form of Employment Agreements between the Company and
Donald W. Townsend, Bradley P. Forst, James A. Saunders,
and Randall L. Taylor.................................... (8)
*10.31 Modification Agreement No. 2 with Bank One, Arizona, N.A.
and Imperial Bank, Arizona dated April 28, 1999..........
*10.32 Form of Employment Agreement between the Company and James
C. Dodd..................................................
*10.33 Form of Change of Control Agreement between the Company
and James C. Dodd........................................
18. Preference Letter re: change in accounting principles.... (5)
21. Subsidiaries of the Company.............................. (8)
+24. Powers of Attorney - Directors........................... (8)
*27. Financial Data Schedule
- ----------
* Filed herewith.
(1) Filed with Registration Statement on Form S-18, No. 33-46152-LA, under the
Securities Act of 1933, effective April 13, 1992.
(2) Filed with Registration Statement on Form SB-2, No. 33-61028 under the
Securities Act of 1933, effective December 10, 1993.
(3) Filed with Registration Statement on Form SB-2, No. 33-87582, under the
Securities Act of 1933, effective December 28, 1994.
(4) Filed with Definitive Proxy on May 14, 1996, for the Company's Annual
Meeting of Shareholders held on June 20, 1996.
(5) Filed with report on Form 10-Q/A for the quarter ended June 30, 1996.
(6) Filed with report on Form 10-K for the year ended December 31, 1996.
(7) Filed with registration Statement on Form S-3, No. 333-13499, under the
Securities Act of 1993, effective April 24, 1997.
(8) Filed with report on Form 10-K for the year ended December 31, 1997.
(9) Filed with report on Form 10-Q for the quarter ended March 31, 1998.
(10) Filed with report on Form 10-Q for the quarter ended September 30, 1998.
(11) Filed with report on Form 10-K for the year ended December 31, 1998.
<PAGE> 1
EXHIBIT 4.8
STATEMENT PURSUANT TO SECTION 10-602 OF THE ARIZONA REVISED STATUTES
OF THE DESIGNATIONS, PREFERENCES, RIGHTS AND PRIVILEGES OF THE
$7,500,000 SERIES A CONVERTIBLE PREFERRED STOCK
PAR VALUE $.05 PER SHARE OF
SIMULA, INC.
Simula, Inc., a corporation organized and existing under the laws of
the state of Arizona (the "Company"), does hereby submit this Statement pursuant
to Section 10-602 of the Arizona Revised Statutes as follows:
1. The name of this corporation is: Simula, Inc.
2. The resolution (the "Resolution") determining the terms of the
Series A Convertible Preferred Stock, par value $.05 per share, of the Company
is attached as Exhibit A hereto and is incorporated by reference herein.
3. The Resolution was duly adopted by unanimous consent of the Board
of Directors of the Company on March 16, 1999.
4. The Resolution was duly adopted by the Board of Directors of the
Company and has not been amended, modified, rescinded or superseded and remains
in full force and effect.
IN WITNESS WHEREOF, the Company has caused this Statement to be
executed, delivered and filed this 16 day of March, 1999.
/s/ Donald W. Townsend
__________________________________
Donald W. Townsend, President
/s/ Bradley P. Forst
__________________________________
Bradley P. Forst, Secretary
<PAGE> 2
Exhibit A
RESOLUTION OF THE BOARD OF DIRECTORS OF SIMULA, INC.
PURSUANT TO SECTION 10-602 OF THE ARIZONA REVISED STATUTES
RESOLVED, that pursuant to the authority vested in the Board of
Directors of the Company in accordance with the provisions of its Articles of
Incorporation, a new series of preferred stock, par value $.05 per share, to be
titled the "SERIES A CONVERTIBLE PREFERRED STOCK" of the Company is hereby
created and designated. The number of shares of Series A Preferred Shares (as
defined in Section 1 below) shall be 7,500 shares. The voting powers,
preferences and relative, participating, optional and other special rights of
the Series A Preferred Shares, and the qualifications, limitations and
restrictions thereof, are as follows:
(1) Designation. The series of preferred stock established hereby
shall be designated the "Series A Convertible Preferred Stock" (and shall
be referred to herein as the "SERIES A PREFERRED SHARES") and the
authorized number of Series A Preferred Shares shall be 7,500. The stated
value per share shall be $1,000 (the "STATED VALUE").
(2) Conversion of Series A Preferred Shares. A holder of Series A
Preferred Shares (collectively, the "HOLDERS" and each a "HOLDER") shall
have the right, at such holder's option, to convert the Series A Preferred
Shares into shares of the Company's common stock, par value $.01 per share
(the "COMMON STOCK"), on the following terms and conditions:
(a) Conversion Right. Subject to the provisions of Section
2(f) below, each Series A Preferred Share shall be convertible at the
option of the Holder thereof, at any time or from time to time on or after
the initial date of issuance of the Series A Preferred Shares which shall
be the date of the Securities Purchase Agreement (the "SECURITIES PURCHASE
AGREEMENT"), among the Company and the initial Investors named therein
(such date, "INITIAL ISSUANCE DATE") into fully paid, validly issued and
nonassessable shares (rounded to the nearest whole share in accordance
with Section 2(g) below) of Common Stock, at the Conversion Rate (as
defined below), provided, however, that (i) no Holder shall be entitled to
convert any Series A Preferred Shares in excess of the Conversion Limit
(except pursuant to Section 2(f)) or (ii) with respect to the Holders in
the aggregate, the Common Share Limit (as defined in Section 2(b)(vii)
below), unless the Company (A) has obtained approval of the issuance of
the Common Stock upon conversion of the Series A Preferred Shares by a
majority of the total votes eligible to be cast on such proposal, in
person or by proxy, by the holders of the then outstanding shares of
Common Stock, (B) shall have otherwise obtained permission to allow such
issuances from the New York Stock Exchange ("NYSE") or (C) is no longer
governed by a rule promulgated by a stock exchange, NASDAQ or other
applicable body prohibiting the issuance of the Common Stock upon
conversion of the Series A Preferred Shares in excess of 19.99% of the
number of shares of Common Stock outstanding on the Initial Issuance Date
and in the case of (i) and (ii) above, except as provided in this
Statement. In addition, in no event shall any Holder be entitled to
convert Series A Preferred Shares in excess of that number of Series A
Preferred Shares which, upon
<PAGE> 3
giving effect to such conversion, would cause the aggregate number of
shares of Common Stock beneficially owned by the Holder and its affiliates
to exceed 4.99% of the outstanding shares of the Common Stock following
such conversion, provided, however, that a Holder may elect to waive this
restriction upon not less than sixty-one (61) days prior written notice to
the Company. For purposes of this paragraph "beneficial ownership" shall
be calculated in accordance with Section 13(d) of the Securities Exchange
Act of 1934, as amended.
(b) Conversion Rate. The number of shares of Common Stock
issuable upon conversion of each of the Series A Preferred Shares pursuant
to Sections (2)(a) and 2(f) shall be determined in accordance with the
following formula (the "CONVERSION RATE"):
Stated Value + all accrued and unpaid dividends
------------------------------------------------
Conversion Price
For purposes of this Statement, the following terms shall have the
following meanings:
(i) "ADDITIONAL SHARES OF COMMON STOCK" shall mean, all
shares (including treasury shares) of Common Stock issued or sold or
deemed to be issued by the Company after the Initial Issuance Date,
whether or not subsequently reacquired or retired by the Company other
than (A) shares of Common Stock issued upon conversion of the Series A
Preferred Shares and (B) Approved Stock Plan Shares;
(ii) "ANNIVERSARY DATE" means the calendar date of the
Initial Issuance Date of each calendar year;
(iii) "ANNIVERSARY MARKET PRICE" means the average of
the Closing Bid Prices of the Common Stock on the 20 consecutive trading
days immediately preceding the applicable Anniversary Date;
(iv) "APPROVED STOCK PLAN SHARES" means any Options (as
defined below) issued to an employee, officer, director, consultant or
other service provider of the Company pursuant to any contract, plan or
agreement which has been approved by the Board of Directors of the Company
(collectively, the "APPROVED STOCK PLANS") for which the price per share
of the Common Stock issuable upon the exercise of such Options (a) is
equal or in excess of the last sale price of the Common Stock on the date
of such issuance (the "SALES PRICE") or (b) is greater than 85% of the
Sales Price, but less than the Sales Price (the "BELOW FAIR MARKET VALUE
OPTIONS"); provided, however, that the aggregate amount of such Below Fair
Market Value Options issued in total by the Company under the Approved
Stock Plans cannot exceed 0.5% of the number of shares of Common Stock
issued and outstanding as of such issuance date.
-2-
<PAGE> 4
(v) "AVERAGE MARKET PRICE" means the average of the
Closing Bid Prices of the Common Stock on the ten consecutive trading days
immediately preceding the applicable date;
(vi) "CLOSING BID PRICES" means, for any security as of
any date, the last closing bid price on the New York Stock Exchange
Composite Transactions Tape as reported by Bloomberg, L.P. ("BLOOMBERG"),
or, if the NYSE is not the principal securities exchange for such
security, the last closing bid price of such security on the principal
securities exchange or trading market where such security is listed or
traded as reported by Bloomberg, or if the foregoing do not apply, the
last closing bid price of such security in the over-the-counter market on
the electronic bulletin board for such security as reported by Bloomberg,
or, if no closing bid price is reported for such security by Bloomberg,
or, if no last closing trade price is reported for such security by
Bloomberg, the average of the bid prices of any market makers for such
security as reported in the "pink sheets" by the National Quotation
Bureau, Inc.;
(vii) "COMMON SHARE LIMIT" means 1,982,681;
(viii) "COMPANY CONVERSION EVENT LIMIT" means with
respect to Section 2(f), (A) 10% of the number of Series A Preferred
Shares issued to the Holders on the Initial Issuance Date for the period
beginning on the Initial Issuance Date and ending on March 31, 1999 and
(B) for each calendar month thereafter, an additional 10% of the number of
Series A Preferred Shares issued to the Holders on the Initial Issuance
Date; provided, however, that in no event shall the Company in any one
calendar month be required to convert more than 30% of the number of
Series A Preferred Shares issued to the Holders on the Initial Issuance
Date.
(ix) "CONVERSION LIMIT" means with respect to any
Holder, (A) 10% of the number of Series A Preferred Shares issued to such
Holder on the Initial Issuance Date for the period beginning on the
Initial Issuance Date and ending on March 31, 1999 and (B) for each
calendar month thereafter, an additional 10% of the number of Series A
Preferred Shares issued to such Holder on the Initial Issuance Date;
provided, however, that in no event shall the Company in any one calendar
month be required to convert more than 30% of the number of Series A
Preferred Shares issued to such Holder on the Initial Issuance Date.
(x) "CONVERSION PRICE" means as of any Conversion Date
(as defined below) or other date of determination, the lesser of (A) the
Fixed Conversion Price and (B) the Variable Conversion Price;
(xi) "FIXED CONVERSION PRICE" means with respect to any
Conversion Date (A) for the period from the Initial Issuance Date and
ending on the day immediately preceding the first Anniversary Date
thereof, $8.60; provided, that if (I) on or prior to July 31, 1999 the
Company fails to consummate the sale, in a single transaction, of all of
the capital stock or all or substantially all of the assets of Coach and
Car Equipment Corporation ("CCEC"), an Arizona corporation and
wholly-owned subsidiary of the Company, for an aggregate cash
consideration of at least $7.5 million
-3-
<PAGE> 5
and (II) for the period from January 1, 1999 through July 31, 1999, net
income (after deduction of all expenses, taxes and interest) of CCEC, as
determined in accordance with generally accepted accounting principles, is
equal to or less than zero, then the Fixed Conversion Price from August 1,
1999 and ending on the day immediately preceding the first Anniversary
Date, shall equal the lesser of (x) $8.60 and (y) 130% of the average
Closing Bid Prices of the Common Stock on the 20 consecutive trading days
immediately preceding August 1, 1999; and (B) for each successive annual
period thereafter, beginning on an Anniversary Date and ending on the day
immediately preceding the next Anniversary Date, the lesser of (x) the
Fixed Conversion Price then in effect and (y) 130% of the applicable
Anniversary Market Price;
(xii) "VARIABLE CONVERSION PRICE" means 101% of the
average of the Closing Bid Prices for any 15 trading days during a period
of the 30 consecutive trading days ending one day prior to the applicable
Conversion Date.
(c) Effect of Failure to Obtain and Maintain Effectiveness of
Registration Statement. (i) If the registration statement (the
"REGISTRATION STATEMENT") covering the resale of the shares of Common
Stock issuable upon conversion of the Series A Preferred Shares and
required to be filed by the Company pursuant to the Registration Rights
Agreement between the Company and the initial Holders of the Series A
Preferred Shares (the "REGISTRATION RIGHTS AGREEMENT") is not declared
effective by the United States Securities and Exchange Commission or any
successor entity thereto (the "SEC") on or before the 120th calendar day
following the Initial Issuance Date (the "SCHEDULED EFFECTIVE DATE"), then
for each consecutive thirty (30) day period following the Scheduled
Effective Date, each Holder of Series A Preferred Shares shall, until such
time as the Registration Statement is declared effective by the SEC (all
such payments to be made in cash and nonrefundable on the first day of
each thirty (30) day period), be entitled to an amount equal to the
product of (A) one percent, multiplied by (B) the Stated Value plus all
accrued and unpaid dividends thereon, multiplied by (C) the number of
Series A Preferred Shares held by such Holder.
(ii) If the Registration Statement shall not have been
declared effective by the 140th day following the Scheduled Effective
Date, the Company shall be required, at the option of the Holders, to
redeem the Series A Preferred Shares in accordance with Section 3(a) and
in connection therewith the Company shall pay the Holders who so elect, a
price per Series A Preferred Share equal to the Triggering Event
Redemption Price (as defined in Section 3(a)(ii)).
(d) Adjustment to Fixed Conversion Price, the Common Share
Limit, the Conversion Limit, the Company Conversion Event Limit and the
Closing Bid Prices -- Dilution and Other Events. In order to prevent
dilution of the rights granted under this Statement, the Fixed Conversion
Price, the Common Share Limit, the Conversion Limit, the Company
Conversion Event Limit and the Closing Bid Prices for any days during any
measuring period prior to any of the events set forth below (the
"ADJUSTING CLOSING BID PRICES") will be subject to adjustment from time to
time as provided in this Section 2(d). Any such adjustments to the Fixed
Conversion Price, the Conversion Limit, the Company
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Conversion Event Limit and the Adjusting Closing Bid Prices will be
applicable to Series A Preferred Shares not yet converted or redeemed.
(i) Dividends and Distributions. If the Company shall
declare or pay to the holders of the Common Stock a dividend or other
distribution payable in shares of Common Stock or any other security
convertible into or exchangeable for shares of Common Stock, each Holder
shall be entitled to receive the number of shares of Common Stock or other
securities convertible into or exchangeable for shares of Common Stock, as
applicable, which such Holder would have owned or been entitled to receive
after the declaration and payment of such dividend or other distribution
as if the Series A Preferred Shares then held by such Holder had been
converted at the Conversion Price in effect immediately prior to the
record date for the determination of stockholders entitled to receive such
dividend or other distribution.
(ii) Stock Splits and Combinations. If the Company shall
subdivide (by means of any stock split, stock dividend, recapitalization
or otherwise) the outstanding shares of Common Stock into a greater number
of shares of Common Stock, or combine (by means of any combination,
reverse stock split or otherwise) the outstanding shares of Common Stock
into a lesser number of shares, or issue by reclassification of shares of
Common Stock any shares of the Company, the Fixed Conversion Price, the
Common Share Limit, the Conversion Limit, the Company Conversion Event
Limit and the Adjusting Closing Bid Prices, each in effect immediately
prior thereto shall be adjusted so that each Holder shall receive the
number of shares of Common Stock which such Holder would have owned or
been entitled to receive after the happening of any and each of the events
described above if such Holder had converted the Series A Preferred Shares
held by such Holder immediately prior to the happening of each such event
on the day upon which such subdivision or combination, as the case may be,
becomes effective.
(iii) Organic Changes. Any recapitalization,
reorganization, reclassification, consolidation, merger, sale of all or
substantially all of the Company's assets (in one or a series of related
transactions) to another Person (as defined below) or other transaction
which is effected in such a way that holders of Common Stock are entitled
to receive (either directly or upon subsequent liquidation) stock,
securities or assets with respect to or in exchange for Common Stock is
referred to herein as an "ORGANIC CHANGE". In case the Company shall
effect an Organic Change, then the Holder shall be given a written notice
from the Company informing such Holder of the terms of such Organic Change
and of the record date thereof for any distribution pursuant thereto, at
least ten (10) days in advance of such record date, and, if such record
date shall precede the Mandatory Redemption Date, each Holder shall have
the right thereafter to receive, upon conversion of the Series A Preferred
Shares, the number of shares of stock or other securities, property or
assets of the Company, or of its successor or transferee or any affiliate
thereof, or cash receivable upon or as a result of such Organic Change
that would have been received by a holder of the number of shares of
Common Stock equal to the number of shares each Holder would have received
had such Holder converted its Series A Preferred Shares prior to such
event at the Conversion Price in effect
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<PAGE> 7
immediately prior to such event. In any such case, the Company will make
appropriate provision (in form and substance reasonably satisfactory to
the Holders of a majority of the Series A Preferred Shares then
outstanding) to insure that the provisions of this Section 2(d)(iii) will
thereafter be applicable to the Series A Preferred Shares (including, in
the case of any such Organic Change in which the successor entity or
purchasing entity is other than the Company, an immediate adjustment of
the Conversion Price to the value for the Common Stock reflected by the
terms of such Organic Change, if the value so reflected is less than the
Conversion Price in effect immediately prior to such Organic Change). The
Company will not effect any such Organic Change unless prior to the
consummation thereof the successor entity (if other than the Company)
resulting from such Organic Change assumes, by written instrument (in form
and substance satisfactory to the Holders of a majority of the Series A
Preferred Shares then outstanding), the obligation to deliver to each
Holder such shares of stock, securities or assets as, in accordance with
the foregoing provisions, such Holder may be entitled to acquire or
receive. The provisions of this subparagraph (iii) shall similarly apply
to successive Organic Changes. "PERSON" means an individual, a limited
liability company, a partnership, a joint venture, a corporation, a trust,
an unincorporated organization and a government or any department or
agency thereof.
(iv) Adjustment upon Issuance of Options and Convertible
Securities. If the Company in any manner grants any rights or options to
subscribe for or to purchase one or more classes of its Common Stock or
any stock or other securities convertible into or exchangeable for Common
Stock (such rights or options being herein called "OPTIONS" and such
convertible or exchangeable stock or securities being herein called
"CONVERTIBLE SECURITIES") (other than Approved Stock Plan Shares) and the
price per share for which Common Stock is issuable upon the exercise of
such Options or upon conversion or exchange of such Convertible Securities
(the "NEW OPTION ISSUANCE PRICE") is less than the Average Market Price
immediately prior to such time, then, from and after the time of such
issue or sale, the Fixed Conversion Price shall be reduced, if necessary,
so that it shall not exceed the New Option Issuance Price. For purposes of
this Section 2(d)(iv), the New Option Issuance Price shall mean the amount
determined by dividing (A) the total amount, if any, received or
receivable by the Company as consideration for the granting of such
Options, plus the minimum aggregate amount of additional consideration
payable to the Company upon the exercise of all such Options, plus in the
case of such Options which relate to Convertible Securities, the minimum
aggregate amount of additional consideration, if any, payable to the
Company upon the issuance or sale of such Convertible Securities and the
conversion or exchange thereof, by (B) the total maximum number of shares
of Common Stock issuable upon exercise of such Options or upon the
conversion or exchange of all such Convertible Securities issuable upon
the exercise of such Options. No further adjustment of the Conversion
Price shall be made upon the actual issuance of such Common Stock or of
such Convertible Securities upon the exercise of such Options or upon the
actual issuance of such Common Stock upon conversion or exchange of such
Convertible Securities.
(v) Change in Option Price or Rate of Conversion. If the
purchase price provided for in any Options, the additional consideration,
if any, payable
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<PAGE> 8
upon the issue, conversion or exchange of any Convertible Securities, or
the rate at which any Convertible Securities are convertible into or
exchangeable for any class of Common Stock change at any time, the Fixed
Conversion Price at the time of such change shall be readjusted, effective
on and after the date of such change, to the Fixed Conversion Price which
would have been in effect on the date of such change had such Options or
Convertible Securities still outstanding provided for such changed
purchase price, additional consideration or changed conversion rate, as
the case may be, at the time initially granted, issued or sold; provided
that no adjustment shall be made if such adjustment would result in an
increase of the Fixed Conversion Price then in effect.
(vi) Issuance of Additional Shares of Common Stock. In
case the Company at any time or from time to time after the date hereof
shall issue or sell Additional Shares of Common Stock (including
Additional Shares of Common Stock deemed to be issued pursuant to Section
2(d)(ii), (iv) or (v)), without consideration or for a consideration per
share less than the Average Market Price in effect immediately prior to
such issue or sale, then, and in each such case, the Fixed Conversion
Price shall be reduced, to a price determined by multiplying such Fixed
Conversion Price by a fraction
(A) the numerator of which shall be the sum of (i)
the number of shares of Common Stock outstanding immediately prior to such
issue or sale and (ii) the number of shares of Common Stock which the
aggregate consideration received by the Company for the total number of
such Additional Shares of Common Stock so issued or sold would purchase at
the Average Market Price, and
(B) the denominator of which shall be the
number of shares of Common Stock outstanding immediately after such issue
or sale, provided that, for the purposes of this Section 2(d)(vi),
immediately after any Additional Shares of Common Stock are deemed to have
been issued pursuant to Section 2(d)(ii), (iv) or (v), such Additional
Shares of Common Stock shall be deemed to be outstanding, and (y) treasury
shares of Common Stock shall not be deemed to be outstanding.
(vii) Other Dilutive Events. In case any event shall
occur as to which the provisions of this Section 2(d) are not strictly
applicable or if strictly applicable would not fairly protect the
conversion rights of the Holder in accordance with the essential intent
and principles of this Section 2(d), then, in each such case, the Board of
Directors of the Company shall make an adjustment in the application of
such provisions, in accordance with such essential intent and principles,
so as to preserve, without dilution, the conversion rights represented by
this Note.
(viii) No Dilution or Impairment. The Company shall not,
by amendment of its certificate of incorporation or through any Organic
Change or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Statement, but will
at all times in good faith assist in the carrying out of all such terms
and in the taking of all such action as may be necessary or appropriate in
order to protect the rights of the Holders against dilution or other
impairment. Without limiting the generality of the foregoing, the Company
(A) shall take all such action as may be
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<PAGE> 9
necessary or appropriate in order that the Company may validly and legally
issue fully paid and nonassessable shares of Common Stock, free from all
taxes, liens, security interests, encumbrances, preemptive rights and
charges on the conversion of the Series A Preferred Shares, (B) shall not
take any action which results in any adjustment of the Fixed Conversion
Price or the Adjusting Closing Bid Prices if the total number of shares of
Common Stock issuable after the action upon the conversion of the Series A
Preferred Shares would exceed the total number of shares of Common Stock
then authorized by the Company's articles of incorporation and available
for the purpose of issue upon such exercise, (C) shall not permit the par
value of any shares of stock receivable upon the conversion of the Series
A Preferred Shares to exceed the amount payable therefor upon such
exercise, and (D) shall not issue any capital stock of any class which, as
to the Holders, is preferred as to dividends or as to the distribution of
assets upon voluntary or involuntary dissolution, liquidation or
winding-up, unless the rights of the holders thereof shall be limited to a
fixed sum or percentage of par value or a sum determined by reference to a
formula based on a published index of interest rates, an interest rate
publicly announced by a financial institution or a similar indicator of
interest rates in respect of participation in dividends and to a fixed sum
or percentage of par value in any such distribution of assets.
(ix) Notices.
(A) Immediately upon any adjustment pursuant
hereto, the Company will give immediate written notice thereof to each
Holder, setting forth in reasonable detail and certifying the calculation
of such adjustment.
(B) The Company will give written notice to
each Holder at least twenty (20) days prior to the date on which the
Company closes its books or takes a record (I) with respect to any
dividend or distribution upon the Common Stock, or (II) for determining
rights to vote with respect to any Organic Change, dissolution or
liquidation; provided, that in no event shall such notice be provided to
such Holder prior to such information being made known to the public.
(C) The Company will also give written notice
to each Holder at least twenty (20) days prior to the date on which any
Organic Change, dissolution or liquidation will take place.
(x) Successive Adjustments. Successive adjustments in
the Fixed Conversion Price, the Common Share Limit, the Conversion Limit,
the Company Conversion Event Limit and the Adjusting Closing Bid Prices
shall be made whenever any event specified above shall occur. All
calculations under this Section 2(d) shall be made to the nearest cent or
to the nearest one-hundredth of a share, as the case may be. No adjustment
in the Adjusting Closing Bid Prices shall be made if the amount of such
adjustment would be less than $0.01, but any such amount shall be carried
forward and an adjustment with respect thereto shall be made at the time
of, and together with, any subsequent adjustment which, together with such
amount and any other amount or amounts so carried forward, shall in the
aggregate equal $0.01 or more.
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<PAGE> 10
(e) Mechanics of Conversion. Subject to the Company's
inability to fully satisfy its obligations under a Conversion Notice (as
defined below) as provided for in Section 5 below:
(i) Holder's Delivery Requirements. To convert Series A
Preferred Shares into full shares of Common Stock on any date (the
"CONVERSION DATE"), the Holder thereof shall (A) deliver by courier or
transmit by facsimile, for receipt on or prior to 11:59 p.m., Central Time
on such date, a copy of a fully executed notice of conversion in the form
attached hereto as Exhibit I (the "CONVERSION NOTICE"), to the Company or
its designated transfer agent (the "TRANSFER AGENT"), and (B) surrender to
a common carrier for delivery to the Company or the Transfer Agent as soon
as practicable following such date, the original certificates representing
the Series A Preferred Shares being converted (or an indemnification
undertaking with respect to such shares in the case of their loss, theft
or destruction pursuant to the provisions set forth in Section 12 hereof)
(the "PREFERRED STOCK CERTIFICATES") and the originally executed
Conversion Notice.
(ii) Company's Response. Upon receipt by the Company of
a copy of a Conversion Notice, the Company shall immediately send, via
facsimile, a confirmation of receipt of such Conversion Notice to such
Holder. Upon receipt by the Company or the Transfer Agent of the Preferred
Stock Certificates to be converted pursuant to a Conversion Notice (or an
indemnification undertaking with respect to such shares in the case of
their loss, theft or destruction pursuant to the provisions set forth in
Section 12 hereof), together with the originally executed Conversion
Notice, the Company or the Transfer Agent (as applicable) shall, on the
next business day following the date of such receipt (A) issue and
surrender to a common carrier for overnight delivery to the address as
specified in the Conversion Notice, a certificate, registered in the name
of the Holder or its designee, for the number of shares of Common Stock to
which the Holder shall be entitled, (B) credit such aggregate number of
shares of Common Stock to which the Holder shall be entitled to the
Holder's or its designee's balance account with The Depository Trust
Company, or (C) if the Holder requests, issue shares in electronic format
(e.g. via DWAC).
(iii) Dispute Resolution. In the case of a dispute as to
the determination of the Conversion Price, the Company shall promptly
issue to the Holder the number of shares of Common Stock that is not
disputed pursuant to the provision in this Section 2(e) and shall submit
the disputed determinations or arithmetic calculations to the Holder via
facsimile within one (1) business day of receipt of such Holder's
Conversion Notice. If such Holder and the Company are unable to agree upon
the determination of the Conversion Price within one (1) business day of
such disputed determination or arithmetic calculation being submitted to
the Holder, then the Company shall within one (1) business day submit via
facsimile the disputed determination of the Conversion Price to an
independent, reputable accounting firm of national standing acceptable to
the Company and such Holder of Series A Preferred Shares. The Company
shall cause such accounting firm to perform the determinations or
calculations and notify the Company and the Holder of the results no later
than forty-eight (48) hours from the
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<PAGE> 11
time it receives the disputed determinations or calculations. Such
accounting firm's determination, shall be binding upon all parties absent
manifest error. If as a result of such determination by the accounting
firm the Company is required to issue additional shares of Common Stock to
a Holder, the Company or the Transfer Agent, as applicable, shall on the
next business day following the date such determination is made, issue
such shares of Common Stock in accordance with the options set forth in
the last sentence of Section 2(e)(ii) above. The reasonable fees and
expenses of the accounting firm shall be borne by the party whose
calculations is furthest from the accounting firm's determination.
(iv) Record Holder. The Person or Persons entitled to
receive the shares of Common Stock issuable upon a conversion of Series A
Preferred Shares shall be treated for all purposes as the record Holder or
Holders of such shares of Common Stock on the Conversion Date.
(v) Company's Failure to Timely Convert. If the Company
shall fail (other than as a result of the situations described in Section
4(a) with respect to which the Holder has elected, and the Company has
satisfied its obligations under, one of the options set forth in
subparagraphs (i) through (v) of Section 4(a)) to issue to a Holder on a
timely basis as described in this Section 2(e), a certificate for the
number of shares of Common Stock to which such Holder is entitled upon
such Holder's conversion of Series A Preferred Shares, the Company shall
pay damages to such Holder equal to the greater of (A) actual damages
incurred by such Holder as a result of such Holder's needing to "buy in"
shares of Common Stock to satisfy its securities delivery requirements
("BUY IN ACTUAL DAMAGES") and (B) if the Company fails to deliver such
certificates within five days after the last possible date which the
Company could have issued such Common Stock to such Holder without
violating this Section 2(e), on each date such conversion is not timely
effected in an amount equal to 1% of the product of (A) the number of
shares of Common Stock not issued to the Holder on a timely basis and to
which such Holder is entitled and (B) the Closing Bid Price of the Common
Stock on the last possible date which the Company could have issued such
Common Stock to such Holder without violating this Section 2(e).
(f) Conversion at the Option of the Company. On any Company
Conversion Event Date (as defined below), the Holders shall be required to
convert on a pro rata basis such number of Series A Preferred Shares as
required by the Company pursuant to a written notice delivered to the
holders via facsimile provided, that such notice is delivered within one
(1) business day following a Company Conversion Event Date. Any such
conversion shall be made in accordance with this Section 2 as if the
Holders of such Series A Preferred Shares had given a Conversion Notice on
the Company Conversion Event Date, and the Conversion Date had been fixed
as of the Company Conversion Event Date for all purposes of this Section
2. Any conversion pursuant to this Section 2(f) shall be subject to the
Common Share Limit and the Company Conversion Event Limit, in each case as
adjusted as provided herein, but shall not be subject to or otherwise
counted towards the Conversion Limit. The Holders of Series A Preferred
Shares shall thereupon and within two (2) business days thereafter
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<PAGE> 12
surrender the Preferred Stock Certificates to be converted (or an
indemnification undertaking with respect to such shares in the case of
their loss, theft or destruction pursuant to the provisions set forth in
Section 12 hereof), duly endorsed for cancellation, to the Company or the
Transfer Agent. No person shall thereafter have any rights in respect of
the Series A Preferred Shares so converted, except the right to receive
shares of Common Stock on conversion thereof as provided in this Section
2. "COMPANY CONVERSION EVENT DATE" means any date on which the average of
the Closing Bid Prices of the Common Stock for the twenty (20) consecutive
trading days immediately preceding such date exceeds the Fixed Conversion
Price multiplied by 150%.
(g) Fractional Shares. The Company shall not issue any
fraction of a share of Common Stock upon any conversion. All shares of
Common Stock (including fractions thereof) issuable upon conversion of
more than one Series A Preferred Share by a Holder shall be aggregated for
purposes of determining whether the conversion would result in the
issuance of a fraction of a share of Common Stock. If, after the
aforementioned aggregation, the issuance would result in the issuance of a
fraction of a share of Common Stock, the Company shall round such fraction
of a share of Common Stock up or down to the nearest whole share.
(h) Taxes. The Company shall pay any and all taxes which may
be imposed upon it with respect to the issuance and delivery of Common
Stock upon the conversion of the Series A Preferred Shares.
(3) Redemption.
(a) Voluntary Redemption.
(i) Major Transaction. In addition to all other rights
of the Holders of Series A Preferred Shares contained in this Statement
(including, without limitation, the provisions of Section 2), after a
Major Transaction (as defined in Section 3(b) below), each Holder shall
have the right in accordance with Section 3(e), at such Holder's option,
to require the Company to redeem all or a portion of such Holder's Series
A Preferred Shares at a price per Series A Preferred Share equal to the
product of (A) the Stated Value plus all accrued and unpaid dividends
thereon, multiplied by (B) 105% ("MAJOR TRANSACTION REDEMPTION PRICE").
The provisions of this Section 3(a)(i) shall not be deemed to restrict the
ability of a Holder to convert Series A Preferred Shares pursuant to the
provisions of Section 2 at any time and from time to time before the
consummation of a Major Transaction.
(ii) Triggering Event. In addition to all other rights
of the Holders of Series A Preferred Shares contained in this Statement
(including, without limitation, the provisions of Section 2), after a
Triggering Event (as defined in Section 3(c) below), each Holder of Series
A Preferred Shares shall have the right in accordance with Section 3(e),
at such Holder's option, to require the Company to redeem all or a portion
of such Holder's Series A Preferred Shares at a price per Series A
Preferred Share equal to the greater of (x) product of (A) the aggregate
number of shares of Common Stock for which such Holder would be entitled
to receive if the Series A Preferred Shares
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<PAGE> 13
that it holds would be converted as of the date immediately preceding such
Triggering Event on which the exchange or market on which the Common Stock
is traded is open, multiplied by (B) the greater of (x) the Average Market
Price of the Common Stock on such date and (y) the product of (A) the
Stated Value plus all accrued and unpaid dividends thereon, multiplied by
(B) 130% (the "TRIGGERING EVENT REDEMPTION PRICE"). The provisions of this
Section 3(a)(ii) shall not be deemed to restrict the ability of a Holder
to convert the Series A Preferred Shares pursuant to the provisions of
Section 2 at any time and from time to time before such Holder receives
the Triggering Event Redemption Price.
(b) "Major Transaction". A "MAJOR TRANSACTION" means the
occurrence at such time of any of the following events:
(i) the consolidation or merger of the Company with or
into another Person (other than pursuant to a migratory merger effected
solely for the purpose of changing the jurisdiction of incorporation of
the Company or pursuant to a merger after which the Holders of the
Company's outstanding capital stock immediately prior to the merger own a
number of shares of the resulting company's outstanding capital stock
sufficient to elect a majority of the resulting company's board of
directors;
(ii) the sale, transfer, lease, disposal or abandonment
of (whether in one transaction or in a series of transactions) of all or
substantially all of the Company's assets (other than a sale or transfer
to an entity controlling, controlled by or under common control with the
Company); or
(iii) a purchase, tender or exchange offer for more than
50% of the outstanding shares of Common Stock or other voting securities
of the Company is made and accepted by the holders thereof.
(c) "Triggering Event". A "TRIGGERING EVENT" shall be deemed
to have occurred at such time as any of the following events:
(i) notice from the Company that Common Stock issued or
issuable upon conversion of the Series A Preferred Shares cannot be sold
under the Registration Statement covering such Common Stock (the
"SUSPENSION PERIOD"), for any period of ten consecutive trading days or
any twenty non-consecutive trading days during any period of 180
consecutive days that is (A) after the date the Registration Statement has
been declared effective by the SEC and (B) prior to the time that the
Conversion Stock issuable upon conversion of the Series A Preferred Shares
may be sold without limitation in accordance with Rule 144(k) under the
Securities Act of 1933, as amended (the "1933 ACT"); provided, that any
demand for redemption under this Section 3(c)(i) must be made by a Holder
of Series A Preferred Shares within 30 days after receipt of notice from
the Company of the termination of the Suspension Period; provided,
further, that if the aggregate number of days in all Suspension Periods
(the "SUSPENSION DAYS") is equal to or greater than thirty (30) days, then
the Mandatory Redemption Date may, at the option of the Holder, be
extended by the aggregate number of Suspension Days;
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<PAGE> 14
(ii) the failure of the Common Stock or the Conversion
Shares to be listed on the American Stock Exchange (the "AMEX"), the NYSE
or the Nasdaq National Market System for a period of 10 days during any
period of 12 months (the "DELISTING PERIOD"); provided, however, that any
demand for redemption under this Section 3(c)(ii) must be made by a Holder
within 30 days after receipt of the Notice of Redemption Event (as defined
in Section 3(e)); or
(iii) the Company's notice to any Holder of Series A
Preferred Shares, including by way of public announcement, at any time, of
its intention not to comply with proper requests for conversion of any
Series A Preferred Shares into shares of Common Stock, including due to
any of the reasons set forth in Section 4(a) below, except in any case in
which the basis for such intention by the Company is a bona fide dispute
as to the right of such Holder to such conversion.
(d) Mandatory Redemption. If any of the Series A Preferred
Shares remain outstanding on May 1, 2004 (the "MANDATORY REDEMPTION DATE")
(subject to extension as provided in Section 3(c)(i) above), then the
Company shall be required to redeem all of such Series A Preferred Shares
at a price per Series A Preferred Shares equal to the Triggering Event
Redemption Price (the "MANDATORY REDEMPTION PRICE" and together with the
Major Transaction Redemption Price, and the Triggering Event Redemption
Price, each a "REDEMPTION PRICE").
(e) Mechanics of Redemption. (i) Upon Major Transaction. No
sooner than fifteen (15) days nor later than ten (10) days prior to the
consummation of a Major Transaction, but not prior to the public
announcement of such Major Transaction, the Company shall deliver written
notice thereof via facsimile and overnight courier to each Holder (each a
"NOTICE OF MAJOR TRANSACTION"). At anytime after receipt of a Notice of
Major Transaction, any Holder of the Series A Preferred Shares then
outstanding may require the Company to redeem all or any portion of its
Series A Preferred Shares by delivering written notice thereof via
facsimile or overnight courier (each a "NOTICE OF VOLUNTARY REDEMPTION
UPON MAJOR TRANSACTION") to the Company, which Notice of Voluntary
Redemption Upon Major Transaction shall indicate (A) the number of Series
A Preferred Shares that such Holder is requesting redemption for and (B)
the Major Transaction Redemption Price as calculated pursuant to Section
3(a)(i) above.
(ii) Upon Triggering Event. Within one day after the
occurrence of a Triggering Event, the Company shall deliver written notice
thereof via facsimile and overnight courier to each Holder (each a "NOTICE
OF TRIGGERING EVENT"). At anytime after receipt of a Notice of Triggering
Event, but only for so long as the facts giving rise to the Triggering
Event continue to exist, any Holder may require the Company to redeem all
or any portion of its Series A Preferred Shares by delivering written
notice thereof via facsimile or overnight courier (each a "NOTICE OF
VOLUNTARY REDEMPTION UPON TRIGGERING EVENT") to the Company, which Notice
of Voluntary Redemption Upon Triggering Event shall indicate (A) the
number of Series A Preferred
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<PAGE> 15
Shares that such Holder is requesting redemption for and (B) the
Triggering Event Redemption Price as calculated pursuant to Section
3(a)(ii) above.
(iii) Upon Mandatory Redemption Date. Within two
business days after receipt of the Mandatory Redemption Price in cash, the
Holders shall surrender all Preferred Stock Certificates, duly endorsed
for cancellation, to the Company or the Transfer Agent. No Person shall
thereafter have any rights in respect of Series A Preferred Shares, except
the right to receive the Mandatory Redemption Price.
(f) Payment of Redemption Price Upon Voluntary Redemption.
Upon the Company's receipt of a Notice of Voluntary Redemption Upon Major
Transaction or Notice of Voluntary Redemption Upon Triggering Event from
any Holder, the Company shall immediately notify such Holder by facsimile
of the mechanics of the delivery of each Holder's Preferred Stock
Certificate and, if applicable, the Company's receipt of such requisite
notice necessary to effect a redemption and such Holder of Series A
Preferred Shares shall thereafter promptly send such Holder's Preferred
Stock Certificates to be redeemed to the Company or its Transfer Agent (or
an indemnification undertaking with respect to such shares in the case of
their loss, the theft or destruction pursuant to the provisions set forth
in Section 12 hereof). The Company shall deliver the applicable Redemption
Price to such Holder within ten (10) days after the Company's receipt of
the requisite notice required to affect a redemption; provided, that a
Holder's Preferred Stock Certificates shall have been so delivered to the
Company or its Transfer Agent (or an indemnification undertaking with
respect to such shares in the case of their loss, the theft or destruction
pursuant to the provisions set forth in Section 12 hereof); provided
further that if the Company is unable to redeem all of the Series A
Preferred Shares, the Company shall redeem an amount from each Holder of
Series A Preferred Shares equal to such Holder's pro rata amount (based on
the number of Series A Preferred Shares held by such Holder relative to
the number of Series A Preferred Shares outstanding) of all Series A
Preferred Shares being redeemed. If the Company shall fail to redeem all
of the Series A Preferred Shares submitted for redemption (other than
pursuant to a dispute as to the arithmetic calculation of the applicable
Redemption Price), in addition to any remedy such Holder of Series A
Preferred Shares may have under this Statement and the Securities Purchase
Agreement, the applicable Redemption Price payable in respect of such
unredeemed Series A Preferred Shares shall bear interest at the rate of
1.25% per month (prorated for partial months) until paid in full. Until
the Company pays such unpaid Redemption Price in full to each Holder,
Holders of the Series A Preferred Shares then outstanding, including
shares of Series A Preferred Shares submitted for redemption pursuant to
this Section 3 and for which the applicable Redemption Price has not been
paid, shall have the option (the "VOID REDEMPTION OPTION") to, in lieu of
redemption, require the Company to promptly return to each Holder all of
the Series A Preferred Shares that were submitted for redemption by such
Holder under this Section 3 and for which the applicable Redemption Price
has not been paid, by sending written notice thereof to the Company via
facsimile or by courier (the "VOID REDEMPTION NOTICE"). Upon the Company's
receipt of such Void Redemption Notice and prior to payment of the full
applicable Redemption Price to each Holder, (i) the Notice of Voluntary
Redemption Upon Major Transaction or Notice of Voluntary Redemption Upon
Triggering Event, as
-14-
<PAGE> 16
applicable, shall be null and void with respect to those Series A
Preferred Shares submitted for redemption and for which the applicable
Redemption Price has not been paid, and (ii) the Company shall immediately
return any Series A Preferred Shares submitted to the Company by each such
Holder for redemption under this Section 3(f) and for which the applicable
Redemption Price has not been paid. Notwithstanding the foregoing, in the
event of a dispute as to the determination of the arithmetic calculation
of the applicable Redemption Price, such dispute shall be resolved
pursuant to the provisions set forth in Section 2(e)(iii) above. Payments
provided for in this Section 3 in connection with a Redemption Upon a
Major Transaction shall have priority to payments to other stockholders in
connection with a Major Transaction.
(g) Redemption Upon Reaching Common Share Limit. In addition
to all other rights of the Holder contained herein (including, without
limitation, the provisions of Section 2), after the Common Share Limit has
been reached (unless it is no longer applicable as contemplated by Section
2(a)), the Company shall redeem all of the Series A Preferred Shares then
outstanding, and pay each Holder in cash an amount per Series A Preferred
Share equal to the greater of (i) 130% of the Stated Value plus accrued
and unpaid dividends to the date of such redemption and (ii) the product
of (A) the aggregate number of shares of Common Stock for which such
Holder would be entitled to receive if the Series A Preferred Shares that
it holds would be converted as of the date that the Common Share Limit was
reached and (B) the Average Market Price ("COMMON SHARE LIMIT REDEMPTION
PRICE"). The provisions of this Section 3(g) shall not be deemed to
restrict the ability of the Holder to convert Series A Preferred Shares
pursuant to the provisions of Section 2 at any time and from time to time
before the Common Share Limit is reached or if the Common Share Limit is
no longer applicable.
(4) Inability to Fully Convert.
(a) Holder's Option if Company Cannot Fully Convert. If, upon
the Company's receipt of a Conversion Notice, the Company cannot issue
shares of Common Stock registered for resale under the Registration
Statement for any reason, including, without limitation, because the
Company (x) does not have a sufficient number of shares of Common Stock
authorized and available, (y) is otherwise prohibited by applicable law or
by the rules or regulations of any stock exchange, interdealer quotation
system or other self-regulatory organization with jurisdiction over the
Company or its securities, including without limitation the NYSE, from
issuing all of the Common Stock which is to be issued to a Holder pursuant
to a Conversion Notice or (z) fails to have a sufficient number of shares
of Common Stock registered for resale under the Registration Statement,
then the Company shall issue as many shares of Common Stock as it is able
to issue in accordance with such Holder's Conversion Notice and pursuant
to Section 2(e) above and, with respect to the unconverted Series A
Preferred Shares, the Holder, solely at such Holder's option, can elect to
(unless the Company issues and delivers the Common Stock underlying the
unconverted Series A Preferred Shares prior to the Holder's election
hereunder, in which case such Holder shall only be entitled to receive Buy
In Actual Damages under Section 2(e)(v)):
-15-
<PAGE> 17
(i) require the Company to redeem from such Holder those
Series A Preferred Shares for which the Company is unable to issue Common
Stock in accordance with such Holder's Conversion Notice ("DEFAULT
REDEMPTION") at a price per Series A Preferred Share equal to the
Triggering Event Redemption Price as of such Conversion Date;
(ii) if the Company's inability to fully convert Series
A Preferred Shares is pursuant to Section 4(a)(i)(z) above, require the
Company to issue restricted shares of Common Stock in accordance with such
Holder's Conversion Notice pursuant to Section 2(e) above;
(iii) void its Conversion Notice and retain or have
retained, as the case may be, the nonconverted Series A Preferred Shares
that were to be converted pursuant to such Holder's Conversion Notice; or
(iv) if the Company's inability to fully convert Series
A Preferred Shares is pursuant to the rules and regulations described in
Section 4(a)(i)(y) above, require the Company to issue shares of Common
Stock in accordance with such Holder's Conversion Notice and pursuant to
Section 2(e) above at a Conversion Price equal to the Average Market Price
of the Common Stock on the date preceding such Holder's Notice in Response
to Inability to Convert (as defined below).
(b) Mechanics of Fulfilling Holder's Election. The Company
shall immediately send via facsimile to a Holder of Series A Preferred
Shares, upon receipt of a facsimile copy of a Conversion Notice from such
Holder which cannot be fully satisfied as described in Section 4(a) above,
a notice of the Company's inability to fully satisfy such Holder's
Conversion Notice (the "INABILITY TO FULLY CONVERT NOTICE"). Such
Inability to Fully Convert Notice shall indicate (i) the reason why the
Company is unable to fully satisfy such Holder's Conversion Notice, (ii)
the number of Series A Preferred Shares which cannot be converted and
(iii) the Default Redemption Price. Such Holder must within five (5)
business days of receipt of such Inability to Fully Convert Notice deliver
written notice via facsimile to the Company ("NOTICE IN RESPONSE TO
INABILITY TO CONVERT") of its election pursuant to Section 4(a) above.
(c) Payment of Default Redemption Price. If such Holder shall
elect to have its shares redeemed pursuant to Section 4(a)(i) above, the
Company shall pay the Default Redemption Price in cash to such Holder
within ten (10) days of the Company's receipt of the Holder's Notice in
Response to Inability to Convert. If the Company shall fail to pay the
Default Redemption Price to such Holder on a timely basis as described in
this Section 4(c) (other than pursuant to a dispute as to the
determination of the arithmetic calculation of the Default Redemption
Price), in addition to any remedy such Holder of Series A Preferred Shares
may have under this Statement and the Securities Purchase Agreement, such
unpaid amount shall bear interest at the rate of 1.25% per month (prorated
for partial months) until paid in full. Until the full Default Redemption
Price is paid in full to such Holder, such Holder may void the Default
Redemption with respect to those Series A Preferred Shares for which the
full Default Redemption Price has not been
-16-
<PAGE> 18
paid and receive back such Series A Preferred Shares. Notwithstanding the
foregoing, if the Company fails to pay the Default Redemption Price within
such ten (10) day time period due to a dispute as to the determination of
the arithmetic calculation of the Default Redemption Price, such dispute
shall be resolved pursuant to Section 2(e)(iii) above.
(d) Pro-rata Conversion and Redemption. In the event the
Company receives a Conversion Notice from more than one Holder on the same
day and the Company can convert and redeem some, but not all, of the
Series A Preferred Shares pursuant to this Section 4, the Company shall
convert and redeem from each Holder electing to have Series A Preferred
Shares converted and redeemed at such time an amount equal to such
Holder's pro rata amount (based on the number of Series A Preferred Shares
held by such Holder relative to the number of Series A Preferred Shares
outstanding) of all Series A Preferred Shares being converted and redeemed
at such time.
(5) Reissuance of Certificates. In the event of a conversion or
redemption pursuant to this Statement of less than all of the Series A
Preferred Shares represented by a particular Preferred Stock Certificate,
the Company shall promptly cause to be issued and delivered to the Holder
of such Series A Preferred Shares a preferred stock certificate
representing the remaining Series A Preferred Shares which have not been
so converted or redeemed.
(6) Reservation of Shares. The Company shall, so long as any of the
Series A Preferred Shares are outstanding, reserve and keep available out
of its authorized and unissued Common Stock, solely for the purpose of
effecting the conversion of the Series A Preferred Shares, such number of
shares of Common Stock as shall from time to time be sufficient to effect
the conversion of all of the Series A Preferred Shares then outstanding;
provided, that the number of shares of Common Stock so reserved shall at
no time be less than 200% of the aggregate number of shares of Common
Stock for which (a) the Series A Preferred Shares are at any time
convertible and (b) the dividends on the Series A Preferred Shares
pursuant to Section 7 hereof are payable; provided, further, that such
shares of Common Stock so reserved shall be allocated for issuance upon
conversion of Series A Preferred Shares pro rata among the Holders of
Series A Preferred Shares based on the number of Series A Preferred Shares
held by such Holder relative to the total number of authorized Series A
Preferred Shares.
(7) Dividends. The Holders of the outstanding Series A Preferred
Shares shall be entitled to receive cumulative dividends at the rate of 6%
per annum of the Stated Value per Series A Preferred Share. Such dividends
shall be payable quarterly in arrears on the last day of March, June,
September and December of each year, commencing on June 30, 1999 (each of
such dates being a "DIVIDEND PAYMENT DATE"). Such dividend shall accrue on
each Series A Preferred Share from the Initial Issuance Date (with
appropriate proration for any partial dividend period) and shall accrue
from day-to-day, whether or not earned or declared. Dividend payments made
with respect to Series A Preferred Shares may be made, subject to the
terms hereof, in cash or, at the option and in the sole discretion of the
Board of Directors of the Company, in full or in part, by issuing validly
issued, fully paid and nonassessable shares of Common Stock; provided that
the
-17-
<PAGE> 19
shares of Common Stock so issued are covered by an effective Registration
Statement or may otherwise be sold without limitation in accordance with
Rule 144(k) under the 1933 Act. The number of shares of Common Stock to be
so issued shall be equal to the quotient of (a) the amount of the dividend
to be paid on such Dividend Payment Date which is not being paid in cash,
divided by (b) 90% times the Average Market Price. If the Board of
Directors shall elect to pay any part of a dividend by such issuance of
Common Stock, the Company shall provide notice (the "COMMON STOCK ELECTION
NOTICE") to such effect to the Holders of the Series A Preferred Shares by
no later than thirty (30) days prior to the applicable Dividend Payment
Date. If the Company shall not provide a Common Stock Election Notice, the
applicable dividend shall be paid in cash. The issuance of such Common
Stock (plus the amount of cash dividend, if any, paid together therewith)
shall constitute full payment of such dividend. In no event shall an
election by the Board of Directors to pay dividends, in full or in part,
in cash on any Dividend Payment Dates preclude the Board of Directors from
electing any other available alternative in respect of all or any portion
of any subsequent dividend.
(8) Liquidation, Dissolution, Winding-Up. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
Company, the Holders of the Series A Preferred Shares shall be entitled to
receive in cash out of the assets of the Company, whether from capital or
from earnings available for distribution to its stockholders (the
"PREFERRED FUNDS"), before any amount shall be paid to the holders of any
of the capital stock of the Company of any class junior in rank to the
Series A Preferred Shares in respect of the preferences as to the
distributions and payments on the liquidation, dissolution and winding up
of the Company, an amount per Series A Preferred Share equal to the
product of (x) 110% and (y) the sum of (i) the Stated Value and (ii) all
accrued and unpaid dividends thereon (such sum being referred to as the
"LIQUIDATION VALUE"); provided, that if the Preferred Funds are
insufficient to pay the full amount due to the holders of Series A
Preferred Shares and holders of shares of other classes or series of
preferred stock of the Company that are of equal rank with the Series A
Preferred Shares as to payments of Preferred Funds (the "PARI PASSU
SHARES"), then each holder of Series A Preferred Shares and Pari Passu
Shares shall receive a percentage of the Preferred Funds equal to the full
amount of Preferred Funds payable to such holder as a liquidation
preference, in accordance with their respective Statement, as a percentage
of the full amount of Preferred Funds payable to all holders of Series A
Preferred Shares and Pari Passu Shares. The purchase or redemption by the
Company of stock of any class, in any manner permitted by law, shall not,
for the purposes hereof, be regarded as a liquidation, dissolution or
winding up of the Company. Neither the consolidation or merger of the
Company with or into any other Person, nor the sale or transfer by the
Company of less than substantially all of its assets, shall, for the
purposes hereof, be deemed to be a liquidation, dissolution or winding up
of the Company.
(9) Preferred Rank. All shares of Common Stock of the Company shall
be of junior rank to all Series A Preferred Shares in respect to the
preferences as to distributions and payments upon the liquidation,
dissolution and winding up of the Company. All other shares of preferred
stock shall not be of senior rank to all Series A Preferred Shares in
respect to the preferences as to distributions and payments upon the
-18-
<PAGE> 20
liquidation, dissolution and winding up of the Company. As long as the
Series A Preferred Shares initially issued remain outstanding, then
without the prior express written consent of the holders of not less than
two-thirds (2/3) of the then outstanding Series A Preferred Shares, the
Company shall not hereafter authorize or issue additional or other capital
stock that is of senior rank or rank pari passu to the Series A Preferred
Shares in respect of the preferences as to distributions and payments upon
the liquidation, dissolution and winding up of the Company. Without the
prior express written consent of the holders of not less than two-thirds
(2/3) of the then outstanding Series A Preferred Shares, the Company shall
not hereafter authorize or make any amendment to the Company's Articles of
Incorporation or bylaws, or file any resolution of the board of directors
of the Company with the Arizona Secretary of State containing any
provisions, which would adversely affect or otherwise impair the rights or
relative priority of the holders of the Series A Preferred Shares relative
to the holders of the Common Stock or the holders of any other class of
capital stock. In the event of the merger or consolidation of the Company
with or into another corporation, the Series A Preferred Shares shall
maintain their relative powers, designations and preferences provided for
herein and no merger shall result inconsistent therewith.
(10) Restriction on Redemption and Cash Dividends with respect to
Other Capital Stock. Until all of the Series A Preferred Shares have been
converted or redeemed as provided herein, the Company shall not, directly
or indirectly, declare or pay any cash dividend or distribution on its
Common Stock without the prior express written consent of the holders of
not less than two-thirds (2/3) of the then outstanding Series A Preferred
Shares.
(11) Voting Rights and Related Matters.
(a) The Holders of the outstanding Series A Preferred Shares
shall have no voting rights, except as required by law, including, but not
limited to, the laws of the State of Arizona, and as expressly provided in
this Statement.
(b) The affirmative vote at a meeting duly called for such
purpose or the written consent without a meeting, of the holders of not
less than two-thirds (2/3) of the then outstanding Series A Preferred
Shares, shall be required for any change to this Statement or the
Company's Articles of Incorporation which would amend, alter, change or
repeal any of the powers, designations, preferences and rights of the
Series A Preferred Shares.
(12) Lost or Stolen Certificates. Upon receipt by the Company of
evidence satisfactory to the Company of the loss, theft, destruction or
mutilation of any Preferred Stock Certificates representing the Series A
Preferred Shares, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the holder to the Company and, in the case
of mutilation, upon surrender and cancellation of the Preferred Stock
Certificate(s), the Company shall execute and deliver new Preferred Stock
Certificate(s) of like tenor and date; provided, however, the Company
shall not be obligated to re-issue
-19-
<PAGE> 21
Preferred Stock Certificates if the holder contemporaneously requests the
Company to convert such Series A Preferred Shares into Common Stock.
-20-
<PAGE> 22
IN WITNESS WHEREOF, the Company has caused this Statement to be
signed, as of the 24 day of March, 1999.
SIMULA, INC.
By: /s/ Donald W. Townsend
_________________________________
Name: Donald W. Townsend
Its: President
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<PAGE> 23
EXHIBIT I
SIMULA, INC.
CONVERSION NOTICE
Reference is made to the Statement Pursuant to Section 10-602 of the Arizona
Revised Statutes of Simula, Inc. (the "CERTIFICATE OF DESIGNATIONS"). In
accordance with and pursuant to the Certificate of Designations, the undersigned
hereby elects to convert the number of shares of Series A Convertible Preferred
Stock, par value $.05 per share (the "SERIES A PREFERRED SHARES"), of Simula,
Inc., an Arizona corporation (the "COMPANY"), indicated below into shares of
Common Stock, par value $.01 per share (the "COMMON STOCK"), of the Company, by
tendering the stock certificate(s) representing the share(s) of Series A
Preferred Shares specified below as of the date specified below.
Date of Conversion:
---------------------------------------
Number of Series A
Preferred Shares to be converted:
---------------------------------------
Stock certificate no(s). of Series A
Preferred Shares to be converted:
---------------------------------------
Please confirm the following information:
Conversion Price:
---------------------------------------
Number of shares of Common Stock
to be issued:
---------------------------------------
Please issue and deliver the Common Stock and, if applicable, any check drawn on
an account of the Company into which the Series A Preferred Shares are being
converted in the following name and to the following address:
Issue to:
---------------------------------------
---------------------------------------
---------------------------------------
---------------------------------------
---------------------------------------
Facsimile Number:
---------------------------------------
Authorization:
---------------------------------------
By:
------------------------------------
Title:
---------------------------------
Dated:
---------------------------------------
<PAGE> 1
Exhibit 10.31
SECOND MODIFICATION AGREEMENT
BY THIS SECOND MODIFICATION AGREEMENT (the "Agreement"), made and entered
into as of the 28th day of April, 1999, BANK ONE, ARIZONA, NA, a national
banking association, as administrative agent for the Banks (as hereinafter
defined) (the "Administrative Agent"), and SIMULA, INC., an Arizona corporation
(the "Company"), all present and future Subsidiaries of the Company (with the
Company, the "Borrower"), in consideration of the mutual covenants herein
contained and other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, hereby confirm and agree as follows:
RECITALS:
A. Borrower, the Administrative Agent, the Issuing Bank and the "Banks"
named therein entered into that Senior Credit Agreement dated November 6, 1998
to provide financial accommodations to the Borrower as provided therein (as
modified from time to time, including without limitation by that Modification
Agreement dated as of February 12, 1999, the "Senior Credit Agreement").
B. Borrower and the Administrative Agent, with the consent of the Banks
and the Issuing Bank, desire to modify the Senior Credit Agreement as set forth
herein.
C. All undefined capitalized terms used herein shall have the meaning
given them in the Senior Credit Agreement.
AGREEMENT:
SECTION 1. ACCURACY OF RECITALS.
Borrower acknowledges the accuracy of the Recitals.
SECTION 2. MODIFICATIONS OF LOAN DOCUMENTS; OTHER AGREEMENTS.
2.1 The following definitions in Section 1.1 of the Senior Credit
Agreement are hereby amended to read as follows:
"RLC Adjustment Date" means the earliest of (i) July 31, 1999, (ii)
the Discontinued Operations Sale Date, or (iii) the date on which the
aggregate outstanding principal balance of the RLC is reduced to a balance
below $20,000,000.00 by Borrower from funds obtained by it from a junior
capital source after the date of the Second Modification Agreement between
the Borrower and the Administrative Agent.
<PAGE> 2
"RLC Commitment" means Twenty-Three Million And No/100 Dollars
($23,000,000.00) until the RLC Adjustment Date, after which it means
Twenty Million And No/100 Dollars ($20,000,000.00).
"Rail Credit Fee": See Section 3.2(e).
2.2 Section 7.20 of the Senior Credit Agreement is hereby amended to read
as follows:
7.20 Building Sale. The building located at 10016 South 51st Street,
Phoenix, Arizona shall be sold no later than June 30, 1999. As a result of
such sale, at least $2,000,000 of such sale proceeds shall be available
for, and shall be applied to, the repayment of the Loans, first to the
extent applicable the RLC and thereafter to the other Loans.
2.3 Article 7 of the Senior Credit Agreement is hereby amended by the
addition of the following section:
7.21 Junior Capital Funds. Any future funds obtained from a junior
capital source shall be applied by the Company to the repayment of the
Loans, first to the extent applicable the RLC, second to the extent
applicable the Term B Loan and third to the extent applicable the Term A
Loan.
2.4 Schedule 1.1 of the Senior Credit Agreement is hereby amended to read
as attached hereto.
2.5 The reference to "$26,000,000.00" in Section 2(a) of each Security
Agreement is hereby amended to read "$23,000,000.00."
2.6 Each of the Loan Documents is modified to provide that it shall be a
default or an event of default thereunder if Borrower shall fail to comply with
any of the covenants of Borrower herein or if any representation or warranty by
Borrower herein or by any guarantor in any related Consent and Agreement of
Guarantors is materially incomplete, incorrect, or misleading as of the date
hereof.
2.7 Each reference in the Credit Documents to any of the Credit Documents
is hereby amended to be a reference to such document as modified herein.
SECTION 3. RATIFICATION OF CREDIT DOCUMENTS AND COLLATERAL.
The Credit Documents are ratified and affirmed by Borrower and shall
remain in full force and effect as modified herein. Any property or rights to or
interests in property granted as security in the Credit Documents shall remain
as security for the Loans and the obligations of Borrower in the Credit
Documents.
-2-
<PAGE> 3
SECTION 4. BORROWER REPRESENTATIONS AND WARRANTIES.
Company and each Co-Borrower to the extent applicable represents and
warrants to the Banks:
4.1 No default or event of default under any of the Credit Documents as
modified herein, nor any event, that, with the giving of notice or the passage
of time or both, would be a default or an event of default under the Credit
Documents as modified herein has occurred and is continuing.
4.2 There has been no material adverse change in the financial condition
of Borrower or any other person whose financial statement has been delivered to
the Banks in connection with the Loans from the most recent financial statement
received by the Banks.
4.3 Each and all representations and warranties of Borrower in the Credit
Documents are accurate on the date hereof.
4.4 Borrower has no claims, counterclaims, defenses, or set-offs with
respect to the Loans or the Credit Documents as modified herein.
4.5 The Credit Documents as modified herein are the legal, valid, and
binding obligation of Borrower, enforceable against Borrower in accordance with
their terms.
4.6 Borrower is validly existing under the laws of the State of its
formation or organization and has the requisite power and authority to execute
and deliver this Agreement and to perform the Credit Documents as modified
herein. The execution and delivery of this Agreement and the performance of the
Credit Documents as modified herein have been duly authorized by all requisite
action by or on behalf of Borrower. This Agreement has been duly executed and
delivered on behalf of Borrower.
SECTION 5. BORROWER COVENANTS.
Borrower covenants with the Banks:
5.1 Borrower shall execute, deliver, and provide to the Administrative
Agent such additional agreements, documents, and instruments as reasonably
required by the Banks to effectuate the intent of this Agreement.
5.2 Borrower fully, finally, and absolutely and forever releases and
discharges the Administrative Agent and the Banks and their present and former
directors, shareholders, officers, employees, agents, representatives,
successors and assigns, and their separate and respective heirs, personal
representatives, successors and assigns, from any and all actions, causes of
action, claims, debts, damages, demands, liabilities, obligations, and suits, of
whatever kind or nature, in law or equity of Borrower, whether now known or
unknown to Borrower, and whether contingent or matured, (i) in respect of the
Loans, the Credit Documents, or the actions or omissions of the
-3-
<PAGE> 4
Administrative Agent or the Banks in respect of the Loans or the Credit
Documents and (ii) arising from events occurring prior to the date of this
Agreement.
SECTION 6. CONDITIONS PRECEDENT.
The agreements of the Banks and the Administrative Agent and the
modifications contained herein shall not be binding upon the Banks until the
Banks have executed and delivered this Agreement and the Administrative Agent
has received, at Borrower's expense, all of the following, all of which shall be
in form and content satisfactory to the Administrative Agent and shall be
subject to approval by the Administrative Agent:
6.1 An original of this Agreement fully executed by the Borrower and all
Guarantors;
6.2 Such resolutions or authorizations and such other documents as the
Administrative Agent may require relating to the existence and good standing of
each Borrower and Guarantor the authority of any person executing this Agreement
or other documents on behalf of each Borrower and Guarantor; and
6.3 Payment of all the internal and external costs and expenses incurred
by the Administrative Agent and the Banks in connection with this Agreement
(including, without limitation, inside and outside attorneys, appraisal,
appraisal review, processing, title, filing, and recording costs, expenses, and
fees).
SECTION 7. INTEGRATION, ENTIRE AGREEMENT, CHANGE, DISCHARGE, TERMINATION, OR
WAIVER.
The Credit Documents as modified herein contain the complete understanding
and agreement of Borrower and the Banks in respect of the Loans and supersede
all prior representations, warranties, agreements, arrangements, understandings,
and negotiations. No provision of the Credit Documents as modified herein may be
changed, discharged, supplemented, terminated, or waived except in a writing
signed by the parties thereto.
SECTION 8. BINDING EFFECT.
The Credit Documents as modified herein shall be binding upon and shall
inure to the benefit of Borrower and the Banks and their successors and assigns
and the executors, legal administrators, personal representatives, heirs,
devisees, and beneficiaries of Borrower, provided, however, Borrower may not
assign any of its right or delegate any of its obligation under the Credit
Documents and any purported assignment or delegation shall be void.
SECTION 9. CHOICE OF LAW.
This Agreement shall be governed by and construed in accordance with the
laws of the State of Arizona, without giving effect to conflicts of law
principles.
-4-
<PAGE> 5
SECTION 10. COUNTERPART EXECUTION.
This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original and all of which together shall constitute one and
the same document. Signature pages may be detached from the counterparts and
attached to a single copy of this Agreement to physically form one document.
DATED as of the date first above stated.
SIMULA, INC., an Arizona corporation
By: /s/ Donald Townsend
------------------------------------------
Name: Donald Townsend
Its: Treasurer
COMPANY
SIMULA SAFETY SYSTEMS, INC., formerly
known as Simula Government Products, Inc., an
Arizona corporation
By: /s/ Donald Townsend
------------------------------------------
Name: Donald Townsend
Its: Assistant Treasurer
SIMULA AUTOMOTIVE SAFETY DEVICES,
INC., an Arizona corporation, a/k/a ASD-Simula
By: /s/ Donald Townsend
------------------------------------------
Name: Donald Townsend
Its: Treasurer
-5-
<PAGE> 6
SIMULA TRANSPORTATION EQUIPMENT
CORPORATION, an Arizona corporation
By: /s/ Donald Townsend
-----------------------------------------
Name: Donald Townsend
Its: Assistant Treasurer
AIRLINE INTERIORS, INC., an Arizona
corporation
By: /s/ Donald Townsend
-----------------------------------------
Name: Donald Townsend
Its: Assistant Treasurer
ARTCRAFT INDUSTRIES CORP., an Arizona
corporation
By: /s/ Donald Townsend
-----------------------------------------
Name: Donald Townsend
Its: Assistant Treasurer
COACH AND CAR EQUIPMENT
CORPORATION, an Arizona corporation
By: /s/ Donald Townsend
-----------------------------------------
Name: Donald Townsend
Its: Assistant Treasurer
-6-
<PAGE> 7
VIATECH, INC., a Delaware corporation
By: /s/ Donald Townsend
-----------------------------------------
Name: Donald Townsend
Its: Assistant Treasurer
SIMULA TECHNOLOGIES, INC., an Arizona
corporation
By: /s/ Donald Townsend
-----------------------------------------
Name: Donald Townsend
Its: Treasurer
SIMULA AUTOMOTIVE SAFETY DEVICES
LIMITED, a company organized under the laws of
the United Kingdom
By: /s/ Donald Townsend
-----------------------------------------
Name: Donald Townsend
Its:
-----------------------------------------
INTERNATIONAL CENTER FOR SAFETY
EDUCATION, INC., an Arizona corporation
By: /s/ Donald Townsend
-----------------------------------------
Name: Donald Townsend
Its: Treasurer
-7-
<PAGE> 8
INTAERO, LTD., an Arizona corporation
By: /s/ Donald Townsend
-----------------------------------------
Name: Donald Townsend
Its: Assistant Treasurer
CO-BORROWERS
BANK ONE, ARIZONA, NA, a national banking
association
By: /s/ Steve Reinhart
-----------------------------------------
Name: Steve Reinhart
Title: Vice President
ADMINISTRATIVE AGENT
-8-
<PAGE> 9
SCHEDULE 1.1
PRO RATA SHARE AND NOTICE ADDRESS OF EACH BANK
<TABLE>
<CAPTION>
Pro Rata Share: Bank One Imperial
- --------------- -------- --------
<S> <C> <C>
RLC:
If RLC Commitment is $20,000,000: $12,000,000 $8,000,000
If RLC Commitment is $23,000,000: $15,000,000 $8,000,000
Term A Loan $ 5,000,000 0
Term B Loan $ 2,500,000 0
</TABLE>
Notice Address:
Bank One: See Section 10.4
Imperial: Imperial Bank
400 East Van Buren
Suite 900
Phoenix, Arizona 85004
Attention: Kevin Halloran
Telecopier: (602) 261-7881
With a copy to: Imperial Bank
9920 South La Cienega Boulevard
Suite 636
Inglewood, California 90301
Attention: General Counsel
Telecopier: (310) 417-5695
<PAGE> 1
EXHIBIT 10.32
EMPLOYMENT AGREEMENT
THIS AGREEMENT is by and between Simula, Inc., an Arizona corporation (the
"Company") and James C. Dodd (the "Executive"), dated effective as of March 2,
1999 (the "Effective Date").
BACKGROUND
The Board of Directors of the Company (the "Board"), has determined that
it is in the best interests of the Company and its shareholders to assure that
the Company will have the continued employment and dedication of the Executive.
The Board has further determined that it is desirable to provide the
Executive with compensation and benefits terms which adequately compensate the
Executive for the services he renders to the Company, and, to ensure that such
compensation and benefits are consistent with those of like executives of other
public companies.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
AGREEMENT
1. EMPLOYMENT PERIOD. The Company hereby agrees to continue the Executive
in its employ, and the Executive hereby agrees to remain in the employ of the
Company subject to the terms and conditions of this Agreement, for the period
commencing on the Effective Date and ending on the first anniversary of such
date (the "Employment Period"). If the relationship is satisfactory to the
Company, and unless earlier terminated by the Company for Cause (as defined in
Section 3.3 below) or by the Executive for Good Reason (as defined in Section
3.3 below), on the last day of the one year anniversary date, commencing one
year after the Effective Date, this Agreement shall be automatically renewed,
under the same terms and conditions, for a three year term, and unless
terminated for cause or good reason thereafter as provided above, on the last
day of each successive one year anniversary date, this Agreement shall be
automatically renewed for continuous successive three year terms.
2. TERMS OF EMPLOYMENT.
2.1 Position and Duties.
(a) During the Employment Period, the Executive shall be
employed in an executive capacity in the positions of Executive Vice
President, Chief Financial Officer, and Treasurer of the Company at
Company headquarters in Phoenix, Arizona;
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(b) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the
Executive agrees to devote full attention and time during normal
business hours to the business and affairs of the Company and to use
the Executive's best efforts to perform faithfully and efficiently
such responsibilities.
2.2 Compensation.
(a) Base Salary. The Executive shall receive an initial annual
base salary ("Initial Base Salary") of ONE HUNDRED SEVENTY THOUSAND
DOLLARS ($170,000). Thereafter, the Executive's salary and total
compensation shall be reviewed on a periodic basis by the
Compensation Committee of the Board to determine what, if any,
increases shall be made thereto. The base salary payable to the
Executive in any given year, including the Initial Base Salary, is
hereafter referred to as the "Annual Base Salary." Any increase in
Annual Base Salary shall not serve to limit or reduce any other
obligation to the Executive under this Agreement. Annual Base Salary
shall not be reduced after any increase and the term Annual Base
Salary as utilized in this Agreement shall refer to Annual Base
Salary as increased. The Annual Base Salary shall in all instances
be payable in twenty-six (26) equal bi-weekly installments.
(b) Stock Option Grant; Annual Bonus or Option Plans.
Executive will be granted stock options to purchase 150,000 shares
of the Company's Common Stock, at the price and according to the
vesting schedule set out in the Options Agreements attached hereto
as Exhibit A. Thereafter, in addition to Annual Base Salary, the
Executive shall be eligible to participate in any applicable Company
bonus plan or program or stock option plan or program in effect
immediately prior to the Effective Date, or put into effect by the
Board at any time thereafter.
(c) Incentive, Savings and Retirement Plans. During the
Employment Period, the Executive shall be entitled to participate in
all incentive, savings and retirement plans, practices, policies and
programs applicable generally to other executives of the Company,
but in no event shall such plans, practices, policies and programs
provide the Executive with incentive opportunities, savings
opportunities and retirement benefit opportunities, in each case,
less favorable, in the aggregate, than the most favorable of those
provided by the Company to other executives of the Company; provided
however, the dollar value awarded Executive in the reasonable
discretion of management need not be equal to that awarded to all
other executives.
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(d) Welfare Benefit Plans. During the Employment Period, the
Executive and/or the Executive's family, as the case may be, shall
be eligible for participation in and shall receive all benefits
under welfare benefit plans, practices, policies and programs
provided by the Company (including, without limitation, medical,
prescription, dental, disability, salary continuance, employee life,
group life, accidental death and travel accident insurance plans and
programs) to the extent applicable generally to other executives of
the Company, but in no event shall such plans, practices, policies
and programs provide the Executive with benefits which are less
favorable, in the aggregate, than the most favorable of such plans,
practices, policies and programs provided generally at any time
after the Effective Date to other executives of the Company.
(e) Expenses. During the Employment Period, the Executive
shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred by the Executive in the conduct of Company
business.
(f) Vacation. During the Employment Period, the Executive
shall be entitled to paid vacation in accordance with the plans,
policies, programs and practices of the Company in all respects as
in effect for the Executive during the 120-day period immediately
preceding the Effective Date or, if more favorable to the Executive,
as in effect generally at any time thereafter with respect to other
executives of the Company.
3. TERMINATION OF EMPLOYMENT.
3.1 Death or Disability. The Executive's employment shall terminate
automatically upon the Executive's death during the Employment Period. If
the Company determines in good faith that any Disability of the Executive
has occurred during the Employment Period (pursuant to the definition of
Disability set forth below), it may give to the Executive written notice
in accordance with Section 10.2 of this Agreement of its intention to
terminate the Executive's employment. In such event, the Executive's
employment with the Company shall terminate effective on the 30th day
after receipt of such notice by the Executive (the "Disability Effective
Date"), provided that, within the 30 days after such receipt, the
Executive shall not have returned to full-time performance of the
Executive's duties. For purposes of this Agreement, "Disability" shall
mean the absence of the Executive from the Executive's duties with the
Company on a full-time basis for 180 consecutive business days as a result
of incapacity due to mental or physical illness certified by a physician
selected by the Company or its insurers and acceptable to the Executive or
the Executive's legal representative.
3.2 Cause. The Company may terminate the Executive's employment
during the Employment Period for Cause. For purposes of this Agreement,
"Cause"
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shall mean: (i) the willful and continued failure of the Executive to
perform substantially the Executive's duties with the Company or its
affiliates (other than any such failure resulting from incapacity due to
physical or mental illness), after a written demand for substantial
performance is delivered to the Executive by the Board which specifically
identifies the manner in which the Board believes that the Executive has
not substantially performed the Executive's duties, or (ii) the willful
engaging by the Executive in illegal conduct or gross misconduct which is
materially and demonstrably injurious to the Company. For purposes of this
provision, no act or failure to act, on the part of the Executive, shall
be considered "willful" unless it is done, or omitted to be done, by the
Executive in bad faith.
3.3 Good Reason. The Executive's employment may be terminated by the
Executive for Good Reason at any time within 90 days after the Executive
first has actual knowledge of the occurrence of such Good Reason. For
purposes of this Agreement, "Good Reason" shall mean:
(a) the assignment to the Executive of any duties that are not
of an executive nature, or any other action by the Company which
results in a material diminution in the Executive's position,
authority, duties or responsibilities, excluding for this purpose an
isolated, insubstantial and inadvertent action not taken in bad
faith and which is remedied by the Company promptly after receipt of
notice thereof given by the Executive;
(b) any failure by the Company to comply with any of the
provisions of Section 2.2 of this Agreement, other than an isolated,
insubstantial, and inadvertent failure not occurring in bad faith
and which is remedied by the Company promptly after receipt of
notice thereof given by the Executive;
(c) the Company's requiring the Executive, without the
Executive's consent and full agreement, to be based at any office or
position other than as provided in Section 2.1(a) hereof;
(d) any purported termination by the Company of the
Executive's employment otherwise than as expressly permitted by this
Agreement; or
(e) any failure by the Company to comply with and satisfy
Section 9.3 of this Agreement.
3.4 Notice of Termination. Any termination by the Company for Cause,
or by the Executive for Good Reason, shall be communicated by Notice of
Termination to the other party hereto given in accordance with Section
10.2 of this Agreement. For purposes of this Agreement, a "Notice of
Termination" means a written notice which:
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(a) indicates the specific termination provision in this
Agreement relied upon;
(b) to the extent applicable, sets forth in reasonable detail
the facts and circumstances claimed to provide a basis for
termination of the Executive's employment under the provision so
indicated; and
(c) if the Date of Termination (as defined below) is other
than the date of receipt of such notice, specifies the termination
date (which date shall be not more than thirty days after the giving
of such notice). The failure by the Executive or the Company to set
forth in the Notice of Termination any fact or circumstance which
contributes to a showing of Good Reason or Cause shall not waive any
right of the Executive or the Company, respectively, hereunder or
preclude the Executive or the Company, respectively, from asserting
such fact or circumstance in enforcing the Executive's or the
Company's rights hereunder.
3.5 Date of Termination. "Date of Termination" means:
(a) if the Executive's employment is terminated by the Company
for Cause, or by the Executive for Good Reason, the date of receipt
of the Notice of Termination or any later date specified therein, as
the case may be;
(b) if the Executive's employment is terminated by the Company
other than for Cause or Disability, the date on which the Company
notifies the Executive of such termination; and
(c) if the Executive's employment is terminated by reason of
death or Disability, the date of death of the Executive or the
Disability Effective Date, as the case may be.
4. OBLIGATIONS OF THE COMPANY UPON TERMINATION.
4.1 Good Reason; Other Than for Cause; Disability. If, during the
Employment Period, the Company shall terminate the Executive's employment
other than for Cause or Disability or the Executive shall terminate
employment for Good Reason, the Company shall pay to the Executive in a
lump sum in cash within thirty (30) days after the Date of Termination the
aggregate of the following amounts:
(a) The amount of Annual Base Salary compensation which would
have been payable to the Executive over the period then remaining
under this Agreement, as it may have been renewed as provided for in
Section 1 hereof;
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(b) Any declared and accrued, but as of then unpaid, bonus or
stock options grant (whether or not vested) to which the Execute
would have received but for such termination. Additionally, any
stock options owned or granted shall be deemed immediately vested,
not forfeitable, and shall be the property of Executive,
exerciseable according to their terms for the balance of the term of
years of the options;
(c) Any accrued vacation pay;
(d) Any amounts payable pursuant to the Company's Defined
Benefit Pension Plan, 401(k) plan, including such amounts which
would have accrued (whether or not vested) if the Executive's
employment had continued after the Date of Termination for the
period then remaining under this Agreement, as it may have been
renewed as provided for in Section 1 hereof;
(e) Any other amounts or benefits required to be paid or
provided or which the Executive is eligible to receive under any
plan, program, policy or practice or contract or agreement of the
Company (such other amounts and benefits shall be hereinafter
referred to as the "Other Benefits");
(f) For the remaining term of this Agreement, as it may have
been renewed pursuant to Section 1 hereof, or such longer period as
may be provided by the terms of the appropriate plan, program,
practice or policy, the Company shall continue benefits to the
Executive and/or the Executive's family at least equal to those
which would have been provided to them in accordance with the plans,
programs, practices and policies described in Section 2.2(d) of this
Agreement if the Executive's employment had not been terminated or,
if more favorable to the Executive, as in effect generally at any
time thereafter with respect to other executives of the Company and
their families, provided, however, that if the Executive becomes
re-employed with another employer and is eligible to receive medical
or other welfare benefits under another employer-provided plan, the
medical and other welfare benefits described herein shall be
secondary to those provided under such other plan during such
applicable period of eligibility, and for purposes of determining
eligibility (but not the time of commencement of benefits) of the
Executive for retiree benefits pursuant to such plans, practices,
programs and policies, the Executive shall be considered to have
remained employed for the remaining term of this Agreement, as it
may have been renewed pursuant to Section 1 hereof, and to have
retired on the last day of such period; and
(g) The Company shall, at its sole expense as incurred,
provide the Executive with out-placement services, the scope and
provider of which
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shall be selected by the Executive in the Executive's sole
discretion (but the total cost thereof shall not exceed $50,000).
4.2 Death. If the Executive's employment is terminated by reason of
the Executive's death during the Employment Period, this Agreement shall
terminate without further obligations to the Executive's legal
representatives under this Agreement, other than for payment of Death
Benefit Compensation under other contracts, if any, full vesting and
non-forfeiture of stock options granted to Executive, and the timely
payment or provision of Other Benefits. Such amounts shall be paid to the
Executive's estate or beneficiary, as applicable, in a lump sum in cash
within 30 days of the Date of Termination. With respect to the provision
of Other Benefits, the term Other Benefits as utilized in this Section 4.2
shall include, without limitation, and the Executive's estate and/or
beneficiaries shall be entitled to receive, benefits at least equal to the
most favorable benefits provided by the Company to the estates and
beneficiaries of other executives of the Company under such plans,
programs, practices and policies relating to death benefits, if any, as in
effect with respect to other executives and their beneficiaries at any
time during the 120-day period immediately preceding the Effective Date
or, if more favorable to the Executive's estate and/or the Executive's
beneficiaries, as in effect on the date of the Executive's death with
respect to other executives of the Company and their beneficiaries.
4.3 Disability. If the Executive's employment is terminated by
reason of the Executive's Disability under Section 3.1 during the
Employment Period, this Agreement shall terminate without further
obligations to the Executive, other than for the timely payment or
provision of (i) Base Salary and, (ii) accrued bonus through the
Termination Date, (iii) payment of pension, 401(k), and Other Benefits,
(iv) full vesting and non-forfeiture of stock options, and, (v) the
receipt of fully-paid Welfare Benefit Plans under Section 2.2(d) for the
balance of the term of this Agreement. In addition, Executive shall be
paid for the term of this Agreement at regular pay periods that amount
equal to the difference between his Annual Base Salary and the disability
insurance payment received by the disabled Executive under the Company's
disability insurance program. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 4.3 shall
include, and the Executive shall be entitled after the Disability
Effective Date to receive, disability and other benefits at least equal to
the most favorable of those generally provided by the Company to disabled
executives and/or their families in accordance with such plans, programs,
practices and policies relating to disability, if any, as in effect
generally with respect to other executives and their families at any time
during the 120-day period immediately preceding the Effective Date or, if
more favorable to the Executive and/or the Executive's family, as in
effect at any time thereafter generally with respect to other executives
of the Company and their families.
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4.4 Cause; Other than for Good Reason. If the Executive's employment
shall be terminated for Cause during the Employment Period, this Agreement
shall terminate without further obligations to the Executive other than
the obligation to pay to the Executive: (x) the Annual Base Salary through
the Date of Termination, (y) the amount of any compensation previously
deferred by the Executive, and (z) Other Benefits, in each case to the
extent therefore unpaid. If the Executive voluntarily terminates
employment during the Employment Period, excluding a termination for Good
Reason, this Agreement shall terminate without further obligations to the
Executive, other than for items (x), (y) and (z) of this paragraph,
accrued but unpaid vacation leave, and the timely payment or provision of
Other Benefits. In such case, all Accrued Obligations shall be paid to the
Executive in a lump sum in cash within 30 days of the Date of Termination.
5. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any plan, program,
policy or practice provided by the Company and for which the Executive may
qualify, nor, affect such rights as the Executive may have under any other
contract or agreement with the Company. Amounts which are vested benefits or
which the Executive is otherwise entitled to receive under any plan, policy,
practice or program of or any contract or agreement with the Company at or
subsequent to the Date of Termination shall be payable in accordance with such
plan, policy, practice or program or contract or agreement except as explicitly
modified by this Agreement. This Agreement shall not supersede any of the terms
or conditions of such other agreements. To the extent of any inconsistency in
these agreements, the agreements shall be interpreted and applied in the way to
confer upon the employee the greatest benefits. The agreements shall be read and
applied consistent with each other, but in the event of a conflict, the terms
most favorable to the employee will be applied from the various provisions of
the agreements in the aggregate.
6. FULL SETTLEMENT; LEGAL FEES. The Company's obligation to make the
payments provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive or others. In no event shall the Executive be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to the Executive under any of the provisions of this Agreement and except as
specifically provided in Section 4.1(f), such amounts shall not be reduced
whether or not the Executive obtains other employment. The Company agrees to pay
promptly as incurred, to the full extent permitted by law, all legal fees and
expenses which the Executive may reasonably incur as a result of any contest
(regardless of the outcome thereof) by the Company, the Executive or others of
the validity or enforceability of, or liability or entitlement under, any
provision of this Agreement or any guarantee of performance thereof (whether
such contest is between the Company and the Executive or between either of them
and any third party, and including as a result of any contest by the Executive
about the amount of any payment pursuant to this Agreement),
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plus in each case interest on any delayed payment at the applicable Federal rate
("Applicable Federal Rate") provided for in Section 7872(f)(2)(A) of the
Internal Revenue Code of 1986, as amended (the "Code").
7. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY.
7.1 Anything in this Agreement to the contrary notwithstanding, in
the event it shall be determined that any payment or distribution by the
Company to or for the benefit of the Executive (whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise, but determined without regard to any additional payments
required under this Section 7) (a "Payment") would be subject to the
excise tax imposed by Section 4999 of the Code or any corresponding
provisions of state or local tax laws, or any interest or penalties are
incurred by the Executive with respect to such excise tax (such excise
tax, together with any such interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), then the Executive shall be
entitled to receive an additional payment (a "Gross-Up Payment") in an
amount such that after payment by the Executive of all taxes (including
any interest or penalties imposed with respect to such taxes), including,
without limitation, any income or employment taxes (and any interest and
penalties imposed with respect thereto) and Excise Tax imposed upon the
Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments.
7.2 Subject to the provisions of Section 7.3, all determinations
required to be made under this Section 7, including whether and when a
Gross-Up Payment is required and the amount of such Gross-Up Payment and
the assumptions to be utilized in arriving at such determination, shall be
made by Deloitte & Touche LLP or such other certified public accounting
firm as may be designated by the Executive (the "Accounting Firm"), which
shall provide detailed supporting calculations both to the Company and the
Executive within 15 business days of the receipt of notice from the
Executive that there has been a Payment, or such earlier time as is
requested by the Company.
7.3 The Executive shall notify the Company in writing of any claim
by the Internal Revenue Service that, if successful, would require the
payment by the Company of the Gross-Up Payment. Such notification shall be
given as soon as practicable but no later than ten business days after the
Executive is informed in writing of such claim.
7.4 If, after the receipt by the Executive of an amount advanced by
the Company pursuant to Section 7.3, the Executive becomes entitled to
receive any refund with respect to such claim, the Executive shall
(subject to the Company's complying with the requirements of Section 7.3)
promptly pay to the Company the
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amount of such refund (together with any interest paid or credited thereon
after taxes applicable thereto).
8. CONFIDENTIAL INFORMATION; NONCOMPETITION.
8.1 Nondisclosure. The Executive shall hold in fiduciary capacity
for the benefit of the Company all secret, proprietary or confidential
information, knowledge or data relating to the Company and its businesses,
which shall have been obtained by the Executive during the Executive's
employment by the Company. During the period the Executive is employed
with the Company, and after termination of the Executive's employment with
the Company, the Executive shall not, without the prior written consent of
the Company or as may otherwise be required by law or legal process,
communicate or divulge any such information, knowledge or data to anyone
other than the Company and those designated by it. The restrictions set
forth in this Section 8 will not apply to information which is generally
known to the public or in the trade, unless such knowledge results from an
unauthorized disclosure by the Executive or representatives of the
Executive in violation of this Agreement. This exception will not affect
the application of any other provisions of this Agreement to such
information in accordance with the terms of such provision. All documents
and tangible things embodying or containing confidential information are
the Company's exclusive property. The Executive will protect the
confidentiality of their content and will return all copies, facsimiles
and specimens of them and any other form of confidential information in
the Executive's possession, custody or control to the Company before
leaving the employment with the Company.
8.2 Competition. During the term of the Executive's employment with
the Company, and for a period of eighteen (18) months thereafter (equal to
one-half of the total months of the term of this Agreement), the Executive
will not, directly or indirectly, engage, participate or invest in or be
employed by any business anywhere in the world which:
(a) Develops or manufactures products which are competitive
with or similar to products developed or manufactured by the
Company;
(b) Distributes, markets or otherwise sells products
manufactured by others which are competitive with or similar to
products distributed, marketed or sold by the Company; or
(c) Provides services which are competitive with or similar to
services provided by the Company, including, in each case, any
products or services the Company has under development or which are
the subject of active planning at any time during the term of the
Executive's employment. The foregoing restriction shall apply
regardless of the capacity in which the
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Executive engages or engaged, participates or participated, or
invests or invested in or is employed by a given business, whether
as owner, partner, shareholder, consultant, agent, employee,
co-venturer or otherwise. In addition, during the term of the
Executive's employment with the Company, and for a period of
eighteen (18) months thereafter, the Executive will not, directly or
indirectly, without the prior written consent of the Company, hire
or solicit for hire with any business any person who is employed by
the Company at such time or was employed by the Company within the
preceding eighteen (18) months. The provisions of this Section 8
shall not prevent the Executive from acquiring or holding publicly
traded stock or other publicly traded securities of a business, so
long as the Executive's ownership does not exceed ten percent (10%)
of the outstanding securities of such company of the same class as
those held by the Executive or from engaging in any activity or
having an ownership interest in any business that is reviewed by the
Board of Directors. The Executive understands that the restrictions
set out in this Section 8 are intended to protect the Company's
interest in its secret, proprietary or confidential information and
established customer relationships and goodwill, and agrees that
such restrictions are reasonable and appropriate for this purpose.
8.3 Damages. The Executive agrees that it would be difficult to
measure any damages caused to the Company which might result from any
breach by the Executive of the promises set forth in this Agreement, and
that in any event money damages would be an inadequate remedy for any such
breach. Accordingly, the Executive agrees that in the case of breach, or
proposed breach, of any portion of this Agreement, the Company shall be
entitled, in addition to all other remedies that it may have, to an
injunction or other appropriate equitable relief to restrain any such
breach without showing or proving any actual damage to the Company.
However, in no event shall an asserted violation of the provisions of this
Section 8 constitute a basis for deferring or withholding any amounts
otherwise payable to the Executive under this Agreement.
9. SUCCESSORS.
9.1 This Agreement is personal to the Executive and without the
prior written consent of the Company shall not be assigned by the
Executive otherwise than by will or the laws of descent and distribution.
This Agreement shall inure to the benefit of and be enforceable by the
Executive's legal representatives.
9.2 This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
9.3 The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the
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business and/or assets of the Company to assume expressly and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken
place. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which assumes and agrees to perform this Agreement by operation
of law, or otherwise.
10. MISCELLANEOUS.
10.1 This Agreement shall be governed by and construed in accordance
with the laws of the State of Arizona, without reference to principles of
conflict of laws. The captions of this Agreement are set forth for
convenience only and shall have no separate force or effect. This
Agreement may not be amended or modified otherwise than by a written
agreement executed by the parties hereto or their respective successors
and legal representatives.
10.2 All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive: James C. Dodd
2700 North Central Avenue
Suite 1000
Phoenix, Arizona 85004
If to the Company: Simula, Inc.
ATTN: Corporate Secretary
2700 North Central Avenue, Suite 1000
Phoenix, Arizona 85004
or to such other address as either party shall have furnished to the other
in writing in accordance herewith. Notice and communications shall be
effective when actually received by the addressee.
10.3 The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
10.4 The Company may withhold from any amounts payable under this
Agreement such Federal, state, local or foreign taxes as shall be required
to be withheld pursuant to any applicable law or regulation.
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10.5 The Executive's or the Company's failure to insist upon strict
compliance with any provision hereof or any other provision of this
Agreement or the failure to assert any right the Executive or the Company
may have hereunder, including, without limitation, the right of the
Executive to terminate employment for Good Reason pursuant to Section 3.3
of this Agreement, shall not be deemed to be a waiver of such provision or
right or any other provision or right of this Agreement.
IN WITNESS WHEREOF, pursuant to the authorization from its Compensation
Committee and Board of Directors, the Company has caused this Agreement to be
executed in its name on its behalf, as of the day and year first above written.
SIMULA, INC.
By /s/ Donald W. Townsend
---------------------------------
Title President
------------------------------
EXECUTIVE
/s/ James C. Dodd
------------------------------------
James C. Dodd
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EXHIBIT 10.33
SIMULA, INC.
CHANGE OF CONTROL
EMPLOYMENT AGREEMENT
Name of Employee (herein "Employee"): James C. Dodd
Position: Executive Vice President
Date: March 2, 1999
Termination Date: Termination of Employment
THIS AGREEMENT is entered into between Simula, Inc. and its controlled
affiliates ("Company" or "Employer"), and Employee for the following purposes
and upon the following conditions:
1. PURPOSE. In order to attract and retain key employees, the Company
believes it is necessary to provide for the fulfillment of the expectation of
long-term employment with the Company (i) by providing a financial benefit to
Employee in the case of employment termination after a Change of Control of the
Company, and to (ii) protect against employees' distraction or departure, to the
detriment of the Company, in the event of a proposed or pending Change of
Control transaction.
2. TERM. This Agreement shall be effective as of the date stated above and
shall terminate concurrently with the Employee's termination from employment
with the Company. This Agreement creates no obligation on behalf of the Company
other than as specified herein. In the event Employee terminates voluntarily or
involuntarily from the Company under any circumstances other than a Change of
Control, this Agreement shall confer no rights upon Employee.
3. CHANGE OF CONTROL. For purposes of this Agreement "Change of Control"
shall be deemed to have occurred when any of the following events occur:
(i) the direct or indirect acquisition by any person or related
group of persons (other than a trustee or other fiduciary holding
securities under an employee benefit plan of the Company) of beneficial
ownership (within the meaning of Rule 13-d-3 of the Securities Exchange
Act of 1934, as amended) of securities possessing in excess of 20% of the
total combined voting power of the Company's outstanding securities
<PAGE> 2
pursuant to a tender or exchange offer made directly to the Company's
stockholders or other transaction; (provided, however, during the one year
period from the date of this Agreement until March 2, 2000, this "in
excess of 20%" provision shall not pertain, nor be triggered by a sale or
other disposition of stock to a third party made by the Company's majority
shareholder, Stanley Desjardins. As of March 2, 2000, and thereafter, this
limitation shall be terminated and the acquisition of shares "in excess of
20%" shall apply as to any disposition whether by Desjardins, any other
holder(s), or the Company); or
(ii) a change in the composition of the Board of Directors over a
period of 36 consecutive months or less, such that a majority of the Board
members (rounded up to the next whole numbers) ceases, by reason of one or
more contested elections for Board membership, to be comprised of
individuals who either (A) have been Board members continuously since the
beginning of such period, or (B) have been elected or nominated for
election as Board members during such period by at least a majority of the
Board members described in clause (A) who were still in office at the time
such election or nomination was approved by the Board; or
(iii) a merger or consolidation approved by the stockholders of the
Company, other than 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) at least 80% of
the total voting power represented by voting securities of the Company or
such surviving entity outstanding immediately after such merger or
consolidation; or
(iv) The sale, transfer, or other disposition (in one transaction or
a series of transactions) of all or substantially all of the assets of the
Company approved by the stockholders or the complete liquidation or
dissolution of the Company approved by the stockholders.
4. COMPENSATION. Severance compensation ("Compensation") will be paid to
Employee in the event of a Change of Control where:
(i) Employee is terminated by the acquiring person or surviving
entity within one year of the effective date of the Change of Control; or
(ii) Employee voluntarily resigns from his position within a period
of 180 days after the effective date of the Change of Control.
Compensation shall be calculated and paid as follows:
(i) Employee's then current annual base salary, plus the equivalent
dollar value for one year of all benefits (including insurance, defined
benefit plan contributions by the Company in qualified and unqualified
plans, and similar benefits) multiplied by four (4);
2
<PAGE> 3
(ii) the dollar amount necessary for payment of all taxes on such
Compensation including, without limitation, all employment taxes, income
taxes and alternative minimum income taxes, if any, payable with respect
to a lump sum payment in that year, grossed up by an amount necessary to
pay all such taxes on the amounts paid under this subparagraph (ii), and
as further provided in Section 7; and
(iii) the Compensation shall be paid in a lump sum within ten (10)
days of the termination of employment.
5. STOCK OPTIONS. In the event of a Change of Control, in addition to the
Compensation set forth above:
(i) all unexercised stock purchase options in the name of Employee
on the effective date of the Change of Control shall be subject to
accelerated vesting and shall thereupon be deemed fully exercisable and
shall be exercised and paid for by the Employer, acquiring person, or
surviving entity, on behalf of Employee and the total number of shares of
Common Stock represented by the total number of options shall be fully
paid, nonassessable, and validly issued to Employee, without payment of
monetary consideration by Employee. Alternatively, the optionee may elect
in lieu of the receipt of shares, to relinquish his options with respect
to all or any of such shares and receive a payment equal to the price paid
for common share in such merger, tender offer, or similar transaction
multiplied by the number of common shares the optionee could have
purchased with the options;
(ii) in connection with Employee's receipt of the foregoing option
shares or consideration, Employer will pay full tax assistance to keep
Employee whole due to this immediate income, including payment of all
relevant employment taxes, income taxes, capital gains taxes, and
alternative minimum income taxes, grossed up by an amount necessary to pay
all such taxes on the amounts paid under this subparagraph (ii), and as
further provided in Section 7; and
(iii) in the event of a Change of Control of the Company by the
exchange of securities or issuance of stock in a merger or otherwise,
Employer and the acquiring person or surviving entity shall extend to
Employee the opportunity to sell or exchange the option shares issued
under provisions (i) and (ii) in a manner and at a time that will allow
Employee to benefit, at his election, from the exchange or issuance of
stock in the merger, exchange, or other transaction.
6. CONDITION. Notwithstanding any other provision in this Agreement, or
unless the operation of this paragraph shall expressly and voluntarily be waived
or modified by the Employee in a written instrument signed by the Employee
specifically for that purpose, the remuneration under Sections 4 and 5 required
to be paid by Employer to Employee under this Agreement shall be paid by the
Employer or by the acquiring person or surviving entity as a condition to the
acquisition, merger, exchange, or other transaction.
3
<PAGE> 4
7. EXCISE TAXES. The Internal Revenue Code of 1986, as amended (the
"Code), will impose significant tax on Employee and the Company if the total
amounts received by the Employee due to a Change of Control exceed prescribed
limits. This includes a 20% excise tax on certain amounts received in excess of
the prescribed limits and a loss of deduction for the Company. If, as a result
of these Code provisions, the Employee is required to pay such excise tax, then
upon written notice from the Employee to the Company, the Company shall pay the
Employee an amount equal to the total excise tax imposed on the Employee
(including the excise taxes on any excise tax reimbursements due pursuant to
this sentence and the excise taxes on any income tax reimbursements due pursuant
to the next sentence). If the Company is obligated to pay taxes for the Employee
pursuant to the preceding sections, the Company also shall pay the Employee an
amount equal to the "total presumed federal and state taxes" that could be
imposed on the Employee with respect to the excise tax reimbursements due to the
Employee pursuant to the preceding sentence and the income tax reimbursements
due to the Employee pursuant to this sentence. For purposes of the preceding
sentence, the "total presumed federal and state taxes" that could be imposed on
the Employee shall be conclusively calculated using a combined tax rate equal to
the sum of the then prevailing maximum marginal federal and state income tax
rates. No adjustments will be made in this combined rate for the deduction of
state taxes on the federal return, the loss of itemized deductions or
exemptions, or for any other purpose. The Employee shall be responsible for
paying the actual taxes. The amounts payable to the Employee pursuant to this or
any other agreement or arrangement with Company shall not be limited in any way
by the amount that may be paid pursuant to the Code without the imposition of an
excise tax or the loss of Company deductions.
8. EFFECT ON OTHER AGREEMENTS. This Change of Control Agreement shall be
supplemental to and will modify a written employment contract between Employer
and Employee, if any. Except as otherwise provided by written contract, Employee
shall remain "at will," and this Change of Control Agreement shall not confer
upon Employee any contractual rights to employment, except as described in an
employment agreement, if any, and as provided in this Change of Control
Agreement. To the extent of any inconsistency between this Agreement and any
other agreements with the employee, the Agreement shall be interpreted and
applied in the way to confer upon Employee the greatest benefit. The agreements
shall be read and applied consistent with each other, but in the event of a
conflict, the terms most favorable to the Employee will be applied from the
various provisions of the agreements in the aggregate.
9. RETURN OF BOOKS AND PAPERS. Upon the termination of Employee's
employment with Employer for any reason, Employee shall deliver promptly to
Employer all manuals and memoranda; all cost, pricing and other financial data;
all customer information; all other written or printed materials which are the
property of the Company (and any copies of them); and all other materials which
may contain confidential information relating to the business of Employer, which
Employee may then have in his possession whether prepared by Employee or not.
10. NOTICES. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing, and if sent by registered mail to
his residence in the case of Employee, or to its principal office in the case of
Employer.
4
<PAGE> 5
11. WAIVER OF BREACH. The waiver of Employer of a breach of any provision
of this Agreement by Employee shall not operate or be construed as a waiver of
any subsequent breach by Employee.
12. ASSIGNMENT. The rights and obligations of Employer under this
Agreement shall inure to the benefit of and shall be binding upon the successors
and assigns of Employer. Employee may not sell, assign, transfer, or delegate
any duties, rights or interests created under this Agreement without the express
written consent of the Employer.
13. ENTIRE AGREEMENT. This instrument contains the entire agreement of the
parties. It may not be changed orally but only by an agreement in writing signed
by the party against whom enforcement of any waiver, change, modification,
extension or discharge is sought.
IN WITNESS WHEREOF, the parties have executed this Agreement effective on
the 2nd day of March, 1999.
SIMULA, INC.
By /s/ Donald W. Townsend
-------------------------------------
"EMPLOYER"
/s/ James C. Dodd
----------------------------------------
James C. Dodd
"EMPLOYEE"
5
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