================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 10-K/A
_________________
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended July 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 1-6711.
------
OEA, INC.
(Exact name of registrant as specified in its charter)
________________
Delaware 36-2362379
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
P. O. Box 100488
Denver, Colorado 80250
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (303) 693-1248
--------------
Securities registered pursuant to Section 12 (b) of the Act:
________________
Common Stock, Par Value $0.10 New York Stock Exchange
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
________________
NONE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____.
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ].
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of October 15, 1999. Common Stock, $.10 par value - $144,284,147.
The number of shares outstanding of the issuer's classes of common stock as of
October 15, 1999. Common Stock $.10 par value - 20,612,021.
Documents Incorporated By Reference
Portions of the proxy statement for the annual shareholders meeting to be held
on or before January 11, 2000, are incorporated by reference into Part III. (A
definitive proxy statement will be filed with the Commission within the
prescribed period.)
================================================================================
PART I
Item 1 - Business
- -----------------
General Development of Business
- -------------------------------
OEA, Inc. ("OEA" or "the Company") is a technology leader in the development and
production of high-reliability, propellant-actuated safety devices for the
automotive and aerospace industries. The foundation of our growth is our core
knowledge (over 2,000 man-years of experience) in propellants, interior
ballistics and related mechanical design. Founded in 1957, our first three
decades of growth came from developing and producing the aerospace industry's
largest selection of propellant-actuated devices for (1) military aircraft
escape systems, (2) satellites and satellite launch vehicles and (3) missiles.
The growth over the last decade has come from adapting our proprietary aerospace
technology to the automotive air bag market. We began producing air bag
initiators in 1987 and have since shipped over 150 million initiators. In 1996,
we added air bag inflators to our product mix. In our first full year of
production, we sold 3 million inflators. By 1999, the annual volume had more
than doubled to 7.6 million inflators. These inflators were the industry's first
environmentally friendly production inflators, generating no smoke, dust or
toxins.
We were organized as a Delaware corporation on October 1, 1969. Our predecessor,
Ordnance Engineering Associates, Inc., an Illinois corporation, was organized on
July 13, 1957, and was merged into OEA on December 3, 1969. Our corporate
headquarters are located 20 miles southeast of Denver, Colorado, with additional
manufacturing facilities located in Utah, California and France. Our automotive
operations are carried out through our Automotive Safety Products Division. This
division includes OEA Europe S.A.R.L. (previously Pyroindustrie S.A.), which was
organized on July 16/th/, 1999. OEA's aerospace operations are carried out
through its subsidiary OEA Aerospace, Inc.
Our principal executive offices are located at 34501 East Quincy Avenue, Denver,
Colorado 80250 and our telephone number is (303) 693-1248.
Glossary of Terms
- -----------------
Propellant (solid propellant): A chemical mixture that can be ignited to produce
gas rapidly and controllably.
Air Bag Initiator: The air bag system's smallest propellant-actuated device,
weighing about 5 grams and containing about 1/10 gram of propellant, which is
ignited by an electrical signal (from the car's crash-sensing system) to
activate the air bag inflator.
Propellant-Actuated Device: A device that operates by the ignition of
propellant. OEA's air bag inflators, air bag initiators and aircraft escape
system components are propellant-actuated devices.
Air Bag Inflator: The air bag system's largest propellant-actuated device,
weighing between 200 and 1,500 grams. When activated by the initiator, the
inflator produces gas to inflate the air bag.
2
Financial Information about Industry Segments
- ---------------------------------------------
(in thousands)
FY 1999 FY 1998 FY 1997
----------- ----------- -----------
Sales to Unaffiliated Customers
- -------------------------------
Automotive $ 203,963 $ 195,891 $ 168,869
Aerospace 44,842 49,484 42,688
----------- ----------- -----------
Total $ 248,805 $ 245,375 $ 211,557
=========== =========== ===========
Inter-Segment Sales or Transfers
- --------------------------------
Automotive $ - $ 2 $ 20
Aerospace 29 240 141
----------- ----------- -----------
Total $ 29 $ 242 $ 161
=========== =========== ===========
Operating Profit
- ----------------
Automotive $ (3,549) $ (8,765) $ 45,522
Aerospace 4,076 3,177 4,037
----------- ----------- -----------
Total $ 527 $ (5,588) $ 49,559
=========== =========== ===========
Identifiable Assets
- -------------------
Automotive $ 252,556 $ 276,063 $ 275,153
Aerospace 45,802 52,696 56,403
----------- ----------- -----------
Total $ 298,358 $ 328,759 $ 331,556
=========== =========== ===========
3
Automotive Safety Products
- --------------------------
Introduction to Automotive Safety Products
Our Automotive Safety Products Division was created to meet the growing demand
for automotive air bags by taking advantage of technologies we developed in our
aerospace business. We design, develop, test and manufacture propellant-
actuated devices for use in automotive safety products, which are currently
single-stage hybrid inflators (passenger, driver and side-impact) and electric
initiators. These are sold to automotive module and inflator manufacturers,
respectively, which, in turn, sell their products directly to automobile
manufacturers. Our automotive segment accounted for approximately 82%, 80%, and
80% of consolidated net sales in fiscal 1999, 1998, and 1997, respectively, and
is expected to continue to represent a similar percentage of our sales in the
future.
In an air bag system, the initiator activates the inflator, which produces gas
to inflate the bag. We have designed a low-cost hybrid inflator that uses a
combination of compressed gas and a non-azide propellant. These hybrid inflators
are favored over sodium-azide inflators because they are smokeless and nontoxic,
using a propellant that is very insensitive under normal handling conditions.
Management believes that the air bag industry is shifting away from sodium-azide
inflators to non-azide alternatives such as OEA's hybrid inflators.
Growth through Technology
Our strategy is to strengthen our leadership position in the initiator market
and to become a world leader in inflator manufacturing by taking advantage of
advanced technology to produce a high quality product at the lowest possible
cost. Management believes that by using our technology to continually drive
reductions in core product costs, it will encourage air bag system manufacturers
to utilize our capacity instead of reinvesting in costly expansions of their own
inflator manufacturing facilities.
We have made a substantial capital investment in highly automated advanced
technology equipment to produce inflators in our Denver facilities and to
produce initiators in two manufacturing facilities located in Tremonton, Utah
and Les Mureaux, France. Our new inflator production facility in Denver became
fully operational late in fiscal 1998.
Additionally, we are utilizing leading-edge technology to develop advanced
products in both traditional and non-traditional areas of automotive safety. We
believe we have market leading technology initiatives in products such as
advanced curtain inflators for side impact collisions; "smart" or dual-stage
inflators, which vary air bag inflation for the characteristics and severity of
the impact and position of the occupant; micro-gas generators for seat belt
pretensioner systems, which tighten seat belts in a collision; and "smart"
initiators, which have an embedded micro-chip/capacitor that will be required
for advanced safety systems of the future. These new concepts in various stages
of development reflect our demonstrated excellence in rapidly delivering new
products to market. While the advanced curtain inflators and smart initiators
are still in early stages of development, we have been awarded contracts for
micro gas generators, which are already in production and for "smart" inflators,
expected to begin production in late fiscal year 2000.
4
We continue to make significant expenditures through research and development to
maintain technology leadership. The estimated amounts spent by the automotive
segment during each of the last three fiscal years for customer-sponsored and
Company-sponsored research and development activities were:
Customer- Company-
Sponsored Sponsored
--------- ----------
Fiscal year 1999 $ -- $3,552,000
Fiscal year 1998 -- 1,373,000
Fiscal year 1997 200,000 1,428,000
The demand for air bag components (both domestic and worldwide) is expected to
grow over the next several years, with increased demand for frontal and side air
bags and additional air bag products. We believe that our technology provides a
distinct competitive advantage in this market environment.
Other Business and Industry Considerations
Customers providing more than 10% of our consolidated sales for the fiscal year
ended July 31, 1999, were Takata Corporation with 30%, Delphi Interior &
Lighting with 20% and Daicel Chemical Industries, Ltd. with 11%. The loss of
any of these customers would have a materially adverse effect on the automotive
segment of OEA's business. As Daicel transitions to internal manufacture of
inflators and initiators their purchases will decline; however, this volume is
expected to be replaced by increased sales to existing customers. In addition,
we will earn royalty payments on Daicel's internally manufactured inflators and
initiators, as explained in the following paragraphs.
There is no particular relationship with our customers other than that of
supplier/customer, except for the following:
1. An agreement with Daicel Chemical Industries, Ltd., Tokyo, Japan, for the
transfer of technology and manufacture of our automotive air bag initiators
for the Asian market. This agreement provides for an exclusive license of
such technology to Daicel for a term ending in 2007, for fixed royalties
totaling $6 million (subject to possible increase if certain production
volumes are achieved) and variable royalties at a rate of 5% of net sales,
and
2. An agreement with Daicel Chemical Industries, Ltd., Tokyo, Japan, for the
transfer of technology and manufacture of our single-stage (i.e., not
"smart") hybrid inflators for passenger, driver and side-impact automotive
air bags for manufacture in Asia for the Asian market. The initial annual
fixed royalty payment for this fifteen-year agreement was received in 1995.
Total fixed royalties under this agreement to date were $11 million, and we
anticipate receiving $7 million in future fixed royalties. We also receive
variable royalties at a rate of 3.5% of net sales. Daicel began the
manufacture of OEA's second-generation passenger inflator in August 1998,
and we receive variable royalty payments on these units.
Auto manufacturers generally change designs every three to five years. We
receive annual blanket purchase orders, but deliveries are specified by
customers on weekly releases for
5
deliveries over the next 10 to 12 weeks. Because this is the accepted practice
in the automotive industry, the amount of backlog at any given time is not
representative of annual sales.
We believe we are the larger of only two independent inflator manufacturers in
the world not affiliated with, or owned by, an air bag module manufacturer.
This independence gives us wide latitude to sell to all module manufacturers.
We are aware of five major inflator manufacturers in the world: OEA, Autoliv,
TRW, Takata, and BAICO (owned by Atlantic Research Corporation). Autoliv and TRW
are the largest inflator manufacturers in the airbag market and consume the
majority of their inflators for use in their own airbag modules. Management
believes that we have the leading technology and are the largest independent
inflator manufacturer in the industry. In addition to supplying an increasing
portion of Autoliv and TRW's inflator requirements, we believe we are in an
excellent position to grow our business in the segment of the airbag
module/system market that has either limited or no internal inflator capacity
(approximately 50% of the overall market).
There are two major automotive initiator manufacturers in the United States: OEA
and Special Devices, Inc. Additionally, there are four major automotive
initiator manufacturers in Europe: OEA Europe (wholly owned by OEA), Davey
Bickford Smith, Nouvelle Cartoucherie de Survilliers (owned by Autoliv), and
Patvag. We are currently one of the world's leading producers of initiators for
automotive air bags.
Other companies may enter the automotive inflator and initiator markets;
however, substantial financial resources, development, and qualification time
would be required to achieve design and product verification. Contracts are
generally awarded based upon competitive price, product reliability and
production capacity. We believe that the major automotive manufacturers, in an
effort to encourage price competition, are providing increased business
opportunities to smaller second tier suppliers, and that this will provide
increased opportunity to more fully utilize our manufacturing capacity.
Raw materials we use include stamped and machined parts and commercially
available propellants. We are not dependent upon any one source for purchased
materials because alternate sources of supply are available in the marketplace.
Customer payments are due on a current basis and extended terms or collateral
have not been required.
Our hybrid inflators and initiators are covered by several patents. Some of the
patents have been issued and others are pending relating to technology used in
these products.
Our business is not seasonal.
Compliance with federal, state, and local provisions regulating the discharge of
materials into the environment is not expected to materially affect capital
expenditures, earnings, or the competitive position of OEA, Inc. or its
subsidiaries.
Together with our consolidated subsidiaries and divisions we employ
approximately 1,300 people in our automotive segment.
6
Aerospace Products
- ------------------
Introduction to OEA Aerospace Products
OEA Aerospace designs, develops, and manufactures propellant and explosive-
actuated devices used in (1) personnel escape systems in high-speed aircraft,
(2) separation and release devices for space vehicles and aircraft, (3) devices
for control, separation, ejection, and jettison of missiles, and (4) flexible
linear-shaped charges, mild detonating cord systems and other energy transfer
systems. The principal customers for such products are the United States
Government and major aircraft and aerospace companies. Other products and
services include propellant-actuated valves, fluid control systems, and the
largest neutron radiography inspection operation of its kind.
Business Considerations
Sales are made directly to the customer. The aerospace segment accounted for
approximately 18%, 20% and 20% of our net sales for fiscal years 1999, 1998, and
1997, respectively, and is expected to continue to represent a similar
percentage of its sales in the future.
Our aerospace segment customers are primarily in the defense and space fields
under prime government contracts. The major portion of this business comes from
subcontracts that are generally awarded to us on a fixed-price basis. Each new
contract involves either the design or manufacture of a new product to meet a
specific requirement, or a follow-on order for additional items previously
manufactured under other contracts. Inasmuch as our aerospace business involves
constant development and engineering of products required by our customers, it
would be inappropriate to classify each new item as a new product.
Our aerospace products are produced in Fairfield, California. A smaller test
facility is located in San Ramon, California.
Raw materials used by our aerospace segment include aluminum, inconel, monel,
molybdenum, rubbers, copper, alloy and stainless steel, ceramics, silver,
titanium alloys, certain commercially available and special-order propellants
and explosives, elastomeric seals and epoxy-sealants. This segment is not
dependent upon any one source for purchased materials because alternate sources
of supply are available in the marketplace.
Our aerospace business is not dependent upon patented items, trademarks,
franchises, concessions, or licenses thereunder.
Our aerospace business is not seasonal.
Products are manufactured to order and are shipped according to specified
contract delivery dates.
Customer payments are reasonably prompt and extended terms or collateral have
not been required.
We did not have a customer providing more than 10% of consolidated sales in the
aerospace segment for the fiscal year 1999. Transactions with the United States
Government are with several procurement agencies and/or prime contractors.
Although the loss of all government
7
contracts would have an adverse effect, the loss of any one agency or prime
contract would not have a materially adverse impact on the Company.
There is no particular relationship between our aerospace segment and its
customers other than that of supplier/customer.
The aerospace segment's funded backlog of orders as of July 31, 1999, was $30.3
million. We estimate that $4.4 million of our backlog will not be recorded as a
sale within the fiscal year ending July 31, 2000.
The majority of our aerospace business with the United States Government is
subject to termination of contracts for the convenience of the United States
Government. Such termination, however, is an unusual occurrence. In addition,
a significant portion of our aerospace sales for the current and prior years is
subject to audit by the Defense Contract Audit Agency. Such audits may occur at
any time up to three years after contract completion.
Other companies, both larger and smaller than us, also have capabilities and
resources to design and develop similar items. We are aware of nine competitors
in our aerospace field of propellant and explosive devices. No individual
competitor dominates the field. We believe we are in a good competitive
position in this segment.
On new development and qualification programs, contract awards are based upon
technical and competitive price proposals. Subsequent production awards are
both negotiated with the customer and subject to competitive bid.
The estimated amounts spent by the aerospace segment during each of the last
three fiscal years for customer-sponsored and Company-sponsored research and
development activities were:
Customer- Company-
Sponsored Sponsored
---------- ---------
Fiscal year 1999 $1,326,000 $120,000
Fiscal year 1998 2,100,000 153,000
Fiscal year 1997 3,400,000 45,000
Compliance with federal, state, and local provisions regulating the discharge of
materials into the environment is not expected to materially affect capital
expenditures, earnings, or competitive position of OEA or its subsidiaries.
Together with our subsidiaries and divisions, we employ approximately 400 people
in our aerospace segment.
8
Financial Information about Foreign and Domestic Operations and Export Sales
- ----------------------------------------------------------------------------
(in thousands)
Sales to Unaffiliated Customers FY 1999 FY 1998 FY 1997
- ------------------------------- ---------------- ---------------- ---------------
United States $ 139,143 126,777 $ 131,201
Foreign Sales
Asia 70,974 83,307 66,901
Europe 18,183 18,974 12,724
Other 20,505 16,317 731
---------------- ---------------- ---------------
Total Foreign Sales 109,662 118,598 80,356
---------------- ---------------- ---------------
Total Sales $ 248,805 245,375 $ 211,557
================ ================ ===============
Identifiable Assets
- -------------------
United States $ 264,281 $ 294,614 $ 313,647
France 34,077 34,145 17,909
---------------- ---------------- ---------------
Total Assets $ 298,358 $ 328,759 $ 331,556
================ ================ ===============
Notes:
(1) There were no sales or transfers between the geographic areas reported
above.
9
Item 2 - Properties
- -------------------
Our properties are located in Arapahoe County, Colorado (near Denver);
Fairfield, California; San Ramon, California; Tremonton/Garland, Utah; and Les
Mureaux, France.
The Arapahoe County facilities are located on 960 acres of land that we own. In
fiscal year 1999, automotive operations were conducted in various one-story
brick and steel buildings containing 400,000 square feet of floor space in the
aggregate. This includes a 173,000 square foot inflator manufacturing facility
that was completed in December 1996.
The Fairfield, California, facilities are occupied by OEA Aerospace, Inc., our
wholly owned subsidiary. Its operations are conducted in twenty buildings
containing 180,000 square feet of floor space in the aggregate, located on 515
acres of land that we own. All parts of the various buildings are occupied and
used in the operations of our business.
The San Ramon, California, property consists of a 10,000 square foot steel
building situated on approximately one acre of land that we own. It is occupied
by Aerotest Operations, Inc., a wholly owned subsidiary of OEA Aerospace, Inc.,
which conducts neutron radiography therein. Also contained in this building, as
a part of the premises, is a 250-kilowatt nuclear reactor used in the process.
The property in Tremonton/Garland, Utah, consists of a 66,000 square foot
manufacturing facility located on 160 acres which we own. This facility will
accommodate the growing demand for air bag initiators and other automotive
safety products for the foreseeable future.
The property in Les Mureaux, France, consists of a 34,600 square foot
manufacturing facility located on 6 acres and is occupied by OEA Europe S.A.R.L.
In 1997 we purchased a 74-acre parcel of land upon which a new inflator facility
is being built. The existing and new facilities will accommodate the growing
demand for air bag initiators and inflators for the European market for the
foreseeable future.
The above-described properties are considered suitable and adequate for our
operations.
Item 3 - Legal Proceedings
- --------------------------
The Company is not involved in any legal proceedings that are required to be
reported herein. From time to time the Company is subject to minor lawsuits
incidental to its operations. The Company believes it has meritorious defenses
to all lawsuits in which it is currently a defendant and will vigorously defend
against them. The resolution of current lawsuits, regardless of the outcome,
will not have a material adverse effect on the Company's results of operations
or financial position.
Item 4 - Submission Of Matters To A Vote Of Security Holders
- ------------------------------------------------------------
None
10
PART II
Item 5 - Market For Registrant's Common Stock And Related Stockholder Matters
- -----------------------------------------------------------------------------
The Company's common stock, $0.10 par value, is traded on the New York Stock
Exchange, New York, New York, under the symbol "OEA."
The following table presents the high and low sales prices, as reported in the
consolidated transaction reporting system, for the periods indicated. These
prices do not include retail markups, markdowns or commissions.
Fiscal Year 1999 High Low
---------------- ---- ---
1st Quarter $12.81 $ 7.75
2nd Quarter 15.06 11.31
3rd Quarter 13.75 8.25
4th Quarter 11.50 7.94
Fiscal Year 1998 High Low
---------------- ---- ---
1st Quarter $41.63 $32.81
2nd Quarter 41.25 26.63
3rd Quarter 29.56 16.63
4th Quarter 19.75 12.75
The approximate number of holders of record of OEA's issued and outstanding
shares at October 15, 1999, was 995.
The Board of Directors has declared dividends during the last three fiscal years
as follows:
Amount
Declared Payable Per Share
-------- ------- ---------
November 1, 1996 December 10, 1996 $.30
November 3, 1997 December 10, 1997 .33
November 24, 1998 December 23, 1998 .08
Any future cash dividends will depend on future earnings, capital requirements,
our financial condition and other factors deemed relevant by the Board of
Directors. Our credit facility includes financial covenants that could, in
certain circumstances, limit our ability to pay dividends in the future.
11
ITEM 6 - SELECTED FINANCIAL DATA
- --------------------------------
Consolidated Summary of Operations
(in thousands, except per share data)
1999 1998 1997 1996 1995
---------------- ---------------- ---------------- ---------------- ----------------
Net Sales $ 248,805 245,375 211,557 152,810 129,211
Operating Profit (Loss) 527 (5,588) 49,559 39,066 34,927
Earnings (Loss) Before Minority
Interest and Income Taxes (4,154) (13,931) 55,304 40,683 36,226
Minority Interest ---- ---- ---- 25 519
Income Tax Expense (Benefit) 1,746 4,655 (19,863) (15,165) (15,469)
---------------- ---------------- ---------------- ---------------- ----------------
Net Earnings (Loss)
Before Cumulative Effect of a
Change in Accounting Principle (2,408) (9,276) 35,441 25,543 21,276
Cumulative Effect of a
Change in Accounting Principle ---- (10,040) ---- ---- ----
---------------- ---------------- ---------------- ---------------- ----------------
Net Earnings (Loss) $ (2,408) (19,316) 35,441 25,543 21,276
================ ================ ================ ================ ================
Basic Earnings (Loss) Per Share
Before Cumulative Effect of a
Change in Accounting Principle $ (.12) (.45) 1.73 1.25 1.04
================ ================ ================ ================ ================
Basic Earnings (Loss) Per Share $ (.12) (.94) 1.73 1.25 1.04
================ ================ ================ ================ ================
Cash Dividends Per Share $ .08 .33 .30 .25 .20
================ ================ ================ ================ ================
Weighted Average Number of
Shares Outstanding During Year 20,602 20,581 20,540 20,499 20,480
================ ================ ================ ================ ================
Total Number of Shares
Outstanding at Year End 20,610 20,595 20,552 20,514 20,487
================ ================ ================ ================ ================
12
Balance Sheet Data at July 31,
(in thousands, except per share data)
1999 1998 1997 1996 1995
---------- ---------- --------- -------- --------
Current Assets $ 95,875 117,578 127,319 77,579 74,871
Current Liabilities $ 34,192 31,461 36,031 33,524 12,160
Working Capital $ 61,683 86,117 91,288 44,055 62,711
Working Capital Ratio 2.8 to 1 3.7 to 1 3.5 to 1 2.3 to 1 6.2 to 1
Total Assets $ 298,358 328,759 331,556 203,208 160,902
Shareholders' Equity $ 156,574 161,506 186,778 160,448 140,352
Book Value Per Share $ 7.60 7.84 9.09 7.82 6.85
13
Item 7 - Management's Discussion And Analysis Of Financial Condition And Results
- --------------------------------------------------------------------------------
Of Operations
-------------
Disclosure Regarding Forward Looking Statements
- -----------------------------------------------
This report contains certain forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, including
statements regarding Company strategy, its soundness, the inflator and initiator
market, inflator and initiator demand, sales volume increases, the benefits of
cost reduction programs and improved manufacturing processes, market price
levels, correction of quality issues, capacity utilization, new technologies and
products, improved customer relations, and year 2000 compliance, as well as
other statements or implications regarding future events. Actual results or
events may differ materially from these forward-looking statements depending on
a variety of factors. Reference is made to the cautionary statements reported on
Form 8-K filed on June 4, 1998 for a description of various factors that might
cause our actual results to differ materially from those contemplated by such
forward-looking statements.
Fiscal 1999 Summary
- --------------------
During fiscal year 1999, our Automotive Safety Products division aggressively
attacked its cost structure and reduced operating costs in all areas.
Strengthening the management team with the addition of key personnel with
automotive experience allowed us to achieve significant initial results in
improving the cost structure in fiscal 1999. Through these efforts, we were
able to offset the $48 million in price reductions experienced in fiscal year
1999.
In addition to our cost reduction efforts, the Automotive Safety Products
division achieved a 35% increase in inflator unit sales and a 30% increase in
outside initiator unit sales. In fiscal year 1999, we received significant
additional new automotive business awards which we believe will contribute
significantly to additional growth in revenue in fiscal year 2000 and beyond.
In order to position our business for continued long-term growth in automotive
safety products, we hired a seasoned sales and marketing executive as Vice
President of Sales and Marketing for our Automotive Safety Products division.
We are also focusing on streamlining operations in our aerospace division in
order to reduce cycle time and costs while strengthening our position with
existing customers and developing new customers in new markets.
In addition to improving net income year over year, we significantly
strengthened our balance sheet by reducing long-term debt from $124 million a
year ago to $91 million. This $33 million decrease in borrowings resulted from
positive cash flow from operations and a reduction in working capital. An $11
million decrease in inventory, during a year of significant growth in automotive
unit sales, accounted for the majority of the working capital reduction.
Additionally, accounts receivable were reduced by nearly $6 million while sales
increased.
Although we reported a net loss of $.12 per share for the current year, overall
net income, working capital, and long-term debt outstanding showed marked
improvement from the prior year.
14
Results of Operations
- ---------------------
Fiscal Year 1999 vs. 1998
- -------------------------
Net Sales
- ---------
Net sales for fiscal year 1999 were $248.8 million, as compared with fiscal 1998
net sales of $245.4 million. Automotive segment sales were $204.0 million, as
compared with the prior year sales of $195.9 million. This 4% growth in sales
dollars does not reflect the significant growth in unit shipments for the year
due to a weighted average price decrease of 23%, or $45 million. This price
reduction was negotiated in 1995/1996 in order to meet competitive pricing. No
further price decreases of this magnitude are presently expected. Inflator
shipments continued a growth trend as unit shipments increased from 5.6 million
units in fiscal 1998 to 7.6 million units in 1999. This 35% increase reflects
continued strong demand for hybrid technology inflators worldwide. Initiator
shipments to outside customers also increased sharply from fiscal 1998,
increasing 30% from 18.4 million units to 24.1 million units in fiscal 1999.
This unit sales increase for initiators was partially offset by price reductions
of 6%, or $3 million.
Aerospace segment sales decreased $4.7 million to $44.8 million in fiscal 1999
primarily due to fluctuations in foreign sales to customers in Asia, the United
Kingdom, and Italy.
Cost of Sales
- -------------
Cost of sales for fiscal year 1999 was $231.0 million, as compared with fiscal
1998 cost of sales of $238.6 million. Automotive segment cost of sales was
$194.2 million in fiscal 1999, as compared with $194.8 million in the prior
year. The relatively flat cost of sales for the automotive segment reflects the
successful implementation of an aggressive cost reduction program in fiscal 1999
and the effect of last year's $19.0 million one-time charges (See "Fiscal 1998
One-time Charges" below). These cost reductions were offset by higher costs
associated with the increased inflator and initiator shipments.
In order to overcome the effects of $48 million in automotive segment price
reductions, we targeted cost improvement initiatives that included: 1) Material
cost reductions via design improvements and supplier price reductions; 2)
Operating cost reductions through manufacturing scrap improvements; and, 3)
Productivity improvements through selective automation projects, product flow
streamlining, and the consolidation of operations, including initiator
manufacturing. Additional cost improvement was realized as utilization of our
new inflator production facility improved from 20% in the fourth quarter of 1998
to 36% in the fourth quarter of 1999.
Aerospace segment cost of sales was $36.7 million in fiscal 1999, as compared
with $43.8 million in the prior year. This decrease primarily reflects reduced
sales and higher 1998 costs including testing and replacement costs relating to
a TLX (energy transfer line) performance issue and $1.4 million in one-time
charges (see "Fiscal 1998 One-Time Charges" below).
15
Gross Margin
- ------------
Gross margin improved to $17.9 million (7.2% of net sales) for fiscal 1999, as
compared with $6.8 million (2.8% of net sales) for fiscal 1998. Automotive
segment gross margin was $9.7 million (4.8% of net automotive sales) for fiscal
1998, up from $1.1 million (0.6% of net automotive sales) for fiscal 1998. The
improved gross margin was a result of improved automotive costs as discussed in
"Cost of Sales" above, and the effect of last year's $19.0 million one-time
charges (See "Fiscal 1998 One-time Charges" below), partially offset by $48.0
million in price reductions.
Aerospace segment gross margin was $8.1 million (18.1% of net aerospace sales)
for fiscal 1999, as compared with $5.7 million (11.6% of net aerospace sales)
for fiscal 1998. The improved gross margin as a percent of aerospace segment
sales primarily resulted from the avoidance of testing and replacement costs
relating to a TLX (energy transfer line) performance issue and $1.4 million in
one-time charges (see "Fiscal 1998 One-Time Charges" below).
Selling and General & Administrative Expenses
- ---------------------------------------------
General and administrative expenses for fiscal year 1999 were $13.7 million
(5.5% of net sales), as compared with $10.9 million (4.4% of net sales), for
fiscal year 1998. The 1998 figure included a $1.8 million one-time charge
related to the settlement of a legal claim (see "Fiscal 1998 One-Time Charges"
below). After adjusting for the one-time charge, the increase would have been
$4.6 million. The adjusted increase was partially due to a reclassification from
cost of sales of $2.4 million in outbound freight costs. Our normal terms are
F.O.B. shipping point; therefore, any freight expenses incurred by us to satisfy
customer delivery requirements are now considered a selling expense. A reserve
was also established for uncollectible accounts related to one of our customers
who filed for bankruptcy protection under chapter 11 after year-end. The
remaining growth in expenditures in 1999 was money spent to establish an
automotive sales and marketing office in Detroit, to recruit key executives at
our aerospace subsidiary, and for corporate training initiatives. These expenses
were incurred in order to diversify our automotive customer base and promote
long-term growth in both the automotive and aerospace segments.
Research and Development Expenses
- ---------------------------------
Research and development expenses were $3.7 million in fiscal 1999 as compared
with $1.5 million in fiscal year 1998. This significant increase in R&D effort
reflects continued work on our "smart" (dual-stage) inflators, curtain
inflators, micro-gas generators for seat belt pretensioner systems, and other
advanced products in early stages of development. Leading-edge technology has
been an important part of our success over the years. Continued expenditures in
R&D to maintain this competitive advantage is an important part of our long-term
strategy.
16
Operating Profit (Loss)
- -----------------------
We recorded a $0.5 million operating profit for fiscal year 1999 (0.2% of net
sales), as compared with an operating loss of $5.6 million (-2.3% of net sales)
for fiscal year 1998. The improved operating profit was a result of cost
improvements implemented in 1999 (See "Cost of Sales" above) and higher costs in
1998 related to the one-time charges (See "Fiscal 1998 One-time Charges" below).
These favorable items exceeded the negative effects of automotive price
decreases and increases in G&A and R&D spending.
Other Income and (Expense)
- --------------------------
Total other expense was $4.7 million for fiscal year 1999, compared with $8.3
million of expense in the prior year. Fiscal 1998 included a $4.7 million one-
time charge for the disposal of idle and obsolete automotive segment equipment
(see "Fiscal 1998 One-Time Charges" below). When 1998 is adjusted for the $4.7
million one-time charge, the year over year increase in other expense is $1.1
million. Interest costs increased $1.7 million over the prior year due to a
reduction in capitalized interest as significant capital investments were placed
in service late in 1998 and into 1999. The increased interest expense was
partially offset by an increase in royalty income from our Asian licensee,
Daicel Chemical Industries.
Cumulative Effect of a Change in Accounting Principle
- -----------------------------------------------------
SOP 98-5, "Reporting on the Costs of Start-up Activities" was adopted in 1998
and therefore had no impact on 1999.
Net Earnings (Loss)
- -------------------
We recorded a $2.4 million net loss for fiscal year 1999 (-1.0% of net sales),
as compared with a net loss of $19.3 million (7.9% of net sales) for fiscal year
1998. Basic loss per share was $.12 for fiscal 1999, as compared with a loss of
$.94 for fiscal 1998.
Fiscal Year 1998 vs. 1997
- -------------------------
Net Sales
- ---------
Net sales for fiscal year 1998 were $245.4 million, as compared with fiscal 1997
net sales of $211.6 million. The $33.8 million increase from the prior year
reflected a 16% sales increase in both the automotive and aerospace segments of
our business. Automotive segment sales increased $27.0 million to $195.9
million in fiscal 1998, primarily due to a $48.4 million increase in inflator
sales (5.6 million units in fiscal 1998, as compared with 2.9 million units in
fiscal 1997), partially offset by a $21.4 million decrease in initiator sales.
The increased inflator sales reflected continued strong customer acceptance of
our inflator program and increased demand for air bags from both domestic and
foreign automobile manufacturers. The reduced initiator sales resulted from a
temporary (one year) reduction in demand from a major customer.
Aerospace segment sales increased $6.8 million to $49.5 million in fiscal 1998
primarily due to increases in engineering development contracts and the Delta
satellite launcher program.
17
Cost of Sales
- -------------
Cost of sales for fiscal year 1998 was $238.6 million, as compared with fiscal
1997 cost of sales of $153.2 million. Automotive segment cost of sales was
$194.8 million in fiscal 1998, as compared with $116.5 million in the prior
year. This increase primarily reflected increased inflator volume, partially
offset by reduced initiator volume; a parts shortage resulting in periodic
production shut-downs on passenger inflator lines; the impact of the General
Motors strike; increased overhead and other costs associated with the new
inflator production facility, which was only running at a 20% utilization level
by the fiscal 1998 fourth quarter; and $19.0 million in one-time charges (see
"Fiscal 1998 One-Time Charges" below).
Additionally, automotive segment cost of sales was impacted by the adoption of
the AICPA's Statement of Position 98-5, "Reporting the Costs of Start-up
Activities." This resulted in expensing previously capitalized inflator start-
up costs of $6.7 million in fiscal 1998, partially offset by the reversal of
capitalized start-up amortization expense in the amount of $3.7 million. Refer
to "Cumulative Effect of a Change in Accounting Principle" below for further
detail on Statement of Position 98-5.
Aerospace segment cost of sales was $43.8 million in fiscal 1998, as compared
with $36.6 million in the prior year. This increase primarily reflected
increased sales, testing and replacement costs relating to a TLX (energy
transfer line) performance issue and $1.4 million in one-time charges (see
"Fiscal 1998 One-Time Charges" below). The cause of the TLX performance problem
was quickly identified and corrected and product shipments resumed shortly
thereafter.
Gross Margin
- ------------
Gross margin was $6.8 million (2.8% of net sales) for fiscal 1998, as compared
with $58.4 million (27.6% of net sales) for fiscal 1997. Automotive segment
gross margin was $1.1 million (0.6% of net automotive sales) for fiscal 1998, as
compared with $52.3 million (31.0% of net automotive sales) for fiscal 1997.
This decrease in gross margin was primarily due to the increased inflator costs
as discussed above, lower leverage of fixed initiator costs due to reduced
volume, adoption of the AICPA's Statement of Position 98-5 relating to start-up
costs and $19.0 million in one-time charges (see "Fiscal 1998 One-Time Charges"
below). Excluding the adoption of SOP 98-5 and the one-time charges, automotive
segment gross margin would have been $23.1 million (9.4% of net sales) for
fiscal 1998.
Aerospace segment gross margin was $5.7 million (11.6% of net aerospace sales)
for fiscal 1998, as compared with $6.1 million (14.3% of net aerospace sales)
for fiscal 1997. Excluding the $1.4 million one-time charge, aerospace segment
gross margins would have been $7.1 million (14.4% of net sales) for fiscal 1998.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses for fiscal year 1998 were $10.9 million
(4.4% of net sales), as compared with $7.4 million (3.5% of net sales), for
fiscal year 1997. This increase was primarily due to a $1.8 million one-time
charge related to the settlement of a legal claim (see "Fiscal 1998 One-Time
Charges" below) and to costs of establishing an infrastructure to service the
European inflator market at our French subsidiary, OEA Europe. Excluding the
one-time
18
charge, general and administrative expenses as a percentage of net sales would
have been 3.7% for fiscal 1998.
Research and Development Expenses
- ---------------------------------
Research and development expenses were $1.5 million for both fiscal year 1998
and fiscal year 1997.
Operating Profit (Loss)
- -----------------------
We experienced a $5.6 million operating loss for fiscal year 1998 (-2.3% of net
sales), as compared with an operating profit of $49.6 million (23.4% of net
sales) for fiscal year 1997. Excluding the adoption of SOP 98-5 and the one-
time charges, operating profit would have been $19.7 million (8.0% of net sales)
for fiscal year 1998.
Other Income and (Expense)
- --------------------------
Total other expense was $8.3 million for fiscal year 1998, as compared with $5.7
million of income in the prior year. Fiscal 1998 included a $4.7 million one-
time charge for the disposal of idle and obsolete automotive segment equipment
(see "Fiscal 1998 One-Time Charges" below), while fiscal 1997 included $3.2
million in income for the sale of our foreign joint venture, Pyrospace S.A. The
remaining difference was primarily due to interest expense, which was $6.5
million in fiscal 1998, as compared with $0.1 million in fiscal 1997. Interest
costs increased due to a higher debt level and the significant reduction in
capitalized interest in fiscal 1998. We made substantial capital asset
acquisitions (i.e., building and equipment) in fiscal 1997 for which related
interest costs were capitalized. These assets were placed in service by fiscal
1998; therefore, a significant amount of interest costs were expensed, not
capitalized in fiscal 1998.
Cumulative Effect of a Change in Accounting Principle
- -----------------------------------------------------
In April 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities" (SOP 98-5). This Statement requires entities to expense costs of
start-up activities as they are incurred and to report the initial adoption as a
cumulative effect of a change in accounting principle as described in Accounting
Principles Board Opinion No. 20, "Accounting Changes." Start-up activities are
defined broadly as those one-time activities related to opening a new facility,
introducing a new product or service, conducting business in a new territory,
conducting business with a new class of customer or beneficiary, initiating a
new process in an existing facility, or commencing some new operation.
SOP 98-5 is effective for fiscal years beginning after December 15, 1998.
However, in July 1998 we elected to adopt it retroactively to the first quarter
of fiscal 1998. Accordingly, we wrote off in the first quarter the net book
value ($10.0 million) of our start-up and related costs included in the scope of
SOP 98-5 as a one-time adjustment referred to as a Cumulative Effect of a Change
in Accounting Principle.
19
Net Earnings (Loss)
- -------------------
We recorded a $19.3 million net loss for fiscal year 1998 (7.9% of net sales),
as compared with net earnings of $35.4 million (16.8% of net sales) for fiscal
year 1997. Basic loss per share was $.94 for fiscal 1998, as compared with
earnings of $1.73 for fiscal 1997. Excluding the adoption of SOP 98-5 and the
one-time charges, net earnings would have been $10.0 million and basic earnings
per share would have been $.49 for fiscal year 1998.
Fiscal 1998 One-Time Charges
- ----------------------------
We recognized one-time charges in fiscal 1998 of $17.2 million, net of taxes, or
$.83 per share. Explanations of the more significant charges are detailed below.
Inventory Adjustments. We booked inventory adjustments totaling $11.3 million
- ---------------------
($7.3 million after tax) in the fiscal 1998 third quarter primarily related to
the start-up of its new inflator production lines. These adjustments resulted
from a combination of the rapid expansion of the inflator program, including
significant additions in personnel, and system conversion issues associated with
the implementation of a new, fully integrated Enterprise Resource Planning (ERP)
System for our automotive operations. Management took immediate action to
resolve these problems including a complete re-implementation of the ERP system
and quarterly physical counts to ensure performance.
Disposal of Inflators. We disposed of early production inflators from our new
- ---------------------
facility for a total cost of $3.9 million ($2.5 million after tax) in the fiscal
1998 third quarter, which includes both production and disposal costs. This
resulted from an unusual quality issue that affected one in ten thousand units.
However, due to the unusual nature of the problem, the actual units affected
could not be identified. Our automotive products are propellant-actuated, life-
saving devices and only the highest level of quality is acceptable. Therefore,
all potentially affected units (approximately 130,000 inflators) were disposed
of to ensure that they would not be installed in air bag modules or automobiles.
Corrective action, which management believes will prevent any future
occurrences, was implemented immediately and has been approved by our customers.
Production and customer shipments have resumed.
Domestic Initiator Consolidation. We incurred costs totaling $5.1 million ($3.2
- --------------------------------
million after tax) in the fiscal 1998 third quarter related to the consolidation
of its domestic initiator production operations into its Utah facility. These
costs consisted of $0.5 million for equipment and personnel relocation and a
$4.6 million charge for idled and/or obsolete equipment and inventory.
Settlement of Legal Claim. In consideration of new business and improving
- -------------------------
relations, we settled a lawsuit with a major initiator customer. This resulted
in a fiscal 1998 third quarter charge of $2.5 million ($1.6 million after tax)
for trade receivables and obsolete inventory. In return, the customer committed
to significantly higher initiator purchases in fiscal 1999. This resolution was
an important milestone toward improving our relationship with this customer.
20
Inflator Equipment Obsolescence. We wrote off $1.9 million ($1.2 million after
- -------------------------------
tax) of low-volume inflator production equipment in the fiscal 1998 third
quarter. This equipment was originally purchased to support customers'
requirements by bridging the gap between prototype production and high-volume
production. With our new high-volume inflator production lines becoming fully
operational, this low-volume production equipment became idled and obsolete.
Aerospace Inventory Obsolescence. As the aerospace business shifts from
- --------------------------------
traditional defense/government business to commercial business (satellites and
satellite launch vehicles), a more stringent obsolescence approach is required.
The new approach was adopted during the fiscal 1998 third quarter and resulted
in a charge of $1.4 million ($0.9 million after tax).
Liquidity and Capital Resources
- -------------------------------
Our working capital decreased $24.4 million during the year to $61.7 million at
July 31, 1999 from $86.1 million at July 31, 1998. This 30% improvement
primarily resulted from aggressive management of inventory and accounts
receivable.
We made capital expenditures totaling $17.3 million in fiscal 1999, which were
funded from bank borrowings and operating cash flow. On April 10, 1998, we
entered into a four-year, $180 million Amended and Restated Revolving Credit
Agreement with a group of seven banks. This agreement was amended on June 11,
1998. At our request, this agreement was again amended on December 10, 1998 to
reduce the amount of the facility to $150 million, to modify the financial debt
covenants, and to pledge as collateral substantially all of our assets. The
interest rate (applicable margin plus federal funds rate or LIBOR) is
progressive and based upon our ratio of indebtedness to EBITDA. The margin will
fluctuate up or down as determined by the above ratio. At July 31, 1999, the
applicable interest rate was 7.32%. The agreement contains certain financial
covenants including tangible net worth, indebtedness to EBITDA, indebtedness to
total capitalization and minimum interest coverage. At our discretion, we may
convert all or part of the total debt to Eurodollar or Alternate Base Rate
loan(s). This credit facility expires on December 18, 2000, and provides for one
twelve-month extension to the termination date. At July 31, 1999, we had reduced
our borrowings on this credit facility to $91.0 million as compared with $124.0
million at July 31, 1998. This overall reduction in debt was due to the
significant working capital improvement as discussed above and cash flow from
operations which yielded a $33.5 million positive cash flow in fiscal year 1999
as compared with a negative $33.0 million in fiscal year 1998. Anticipated
working capital requirements, capital expenditures, and facility expansions are
expected to be met through bank borrowings and from internally generated funds.
21
Impact of the Year 2000 Issue
- -----------------------------
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The problem is
complicated and, in fact, consists of three different problems. Firstly, it has
been common practice in computer programming to identify calendar dates only by
the last two digits of the year and to assume that the first two digits are
"19". As a result, automated systems may interpret "00" as 1900 instead of 2000,
and do one of two things: shut down or make mistakes. Secondly, problems will
arise from the fact that the year 2000 is an irregular leap year. If equipment
is not programmed appropriately and the date February 29, 2000 does not exist in
the software, software applications may malfunction. Finally, the codes "99" or
"00", and "999" or "9999" could mean other things, like "error" or
"miscellaneous". It can be concluded that computer problems may arise not only
on January 1, 2000, but also before the turn of the century and afterwards.
These problems could result in miscalculations or failures causing disruptions
of operations, including, among other things, a temporary inability to maintain
traceability, process transactions, send invoices, or engage in similar normal
business activities.
We recognize that the Year 2000 problem is a serious issue for businesses, and
we are committed to making the transition to Year 2000 compliant systems. We
have had a formal program in place to address and resolve potential issues
associated with the Year 2000 problem since October 1997. We have devoted
significant resources to the identification, remediation, and or replacement of
systems that could be effected by the Year 2000 problem. Our goal is to prevent
the impairment of our critical business operations and computer processes that
we share with our customers and suppliers.
Our Year 2000 Project has focused on the following four areas:
1) Products manufactured and distributed by us.
2) Information Systems such as computer hardware/software systems and business
application software.
3) Non-Information Systems, such as manufacturing equipment and the mechanical
systems in our facilities (including HVAC, security and safety systems).
4) Third party suppliers and customers.
OEA Products
Because our products do not contain any embedded microchips or date sensitive
electronic components, we do not believe that our products will require
remediation to address the Year 2000 problem.
Information Systems
We have conducted an inventory of our critical computer systems and have
determined that approximately 99% of such systems now operate with hardware,
operating software and basic business applications software that have been
certified by third party vendors as Year 2000 compliant.
22
Our largest Year 2000 undertaking has been the replacement of our existing ERP
system (Accounting, Inventory Control, and Manufacturing) with Year 2000
certified software. We have successfully implemented and tested the new system
in our Denver and Utah operations. In addition, we have upgraded our Human
Resources, Payroll, and Fixed-asset tracking software to the latest versions,
each of which have been certified by the third-party vendor as Year 2000
compliant. We have also implemented network client management software that
will allow us to audit our PC hardware and software and to allow for the rapid
deployment of software updates and service packs that address any ancillary Year
2000 issues. Our fiscal Year 2000 began August 1, 1999 and all operations
continued without a Year 2000 related issue or disruption.
Non-Information Systems
We have completed an exhaustive inventory, remediation, and certification of all
manufacturing equipment, including factory automation devices. More than 98% of
our manufacturing equipment has been tested and is Y2K ready.
All telecommunications and environmental controls technology systems have been
Year 2000 certified by third party vendors.
Third Party Suppliers and Customers
Our Year 2000 program also includes assessment of the business impact on us of
the failure of third party suppliers and customers to provide needed products,
services, information and payments. We are in the process of assessing the Year
2000 readiness of each of our suppliers who is deemed critical to our
operations, as well as the Year 2000 status of our major customers. Our
transportation providers and local utilities also have been included in our
supplier surveys.
We and many of our customers use EDI (Electronic Data Interchange) to effect
business communications, including orders and shipping information. Our EDI
software has been upgraded and certified by third party vendors as Year 2000
compliant. Our EDI VANs (Value Added Networks) have been polled and are Year
2000 ready.
In addition to addressing the Year 2000 problem in these four areas, we expect
to validate our remediation efforts with additional post-installation testing.
We also expect to respond to and initiate requests to test with various external
agents, including key suppliers and customers.
Given our current state of readiness, if no further remediation effort was made,
the most reasonably likely worst case scenario would be only minor disruptions
in internal operations. However, external disruptions of our supplier base and
the economy in general could have a materially adverse impact on the Company.
The amount of potential worst case impact cannot be reasonably estimated at this
time.
Our current contingency planning efforts are focused on working to identify
additional sources of supply for critical materials. We are planning on
increasing raw material and finished goods inventories to ensure that our
customers are not adversely effected by any unforeseen disruption in the supply
chain. During these last few months of 1999, we will be assessing other
potential business disruption risks and fine tuning contingency plans to
mitigate such risks. We are also planning audits and creating formalized
rollover plans.
23
Costs to Address Year 2000 Issues
The total cost of our Year 2000 remediation project is currently expected to be
approximately $1.6 million. To date we have spent approximately $1.5 million.
Our cost projections do not include post installation testing and contingency
planning. Additionally, it does not include any costs of business disruptions
from supplier or customer non-performance, which cannot be quantified at this
time.
Independent Validation and Verification
On February 9, 1999, BBK, Ltd., at the request of General Motors, performed a
Year 2000 Readiness Assessment of OEA. The risk assessment score is based on a
statistical model that uses several variables (acceptance testing, remediation,
risk evaluation, planned completion of inventories, etc.). The assessor then
gives a subjective score that results in a green (low risk), yellow (medium
risk), or red (high-risk) rating. Based on this assessment, we received a green
(low risk of Y2K failure) rating from BBK.
Foreign Currency Translation
- ----------------------------
Assets and liabilities of our foreign subsidiary are translated to U.S. dollars
at period-end exchange rates. Income and expense items are translated at
average exchange rates prevailing during the period. The local currency (French
Francs) is used as the functional currency for the foreign subsidiary. A
translation adjustment results from translating the foreign subsidiary's
accounts from functional currencies to U.S. dollars. Exchange gains (losses)
resulting from foreign currency transactions are included in the consolidated
statements of earnings.
24
Item 8 - Financial Statements And Supplementary Data
- ----------------------------------------------------
Report of Independent Auditors
The Board of Directors and Stockholders
OEA, Inc.
We have audited the accompanying consolidated balance sheets of OEA, Inc. and
subsidiaries as of July 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended July 31, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of OEA, Inc. and
subsidiaries at July 31, 1999 and 1998, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
July 31, 1999, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, in 1998 the Company changed
its method of accounting for start-up activities.
ERNST & YOUNG LLP
Denver, Colorado
September 20, 1999
25
OEA, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except per share data)
July 31
1999 1998
--------------------------
Assets
Current assets:
Cash and cash equivalents $ 2,445 $ 1,920
Accounts receivable 35,236 43,998
Unbilled costs and accrued earnings 6,302 3,190
Inventories 43,594 54,567
Income taxes receivable 3,858 12,040
Prepaid expenses and other 2,006 1,665
Deferred income taxes 2,434 198
----------------------------
Total current assets 95,875 117,578
Property, plant, and equipment:
Land and improvements 3,662 3,474
Buildings and improvements 68,145 64,827
Machinery and equipment 205,019 194,506
Furniture and fixtures 10,798 9,604
----------------------------
287,624 272,411
Accumulated depreciation and amortization 90,907 67,761
----------------------------
196,717 204,650
Long-term receivable 2,000 3,000
Investment in foreign joint venture 2,323 2,323
Other assets 1,443 1,208
----------------------------
Total assets $298,358 $328,759
============================
26
July 31
1999 1998
------------------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 25,665 $ 22,457
Accrued expenses:
Salaries and wages 3,010 2,598
Profit sharing and pension contributions 1,741 2,109
Interest payable 2,137 2,368
Other 1,639 1,929
------------------------
Total current liabilities 34,192 31,461
Long-term bank borrowings 91,000 124,000
Deferred income taxes 16,009 10,821
Other 583 971
Commitments and contingencies
Stockholders' equity:
Common stock, $0.10 par value:
Authorized shares - 50,000,000
Issued and outstanding shares - 22,019,700 2,202 2,202
Additional paid-in capital 13,376 13,201
Retained earnings 146,333 150,440
Equity adjustment from translation (3,220) (2,195)
Treasury stock, 1,408,379 and 1,424,943 shares
in 1999 and 1998, respectively, at cost (2,117) (2,142)
------------------------
Total stockholders' equity 156,574 161,506
------------------------
Total liabilities and stockholders' equity $298,358 $328,759
========================
See accompanying notes.
27
OEA, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
Year ended July 31
1999 1998 1997
-----------------------------------------------
Net sales $248,805 $245,375 $211,557
Cost of sales 230,951 238,571 153,153
-----------------------------------------------
Gross profit 17,854 6,804 58,404
General and administrative expenses 13,655 10,866 7,372
Research and development expenses 3,672 1,526 1,473
-----------------------------------------------
Operating profit (loss) 527 (5,588) 49,559
Other income (expense):
Interest income 206 317 248
Interest expense (8,079) (6,479) (102)
Equity in earnings of foreign joint
venture - - 302
Gain on sale of foreign joint venture - - 3,243
Royalty income 3,431 2,222 2,255
Loss on sale of property, plant, and
Equipment (46) (4,676) (176)
Other, net (193) 273 (25)
-----------------------------------------------
(4,681) (8,343) 5,745
-----------------------------------------------
Earnings (loss) before income taxes (4,154) (13,931) 55,304
Income tax expense (benefit) (1,746) (4,655) 19,863
-----------------------------------------------
Earnings (loss) before cumulative effect
of change in accounting principle (2,408) (9,276) 35,441
Cumulative effect of change in accounting
Principle, net of tax benefit of $5,965 - (10,040) -
-----------------------------------------------
Net earnings (loss) $ (2,408) $(19,316) $ 35,441
===============================================
28
OEA, Inc. and Subsidiaries
Consolidated Statements of Operations (continued)
(in thousands, except per share data)
Year ended July 31
1999 1998 1997
---------------------------------------------------
Basic net earnings (loss) per share:
Net earnings (loss) per share before cumulative
effect of change in accounting principle $ (0.12) $ (0.45) $ 1.73
Cumulative effect of change in accounting
Principle - (0.49) -
---------------------------------------------------
Net earnings (loss) per share $ (0.12) $ (0.94) $ 1.73
===================================================
Diluted net earnings (loss) per share:
Net earnings (loss) per share before cumulative
effect of change in accounting principle $ (0.12) $ (0.45) $ 1.72
Cumulative effect of change in accounting
Principle - (0.49) -
---------------------------------------------------
Net earnings (loss) per share $ (0.12) $ (0.94) $ 1.72
===================================================
Weighted average number of shares outstanding:
Basic 20,602 20,581 20,540
===================================================
Diluted 20,602 20,581 20,606
===================================================
See accompanying notes.
29
OEA, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(in thousands, except share data)
Accumulated
Additional Other Total
Common Stock Treasury Stock Paid-In Retained Comprehensive Stockholders'
Shares Amount Shares Amount Capital Earnings Income Equity
------------------------------------------------------------------------------------------
Balances at July 31, 1996 22,019,700 $2,202 1,505,256 $(2,104) $12,467 $147,268 $ 615 $160,448
Purchase of common stock for
Treasury - - 2,500 (117) - - - (117)
Issuance of treasury stock for
options exercised - - (40,225) 57 489 - - 546
Cash dividends ($0.30 per share) - - - - - (6,162) - (6,162)
Net earnings - - - - - 35,441 - 35,441
Currency translation adjustment - - - - - - (3,378) (3,378)
------------
Comprehensive Income - - - - - - - 32,063
-----------------------------------------------------------------------------------------
Balances at July 31, 1997 22,019,700 2,202 1,467,531 (2,164) 12,956 176,547 (2,763) 186,778
Purchase of common stock for
Treasury - - 1,162 (43) - - - (43)
Issuance of treasury stock for
options exercised - - (43,750) 65 245 - - 310
Cash dividends ($0.33 per share) - - - - - (6,791) - (6,791)
Net loss - - - - - (19,316) - (19,316)
Currency translation adjustment - - - - - - 568 568
------------
Comprehensive Income - - - - - - - (18,748)
-----------------------------------------------------------------------------------------
Balance at July 31, 1998 22,019,700 2,202 1,424,943 (2,142) $13,201 $150,440 (2,195) 161,506
Issuance of treasury stock for
options exercised and sales
of common stock - - (13,878) 21 72 - - 93
Deferred common stock and options
to directors and officers - - (2,686) 4 103 - - 107
Cash dividends ($0.08 per share) - - - - - (1,699) - (1,699)
Net loss - - - - - (2,408) - (2,408)
Currency translation adjustment - - - - - - (1,025) (1,025)
------------
Comprehensive Income - - - - - - - (3,433)
-----------------------------------------------------------------------------------------
Balances at July 31, 1999 22,019,700 $2,202 1,408,379 $(2,117) $13,376 $146,333 $(3,220) $156,574
=========================================================================================
See accompanying notes.
30
OEA, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Year ended July 31
1999 1998 1997
---------------------------------------------------
Operating activities
Net earnings (loss) $ (2,408) $(19,316) $ 35,441
Adjustments to reconcile net earnings (loss) to net cash
Provided by operating activities:
Cumulative effect of change in accounting principle - 10,040 -
Undistributed earnings of foreign joint venture - - (302)
Gain on sale of foreign joint venture - - (3,243)
Depreciation and amortization 24,091 21,413 15,597
Deferred income taxes 2,952 (72) 6,337
Decrease in deferred compensation (388) - (177)
Common stock and options issued to directors
and officers for services 107 - -
Loss on sale of property, plant, and equipment 46 4,676 176
Changes in operating assets and liabilities:
Accounts receivable 9,013 1,305 (16,127)
Unbilled costs and accrued earnings (3,112) 873 2,783
Inventories 10,914 15,901 (34,108)
Prepaid expenses and other (139) (555) (40)
Accounts payable and accrued expenses 2,843 (3,567) 17,323
Income taxes 8,774 (8,689) (1,735)
---------------------------------------------------
Net cash provided by operating activities 52,693 22,009 21,925
Investing activities
Capital expenditures (17,341) (48,985) (87,197)
Cash proceeds from sale of joint venture - - 4,624
Proceeds from sale of property, plant, and equipment 239 403 -
Decrease in cash value of life insurance - 297 -
Increase in deferred charges - - (10,639)
Increase in other assets, net (402) (116) (102)
---------------------------------------------------
Net cash used in investing activities (17,504) (48,401) (93,314)
Financing activities
Purchase of common stock for treasury - (43) (117)
Proceeds from issuance of treasury stock 93 310 546
Increase (decrease) in net bank borrowings (33,000) 30,800 79,200
Payment of dividends (1,699) (6,791) (6,162)
---------------------------------------------------
Net cash provided by (used in) financing activities (34,606) 24,276 73,467
Effect of exchange rate changes on cash (58) (102) (500)
---------------------------------------------------
Net increase (decrease) in cash and cash equivalents 525 (2,218) 1,578
Cash and cash equivalents at beginning of year 1,920 4,138 2,560
---------------------------------------------------
Cash and cash equivalents at end of year $ 2,445 $ 1,920 $ 4,138
===================================================
Supplemental information:
Interest payments $ 8,551 $ 7,620 $ 2,348
Income tax payments - 3,843 15,017
See accompanying notes.
31
OEA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 1999
1. Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts and transactions of
OEA, Inc. (the "Company"), its wholly owned subsidiary, OEA Aerospace, Inc., and
wholly owned foreign operating subsidiary, OEA Europe (previously named
Pyroindustrie S.A.). All significant intercompany balances and transactions have
been eliminated.
The investment in affiliated companies in which the Company owns greater than
20%, but less than 50%, and can exercise significant influence over operating
and financial policies is accounted for under the equity method. The investment
in affiliated companies in which the Company does not have control or the
ability to exercise significant influence over operating and financial policies,
generally less than 20% ownership, is accounted for using the cost method (see
also Note 3).
Revenue Recognition
Sales of products within the automotive segment are recognized as shipments are
made. Sales of products within the aerospace segment are recognized as
deliveries are made or when the products are completed and held on the Company's
premises to meet specified contract delivery dates. Unbilled costs and accrued
earnings are recorded as costs are incurred on aerospace contracts and relate to
products anticipated to be delivered and billed within 12 months of the balance
sheet date. Costs are based on the estimated average cost per unit.
Cash Equivalents
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
Inventories
Inventories of raw materials and component parts are stated at the lower of cost
(principally first-in, first-out) or market. Inventoried costs of work in
process and finished goods are stated at average production costs consisting of
materials, direct labor, and manufacturing overhead.
32
1. Accounting Policies (continued)
Property, Plant, and Equipment
Property, plant, and equipment are recorded at cost. Expenditures for
maintenance and repairs are charged to earnings as incurred, and major renewals
and betterments are capitalized. Upon sale or retirement, the cost of the
assets and related accumulated depreciation are removed from the accounts, and
the resulting gains or losses are reflected in operations.
Depreciation is computed on the straight-line, double-declining balance, and
units-of-production methods at rates calculated to amortize the cost of the
depreciable assets over the related useful lives. Plant and equipment lives are
estimated as follows:
Buildings and improvements 10-30 years
Machinery and equipment 5-10 years
Furniture and fixtures 5-10 years
Depreciation charged to costs and expenses was $23.9 million, $21.3 million, and
$14.8 million in 1999, 1998, and 1997, respectively. Repairs and maintenance
charged to costs and expenses was $8.5 million, $8.2 million, and $7.7 million
in 1999, 1998, and 1997, respectively.
Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability is based upon future discounted cash flows from the use of the
assets. If this review indicates that such assets will not be recoverable, the
carrying amount of such assets is adjusted to fair value.
Deferred Start-Up Costs
During the initial phase of product introduction or development of significant
new plant facilities for which prospective sales and cost recovery are based
upon long-term commitments from customers, start-up costs were being deferred
and amortized on a straight-line basis over periods not exceeding five years.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 ("SOP 98-5"), Reporting on the Costs of Start-Up
Activities, which requires the Company to expense start-up, preopening and
organizational expenses as incurred. The Company early adopted SOP 98-5 as of
August 1, 1997 and has reported the initial application as a cumulative effect
of a change in accounting principle in the consolidated statement of operations
for the year ended July 31, 1998. The effect of the change in accounting
principle was to increase the net loss reported for 1998 by approximately $10.0
million (net of tax of $6.0 million), or $0.49 per share.
33
1. Accounting Policies (continued)
Research and Development
Expenses for new products or improvements of existing products, net of amounts
reimbursed from others, are charged against operations in the year incurred.
Foreign Currency Translation
Assets and liabilities of the Company's foreign subsidiary (OEA Europe) are
translated to U.S. dollars at period-end exchange rates. Income and expense
items are translated at average exchange rates prevailing during the period.
The local currency is used as the functional currency for the foreign
subsidiary. A translation adjustment, which is recorded as a separate component
of stockholders' equity, results from translating the foreign subsidiary's
accounts from functional currencies to U.S. dollars. Exchange gains (losses)
resulting from foreign currency transactions are included in the consolidated
statements of operations.
Stock-Based Compensation
As permitted by Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation, the Company has chosen to continue to account for
stock-based compensation to employees using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. Accordingly, compensation cost
for stock options is measured as the excess, if any, of the quoted market price
of the Company's stock at the date of the grant over the options' exercise
price.
Earnings per Share
Basic earnings per share is computed using the weighted average number of common
shares outstanding during the period. Diluted earnings per share is computed
using the weighted average number of common and dilutive common equivalent
shares outstanding during the period. Common equivalent shares consist of the
shares issuable upon the exercise of stock options under the treasury stock
method.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
34
1. Accounting Policies (continued)
Fair Value of Financial Instruments
The Company's financial instruments consist principally of cash and cash
equivalents, receivables, unbilled costs and accrued earnings, accounts payable,
and bank borrowings. The Company believes all of the financial instruments'
recorded values approximate current values.
Recently Issued Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
No. 130, Reporting Comprehensive Income. The Statement establishes standards
for reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. The Company adopted Statement No.
130 during the first quarter of fiscal year 1999. The effect of the adoption
was not material.
In June 1997, the FASB issued Statement No. 131, Disclosures about Segments of
an Enterprise and Related Information. The Statement requires public companies
to report certain information about operating segments in complete sets of
financial statements and in condensed financial statements of interim periods
issued to stockholders. Under Statement No. 131, operating segments are to be
determined based on how management measures performance and makes decisions
about allocating resources. It also requires that public companies report
certain information about their products and services, the geographic areas in
which they operate, and their major customers. Statement No. 131 is effective
for fiscal years beginning after December 15, 1997. The Company adopted
Statement No. 131 in the fourth quarter of fiscal year 1999. The adoption of
Statement No. 131 had no effect on the Company's determination of its operating
segments.
2. Inventories
Inventories are summarized as follows (in thousands):
July 31
1999 1998
----------------------------
Raw materials and component parts $24,056 $25,954
Work in process 12,139 17,222
Finished goods 7,399 11,391
----------------------------
$43,594 $54,567
============================
35
3. Investment in Foreign Joint Ventures
In 1986, the Company signed a joint venture agreement with two French companies
for the establishment of a company in France, Pyrospace S.A. ("Pyrospace").
Pyrospace was engaged in the design, development, and manufacture of propellant
and explosive devices for European space programs, as well as aircraft and
missiles. Effective December 31, 1996, Pyrospace was merged with another French
aerospace company, Pyromeca S.A., creating a new entity, PyroAlliance S.A. The
Company sold its original ownership share of Pyrospace (45%) to SNPE S.A. (owner
of Pyromeca S.A.) for 25 million French francs (approximately $4.8 million) and
a 10% ownership in PyroAlliance S.A. This transaction resulted in a gain to the
Company of approximately $3.2 million, which is reflected in "Other Income" in
the year ended July 31, 1997.
During 1993, a joint venture agreement was signed between the Company (80%
owner) and Pyrospace (20% owner) for the establishment of a company in France,
Pyroindustrie S.A. Pyroindustrie is engaged in the manufacture of initiators
for the European air bag market. In 1996, the Company acquired the remaining
20% of Pyroindustrie, making Pyroindustrie a wholly owned subsidiary of the
Company. In fiscal 1999, the Company changed the name of the wholly owned
subsidiary from Pyroindustrie to OEA Europe. Net assets of OEA Europe at July
31, 1999 and 1998 totaled $34.1 million and $35.6 million, respectively.
4. Royalty Agreement
During 1995, the Company entered into a fifteen-year agreement with Daicel
Chemical Industries, Ltd., Tokyo, Japan ("Daicel"), for the transfer of
technology and supply of the Company's single-stage hybrid inflators for
passenger, driver and side-impact automotive air bags. Royalty payments
totaling $3.0 million, $2.0 million, and $2.0 million, have been received
related to this agreement during 1999, 1998, and 1997, respectively.
36
5. Bank Borrowings
On April 10, 1998, the Company entered into a $180 million Amended and Restated
Revolving Credit Agreement with a group of seven banks. This agreement was
amended on June 11, 1998. At the Company's request, this agreement was again
amended on December 10, 1998 to reduce the amount of the facility to $150
million, to modify the financial debt covenants, and to pledge as collateral
substantially all of our assets. The Company's principal bank is acting as agent
for this agreement. The interest rate, applicable margin plus federal funds or
LIBOR, is progressive and based upon the Company's ratio of total indebtedness
to earnings before interest, taxes, depreciation and amortization ("EBITDA")
plus interest income. At July 31, 1999, the interest rate was approximately
7.3%. At the Company's discretion, it may convert all or part of the total debt
to Eurodollar or Alternate Base rate loan(s). The line of credit expires on
December 18, 2000 and provides for one twelve-month extension to the maturity
date. At July 31, 1999, the total debt outstanding related to the line of credit
facility was $91 million. All debt relating to this line of credit is classified
as long term at July 31, 1999, since the expiration date for the line of credit
is December 18, 2000 and none of the debt balance is either due or expected to
be permanently repaid within the next twelve-month period.
Prior to the above discussed Amended and Restated Agreement, the Company entered
into an unsecured, four-year $100 million Revolving Credit Agreement with a
group of four banks on December 18, 1996. This agreement was amended on
September 10, 1997 to increase the revolving credit facility to $130 million.
The interest rate was .625% above the federal funds rate when total indebtedness
was equal to or less than 30% of total capitalization and increased to .7% above
the federal funds rate when total indebtedness exceeded 30% of total
capitalization. Additionally, the Company paid annual fees equal to .125% of
the banks' total commitment.
The above agreements contain certain financial covenants including tangible net
worth, indebtedness to EBITDA, indebtedness to total capitalization and minimum
interest coverage. The company has, from time to time, failed to meet a given
financial covenant; however, it has successfully negotiated a temporary waiver
or amendment to the agreement in each such instance.
Interest costs incurred during fiscal years 1999 and 1998 were $9.3 million and
$8.8 million, including capitalized interest of $1.2 million and $2.3 million,
respectively. The weighted average interest rate on bank borrowings during
fiscal years 1999 and 1998 was 6.8% and 6.4% respectively.
37
6. Commitments and Contingencies
Contract disputes and other claims may arise in connection with government
contracts and subcontracts. A substantial portion of the Company's aerospace
sales for the current and prior years is subject to audit by the Defense
Contract Audit Agency. Such audits may occur at any time up to three years
after contract completion. In the opinion of the Company's management, a
provision for government claims is not necessary.
At July 31, 1999, the Company had commitments to purchase approximately $4.3
million of property, plant, and equipment.
7. Profit Sharing and Pension Plans
The Company has noncontributory profit sharing and defined contribution pension
plans covering all full-time employees. The Company is committed to contribute
to the pension plans 5% of participants' eligible annual compensation as defined
in the plan documents. Employer contributions to the profit sharing plans are
discretionary, but are not to exceed 10% of eligible annual compensation.
Combined contributions to these plans for the years ended July 31, 1999, 1998,
and 1997 were $1.8 million, $2.0 million, and $2.2 million, respectively.
38
8. Income Taxes
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's net deferred tax liabilities as of July 31, 1999 and 1998 are as
follows (in thousands):
1999 1998
-----------------------------
Current deferred tax liabilities:
Unbilled receivables $ 83 $ 282
Deferred income - 387
Prepaid expenses 73 152
Other - 158
-----------------------------
Total current deferred tax liabilities 156 979
Long-term deferred tax liabilities:
Plant and equipment 13,970 8,464
Deferred income 884 864
Capitalized interest expense 1,782 1,705
Other 248 73
-----------------------------
Total long-term deferred tax liabilities 16,884 11,106
-----------------------------
Total deferred tax liabilities 17,040 12,085
Current deferred tax assets:
Inventory capitalization 2,286 -
Allowances 304 1,151
Other - 26
-----------------------------
Total current deferred tax assets 2,590 1,177
Long-term deferred tax asset:
Deferred compensation 279 285
State tax carryforwards 277 -
Other 319 -
-----------------------------
Total long-term deferred tax assets 875 285
-----------------------------
Total deferred tax assets 3,465 1,462
------------------------------
Net deferred tax liabilities $13,575 $10,623
=============================
39
8. Income Taxes (continued)
Components of income tax expense (benefit) are as follows (in thousands):
Current Deferred Total
------------------------------------------
1999:
Federal $(4,485) $2,659 $(1,826)
State (213) 293 80
------------------------------------------
$(4,698) $2,952 $(1,746)
==========================================
1998:
Federal $(4,266) $ 75 $(4,191)
State (355) (109) (464)
------------------------------------------
$(4,621) $ (34) $(4,655)
==========================================
1997:
Federal $11,491 $5,515 $17,006
State 2,035 822 2,857
------------------------------------------
$13,526 $6,337 $19,863
==========================================
Actual tax expense for 1999, 1998, and 1997 differs from "expected" tax expense
for those years (computed by applying the U.S. federal corporate tax rate of 35%
to earnings before income taxes) as follows (in thousands):
1999 1998 1997
---------------------------------------
Computed "expected" tax expense (benefit) $ (1,454) $(4,876) $19,356
Increases (reductions) in taxes resulting from:
State taxes, net of federal income
tax benefit 52 (230) 1,877
Sales to foreign customers (345) (194) (494)
Tax effect of joint venture operations - - (105)
Income tax credits (269) (76) (915)
Other 270 721 144
--------------------------------------
Actual tax expense (benefit) $ (1,746) $(4,655) $19,863
======================================
40
9. Stock Options
The Company follows APB No. 25 and related interpretations in accounting for its
employee stock options, and has adopted the disclosure-only option under FASB
Statement No. 123, Accounting for Stock-Based Compensation.
The stockholders approved an Employees' Stock Option Plan (the "Employees'
Plan") on January 13, 1995, and a Nonemployee Directors' Stock Option Plan (the
"Directors' Plan") on January 12, 1996. These plans provide for stock options
to be granted for a maximum of 1,350,000 shares of common stock under the
Employees' Plan and a maximum of 50,000 shares of common stock under the
Directors' Plan. Options may be granted to employees and nonemployee directors
at prices not less than fair market value of the Company's common stock on the
date of grant. Vesting of the options granted under the Employees' Plan and the
Directors' Plan is established by the Board of Directors at the time of grant.
Employee and Director stock options have a ten-year life from the date of the
grant, except that any options granted to a recipient who owns more than 10% of
the total combined voting power of the stock of the Company have a five-year
life from the date of the grant. Shares may be granted from either authorized,
but unissued, common stock or issued shares reacquired and held as treasury
stock.
Prior to July 28, 1994, the Company had a qualified incentive stock option plan
for key employees of the Company whereby a total of 666,000 shares of common
stock were reserved for issuance ("Previous Employees' Plan"). Options were
granted to key employees at prices not less than the fair market value of the
Company's common stock on the date of grant, and were exercisable after one year
of continuous employment following the date of grant. Options had a ten-year
life from the date of the grant, except that any option granted to a recipient
who owned more than 10% of the total combined voting power of the stock of the
Company had a five-year life from the date of the grant.
41
9. Stock Options (continued)
The following schedule shows the activity in each of these plans for the past
three years:
Previous
Employees' Plan Employees' Plan Directors' Plan
------------------------------------------------------------------------------------------
Number of Weighted Number of Weighted Number of Weighted
Shares Avg Price Shares Avg Price Shares Avg Price
-------------------------- ---------------------------- ---------------------------
Options outstanding at
July 31, 1996 130,514 $14.21 25,272 $28.34 4,375 $27.75
Granted - - 25,800 38.34 4,375 45.13
Exercised (36,950) 12.11 (3,275) 28.34 - -
Forfeited (1,836) 24.20 (2,293) 33.31 - -
--------- ---------- ----------
Options outstanding at
July 31, 1997 91,728 14.86 45,504 33.70 8,750 36.44
Granted - - 140,000 16.43 4,375 27.69
Exercised (43,250) 6.95 (500) 19.00 - -
Forfeited (7,086) 28.69 (7,700) 35.05 - -
--------- ---------- ----------
Options outstanding at
July 31, 1998 41,392 20.99 177,304 19.93 13,125 33.52
Granted - - 437,000 9.66 6,491 12.96
Exercised (4,844) 4.67 - - - -
Forfeited (2,286) 25.42 (9,518) 33.08 - -
--------- ---------- ----------
Options outstanding at
July 31, 1999 34,262 23.00 604,786 12.30 19,616 26.72
========= ========== ==========
The following schedule shows the exercise prices, the quantities, and the
weighted average remaining contractual lives for all options outstanding and
exercisable at July 31, 1999:
Weighted Average Number of Options Weighted Average
Exercise Price Outstanding Remaining Life (years)
------------------------------------------------------------------------
Previous Employees' Plan
$19.00 - $30.00 $23.00 34,262 3.0
Employees' Plan
$8.31 - $13.81 9.66 437,000 9.3
$14.19 - $19.06 16.43 140,000 8.9
$28.00 - $37.88 33.06 27,786 6.8
Directors' Plan
$8.56- $13.81 12.96 6,491 9.5
$27.69 - $45.13 33.52 13,125 7.5
42
9. Stock Options (continued)
If fair value accounting under Statement No. 123 had been adopted as of the
beginning of fiscal year 1996, the pro forma effects on net earnings and
earnings per share, as calculated using the Black-Scholes option-pricing model,
would have been as follows:
1999 1998 1997
-----------------------------------------------------------
Estimated fair value per share of
options granted to:
Employees $4.67-$7.44 $ 5.70-$7.70 $ 14.52
Directors $4.74-$7.44 $ 11.07 $ 17.40
Effect on net earnings $ (547,221) $ (128,000) $(434,000)
Effect on basic and diluted
earnings per share $ (0.03) $ (0.01) $ (0.02)
Assumptions:
Annualized dividend yield 0.70% 0.70% 0.70%
Common stock price volatility 62.1% 39.0% 35.40%
Risk-free rate of return 4.41%-5.93% 5.39%- 5.65% 5.87%
Expected option term (years) 5.0 5.0 5.0
10. Segment Information and Major Customers
The Company operates primarily in two industry segments, automotive and
aerospace. Financial information for each segment and major customers is
summarized as follows (in thousands):
1999
--------------------------------------------
Automotive Aerospace Total
--------------------------------------------
Net sales $203,963 $44,842 $248,805
Operating profit (loss) (3,549) 4,076 527
Identifiable assets 252,556 45,802 298,358
Depreciation and
amortization expenses 22,916 1,175 24,091
Capital expenditures 15,730 1,611 17,341
43
10. Segment Information and Major Customers (continued)
1998
----------------------------------------------
Automotive Aerospace Total
----------------------------------------------
Net sales $195,891 $49,484 $245,375
Operating profit (loss) (8,765) 3,177 (5,588)
Identifiable assets 276,063 52,696 328,759
Depreciation and
amortization expense 20,167 1,246 21,413
Capital expenditures 47,577 1,408 48,985
1997
----------------------------------------------
Automotive Aerospace Total
----------------------------------------------
Net sales $168,869 $42,688 $211,557
Operating profit 45,522 4,037 49,559
Identifiable assets 275,153 56,403 331,556
Depreciation and
amortization expense 13,842 1,755 15,597
Capital expenditures 85,304 1,893 87,197
The automotive segment includes the design, development and manufacture of
propellant-actuated devices for use in automotive safety products. The products
currently in production are inflators and electric initiators which are sold to
automotive module and inflator manufacturers. The aerospace segment primarily
includes the manufacture and sale of propellant and explosive-actuated devices
for the U.S. government and prime contractors of the U.S. government and foreign
governments, and the manufacture and sale of similar explosive-actuated devices
for commercial aircraft. Customer payments of accounts receivable are
reasonably prompt and collateral is not required.
44
10. Segment Information and Major Customers (continued)
Customers representing 10% or more of consolidated net sales are as follows:
1999 1998 1997
----------------------------------
Takata Corporation 30% 33% 24%
Daicel Chemical Industries 11% 12% 7%
Delphi Interior & Lighting 20% 15% 18%
Sales to foreign customers were 44%, 48%, and 38%, of consolidated net sales for
the years 1999, 1998 and 1997, respectively, and consisted primarily of sales to
Asian automotive module and inflator manufacturers. The Company ships product
to its Asian automotive customers' manufacturing operations located both in the
United States and Asia.
Accounts receivable are summarized as follows (in thousands):
1999 1998
------------------------
Automotive $27,812 $30,366
Aerospace 7,424 13,632
------------------------
$35,236 $43,998
========================
45
11. Quarterly Results of Operations (Unaudited)
October 31 January 31 April 30 July 31
----------------------------------------------------------------
(in thousands, except share data)
1999
- ----
Net sales $56,793 $59,434 $ 66,700 $65,878
Gross profit (loss) 1,509 2,871 5,969 7,505
Net earnings (loss) (2,716) (1,001) 324 985
Earnings (loss) per share--basic and diluted $ (0.13) $ (0.05) $ 0.02 $ 0.05
1998
- ----
Net sales
Gross profit (loss) $57,335 $59,414 $ 63,592 $65,034
Earnings (loss) before cumulative effect of 10,164 8,109 (12,908) 1,439
change in accounting principle
Cumulative effect of change in accounting
principle 4,632 2,378 (14,925) (1,361)
Net earnings (loss)
10,040 - - -
Earnings (loss) per share before cumulative (5,408) 2,378 (14,925) (1,361)
effect of change in accounting principle--basic
and diluted
Cumulative effect of change in accounting
principle--basic and diluted
$ 0.23 $ 0.12 $ (0.72) $ (0.08)
Earnings (loss) per share--basic and diluted
$ (0.49) - - -
$ (0.26) $ 0.12 $ (0.72) $ (0.08)
During the quarter ended July 31, 1999, the Company received a $2.8 million
royalty payment net of tax related to the technology transfer agreement with
Daicel. The royalty payment was recognized as other income ratably over the
year ended July 31, 1999. During the quarters ended July 31, 1998, the Company
recorded other income of $1.8 million net of tax, or $0.09 per share, related to
royalty payments received under the technology transfer agreement with Daicel.
During the quarter ended April 30, 1998, the Company recorded one-time charges
of $17.2 million net of tax, or ($0.84) per share, related to inventory
adjustments, disposal of early production inflators, domestic initiator
consolidation, settlement of a legal claim, inflator equipment obsolescence, and
aerospace inventory obsolescence.
The Company adopted SOP 98-5, Reporting on the Costs of Start-up Activities, as
of August 1, 1997, which was accounted for as a cumulative effect of change in
accounting principle.
46
Item 9 - Changes In And Disagreements With Accountants On Accounting And
- -------------------------------------------------------------------------
Financial Disclosure
- --------------------
Not applicable
47
PART III
Item 10 - Directors And Executive Officers Of The Registrant
- ------------------------------------------------------------
The information required by this item will appear in, and is incorporated by
reference from, the Registrant's definitive proxy statement for its 2000 annual
shareholders' meeting to be filed with the Securities and Exchange Commission
prior to November 29, 1999.
Item 11 - Executive Compensation
- --------------------------------
The information required by this item will appear in, and is incorporated by
reference from, the Registrant's definitive proxy statement for its 2000 annual
shareholders' meeting to be filed with the Securities and Exchange Commission
prior to November 29, 1999.
Item 12 - Security Ownership Of Certain Beneficial Owners And Management
- -------------------------------------------------------------------------
The information required by this item will appear in, and is incorporated by
reference from, the Registrant's definitive proxy statement for its 2000 annual
shareholders' meeting to be filed with the Securities and Exchange Commission
prior to November 29, 1999.
Item 13 - Certain Relationships And Related Transactions
- --------------------------------------------------------
The information required by this item, if any, will appear in, and is
incorporated by reference from, the Registrant's definitive proxy statement for
its 2000 annual shareholders' meeting to be filed with the Securities and
Exchange Commission prior to November 29, 1999.
48
PART IV
Item 14 - Exhibits, Financial Statement Schedules And Reports On Form 8-K
- -------------------------------------------------------------------------
(a) Documents filed as a part of this report:
(1) Financial Statements:
Report of Independent Auditors
Consolidated Balance Sheets - July 31, 1999 and 1998
Consolidated Statements of Operations
Years ended July 31, 1999, 1998, and 1997
Consolidated Statements of Stockholders' Equity
Years ended July 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows
Years ended July 31, 1999, 1998, and 1997
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules required to be filed by Item 8 of Form
10-K and by paragraph (d) of this Item 14:
The schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable, and therefore, have been omitted.
(3) Exhibits required to be filed by Item 601 of Regulation S-K and
paragraph (c) of this Item 14:
Exhibit 3.1 - Articles of Incorporation, as amended (filed herewith).
Exhibit 3.2 - By-laws, as amended (filed herewith).
Exhibit 10.1 - Amended and Restated Revolving Credit Agreement, dated
April 10, 1998 (incorporated by reference from the
Company's Form 10-Q for the period ended May 1, 1998).
Exhibit 10.2 - First Amendment to Amended and Restated Revolving
Credit Agreement dated June 11, 1998 (incorporated by
reference from the Company's Form 10-K for the period
ended July 31, 1998).
49
Exhibit 10.3 - Second Amendment to Amended and Restated Revolving
Credit Agreement dated December 10, 1998 (incorporated
by reference from the Company's Form 10-Q for the
period ended October 30, 1998).
Exhibit 10.4 - Retirement Agreement dated May 15, 1990 between the
Company and Charles B. Kafadar (filed herewith).
Exhibit 10.5 - Rights Agreement dated March 25, 1998 between the
Company and Chase Mellon Shareholder Services, L.L.C.
(incorporated by reference from the Company's Form 8-A
filed April 8, 1998).
Exhibit 10.6 - First Amendment to Rights Agreement dated February 19,
1999 between the Company and Chase Mellon Shareholder
Services, L.L.C. (incorporated by reference from the
Company's Form 8-K filed February 19, 1999).
Exhibit 10.7 - Second Amendment to Rights Amendment dated August 23,
1999 among the Company, Chase Mellon Shareholder
Services, L.L.C. and LaSalle Bank National Association
(incorporated by reference from the Company's Form 8-K
filed August 24, 1999).
Exhibit 10.8 - OEA, Inc. 1997 Employee Stock Purchase Plan
(incorporated by reference from the Company's
Definitive Proxy Statement on Schedule 14A filed
November 28, 1997).
Exhibit 10.9 - OEA, Inc. Employee's Stock Option Plan (incorporated
by reference from the Company's Form S-8 filed
November 11, 1998).
Exhibit 10.10 - OEA, Inc. Nonemployee Director's Stock Option Plan
(incorporated by reference from the Company's Form S-8
filed November 11, 1998).
Exhibit 10.11 - OEA, Inc. Director's Compensation Plan (incorporated
by reference from the Company's Definitive Proxy
Statement on Schedule 14A filed December 15, 1998).
Exhibit 10.12 - Form of Change of Control Employment Agreement (filed
herewith).
50
Exhibit 21 - During fiscal year 1999, the Registrant was the parent
company of each of the following described companies:
Percent of Outstanding
Corporation Stock Owned by Parent
----------- ----------------------
OEA Aerospace, Inc. a California corporation, which 100%
owns 100% of Aerotest Operations, Inc., a California
corporation
OEA Europe S.A.R.L., a corporation in France 100%
The above entities are included in the consolidated financial
statements of the Registrant being submitted herewith.
Exhibit 23 - Consent of Ernst & Young LLP
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K during the quarter ended July 31, 1999.
None
51
SIGNATURES
----------
Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Date: October 15, 1999
OEA, INC.
Registrant
By /s/ Robert J. Schultz
------------------------------------
Robert J. Schultz, Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated:
Directors and Officers
- ----------------------
/s/ Robert J. Schultz /s/ Charles B. Kafadar
__________________________________ ______________________________________
Robert J. Schultz, Chairman Charles B. Kafadar, CEO, Principal
Executive Officer, and Director
/s/ George S. Ansell /s/ Philip E. Johnson
__________________________________ ______________________________________
George S. Ansell, Director Philip E. Johnson, Director
/s/ Donald E. Miller /s/ J. Thompson McConathy
__________________________________ ______________________________________
Donald E. Miller, Director J. Thompson McConathy, Vice President
Finance and Principal Financial Officer
/s/ Jepson S. Fuller
__________________________________
Jepson S. Fuller, Controller and
Principal Accounting Officer
52