1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 8, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SPECIAL DEVICES, INCORPORATED
(EXACT NAME OF EACH REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 3714 95-3008754
(STATE OF INCORPORATION OR (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
SCOT, INCORPORATED
DELAWARE 3728 36-3972852
(STATE OF INCORPORATION OR (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
14370 WHITE SAGE ROAD
MOORPARK, CALIFORNIA 93021
(805) 553-1200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES)
JOHN M. CUTHBERT
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SPECIAL DEVICES, INCORPORATED
14370 WHITE SAGE ROAD
MOORPARK, CALIFORNIA 93021
(805) 553-1200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
WITH A COPY TO:
KENNETH M. DORAN, ESQ.
GIBSON, DUNN & CRUTCHER LLP
333 SOUTH GRAND AVENUE
LOS ANGELES, CALIFORNIA 90071
(213) 229-7000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ] ---------
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ---------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ---------
------------------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM OFFERING PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER UNIT AGGREGATE OFFERING PRICE REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------------
11 3/8% Senior Subordinated Notes
due 2008, Series B............... $100,000,000 100% $100,000,000 $27,800
- --------------------------------------------------------------------------------------------------------------------------------
Guarantee of the 11 3/8% Senior
Subordinated Notes due 2008...... $100,000,000 None(1) None(1) None(1)
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
(1) Pursuant to Rule 457(n) under the Securities Act of 1933, no separate fee is
payable for the Guarantee.
------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED APRIL 8, 1999
SPECIAL DEVICES, INCORPORATED
OFFER TO EXCHANGE
11 3/8% SENIOR SUBORDINATED NOTES DUE 2008, SERIES B
REGISTERED UNDER THE SECURITIES ACT
FOR
11 3/8% SENIOR SUBORDINATED NOTES DUE 2008, SERIES A
We hereby offer, upon the terms and conditions described in this
prospectus, to exchange all of our outstanding and unregistered 11 3/8% Senior
Subordinated Notes due 2008, Series A ("OLD NOTES") for our registered 11 3/8%
Senior Subordinated Notes due 2008, Series B ("NEW NOTES"). The Old Notes were
issued on December 15, 1998 and, as of the date of this prospectus, an aggregate
principal amount of $100.0 million is outstanding. The terms of the New Notes
are identical to the terms of the Old Notes except that the New Notes will be
registered under the Securities Act and will not contain any legends restricting
their transfer. The Old Notes and New Notes are sometimes collectively referred
to as the "NOTES."
TERMS OF THE EXCHANGE OFFER
- - Expiration date of 5:00 p.m., New York City time, on , 1999,
unless extended
- - We will exchange New Notes for all validly tendered Old Notes that are not
withdrawn
- - Tenders may be withdrawn at any time prior to the expiration date
- - Exchanges of notes will not be taxable exchanges for U.S. federal income tax
purposes
- - We will not receive any proceeds from the exchange offer
- - The terms of the New Notes are substantially identical to those of the Old
Notes, except for certain transfer restrictions and registration rights
relating to the Old Notes
- - If you fail to tender your Old Notes, you will continue to hold unregistered
securities and your ability to transfer them could be adversely affected
TERMS OF THE NOTES
- - The Notes will mature on December 15, 2008
- - We will pay interest on the Notes semi-annually on June 15 and December 15 of
each year, beginning on June 15, 1999
- - We have the option to redeem all or a portion of the Notes on or after
December 15, 2003 at certain rates set forth on page 74 of this prospectus
- - We also have the option to redeem up to 35% of the original aggregate
principal amount of the Notes on or prior to December 15, 2001 with the net
cash proceeds from a public equity offering
- - The Notes are unsecured obligations and rank junior in right of payment to our
existing and future senior debt. As of January 31, 1999, we had $70.8 million
of senior debt
- - Scot, Incorporated, our wholly owned subsidiary, has guaranteed our
obligations under the Notes
-------------------------
See "Risk Factors" beginning on page 11 of this prospectus for a discussion
of matters that you should consider before deciding whether to exchange your Old
Notes for New Notes.
-------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the notes to be distributed in the
exchange offer or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
-------------------------
The date of this prospectus is , 1999
3
TABLE OF CONTENTS
PAGE
----
Disclosure Regarding Forward-Looking
Statements........................ 1
Where You Can Find More Information
About the Company................. 2
Prospectus Summary.................. 3
Risk Factors........................ 11
The Transactions.................... 22
Sources and Uses of Funds........... 23
The Exchange Offer.................. 24
Capitalization...................... 33
Selected Historical Consolidated
Financial Data.................... 34
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 36
PAGE
----
Business............................ 47
Management.......................... 60
Certain Transactions................ 67
Security Ownership of Certain
Beneficial Owners and
Management........................ 69
Description of New Credit
Facility.......................... 71
Description of Notes................ 73
Book-Entry; Delivery and Form....... 112
Plan of Distribution................ 114
Legal Matters....................... 114
Experts............................. 114
Index to Financial Statements....... F-1
We have not authorized any dealer, salesperson or other person to give any
information or represent anything to you other than the information contained in
this prospectus. You must not rely on unauthorized information or
representations. This prospectus does not offer to sell or ask for offers to buy
any of the securities in any jurisdiction where it is unlawful, where the person
making the offer is not qualified to do so, or to any person who can not legally
be offered the securities.
The information in this prospectus is current only as of the date on its
cover, and may change after that date. For any time after the cover date of this
prospectus, we do not represent that our affairs are the same as described or
that the information in this prospectus is correct, nor do we imply those things
by delivering this prospectus to you.
Until , 1999 (90 days after the date of this prospectus), all
dealers that effect transactions in these securities, whether or not
participating in this exchange offer, may be required to deliver a prospectus.
This exchange offer is not being made to, nor will we accept surrenders for
exchange from, holders of outstanding notes in any jurisdiction in which this
exchange offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of such jurisdiction.
i
4
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this prospectus under the sections
entitled "Prospectus Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" are
forward-looking. They include statements about our expectations, beliefs, plans,
objectives, assumptions or future events or performance. These forward-looking
statements are based on our expectations and are subject to a number of risks
and uncertainties. Certain of these risks and uncertainties are beyond our
control. Our actual results may differ materially from those suggested by these
forward-looking statements for various reasons, including those discussed under
the sections entitled "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business." You can find many
of these statements by looking for words such as "believes," "expects,"
"anticipates," "estimates" or similar expressions used in this prospectus. Some
of the key factors that have a direct bearing on our results of operations are:
- the competitive environment in the automotive and aerospace industries in
general and in the specific markets for our products,
- reliance on major customers, such as TRW and Autoliv (formerly Morton
International),
- the number of new automobiles sold (particularly in North America),
- continued acceptance of airbags as the principal secondary restraint
system incorporated in automobiles,
- voluntary incorporation of side and rear airbags and other safety devices
by automobile manufacturers,
- market acceptance of our new products,
- our ability to continue increasing the automation of our manufacturing
process in a timely and efficient manner,
- the impact of government regulations on our ability to obtain and
complete government contracts,
- changes in prevailing interest rates and the availability of favorable
terms of financing to fund the anticipated growth of our business,
- inflation,
- changes in or failure to comply with federal, state and/or local
governmental regulations, including our ability to safely manufacture
products which contain pyrotechnic devices,
- product liability and other claims asserted against us,
- our significant debt and the impact of increases in interest rates on
such debt and
- labor disturbances.
Given these uncertainties, you are cautioned not to place undue reliance on
such forward-looking statements and plans, which speak only as of the date of
this prospectus. We do not undertake any responsibility to publicly release any
revisions to these forward-looking statements to take into account events or
circumstances that occur after the date of this prospectus. Additionally, we do
not undertake any responsibility to update you on the occurrence of any
unanticipated events which may cause actual results to differ from those
expressed or implied by the forward-looking statements contained in this
prospectus.
1
5
WHERE YOU CAN FIND MORE INFORMATION ABOUT THE COMPANY
We have filed a Registration Statement on Form S-4 to register with the
Commission the New Notes to be issued in exchange for the Old Notes. This
prospectus is part of that Registration Statement. As allowed by the
Commission's rules, this prospectus does not contain all of the information you
can find in the Registration Statement or the exhibits to the Registration
Statement. This prospectus contains summaries of the material terms and
provisions of certain documents and in each instance we refer you to the copy of
such document filed as an exhibit to the Registration Statement.
From August 1991 until December 15, 1998, we were subject to the
informational requirements of the Securities and Exchange Act of 1934, as
amended, and in accordance therewith, filed reports, proxy statements and other
information with the Commission. Upon the effectiveness of the Registration
Statement, of which this prospectus forms a part, we will once again be subject
to the informational requirements of the Exchange Act, and in accordance
therewith we will file annual, quarterly and other reports and information with
the Commission.
The Registration Statement (including the exhibits and schedules thereto)
and the periodic reports and other information filed by us with the Commission
may be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the regional offices of the Commission located at 7 World Trade Center, 13th
Floor, New York, New York 10048, and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials may be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and its public reference facilities in New
York, New York and Chicago, Illinois, at prescribed rates. Such information may
also be accessed electronically by means of the Commission's homepage on the
Internet at http://www.sec.gov., which contains reports, proxy and information
statements and other information regarding registrants, including us, that file
electronically with the Commission.
Pursuant to the indenture governing the Notes, we have agreed, whether or
not subject to the informational requirements of the Exchange Act, to provide
the trustee and holders of the Notes with annual, quarterly and other reports at
the times and containing in all material respects the information specified in
Sections 13 and 15(d) of the Exchange Act and to file such reports with the
Commission.
2
6
PROSPECTUS SUMMARY
This brief summary highlights selected information from the prospectus. It
does not contain all of the information that is important to you. We urge you to
carefully read and review the entire prospectus and the other documents to which
it refers to fully understand the terms of the Notes and the exchange offer. In
this prospectus, the "Company," "we," "us" and "our" refer to Special Devices,
Incorporated and its subsidiaries, unless the context requires otherwise. The
term "you" refers to holders of the Old Notes. The term "Fiscal" used in
conjunction with a year refers to the Company's fiscal year ended or ending on
October 31 of that year.
THE COMPANY
We are a leading designer and manufacturer of highly reliable precision
engineered pyrotechnic devices. These devices are used predominantly in vehicle
airbag and other automotive safety systems as well as in various aerospace
applications. Our primary products are initiators, which function like an
"electrical match" to ignite the gas generating charge in an automotive airbag
system or to provide precision ignitions in aerospace-related products. In
manufacturing our products, which utilize pyrotechnic materials, we ensure safe
handling and processing by following strict safety procedures that we have
developed over the past 35 years.
We have two divisions: an Automotive Products Division and an Aerospace
Division.
- We believe that our Automotive Products Division is the world's largest
supplier of initiators sold to leading U.S. and foreign automotive airbag
system manufacturers. Those manufacturers use our product in the assembly
of integrated airbag safety systems, which they then sell to automobile
original equipment manufacturers.
- Our Aerospace Division supplies initiators and other advanced pyrotechnic
products to aerospace companies. Those companies, in turn, use our
products in a variety of applications including tactical missile systems,
spacecraft launch vehicles and military aircraft crew safety systems.
We have consistently generated strong financial results, which are largely
a result of favorable industry dynamics, various barriers to entry and a leading
market position. From Fiscal 1994 to Fiscal 1998, our net sales increased at a
compound annual growth rate of 27.5% and our EBITDA increased at a compound
annual growth rate of 41.8%. For the last twelve months ended January 31, 1999,
our net sales were $167.5 million and our EBITDA was $34.3 million.
Our principal executive offices are located at 14370 White Sage Road,
Moorpark, California 93021, and our phone number is (805) 553-1200.
AUTOMOTIVE PRODUCTS DIVISION
We believe that our Automotive Products Division is the world's largest
supplier of initiators to airbag system manufacturers. We formed the division in
1989 after the United States government adopted regulations requiring the
installation of airbags and other crash protection systems in all new passenger
automobiles. Since that time, demand for our initiators has grown rapidly. We
attribute this growth in large part to the continuing evolution of automotive
safety standards and increased customer preferences for airbag-related safety
options. We expect continued growth in the demand for our products as the number
of airbag-equipped vehicles increases, the number of airbags per vehicle grows
and our customers implement new technologies. These new technologies include
seat belt pre-tensioners and "smart" airbag systems, both of which we expect
will require new types of initiators and sometimes more than one initiator per
product.
In recent years our Automotive Products Division has grown its net sales
and cash flows significantly. The Automotive Products Division increased its net
sales from $49.5 million in Fiscal 1994 to $135.2 million in Fiscal 1998. This
represents an increasing portion of the Company's total net sales during that
time (76.7% in Fiscal 1994 to 79.3% in Fiscal 1998). During the same period, our
Automotive Products Division increased its EBITDA from $5.7 million to $26.4
million, representing a compound annual growth rate of 46.7%.
3
7
We sell our initiators to leading domestic and foreign manufacturers of
airbag systems and subsystems. We have strong, long-term relationships with our
customers. In particular, we have supplier agreements with TRW, Autoliv ASP
Incorporated (formerly Morton International) and Atlantic Research Corporation.
We have been shipping initiators to Autoliv since 1990, TRW since 1991 and ARC
since 1994. In addition, we have established new relationships with other
growing safety systems suppliers, including Richard Hirschmann and Takata.
We have established a strong reputation for manufacturing high quality and
extremely reliable initiators. Since 1989, we estimate that approximately over
100 million of our initiators have been installed in automobiles. We do not know
of any instances where our initiators failed to perform. To date, we have
focused on developing glass-sealed, co-axial initiators. We believe that these
initiators are superior to plastic-sealed, spark-gap initiators, which are lower
priced and used in safety restraint systems outside the United States, primarily
in Europe. We are currently testing a new, low-cost, glass-sealed initiator (the
"AGI") that we expect will allow us to compete more favorably in Europe. We
intend to introduce this product during Fiscal 1999.
We base our success, in part, on years of investment in proprietary, highly
automated manufacturing equipment and the design of proprietary manufacturing
processes. In addition, we have significantly improved our operating efficiency
and profitability. We expect additional production efficiencies upon completion
of our relocation to our new facility in Moorpark, California during Fiscal
1999.
AEROSPACE DIVISION
Our Aerospace Division designs and manufactures highly reliable pyrotechnic
devices. Our customers use these devices in a variety of commercial and military
aerospace applications. The Aerospace Division's products include state-of-the
art initiators and mechanical subassemblies (such as explosive bolts, cable
cutters, actuators, valves, safe-arm devices, aircraft crew safety systems and
bomb ejectors) that incorporate these initiators. We have produced many of these
products for over 35 years. As a result, we have a strong reputation across a
diverse customer base which includes the United States government and leading
prime contractors such as Boeing, Lockheed Martin, Raytheon and Alliant
Techsystems.
Our aerospace initiators and the devices that incorporate them are used to
ignite larger pyrotechnic systems, including rocket motors, and activate
mechanical devices such as valves, directional fins, arm-fire devices, aircraft
crew ejection systems and rotary bomb ejectors.
We produce these high-cost-of-failure products according to customer
specifications. Lead times typically range between six to nine months in order
to satisfy the highly technical nature and intense product testing required
before shipment. As a result, our Aerospace Division produces a wider variety of
products in significantly lower volumes than our Automotive Products Division,
although these products typically generate higher gross margins than automotive
initiators. We believe that over the last four decades we have produced nearly
2,000 diverse products that are critical components in missile systems, bomb
deployment systems and satellite launching mechanisms.
Our Aerospace Division has produced stable financial results over the last
five years and has consistently generated strong cash flows. The Aerospace
Division has increased net sales from $15.0 million in Fiscal 1994 to $35.3
million in Fiscal 1998. The division's net sales have represented a decreasing
portion of the Company's net sales during that time (23.3% in Fiscal 1994 to
20.7% in Fiscal 1998) because of the significant growth of our Automotive
Products Division. During the same period, the Aerospace Division increased its
EBITDA from $2.8 million to $8.0 million, representing a compound annual growth
rate of 30.0%.
4
8
THE EXCHANGE OFFER
Securities to be Exchanged.... On December 15, 1998, we issued $100.0 million
aggregate principal amount of Old Notes to BT
Alex. Brown Incorporated and Paribas
Corporation (the "INITIAL PURCHASERS") in a
transaction exempt from the registration
requirements of the Securities Act of 1933, as
amended (the "SECURITIES ACT"). The terms of
the New Notes and the Old Notes are
substantially identical in all material
respects, except that the New Notes will
generally be freely transferable by their
holders. See "-- Resales of the New Notes" in
this table below.
The Exchange Offer............ We are offering to exchange $1,000 principal
amount of New Notes for each $1,000 principal
amount of Old Notes. As of the date hereof,
$100.0 million aggregate principal amount of
Old Notes is outstanding.
Expiration Date............... The exchange offer will expire at 5:00 p.m.,
New York City time, on , 1999, or
such later date and time to which it is
extended (the "EXPIRATION DATE").
Withdrawal Rights............. The tender of the Old Notes pursuant to the
exchange offer may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the
Expiration Date. Any Old Notes not accepted for
exchange for any reason will be returned
without expense to the tendering holder thereof
as soon as practicable after the expiration or
termination of the exchange offer.
Interest on the New Notes and
Old Notes................... Interest on the New Notes will accrue from the
date of the original issuance of the Old Notes
or from the date of the last periodic payment
of interest on the Old Notes, whichever is
later. No additional interest will be paid on
Old Notes tendered and accepted for exchange.
Conditions of the Exchange
Offer......................... The exchange offer is not conditioned upon any
minimum principal amount of Old Notes being
tendered for exchange. The only condition to
the exchange offer is the declaration by the
Commission of the effectiveness of the
Registration Statement of which this prospectus
constitutes a part.
Procedures for Tendering Old
Notes......................... Each holder of the Old Notes wishing to accept
the exchange offer must complete, sign and date
the letter of transmittal, or a copy thereof,
in accordance with the instructions contained
in this prospectus and in the letter of
transmittal itself, and mail or otherwise
deliver the letter of transmittal, or the copy,
together with the Old Notes and any other
required documentation, to the exchange agent
at the address set forth in this prospectus.
Persons holding the Old Notes through the
Depository Trust Company ("DTC") and wishing to
accept the exchange offer must do so pursuant
to the DTC's Automated Tender Offer Program, by
which each tendering participant will agree to
be bound by the letter of transmittal. By
executing or agreeing to be bound by the letter
of transmittal, each holder will represent to
us that, among other things:
5
9
- the New Notes acquired pursuant to the
exchange offer are being obtained in the
ordinary course of business of the person
receiving such New Notes, whether or not such
person is the registered holder of the Old
Notes,
- the holder is not engaging in and does not
intend to engage in a distribution of such
New Notes,
- the holder does not have an arrangement or
understanding with any person to participate
in the distribution of such New Notes and
- the holder is not an "affiliate," as defined
under Rule 405 promulgated under the
Securities Act, of the Company.
Guaranteed Delivery
Procedures.................... If your Old Notes are not immediately available
to you or if you cannot deliver your Old Notes
or any other documents required by the letter
of transmittal to the exchange agent prior to
the Expiration Date (or complete the procedure
for book-entry transfer on a timely basis), you
may tender your Old Notes according to the
guaranteed delivery procedures set forth in the
letter of transmittal. See "The Exchange
Offer -- Guaranteed Delivery Procedures"
beginning on page 28.
Acceptance of Old Notes and
Delivery of New Notes......... We will accept for exchange any and all Old
Notes which are properly tendered (and not
withdrawn) in the exchange offer prior to 5:00
p.m., New York City time, on the Expiration
Date. The New Notes issued pursuant to the
exchange offer will be delivered promptly
following the expiration date.
Exchange Agent................ United States Trust Company of New York is
serving as exchange agent (in such capacity,
the "EXCHANGE AGENT") in connection with the
exchange offer.
Federal Income Tax
Consequences.................. The exchange of Old Notes for New Notes
pursuant to the exchange offer should not be a
taxable event for federal income tax purposes.
See "The Exchange Offer -- Federal Income Tax
Consequences" beginning on page 31.
Resales of the New Notes...... Based on existing interpretations by the staff
of the SEC set forth in no-action letters
issued to third parties, we believe that New
Notes issued pursuant to the exchange offer to
a holder in exchange for Old Notes may be
offered for resale, resold and otherwise
transferred by a holder (other than (i) a
broker-dealer who purchased the Old Notes
directly from us for resale pursuant to Rule
144A under the Securities Act or any other
available exemption under the Securities Act or
(ii) a person that is an affiliate of the
Company within the meaning of Rule 405 under
the Securities Act), without compliance with
the registration and prospectus delivery
provisions of the Securities Act, provided that
such holder is acquiring the New Notes in the
ordinary course of business and is not
participating, and has no arrangement or
understanding with any person to participate,
in a distribution of the New Notes. Each
broker-dealer that receives New Notes for its
own account in exchange for Old Notes, where
such Old Notes were acquired by such broker as
a result of market-making or
6
10
other trading activities, must acknowledge that
it will deliver a prospectus in connection with
any resale of such New Notes. See "The Exchange
Offer -- Resales of the Exchange Notes" on page
32 and "Plan of Distribution" on page 114.
Termination of Rights......... Pursuant to the Old Notes and the registration
rights agreement entered into between us and
the Initial Purchasers (the "REGISTRATION
RIGHTS AGREEMENT"), holders of Old Notes have
rights to receive Additional Interest in the
event of a Registration Default (as defined in
"The Exchange Offer -- Purpose and Effect;
Termination of Rights" on pages 24-25) and
other rights intended for holders of
unregistered securities. "ADDITIONAL INTEREST"
means additional interest of 0.50% per annum
per $1,000 principal amount of Old Notes during
the first 90-day period immediately following
the occurrence of a Registration Default,
increased by an additional 0.50% per annum per
$1,000 principal amount of Old Notes during the
second 90-day period following a Registration
Default, pursuant to the terms of the
Registration Rights Agreement.
Holders of New Notes will not be, and upon
consummation of the exchange offer, holders of
Old Notes will no longer be, entitled to (i)
the right to receive Additional Interest or
(ii) other rights under the Registration Rights
Agreement intended for holders of unregistered
securities.
Effect of Not Tendering Old
Notes for Exchange............ Old Notes that are not tendered or that are
tendered but not accepted will, following the
completion of the exchange offer, continue to
be subject to the existing restrictions upon
transfer thereof. We will have no further
obligation to provide for the registration
under the Securities Act of such Old Notes.
Fees and Expenses............. All expenses incident to our consummation of
the exchange offer will be borne by us.
7
11
THE NOTES
Except as otherwise indicated, the following description relates both to
the Old Notes and the New Notes. The New Notes will evidence the same
indebtedness as the Old Notes, and will be entitled to the benefits of the same
indenture. The form and terms of the New Notes are the same as the form and
terms of the Old Notes, except that the New Notes have been registered under the
Securities Act and therefore will not bear legends restricting the transfer
thereof.
Issuer........................ Special Devices, Incorporated. See "The
Transactions" beginning on page 22 for a
description of the transactions by which we
assumed the obligations of SDI Acquisition
Corp. under the Old Notes and the indenture.
Securities Offered............ $100,000,000 principal amount of 11 3/8% Senior
Subordinated Notes due 2008.
Maturity...................... December 15, 2008.
Interest Rate................. 11 3/8% per year.
Interest Payment Dates........ We will pay interest on the Notes semi-annually
on each June 15 and December 15, beginning on
June 15, 1999. Interest will accrue from the
issue date of the Notes. The New Notes will
bear interest from the most recent date to
which interest has been paid on the Old Notes
or, if no interest has been paid on the Old
Notes, from December 15, 1998.
Ranking....................... The Notes are unsecured senior subordinated
obligations of the Company and rank junior in
right of payment to our existing and future
senior debt. The guarantees by our subsidiaries
will be subordinated to existing and future
senior debt of our subsidiaries that guarantee
the Notes. As of January 31, 1999, we
(including our subsidiaries) had $70.8 million
of senior debt, excluding approximately $21.8
million that we have available to borrow under
our credit facility.
Guarantees.................... Scot, Incorporated, a wholly owned subsidiary
("SCOT"), has unconditionally guaranteed our
obligations under the Notes. If we create or
acquire a new domestic subsidiary, it too will
guarantee the Notes unless we designate the
subsidiary as an "unrestricted subsidiary"
under the indenture or the subsidiary does not
have significant assets.
Optional Redemption........... We cannot redeem the Notes until December 15,
2003. Thereafter, we may redeem some or all of
the Notes at the redemption prices set forth
herein, plus accrued interest. See "Description
of the Notes -- Redemption -- Optional
Redemption" on page 74 for a list of those
redemption prices.
Optional Redemption after
Public Equity Offerings....... At any time (which may be more than once)
before December 15, 2001, we may buy back up to
35% of the outstanding Notes with money that we
raise in one or more public equity offerings,
as long as:
- we pay 111.375% of the face amount of the
Notes, plus interest,
- we buy the Notes back within 120 days of
completing the public equity offering and
8
12
- at least 65% of the sum of the aggregate
principal amount of Notes issued under the
indenture remains outstanding immediately
after redemption.
Change of Control............. If a change of control occurs, we must give
holders of the Notes the opportunity to sell
their Notes to us at 101% of their face amount,
plus accrued interest. See "Description of the
Notes -- Change of Control" beginning on page
76.
Certain Indenture
Provisions.................... The indenture governing the Notes contains
covenants limiting our ability to:
- incur additional debt,
- pay dividends or distributions on, or
repurchase, capital stock,
- issue stock of subsidiaries,
- make certain investments,
- create liens on our assets to secure debt,
- enter into transactions with affiliates,
- merge or consolidate with another company or
- transfer or sell assets.
These covenants are subject to a number of
important limitations and exceptions. See
"Description of Notes -- Certain Covenants"
beginning on page 77.
Asset Sale Proceeds........... If we engage in asset sales, we generally must
either invest the net cash proceeds from such
sales in our business within a prescribed
period of time, repay senior debt or make an
offer to purchase a principal amount of the
Notes equal to the excess net cash proceeds. In
the event we purchase Notes with such proceeds,
the purchase price will be 100% of their
principal amount, plus accrued interest. See
"Description of Notes -- Certain
Covenants -- Limitation on Asset Sales"
beginning on page 80.
Use of Proceeds............... We will not receive any cash from the exchange
of the New Notes for the Old Notes. We used the
money raised from the sale of the Old Notes
(along with money from our new credit facility
and equity contributions) to:
- fund a portion of the consideration paid to
the Company's stockholders in connection with
the Transactions (as defined on page 21),
- refinance then-outstanding debt of the
Company and
- pay the transaction costs associated with the
Transactions.
RISK FACTORS
We urge you to carefully review the Risk Factors beginning on page 11 for a
discussion of factors you should consider before exchanging your Old Notes for
New Notes.
9
13
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
We have summarized below the historical consolidated financial data of the
Company for the last three fiscal years and for the three months ended February
1, 1998 and January 31, 1999. The information should be read in conjunction with
"Selected Historical Consolidated Financial Data" on page 34, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
beginning on page 36 and our historical consolidated financial statements and
related notes beginning on page F-1 of this prospectus.
THREE MONTHS ENDED
FISCAL YEAR ENDED OCTOBER 31, --------------------
----------------------------- FEB. 1, JAN. 31,
1996 1997 1998 1998 1999
------- ------- ------- -------- --------
(UNAUDITED)
(DOLLARS IN MILLIONS)
OPERATING DATA:
Net sales..................................... $104.5 $140.5 $170.5 $ 40.7 $ 37.7
Cost of sales................................. 84.3 112.6 131.6 32.5 30.7
------ ------ ------ ------ ------
Gross profit................................ 20.2 27.9 38.9 8.2 7.0
Operating expenses............................ 8.1 10.7 13.0 2.7 2.6
Recapitalization costs(1)..................... -- -- -- -- 15.6
------ ------ ------ ------ ------
Earnings (loss) from operations............. 12.0 17.2 25.9 5.6 (11.2)
Net interest income (expense)................. 0.1 0.1 -- -- (2.5)
------ ------ ------ ------ ------
Earnings (loss) before income taxes........... 12.2 17.3 25.9 5.6 (13.7)
Income taxes.................................. 4.7 6.7 10.4 2.2 (3.3)
------ ------ ------ ------ ------
Net earnings (loss)......................... $ 7.4 $ 10.7 $ 15.4 $ 3.4 $(10.4)
====== ====== ====== ====== ======
OTHER DATA:
EBITDA(2)..................................... $ 17.4 $ 23.6 $ 34.4 $ 7.4 $ 7.3
EBITDA margin(2).............................. 16.7% 16.8% 20.2% 18.1% 19.4%
Depreciation.................................. $ 5.4 $ 6.4 $ 8.5 $ 1.8 $ 3.0
Capital expenditures:.........................
Moorpark Facility........................... $ 3.1 $ 5.8 $ 16.5 $ 2.1 $ 2.4
Other....................................... 8.0 16.8 22.0 5.8 4.5
------ ------ ------ ------ ------
Total.................................... $ 11.1 $ 22.5 $ 38.5 $ 7.9 $ 6.9
====== ====== ====== ====== ======
Cash interest expense......................... $ 0.4 $ 0.3 $ 0.2 $ 0.1 $ 0.1
Ratio of earnings to fixed charges(3)......... 23.9x 33.2x 59.1x 49.5x (4.7x)
BALANCE SHEET DATA:
Total assets.................................. $ 86.2 $ 99.8 $124.6 $104.8 $136.9
Total debt.................................... 4.6 3.0 2.5 2.7 170.8
Stockholders' equity (deficit)................ $ 69.7 $ 81.4 $ 97.3 $ 84.9 $(79.6)
- ---------------
(1) We incurred approximately $15,600,000 in one-time pre-tax charges in
connection with the Recapitalization (representing approximately $5,600,000
in professional advisory fees and approximately $10,000,000 of compensation
expense relating to cash payments to settle certain outstanding stock
options).
(2) EBITDA is the sum of earnings before income taxes, interest, depreciation
and amortization expense. We have presented EBITDA information because we
believe that it is a widely accepted financial indicator of a company's
ability to service indebtedness. However, EBITDA does not represent cash
flow from operations as defined by generally accepted accounting principles
("GAAP"), is not necessarily indicative of cash available to fund all cash
flow needs, should not be considered as an alternative to net income or to
cash flows from operating activities (as determined in accordance with GAAP)
and should not be construed as an indication of a company's operating
performance or as a measure of liquidity. Our EBITDA is not necessarily
comparable with similarly-titled measures for other companies. EBITDA margin
equals EBITDA as a percentage of net sales.
(3) In calculating the ratio of earnings to fixed charges, earnings consist of
income (loss) before income taxes, plus fixed charges. Fixed charges consist
of interest incurred (which includes amortization of deferred financing
costs) whether expensed or capitalized and a portion of rental expense
(based on the one-third of rent expense convention) which management
believes is a reasonable approximation of an interest factor.
10
14
RISK FACTORS
You should carefully consider the information below in addition to all
other information provided to you in this prospectus before deciding whether to
exchange your Old Notes for New Notes.
RISKS RELATING TO THE NOTES
THERE ARE RISKS ASSOCIATED WITH FAILING TO EXCHANGE OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the exchange offer will continue to be subject to restrictions on
transfer of their Old Notes. In general, Old Notes may not be offered or sold
unless they are registered under the Securities Act and applicable state
securities laws or an exemption is available therefrom. After this exchange
offer, we do not anticipate registering any Old Notes under the Securities Act.
Accordingly, the liquidity of the market for a holder's Old Notes will be
adversely affected upon the completion of the exchange offer if a holder does
not participate. See "The Exchange Offer" beginning on page 24.
THERE ARE RISKS RELATED TO OUR SUBSTANTIAL LEVERAGE
We Have Large Amounts Of Debt
In connection with our recapitalization on December 15, 1998, we incurred
significant debt and, as a result, became highly leveraged. At January 31, 1999,
we had total debt of approximately $170.8 million (including $100.0 million of
Notes) and a stockholders' deficit of $79.6 million. On a pro forma basis,
assuming the Transactions had been completed on November 1, 1997, our ratio of
earnings to fixed charges would have been 1.4x for Fiscal 1998. See "The
Transactions -- The Recapitalization" on page 22.
We Have The Capacity For Additional Debt
In addition to this debt, we will also be permitted to incur substantial
additional debt in the future. As of January 31, 1999, approximately $21.8
million was available for additional borrowing under our credit facility. If new
debt is added to our current debt levels, the related risks that we now face
could intensify. See "Capitalization" on page 33, "Selected Historical
Consolidated Financial Data" on page 34, "Description of the New Credit
Facility" beginning on page 71 and "Description of the Notes -- Certain
Covenants -- Limitation on Incurrence of Additional Indebtedness" on page 77.
Consequences Of Debt
Our substantial debt may have important consequences, including:
- making it more difficult for us to satisfy our obligations with
respect to the Notes,
- increasing our vulnerability to general adverse economic and industry
conditions,
- limiting our ability to obtain additional financing to fund future
working capital, capital expenditures, research and development and
other general corporate requirements,
- requiring us to dedicate a substantial portion of our cash flow from
operations to make debt service payments, which would reduce our
ability to fund working capital, capital expenditures, research and
development and other general corporate requirements,
- limiting our flexibility in planning for, or reacting to, changes in
our business and the industry and
- placing us at a disadvantage when compared to those of our competitors
that have less debt.
There Is No Guarantee We Will Be Able To Service Our Debt
You should be aware that our ability to repay or refinance our current debt
or to fund planned capital expenditures, research and development expenses and
other obligations depends on our successful financial and operating performance
and on our ability to successfully implement our business strategy.
Unfortunately,
11
15
we cannot assure you that we will be successful in implementing our strategy or
in realizing our anticipated financial results. You should also be aware that
our financial and operational performance depends on general economic,
financial, competitive, legislative, regulatory and other factors, many of which
are beyond our control. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources"
beginning on page 42.
Based on our current level of operations and anticipated cost savings and
operating improvements, we believe our cash flow from operations, available cash
and available borrowings under our credit facility will be adequate to meet our
future liquidity needs through at least fiscal 1999.
We cannot assure you, however, that our business will generate sufficient
cash flow from operations, that currently anticipated cost savings and operating
improvements will be realized on schedule or that future borrowings will be
available to us under our credit facility in an amount sufficient to enable us
to service our debt, including the Notes, or to fund our other liquidity needs.
We may need to refinance all or a portion of our debt, including our credit
facility and the Notes, on or before maturity. We cannot assure you that we will
be able to refinance any of such debt on commercially reasonable terms or at
all.
WE ARE SUBJECT TO RESTRICTIVE DEBT COVENANTS
Our credit facility and the indenture contain a number of significant
covenants. These covenants limit our ability to, among other things:
- borrow additional money,
- make capital expenditures and other investments,
- pay dividends,
- merge, consolidate or dispose of our assets,
- enter into transactions with our affiliates and
- grant liens on our assets.
Our credit facility also requires us to meet certain financial tests. The
failure to comply with these tests would cause a default under our credit
facility. A default, if not waived, could result in acceleration of indebtedness
by the lenders under the credit facility, in which case the debt would become
immediately due and payable. If this were to occur, we might not be able to pay
our debt under the credit facility or borrow sufficient funds to refinance it.
Even if new financing is available, it may not be on terms that are acceptable
to us. Complying with these covenants may cause us to take actions that we
otherwise would not take, or not take actions that we otherwise would take. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" beginning on page 42 and
"Description of the New Credit Facility" beginning on page 71.
In connection with entering into the credit facility, we granted the
lenders a first priority lien on substantially all of our assets to secure our
obligations under the facility. In the event of a default under the credit
facility, the lenders could foreclose upon the assets pledged to secure our
obligations under the facility, and you, as holders of the Notes, might not be
able to receive any payments on the Notes until:
- any payment default under the credit facility was cured or waived,
- any acceleration of our debt under the credit facility was rescinded by
the lenders or
- our debt under the credit facility was discharged or paid in full.
12
16
THE NOTES ARE SUBORDINATED TO OTHER DEBT
Contractual Subordination
The Notes and the guarantees are unsecured and contractually subordinated
to all our and the guarantors' existing and future senior debt (including all
debt under the credit facility). See "Description of the Notes -- Subordination"
beginning on page 75.
Effective Subordination
The Notes and the guarantees are effectively subordinated to all our and
our subsidiaries' existing and future secured debt to the extent of the value of
the assets securing such debt. Indebtedness under our credit facility is secured
by liens against substantially all of our assets. In the event (1) we were to
default on any senior debt (such as our credit facility) or (2) we or our
property were involved in a bankruptcy, liquidation, dissolution, reorganization
or similar proceeding, our assets would be available first to satisfy any
obligations owing under the secured debt to secured creditors before any payment
could be made on the Notes. In addition, to the extent our assets could not
satisfy in full obligations owing on secured debt, the holders of such secured
debt would have a claim for any such shortfall that would rank, subject to any
contractual subordination, equally in right of payment with the Notes (or
effectively senior if the debt were issued by a subsidiary that is not a
guarantor). Thus, if either of the scenarios set forth in (1) or (2) above were
to occur, there might only be a limited amount of assets available to satisfy
your claims as a holder of the Notes.
As of January 31, 1999, we had approximately $70.8 million of secured debt
outstanding. Our assets may not be sufficient to repay this debt in full.
The Notes are also effectively subordinated to all debt of our subsidiaries
that are not guarantors of the Notes. Holders of indebtedness of, and trade
creditors of, such subsidiaries, would, in a bankruptcy, reorganization,
insolvency, receivership or similar proceeding relating to us or our property,
generally be entitled to payment of their claims from the assets of the affected
subsidiaries before such assets would be made available for distribution to our
creditors, including holders of the Notes.
THERE COULD BE ADVERSE CONSEQUENCES TO YOU IF A COURT FINDS A FRAUDULENT
CONVEYANCE
Various fraudulent conveyance laws have been passed for the protection of
creditors. These laws may be applied by a federal or state court to subordinate
or avoid the Notes in favor of our other existing or future creditors.
Under the federal bankruptcy law and comparable provisions of state
fraudulent transfer laws, the Notes and the guarantees could be voided, or
claims in respect of the Notes or the guarantees could be subordinated to all of
our or any guarantor's other debts if, among other things, we or such guarantor,
at the time we or such guarantor incurred the debt evidenced by the Notes or the
guarantee:
- received less than reasonably equivalent value or fair consideration for
the incurrence of such debt, or
- was insolvent or rendered insolvent by reason of such incurrence, or
- was engaged in a business or transaction for which our or such
guarantor's remaining assets constituted unreasonably small capital or
- intended to incur, or believed that we or it would incur, debts beyond
our or its ability to pay such debts as they mature.
In addition, any payment by us or such guarantor pursuant to the Notes or a
guarantee could be voided and required to be returned to us or such guarantor,
or to a fund for the benefit of our creditors or creditors of such guarantor.
13
17
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, the Company or a
guarantor would be considered insolvent if:
- the sum of its debts, including contingent liabilities, were greater than
the fair saleable value of all of its assets, or
- if the present fair saleable value of its assets were less than the
amount that would be required to pay its probable liability on its
existing debts, including contingent liabilities, as they become absolute
and mature or
- it could not pay its debts as they become due.
On the basis of historical financial information, recent operating history
and other factors, we believe that, after giving effect to the debt incurred in
connection with the offering of the Old Notes and the establishment of our
credit facility, neither the Company nor Scot (the sole guarantor of the Notes
as of the date of this prospectus):
- will be insolvent,
- will have unreasonably small capital for the business in which it is
engaged or
- will have incurred debts beyond its ability to pay such debts as they
mature.
There can be no assurance, however, as to what standard a court would apply in
making such determinations or that a court would agree with our conclusions in
this regard.
WE MAY NOT BE ABLE TO FUND A CHANGE OF CONTROL OFFER
Upon the occurrence of a Change of Control (as defined in the indenture),
we will be required to offer to repurchase all outstanding Notes at a purchase
price equal to 101% of the principal amount thereof plus accrued and unpaid
interest to the date of purchase. However, in such a situation, there can be no
guarantee that we will have sufficient funds to make the required repurchase of
Notes. If we were required to purchase the Notes, we would probably require
third party financing; however, we cannot be sure we would be able to obtain
such financing on acceptable terms, if at all. In addition, our credit facility
restricts our ability to repurchase the Notes, including in the event of a
Change of Control under the indenture. A Change of Control will result in an
event of default under our credit facility and may cause the acceleration of
certain debt, in which case we would have to pay in full our credit facility and
any other such senior debt before repurchasing the Notes. Certain important
corporate events, such as leveraged recapitalizations that would increase the
level of our debt, would not constitute a Change of Control under the indenture.
See "Description of Notes -- Change of Control" beginning on page 76.
THERE IS NO PUBLIC MARKET FOR THE NOTES
There is no active trading market for the Notes. We do not intend to apply
for listing of the Notes on any securities exchange or for quotation through the
National Association of Securities Dealers Automated Quotation system. The
Initial Purchasers have told us that they plan on making a market in the Notes,
but they do not have to do so, and may discontinue such activities at any time
without notice. In addition, such market-making activity will be subject to the
limitations imposed by the Securities Act and the Exchange Act, and may be
limited during the exchange offer. See "Plan of Distribution" on page 114.
Accordingly, there can be no assurance that an active public or other market
will develop for the Notes or as to the liquidity of or the trading for the
Notes.
The liquidity of any market for the Notes will depend upon various factors,
including:
- the number of holders of the Notes,
- the interest of securities dealers in making a market for the Notes,
- the overall market for high yield securities,
- our financial performance or prospects and
- the prospects for companies in our industry generally.
14
18
Historically, the market for non-investment grade debt such as the Notes
has been subject to disruptions that have caused substantial volatility in the
prices of securities similar to the Notes. We cannot assure you that the market
for the Notes, if any, will not be subject to similar disruptions. Any such
disruptions may adversely affect you as a holder of the Notes.
RISKS RELATING TO THE COMPANY
WE ARE DEPENDENT ON KEY CUSTOMERS
Our sales to TRW constituted 77.3% of total Automotive Products Division's
net sales in Fiscal 1996 (59.7% of our total net sales), 61.6% in Fiscal 1997
(49.1% of our total net sales) and 49.9% in Fiscal 1998 (39.7% of our total net
sales). Our Master Purchase Agreement with TRW does not require TRW to purchase
a minimum number of units or a specified percentage of its requirements from us
unless our prices are competitive with those offered by other suppliers and our
technology and quality are equivalent to or better than that of other suppliers.
In general, the TRW agreement may be terminated by TRW if:
- we breach our obligations,
- we become insolvent or bankrupt or dissolve or
- we fail to provide TRW with reasonable assurances that we can perform
under the TRW agreement.
In addition, TRW will not have to meet its purchase obligations if, in its
sole discretion, it determines that we will have difficulty meeting our supply
commitments. We determine manufacturing schedules and ship products to TRW based
upon delivery orders which specify the desired quantities and delivery dates.
This information is released several weeks in advance of delivery. Because the
number of airbag-system manufacturers in the United States is quite limited, a
significant decline in sales to TRW would have a material adverse effect on us.
See "Business -- Automotive Products Division -- Customers" beginning on page
51.
Our sales to Autoliv constituted 25.9% of the Automotive Products
Division's net sales (20.6% of our total net sales) during Fiscal 1997 and 31.3%
in Fiscal 1998 (24.9% of our total net sales). Pricing under our three-year
Supplier Agreement with Autoliv is determined annually by the parties. Prices
may be increased through negotiation if Autoliv requests a design change. We are
obligated to maintain pricing, terms, delivery, service and quality that are
consistent with industry standards. The Autoliv agreement may be terminated by
Autoliv if, among other things:
- we commit a material breach of our obligations,
- we are declared bankrupt or make an assignment for the benefit of
creditors or
- Autoliv determines that our products are not competitive with the
industry and we fail to correct the situation within a specified period.
A significant decline in sales to Autoliv would have a material adverse
effect on us. See "Business -- Automotive Products Division -- Customers."
Additionally, Autoliv is the parent company of Nouvelle Cartoucherie de
Survilliers, one of our competitors in the automotive initiator industry. See
"-- We Operate In A Competitive Environment -- Automotive Products Division" on
page 17.
We have in the past negotiated the unit prices for units sold to both TRW
and Autoliv during the terms of both agreements. Additional renegotiations in
the future resulting in reduced unit prices could adversely affect our financial
condition.
15
19
WE ARE DEPENDENT ON THE AUTOMOTIVE INDUSTRY
Automotive Products Division net sales constituted approximately 76.8% of
our total net sales in Fiscal 1996, 79.7% in Fiscal 1997 and 79.3% in Fiscal
1998. We attribute the growth and increasing success of the division in large
part to federal regulations requiring the phased-in use of airbags in
automobiles and increased sales of automobiles during the last several years.
Future changes in federal regulations, the rate of implementation of new
applications for airbags and initiators and the rate of sales of new automobiles
could adversely affect the success of the Automotive Products Division.
For the last few years, the automobile industry has grown significantly.
There is no guarantee that such growth will continue in the future. New
automobile sales are also cyclical. In general, new automobile sales are
affected by:
- economic cycles,
- consumer spending levels,
- the timing of the introduction of new models,
- changes in consumer preferences,
- governmental regulation of auto safety,
- potential labor difficulties,
- adverse weather conditions and
- potential problems with obtaining supplies and other risks of production.
Fewer new automobile sales could have an adverse effect on our Automotive
Products Division. In addition, the business of automotive component
manufacturers is generally subject to the seasonal automotive industry shutdowns
in July and December of each year. We typically make fewer shipments in the
third and fourth quarters of each calendar year as a result of these shutdowns.
This seasonality may have an adverse effect on the Automotive Products
Division's operations in the future once demand for airbags and airbag
initiators stabilizes. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Seasonality" on page 42.
Our Automotive Products Division competes in a very competitive market. We
and other automotive components suppliers are under constant pressure from major
customers to reduce product costs, improve quality and provide additional design
and engineering capabilities. The Automotive Products Division's continued
success will depend upon, among other things, its ability to continue to improve
its manufacturing efficiencies while minimizing costs. We anticipate that the
Automotive Products Division will continue making capital expenditures to
accomplish these objectives. Nevertheless, we cannot assure you that the
Automotive Products Division will be able to maintain satisfactory margins in
the face of downward pricing pressures.
WE ARE DEPENDENT ON THE DEFENSE INDUSTRY
We have been supplying components for United States defense programs for
over 30 years. Reliance upon defense programs has inherent risks. Some of these
risks include uncertain economic conditions, dependence on Congressional
appropriations and administrative allotment of funds, changes in governmental
policies that reflect military and political developments, and other facts
characteristic of the defense industry. We are unable to predict the impact, if
any, of changes in the political climate on defense appropriations for programs
that result in sales of our products.
Changes in the strategic direction of defense spending, the timing of
defense procurements and specific defense program appropriation decisions may
adversely affect our performance in coming years. The precise impact of these
matters on our profitability will depend on how well we can offset the negative
effects of these developments with new business and/or cost reductions. In view
of the continuing uncertainty
16
20
regarding the size, content and priorities of the annual Department of Defense
budget, the historical financial information relating to our defense-related
operations may not be indicative of future performance.
RELOCATION TO THE MOORPARK FACILITY MAY DISRUPT OUR OPERATIONS
We completed construction of our new facility in Moorpark, California (the
"MOORPARK FACILITY") during the first quarter of Fiscal 1999. In December 1998,
we began relocating our operations from our existing facility in Newhall,
California (the "NEWHALL FACILITY") to the Moorpark Facility. Seven automotive
initiator production lines and all Aerospace Division production will be
relocated approximately 30 miles to the Moorpark Facility from the Newhall
Facility. Relocation involves movement and reassembly of intricate and precisely
calibrated machinery. Because of the strict manufacturing tolerances associated
with our products, the relocation process may result in production delays and
interruptions. As of March 31, 1999, two automotive initiator lines had been
relocated to Moorpark as well as all of our aerospace operations.
In addition, process validation (the procedure through which a customer
verifies that a manufacturer's management, personnel, equipment, facilities and
processes are capable of producing products within satisfactory tolerances) may
cause delays. These delays are possible because relocating an existing line,
even if it has already undergone a process validation, requires a new (albeit
abbreviated) process validation for the relocated line. See
"Business -- Manufacturing -- Quality Control" on page 55. Because of these
potential delays, we have scheduled our relocation efforts to minimize
disruptions to production. Significant production delays or interruptions
associated with the relocation could have a material adverse effect on our
operations. As of March 31, 1999, four automotive initiator production lines
(two new lines and two relocated lines from Newhall) are currently in process
validation testing.
Relocation to the Moorpark Facility will require us to "requalify" as an
approved subcontractor in connection with at least two of the Aerospace
Division's government contracts. With respect to other government contracts,
requalification will only be required if waivers cannot be obtained. Our failure
to successfully requalify promptly or at all could have a material adverse
effect on us.
Notwithstanding our efforts to lessen the impact on our employees of our
relocation to the Moorpark Facility, the move could cause a portion of the
engineering or labor force currently employed at the Newhall Facility to leave
our employ because the Moorpark Facility is approximately 30 miles from the
Newhall Facility. If a significant number of our employees or key personnel were
to leave, this could have a material adverse effect on us. As of January 31,
1999, there has been no significant loss of employees due to the move. We expect
to realize certain recurring cost savings as a result of our relocation to the
Moorpark Facility, including savings relating to improved efficiencies,
materials handling, facilities maintenance, waste disposal and related items. We
cannot assure you, however, that these cost savings will actually be realized.
Additionally, until we fully integrate our manufacturing operations into our
Moorpark Facility, we expect to experience short-term operating inefficiencies.
WE OPERATE IN A COMPETITIVE ENVIRONMENT
Automotive Products Division
Currently, two major manufacturers, OEA, Inc. and the Company, and one
smaller manufacturer, Quantic Industries, Inc., compete in the domestic
automotive initiator market. Davey Bickford Smith ("DBS") and Nouvelle
Cartoucherie de Survilliers are the two major suppliers of airbag initiators in
Europe. Other companies, such as foreign manufacturers of initiators that have
not penetrated the U.S. market, may choose to enter the U.S. airbag initiator
market. In addition, during recent years, competition among manufacturers of
airbag initiators has intensified. As a result of this increased competition, we
and other manufacturers of initiators have had to significantly reduce the price
of initiators. We expect this competition to continue and to cause additional
price pressure on us and other initiator manufacturers. We cannot assure you
that we will be able to compete successfully in such an environment.
In November 1990, we entered into a perpetual technology license agreement
with DBS (the "DBS LICENSE AGREEMENT"). This license gives DBS the right to use
all our technology and to distribute initiators
17
21
worldwide using this technology. DBS, however, will not be able to sell
initiators to TRW or its affiliates in the U.S. DBS's obligation to pay us
royalties under this agreement ceased on January 1, 1999. To date, DBS has not
manufactured or distributed any products under the DBS License Agreement. If it
did, DBS would compete directly with us, and without having to pay royalties to
us for using our technology. Significant competition from DBS in Europe or the
U.S. could have a material adverse effect on our financial results. See
"Business -- Automotive Products Division -- Sales and Marketing" beginning on
page 52.
We believe that Autoliv, which is the parent of Nouvelle Cartoucherie de
Survilliers, is currently the only manufacturer of airbag systems to manufacture
initiators. Additional vertical integration of airbag systems manufacturers
could adversely affect us.
Aerospace Division
During the bid process for the initial contract for a program, the
Aerospace Division competes with several firms, some with greater financial
resources than ours. Once the initial contract is awarded, we generally enter
into contracts for additional products on a negotiated price basis and do not
bid competitively. We cannot assure you that we will successfully compete with
existing and future companies who are bidding against us. See
"Business -- Aerospace Division -- Competition" on page 54.
THERE ARE RISKS ASSOCIATED WITH NEW PRODUCT DEVELOPMENT, PRODUCT OBSOLESCENCE
AND THIRD-PARTY DEVELOPMENT OF ALTERNATIVE TECHNOLOGIES
To be successful we must continue to introduce new products as automotive
safety and aerospace technologies develop. We cannot assure you that our new
products will enjoy market acceptance. For example, because the European market
for automotive initiators is currently dominated by plastic-sealed, spark-gap
initiators, we cannot assure you that the AGI will win widespread acceptance as
a cost-effective substitute in the European market. Our failure to gain market
acceptance of our own new products could hurt our business and negatively affect
our financial performance.
The development process is often extremely complex and will likely become
more complex as automotive safety devices and aerospace applications become more
advanced. We cannot assure you that our product development efforts will be able
to keep pace with the rapid technological innovation in the automotive safety
and aerospace fields. Furthermore, it is possible that alternative technologies
could replace pyrotechnic-based initiators in the applications in which our
products are currently used. Our failure to keep pace with technological
innovations or switch to viable alternative technologies could hurt our business
and negatively affect our financial performance.
WE ARE SUBJECT TO ENVIRONMENTAL AND WORKPLACE REGULATIONS
We use various hazardous and toxic substances in our manufacturing
processes, including organic solvents and pyrotechnic materials. Our operations
are subject to numerous federal, state and local laws, regulations and permit
requirements relating to the handling, storage and disposal of those substances.
In general, organic solvents are recycled by a licensed disposal company and are
then reused by us. The pyrotechnic charge contained in units that are rejected
in the quality-control process is eliminated by explosive discharge pursuant to
government regulations. We believe that we are in substantial compliance with
applicable laws and regulations and have obtained all necessary permits. While
compliance with these laws and regulations increases our costs, our competitors
must also incur these costs.
In addition, we are subject to, among other things, stringent and
comprehensive occupational health and safety laws and regulations. These laws,
among other things, regulate employee exposure to hazardous substances in the
workplace. The nature of our operations exposes us to the risk of liabilities or
claims with respect to these environmental and workplace health and safety
matters. In the future, we may be required to make significant expenditures in
connection with these liabilities or claims. These laws and regulations may
become even more stringent and comprehensive and result in modifications to our
facilities or manufacturing practices. These modifications could involve
additional costs that could have an adverse effect on our business.
18
22
On February 18, 1999, an accidental explosion occurred at our Newhall
Facility, resulting in the death of one employee. We suspended all production at
Newhall for four days to conduct a thorough investigation of the accident along
with California OSHA, and suspended the blending of pyrotechnic powders for
approximately two weeks. Concurrently, we implemented contingency manufacturing
plans to meet customer demand from existing inventory and production from our
Mesa facility. No buildings or equipment, other than one transport vehicle, were
damaged in the accident. We resumed full production at Newhall on March 4, 1999.
California OSHA's investigation of the accident is continuing.
Based on information currently available, we believe that the cost of
compliance with existing environmental and health and safety laws and
regulations (and liability for known environmental conditions) will not have a
material adverse effect on our profitability. However, we cannot predict:
- whether environmental or health and safety laws and regulations that
impose additional costs will be enacted or promulgated in the future,
- how existing or future laws or regulations will be enforced,
administered or interpreted or
- whether our results of operations or financial condition will be
significantly affected by the accident which occurred at our Newhall
Facility in February 1999 (which resulted in one fatality) or any
future accidents, whether through third-party claims or actions by
state or federal regulators (such as OSHA) or
- the amount of future expenditures that we may incur in order to comply
with such laws or regulations to pay for remediation or to respond to
any future environmental claims.
See "Business -- Environmental Regulation" on page 58.
WE DEPEND ON KEY MANAGEMENT PERSONNEL
Our success depends in part on our ability to attract and retain highly
trained and qualified engineering personnel, especially pyrotechnic and
mechanical engineers. Competition for qualified employees can be intense, and
pyrotechnic engineers are especially scarce. We also depend on the continued
employment of our senior management. We cannot assure you that we will be
successful in attracting and retaining sufficient numbers of qualified
employees.
WE ARE SUBJECT TO LABOR ACTIVITY
Our employees are not currently unionized. An unsuccessful attempt to
organize the employees at the Newhall Facility occurred in June 1996. We cannot
assure you that labor organizing activities or other labor difficulties at one
or more of our facilities will not occur. The occurrence of labor difficulties
at our facilities or at those of any of our suppliers, transportation providers
or customers could have a material adverse effect on results of operations.
THERE ARE RISKS RELATED TO GOVERNMENT CONTRACTS AND COMPLIANCE WITH GOVERNMENT
REGULATIONS
The Aerospace Division is engaged primarily in supplying defense-related
equipment and services to contractors engaged by United States government
agencies or their subcontractors. As a result, the Aerospace Division is subject
to certain business risks that are specific to the defense industry. The
Aerospace Division is required to comply not only with the terms of its
contracts but also with an extensive body of regulations governing, among other
things, manufacturing, use of materials, safety and accounting.
Approximately 40% of the Aerospace Division's net sales in Fiscal 1998 were
made to the United States government. The remaining 60% of net sales were made
to government contractors or their subcontractors. Contracts with the United
States government are subject to cancellation for default or for convenience by
the government if deemed in its best interests. Such contracts generally provide
that if the contract is terminated for convenience, the contractor is entitled
to reimbursement of costs and a proportionate payment of profit for work
accomplished through the date of termination. If the contract is terminated for
default, the government is generally required to pay only for the work it has
accepted, and the contractor can be required to pay the
19
23
difference between the contract price and the cost to procure the remaining
unfulfilled contract items from another source as well as pay other damages. We
cannot assure you that any current or prospective contract for which we are a
primary contractor or any such contract for which we are a subcontractor or
supplier will not be terminated for default or for convenience by the government
or that any such cancellation will not result in us realizing a loss or failing
to realize the expected profit on any such contract. The loss of a significant
government contract or portion of such a contract could have a material adverse
effect on us.
We are further at risk because our government contracts include price
redetermination clauses. Some of these contracts are fixed-priced or fixed-price
incentive development contracts. As a result, we bear the risk that actual costs
may exceed those expected when the contracts are originally negotiated.
Although we try to comply with the terms of our contracts and all
applicable government rules, regulations and procedures, the United States
government and its agencies have substantial latitude in determining compliance.
The United States government has asserted, and may assert, various claims
against us relating to our United States government contract work (whether based
on United States government or Company audits and investigations or otherwise).
This list includes claims based on business practices and cost classifications
and actions under the False Claims Act. The False Claims Act permits a person to
assert the rights of the United States government by initiating a suit under
seal against a contractor if such person claims to have information that the
contractor falsely submitted a claim to the United States government for
payment. The United States government, if it chooses, may intervene and assume
control of the case.
Governmental proceedings can result in fines, penalties, compensatory and
treble damages, the cancellation or suspension of payments under one or more
United States government contracts and the suspension or debarment from
government contracts. Given the extent of our business with the United States
government, a suspension or debarment could have a material adverse effect on
our operations. The resolution in any reporting period of one or more of these
matters could have a material adverse effect on our results of operations for
that period.
At present, we know of two pending preliminary inquiries regarding
compliance with government policies by the Aerospace Division. On their face,
the two matters, if determined adversely to us, are not likely to have a
material adverse effect on our operations. Nevertheless, the investigations are
in their preliminary stages and we cannot assure you of successful outcomes at
this time.
WE ARE SUBJECT TO PRODUCT LIABILITY CLAIMS AND PRODUCT RECALLS
As a manufacturer of products for the automotive and aerospace industries,
we are subject to the risk of claims arising from injuries to persons or
property and product recalls. We maintain general and product liability
insurance for both the Aerospace Division and the Automotive Products Division.
We cannot assure you that our insurance will be sufficient if any claims do
arise. In particular, the general incorporation of airbag systems into
automobiles is a relatively recent phenomenon. If the actual number of the
Company's initiators incorporated into airbags that fail to perform is higher
than the number predicted by our quality control procedures, the damages
resulting could be significantly higher than the Company's level of product
liability insurance. Although we have instituted quality control procedures that
we believe produce initiators of the highest quality, we may become subject to
future proceedings alleging defects in our initiators, including recalls of
airbag systems by automobile manufacturers. Recalls or products liability claims
could have a material adverse effect on our operations.
WE ARE SUBJECT TO CLAIMS OF INTELLECTUAL PROPERTY VIOLATIONS
Because of the technology-intensive nature of our business, from time to
time we receive notice of threatened intellectual property litigation with
respect to our manufacturing techniques and product design. Litigation, whether
meritorious or not, could result in substantial legal costs. If determined
adversely to us, such litigation could require us to pay damages or license fees
to third parties, and could result in injunction and/or sanctions, which could
have a material adverse effect on our operations. While we make every effort
20
24
to respect the intellectual property rights of third parties, no guarantee can
be made that a court or other competent tribunal might not ultimately decide an
intellectual property matter adversely to us.
WE ARE DEPENDENT ON A KEY SUPPLIER
In September 1997, we entered into an amendment to our only long-term
supply contract with a supplier of approximately 85% of our requirements for a
key component for our initiators. See "Certain Transactions" on page 66. We are
required to purchase a substantial majority of our requirements for this
component from this supplier. This supplier currently produces all components
for us at its facility in Rosemead, California. Although the supplier has
another facility in New Jersey, any significant disruption of production at the
Rosemead facility could create a shortage of parts for us. Although we believe
that several other sources are available to supply us with this component, an
unexpected delay in the delivery of a large order from this supplier, or the
sudden loss of the supplier, would delay our ability to obtain this component
while we qualify alternative sources. Such a delay may adversely affect
production schedules and results of operations for a particular quarter or year.
This could have a material adverse effect on our financial condition.
THERE ARE RISKS ASSOCIATED WITH ACQUISITIONS
From time to time, we may acquire the assets or capital stock of other
complementary businesses. We cannot assure you that future acquisitions will not
affect our operating results, particularly right after an acquisition while we
are in the process of integrating operations. In addition, the integration of
acquired companies requires substantial attention from our senior management,
which may limit the amount of time available to be devoted to our day-to-day
operations or to our growth strategy.
THE NEW INVESTOR GROUP EFFECTIVELY CONTROLS THE COMPANY
As a result of our recapitalization on December 15, 1998 (the
"RECAPITALIZATION") and the transactions related thereto (collectively with the
Recapitalization, the "TRANSACTIONS"), J.F. Lehman Equity Investors I, L.P.
("JFL EQUITY"), JFL Co-Invest Partners I, L.P. ("JFL CO-INVEST") and Paribas
Principal Inc., an affiliate of one of the Initial Purchasers ("PPI," and
collectively with JFL Equity and JFL Co-Invest, the "NEW INVESTOR GROUP"),
currently own approximately 58.7% of the Company's outstanding common stock in
the aggregate. In addition, J.F. Lehman & Company ("LEHMAN") has the right to
vote and to acquire an additional 19.8% of the Company's common stock from two
stockholders. See "The Transactions -- The Recapitalization" on page 22 and
"Security Ownership of Certain Beneficial Owners and Management" on page 69. As
a result of its stock ownership and voting rights, the New Investor Group has
the power to elect all of our directors, appoint new management and approve any
action requiring the approval of the holders of common stock, including adopting
amendments to our Certificate of Incorporation and Bylaws and approving mergers
or sales of all or substantially all of our assets. The directors elected by the
New Investor Group have the authority to make or issue additional capital stock,
implement stock repurchase programs and declare dividends. The interests of the
New Investor Group and the holders of the Notes may differ from each other.
RISK ASSOCIATED WITH THE "YEAR 2000" PROBLEM
Many computer systems and software products may not function properly
following December 31, 1999 due to a once-common programming standard that may
result in confusion of dates prior to or after such date. This problem is often
referred to as the "Year 2000" or the "Y2K" problem. We are currently working to
evaluate and resolve the potential impact of the Year 2000 problem on our
processing of date-sensitive information and network systems. We plan to contact
all our significant suppliers, contractors and major systems developers to
determine our vulnerability to their Year 2000 situations. We presently believe
that the Year 2000 problem will only have a minimal cost impact. However, we
cannot assure you that other companies will convert their systems on a timely
basis and that their failure will not have an adverse effect on our systems. Any
failure by our customers, suppliers, contractors or major systems developers to
resolve their Year 2000 problems in a timely manner may adversely affect us. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Information Systems and the Year 2000" on page 44.
21
25
THE TRANSACTIONS
THE RECAPITALIZATION
JFL Equity and JFL Co-Invest were the sole shareholders of SDI Acquisition
Corp., an affiliate of J.F. Lehman & Company ("SDI ACQUISITION"). On June 19,
1998, the Company and SDI Acquisition entered into the Recapitalization
Agreement (as subsequently amended) pursuant to which, on December 15, 1998, SDI
Acquisition merged with and into the Company. In the merger, each share of the
Company's common stock then outstanding was canceled and converted into the
right to receive $34.00 in cash, other than:
- 1,530,419 shares of common stock held by Messrs. Walter Neubauer and
Thomas F. Treinen,
- options to acquire common stock held by certain members of management
(together with Messrs. Neubauer and Treinen, the "CONTINUING
SHAREHOLDERS") and
- common stock held by stockholders who have perfected their dissenters'
rights under Delaware law.
The 1,530,419 shares of common stock held by Messrs. Neubauer and Treinen and
the options held by management remain outstanding (the "EQUITY ROLLOVER").
In connection with the Recapitalization, Paribas Principal Inc. acquired
from us 323,529 shares of common stock, or approximately 8.7% of the outstanding
common stock. PPI is an affiliate of a limited partner of both JFL Equity and
JFL Co-Invest. In addition, PPI is an affiliate of one of the Initial
Purchasers.
As a result of the Recapitalization, the Continuing Shareholders
collectively own approximately 41.3% of the outstanding common stock, and the
New Investor Group (JFL Equity, JFL Co-Invest and PPI) collectively owns
approximately 58.7% of the outstanding common stock. The transactions were
accounted for as a recapitalization. The Recapitalization was completed on
December 15, 1998.
Lehman has the right, exercisable at any time prior to December 15, 2002,
to acquire all or any portion of 735,294 shares of common stock held by Messrs.
Neubauer and Treinen (the "ADDITIONAL ROLLOVER SHARES") (or 19.8% of the
outstanding common stock) at a per share purchase price (the "CALL PRICE") equal
to the sum of $34.00 plus a premium equal to $2.04 for each full 6-month period
elapsed since December 15, 1998. In addition, Lehman has been granted an
irrevocable proxy to vote all of the Additional Rollover Shares. Messrs.
Neubauer and Treinen have the right to require the Company to purchase all or
any portion of the Additional Rollover Shares at a per share price equal to the
Call Price upon the earliest to occur of the repayment and termination of our
existing credit facility and repayment of the Notes, or, upon a change of
control of the Company or the completion of a qualified public offering by the
Company (provided, in the latter two cases, that such purchase by the Company is
permitted under our credit facility and the Notes).
For a description of the financing of the Recapitalization, see "Sources
and Uses of Funds."
NEW CREDIT FACILITY
As part of the Recapitalization, we entered into a credit facility
(sometimes referred to herein as the "NEW CREDIT FACILITY") with a syndicate of
banks, as lenders, and Bankers Trust Company ("BANKERS TRUST"), as lead arranger
and administrative agent. Bankers Trust is an affiliate of BT Alex. Brown
Incorporated, one of the Initial Purchasers. The New Credit Facility consists of
a $70.0 million Senior Term Loan and a $25.0 million Revolving Credit Facility.
We borrowed the full amount of the Senior Term Loan in connection with the
Recapitalization. As of January 31, 1999, $0.8 million was drawn and letters of
credit aggregating $2.5 million had been issued under the Revolving Credit
Facility. See "Description of the New Credit Facility" for a discussion of
various terms of the New Credit Facility, including the amortization schedule,
guarantees and covenants.
22
26
SOURCES AND USES OF FUNDS
We will not receive any proceeds from the exchange of the New Notes for Old
Notes. We used the gross proceeds of $100.0 million from the sale of the Old
Notes, together with borrowings under the $70.0 million Senior Term Loan and the
equity contribution of approximately $127.8 million, to
- fund the consideration payable to the Company's stockholders in
connection with the recapitalization,
- refinance our then-existing debt and
- pay transaction costs associated with the Transactions.
The following table outlines the sources and uses of funds in connection
with the Transactions as if they had occurred on October 31, 1998:
AMOUNT
---------------------
(DOLLARS IN MILLIONS)
SOURCES OF FUNDS:
Revolving Credit Facility(1).............................. $ --
Senior Term Loan(1)....................................... 70.0
Notes..................................................... 100.0
Equity Investment by the New Investor Group(2)............ 74.0
Equity Rollover by Continuing Shareholders(3)............. 53.8
------
Total sources of funds.......................... $297.8
======
USES OF FUNDS:
Aggregate Recapitalization consideration(4)............... $277.4
Repayment of existing indebtedness........................ 2.5
Transaction expenses...................................... 15.5
Working capital........................................... 2.4
------
Total uses of funds............................. $297.8
======
- ---------------
(1) The New Credit Facility provides for a Revolving Credit Facility of $25.0
million and a Senior Term Loan of $70.0 million. See "Description of the New
Credit Facility." Does not include potential reimbursement obligations as of
October 31, 1998 in respect of approximately $3.5 million in outstanding
letters of credit.
(2) Reflects cash capital contributions by the New Investor Group, which
collectively owns 58.7% of the outstanding common stock. In addition, Lehman
has been granted an irrevocable proxy to vote, and the right to acquire,
735,294 shares of common stock held by Messrs. Neubauer and Treinen.
(3) Reflects the value of shares of common stock and options retained by the
Continuing Shareholders who collectively own approximately 41.3% of the
outstanding common stock. Under certain circumstances, the Continuing
Shareholders have the right to require the Company to purchase 735,294
shares of Common Stock held by them.
(4) Consists of approximately $223.6 million in cash and $53.8 million from the
Equity Rollover by the Continuing Shareholders.
23
27
THE EXCHANGE OFFER
PURPOSE AND EFFECT; TERMINATION OF CERTAIN RIGHTS
We sold the Old Notes to the Initial Purchasers on December 15, 1998 in a
transaction exempt from the registration requirements of the Securities Act. The
Initial Purchasers subsequently resold the Old Notes in reliance on Rule 144A
under the Securities Act. In connection with the sale of the Old Notes to the
Initial Purchasers, we entered into the Registration Rights Agreement with the
Initial Purchasers, pursuant to which we agreed, for the benefit of the Holders
of the Old Notes and at our expense, to:
- file on or prior to April 14, 1999 (the 120th calendar day following the
Closing Date) this Registration Statement with the Commission,
- use our best efforts to cause this Registration Statement to be declared
effective under the Securities Act on or prior June 13, 1999 (the 180th
calendar day following the Closing Date) and
- use our best efforts to consummate the exchange offer on or prior to July
13, 1999 (the 210th calendar day following the Closing Date).
We will keep the exchange offer open for not less than 20 business days (or
longer if required by applicable law) after the date we mail notice of the
exchange offer to you. The exchange offer is intended to satisfy our obligations
under the Registration Rights Agreement.
The form and terms of the New Notes are substantially the same as the form
and terms of the Old Notes except that the New Notes have been registered under
the Securities Act and will not bear legends restricting their transfer, will
not have registration rights and will not provide for Additional Interest, as
discussed below. The New Notes will evidence the same debt as the Old Notes and
will be issued pursuant to, and entitled to the benefits of, the indenture
pursuant to which the Old Notes were issued.
In the event that changes in the law or applicable interpretations of the
staff of the Commission do not permit us to effect the exchange offer, or if for
any reason the exchange offer is not consummated by July 13, 1999 (within 210
days of the Closing Date) or in other circumstances, the Registration Rights
Agreement requires us to, at our own expense:
- as promptly as practicable, and in any event on or prior to 90 days after
such filing obligation arises, file with the Commission a shelf
registration statement (the "SHELF REGISTRATION STATEMENT") covering
resales of the Old Notes,
- use our best efforts to cause the Shelf Registration Statement to be
declared effective under the Securities Act on or prior to 45 days after
such filing occurs and
- keep effective the Shelf Registration Statement until two years after its
effective date (or such shorter period that will terminate when all the
Old Notes covered thereby (1) have been sold pursuant thereto or (2) are
distributed to the public pursuant to Rule 144 under the Securities Act
or are saleable pursuant to Rule 144(k) under the Securities Act).
The Registration Rights Agreement provides that, subject to certain
exceptions, in the event of a Registration Default (as defined below), holders
of Old Notes are entitled to receive Additional Interest, with respect to the
first 90-day period immediately following the occurrence of such Registration
Default, at a rate of 0.50% per annum per $1,000 principal amount of Old Notes
held by such holders, increasing by an additional 0.50% per annum per $1,000
principal amount of Old Notes with respect to each subsequent 90-day period
until all Registration Defaults have been cured, up to a maximum of Additional
Interest of 1.00% per annum per $1,000 principal amount of Old Notes.
A "REGISTRATION DEFAULT" shall occur if:
- we fail to file either this Registration Statement or the Shelf
Registration Statement on or before the date specified for such filing,
24
28
- any of such registration statements is not declared effective by the
Commission on or prior to the date specified for such effectiveness (the
"EFFECTIVENESS TARGET DATE"),
- we fail to exchange all New Notes for all Old Notes validly tendered and
not withdrawn in accordance with the terms of the exchange offer on or
prior to the 30th day after the date on which this Registration Statement
was declared effective or
- if applicable, the Shelf Registration Statement is declared effective but
thereafter ceases to be effective or usable in connection with resales of
New Notes during the periods specified in the Registration Rights
Agreement.
Holders of New Notes will not be, and upon consummation of the exchange
offer, holders of Old Notes will no longer be, entitled to:
- the right to receive Additional Interest and
- other rights under the Registration Rights Agreement intended for holders
of Old Notes.
The exchange offer shall be deemed consummated upon the occurrence of the
delivery by us to the Trustee under the indenture of New Notes in the same
aggregate principal amount as the aggregate principal amount of Old Notes that
are validly tendered by holders thereof pursuant to the exchange offer.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Following the expiration of the exchange offer, holders of Old Notes not
tendered, or not properly tendered, will not have any further registration
rights and such Old Notes will continue to be subject to the existing
restrictions on transfer thereof. Accordingly, the liquidity of the market for a
holder's Old Notes will be adversely affected upon expiration of the exchange
offer if such holder elects to not participate in the Exchange Offer.
TERMS OF THE EXCHANGE OFFER
We hereby offer, upon the terms and subject to the conditions set forth
herein and in the accompanying Letter of Transmittal, to exchange $1,000 in
principal amount of the New Notes for each $1,000 in principal amount of the
outstanding Old Notes. We will accept for exchange any and all Old Notes that
are validly tendered on or prior to 5:00 p.m., New York City time, on the
Expiration Date. Tenders of Old Notes may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date. The exchange offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange. However, the exchange offer is subject to the terms and provisions of
the Registration Rights Agreement. See "-- Conditions of the Exchange Offer."
Old Notes may be tendered only in multiples of $1,000. Subject to the
foregoing, holders of Old Notes may tender less than the aggregate principal
amount represented by the Old Notes held by them, provided that they
appropriately indicate this fact on the Letter of Transmittal accompanying the
tendered Old Notes (or so indicate pursuant to the procedures for book-entry
transfer).
As of the date of this prospectus, $100.0 million in aggregate principal
amount of the Old Notes is outstanding of the maximum of $150.0 million of Notes
authorized for issuance under the Indenture. Solely for reasons of
administration (and for no other purpose), we have fixed the close of business
on June , 1999 as the record date (the "RECORD DATE") for purposes of
determining the persons to whom this prospectus and the Letter of Transmittal
will be mailed initially. Only a holder of the Old Notes (or such holder's legal
representative or attorney-in-fact) may participate in the exchange offer. There
will be no fixed record date for determining holders of the Old Notes entitled
to participate in the exchange offer. We believe that, as of the date of this
prospectus, no such holder is an affiliate (as defined in Rule 405 under the
Securities Act) of the Company.
25
29
We shall be deemed to have accepted validly tendered Old Notes when, as and
if we have given oral or written notice thereof to the Exchange Agent. The
Exchange Agent will act as agent for the tendering holders of Old Notes and for
the purposes of receiving the New Notes from us.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The Expiration Date shall be , 1999 at 5:00 p.m., New York
City time, unless we, in our sole discretion, extend the exchange offer, in
which case the Expiration Date shall be the latest date and time to which the
exchange offer is extended.
In order to extend the exchange offer, we will notify the Exchange Agent of
any extension by oral or written notice and will make a public announcement
thereof, each prior to 9:00 a.m., New York City time, on the next business day
after the previously scheduled Expiration Date.
We reserve the right, in our sole discretion, to:
- delay accepting any Old Notes,
- extend the exchange offer,
- if any of the conditions set forth below under "-- Conditions of the
Exchange Offer" shall not have been satisfied, terminate the exchange
offer, by giving oral or written notice of such delay, extension or
termination to the Exchange Agent and
- amend the terms of the exchange offer in any manner.
If the exchange offer is amended in a manner which we determine to
constitute a material change, we will promptly disclose such amendments by means
of a prospectus supplement that will be distributed to the registered holders of
the Old Notes.
CONDITIONS OF THE EXCHANGE OFFER
The exchange offer is not conditioned upon any minimum principal amount of
the Old Notes being tendered for exchange. However, the exchange offer is
conditioned upon the declaration by the Commission of the effectiveness of the
Registration Statement of which this prospectus constitutes a part.
ACCRUED INTEREST
The New Notes will bear interest from the most recent date to which
interest has been paid on the Old Notes or, if no interest has been paid on the
Old Notes, from December 15, 1998. See "Description of Notes -- Principal,
Maturity and Interest."
PROCEDURES FOR TENDERING OLD NOTES
The tender of a holder's Old Notes as set forth below and the acceptance
thereof by us will constitute a binding agreement between the tendering holder
and us upon the terms and subject to the conditions set forth in this prospectus
and in the accompanying Letter of Transmittal. Except as set forth below, a
holder who wishes to tender Old Notes for exchange pursuant to the exchange
offer must transmit such Old Notes, together with a properly completed and duly
executed Letter of Transmittal, including all other documents required by such
Letter of Transmittal, to the Exchange Agent at the address set forth on the
back cover page of this prospectus prior to 5:00 p.m., New York City time, on
the Expiration Date. The method of delivery of Old Notes, Letters of Transmittal
and all other required documents is at the election and risk of the holder. IF
SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY
INSURED, WITH RETURN RECEIPT
26
30
REQUESTED, BE USED. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT YOU USE
AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE TIMELY DELIVERY.
Each signature on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant hereto are tendered:
- by a registered holder of the Old Notes who has not completed either the
box entitled "Special Exchange Instructions" or the box entitled "Special
Delivery Instructions" in the Letter of Transmittal or
- by an Eligible Institution (as defined immediately below).
In the event that a signature on a Letter of Transmittal or a notice of
withdrawal, as the case may be, is required to be guaranteed, such guarantee
must be by a firm which is a member of a registered national securities exchange
or the National Association of Securities Dealers, Inc., a commercial bank or
trust company having an office or correspondent in the United States or
otherwise be an "eligible guarantor institution" within the meaning of the
Exchange Act (collectively, "ELIGIBLE INSTITUTIONS"). If the Letter of
Transmittal is signed by a person other than the registered holder of the Old
Notes, the Old Notes surrendered for exchange must either:
- be endorsed by the registered holder, with the signature thereon
guaranteed by an Eligible Institution or
- be accompanied by a bond power, in satisfactory form as determined by us
in our sole discretion, duly executed by the registered holder, with the
signature thereon guaranteed by an Eligible Institution.
The term "REGISTERED HOLDER" as used herein with respect to the Old Notes means
any person in whose name the Old Notes are registered on the books of the
Registrar.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of Old Notes tendered for exchange will be
determined by us in our sole discretion, which determination shall be final and
binding. We reserve the absolute right to reject any and all Old Notes not
properly tendered and to reject any Old Notes, our acceptance of which might, in
the judgment of the Company or our counsel, be unlawful. We also reserve the
absolute right to waive any defects or irregularities or conditions of the
exchange offer as to particular Old Notes either before or after the Expiration
Date (including the right to waive the ineligibility of any holder who seeks to
tender Old Notes in the exchange offer). Our interpretation of the terms and
conditions of the exchange offer (including the Letter of Transmittal and its
instructions) shall be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes for exchange
must be cured within such period of time as we shall determine. We will use
reasonable efforts to give notification of defects or irregularities with
respect to tenders of Old Notes for exchange but shall not incur any liability
for failure to give such notification. Tenders of the Old Notes will not be
deemed to have been made until such irregularities have been cured or waived.
If any Letter of Transmittal, endorsement, bond power, power of attorney or
any other document required by the Letter of Transmittal is signed by a trustee,
executor, corporation or other person acting in a fiduciary or representative
capacity, such person should so indicate when signing and, unless waived by us,
proper evidence satisfactory to us, in our sole discretion, of such person's
authority to so act must be submitted.
Any beneficial owner of the Old Notes (a "BENEFICIAL OWNER") whose Old
Notes are registered in the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender Old Notes in the exchange
offer should contact such registered holder promptly and instruct such
registered holder to tender on such Beneficial Owner's behalf. If such
Beneficial Owner wishes to tender directly, such Beneficial Owner must, prior to
completing and executing the Letter of Transmittal and tendering Old Notes, make
appropriate arrangements to register ownership of the Old Notes in such
Beneficial Owner's name. Beneficial Owners should be aware that the transfer of
registered ownership may take considerable time.
27
31
By tendering, each registered holder will represent to us that, among other
things:
- the New Notes to be acquired in connection with the exchange offer by the
holder and each Beneficial Owner of the Old Notes are being acquired by
the holder and each Beneficial Owner in the ordinary course of business
of the holder and each Beneficial Owner,
- the holder and each Beneficial Owner are not participating, do not intend
to participate, and have no arrangement or understanding with any person
to participate, in the distribution of the New Notes,
- the holder and each Beneficial Owner acknowledge and agree that any
person participating in the exchange offer for the purpose of
distributing the New Notes must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with
a secondary resale transaction of the New Notes acquired by such person
and cannot rely on the position of the staff of the Commission set forth
in no-action letters that are discussed herein under "-- Resales of New
Notes,"
- that if the holder is a broker-dealer that acquired Old Notes as a result
of market-making or other trading activities, it will deliver a
prospectus in connection with any resale of New Notes acquired in the
exchange offer,
- the holder and each Beneficial Owner understand that a secondary resale
transaction described in the third bullet point above should be covered
by an effective registration statement containing the selling security
holder information required by Item 507 of Regulation S-K of the
Commission and
- neither the holder nor any Beneficial Owner is an "affiliate," as defined
under Rule 405 of the Securities Act, of the Company except as otherwise
disclosed to us in writing.
In connection with a book-entry transfer, as discussed immediately below,
each participant will confirm that it makes the representations and warranties
contained in the Letter of Transmittal.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the DTC (the "BOOK-ENTRY TRANSFER FACILITY") for purposes of
the exchange offer within two business days after the date of this prospectus,
and any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes being tendered by
causing the Book-Entry Transfer Facility to transfer such Old Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility in accordance with
such Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or copy thereof, with
any required signature guarantees and any other required documents, must, in any
case other than as set forth in the following paragraph, be transmitted to and
received by the Exchange Agent at the address set forth under "-- Exchange
Agent" on or prior to 5:00 p.m., New York City time, on the Expiration Date, or
the guaranteed delivery procedures described below must be complied with.
DTC's Automated Tender Offer Program ("ATOP") is the only method of
processing exchange offers through DTC. To accept the exchange offer through
ATOP, participants in DTC must send electronic instructions to DTC through DTC's
communication system in lieu of sending a signed, hard copy Letter of
Transmittal. DTC is obligated to communicate those electronic instructions to
the Exchange Agent. To tender Old Notes through ATOP, the electronic
instructions sent to DTC and transmitted by DTC to the Exchange Agent must
contain the character by which the participant acknowledges its receipt of and
agrees to be bound by the Letter of Transmittal.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and whose Old Notes are not
immediately available or who cannot deliver their Old Notes or any other
documents required by the Letter of Transmittal to the Exchange Agent prior to
the Expiration Date (or complete the procedure for book-entry transfer on a
timely basis)
28
32
may tender their Old Notes according to the guaranteed delivery procedures set
forth in the Letter of Transmittal. Pursuant to such procedures:
- such tender must be made by or through an Eligible Institution and a
Notice of Guaranteed Delivery (as defined in the Letter of Transmittal)
must be signed by such Holder,
- on or prior to the Expiration Date, the Exchange Agent must have received
from the Holder and the Eligible Institution a properly completed and
duly executed Notice of Guaranteed Delivery (by facsimile transmission,
mail or hand delivery) setting forth the name and address of the Holder,
the certificate number or numbers of the tendered Old Notes, and the
principal amount of tendered Old Notes, stating that the tender is being
made thereby and guaranteeing that, within four business days after the
date of delivery of the Notice of Guaranteed Delivery, the tendered Old
Notes, a duly executed Letter of Transmittal and any other required
documents will be deposited by the Eligible Institution with the Exchange
Agent and
- such properly completed and executed documents required by the Letter of
Transmittal and the tendered Old Notes in proper form for transfer (or
confirmation of a book-entry transfer of such Old Notes into the Exchange
Agent's account at the DTC) must be received by the Exchange Agent within
four business days after the Expiration Date.
Any Holder who wishes to tender Old Notes pursuant to the guaranteed delivery
procedures described above must ensure that the Exchange Agent receives the
Notice of Guaranteed Delivery and Letter of Transmittal relating to such Old
Notes prior to 5:00 p.m., New York City time, on the Expiration Date.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of the conditions to the exchange offer, we
will accept any and all Old Notes that are properly tendered in the Exchange
Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New
Notes issued pursuant to the exchange offer will be delivered promptly after
acceptance of the Old Notes. For purposes of the Exchange Offer, we shall be
deemed to have accepted validly tendered Old Notes, when, as, and if we have
given oral or written notice thereof to the Exchange Agent.
In all cases, issuances of New Notes for Old Notes that are accepted for
exchange pursuant to the exchange offer will be made only after timely receipt
by the Exchange Agent of such Old Notes, a properly completed and duly executed
Letter of Transmittal and all other required documents (or of confirmation of a
book-entry transfer of such Old Notes into the Exchange Agent's account at the
DTC); provided, however, that we reserve the absolute right to waive any defects
or irregularities in the tender or conditions of the exchange offer. If any
tendered Old Notes are not accepted for any reason, we will return such
unaccepted Old Notes without expense to the tendering Holder thereof as promptly
as practicable after the expiration or termination of the exchange offer.
WITHDRAWAL RIGHTS
Tenders of the Old Notes may be withdrawn by delivery of a written notice
to the Exchange Agent, at its address set forth on the back cover page of this
prospectus, at any time prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must:
- specify the name of the person having deposited the Old Notes to be
withdrawn (the "DEPOSITOR"),
- identify the Old Notes to be withdrawn (including the certificate number
or numbers and principal amount of such Old Notes, as applicable),
- be signed by the Holder in the same manner as the original signature on
the Letter of Transmittal by which such Old Notes were tendered
(including any required signature guarantees) or be accompanied by a bond
power in the name of the person withdrawing the tender, in satisfactory
form as determined by us in our sole discretion, duly executed by the
registered holder, with the signature thereon guaranteed by an Eligible
Institution together with the other documents required upon transfer by
the indenture and
29
33
- specify the name in which such Old Notes are to be re-registered, if
different from the Depositor, pursuant to such documents of transfer.
Any questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by us, in our sole discretion. The
Old Notes so withdrawn will be deemed not to have been validly tendered for
exchange for purposes of the exchange offer. Any Old Notes which have been
tendered for exchange but which are withdrawn will be returned to the Holder
thereof without cost to such Holder as soon as practicable after withdrawal.
Properly withdrawn Old Notes may be retendered by following one of the
procedures described under "The Exchange Offer -- Procedures for Tendering Old
Notes" at any time on or prior to the Expiration Date.
THE EXCHANGE AGENT; ASSISTANCE
United States Trust Company of New York is the Exchange Agent. All tendered
Old Notes, executed Letters of Transmittal and other related documents should be
directed to the Exchange Agent. Questions and requests for assistance and
requests for additional copies of the prospectus, the Letter of Transmittal and
other related documents should be addressed to the Exchange Agent as follows:
BY REGISTERED OR CERTIFIED MAIL:
United States Trust Company of New York
P.O. Box 844, Cooper Station
New York, NY 10276-0844
Attn: Corporate Trust Services
BY FACSIMILE:
United States Trust Company of New York
(212) 780-0592
Attention: Customer Service
Confirm by Telephone: (800) 548-6565
Attn: Corporate Trust Services
BY OVERNIGHT COURIER (AND BY HAND AFTER 4:30 P.M.
ON THE EXPIRATION DATE ONLY):
United States Trust Company of New York
770 Broadway, 13th Floor
New York, New York 10003
Attn: Corporate Trust Services
BY HAND:
United States Trust Company of New York
111 Broadway
Lower Level
New York, New York 10006
Attn: Corporate Trust Services
30
34
FEES AND EXPENSES
All expenses incident to our consummation of the exchange offer and
compliance with the Registration Rights Agreement will be borne by us,
including, without limitation:
- all registration and filing fees (including, without limitation, fees and
expenses of compliance with state securities or "blue sky" laws),
- printing expenses (including, without limitation, expenses of printing
certificates for the New Notes in a form eligible for deposit with the
DTC and of printing prospectuses),
- messenger, telephone and delivery expenses,
- fees and disbursements of our counsel,
- fees and disbursements of our accountants,
- rating agency fees and
- our internal expenses (including, without limitation, all salaries and
expenses of our officers and other employees performing legal or
accounting duties).
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to brokers, dealers or others soliciting
acceptance of the exchange offer. We will, however, pay the Exchange Agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses in connection with the exchange offer.
We will pay all transfer taxes, if any, applicable to the exchange of Old
Notes pursuant to the exchange offer. If, however, a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the exchange offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption is not submitted
with the Letter of Transmittal, the amount of such transfer taxes will be billed
directly to such tendering holder.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
as reflected in our accounting records on the date of the exchange. Accordingly,
no gain or loss will be recognized by us for accounting purposes. The expenses
we incur in connection with the exchange offer will be amortized over the term
of the New Notes.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizing federal income tax consequences of the
exchange offer reflects the opinion of Gibson, Dunn, & Crutcher LLP, counsel to
us, as to material federal income tax consequences expected to result from the
exchange offer. An opinion of counsel is not binding on the IRS or the courts,
and there can be no assurances that the IRS will not take, and that a court
would not sustain, a position contrary to that described below. Moreover, the
following discussion is for general information only and does not constitute
comprehensive tax advice to any particular holder of Old Notes. The summary is
based on the current provisions of the Internal Revenue Code of 1986, as
amended, and applicable Treasury regulations, judicial authority and
administrative pronouncements. The tax consequences described below could be
modified by future changes in the relevant law, which could have retroactive
effect. Each holder of Old Notes should consult its own tax adviser as to these
and any other federal income tax consequences of the exchange offer as well as
any tax consequences to it under foreign, state, local or other law.
Exchanges of Old Notes for New Notes pursuant to the exchange offer should
be treated as a modification of the Old Notes that does not constitute a
material change in their terms, and the Company intends to treat the exchanges
in that manner. Under that approach, a New Note is treated as a continuation of
the corresponding Old Note. An exchanging holder's holding period for a New Note
would include such
31
35
holder's holding period for the Old Note. Such holder would not recognize any
gain or loss, and such holder's basis in the New Note would be the same as such
holder's basis in the Old Note. The exchange offer will result in no federal
income tax consequences to a non-exchanging Holder.
RESALES OF THE NEW NOTES
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, we believe that the New Notes issued
pursuant to the exchange offer to a holder in exchange for Old Notes may be
offered for resale, resold and otherwise transferred by such holder (other than
(1) a broker-dealer who purchased Old Notes directly from us for resale pursuant
to Rule 144A under the Securities Act or any other available exemption under the
Securities Act or (2) a person that is an affiliate of the Company within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such holder is acquiring the New Notes in the ordinary course of business
and is not participating, and has no arrangement or understanding with any
person to participate, in the distribution of the New Notes.
We have not requested or obtained an interpretive letter from the
Commission staff with respect to this exchange offer, and neither we nor the
holders are entitled to rely on interpretive advice provided by the staff to
other persons, which advice was based on the facts and conditions represented in
such letters. However, the exchange offer is being conducted in a manner
intended to be consistent with the facts and conditions represented in such
letters. If any holder acquires New Notes in the exchange offer for the purpose
of distributing or participating in a distribution of the New Notes, such holder
cannot rely on the position of the staff of the Commission enunciated in Morgan
Stanley & Co. Incorporated (available June 5, 1991) and Exxon Capital Holdings
Corporation (available April 13, 1989), or interpreted in the Commission's
letter to Shearman and Sterling (available July 2, 1993), or similar no-action
or interpretive letters and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction, unless an exemption from registration is otherwise
available.
Each broker-dealer that receives New Notes for its own account in exchange
for Old Notes, where such Old Notes were acquired by such broker-dealer as a
result of market-making or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such New Notes. See
"Plan of Distribution."
Sales of New Notes acquired in the exchange offer by holders who are
"affiliates" of the Company within the meaning of the Securities Act will be
subject to certain limitations on resale under Rule 144 of the Securities Act.
Such persons will only be entitled to sell New Notes in compliance with the
volume limitations set forth in Rule 144, and sales of New Notes by affiliates
will be subject to certain Rule 144 requirements as to the manner of sale,
notice and the availability of current public information regarding the Company.
The foregoing is a summary only of Rule 144 as it may apply to affiliates of the
Company. Any such persons must consult their own legal counsel for advice as to
any restrictions that might apply to the resale of their Notes.
The New Notes will be freely transferable by the holders thereof, subject
to the limitations described in this section.
32
36
CAPITALIZATION
The following table sets forth our consolidated capitalization as of
January 31, 1999. The Old Notes surrendered in exchange for the New Notes will
be retired and canceled and cannot be reissued. Accordingly, issuance of the New
Notes will not result in any increase or decrease in our debt. As such, we have
not given any effect to the exchange offer in the table below. This table should
be read in conjunction with "The Transactions," "Selected Historical
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
appearing elsewhere in this prospectus.
JANUARY 31,
1999
---------------------
(DOLLARS IN MILLIONS)
(UNAUDITED)
Debt:
New Credit Facility(1)
Revolving Credit Facility.............................. $ 0.8
Senior Term Loan....................................... 70.0
11 3/8% Senior Subordinate Notes due 2008................. 100.0
-------
Total long-term debt(1)................................ 170.8
Redeemable common stock..................................... 25.4
Total stockholders' equity.................................. (79.6)
-------
Total capitalization........................................ $ 116.6
=======
- ---------------
(1) Does not include potential reimbursement obligations in respect of
outstanding letters of credit of approximately $2.5 million.
33
37
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data below as of October 31, 1998 and
1997 and for the fiscal years ended October 31, 1998, 1997 and 1996 have been
derived from our Consolidated Financial Statements which have been audited by
KPMG LLP, independent certified public accountants, and are included elsewhere
in this prospectus. The selected consolidated financial data below as of October
31, 1996, 1995 and 1994 and for the fiscal years ended October 31, 1995 and 1994
have been derived from the Company's audited financial statements that are not
included in this prospectus. The selected consolidated financial data below as
of and for the three months ended January 31, 1999 and February 1, 1998 have
been derived from our unaudited financial statements that are included elsewhere
in this prospectus. The unaudited interim consolidated financial statements for
each of the periods referred to above include, in management's opinion, all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the results for the unaudited periods. The information presented
below is qualified in its entirety by, and should be read in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our Consolidated Financial Statements and related notes included
elsewhere in this prospectus.
THREE MONTHS
ENDED
FISCAL YEAR ENDED OCTOBER 31, ----------------
------------------------------------------- FEB. 1 JAN. 31
1994(1) 1995 1996 1997 1998 1998 1999
------- ------ ------ ------ ------ ------ -------
(UNAUDITED)
(DOLLARS IN MILLIONS)
OPERATING DATA:
Net sales.............................. $64.5 $100.6 $104.5 $140.5 $170.5 $ 40.7 $ 37.7
Cost of sales.......................... 54.4 83.0 84.3 112.6 131.6 32.5 30.7
----- ------ ------ ------ ------ ------ ------
Gross profit...................... 10.1 17.6 20.2 27.9 38.9 8.2 7.0
Operating expenses..................... 4.3 7.7 8.1 10.7 13.0 2.7 2.6
Recapitalization costs(2).............. -- -- -- -- -- -- 15.6
----- ------ ------ ------ ------ ------ ------
Earnings (loss) from operations... 5.8 9.9 12.0 17.2 25.9 5.6 (11.2)
Net interest income (expense).......... (0.5) (0.6) 0.1 0.1 -- -- (2.5)
----- ------ ------ ------ ------ ------ ------
Earnings before income taxes........... 5.3 9.3 12.2 17.3 25.9 5.6 (13.7)
Income taxes........................... 2.1 3.7 4.7 6.7 10.4 2.2 (3.3)
----- ------ ------ ------ ------ ------ ------
Net earnings (loss)............... $ 3.2 $ 5.6 $ 7.4 $ 10.7 $ 15.4 $ 3.4 $(10.4)
===== ====== ====== ====== ====== ====== ======
OTHER DATA:
EBITDA(3).............................. $ 8.5 $ 14.3 $ 17.4 $ 23.6 $ 34.4 $ 7.4 $ 7.3
EBITDA margin(3)....................... 13.2% 14.2% 16.7% 16.8% 20.2% 18.1% 19.4%
Depreciation........................... $ 2.7 $ 4.4 $ 5.4 $ 6.4 $ 8.5 $ 1.8 $ 3.0
Capital expenditures:
Moorpark Facility.................... $ 0.0 $ 0.6 $ 3.1 $ 5.8 $ 16.5 $ 2.1 $ 2.4
Other................................ 6.3 12.8 8.0 16.8 22.0 5.8 4.5
----- ------ ------ ------ ------ ------ ------
Total............................. $ 6.3 $ 13.4 $ 11.1 $ 22.5 $ 38.5 $ 7.9 $ 6.9
===== ====== ====== ====== ====== ====== ======
Cash interest expense.................. $ 0.4 $ 1.0 $ 0.4 $ 0.3 $ 0.2 $ 0.1 $ 0.1
Ratio of earnings to fixed
charges(4)........................... 9.5x 9.2x 23.9x 33.2x 59.1x 49.5x (4.7x)
BALANCE SHEET DATA:
Total assets........................... $51.7 $ 78.6 $ 86.2 $ 99.8 $124.6 $104.8 $136.9
Total debt............................. 13.8 5.9 4.6 3.0 2.5 2.7 170.8
Stockholders' equity (deficit)......... $26.7 $ 62.1 $ 69.7 $ 81.4 $ 97.3 $ 84.9 $(79.6)
- ---------------
(1) We acquired Scot in September 1994. Accordingly, the operating data for
Fiscal 1994 reflect only one month of Scot's operations.
34
38
(2) We incurred approximately $15,600,000 in one-time pre-tax charges in
connection with the Recapitalization (representing approximately $5,600,000
in professional advisory fees and approximately $10,000,000 of compensation
expense relating to cash payments to settle certain outstanding stock
options).
(3) EBITDA is the sum of earnings before income taxes, interest, depreciation
and amortization expense. EBITDA is presented because the Company believes
that it is a widely accepted financial indicator of a company's ability to
service indebtedness. However, EBITDA does not represent cash flow from
operations as defined by GAAP, is not necessarily indicative of cash
available to fund all cash flow needs, should not be considered as an
alternative to net income or to cash flows from operating activities (as
determined in accordance with GAAP) and should not be construed as an
indication of a company's operating performance or as a measure of
liquidity. Our EBITDA is not necessarily comparable with similarly-titled
measures for other companies. EBITDA margin equals EBITDA as a percentage
net sales.
(4) In calculating the ratio of earnings to fixed charges, earnings consist of
income (loss) before income taxes, plus fixed charges. Fixed charges consist
of interest incurred (which includes amortization of deferred financing
costs) whether expensed or capitalized and a portion of rental expense
(based on the one-third of rent expense convention) which management
believes is a reasonable approximation of an interest factor.
35
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the "Selected Historical Consolidated Financial Data" and our audited
Consolidated Financial Statements and the notes thereto included elsewhere in
this prospectus. See "Disclosure Regarding Forward-Looking Statements."
GENERAL
Automotive Products Division. The Automotive Products Division was formed
in 1989 as a result of management's strategic decision to participate in the
anticipated demand for airbag systems arising from new federal regulations.
Demand for initiators produced by the division has grown steadily since 1992 as
U.S. automobile manufacturers have installed airbags in automobiles for both the
driver and front passenger. Even though installation of the driver and front
passenger airbags is now mostly implemented in the United States, demand appears
to be continuing to grow as U.S. automobile manufacturers are now installing
airbags for side-impact protection and for seat belt pre-tensioners which also
employ an initiator. In addition, European and Pacific Rim automobile
manufacturers have over the last few years accelerated the rate of airbag
implementation for automobiles produced in these countries. We have invested in,
and continue to invest in, facilities and production equipment to meet these
increases in demand. Beginning in Fiscal 1992, we have improved gross profit
margins and operating income amounts through:
- automation of the initiator manufacturing process,
- improvements in manufacturing techniques,
- reductions in the prices of certain raw materials and
- a larger base of customers to absorb overhead costs.
No assurance can be given that the foregoing trends will continue. Our
future results of operations, financial position and cash flows are dependent on
a variety of factors that are inherently difficult to predict including, without
limitation:
- the number of automobiles sold (particularly in North America),
- continued acceptance of airbags as the primary restraint system
incorporated in automobiles,
- the impact of pressure from our customers and actions by our competitors
on our ability to sell initiators at acceptable average sales prices,
- voluntary incorporation of side and rear airbags and other safety devices
by automobile manufacturers and
- our ability to continue to improve automation of the manufacturing
processes efficiently.
The prices we receive for units of our automotive initiators vary depending
upon the complexity of design and the value of added components. As a result,
the total average selling price in any period will be affected by the relative
quantities sold to each customer. We sell the majority of airbag initiators to
TRW and Autoliv. Historically, the initiators we have sold to TRW are more
complex and have a higher material cost than the initiators we have sold to
Autoliv. Consequently, we sell initiators to TRW for a higher average unit price
than the initiators we sell to Autoliv.
During recent years, competition among manufacturers of airbag initiators
has intensified. As a result of this increased competition, we and other
manufacturers of initiators have had to significantly reduce the price of
initiators. We expect this competition to continue and to cause additional price
pressure on us and other initiator manufacturers. We cannot assure you that we
will be able to compete successfully in such an environment. See
"Business -- Automotive Products Division -- Competition."
Aerospace Division. Demand for our aerospace products is driven primarily
by the U.S. government's purchases of missiles and other weapon systems and
commercial launch vehicles for satellite communications
36
40
that incorporate initiators, arm-fire devices and other pyrotechnic components,
and by demand for replacement parts used in military crew safety systems. In
most cases, we are a subcontractor to the non-governmental prime contractor or
other subcontractor of the program. The Aerospace Division's contracts provide
for a specific number of deliveries over a period of time. Revenue is recognized
for these production contracts as completed units are shipped. Cost of sales for
units shipped is computed based on the expected total unit cost of all units
required to be produced under the contract through completion, which amount
includes all estimated costs to complete the contract. Accordingly, the results
of the Aerospace Division for any particular accounting period, or
period-to-period comparisons, may be significantly affected by the timing of
production deliveries and may not be indicative of future operating results.
Unlike most of our products, demand for some of Scot's products is affected by
government purchases of replacement components directly from Scot in order to
replace parts whose service life has expired. The most significant factor
affecting the gross profit margin for the Aerospace Division is the mix of
products being delivered during a particular reporting period.
Calculation of Operating Expenses. Operating expenses for the Automotive
and Aerospace Divisions comprise the sum of two components. First, each division
is charged directly those operating expenses incurred by that division. Second,
on a quarterly basis, each division is allocated general corporate
administrative expenses that are not otherwise attributable to a particular
division. We allocate these expenses on a basis to fairly reflect the benefit
received by each operating division, as determined by management. In Fiscal
1998, we allocated these expenses approximately 60% to the Automotive Products
Division and 40% to the Aerospace Division. In Fiscal 1997, the allocation was
65% to the Automotive Products Division and 35% to the Aerospace Division.
During Fiscal 1996 and 1995, these expenses were allocated approximately equally
to each division.
Recent Developments. On February 18, 1999, an accidental explosion
occurred at our Newhall Facility, resulting in the death of one employee. We
suspended all production at Newhall for four days to conduct a thorough
investigation of the accident along with California OSHA, and suspended the
blending of pyrotechnic powders for approximately two weeks. Concurrently, we
implemented contingency manufacturing plans to meet customer demand for existing
inventory and production from our Mesa facility. No building or equipment, other
than one transport vehicle, were damaged in the accident. We resumed full
production at Newhall on March 4, 1999. California OSHA's investigation of the
accident is continuing.
Management believes that results for the first half of Fiscal 1999 could be
lower than results achieved in the first half of Fiscal 1998 due primarily to
costs relating to our relocation to the Moorpark Facility, including the
operation of duplicative facilities for approximately six months and the
manufacturing inefficiencies inherent with the commencement of new manufacturing
operations. In addition, unit-price concessions we have made to our leading
automotive initiator customers in exchange for anticipated volume increases
expected in the second half of Fiscal 1999 could contribute to a decline in
results over those periods. Finally, the slow-down in production at Newhall as a
result of the accidental explosion and resulting investigation could have an
impact on our results in the second quarter of Fiscal 1999. See "Risk Factors --
We Operate In A Competitive Environment," "-- We Are Dependent On Key Customers"
and "--Relocation To The Moorpark Facility May Disrupt Our Operations."
37
41
RESULTS OF OPERATIONS
The following table is derived from our statements of earnings data and
sets forth, for the periods indicated, certain earnings data as a percentage of
net sales:
THREE MONTHS
ENDED
FISCAL YEAR ENDED OCTOBER 31, -----------------
-------------------------------- FEB 1, JAN 31,
1995 1996 1997 1998 1998 1999
----- ----- ----- ----- ------ -------
AUTOMOTIVE PRODUCTS DIVISION:
Net sales................................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................. 88.8 84.9 82.9 81.6 81.3 84.8
----- ----- ----- ----- ----- -----
Gross profit.............................. 11.2 15.1 17.1 18.4 18.7 15.2
Operating expenses........................ 4.8 4.8 4.9 4.8 4.9 5.6
----- ----- ----- ----- ----- -----
Earnings from operations.................. 6.4% 10.3% 12.2% 13.7% 13.8% 9.6%
===== ===== ===== ===== ===== =====
AEROSPACE DIVISION:
Net sales................................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................. 67.3 66.9 69.3 60.4 69.7 67.5
----- ----- ----- ----- ----- -----
Gross profit.............................. 32.7 33.1 30.7 39.6 30.3 32.5
Operating expenses........................ 14.5 17.4 18.2 18.6 18.1 11.9
----- ----- ----- ----- ----- -----
Earnings from operations.................. 18.2% 15.7% 12.5% 21.0% 12.1% 20.6%
===== ===== ===== ===== ===== =====
COMPARISON OF THE THREE MONTHS ENDED FEBRUARY 1, 1998 AND JANUARY 31, 1999
Net Sales. Net sales for the Automotive Products Division decreased
$5,304,000, or 14.9%, to $30,443,000 for the three months ended January 31, 1999
compared to net sales of $35,747,000 for the same period last year. The decrease
was a result of slight reductions in units shipped in the first quarter of 1999
versus the same period in 1998, in addition to contractual price decreases.
Net sales for the Aerospace Division increased by $2,288,000, or 45.9%, to
$7,273,000 for the three months ended January 31, 1999 compared to net sales of
$4,985,000 for the same period last year. The increase in sales in the first
quarter of 1999 was due to increased shipments of products used on several
missile programs and the commencement of production of bomb ejectors.
Cost of Sales. Cost of sales for the Automotive Products Division
decreased $3,232,000, or 11.1%, to $25,816,000 for the quarter ended January 31,
1999, compared to cost of sales of $29,048,000 for same quarter last year. The
Division's gross profit margin was 15.2% for the 1999 quarter, compared to 18.7%
for the same quarter last year. The decrease in margin reflects the slight
reduction in initiators shipped, as well as certain inefficiencies related to
the Company's move to its new facility in Moorpark.
Cost of sales for the Aerospace Division increased $1,433,232, or 41.2%, to
$4,908,000 for the quarter ended January 31, 1999, compared to cost of sales of
$3,475,000 for the comparable quarter last year. Gross profit as a percent of
sales was 32.5% for the first quarter of 1999 compared to 30.3% for the same
quarter last year. The increase in gross profit as a percent of sales was
primarily attributable to the mix of products shipped in the first quarter of
fiscal 1999.
Operating Expenses. Operating expenses for each division (Automotive
Products and Aerospace) are comprised of two components. First, each division is
charged those operating expenses directly incurred by that division. Second,
each division is allocated administrative expenses incurred by the Company
(which are not attributable to a particular division) on an equitable basis to
reflect fairly the benefit received by each operating division. Administrative
expenses incurred by the Company for allocation to each division were
approximately the same amount for the first quarter of Fiscal 1999 compared to
the same period last year.
Operating expenses for the Automotive Products Division decreased $43,000,
or 2.5%, to $1,712,000 in the first quarter of 1999, compared to operating
expenses of $1,755,000 for the same period last year. As a percentage of sales,
operating expenses were 5.6% compared to 4.9% for the same period last year.
38
42
Operating expenses for the Aerospace Division decreased by $38,000, or
4.2%, to $864,000 for the quarter ended January 31, 1999, compared to operating
expenses of $902,000 for the same period last year. As a percentage of sales,
operating expenses were 11.9% for the quarter ended January 31, 1999 compared to
18.1% for the same quarter last year. The decrease in operating expenses in the
current year first quarter is due to a reduction in the amount of administrative
expenses allocated to the Aerospace Division compared to the same period last
year.
Recapitalization Costs. The Company incurred approximately $15,600,000 in
one-time pre-tax charges in connection with the Recapitalization (representing
approximately $5,600,000 in professional advisory fees and approximately
$10,000,000 of compensation expense relating to stock options). As a result of
the foregoing, the Company incurred a net loss in the quarter. Because this loss
resulted directly from the one-time charges incurred in connection with the
Recapitalization, the Company believes this loss will have no material impact on
its ongoing operations or liquidity.
Net Interest Income (Expense). Net interest income (expense) consists of
interest expense on borrowings and interest income earned on short-term
investments. Interest expense was $2,341,000 in the first quarter of Fiscal 1999
compared to interest expense of $51,000 for the first quarter last year. The
increase of $2,290,000 was the result of increased debt outstanding in the first
quarter of Fiscal 1999, compared to the same period of 1998. Interest income was
$800 in the first quarter of Fiscal 1999, compared to interest income of $66,000
for the same period last year. The decrease was the result of lower average
amounts invested in interest-bearing securities during the first quarter of
Fiscal 1999.
COMPARISON OF FISCAL 1997 AND 1998
Net Sales. Net sales for the Automotive Products Division were
$135,235,000 for Fiscal 1998, compared to net sales of $111,931,000 for Fiscal
1997. The increase of $23,304,000, or 20.8%, was due to a 43.9% increase in
units shipped during Fiscal 1998 compared to Fiscal 1997. The increase in units
shipped resulted primarily from increased shipments to Autoliv under terms of a
supplier agreement signed in November 1995. The initiators sold to Autoliv are
generally sold at lower average unit selling prices than those sold to other
customers, due to simplicity of design, resulting in net sales increasing at a
slower rate than the increase in units sold. Net sales to TRW as a percentage of
Automotive Products Division net sales were 49.9% for Fiscal 1998, compared to
61.6% for Fiscal 1997, and were 39.7% of total Company net sales in Fiscal 1998
compared to 49.1% of total Company net sales for Fiscal 1997. Net sales to
Autoliv as a percentage of Automotive Product Division net sales were 31.3% for
Fiscal 1998, compared to 25.9% for Fiscal 1997 and were 24.9% of total Company
net sales in Fiscal 1998 compared to 20.6% for Fiscal 1997. The portion of the
Company's overall net sales represented by net sales to TRW decreased primarily
as the result of increasing net sales to Autoliv.
Notwithstanding the Automotive Products Division results for Fiscal 1998 as
a whole, results for the Automotive Products Division for the fourth quarter of
Fiscal 1998 were adversely affected by the 54-day United Auto Workers strike at
General Motors and continued weakness in the Asian market, resulting in reduced
purchases by certain customers.
Net sales for the Aerospace Division were $35,303,000 for Fiscal 1998,
compared to net sales of $28,572,000 for Fiscal 1997. The increase of
$6,731,000, or 23.6%, was due primarily to a contract for production of a
proprietary bomb ejector, which began in Fiscal 1998, and also due to increased
demand for products used in commercial satellite launch vehicles.
Cost of Sales. Cost of sales was $110,284,000 for the Automotive Products
Division for Fiscal 1998, compared to cost of sales of $93,159,000 for Fiscal
1997, an increase of $17,126,000, or 18.4%. The increase was due to costs
associated with increased net sales noted above. Gross profit as a percent of
net sales was 18.4% for Fiscal 1998, compared to gross profit as a percent of
net sales of 16.8% for Fiscal 1997. The improvement in gross profit as a percent
of sales was due to efficiencies related to volume increases, improvements in
automated machine yields and other manufacturing efficiencies achieved in the
current period.
39
43
Cost of sales for the Aerospace Division was $21,326,000 for Fiscal 1998,
compared to cost of sales of $19,395,000 for Fiscal 1997. The increase of
$1,931,000, or 9.9%, was due to costs associated with increased net sales during
Fiscal 1998. Gross profit as a percentage of net sales was 39.6% for Fiscal
1998, compared to gross profit as a percentage of sales of 32.1% for Fiscal
1997. The increase in gross profit as a percentage of net sales in Fiscal 1998
was due to changes in the mix of products shipped compared to Fiscal 1997 and
the absorption of relatively stable overhead expenses over greater net sales in
Fiscal 1998.
Operating Expenses. Operating expenses for each division (Automotive
Products and Aerospace) are comprised of two components. First, each division is
charged those operating expenses incurred directly by that division. Second,
each division is allocated administrative general operating expenses (which are
not attributable to a particular division) on what management considers to be an
equitable basis to fairly reflect the benefit received by each division.
Operating expenses for the Automotive Products Division were $6,459,000 for
Fiscal 1998, compared to operating expenses of $6,089,000 for Fiscal 1997. The
increase of $370,000, or 6.1%, was due primarily to labor related cost increases
incurred by the Automotive Products Division, and, to a lesser extent, to
increases in corporate expenses which were allocated to the Automotive Products
Division. Such increases were with respect to recurring costs. The increase in
corporate expenses was primarily legal and other professional services costs not
incurred in connection with the Transactions.
Operating expenses for the Aerospace Division were $6,564,000 for Fiscal
1998, compared to operating expenses of $4,617,000 for Fiscal 1997. The increase
of $1,947,000, or 42.2%, was the result primarily of an increase in incentive
bonus accruals in the current period and increases in corporate expenses for
bonuses that will be payable as a result of the division reaching performance
targets.
Net Interest Income (Expense). Net interest income (expense) consists of
interest expense on borrowings and interest income earned on short-term
investments. Interest income was $108,000 for Fiscal 1998, compared to interest
income of $353,000 for Fiscal 1997. The decrease in interest income during
Fiscal 1998 was due to lower average amounts invested in interest-bearing
securities during the year compared to Fiscal 1997. Interest expense was
$156,000 for Fiscal 1998, compared to interest expense of $259,000 for Fiscal
1997. The decrease in the current year was due to lower average debt balances
resulting from scheduled monthly principal payments, and due to the repayment of
debt relating to the sale of an airplane which we previously owned.
COMPARISON OF FISCAL 1996 AND 1997
Net Sales. Net sales for the Automotive Products Division increased
$31,695,000, or 39.5%, between Fiscal 1996 and Fiscal 1997. This increase was
due primarily to a significant increase in initiator shipments to TRW pursuant
to the TRW Agreement and increases in shipments to Autoliv. In December 1995,
the Company signed a three-year supplier agreement with Autoliv whereby the
Company is required to supply a substantial portion of Autoliv's initiator
requirements. The Autoliv agreement became effective with model year 1997
production (approximately August 1996) and therefore did not have a substantial
impact on Fiscal 1996 results of operations. Increases in initiator unit sales
during the two-year period were partially offset by decreases in initiator unit
prices. Increases in initiator unit sales in Fiscal 1997 were also offset by
lower average initiator unit prices caused by increased shipments to Autoliv of
lower-priced initiators. During Fiscal 1996 and 1997, net sales to TRW accounted
for 77.3% and 61.6%, respectively, of the Automotive Products Division's net
sales, and 59.7%, and 49.1%, respectively, of the Company's combined net sales.
In Fiscal 1997, net sales to Autoliv accounted for 25.9% of the Automotive
Products Division's net sales and 20.6% of the Company's combined net sales. Net
sales to Autoliv were not significant in Fiscal 1996. We expect TRW and Autoliv
to be the Automotive Products Division's largest customers for the foreseeable
future.
Net sales for the Aerospace Division increased $4,325,000, or 17.8%,
between Fiscal 1996 and Fiscal 1997. This increase was due to increased
shipments of parts used for commercial satellite launch vehicles and a
non-recurring engineering contract in Fiscal 1997 to redesign a proprietary
ejector.
Cost of Sales. Cost of sales for the Automotive Products Division
increased by $24,645,000, or 36.2%, between Fiscal 1996 and Fiscal 1997. This
increase was related primarily to the increased volume of initiators shipped.
Automotive Products Division gross profit margins as a percentage of its net
sales improved from
40
44
15.1% in Fiscal 1996 to 17.1% in Fiscal 1997. In Fiscal 1996 and 1997, we
achieved greater recovery of overhead costs from the increases in levels of
production, and in Fiscal 1997, we achieved an increase in production machine
utilization. In addition, in Fiscal 1996 and 1997, we achieved a reduction in
the cost of some raw materials used to manufacture initiators, all of which
contributed to improved gross margins. As described above, these improvements
were partially offset by decreases in the sales price of initiators during the
above periods. Although we have experienced a reduction in total in average unit
selling price, improvements in machine utilization and manpower efficiency,
reductions in raw material costs and greater absorption of overhead have more
than offset selling price reductions. In addition, these improvements in
manufacturing operations have allowed us to absorb higher depreciation expense
as productive capacity has been expanded.
Effective September 1, 1997, we amended the Automotive Products Division's
only long-term supply contract with the supplier of glass-sealed, co-axial
bodies, a key component used in the production of initiators, significantly
reducing the unit prices which we are obligate pay. The amendment also extended
the term of the contract to December 31, 2000 and provides that unit costs will
be further reduced at the beginning of the 1999 and 2000 calendar years. See
"Risk Factors -- We Are Dependent On A Key Supplier" and
"Business -- Manufacturing -- Supplies and Suppliers."
Cost of sales for the Aerospace Division increased $3,580,000, or 22.1%,
between Fiscal 1996 and Fiscal 1997. This increase was the result of an increase
in net sales. Gross profit as a percentage of the Aerospace Division's net sales
decreased from 33.1% in Fiscal 1996 to 30.7% in Fiscal 1997. Fluctuations in
gross profit as a percentage of net sales occur primarily due to the mix of
products sold during any period. Mature product lines, in general, earn a higher
gross profit than newer, developing product lines due to the benefits of
learning and the reduction of start-up costs. In addition, replacement parts, in
general, earn a higher gross profit than other products.
Operating Expenses. Operating expenses increased $2,612,000, or 32.2%,
between Fiscal 1996 and Fiscal 1997. In Fiscal 1996, the allocation of general
corporate expenses was made approximately equally to each division, whereas in
Fiscal 1997, we allocated approximately 65% of such expenses to the Automotive
Products Division and 35% to the Aerospace Division. If the allocation had been
made equally in Fiscal 1997, Aerospace Division operating expenses would have
increased by $581,000, with a corresponding decrease in the Automotive Products
Division's operating expenses. The general corporate expenses which we allocated
to the divisions totaled $2,704,000 in Fiscal 1996 and $3,874,000 in Fiscal
1997.
The increase in operating expenses in Fiscal 1997 compared to Fiscal 1996
was due primarily to increases in corporate administrative expenses and
discretionary bonuses. The increase in corporate administrative expenses
resulted primarily from increases in compensation expense (as increased staffing
was required to support the large increase in sales), outside professional costs
and public relations costs.
Operating expenses for the Automotive Products Division increased
$1,646,000, or 42.4%, between Fiscal 1996 and Fiscal 1997. As a percentage of
the Automotive Products Division net sales, these expenses have remained
relatively constant for the past two fiscal years.
Operating expenses for the Aerospace Division increased by $966,000, or
18.6%, between Fiscal 1996 and Fiscal 1997. Operating expenses as a percentage
of net sales for the Aerospace Division increased from 17.4% in Fiscal 1996 to
18.2% in Fiscal 1997. The increase in operating expenses as a percentage of
sales in Fiscal 1997 resulted from an increase in operating expenses, primarily
at Scot, at a faster rate than sales increased due to increased discretionary
bonus payments.
Net Interest Income (Expense). Net interest income (expense) consists of
interest expense on borrowings and interest income earned on short-term
investments. In Fiscal 1996, interest income earned on short-term investments
was $485,000, offset by interest expense of $365,000. In Fiscal 1997, interest
income earned on short-term investments was $353,000, offset by interest expense
of $259,000. The decrease in interest income in Fiscal 1997 compared to Fiscal
1996 was the result of lower average amounts invested in Fiscal 1997 as some
cash resources were used to finance capital additions. The reduction in interest
expense in Fiscal 1997 was the result of scheduled monthly principal payments of
long-term debt.
41
45
SEASONALITY
Airbag manufacturers' requirements for the Automotive Products Division's
initiators are dependent on the requirements of automobile manufacturers.
Although demand for the Automotive Products Division's initiators has not been
subject to significant seasonal fluctuations to date, we believe that the U.S.
airbag initiator market will become seasonal once demand for airbags stabilizes.
See "Risk Factors -- Dependence upon the Automotive Industry."
The Aerospace Division recognizes sales upon the shipment of units or
completion of a task. While there is no identifiable seasonality in the
aerospace business, there can be quarter-to-quarter changes in shipment volume
that result from customer requirements or other factors beyond our control.
During the past several years, the trend has been that customer shipment
requirements are greater in the second half of our fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are cash flow from operations and
borrowings under the New Credit Facility. Our principal uses of cash are debt
service requirements, capital expenditures, research and development and working
capital. The Recapitalization had a substantial impact on our capital structure,
as we are significantly more highly leveraged than we were prior to the
Recapitalization.
In Fiscal 1998, we generated cash from operations of $29,105,000, and in
the quarter ended January 31, 1999, we used cash of $12,575,000, including a
charge of $15,637,400 for costs incurred in connection with the
Recapitalization. Capital expenditures, primarily for payments related to
automated manufacturing equipment and production facilities, amounted to
$38,523,000 in Fiscal 1998 and $6,925,000 for the first quarter of Fiscal 1999.
At January 31, 1999, we had commitments to acquire capital equipment aggregating
approximately $2,000,000 related primarily to additional production equipment
and other support equipment required for the increased operations of the
Automotive Products Division.
At January 31, 1999, we had working capital of $19,630,800, an increase of
$3,959,500 from working capital of $15,671,300 at October 31, 1998. This
increase was due to:
- an increase in inventories of $2,365,300, which occurred in order to
support several large aerospace contracts, the inventory for which will
be shipped in Fiscal 1999,
- an increase in prepaid expenses of $384,000,
- a decrease in accrued expenses of $1,431,300, resulting from the timing
of payments for certain accrued expenses,
- a decrease in current income taxes payable of $4,590,200, resulting from
a decrease in taxable income in the first quarter of Fiscal 1999 and
- a decrease in the current portion of long-term debt of $484,600,
offset partially by:
- a decrease in cash of $1,160,400, resulting from the use of cash to
provide for working capital,
- a decrease in accounts receivable of $3,236,200, resulting from a
decrease in sales in the first quarter of Fiscal 1999 from the fourth
quarter of Fiscal 1998 and
- an increase in accounts payable of $1,572,400, resulting from the
increase in inventories noted above.
We incurred approximately $15,637,000 in one-time pre-tax charges in
connection with the Recapitalization (representing approximately $5,537,000 in
professional fees and approximately $10,100,000 of compensation expense relating
to cash payments to settle certain outstanding stock options). As a result of
the foregoing, we incurred a net loss in the quarter ended January 31, 1999.
Because this loss will result directly from the one-time charges incurred in
connection with the Recapitalization, we do not expect this loss to materially
impact our ongoing operations or liquidity.
42
46
As part of the Recapitalization, we entered into the New Credit Facility
with a syndicate of banks, as lenders, and Bankers Trust, as lead arranger,
administrative agent and a lender. Bankers Trust is an affiliate of BT Alex.
Brown Incorporated, an Initial Purchaser. The New Credit Facility consists of a
$70,000,000 Senior Term Loan and a $25,000,000 Revolving Credit Facility. As of
January 31, 1999, the Senior Term Loan was fully drawn and we had $750,000
outstanding on the Revolving Credit Facility. In addition, we had approximately
$2,500,000 of letters of credit outstanding under the Revolving Credit Facility.
The Revolving Credit Facility enables us to obtain revolving credit loans and
the issuance of letters of credit for our account from time to time for working
capital, acquisitions and general corporate purposes. See "Description of the
New Credit Facility."
We used the proceeds of the Old Notes offering, the Senior Term Loan and
the equity contribution by the New Investor Group to:
- finance the payment of the cash portion of the Recapitalization
consideration,
- to refinance our then-outstanding debt,
- to pay fees and expenses incurred in connection with the Recapitalization
and
- to provide for working capital and general corporate purposes.
We anticipate that working capital requirements will increase in Fiscal
1999 as compared to Fiscal 1998 to service our new long-term debt incurred in
connection with the Recapitalization (the Notes and the New Credit Facility). In
addition, we will require additional working capital to support our investment
in inventories and accounts receivable related to the anticipated increased
demand for our initiators, although future demand is inherently difficult to
predict and affected by a variety of factors. See "Business -- Automotive
Products Division." We believe that we will be able to meet our expected working
capital requirements for the foreseeable future from cash from operations and
borrowings under the New Credit Facility.
In order to improve manufacturing efficiencies and to provide facilities
for growth, we purchased in October 1996, approximately 280 acres of land in the
City of Moorpark, located in Ventura County, north of Los Angeles, where we are
currently building new facilities. Total cost of the project is estimated at
approximately $32,500,000, of which $27,915,000 had been spent at January 31,
1999 and is included in construction in progress in the accompanying condensed
consolidated balance sheet. We anticipate spending approximately an additional
$4,500,000 in Fiscal 1999 to complete this project. We plan to sell two
commercial lots being developed as part of this project, the proceeds of which
are expected to reduce the net project cost to approximately $27,000,000
(although there can be no assurance that these lots will sold on terms
acceptable to us). We believe that we have available adequate cash flow from
operations and borrowing capacity to adequately finance the completion of this
project. We intend to consider long term financing in connection with the
Moorpark Facility; however, there can be no assurance that such financing will
be available when required.
Excluding expenditures relating to the Moorpark Facility, total capital
expenditures are expected to be approximately $6,000,000 in Fiscal 1999.
Our ability to make scheduled payments of principal of, or to pay the
interest on, or to refinance, our debt (including the Notes), or to fund planned
capital expenditures and research and development expense, will depend on our
future performance, which, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond our control. Based upon the current level of operations, we believe that
cash flow from operations and available cash, together with available borrowings
under the New Credit Facility, will be adequate to meet our future liquidity
needs for the foreseeable future. We may, however, need to refinance all or a
portion of the principal of the Notes on or prior to maturity. There can be no
assurance that our business will generate sufficient cash flow from operations
or that future borrowings will be available under the New Credit Facility in an
amount sufficient to enable us to service our debt, including the Notes, or to
fund our other liquidity needs. In addition, there can be no assurance that we
will be able to effect any such refinancing on commercially reasonable terms or
at all. See "Risk Factors -- Risks Relating to the Notes -- Substantial
Leverage."
43
47
INFORMATION SYSTEMS AND THE YEAR 2000
General
We have established a program to address Year 2000 issues. The Year 2000
effort, which includes the implementation of previously planned business
critical systems and specific Year 2000 projects, is on track to be completed
before the year 2000. The majority of those applications that are not Year 2000
compliant have been, or will be, replaced by new systems. The costs of new
systems have been, or will be, recorded as an asset and amortized. A significant
portion of the costs associated with making the remaining applications not
covered by new systems Year 2000 compliant do not represent incremental costs to
the Company, but rather the redeployment of existing information technology
("IT") resources. Accordingly, we do not expect the Year 2000 effort to have a
material impact on our results of operations, liquidity or financial condition.
In addition, we have not deferred any other projects that will have a material
impact on our results of operations, liquidity or financial condition.
IT Systems
In late 1997, prior to the establishment of our Year 2000 program, we began
converting our corporate, financial and human resources management systems to a
new client server system. The systems are expected to be implemented before June
30, 1999. We have received vendor assurance that the systems are Year 2000
ready, and will conduct additional testing during 1999.
The remaining IT systems have been inventoried, and necessary Year 2000
replacements and retrofits identified. A few of these projects are in the
analysis phase, while most are in the development, testing or implementation
phase. We will focus on these efforts during 1999, since the implementation of
our core systems is nearly complete.
Non-IT Systems
Non-IT Systems may contain date sensitive embedded technology requiring
Year 2000 upgrades. Examples of this technology include industrial equipment and
security equipment such as access and alarm systems, as well as facilities
support equipment.
We are also addressing the readiness of our critical suppliers and
customers. We have inventoried our critical suppliers, and where appropriate,
contacted certain suppliers requesting Year 2000 certification. In certain areas
where we rely on products supplied by manufacturers for systems provided to our
customers, we are seeking standard Year 2000 warranties that, to the extent
assignable, may be transferred to customers.
Costs
The total cost associated with required modifications to become Year 2000
compliant is not expected to be material to our results of operations, liquidity
and financial condition. The estimated total cost of the Year 2000 effort is
approximately $100,000. This estimate does not include the cost of our
previously planned business critical systems which are nearly complete. The
total amount expended through January 1999 was approximately $60,000. The
capital and expense costs above are primarily related to payroll costs for the
Information Technology group, consulting fees and hardware and software costs.
Risks and Contingency Planning
We have identified and assessed our areas of risk related to the Year 2000
problem. The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect our results of
operations, liquidity and financial condition. Due to the general uncertainty
inherent in the Year 2000 problem, resulting in part from the uncertainty of the
Year 2000 readiness of third-party suppliers, we are unable to determine at this
time whether the consequences of the Year 2000 failures will have a material
impact on our results of operations, liquidity or financial condition. The Year
2000 effort is expected to significantly reduce our level of uncertainty about
the Year 2000 problem and, in particular, about the Year 2000 compliance and
readiness of our critical suppliers. We believe that, with the implementation of
new business critical systems and
44
48
completion of the Year 2000 specific projects as scheduled, the possibility of
significant interruptions of normal operations should be reduced.
ENVIRONMENTAL MATTERS
We use various hazardous and toxic substances in its manufacturing
processes, including organic solvents and pyrotechnic materials. Our operations
are subject to numerous federal, state and local laws, regulations and permit
requirements relating to the handling, storage and disposal of those substances.
In general, we reuse organic solvents are recycled by a licensed disposal
company. The pyrotechnic charge contained in products that are rejected in the
quality-control process is eliminated by explosive discharge pursuant to
government regulations. We believe that we are in substantial compliance with
these laws and regulations and we have obtained all necessary permits. While
compliance with such laws and regulations has the effect of increasing our costs
of operations, these costs must also be incurred by our competitors. Therefore,
such costs do not materially adversely affect our competitive position.
Under certain environmental laws, a current or previous owner of real
property, and parties that generate or transport hazardous substances that are
disposed of at real property, may be liable for the costs of investigating and
remediating such substances on or under the property. The federal Comprehensive
Environmental Response, Compensation & Liability Act, as amended ("CERCLA"), and
similar state laws, impose liability on a joint and several basis, regardless of
whether the owner, operator, or other responsible party was at fault for the
presence of such hazardous substances.
In connection with our plan to relocate operations from Newhall to
Moorpark, we may be required to conduct environmental investigations at the
Newhall site. Due to the site's history of industrial use by multiple parties,
it is possible that such investigations will reveal the presence of hazardous
substances in soil and/or groundwater, which could require remediation. While we
do not expect remedial costs, if any, to be material, and while such costs might
be shared with other responsible parties, this cannot be guaranteed.
To date, our compliance with applicable environmental laws has not had a
material adverse effect on our financial condition, results of operations or
competitive position. Furthermore, although no assurances can be given, we do
not believe that compliance with presently existing environmental laws will have
such a material adverse effect or require material expenditures. See "Risk
Factors -- Environmental Matters."
COMPREHENSIVE INCOME
On November 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," issued by the Financial Accounting Standards Board (the
"FASB"). SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial statements.
The statement requires only additional disclosures in the financial statements;
it does not affect the Company's financial position or results of operations.
There is no difference between net earnings and comprehensive income for the
Company.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. SFAS No. 131 is effective for annual financial
statements issued for periods beginning after December 15, 1997. We believe that
the adoption of SFAS No. 131 will not have a material impact on our financial
reporting.
STARTUP ACTIVITIES
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-5, "Reporting on the Cost of Startup
Activities." This SOP requires that costs incurred during start-up activities,
including organization costs, be expensed as incurred. SOP 98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998. Initial
application of the SOP should be as of the beginning of the fiscal year in which
the SOP is first adopted and should be reported as a cumulative effect
45
49
of a change in accounting principles. We believe that the adoption of SOP 98-5
will not have a material impact on our consolidated financial statements.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In 1998, the FASB issued Statement of Financial Statements No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
modifies the accounting for derivative and hedging activities and is effective
for fiscal years beginning after December 15, 1999. We believe that the adoption
of SFAS No. 133 will not have a material impact on our financial reporting.
In March 1999, we entered into an interest rate swap agreement with a bank
with a notional amount of $35 million. Under the swap agreement, we are required
to pay a fixed rate of 5.42% on each March 17, June 17, September 17 and
December 17, commencing on June 17, 1999. The swap agreement terminates on March
7, 2001. We will receive a floating rate based on the three-month LIBOR rate on
the same dates as described above.
46
50
BUSINESS
OVERVIEW
General
We are a leading designer and manufacturer of highly reliable precision
engineered pyrotechnic devices. These devices are used predominantly in vehicle
airbag and other automotive safety systems as well as in various aerospace
applications. Our primary products are initiators, which function like an
"electrical match" to ignite the gas generating charge in an automotive airbag
system or to provide precision ignitions in aerospace-related products. In
manufacturing our products, which utilize pyrotechnic materials, we ensure safe
handling and processing by following strict safety procedures that we have
developed over the past 35 years.
We have two divisions: an Automotive Products Division and an Aerospace
Division.
- We believe that our Automotive Products Division is the world's largest
supplier of initiators sold to leading U.S. and foreign automotive airbag
system manufacturers. Those manufacturers use our product in the assembly
of integrated airbag safety systems, which they then sell to automobile
OEMs.
- Our Aerospace Division supplies initiators and other advanced pyrotechnic
products to aerospace companies. Those companies, in turn, use our
products in a variety of applications including tactical missile systems,
spacecraft launch vehicles and military aircraft crew safety systems.
We have consistently generated strong financial results, which are largely
a result of favorable industry dynamics, various barriers to entry and a leading
market position. From Fiscal 1994 to Fiscal 1998, our net sales increased at a
compound annual growth rate of 27.5% and our EBITDA increased at a compound
annual growth rate of 41.8%. For the last twelve months ended January 31, 1999,
our net sales were $167.5 million and our EBITDA was $34.3 million.
Automotive Products Division
We believe that our Automotive Products Division is the world's largest
supplier of initiators to airbag system manufacturers. We formed the division in
1989 after the United States government adopted regulations requiring the
installation of airbags and other crash protection systems in all new passenger
automobiles. Since that time, demand for our initiators has grown rapidly. We
attribute this growth in large part to the continuing evolution of automotive
safety standards and increased customer preferences for airbag-related safety
options. We expect continued growth in the demand for our products as the number
of airbag-equipped vehicles increases, the number of airbags per vehicle grows
and our customers implement new technologies. These new technologies include
seat belt pre-tensioners and "smart" airbag systems, both of which we expect
will require new types of initiators and sometimes more than one initiator per
product. See "Risk Factors -- We Are Dependent On The Automotive Industry."
In recent years, our Automotive Products Division has grown its net sales
and cash flows significantly. The Automotive Products Division increased its net
sales from $49.5 million in Fiscal 1994 to $135.2 million in Fiscal 1998. This
represents an increasing portion of our total net sales during that time (76.7%
in Fiscal 1994 to 79.3% in Fiscal 1998). During the same period, our Automotive
Products Division increased its EBITDA (excluding pro forma adjustments) from
$5.7 million to $26.4 million, representing a compound annual growth rate of
46.7%.
We sell our initiators to leading domestic and foreign manufacturers of
airbag systems and subsystems. We have strong, long-term relationships with our
customers. In particular, we have supplier agreements with TRW, Autoliv and
Atlantic Research Corporation. We have been shipping initiators to Autoliv since
1990, TRW since 1991 and ARC since 1994. In addition, we have established new
relationships with other growing safety systems suppliers, including Richard
Hirschmann and Takata.
We have established a strong reputation for manufacturing high quality and
extremely reliable initiators. Since 1989, we estimate that over 100 million of
our initiators have been installed in automobiles. We do not
47
51
know of any instances where our initiators failed to perform. To date, we have
focused on developing glass-sealed, co-axial initiators. We believe that these
initiators are superior to plastic-sealed, spark-gap initiators, which are lower
priced and used in safety restraint systems outside the United States, primarily
in Europe. We are currently testing the AGI, a new, low-cost, glass-sealed
initiator, that we expect will allow us to compete more favorably in Europe. We
intend to introduce this product during Fiscal 1999. See "Business -- Automotive
Products Division -- Products and Technology."
We base our success, in part, on years of investment in proprietary, highly
automated manufacturing equipment and the design of proprietary manufacturing
processes. In addition, we have significantly improved our operating efficiency
and profitability. We expect additional production efficiencies upon completion
of our relocation to our new Moorpark Facility in during Fiscal 1999.
Aerospace Division
Our Aerospace Division designs and manufactures highly reliable pyrotechnic
devices. Our customers use these devices in a variety of commercial and military
aerospace applications. The Aerospace Division's products include state-of-the
art initiators and mechanical subassemblies (such as explosive bolts, cable
cutters, actuators, valves, safe-arm devices, aircraft crew safety systems, and
bomb ejectors) that incorporate these initiators. We have produced many of these
products for over 35 years. As a result, we have a strong reputation across a
diverse customer base which includes the United States government and leading
prime contractors such as Boeing, Lockheed Martin, Raytheon and Alliant
Techsystems.
Our aerospace initiators and the devices that incorporate them are used to:
- ignite larger pyrotechnic systems, including rocket motors, and
- activate mechanical devices such as valves, directional fins, arm-fire
devices, aircraft crew ejection systems and rotary bomb ejectors.
We produce these high-cost-of-failure products according to customer
specifications. Lead times typically range between six to nine months in order
to satisfy the highly technical nature and intense product testing required
before shipment. As a result, our Aerospace Division produces a wider variety of
products in significantly lower volumes than our Automotive Products Division,
although these products typically generate higher gross margins than automotive
initiators. We believe that over the last four decades we have produced nearly
2,000 diverse products that are critical components in missile systems, bomb
deployment systems and satellite launching mechanisms.
Our Aerospace Division has produced stable financial results over the last
five years and has consistently generated strong cash flows. The Aerospace
Division has increased net sales from $15.0 million in Fiscal 1994 to $35.3
million in Fiscal 1998. The division's net sales have represented a decreasing
portion of our net sales during that time (23.3% in Fiscal 1994 to 20.7% in
Fiscal 1998) because of the dramatic growth of our Automotive Products Division.
During the same period, the Aerospace Division increased its EBITDA from $2.8
million to $8.0 million, representing a compound annual growth rate of 30.0%.
HISTORY
Special Devices, Incorporated was founded in the late 1950s in Pacoima,
California to manufacture pyrotechnics for motion picture special effects
applications. In 1960, the Company constructed a new facility in Newhall,
California for the production of military pyrotechnic devices. The Company
changed ownership several times before being purchased by Messrs. Thomas F.
Treinen, Jack B. Watson and outside investor Walter Neubauer in 1976. At the
time of that transaction the Company had net sales of $800,000 and 30 employees.
During the 1980s, increased defense spending and a broadening of the
Company's product lines allowed the Company to establish itself as a leading
manufacturer of high-reliability initiators for weapons systems and safe and arm
fire devices. By the end of the 1980s, the decline of the Cold War and rising
budget deficits were placing downward pressure on defense spending. At the same
time Congress passed legislation
48
52
mandating the increased use of airbags in passenger cars and automotive OEMs
were beginning to market the superior safety of cars equipped with airbags.
Management decided to maintain the Company's aerospace business and aggressively
penetrate the automotive market.
In 1989, we signed a five-year contract to supply initiators to TRW, one of
the leading manufacturers of automotive airbags in the U.S. We constructed a
facility in Mesa, Arizona (the "MESA FACILITY") and renovated our Newhall
Facility to support production of automotive initiators. To raise capital for
this expansion we completed an initial public offering of our Common Stock in
August 1991. Through the 1990's, we gained additional airbag customers and by
the last quarter of Fiscal 1993, we had established our position as a leading
supplier of initiators and pyrotechnic devices to the world automotive and
aerospace markets.
COMPETITIVE STRENGTHS
We believe that the following competitive strengths will enable us to
continue to solidify our position as a leader in the global automotive initiator
market and in the aerospace initiator and pyrotechnic device market:
- LEADING MARKET POSITION IN A GROWING MARKET. Through our Automotive
Products Division, we believe we are the world's largest supplier of
automotive initiators with divisional net sales in Fiscal 1998 of $135.2
million. We are one of the two principal manufacturers of automotive
initiators in the United States, and we believe that we manufactured the
majority of initiators produced in the United States in 1998.
- BARRIERS TO ENTRY. We believe that the following significant barriers to
entry have limited the number of competitors that we face:
- Expertise. Handling and processing sensitive pyrotechnic materials
requires extensive pyrotechnics expertise. We have 35 years of
experience working with the fuels and oxidizers used in our
pyrotechnic devices.
- High Sales Volume Needed. A new entrant into the automotive initiator
market must achieve high sales volumes of relatively low priced units
in order to recover significant start up costs, including those
relating to equipment outlays.
- Qualifications. Each automotive initiator platform must pass numerous
tests established by automobile OEM and airbag system manufacturers.
These testing phases typically take approximately 12 to 18 months to
complete and are very expensive. We currently have approximately 65
initiator platforms. It would take a new entrant into our industry
years and significant expenditures to replicate the qualification and
testing required to successfully market the mix of products that we
offer.
- STRONG, LONG-TERM RELATIONSHIPS WITH AUTOMOTIVE INITIATOR CUSTOMERS. We
supply initiators to the major manufacturers and suppliers of airbag
systems and sub-systems in the U.S. market, including TRW, Autoliv, ARC,
Takata and Breed. Since 1991, TRW has purchased most of its initiator
requirements from us under long-term supply agreements. Since Fiscal
1997, we have been supplying Autoliv, a customer since 1990, with a
significant portion of its initiator requirements under a long-term
supply agreement. As a result of our relationships with our customers,
our initiators have been incorporated into airbag systems in vehicles
manufactured by most of the OEMs that sell automobiles, light trucks and
vans in the United States, including the three major domestic
manufacturers (Chrysler, Ford and General Motors), as well as BMW, Fiat,
Kia, Mazda, Mitsubishi, Nissan and Toyota.
- LEADING EDGE MANUFACTURING CAPABILITIES. We have significantly improved
our operating efficiency and productivity through several successful
initiatives. For example, we have expanded shipments of automotive
initiators from 8.3 million units in Fiscal 1994 to 42.3 million units in
Fiscal 1998. During that period, we also improved our Automotive Products
Division gross profit margin from 12.3% to 18.4%.
49
53
- HIGH QUALITY AND RELIABLE PRODUCTS. We have built a strong reputation
for high quality and reliable products through our advanced manufacturing
capabilities. Since 1989, we estimate that over 100 million of our
glass-sealed, co-axial initiators have been installed. We do not know of
any instances where our initiators failed to perform.
- ESTABLISHED POSITIONS ON KEY AEROSPACE PLATFORMS. Our Aerospace Division
provides devices for several important military procurement programs,
including the Tomahawk cruise missile and the Company-designed bomb
ejector for the B-2 Spirit stealth bomber. Our Aerospace Division
maintains its strong competitive position due to long-term relationships
with key customers, participation on high priority platforms, strong
technical expertise, and a proven record for reliability. The division
has successfully maintained preferred supplier positions with prime
contractors following recent industry consolidation.
- EXPERIENCED MANAGEMENT TEAM. Each of our top four executive officers has
at least 20 years of experience in the automotive or aerospace device
industries, primarily in the pyrotechnic field. Our management team has
successfully implemented a strategy that has enabled us to achieve market
leadership and strong financial results.
BUSINESS STRATEGY
Key elements of our business strategy are as follows:
- EXPAND AUTOMOTIVE INITIATOR PRODUCTION CAPACITY. We have continued to
expand our automotive initiator production capacity as the market for
these initiators continues to grow. During the first quarter of Fiscal
1999, we completed construction of our new Moorpark Facility, which will
allow us to expand our California-based automotive initiator production
capacity from 35 million to 80 million units per year with little
additional construction required. See "Risk Factors -- Relocation To The
Moorpark Facility May Disrupt Our Operations." Additionally, we are
expanding production capacity at our Mesa, Arizona facility from 20
million units to 30 million units per year during Fiscal 1999, with
minimal additional construction costs. Our business plan contemplates
expanding total automotive initiator capacity to 120 million units per
year by Fiscal 2002.
- CONTINUE NEW PRODUCT DEVELOPMENT. We have developed the AGI, a new,
low-cost, glass-sealed, co-axial initiator, which is currently undergoing
qualification testing by our customers. We have designed the AGI to
provide an alternative that is cheaper than and as reliable as the
glass-sealed, co-axial initiators that are currently on the market. Also,
we have designed the AGI to be more reliable than plastic-sealed,
spark-gap initiators at a competitive price. We are currently developing
initiators for new automobile restraint technologies, such as seat belt
pre-tensioners and "smart airbags" (airbags that can sense the size,
weight and position of the occupant and deploy accordingly). See "Risk
Factors -- There Are Risk Associated With New Products Development,
Product Obsolescence And Third-Party Development Of Alternative
Technologies."
- PENETRATE INTERNATIONAL MARKETS. As foreign automobile purchasers become
more aware of the safety benefits of airbags, we are positioning
ourselves to address expected growth in these markets. Despite limited
legislative pressure, foreign OEMs are introducing airbag systems in an
effort to compete on safety. We foresee significant opportunities in
Europe and other markets, where current implementation rates for
driver-side and passenger-side airbags are lower than in the United
States and where our market share is lower than our U.S. market share. We
expect that the AGI will allow us to compete favorably with lower priced,
plastic-sealed, spark-gap initiators which currently dominate the
European market. We are also investigating expansion into other
international markets as safety awareness and demand for initiators
increases.
- CONTINUE MANUFACTURING PROCESS IMPROVEMENTS. We have successfully
implemented several manufacturing process improvements that have
dramatically improved manufacturing efficiency in the Automotive Products
Division. These initiatives include increasing automation and labor
productivity, reducing raw material costs, vertically integrating,
reducing scrap and implementing the Toyota
50
54
Production System. In addition, we have designed our Moorpark Facility to
further increase production efficiency and reduce manufacturing costs,
operating costs and costs of future expansion.
- AEROSPACE GROWTH. We intend to capitalize on the strong foundation of
our Aerospace Division by:
- increasing our supply of initiators and other pyrotechnic devices to
the commercial satellite launch industry,
- capitalizing on the availability of numerous complementary
acquisitions in an effort to acquire new capabilities and increase the
number of products that we offer,
- focusing development efforts on long-term production contracts to
assist customers in the design of new pyrotechnic technologies,
- developing additional applications for existing products and
- expanding our capabilities in technologies that could replace
electro-mechanical devices, such as electronic or laser technology.
AUTOMOTIVE PRODUCTS DIVISION
Products and Technology. The Automotive Products Division currently
produces over 65 different airbag initiators for the four major domestic
manufacturers of airbag systems and has a variety of other initiator products
that are currently at various stages of the qualification process. An initiator
acts like an "electrical match" in an airbag, receiving the electrical signal
from a firing module and converting it to a high-energy output to initiate the
inflation of the airbag. Electrical systems and performance requirements differ
among automobile models and airbag systems and airbag systems differ among
driver-side, passenger-side and other applications. Therefore, the electrical
and physical characteristics of our initiators are customized for the airbag
system in which they are used. Each initiator version is similar in design
characteristics and utilizes many of the same basic components and production
techniques. However, each initiator and airbag system must complete design
validation and product validation requirements before it can be installed in
automobiles. See "-- Manufacturing -- Quality Control."
There are two principal types of airbag initiators currently in
use -- glass-sealed, co-axial initiators and plastic-sealed, spark-gap
initiators. We produce only glass-sealed, co-axial initiators. Most
manufacturers of automobiles sold in the U.S. use glass-sealed, co-axial
initiators while most airbags installed in cars sold in Europe employ
plastic-sealed, spark-gap initiators.
We believe that glass-sealed initiators are more reliable than
plastic-sealed initiators because they are more resistant to environmental
forces such as moisture and dirt. The co-axial design is also more resistant to
accidental ignition by stray electromagnetic signals (such as static electricity
or radio signals) than the spark-gap design. Plastic-sealed initiators currently
cannot use the co-axial design, although glass-sealed initiators can be either
co-axial or spark-gap. As a result of sound engineering and quality control
efforts, we believe that there has not been a single reported failure of any of
the estimated 80 million of our initiators that have been installed in
automobiles since the Automotive Products Division was formed in 1989.
The primary advantage of plastic-sealed, spark-gap initiators is their
lower cost. During 1997, however, we developed and our currently testing the
AGI -- a new, low cost glass-sealed, co-axial initiator. The AGI has completed
the production phase of its product validation and has been made available to
our customers in quantities for testing. See "-- Manufacturing -- Quality
Control." The AGI will be available in production quantities during Fiscal 1999.
The AGI's simplified design should enable us to provide an initiator with
equivalent functionality and reliability to current glass-sealed, co-axial
initiators and better reliability than plastic-sealed, spark-gap initiators. The
AGI will be priced to compete favorably with the plastic-sealed, spark-gap
initiators which currently dominate the European initiator market. See "Risk
Factors -- New Product Introductions; Uncertainty of Market Acceptance."
Customers. TRW, Autoliv, ARC, Takata and Breed Technologies, the current
global manufacturers and suppliers of automotive airbag systems or sub-systems,
all incorporate our initiators in certain of their
51
55
airbag systems or sub-systems. In addition, we sell our products to the other
manufacturers of airbag systems, including Richard Hirschmann (Austria), TRW
Auto Systems (England), TRW Airbag Systems (Germany) and Autoliv (Amsterdam).
Our three principal customers are TRW, Autoliv and ARC, who together represented
approximately 93.7% of total Automotive Product Division units produced in
Fiscal 1998. TRW and Autoliv are two of the major domestic manufacturers of
airbag systems. We have supplied initiators to TRW since 1991, Autoliv since
1990 and ARC since 1994. See "Risk Factors -- We Are Dependent On Key
Customers."
In Fiscal 1998, TRW accounted for approximately 35.1% of the units we sold
and approximately 39.7% of our net sales. The TRW Agreement, which expires at
the end of the 2002 model year, obligates TRW to purchase a majority of its
initiator requirements from us at prices per unit that vary based on the type of
initiator purchased and the model year and requires that we have certain
specified minimum production capacities during the term. Prices may be increased
through negotiation if TRW requests a design change. Prices have also been
subject to renegotiation. The TRW Agreement does not require TRW to purchase a
minimum number of units nor is TRW obligated to purchase the specified
percentage of its requirements unless our prices are competitive with those
offered by other suppliers and our technology and quality are equivalent or
better than that of other suppliers. We determine manufacturing schedules and
ship products to TRW based upon delivery orders, specifying the desired
quantities and delivery dates which are released several weeks in advance of
delivery. TRW may terminate a particular purchase order or any part of it by
written notice to us, in which case TRW is obligated to pay us for all goods
that:
- are ready for shipment prior to our receipt of the notice of termination,
- conform to all requirements of the purchase order and
- are free and clear of all encumbrances.
In Fiscal 1998, Autoliv accounted for approximately 42.1% of the units we
sold and approximately 24.9% of our net sales. In November 1995, we entered into
the Autoliv Agreement, which lasts through the 1999 model year, whereby Autoliv
is required to purchase a substantial portion of its airbag-system initiators
from us. We successfully completed qualification requirements, and Autoliv
ordered a substantial volume of initiators under this agreement beginning in
August 1996 for 1997 model year production. Pricing is agreed each year by the
parties, and prices may be increased through negotiation if Autoliv requests a
design change. Prices have also been subject to renegotiation during the course
of a model year. We are obligated to maintain pricing, terms, delivery, service
and quality consistent with industry standards.
We have an agreement with ARC (which accounted for approximately 16.4% of
our units shipped and approximately 11.3% of our net sales in Fiscal 1998) with
terms similar to those contained in the TRW Agreement, pursuant to which ARC
agreed to purchase a majority of its initiator requirements from us through the
2000 model year. In addition, we have established new relationships with other
growing safety systems suppliers, including Richard Hirschmann and Takata. We
began to ship production quantities to Hirschmann in Fiscal 1998 and we expect
to supply production quantities to Takata beginning in Fiscal 1999.
Sales and Marketing. The Automotive Products Division's management,
engineers and personnel maintain close contact with each customer and monitor
developments in the automotive industry (particularly the status of products
such as side and rear seat airbag systems, seat belt pre-tensioners and "smart"
airbag systems) and the domestic and international airbag system markets in
order to exploit marketing opportunities as they become available.
In November 1990, we entered into the DBS License Agreement pursuant to
which we granted DBS a license to:
- use all patented and non-patented technical information, know-how, data,
systems, programs and specifications (collectively, "TECHNOLOGY") used in
the manufacture of initiators or incorporated in initiators (whether such
Technology is owned by us or developed by us subsequently) and
- distribute initiators using the Technology worldwide, provided that DBS
may not sell such initiators to TRW or its affiliates in the U.S.
52
56
Until December 31, 1998, DBS was required to pay royalties to us under the
agreement. From and after January 1, 1999, DBS is no longer obligated to pay
royalties to us, and DBS is entitled to continue using the Technology
perpetually on a royalty-free basis. As DBS failed to meet certain distribution
requirements by December 31, 1998, the Company has the right to license the
Technology to third parties. To date, DBS has not manufactured or distributed
any products under the DBS License Agreement. Significant competition from DBS
in Europe or the U.S. could have a material adverse effect on us.
Competition. Currently there are two large-volume manufacturers of airbag
initiators in the United States -- us and OEA, Inc. We believe that we hold the
largest share of the domestic airbag initiator market although OEA may have
greater financial resources than the Company. Other companies may choose to
enter the automotive initiator market in the future. There are, however,
substantial monetary costs and time associated with the design validation and
product validation qualifications required by customers as well as development
and start-up. See "-- Manufacturing -- Quality Control." Currently, Nouvelle
Cartoucherie de Survilliers and an affiliate of DBS are the major suppliers of
airbag initiators in Europe.
Unit selling prices to customers vary depending upon the complexity of
design and the value of added components. As a result, the total average selling
price in any period will be affected by the relative quantities sold to each
customer. In addition, during recent years, competition among manufacturers of
airbag initiators has intensified. As a result of this increased competition, we
and other manufacturers of initiators have had to significantly reduce the price
of initiators. We expect this competition to continue and to cause additional
price pressure on us and other initiator manufacturers. We cannot assure you
that we will be able to compete successfully in such an environment.
AEROSPACE DIVISION
Products and Technology. The Aerospace Division, like the Automotive
Products Division, designs and manufactures highly reliable initiators and other
pyrotechnic devices. The Aerospace Division's products are used primarily in
tactical missile systems, spacecraft launch vehicles and military aircraft crew
safety systems. The Aerospace Division's products include state-of-the-art
initiators and mechanical devices that incorporate these initiators such as
explosive bolts, cutters, actuators, valves, pin pullers and arm-fire devices
used in tactical missile systems and cutters and gas generators used in military
aircraft escape and safety systems employed by the F-15, F-16, F-18, AV-8B,
T-38, T-45, T-48 and B-2 aircraft, automatic parachute releases, time delays,
separation nuts, thrusters, valves, actuators and retractors used to lock
landing gear, jettison the manipulator arm on the Space Shuttle, and deploy the
drogue chute for the Space Shuttle upon landing. In addition, during Fiscal 1997
the Aerospace Division began selling a portable oxygen flow/ communications
tester used by Air Force pilots and also began production of a proprietary bomb
ejector in Fiscal 1998.
Aerospace Division initiators are used to ignite larger pyrotechnic
charges, such as rocket propellant, or to activate mechanical devices. Missiles,
other weapon systems and aircraft incorporate initiators for several purposes,
such as igniting the fuel which propels the missile, releasing directional fins,
triggering automatic parachutes, ejecting crew members from military aircraft
and opening or closing valves. An arm-fire device is an electro-mechanical
device that prevents a rocket motor from being fired accidentally. Bomb ejectors
are used on aircraft to allow for sequential release of missiles and bombs and
they employ initiators to trigger the release.
Each of the devices manufactured by the Aerospace Division is a component
in a larger product of its customer. As a result, we and our competitors must
respond to specification requirements by devoting significant engineering,
development and testing resources.
Customers. The Aerospace Division's customers typically are prime
contractors or subcontractors on projects where the United States government is
the end-user, although we are supplying an increasing number
53
57
of initiators to the commercial satellite launch industry. The following table
summarizes certain of the Aerospace Division's major customers and the programs
that incorporate our products:
MAJOR CUSTOMERS MAJOR PROGRAMS
- --------------- --------------
U.S. Air Force............... Ejection Seat Components, Parachute
Testers
Primex....................... SFW, BAT, Fire Extinguisher Initiators
Raytheon..................... TOW, Tomahawk, Standard Missile
Thiokol...................... HARM
Alliant Techsystems.......... AMRAAM, Seasparrow, SFW, Maverick,
Hellfire
Lockheed Martin.............. Patriot, Javelin, Atlas, Hellfire,
JASAM
Boeing....................... Tomahawk, Harpoon, SLAM, Delta, BRU-
44
U.S. Navy.................... Initiators
Textron...................... SFW, WAM
Royal Ordnance............... ASRAAM
Northrop..................... BAT, K-1
UTC.......................... Space Shuttle, Tomahawk, Titan, AEGIS
Aerojet Corp. ............... AMRAAM, Hawk
Atlantic Research Corp. ..... RAM, Sidewinder, AMRAAM, Standard
Missile
Orbital Sciences Corp. ...... Pegasus, Taurus
No program of the Aerospace Division accounted For more than 10% of our net
sales during any of the three fiscal years ended October 31, 1998.
A majority of the division's present customer contracts are fixed-price
contracts. These contracts generally specify a fixed price per unit depending on
the quantity desired. Fixed-price contracts carry certain inherent risks,
including underestimating costs, problems with new technologies and economic and
other changes that may occur over the contract period. However, because of
economies of scale that may be realized during the contract term, fixed price
contracts may offer significant profit potential.
Sales and Marketing. Marketing efforts for the Aerospace Division are
focused on identifying emerging new programs that have long-term production
potential and the prime contractors or subcontractors who are likely to receive
contracts for such programs. The Aerospace Division has a full-time Director of
Marketing whose duties include identifying and pursuing new program
opportunities, customers, potential teaming arrangements and new business
development strategies. Scot also employs two full-time employees whose primary
responsibilities are to market Scot's products.
For new programs, the Aerospace Division generally receives a request for
bids from its customer. We respond to customer inquiries with "firm" quotations
and extensive cost, technical and management proposals. In some cases, we will
provide prototype hardware for the customer's evaluation prior to source
selection. We believe that customers award contracts based upon the technical
proposals submitted, which include design innovation, analysis and compliance
with specifications, in addition to pricing.
All proposals with respect to United States government programs involving
amounts in excess of $500,000 are subject to audit by the United States
government. Most of our contracts with respect to United States government
programs are subject to unilateral termination at the government's convenience.
See "Risk Factors -- There Are Risks Related To Government Contracts And
Compliance With Government Regulations."
Competition. The Aerospace Division competes with several firms, some with
greater financial resources than the Company. Once the initial contract is
awarded, contracts for additional products are generally entered into on a
negotiated price basis and are not competitively bid.
54
58
Although we have very few patents, there are practical barriers to entry
for potential new competitors. Each of the Aerospace Division's products is made
to precise technical specifications and must be thoroughly tested before being
used in a customer's products. Testing and approval is a costly and
time-consuming process. Not only must each of the division's products be tested
individually, but all such products must be tested in conjunction with the
larger product into which they are intended to be placed. After commencement of
a program, it is costly for the Aerospace Division's competitors to design, and
the customers to change suppliers of, the components we manufacture since the
customer would be required to re-qualify its products using a new
subcontractor's components.
MANUFACTURING
General. Our production process consists of fabricating and assembling the
hardware components and separately preparing the pyrotechnic charge. Production
of the electro-mechanical assemblies involves the purchase of machined
components, seals and other materials, the mechanical assembly of the components
and the testing of the completed units. Throughout the entire process, strict
quality assurance controls are maintained in order to obtain the lowest possible
theoretical failure rates. After assembly, the products are functionally tested
on a sample basis as required by each customer or the applicable contract.
We manufacture the pyrotechnic charge from raw generic chemicals and have
handled and processed these fuels and oxidizers for over 35 years. Some of the
pyrotechnic fuels are delivered to us in bulk in a wet and non-volatile form. We
dry the pyrotechnic fuels before use. These fuels are then mixed with oxidizers
and pressed in small quantities into the metal housings of the specific product
being made. Handling and processing pyrotechnic materials requires extensive
experience and expertise as well as the proper equipment and facilities.
While both the Automotive Products Division and the Aerospace Division
manufacture similar pyrotechnic products, each division's manufacturing process
is unique. Because the Automotive Products Division must produce large
quantities of highly reliable products at high speeds (current run rates
approximate 50 million units per annum), automation and process engineering are
as important to us as product design. We have a staff of highly trained
automation engineers, technicians and operators whose goal is to maximize yield
and product quality. In addition, we have achieved significant improvements in
operating efficiency and productivity through the successful implementation of a
manufacturing process improvement program based on Japanese manufacturing
techniques, including the Toyota Production System. Our new Moorpark Facility is
designed to increase efficiencies further through improved plant layout. In
contrast, the Aerospace Division manufactures primarily engineered-to-order
products pursuant to custom specifications. Lead times typically range between
six to nine months in order to satisfy the highly technical nature and intense
product testing required prior to product shipment. As a result, the Aerospace
Division produces a wider variety of products at significantly lower volumes
than the Automotive Products Division, although these products typically
generate higher gross margins.
Quality Control. Each type of initiator manufactured by the Automotive
Products Division must qualify for use by passing numerous tests established by
the automobile and airbag system manufacturers. The initial test phase is design
validation, which is intended to demonstrate that the design of the initiator is
capable of performing the required function within the stated specifications.
The second test phase is product validation, which is intended to demonstrate
that we have the management, personnel, equipment and facilities to manufacture
the initiator in production quantities to design specifications. The design
validation and product validation qualification phases must be repeated for each
new initiator design. The product validation qualification phase must also be
repeated for each facility at which initiators are produced. These initial
qualification procedures are very costly and time consuming. The product
validation qualification phase, for example, requires a supplier to have in
place its management, personnel, equipment and facilities prior to the time they
would otherwise be required for production.
Products manufactured by the Aerospace Division also must meet rigorous
standards and specifications for workmanship, process, raw materials, procedures
and testing. Customers, and in some cases the United States government as the
end user, perform periodic quality audits of the manufacturing process. Certain
55
59
customers and the United States government maintain representatives at our
facilities to monitor quality assurance.
Production Facilities. We utilize automatic and semiautomatic production
equipment located at the Moorpark Facility (Automotive Products Division and
Aerospace Division), the Newhall Facility (Automotive Products Division), the
Mesa Facility (Automotive Products Division) and at our facility in Downers
Grove, Illinois (Aerospace Division). Since the end of Fiscal 1996, the
Automotive Products Division has expanded from two production lines in each of
the Mesa and Newhall Facilities (with an annual designed capacity of 20 million
units) to four lines in the Moorpark Facility, four lines in the Newhall
Facility and five lines in the Mesa Facility. As of March 31, 1999, these three
facilities were producing at a combined annualized rate of approximately 50
million automotive initiators per year, with an average of three shifts working
an average of 5 1/2 days a week.
Our Newhall Facility consists of several buildings that are no longer
conducive to achieving optimal manufacturing efficiencies. In October 1996, we
purchased approximately 280 acres of land in the city of Moorpark, located in
Ventura County, north of Los Angeles. During the first quarter of Fiscal 1999,
we completed construction of our new Moorpark Facility, which will allow us to
expand our California-based automotive initiator production capacity from 35
million to 80 million units per year with little additional construction
required. We completed the move of our corporate and administrative offices from
Newhall to Moorpark in February 1999, and we began shifting Aerospace operations
to Moorpark in December 1998 and Automotive operations to Moorpark in January
1999. See "Risk Factors -- Relocation To The Moorpark Facility May Disrupt Our
Operations."
Supplies and Suppliers. The principal materials we use in our various
manufacturing processes include pyrotechnic powder, glass to metal seal
components, fabricated metal parts, wire, nylon and a variety of other
fabricated or manufactured items. While some components, such as flexible
circuits, mechanical parts, connectors, seals and certain chemicals are
purchased from single suppliers, substantially all materials are normally
available from multiple suppliers. Current and potential suppliers are evaluated
on a regular basis on their ability to meet our requirements and standards. Most
components are manufactured specifically for us to our specifications.
In 1997, we leased a facility in Moorpark, California and purchased
equipment to begin manufacturing glass-sealed initiator bodies (header sub
assemblies) internally. All of these initiator bodies have historically been
purchased from outside sources, primarily from one manufacturer, and we expect
to continue to purchase a majority of our requirements for these initiator
bodies from outside sources in the future. We plan to begin production for these
items during Fiscal 1999.
We have a long-term supply contract with a company for header
sub-assemblies used by the Automotive Products Division for incorporation into
initiators. This supply contract was amended in 1997 to extend through December
31, 2000. The amended agreement significantly reduced the prices we pay for
headers purchased effective September 1997 and provides that such prices will be
further reduced at the beginning of the 1999 and 2000 calendar years. In return
for the extension and price reductions, we are required to purchase a
substantial majority of our requirements for sub-assemblies from the supplier.
We are not obligated to make such minimum purchases in the event certain
competitive pricing, quality or delivery issues arise. We believe that
alternative sources of the component are available in the event of any
disruption in delivery by the supplier. In addition, we plan to have internal
production capacity for header sub-assemblies, as discussed above, during Fiscal
1999.
RISK MANAGEMENT AND INSURANCE
The drying, sifting, mixing and processing of pyrotechnic materials involve
certain risks and potential liabilities. Our safety and health programs provide
specialized training to employees working with pyrotechnic materials.
Pyrotechnic chemicals are generally delivered to us and are stored by us in a
non-volatile form. The pyrotechnic materials are then dried, sifted and blended
at a remote location. Work stations are designed to shield employees from any
accidental explosion. Furthermore, our machines are designed so that an
accidental explosion will be contained in a protective enclosure to minimize
damage. The explosion at our
56
60
Newhall Facility in February 1999 occurred while loading pyrotechnic materials
into a transport vehicle, rather than within a building or at a work station.
See "Risk Factors -- We Are Subject To Environmental And Workplace Regulations."
We maintain a liability insurance program covering a number of risks. Our
insurance program includes comprehensive general liability and products
liability coverage in the amount of $100.0 million for the Aerospace Division,
including our subsidiary, Scot, and $50.0 million for the Automotive Products
Division. We also have casualty and fire insurance with various coverage limits
for damage to personal property and buildings, business interruption,
earthquakes, boilers and machinery and automobile liability. Pollution liability
is excluded from our comprehensive general liability insurance policy.
We are engaged in a business which could expose us to possible claims for
injury resulting from the failure of products sold by us, notably initiators for
airbag systems. Although we are not aware of any claims for injury resulting
from its airbag initiators, they have only been in general use for approximately
eight years. We maintain product liability insurance coverage as described
above. However, there can be no assurance that claims will not arise in the
future, that the proceeds of such policy will be sufficient to pay future claims
or that we will be able to maintain the same level of insurance.
EMPLOYEES
At March 31, 1999, we had approximately 770 full-time employees at our
Newhall and Moorpark Facilities, approximately 628 full-time employees at the
Mesa Facility, approximately 70 full-time employees in Downers Grove, Illinois
and one full-time employee in Ogden, Utah. None of our employees is represented
by a collective bargaining unit. We consider our relationship with our employees
to be good.
BACKLOG
The majority of sales for the Automotive Products Division are achieved
under long-term agreements such as the TRW Agreement and the Autoliv Agreement.
Those agreements typically have terms ranging from three to five years and
specify minimum percentage requirements to be supplied by us during the term of
the agreements. Purchase order releases against those agreements are updated
weekly by each customer and include "firm" shipping requirements for the next 12
to 16 weeks. The Automotive Products Division does not reflect an order in
backlog until it has received a purchase order from a customer that specifies
the quantity ordered and the delivery dates required. Since these orders are
generally shipped within 12 to 16 weeks of receipt of the order, the amount of
"firm" backlog for the Automotive Products Division at any given time is not
indicative of sales levels expected to be achieved over a 12-month period.
Aerospace Division backlog was $32.2 million at January 31, 1999 as
compared to $40.8 million at January 31, 1998 and $34.5 million at October 31,
1998. Aerospace Division backlog includes the remaining contract amount for
units yet to be shipped (excluding renewals or extensions which are at the
discretion of the customer) for signed contracts or contract award notifications
with firm delivery dates and prices. Backlog is calculated without regard to
possible adjustments for scope change or potential cancellations until such
changes or cancellations occur. Of the total Aerospace Division backlog at
January 31, 1999, we expect that approximately $9.5 million will not be
delivered until after Fiscal 1999.
FACILITIES
Our principal executive offices are now located at the Moorpark Facility.
The Moorpark Facility consists of six buildings which cover approximately
170,000 square feet. We own the 280 acres of land on which the Moorpark Facility
is located.
We still maintain production operations at our Newhall Facility, which are
in the process of being moved to the Moorpark Facility. The Newhall Facility is
leased from a partnership (consisting of certain of our stockholders) under a
Master Lease Agreement that expired on April 30, 1996 but that has continued
month-to-month since then. We are operating under a non-conforming use permit,
issued by the Los Angeles County Regional Planning Commission, which expires
December 31, 2001. The Newhall Facility consists of approximately 35 buildings,
modular units and other structures aggregating approximately 70,000 square feet.
57
61
We have an additional facility used by the Automotive Products Division in
Mesa, Arizona on approximately 21 acres of land which we own. The Mesa Facility
consists of several buildings aggregating approximately 72,000 square feet,
including two blending facilities. See "Business -- Manufacturing."
Scot's manufacturing facilities and principal offices which are owned by
Scot, subject to a mortgage, are located in Downers Grove, Illinois and consist
of approximately 47,000 square feet of office and manufacturing facilities
located on three and one-half acres of land that are owned by Scot. Scot also
owns 29 acres of land in Ogden, Utah, on which Scot tests various products.
GOVERNMENT REGULATION
As a contractor and subcontractor of the United States government, we are
subject to various laws and regulations more restrictive than those applicable
to non-government contractors. We are subject to periodic audits and
investigations to confirm compliance with those laws. Violations can result in
civil and/or criminal liability as well as suspension or debarment from
eligibility for awards of new government contracts or contract renewals. As of
the date hereof, we know of two pending preliminary inquiries regarding
compliance with government policies by the Aerospace Division. On their face,
the two matters, if determined adversely to us, are not likely to have a
material adverse effect on us, although the investigations are in their
preliminary stages and there can be no assurance as to this. Accordingly, we
cannot predict the outcome of these proceedings. See "Risk Factors -- Risks
Related to Government Contracts and Compliance with Government Regulations."
ENVIRONMENTAL REGULATION
We use various hazardous and toxic substances in our manufacturing
processes, including organic solvents and pyrotechnic materials. Our operations
are subject to numerous federal, state and local laws, regulations and permit
requirements relating to the handling, storage and disposal of those substances.
In general, organic solvents are recycled by a licensed disposal company and
reused by us. The pyrotechnic charge contained in products that are rejected in
the quality-control process is eliminated by explosive discharge pursuant to
government regulations. We believe that we are in substantial compliance with
applicable laws and regulations and that we have obtained all necessary permits.
While compliance with such laws and regulations has the effect of increasing our
costs of operations, these costs must also be incurred by our competitors and,
therefore, they do not materially adversely affect our competitive position.
Under certain environmental laws, a current or previous owner of real
property, and parties that generate or transport hazardous substances that are
disposed of at real property, may be liable for the costs of investigating and
remediating such substances on or under the property. CERCLA, and similar state
laws, impose liability on a joint and several basis, regardless of whether the
owner, operator, or other responsible party was at fault for the presence of
such hazardous substances.
In connection with our plan to relocate operations from Newhall to
Moorpark, we may be required to conduct environmental investigations at the
Newhall site. Due to the site's history of industrial use by multiple parties,
it is possible that such investigations will reveal the presence of hazardous
substances in soil and/or groundwater, which could require remediation. While we
do not expect remedial costs, if any, to be material, and while such costs might
be shared with other responsible parties, this cannot be guaranteed.
To date, our compliance with applicable environmental laws has not had a
material adverse effect on our financial condition, results of operations or
competitive position. Furthermore, although no assurances can be given, we do
not believe that compliance with presently existing environmental laws will have
such a material adverse effect or require material expenditures in the future.
See "Risk Factors -- We Are Subject To Environmental And Workplace Regulations."
LEGAL PROCEEDINGS
We are involved in various legal proceedings generally incidental to our
business. While the ultimate disposition of these proceedings is not presently
determinable, we do not believe that the outcome of these proceedings will have
a material adverse effect on our financial position or results of operations.
58
62
Stockholder Litigation. Four purported stockholder class action lawsuits
have been filed in the Delaware Court of Chancery challenging the Merger. On
June 22, 1998, David Finkelstein filed a purported stockholder class action
lawsuit against J. Nelson Hoffman, Robert S. Ritchie, Jack B. Watson, Thomas F.
Treinen, Walter Neubauer, Samuel Levin, Donald A. Benedix, John M. Cuthbert, the
Company and Lehman. Also on June 22, 1998, a purported stockholder class action
complaint was filed by Harbor Finance Partners against Messrs. Treinen, Hoffman,
Ritchie, Watson, Levin, Bendix, Cuthbert, as well as the Company. Finally, on
June 25, 1998, a purported stockholder class action lawsuit was filed by Timothy
Hawkins against Messrs. Hoffman, Watson, Treinen, Levin, Bendix, Cuthbert, as
well as the Company and Lehman. Each of these three lawsuits charges the
individual defendants with breaching their fiduciary duties to the public
stockholders of the Company by allegedly failing to obtain adequate
consideration for the Merger. The complaints allege, among other things, that
the terms of the Merger are unfair, that the defendants failed to consider other
potential purchasers of the Company, and that the individual defendants are
favoring their own interest at the expense of the stockholders. On August 21,
1998, David Finkelstein, the plaintiff in one of the derivative lawsuits, filed
an amended class action complaint against the same defendants as the original
complaint which charges the individual defendants with failing to disclose
material information in the original proxy statement, including, among other
things, the failure to disclose third quarter financial statements, information
concerning the projections made available to bidders and the firm which rendered
a fairness opinion in connection with the Merger, the interest of certain
persons in the equity of the continuing entity as well as breaching their
fiduciary duties to the public stockholders of the Company by allegedly failing
to obtain adequate consideration for the Merger.
On November 30, 1998, a fourth purported stockholder class action lawsuit
was filed in the Delaware Court of Chancery challenging the Merger. The lawsuit,
filed by Paul Packer, purportedly on behalf of himself and other stockholders of
the Company as of October 15, 1998, is brought against J. Nelson Hoffman, Jack
B. Watson, Thomas F. Treinen, Samuel Levin, Donald A. Bendix, John M. Cuthbert,
Robert S. Ritchie and the Company. The lawsuit essentially charges the
individual defendants with breaching their fiduciary duties to the public
stockholders of the Company by allegedly failing to obtain adequate
consideration for the Merger. The complaint alleges, among other things, that
the terms of the Merger are unfair, that the consideration paid to the public
shareholders of the Company is unfair, inadequate and substantially below the
fair market value of the Company, that the individual defendants failed to take
steps to enhance the Company's value, that they failed to effectively expose the
Company in the marketplace, and that they are favoring their own interests at
the expense of the public stockholders.
The plaintiffs and defendants agreed in the first three purported class
actions to enter into a memorandum of understanding, evidencing the parties'
agreement on the material terms of a settlement of the litigation before the
fourth lawsuit was filed. Since then, the Company and its counsel have had
discussions with counsel for the plaintiffs in all of these actions and it is
possible that the actions will still be settled. Any settlement will be subject
to approval by the Delaware Court of Chancery. No trial date has been set for
any of the four lawsuits and the defendants have not yet filed responsive
pleadings. Management disputes all of the plaintiffs' material allegations and
believes that this litigation is without merit. At this preliminary stage, we
are not in a position to evaluate the likely outcome of this litigation nor the
terms of any possible settlement.
59
63
MANAGEMENT
DIRECTORS AND OFFICERS
The following table sets forth the name, age and position of each of our
directors and executive officers. All of our officers are elected annually and
serve at the discretion of the Board of Directors.
NAME AGE POSITIONS
- ---- --- ---------
John M. Cuthbert.......................... 56 Director, President and Chief Executive Officer
Samuel Levin.............................. 69 President, Scot, Incorporated
Robert S. Ritchie......................... 55 Vice President, Aerospace Division
John T. Vinke............................. 54 Executive Vice President, Chief Financial Officer
George Sawyer............................. 67 Chairman of the Board of Directors
Oliver C. Boileau, Jr..................... 71 Director
Stephen Eisenstein........................ 36 Director
Donald Glickman........................... 65 Director
John F. Lehman............................ 56 Director
Keith Oster............................... 37 Director
William Paul.............................. 62 Director
Thomas G. Pownall......................... 76 Director
Joseph Stroud............................. 43 Director
Thomas F. Treinen......................... 61 Director
Jack B. Watson............................ 62 Director
John M. Cuthbert has been a Director of the Company since June 1991 and
served as President of the Automotive Products Division from January 1992 until
the completion of the Recapitalization, at which time he became President and
Chief Executive Officer of the Company. From December 1989 to January 1992, he
served as a Vice President of the Automotive Products Division. From 1977 to
1984, he was Director of Engineering at OEA, Inc. (Aerospace and Automotive
Products) and was Vice President of Engineering for OEA, Inc. from 1984 to 1989.
Mr. Cuthbert holds a degree in mechanical engineering.
Samuel Levin has been President of Scot since 1992. Mr. Levin served as a
Director of the Company from September 1994 until consummation of the
Recapitalization in December 1998. Prior to September 1994, Mr. Levin spent 18
years in various executive capacities with Scot. Mr. Levin holds a degree in
mechanical engineering.
Robert S. Ritchie has been employed by the Company since 1990 and has been
a Vice President in charge of the Aerospace Division's operations at the Newhall
Facility since October 1991. From 1985 to 1990, Mr. Ritchie was an independent
business management consultant servicing aerospace and commercial companies. Mr.
Ritchie holds a degree in mechanical engineering and an M.B.A.
John T. Vinke has been employed by the Company as Vice President, Finance
and Chief Financial Officer since April 1994. Upon completion of the
Recapitalization, Mr. Vinke became Executive Vice President, Chief Financial
Officer of the Company. Mr. Vinke is a Certified Public Accountant.
George Sawyer, who became Chairman of the Board of Directors of the Company
upon consummation of the Recapitalization, is a Managing Principal of Lehman.
From 1993 to 1995, Mr. Sawyer served as the President and Chief Executive
Officer of Sperry Marine Inc. Prior to that, Mr. Sawyer held a number of
prominent positions in private industry and in the United States government,
including serving as the President of John J. McMullen Associates, the President
and Chief Operating Officer of TRE Corporation, Executive Vice President and
Director of General Dynamics Corporation, the Vice President of International
Operations for Bechtel Corporation and the Assistant Secretary of the Navy for
Shipbuilding and Logistics under Dr. Lehman. Mr. Sawyer is currently Chairman of
Burke Industries, Inc. and a director of Elgar Holdings, Inc. He also serves on
the Board of Trustees of Webb Institute and is on the Board of Managers of the
American Bureau of Shipping.
60
64
Oliver C. Boileau, Jr. became a director of the Company upon consummation
of the Recapitalization. He joined The Boeing Company in 1953 as a research
engineer and progressed through several technical and management positions and
was named Vice President in 1968 and then President of Boeing Aerospace in 1973.
In 1980, he joined General Dynamics Corporation as President and a member of the
Board of Directors. In January 1988, Mr. Boileau was promoted to Vice Chairman.
He retired in May 1988. Mr. Boileau joined Northrop Grumman Corporation in
December 1989 as President and General Manager of the B-2 Division. He also
served as President and Chief Operating Officer of the Grumman Corporation, a
subsidiary of Northrop Grumman, and as a member of the Board of Directors of
Northrop Grumman. Mr. Boileau retired from Northrop Grumman in 1995. He is an
Honorary Fellow of the American Institute of Aeronautics and Astronautics, a
member of the National Academy of Engineering, the Board of Trustees of St.
Louis University and the Massachusetts Institute of Technology -- Lincoln
Laboratory Advisory Board. Mr. Boileau is also director of Burke Industries,
Inc. and Elgar Holdings, Inc.
Stephen Eisenstein became a director of the Company upon consummation of
the Recapitalization. Prior to co-founding Paribas Principal Partners in 1996,
Mr. Eisenstein was a Managing Director specializing in financing and investing
in leveraged buyouts for six years at Paribas. Before joining Paribas, Mr.
Eisenstein worked at The Chase Manhattan Bank in the Media Corporate Finance
Group and at PaineWebber Inc. in the Equity Research Department. Mr. Eisenstein
serves on the Board of Directors of Atlantic Coast Fire Protection, Inc.,
Collins and Aikman Floorcoverings, Inc. and Key Plastics, Inc.
Donald Glickman, who became a director of the Company upon consummation of
the Recapitalization, is a Managing Principal of Lehman. Prior to joining
Lehman, Mr. Glickman was a principal of the Peter J. Solomon Company, a Managing
Director of Shearson Lehman Brothers Merchant Banking Group and Senior Vice
President and Regional Head of The First National Bank of Chicago. Mr. Glickman
served as an armored calvary officer in the Seventh U.S. Army. Mr. Glickman is
currently Chairman of Elgar Holdings, Inc. and a director of the
MacNeal-Schwendler Corporation, General Aluminum Corporation, Monroe Muffler
Brake, Inc. and Burke Industries, Inc. He is also a trustee of MassMutual
Corporate Investors, MassMutual Participation Investors and Wolf Trap Foundation
for the Performing Arts.
John F. Lehman, who became a director of the Company upon consummation of
the Recapitalization, is a Managing Principal of Lehman. Prior to joining
Lehman, Dr. Lehman was an investment banker with PaineWebber Incorporated and
served as a Managing Director in Corporate Finance. Dr. Lehman served for six
years as Secretary of the Navy, was a member of the National Security Council
Staff, served as a delegate to the Mutual Balanced Force Reductions negotiations
and was the Deputy Director of the Arms Control and Disarmament Agency. Dr.
Lehman served as Chairman of the Board of Directors of Sperry Marine, Inc., and
is a member of the Board of Directors of Elgar Holdings, Inc., Ball Corporation,
ISO Inc., and Burke Industries, Inc., and is Chairman of the Princess Grace
Foundation, a director of OpiSail Foundation and a Trustee of LaSalle College
High School.
Keith Oster, who became a director of the Company upon consummation of the
Recapitalization, is a Principal of Lehman. Mr. Oster joined Lehman in 1992 and
is principally responsible for financial structuring and analysis. Prior to
joining Lehman, Mr. Oster was with the Carlyle Group, where he was responsible
for analyzing acquisition opportunities and arranging debt financing, and was a
Senior Financial Analyst with Prudential-Bache Capital Funding, working in the
Mergers, Acquisitions and Leveraged Buyouts Department. Mr. Oster is currently a
director of Burke Industries, Inc. and Elgar Holdings, Inc.
William Paul became a director of the Company upon consummation of the
Recapitalization. Mr. Paul began his career with United Technologies Corporation
("UTC") at its Sikorsky Aircraft division in 1955. Mr. Paul progressed through a
succession of several technical and managerial positions while at Sikorsky
Aircraft, including Vice President of Engineering and Programs and Executive
Vice President and Chief Operating Officer, and in 1983 was named President and
Chief Executive Officer of Sikorsky Aircraft. In 1994, Mr. Paul was appointed
the Executive Vice President of UTC, Chairman of UTC's international operations
and became a member of UTC's Management Executive Committee. Mr. Paul retired
from these positions in 1997 but remains a consultant to UTC. Mr. Paul is a
Fellow of the American Institute of
61
65
Aeronautics and a Fellow of the Royal Aeronautical Society. Mr. Paul is also a
director of Elgar Holdings, Inc.
Thomas G. Pownall, who became a director of the Company upon consummation
of the Recapitalization, is a member of the investment advisory board of Lehman.
Mr. Pownall was Chairman of the Board of Directors from 1983 until 1992 and
Chief Executive Officer of Martin Marietta Corporation ("MARTIN MARIETTA") from
1982 until 1988. Mr. Pownall joined Martin Marietta in 1963 as Vice President of
its Aerospace Advanced Planning Unit, became President of Aerospace Operations
and, in succession, Vice President, then President and Chief Operating Officer
of Martin Marietta. Mr. Pownall is also a director of The Titan Corporation,
Burke Industries, Inc., Elgar Holdings, Inc., Director Emeritus of Sundstrand
Corporation, serves on the advisory board of Ferris, Baker Watts Incorporated,
and is Chairman and President of the American-Turkish Council. He is also a
director of the U.S. Naval Academy Foundation and the Naval Academy Endowment
Trust and a trustee of Salem-Teikyo University.
Joseph Stroud, who became a director of the Company upon consummation of
the Recapitalization, is a Principal of Lehman. Mr. Stroud has been affiliated
with Lehman since 1992 and formally joined the firm in 1996. He is responsible
for managing the financial and operational aspects of portfolio company value-
enhancement. Prior to joining Lehman, Mr. Stroud was the Chief Financial Officer
of Sperry Marine Inc. from 1993 until the company was purchased by Litton
Industries, Inc. in 1996. From 1989 to 1993, Mr. Stroud was Chief Financial
Officer of the Accudyne and Kilgore Corporations. Mr. Stroud is currently a
director of Elgar Holdings, Inc. and Burke Industries, Inc.
Thomas F. Treinen has been a director of the Company since 1976, and served
as Chairman and President of the Company from 1976 until consummation of the
Recapitalization. From 1965 to 1976, Mr. Treinen held various positions,
including project engineer and Vice President, with the Company. From 1961 to
1965, Mr. Treinen was a project engineer at Aerojet General Corporation. Mr.
Treinen holds a degree in mechanical engineering.
Jack B. Watson has been a director of the Company since April 1991. Mr.
Watson served as President of the Automotive Products Division from 1987 to
January 1992 and served as Vice President of the Automotive Products Division
from January 1997 through December 1997. From 1982 to the present, Mr. Watson
has been President of Watson Helicopters Inc. Prior to January 1997, Mr. Watson
provided consulting services to the Company regarding pyrotechnic devices. Mr.
Watson was initially employed by the Company from 1967 to 1981. He served as
Vice President from 1970 to 1975 and as Co-President with Mr. Treinen from 1974
to 1981. Mr. Watson holds degrees in aerodynamics.
COMMITTEES OF THE BOARD OF DIRECTORS
Executive Committee. The Executive Committee of the Board of Directors is
comprised of Messrs. Lehman, Sawyer, Glickman, Paul and Cuthbert. The Executive
Committee's main function is to expedite the decision-making process on certain
matters.
Audit Committee. The Audit Committee of the Board of Directors is
comprised of Messrs. Glickman, Paul, Oster, Treinen, Eisenstein and Boileau. The
Audit Committee makes recommendations concerning the engagement of independent
public accountants, reviews with the independent public accountants the scope
and results of the audit engagement, approves professional services provided by
the independent public accountants, reviews the independence of the independent
public accountants, considers the range of audit and non-audit fees and reviews
the adequacy of the Company's internal accounting controls.
Compensation Committee. The Compensation Committee of the Board of
Directors is comprised of Messrs. Lehman, Sawyer, Glickman, Stroud, Pownall and
Cuthbert. The Compensation Committee makes recommendations concerning the
salaries and incentive compensation of employees of and consultants to the
Company, and oversees and administers the Company's stock option plans.
62
66
EXECUTIVE COMPENSATION
Compensation. Set forth below is information concerning the annual and
long-term compensation for services in all capacities to the Company for Fiscal
1998, 1997 and 1996, of those persons (collectively, the "NAMED EXECUTIVE
OFFICERS") who were, during Fiscal 1998, (i) the Chief Executive Officer and
(ii) the five other most highly compensated executive officers receiving
compensation of $100,000 or more from the Company or one of its subsidiaries.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------- AWARDS-STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS (SHARES) COMPENSATION(1)
- --------------------------- ---- -------- -------- ---------------- ---------------
Thomas F. Treinen............. 1998 $225,680 $ -- -- $3,449
President and Chief
Executive 1997 221,667 72,542 -- 3,353
Officer(2) 1996 199,992 27,465 -- 4,030
John M. Cuthbert.............. 1998 211,598 -- -- 2,917
President and Chief
Executive 1997 177,162 34,660 150,000(3) 2,656
Officer(2) 1996 171,592 13,158 3,000(3) 3,056
Robert S. Ritchie............. 1998 149,365 -- -- 2,061
Vice President, Aerospace 1997 138,263 58,642 30,000(3) 1,781
Division 1996 133,634 13,365 3,000(3) 2,200
Samuel Levin.................. 1998 206,766 437,901 -- 4,000
President, Scot,
Incorporated 1997 187,500 105,019 10,000(4) 9,918
1996 181,900 66,972 5,000(4) 7,894
John T. Vinke................. 1998 131,304 -- -- 772
Vice President, Finance and 1997 118,938 29,096 25,000(4) 716
Chief Financial Officer 1996 112,912 12,149 3,000(4) 1,078
- ---------------
(1) Consists of matching contributions by the Company under its 401(k) plan,
which was adopted in Fiscal 1994, or its non-qualified deferred compensation
plan, which was adopted in Fiscal 1995, and certain life insurance premiums
paid on behalf of Mr. Levin.
(2) Mr. Treinen served as President and Chief Executive Officer of the Company
until December 15, 1998. Mr. Cuthbert became President and Chief Executive
Officer on that date, having served as President of the Automotive Products
Division until that time.
(3) Options granted by the Compensation Committee of the Board of Directors on
December 30, 1996 and ratified by the stockholders at the Company's 1997
annual meeting. All grants were at the market price of the Common Stock
($17.00) on the date of grant.
(4) Granted pursuant to the Company's Amended and Restated 1991 Stock Incentive
Plan at the market price of the Common Stock on the date of grant.
OPTION GRANTS IN LAST FISCAL YEAR
During Fiscal 1998, the Company did not grant any options to the Named
Executive Officers.
EMPLOYMENT AND CONSULTING AGREEMENTS
Samuel Levin
Samuel Levin, the President and Chief Executive Officer of Scot, entered
into an employment agreement with Scot and the Company, the term of which began
on September 8, 1994 and ended on October 31, 1997. Mr. Levin's employment
agreement was extended to December 31, 1999. Such amended employment agreement
provides for an annual salary of $205,000 with annual adjustments for cost of
living increases and also provides for participation by Mr. Levin in a bonus and
qualified deferred compensation plan.
63
67
During his employment term the level of Mr. Levin's participation in the
bonus and qualified compensation plan is calculated according to a formula based
upon Scot's net operating income. In the event Mr. Levin voluntarily terminates
the employment agreement or the employment agreement is terminated due to a
disability suffered by Mr. Levin, Mr. Levin is entitled to a severance payment
equal to one year's salary and the pro rata portion of his bonus for the year of
termination. In the case of disability, he will be entitled to participate in
welfare benefit plans for six months following termination, and in the case of
voluntary termination, he will be entitled to participate (at his expense) in
welfare benefit plans for ten years following termination. In the event Mr.
Levin's employment agreement is terminated "for cause" (as defined therein), Mr.
Levin is not entitled to a severance payment except for a pro rata portion of
his bonus for the year of termination. In the event Mr. Levin's employment
agreement is terminated due to his death, neither Scot nor the Company is
obligated to make a severance payment to Mr. Levin's estate, except for a pro
rata portion of his bonus for the year of his death, and the continuation of
welfare benefits plan coverage for his dependents for a period of six months
after his death. In the event Mr. Levin's employment agreement is terminated by
Scot or the Company for any reason other than "for cause" or upon Mr. Levin's
voluntary termination, death or disability, Mr. Levin is entitled to receive as
severance an amount equal to his then base salary and his existing employee
benefits for the remaining period of the employment agreement as well as
continued participation in the bonus and deferred compensation plans for such
period. Mr. Levin's employment agreement also provides for a consulting term,
beginning on January 1, 2000 and ending on December 31, 2000, during which
period Mr. Levin will receive a payment of $50,000, payable in equal monthly
installments. In the event Mr. Levin provides more than eight hours of service
in any month during this period, he shall be paid at the rate of $1,000 a day.
Jack B. Watson
Jack B. Watson, former Vice President of the Company's Automotive Products
Division and a Director of the Company, entered into an employment and
consulting agreement with the Company dated as of January 1, 1997. The
employment portion of the agreement was for a term of one year which commenced
on January 1, 1997 and ended on December 31, 1997. The employment portion of the
agreement provided for a salary of $150,000 for the one year term, and also
entitled Mr. Watson to participate in the benefit plans provided by the Company
to its other senior officers. Pursuant to the agreement Mr. Watson earned a
bonus in the amount of $50,000 based on the Company's achievement of certain
financial milestones. The Company has no obligations under the agreement to make
severance payments to Mr. Watson of any kind. The consulting portion of the
agreement is for a term of two years which commenced on January 1, 1998 and ends
on December 31, 1999. For his services as a consultant to the Company, Mr.
Watson will receive an annual fee of $50,000 subject to Mr. Watson providing a
certain number of hours of service to the Company each month. In the event Mr.
Watson's retention as a consultant to the Company is terminated for any reason,
Mr. Watson shall receive accrued compensation through the date of termination.
STOCK OPTION PLANS AND GRANTS
During 1991, the Company adopted the Amended and Restated 1991 Stock
Incentive Plan (the "PLAN"). The Plan is administered by a committee of the
Board of Directors, which determines the amount, type, vesting period, terms and
conditions of the awards granted thereunder. The Plan provides for the issuance
of restricted stock, grants of incentive and non-qualified stock options, stock
appreciation rights and performance share awards at exercise prices
approximating the current market value on the date of grant. The Company has
reserved 560,000 shares of Common Stock for issuance under the Plan.
Pursuant to the Plan, no option may be granted that is exercisable in less
than six months or more than ten years from the grant date. Certain events,
including a change in control of the Company, may accelerate exercise dates,
cause forfeiture of all shares of any restricted stock and terminate all
conditions relating to the realization of any performance awards.
Prior to Fiscal 1996, all options granted under the Plan vested ratably
over a three year period. Options granted under the Plan during Fiscal 1996 and
1997 vest ratably during the five years after the grant date.
64
68
In December 1996, the Stock Option Committee authorized stock option grants
to certain employees via a special grant which is not part of the 1991 Stock
Option Plan. Under terms of this authorization, 130,000 shares were granted
which were to vest ratably over five years from the grant date and 312,000
shares were granted which were to vest ratably during the eight years after the
grant date. The exercise price of all of the options granted was the fair market
value of the Common Stock on the grant date, which was $17.00 per share. The
eight-year options contain vesting acceleration clauses which are effective
during the first 36 months of the option term; acceleration of vesting is
contingent upon the price of the Common Stock reaching a minimum level and upon
the Company attaining minimum earnings targets. As of October 31, 1998, all of
the eight-year options and 26,000 five-year options had vested.
Except for options that remain outstanding (set forth in the table below)
after the Recapitalization pursuant to the stock option agreement letters
entered into by the Company and each of John M. Cuthbert, Jack B. Watson, Robert
S. Ritchie, Thomas F. Treinen, John Vinke, Mary Lou Graham and Samuel Levin in
connection with the Equity Rollover (each such letter, a "STOCK OPTION AGREEMENT
LETTER"), all vested and unvested options (the "STOCK RIGHTS") to purchase
shares of Common Stock that were granted under any employee stock option or
compensation plan or other arrangement vested and became exercisable immediately
prior to the Recapitalization, and each holder of an unexercised Stock Right
received a cash payment from the Company equal to the amount by which $34.00
exceeded the per share exercise price of such Stock Right, multiplied by the
number of shares of Common Stock then subject to such Stock Right (the "OPTION
CONSIDERATION"). Upon payment of the Option Consideration, each Stock Right was
canceled.
The following table sets forth the roll-over of certain options pursuant to
the Stock Option Agreement Letters:
NAME OPTIONS ROLLED OVER
- ---- -------------------
John M. Cuthbert............................ 50,000
Jack B. Watson.............................. 21,325
Robert S. Ritchie........................... 7,500
Thomas J. Treinen........................... 7,500
John T. Vinke............................... 7,500
Mary Lou Graham............................. 4,000
Samuel Levin................................ 3,750
All of the options set forth in the table above are ten-year options which
were issued in December 1996, vest ratably over five years and have an exercise
price of $17.50 per share (except for the options granted to Mary Lou Graham,
which have an exercise price of $17.75 per share).
BONUS AND INCENTIVE PLANS
In March 1998, the Company established two short-term incentive plans for
the benefit of all regular, full time employees of the Automotive Division and
the Aerospace Division, respectively (collectively, the "BONUS PLANS"), and a
Management Incentive Plan for certain members of management from both divisions
(the "MANAGEMENT PLAN"). The Bonus Plans permit the Company to pay employees
quarterly bonuses based on employment level, the attainment of certain
pre-established financial performance criteria, and the attainment of certain
pre-established individual goals. The Management Plan bonuses are paid annually,
based upon the attainment of certain pre-established Company and division
financial performance criteria. The Bonus Plans and the Management Plan are
administered by a committee of the Board of Directors, which has full power and
authority to determine the terms and conditions of awards under the Bonus Plans
and the Management Plan. In addition, Scot has instituted a special bonus plan,
the terms of which are described in connection with the description of Mr.
Levin's employment contract under "-- Employment Agreements."
BENEFIT PLANS
The Company also maintains various qualified and non-qualified benefit
plans for its employees, including a 401(k) profit sharing plan and an insured
deferred compensation plan for certain highly compensated
65
69
employees. The Company reserves the right to add, amend, change, tie off and/or
terminate any or all qualified or nonqualified benefit plans at any time and to
alter, amend, add to and/or restrict employee participation to the extent
permitted by applicable Federal or state law or regulation.
COMPENSATION COMMITTEE; INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors is comprised of
Messrs. Lehman, Sawyer, Glickman, Stroud, Pownall and Cuthbert. Of the members,
only Mr. Cuthbert is an employee or officer of the Company. During Fiscal 1998,
no executive officer of the Company has served as a member of the board of
directors or compensation committee of any company of which Messrs. Lehman,
Sawyer, Glickman, Stroud, Pownall or Cuthbert is an executive officer.
STOCKHOLDERS AGREEMENT
Upon consummation of the Recapitalization, the Company entered into a
Stockholders Agreement (the "STOCKHOLDERS AGREEMENT") with JFL Equity, JFL
Co-Invest, Thomas F. Treinen and Walter Neubauer (collectively, the
"STOCKHOLDERS") and Lehman. Among other things, the Stockholders Agreement
provides that each Stockholder will vote all of its Common Stock to elect as
directors the 11 persons designated as directors by JFL Equity and the one
person designated as a director by PPI. The Stockholders Agreement contains
customary restrictions on transfer, rights of first offer, preemptive rights,
tag-along and drag-along rights. The Stockholders Agreement will terminate upon
the earlier of:
- the tenth anniversary of the Stockholders Agreement,
- the date when all Stockholders and their transferees cease to hold any
Securities (as defined under the Stockholders Agreement),
- the date when all Securities have been sold in a registered public
offering or distributed to the public pursuant to Rule 144 under the
Securities Act or
- the date when Securities at an aggregate offering price of least
$20,000,000 are sold in a registered public offering.
The Stockholders Agreement will terminate with respect to any Stockholder
once that Stockholder ceases to hold any Securities. The Stockholders Agreement
will terminate with respect to any Securities once those Securities have been
sold in a registered public offering or distributed to the public pursuant to
Rule 144 under the Securities Act.
ROLLOVER STOCKHOLDERS AGREEMENT
Upon consummation of the Recapitalization, the Company entered into a
Rollover Stockholders Agreement (the "ROLLOVER STOCKHOLDERS AGREEMENT") with
Lehman, Thomas F. Treinen and Walter Neubauer. The Rollover Stockholders
Agreement provides that Neubauer, Treinen and their respective transferees will
have the right under certain circumstances to require the Company to purchase
all or any portion of the Additional Rollover Shares at the Call Price. See "The
Transactions -- The Recapitalization." The Rollover Stockholders Agreement also
provides that Lehman will have the right for a specified period to purchase any
or all of the Additional Rollover Shares held by Neubauer and Treinen at the
Call Price. Lehman has an irrevocable proxy to vote all of the Additional
Rollover Shares it has a right to acquire.
COMPENSATION OF DIRECTORS
None of the directors of the Company who are officers of the Company will
receive any compensation directly for their service on the Board of Directors.
All other directors will receive customary directors' fees for their services.
In addition, the Company will pay Lehman certain fees for various management,
consulting and financial planning services, including assistance in strategic
planning, providing market and financial analyses, negotiating and structuring
financing and exploring expansion opportunities. See "Certain Relationships and
Related Transactions -- Management Agreements With Lehman."
66
70
CERTAIN TRANSACTIONS
NEWHALL LEASE
We lease our land and facilities located in Newhall, California from
Placerita Land and Farming Company, the sole partners of which are Thomas F.
Treinen, one of our directors, and Walter Neubauer, a stockholder of the
Company. The lease is a triple net lease that requires us to pay all utilities,
taxes and insurance. This lease expired on April 30, 1996, but we continue to
lease this property from the same lessor on a month-to-month basis. Our lease
expense for this property was $461,540 in Fiscal 1997 and $524,472 in Fiscal
1998. Lease payments under the month-to-month lease are $43,700 per month,
subject to annual increases based on the Consumer Price Index. We believe that
the terms of the lease are no less favorable to us than those that could have
been obtained from an unrelated third party.
COMPONENT PURCHASES
We purchase various parts and components manufactured to our specifications
and used in our products from Ordnance Products, Inc. and Multi-Screw, Inc.,
companies controlled by Walter Neubauer, a stockholder of the Company. In most
cases, these parts and components are similar to those that could be obtained
from other suppliers without significant delay. Our aggregate purchases of parts
and components from these companies were $2,361,500 in Fiscal 1996, $3,460,100
in Fiscal 1997 and $720,156 in Fiscal 1998. We believe that parts and components
purchased from these companies were purchased at prices that were no less
favorable to us than those that could have been obtained from an unrelated third
party.
GLASS SEAL PURCHASES
We also have a contract to purchase glass seals (the "SEAL CONTRACT") from
Hermetic Seal Corporation ("HSC"). Mr. Neubauer acquired 40% of the common stock
of the ultimate parent company of HSC in November 1989. Mr. Neubauer divested
his ownership in HSC in January 1997. Both the original and the new contracts
were subject to a competitive bidding process. In both instances, HSC was the
lowest bidder. The Seal Contract, as amended, requires us to buy a substantial
majority of our requirements of four header sub-assemblies from HSC at a
decreasing fixed price per unit through December 2002. Our obligations under the
contract are subject to HSC's prices, technology and quality remaining
competitive. Our purchases of header sub-assemblies from HSC aggregated
$12,768,500 in Fiscal 1996 and $11,464,400 in Fiscal 1997. Although Mr. Neubauer
divested his ownership in HSC in January 1997, we continue to do business with
HSC. We believe that the terms of the Seal Contract were no less favorable to us
than could have been obtained from an unrelated third party.
SALE OF AIRPLANE
In December 1994, we purchased an airplane from United Beechcraft, Inc. for
$669,419. We entered into a promissory note with Beech Acceptance, Inc. to
finance the purchase over a 10-year period. The unpaid balance of this note at
August 2, 1998 was $530,000. In May 1997, we entered into an agreement with Mr.
Treinen, whereby he assumed responsibility for the note and agreed to buy the
airplane at its then fair market value. In August 1998, Mr. Treinen repaid the
note. The net book value ($523,000) and the promissory note ($530,000) were
removed from our books in May 1997 to reflect this sale and transfer of
liability. We did not recognize any gain or loss as a result of this
transaction.
COMPENSATION OF OFFICER RELATED TO A DIRECTOR
Thomas J. Treinen (the son of Thomas F. Treinen, one of our directors and a
Stockholder), our Vice President of Administration, receives customary
compensation for services rendered to the Company.
MANAGEMENT AGREEMENTS WITH LEHMAN
Pursuant to the terms of a ten-year Management Agreement and a ten-year
Management Services Agreement (together, the "MANAGEMENT AGREEMENTS") we entered
into with Lehman upon consummation of
67
71
the Recapitalization, we paid Lehman a transaction fee of $3.0 million for its
efforts in connection with the Transactions. In addition, we agreed to pay
Lehman an annual management fee equal to $900,000, payable in advance on a
quarterly basis.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Registration Rights Agreement entered into upon
consummation of the Recapitalization, JFL Equity, JFL Co-Invest, PPI, Thomas F.
Treinen and Walter Neubauer and any of their direct or indirect transferees have
certain demand and piggyback registration rights, on customary terms, with
respect to the Common Stock held by such entities and persons.
68
72
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 1999, ownership of the
Company's Common Stock by (i) the stockholders known to us to be the beneficial
owners of more than five percent of the outstanding shares of Common Stock, (ii)
each Director, (iii) each Named Officer and (iv) all Directors and Executive
Officers as a group:
NUMBER OF SHARES
BENEFICIALLY PERCENT OF CLASS
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(2) OUTSTANDING(3)
- --------------------------------------- ---------------- ----------------
JFL Co-Invest Partners I, L.P. ........................... 1,173,499(4) 31.6%
2001 Jefferson Davis Highway, Suite 607
Arlington, Virginia 22202
J.F. Lehman & Company..................................... 735,294(4)(5) 19.8%
450 Park Avenue
New York, New York 10022
J.F. Lehman Equity Investors I, L.P. ..................... 679,442(4) 18.3%
2001 Jefferson Davis Highway, Suite 607
Arlington, Virginia 22202
Walter Neubauer........................................... 1,096,522(6) 29.6%
Ordnance Products, Inc.
21200 S. Figueroa Street
Carson, CA 90745
Paribas Principal Inc. ................................... 323,529 8.7%
787 Fifth Avenue
New York, New York 10019
Thomas F. Treinen......................................... 433,897(7) 11.7%
Oliver C. Boileau, Jr. ................................... --(8) --
Stephen Eisenstein........................................ 323,529(9) 8.7%
John F. Lehman............................................ 2,588,865(4)(10) 69.7%
Donald Glickman........................................... 2,588,865(4)(10) 69.7%
George Sawyer............................................. 2,588,865(4)(10) 69.7%
Joseph Stroud............................................. 2,588,865(4)(10) 69.7%
Keith Oster............................................... 2,588,865(4)(10) 69.7%
William Paul.............................................. --(11) --
Thomas G. Pownall......................................... --(12) --
Jack B. Watson............................................ 21,325(13) *
John M. Cuthbert.......................................... 20,000(13) *
Robert S. Ritchie......................................... --(13) --
Samuel Levin.............................................. --(13) --
John T. Vinke............................................. --(13) --
Directors and Executive Officers as a Group...............
- ---------------
* Indicates ownership of less than one percent of outstanding shares.
(1) Unless indicated otherwise, the address of the beneficial owner listed
above is c/o Special Devices, Incorporated, 14370 White Sage Road,
Moorpark, California 93021.
(2) As used in this table, beneficial ownership means the sole or shared power
to vote, or to direct the voting of a security, or the sole or shared power
to dispose, or direct the disposition of, a security. However,
69
73
under California law, personal property owned by a married person may be
community property that either spouse may manage and control. The Company has no
information as to whether any shares shown in this table are subject to
California community property law.
(3) Computed based upon the total number of shares of Common Stock outstanding
and the number of shares of Common Stock underlying options or warrants
held by that person exercisable within 60 days of March 31, 1999. In
accordance with Rule 13(d)-3 of the Exchange Act, any Common Stock that
will not be outstanding within 60 days of March 31, 1999 that is subject to
options or warrants exercisable within 60 days of March 31, 1999 is deemed
to be outstanding for the purpose of computing the percentage of
outstanding shares of the Common Stock owned by the person holding such
options or warrants, but is not deemed to be outstanding for the purpose of
computing the percentage of outstanding shares of the Common Stock owned by
any other person.
(4) JFL Co-Invest is a Delaware limited liability company that is an affiliate
of JFL Equity and Lehman. Each of Messrs. Lehman, Glickman, Sawyer, Oster
and Stroud, either directly (whether through ownership interest or
position) or through one or more intermediaries, may be deemed to control
JFL Co-Invest, JFL Equity and Lehman. JFL Equity and Lehman may be deemed
to control the voting and disposition of the shares of the Common Stock
owned by JFL Co-Invest. Accordingly, for certain purposes, Messrs. Lehman,
Glickman, Sawyer, Oster and Stroud may be deemed to be beneficial owners of
the shares of Common Stock owned by JFL Co-Invest.
(5) Represents 735,294 shares owned by Messrs. Neubauer and Treinen that Lehman
has the right to vote under an irrevocable voting power and has the right
to acquire at any time prior to December 15, 2002. See "The Transactions."
(6) Includes 367,647 shares as to which Mr. Neubauer has granted Lehman an
irrevocable voting proxy and which Lehman has the right to acquire at any
time prior to the fourth anniversary of the Recapitalization. See "The
Transactions."
(7) All of such shares are owned by the Treinen Family Trust dated December 2,
1981, as restated on November 3, 1986, under which Mr. Treinen is the sole
trustee and has sole voting and investment power. Includes 367,647 shares
as to which Mr. Treinen has granted Lehman an irrevocable voting proxy and
which Lehman has the right to acquire at any time prior to December 15,
2002. See "The Transactions."
(8) Mr. Boileau is a member of a limited partner of JFL Equity. The address for
Mr. Boileau is 202 North Brentwood Boulevard, Apt. 3A, St. Louis, Missouri
63105.
(9) As an affiliate of Paribas, Mr. Eisenstein may be deemed to control the
shares of Common Stock owned by Paribas. Accordingly, Mr. Eisenstein may be
deemed to be beneficial owner of the shares of Common Stock owned by
Paribas reflected above. The address for Mr. Eisenstein is c/o Paribas
Principal Inc., 787 Fifth Avenue, New York, New York 10019.
(10) The address of Messrs. Lehman, Glickman, Sawyer, Oster and Stroud is 2001
Jefferson Davis Highway, Suite 607, Arlington, Virginia 22202.
(11) Mr. Paul is a member of a limited partner of JFL Equity. The address for
Mr. Paul is 21 Springwood Drive, Trumbull, Connecticut 06611.
(12) Mr. Pownall is a member of a limited partner of JFL Equity and is on the
investment advisory board of Lehman. The address for Mr. Pownall is 1800 K
Street, N.W., Suite 724, Washington, D.C. 20006.
(13) Includes options exercisable within 60 days of March 31, 1999 for 21,235,
20,000, 0, 0 and 0 shares for Messrs. Watson, Cuthbert, Ritchie, Levin and
Vinke, respectively. Does not include stock options that vest and become
exercisable upon a change of control for 0, 30,000, 7,500, 3,750 and 7,500
shares for Messrs. Watson, Cuthbert, Ritchie, Levin and Vinke,
respectively, representing in the aggregate (together with options
exercisable within 60 days of March 31, 1999) 2.7% of the Company's fully
diluted Common Stock.
70
74
DESCRIPTION OF NEW CREDIT FACILITY
As part of the Transactions, we entered into the New Credit Facility with a
syndicate of banks, as lenders, and Bankers Trust, as lead arranger and
administrative agent. Bankers Trust is an affiliate of BT Alex. Brown
Incorporated. The New Credit Facility consists of a $70.0 million Senior Term
Loan and a $25.0 million Revolving Credit Facility. We borrowed the full amount
of the Senior Term Loan in connection with the Recapitalization. As of January
31, 1999, $0.8 million was drawn and letters of credit aggregating $2.5 million
had been issued under the Revolving Credit Facility.
The Revolving Credit Facility enables us to obtain revolving credit loans
and the issuance of letters of credit for our account from time to time for
working capital, acquisitions and general corporate purposes. At our option,
loans under the New Credit Facility bear interest at:
(1) the higher of:
- 1/2 of 1% in excess of the overnight federal funds rate (as defined
in the New Credit Facility) and
- the administrative agent's prime rate,
in either case, plus 1.75% per annum in the case of loans under the
Revolving Credit Facility and 2.25% per annum in the case of the Senior
Term Loan, or
(2) the reserve adjusted Eurodollar Rate (as defined in the New Credit
Facility) as determined by the administrative agent, plus 2.75% per
annum in the case of loans under the Revolving Credit Facility and
3.25% per annum in the case of the Senior Term Loan.
We will pay letter of credit commissions on amounts available to be drawn
under each letter of credit at 3.00% per annum. We will pay a commitment fee on
the unused portion of the Revolving Credit Facility equal to 0.50% per annum. We
will also pay certain fees with respect to the New Credit Facility.
The Revolving Credit Facility has a term of five years, unless terminated
sooner upon an event of default, and outstanding revolving credit loans will be
payable on such date or such earlier date as may be accelerated following the
occurrence of any event of default.
The Senior Term Loan has a term of seven years and provides for the
following amortization schedule:
FY ENDED OCTOBER 31, AMOUNT
- -------------------- -----------
1999............................................ $ 700,000
2000............................................ $ 700,000
2001............................................ $ 700,000
2002............................................ $10,000,000
2003............................................ $16,700,000
Thereafter...................................... $41,200,000
Borrowings under the Senior Term Loan are required to be prepaid (and after
the Senior Term Loan has been paid in full, reductions to the commitments under
the Revolving Credit Facility) from:
- 100% of the net proceeds of certain nonordinary course asset sales by the
Company and its subsidiaries subject to exceptions for reinvestment;
- 100% of the net proceeds from certain issuances of debt by the Company
and its subsidiaries;
- 100% of the net proceeds from certain insurance recovery and condemnation
events of the Company and its subsidiaries subject to an ability to
rebuild or replace;
- 100% of the net proceeds from equity issuances and capital contributions
by the Company and, subject to certain exceptions, its subsidiaries; and
- 75% of excess annual cash flow subject to reduction or elimination upon
achievement of certain performance criteria.
71
75
The Senior Term Loan may be prepaid without penalty or premium.
Our obligations under the New Credit Facility are guaranteed by each of our
domestic subsidiaries (which, as of the date hereof, is only Scot) and are
secured by a first priority lien (subject to permitted encumbrances) on
substantially all of the Company's and each guarantor's real, personal and
intellectual property including all of the capital stock of our domestic
subsidiaries and 65% of the capital stock of our first-tier foreign
subsidiaries.
The New Credit Facility contains various customary covenants that restrict
our ability to take various actions and that require us to achieve and maintain
certain financial covenants. The New Credit Facility also includes covenants
relating to maintenance of specified levels of minimum interest coverage ratios,
minimum levels of consolidated EBITDA and maximum levels of leverage ratios. The
New Credit Facility also contains limitations on, among other things, capital
expenditures, liens, indebtedness, guarantees, mergers, acquisitions,
disposition of assets, dividends and other restricted payments, investments,
changes in business activities and certain corporate activities. The New Credit
Facility prohibits us from prepaying the Notes.
The New Credit Facility also contains customary events of default,
including nonpayment of principal, interest or fees, violation of covenants,
inaccuracy of representations or warranties in any material respect, cross
default and cross acceleration to certain other debt, bankruptcy, ERISA,
material judgments, invalidity of guarantees or collateral documents and certain
changes in control of the Company.
72
76
DESCRIPTION OF NOTES
Except as otherwise indicated below, the following summary applies to both
the Old Notes and the New Notes. As used herein, the term "Notes" shall mean the
Old Notes and the New Notes, unless otherwise indicated. For purposes of this
section, references to the "COMPANY," "WE," "US" and "OUR" include only the
Company and not its subsidiaries. The definitions of certain capitalized terms
used in the following summary are set forth below under "-- Certain
Definitions."
The form and terms of the New Notes are substantially identical to the form
and terms of the Old Notes, except that the New Notes:
- will be registered under the Securities Act,
- will not provide for payment of Additional Interest, which terminates
upon consummation of the Exchange Offer and
- will not bear legends containing transfer restrictions.
The New Notes will be issued solely in exchange for an equal principal
amount of Old Notes. As of the date hereof, $100.0 million aggregate principal
amount of Old Notes is outstanding.
The Old Notes were issued, and the New Notes will be issued, under the
Indenture, dated as of December 15, 1998 (the "INDENTURE"), by and among the
Company, Scot, as Guarantor and United States Trust Company of New York, as
trustee (the "TRUSTEE"). The following summary of certain provisions of the
Indenture does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, the Trust Indenture Act of 1939, as amended (the
"TRUST INDENTURE ACT"), and to all of the provisions of the Indenture, including
the definitions of certain terms therein and those terms made a part of the
Indenture by reference to the Trust Indenture Act as in effect on the date of
the Indenture. A copy of the Indenture is available as set forth under "Where
You Can Find More Information About the Company."
The Notes are general unsecured obligations of the Company, ranking
subordinate in right of payment to all of our Senior Indebtedness, equal in
right of payment with all of our senior subordinated Indebtedness and senior in
right of payment to all of our subordinated Indebtedness. The Notes are also
effectively subordinated to all Indebtedness of our Subsidiaries (other than
Restricted Subsidiaries that are parties to the Guarantee).
The Old Notes were issued, and the New Notes will be issued, in fully
registered form only, without coupons, in denominations of $1,000 and integral
multiples thereof. Initially, the Trustee will act as Paying Agent and Registrar
for the Notes. The Notes may be presented for registration or transfer and
exchange at the offices of the Registrar, which initially will be the Trustee's
corporate trust office. We may change any Paying Agent and Registrar without
notice to holders of the Notes (the "HOLDERS"). We will pay principal (and
premium, if any) on the Notes at the Trustee's corporate office in New York, New
York. At our option, interest may be paid at the Trustee's corporate trust
office or by check mailed to the registered address of Holders. Any Notes that
remain outstanding after the completion of the exchange offer, together with the
New Notes issued in connection with the exchange offer, will be treated as a
single class of securities under the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $150.0 million, of
which $100.0 million in aggregate principal amount was issued in the offering of
the Old Notes (the "PRIOR OFFERING"). The Notes mature on December 15, 2008.
Additional amounts may be issued from time to time, subject to the limitations
set forth under "-- Certain Covenants -- Limitation on Incurrence of Additional
Indebtedness." Interest on the Notes accrues at the rate of 11.375% per annum
and is payable semiannually in cash on each June 15 and December 15, commencing
on June 15, 1999, to the persons who are registered Holders at the close of
business on the June 1 and December 1 immediately preceding the applicable
interest payment date. Interest on the Notes will accrue from the most recent
date to which interest has been paid or, if no interest has been paid, from and
including December 15, 1998.
73
77
The Notes are not entitled to the benefit of any mandatory sinking fund.
REDEMPTION
Optional Redemption. The Notes are redeemable, at our option, in whole at
any time or in part from time to time, on and after December 15, 2003, upon not
less than 30 nor more than 60 days' notice, at the following redemption prices
(expressed as percentages of the principal amount thereof) if redeemed during
the twelve-month period commencing on December 15 of the year set forth below,
plus, in each case, accrued and unpaid interest thereon, if any, to the date of
redemption:
YEAR PERCENTAGE
- ---- ----------
2003.............................................. 105.688%
2004.............................................. 104.266%
2005.............................................. 102.844%
2006.............................................. 101.422%
2007 and thereafter............................... 100.000%
Optional Redemption upon Public Equity Offerings. At any time, or from
time to time, on or prior to December 15, 2001, we may, at our option, use the
net cash proceeds of one or more Public Equity Offerings (as defined below) to
redeem up to 35% of the sum of:
- $100.0 million and
- the respective initial aggregate principal amounts of Notes issued under
the Indenture after the Issue Date,
at a redemption price equal to 111.375% of the principal amount thereof plus
accrued and unpaid interest thereon and Liquidated Damages, if any, to the date
of redemption; provided that at least 65% of the sum of:
- $100.0 million and
- the respective initial aggregate principal amounts of Notes issued under
the Indenture after the Issue Date,
remains outstanding immediately after any such redemption. In order to effect
the foregoing redemption with the proceeds of any Public Equity Offering, we
shall make such redemption not more than 120 days after the consummation of any
such Public Equity Offering.
As used in the preceding paragraph, "PUBLIC EQUITY OFFERING" means an
underwritten public offering of Qualified Capital Stock of the Company pursuant
to a registration statement filed with the Commission in accordance with the
Securities Act.
SELECTION AND NOTICE OF REDEMPTION
Subject to the following sentence, in the event that less than all of the
Notes are to be redeemed at any time, selection of such Notes for redemption
will be made by the Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which such Notes are listed or, if such
Notes are not then listed on a national securities exchange, on a pro rata
basis, by lot or by such method as the Trustee shall deem fair and appropriate.
We will not redeem in part Notes of a principal amount of $1,000 or less, and if
we elect to effect a partial redemption with the proceeds of a Public Equity
Offering, selection of the Notes or portions thereof for redemption shall be
made by the Trustee only on a pro rata basis or on as nearly a pro rata basis as
is practicable (subject to DTC procedures), unless such method is otherwise
prohibited.
Notice of redemption shall be mailed by first-class mail at least 30 but
not more than 60 days before the redemption date to each Holder of Notes to be
redeemed at its registered address. If any Note is to be redeemed in part only,
the notice of redemption that relates to such Note shall state the portion of
the principal amount thereof to be redeemed. A new Note in a principal amount
equal to the unredeemed portion
74
78
thereof will be issued in the name of the Holder thereof upon cancellation of
the original Note. On and after the redemption date, interest will cease to
accrue on Notes or portions thereof called for redemption as long as we have
deposited with the Paying Agent funds in satisfaction of the applicable
redemption price pursuant to the Indenture.
SUBORDINATION
Our payment of all Obligations on the Notes is subordinated in right of
payment to the prior payment in full in cash or Cash Equivalents of all of our
Obligations on Senior Indebtedness, whether outstanding on the Issue Date or
thereafter incurred, including, without limitation, our obligations under the
New Credit Facility. Upon any payment or distribution of our assets, of any kind
or character, whether in cash, property or securities, to creditors upon any
total or partial liquidation, dissolution, winding up, reorganization,
assignment for the benefit of creditors or marshaling of assets of the Company
or in a bankruptcy, reorganization, insolvency, receivership or other similar
proceeding relating to us or our property, whether voluntary or involuntary, all
Obligations due or to become due upon all Senior Indebtedness (including
interest after the commencement of any such proceeding at the rate specified in
the applicable Senior Indebtedness whether or not such interest is an allowed
claim in such proceeding) shall first be paid in full in cash or Cash
Equivalents, or such payment duly provided for to the satisfaction of the
holders of Senior Indebtedness, before any payment or distribution of any kind
or character is made on account of any Obligations on the Notes, or for the
acquisition of any of the Notes for cash or property or otherwise. If any
default occurs and is continuing in the payment when due, whether at maturity,
upon any redemption, by declaration or otherwise, of any principal of, interest
on, unpaid drawings for letters of credit issued in respect of, or regularly
accruing fees with respect to, any Senior Indebtedness, no payment of any kind
or character shall be made by us or on our behalf or any other Person on its or
their behalf with respect to any Obligations on the Notes or to acquire any of
the Notes for cash or property or otherwise.
In addition, if any other event of default occurs and is continuing with
respect to any Designated Senior Indebtedness, as such event of default is
defined in the instrument creating or evidencing such Designated Senior
Indebtedness, permitting the holders of such Designated Senior Indebtedness then
outstanding to accelerate the maturity thereof, and if the Representative for
the respective issue of Designated Senior Indebtedness gives written notice of
the event of default to the Trustee (a "DEFAULT NOTICE"), then, unless and until
all events of default have been cured or waived or have ceased to exist or the
Trustee receives notice from the Representative for the respective issue of
Designated Senior Indebtedness terminating the Blockage Period, during the 180
days after the delivery of such Default Notice (the "BLOCKAGE PERIOD"), neither
we nor any other Person on our behalf shall:
- make any payment of any kind or character with respect to any Obligations
on the Notes or
- acquire any of the Notes for cash or property or otherwise.
Notwithstanding anything herein to the contrary, in no event will a
Blockage Period extend beyond 180 days from the date the payment on the Notes
was due, and only one such Blockage Period may be commenced within any 360
consecutive days. No event of default which existed or was continuing on the
date of the commencement of any Blockage Period with respect to the Designated
Senior Indebtedness shall be, or be made, the basis for commencement of a second
Blockage Period by the Representative of such Designated Senior Indebtedness
whether or not within a period of 360 consecutive days, unless such event of
default shall have been cured or waived for a period of not less than 90
consecutive days (it being acknowledged that any subsequent action, or any
breach of any financial covenants for a period commencing after the date of
commencement of such Blockage Period that, in either case, would give rise to an
event of default pursuant to any provisions under which an event of default
previously existed or was continuing shall constitute a new event of default for
this purpose).
By reason of such subordination, in the event of our insolvency, our
creditors who are not holders of Senior Indebtedness, including the Holders of
the Notes, may recover less, ratably, than holders of Senior Indebtedness.
75
79
As of January 31, 1999, the Company had approximately $70.8 million of
Senior Indebtedness outstanding, letters of credit in the amount of $2.5 million
and unused and available commitments of $21.8 million under the New Credit
Facility and the Guarantor had no Guarantor Senior Indebtedness outstanding
(other than guarantees of Senior Indebtedness).
GUARANTEES
Each Guarantor unconditionally guarantees, on an unsecured senior
subordinated basis, jointly and severally, to each Holder and the Trustee, the
full and prompt performance of our obligations under the Indenture and the
Notes, including the payment of principal of and interest on the Notes. The
Guarantees are subordinated to Guarantor Senior Indebtedness on the same basis
as the Notes are subordinated to Senior Indebtedness.
The obligations of each Guarantor are limited to the maximum amount which,
after giving effect to all other contingent and fixed liabilities of such
Guarantor and after giving effect to any collections from or payments made by or
on behalf of any other Guarantor in respect of the obligations of such other
Guarantor under its Guarantee or pursuant to its contribution obligations under
the Indenture, will result in the obligations of such Guarantor under the
Guarantee not constituting a fraudulent conveyance or fraudulent transfer under
federal or state law. See "Risk Factors -- Fraudulent Conveyance." Each
Guarantor that makes a payment or distribution under a Guarantee shall be
entitled to a contribution from each other Guarantor in an amount pro rata,
based on the net assets of each Guarantor, determined in accordance with GAAP.
Each Guarantor may consolidate with or merge into or sell its assets to us
or another Guarantor that is a Restricted Subsidiary of the Company without
limitation, or with other Persons upon the terms and conditions set forth in the
Indenture. See "-- Certain Covenants -- Merger, Consolidation and Sale of
Assets." In the event all of the Capital Stock or all or substantially all of
the assets of a Guarantor is sold and the sale complies with the provisions set
forth in "-- Certain Covenants -- Limitation on Asset Sales," the Guarantor's
Guarantee will be released. See "-- Certain Covenants -- Limitation of
Guarantees by Restricted Subsidiaries."
Separate financial statements of the Guarantors are not included herein
because such Guarantors are jointly and severally liable with respect to our
obligations pursuant to the Notes, and the aggregate net assets, earnings and
equity of the Guarantors and the Company are substantially equivalent to the net
assets, earnings and equity of the Company on a consolidated basis.
CHANGE OF CONTROL
The Indenture provides that upon the occurrence of a Change of Control,
each Holder will have the right to require us to purchase all or a portion of
such Holder's Notes pursuant to the offer described below (the "CHANGE OF
CONTROL OFFER"), at a purchase price equal to 101% of the principal amount
thereof plus accrued and unpaid interest to the date of purchase. The Indenture
provides that, prior to the mailing of the notice referred to below, but in any
event within 30 days following any Change of Control, we will:
- repay in full and terminate all commitments under Indebtedness under the
New Credit Facility and all other Senior Indebtedness the terms of which
require repayment upon a Change of Control, or offer to repay in full and
terminate all commitments under all Indebtedness under the New Credit
Facility and all other such Senior Indebtedness and to repay the
Indebtedness owed to each lender which has accepted such offer or
- obtain the requisite consents under the New Credit Facility and all other
such Senior Indebtedness to permit the repurchase of the Notes as
provided below.
We shall first comply with the covenant in the immediately preceding
sentence before we shall be required to repurchase Notes pursuant to the
provisions described below. Our failure to comply with the covenant described in
the second preceding sentence shall constitute an Event of Default described in
clause (3) and not in clause (2) under "Events of Default" below.
76
80
Within 30 days following the date upon which the Change of Control
occurred, we must send, by first class mail, a notice to each Holder, with a
copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,
which must be no earlier than 30 days nor later than 60 days from the date such
notice is mailed, other than as may be required by law (the "CHANGE OF CONTROL
PAYMENT DATE"). Holders electing to have a Note purchased pursuant to a Change
of Control Offer will be required to surrender the Note, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the Note completed, to
the Paying Agent at the address specified in the notice prior to the close of
business on the third business day prior to the Change of Control Payment Date.
If a Change of Control Offer is made, there can be no assurance that we
will have available funds sufficient to pay the Change of Control purchase price
for all the Notes that might be delivered by Holders seeking to accept the
Change of Control Offer. In the event we are required to purchase outstanding
Notes pursuant to a Change of Control Offer, we would expect to seek third party
financing to the extent we do not have available funds to meet our purchase
obligations. However, there can be no assurance that we would be able to obtain
such financing.
Neither our Board of Directors nor the Trustee may waive the covenant
relating to a Holder's right to redemption upon a Change of Control.
Restrictions in the Indenture described herein on our ability, and the ability
of our Restricted Subsidiaries, to:
- incur additional Indebtedness,
- grant Liens on property,
- make Restricted Payments or
- make Asset Sales
may also make more difficult or discourage the Company's takeover, whether
favored or opposed by our management. Consummation of any such transaction in
certain circumstances may require redemption or repurchase of the Notes, and
there can be no assurance that we or the acquiring party will have sufficient
financial resources to effect such redemption or repurchase. Such restrictions
and the restrictions on transactions with Affiliates may, in certain
circumstances, make more difficult or discourage any leveraged buyout of the
Company or any of its Subsidiaries by management. While such restrictions cover
a wide variety of arrangements which have traditionally been used to effect
highly leveraged transactions, the Indenture may not afford the Holders of Notes
protection in all circumstances from the adverse aspects of a highly leveraged
transaction, reorganization, restructuring, merger or similar transaction.
We will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such laws
and regulations are applicable in connection with the repurchase of Notes
pursuant to a Change of Control Offer. To the extent that the provisions of any
securities laws or regulations conflict with the "Change of Control" provisions
of the Indenture, we shall comply with the applicable securities laws and
regulations and shall not be deemed to have breached our obligations under the
"Change of Control" provisions of the Indenture by virtue thereof.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness.
We will not, and will not permit any of our Restricted Subsidiaries to,
directly or indirectly, create, incur, assume, guarantee, acquire, become
liable, contingently or otherwise, with respect to, or otherwise become
responsible for payment of (collectively, "INCUR") any Indebtedness (other than
Permitted Indebtedness); provided, however, that if no Default or Event of
Default shall have occurred and be continuing at the time of or as a consequence
of the incurrence of any such Indebtedness, we and/or any Guarantor may incur
Indebtedness (including, without limitation, Acquired Indebtedness) if on the
date of the incurrence of such
77
81
Indebtedness, after giving effect to the incurrence thereof, our Consolidated
Fixed Charge Coverage Ratio is greater than:
- 2.0 to 1.0 if the day of such incurrence is on or prior to December 15,
2000 or
- 2.25 to 1.0 if the date of such incurrence is after December 15, 2000.
For the purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Indebtedness or is otherwise entitled to be incurred
pursuant to this covenant, we shall, in our sole discretion, classify (or
reclassify) such item of Indebtedness in any manner that complies with this
covenant and such items of Indebtedness will be treated as having been incurred
pursuant to only one of such clauses or pursuant to the first paragraph hereof.
Accrual of interest or accretion of accreted value will not be deemed to be an
incurrence of Indebtedness for purposes of this covenant.
Limitation on Restricted Payments.
We will not, and will not cause or permit any of our Restricted
Subsidiaries to, directly or indirectly,
(1) declare or pay any dividend or make any distribution (other than
dividends or distributions payable in Qualified Capital Stock of the Company) on
or in respect of shares of the Company's Capital Stock to holders of such
Capital Stock,
(2) purchase, redeem or otherwise acquire or retire for value any Capital
Stock of the Company or any warrants, rights or options to purchase or acquire
shares of any class of such Capital Stock,
(3) make any principal payment on, purchase, defease, redeem, prepay,
decrease or otherwise acquire or retire for value, prior to any scheduled final
maturity, scheduled repayment or scheduled sinking fund payment, any
Indebtedness of the Company that is subordinate or junior in right of payment to
the Notes (except the prepayment, purchase, repurchase or other acquisition or
retirement of Indebtedness in anticipation of satisfying a sinking fund
obligation, principal installment or final maturity, in each case due within one
year of the date of prepayment, purchase, repurchase or other acquisition or
retirement) or
(4) make any Investment (other than Permitted Investments) (each of the
foregoing actions set forth in clauses (1), (2), (3) and (4) being referred to
as a "RESTRICTED PAYMENT"),
if at the time of such Restricted Payment or immediately after giving effect
thereto:
(a) a Default or an Event of Default shall have occurred and be continuing
or
(b) we are not able to incur at least $1.00 of additional Indebtedness
(other than Permitted Indebtedness) in compliance with the "Limitation on
Incurrence of Additional Indebtedness" covenant or
(c) the aggregate amount of Restricted Payments (including such proposed
Restricted Payment) made subsequent to the Issue Date (the amount expended for
such purposes, if other than in cash, being the fair market value of such
property as determined reasonably and in good faith by our Board of Directors)
shall exceed the sum of:
(w) 50% of our cumulative Consolidated Net Income (or if cumulative
Consolidated Net Income shall be a loss, minus 100% of such loss) earned
subsequent to December 15, 1998 through the last day of our most recently
ended fiscal quarter for which internal financial statements are available
at the time of such proposed Restricted Payment (the "REFERENCE DATE")
(treating such period as a single accounting period); plus
(x) 100% of the aggregate net cash proceeds we received from any Person
(other than one of our Restricted Subsidiaries) from the issuance and sale
subsequent to December 15, 1998 and on or prior to the Reference Date of
(i) Qualified Capital Stock of the Company and (ii) Indebtedness or
Disqualified Capital Stock that has been converted into or exchanged for
Qualified Capital Stock together with the aggregate net cash proceeds
received by us or any Restricted Subsidiary at the time of such conversion
or exchange; plus
78
82
(y) without duplication of any amounts included in clause (c)(x) above,
100% of the aggregate net cash proceeds of any equity contribution we
received from a holder of the Company's Capital Stock (excluding, in the
case of clauses (c)(x) and (y), any net cash proceeds from a Public Equity
Offering to the extent used to redeem the Notes); plus
(z) without duplication, the sum of:
(i) the aggregate amount returned in cash on or with respect to
Investments (other than Permitted Investments) made subsequent to
December 15, 1998 whether through interest payments, principal payments,
dividends or other distributions or payments,
(ii) the net cash proceeds received by us or any of our Restricted
Subsidiaries from the disposition of all or any portion of such
Investments (other than to one of our Restricted Subsidiaries) and
(iii) upon redesignation of an Unrestricted Subsidiary as a
Restricted Subsidiary, the fair market value of such Subsidiary;
provided, however, that the sum of clauses (i), (ii) and (iii) above
shall not exceed the aggregate amount of all such Investments made
subsequent to December 15, 1998.
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit:
(1) the payment of any dividend or the consummation of any irrevocable
redemption within 60 days after the date of declaration of such dividend or the
giving of such irrevocable redemption if the dividend or redemption would have
been permitted on the date of declaration or the giving of such irrevocable
redemption;
(2) if no Default or Event of Default shall have occurred and be
continuing, the acquisition of any shares of our Capital Stock, either
(a) solely in exchange for shares of our Qualified Capital Stock or
(b) through the application (within 10 business days of the sale
thereof) of net proceeds of a sale for cash (other than to one of our
Restricted Subsidiaries) of shares of our Qualified Capital Stock;
(3) if no Default or Event of Default shall have occurred and be
continuing, the purchase, redemption, repayment, retirement, defeasance or other
acquisition of any of our Indebtedness that is subordinate or junior in right of
payment to the Notes, either
(a) solely in exchange for shares of our Qualified Capital Stock,
(b) through the application (within 60 days of the sale thereof) of net
proceeds of a sale for cash (other than to one of our Restricted
Subsidiaries) of
(i) shares of our Qualified Capital Stock or
(ii) Refinancing Indebtedness or
(iii) solely in exchange for the issuance of Refinancing
Indebtedness;
(4) so long as no Default or Event of Default shall have occurred and be
continuing, repurchases by us of our Common Stock from directors, officers or
employees of the Company or any of its Subsidiaries or their authorized
representatives upon the death, disability or termination of employment of such
officers or employees, in an aggregate amount not to exceed, in any calendar
year, the sum of:
- $1.0 million (provided that if at the time of any such repurchase our
Consolidated Fixed Charge Coverage Ratio is greater than 2.0 to 1.0 then
such amount may be up to $3.0 million) and
79
83
- the net cash proceeds received by us after the Issue Date from the sale
of Qualified Capital Stock to employees, directors or officers of the
Company and its Subsidiaries that occurs in such fiscal year (to the
extent such proceeds do not provide the basis for any other Restricted
Payment); and
(5) repurchases of Capital Stock deemed to occur upon the exercise of stock
options if such Capital Stock represents a portion of the exercise price of such
options.
Not later than the date of making any Restricted Payment, we shall deliver
to the Trustee an officers' certificate stating that such Restricted Payment
complies with the Indenture and setting forth in reasonable detail the basis
upon which the required calculations were computed, which calculations may be
based upon our latest available internal quarterly financial statements.
In determining the aggregate amount of Restricted Payments made subsequent
to December 15, 1998 in accordance with clause (3) of the second paragraph under
the covenant "-- Limitation on Restricted Payments," amounts expended pursuant
to clauses (1), (2)(ii), 3(ii)(A) and (4) of such paragraph shall be included in
such calculation. Notwithstanding the foregoing, in determining whether any
Restricted Payment is permitted by the foregoing covenant, we may allocate or
reallocate all or any portion of such Restricted Payment among clauses (1)
through (5) of the second preceding paragraph or among such clauses and the
first paragraph of this covenant; provided that at the time of such allocation
or reallocation, all such Restricted Payments, or allocated portions thereof,
would be permitted under the various provisions of the foregoing covenant.
In making the computations required by this covenant:
- we may use audited financial statements for the portions of the relevant
period for which audited financial statements are available on the date
of determination and unaudited financial statements and other current
financial data based on our books and records for the remaining portion
of such period and
- we will be permitted to rely in good faith on the financial statements
and other financial data derived from our books and records that are
available on the date of determination.
If we make a Restricted Payment that, at the time of the making of such
Restricted Payment, would, in our good faith determination, be permitted under
the requirements of the Indenture, such Restricted Payment will be deemed to
have been made in compliance with the Indenture notwithstanding any subsequent
adjustments made in good faith to our financial statements which adjustments
affect any of the financial data used to make the calculations with respect to
such Restricted Payment.
Limitation on Asset Sales.
We will not, and will not permit any of our Restricted Subsidiaries to,
consummate an Asset Sale unless:
(1) the Company or the applicable Restricted Subsidiary, as the case may
be, receives consideration at the time of such Asset Sale at least equal to the
fair market value of the assets sold or otherwise disposed of (as determined in
good faith by our Board of Directors),
(2) at least 75% of the consideration received by the Company or the
Restricted Subsidiary, as the case may be, from such Asset Sale shall be in the
form of Qualified Proceeds; provided that the amount of:
(a) any liabilities of the Company or any Restricted Subsidiary (as
shown on the Company's or on such Restricted Subsidiary's most recent
balance sheet) (other than liabilities that are by their terms subordinated
to the Notes or, in the case of a Restricted Subsidiary, its Guarantee)
that are assumed by the transferee of any such assets and
(b) any securities, notes or other obligations received by the Company
or any such Restricted Subsidiary from such transferee that are converted
by the Company or such Restricted Subsidiary into cash (to the extent of
the cash received) within 180 days after receipt,
80
84
shall be deemed to be cash for the purposes of this clause (ii);
provided, further, however, that this clause (2) shall not apply to any
sale of Capital Stock of or other Investments in Unrestricted
Subsidiaries or any Sale and Leaseback Transaction and
(3) upon the consummation of an Asset Sale, we shall apply, or cause such
Restricted Subsidiary to apply, the Net Cash Proceeds relating to such Asset
Sale within 360 days of receipt thereof either:
(a) to prepay any Senior Indebtedness or Guarantor Senior Indebtedness
or Indebtedness of a Restricted Subsidiary that is not a Guarantor (and, in
the case of any Senior Indebtedness or Guarantor Senior Indebtedness or
Indebtedness of a Restricted Subsidiary that is not a Guarantor under any
revolving credit facility, including the New Credit Facility, effect a
permanent reduction in the availability under such revolving credit
facility) or effect a permanent reduction in the availability under any
revolving credit facility regardless of the fact that no prepayment is
required in order to do so (in which case no prepayment shall be required),
(b) to make an investment in properties and assets that replace the
properties and assets that were the subject of such Asset Sale or in
properties and assets that are used or usable in the business of the
Company and its Subsidiaries as existing on the Issue Date or in businesses
reasonably related or complementary thereto ("REPLACEMENT ASSETS"), it
being understood that:
(i) the receipt of Qualified Proceeds (other than cash or Cash
Equivalents) and
(ii) the payment of expenses related to the relocation to the
Moorpark Facility (including, without limitation, reimbursement to the
Company of expenses incurred prior to the Issue Date) are deemed to be a
valid application of such Qualified Proceeds pursuant to this clause
(iii)(B) or
(c) a combination of prepayment and investment permitted by the
foregoing clauses (3)(a) and (3)(b).
On the 361st day after an Asset Sale or such earlier date, if any, as the
Board of Directors of the Company or of such Restricted Subsidiary determines
not to apply the Net Cash Proceeds relating to such Asset Sale as set forth in
clauses (3)(a), (3)(b) and (3)(c) of the immediately preceding sentence (each, a
"NET PROCEEDS OFFER TRIGGER DATE"), such aggregate amount of Net Cash Proceeds
which have not been applied on or before such Net Proceeds Offer Trigger Date as
permitted in clauses (3)(a), (3)(b) and (3)(c) of the immediately preceding
sentence (each a "NET PROCEEDS OFFER AMOUNT") shall be applied by the Company or
such Restricted Subsidiary to make an offer to purchase (the "NET PROCEEDS
OFFER") on a date (the "NET PROCEEDS OFFER PAYMENT DATE") not less than 20
Business Days, nor more than 30 Business Days following the date that notice of
the Net Proceeds Offer is mailed to Holders, from all Holders, together with
holders of other Indebtedness that is not by its terms subordinated to the Notes
(the "OTHER ASSET SALE INDEBTEDNESS") of the Company or any Restricted
Subsidiary to whom an offer of Net Cash Proceeds relating to such Asset Sale
must be made pursuant to the terms of the instruments governing such Other Asset
Sale Indebtedness on a pro rata basis, that amount of Notes and such Other Asset
Sale Indebtedness equal to the Net Proceeds Offer Amount at a price equal to
100% of the principal amount of the Notes or such Other Asset Sale Indebtedness
(as the case may be) to be purchased, plus accrued and unpaid interest thereon,
if any, to the date of purchase; provided, however, that if at any time any
non-cash consideration received by the Company or any Restricted Subsidiary of
the Company, as the case may be, in connection with any Asset Sale is converted
into or sold or otherwise disposed of for cash (other than interest or dividends
received with respect to any such non-cash consideration), then such conversion
or disposition shall be deemed to constitute an Asset Sale hereunder and the Net
Cash Proceeds thereof shall be applied in accordance with this covenant.
Notwithstanding the foregoing, we may defer the Net Proceeds Offer until
there is an aggregate unutilized Net Proceeds Offer Amount equal to or in excess
of $10,000,000 resulting from one or more Asset Sales (at which time, the entire
unutilized Net Proceeds Offer Amount, and not just the amount in excess of
$10,000,000, shall be applied as required pursuant to this paragraph). Upon
completion of a Net Proceeds Offer, the amount of Net Cash Proceeds and the
amount of the aggregate unutilized Net Proceeds Offer
81
85
Amount will be reset to zero. Accordingly, to the extent that any Net Proceeds
remain after consummation of a Net Proceeds Offer, we may use such Net Proceeds
for any purpose not prohibited by the Indenture.
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "-- Merger, Consolidation
and Sale of Assets," the successor corporation shall be deemed for purposes of
this covenant to have sold the properties and assets of the Company and its
Restricted Subsidiaries not so transferred, and shall comply with the provisions
of this covenant with respect to such deemed sale as if it were an Asset Sale.
In addition, the fair market value of such properties and assets of the Company
or its Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash
Proceeds for purposes of this covenant.
Each Net Proceeds Offer will be mailed to the record Holders as shown on
the register of Holders within 25 days following the Net Proceeds Offer Trigger
Date, with a copy to the Trustee, and shall comply with the procedures set forth
in the Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may
elect to tender their Notes in whole or in part in integral multiples of $1,000
in exchange for cash. To the extent Holders properly tender Notes in an amount
exceeding the Net Proceeds Offer Amount, Notes of tendering Holders will be
purchased on a pro rata basis (based on amounts tendered). A Net Proceeds Offer
shall remain open for a period of 20 business days or such longer period as may
be required by law.
We will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such laws
and regulations are applicable in connection with the repurchase of Notes
pursuant to a Net Proceeds Offer. To the extent that the provisions of any
securities laws or regulations conflict with the "Asset Sale" provisions of the
Indenture, we shall comply with the applicable securities laws and regulations
and shall not be deemed to have breached our obligations under the "Asset Sale"
provisions of the Indenture by virtue thereof.
Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries.
We will not, and will not cause or permit any of our Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or permit to
exist or become effective any consensual encumbrance or restriction on the
ability of any Restricted Subsidiary to:
(a) pay dividends or make any other distributions on or in respect of its
Capital Stock,
(b) make loans or advances or to pay any Indebtedness or other obligation
owed to the Company or any other Restricted Subsidiary of the Company or
(c) transfer any of its property or assets to the Company or any other
Restricted Subsidiary of the Company,
except for such encumbrances or restrictions existing under or by reason of:
(1) the Indenture and the Notes;
(2) any security or pledge agreements, leases or options (or similar
agreements) containing customary restrictions on transfers of the assets
encumbered thereby or leased or subject to option or on the transfer or
subletting of the leasehold interest represented thereby;
(3) any instrument governing Acquired Indebtedness, which encumbrance or
restriction is not applicable to any Person, or the properties or assets of any
Person, other than the Person or the properties or assets of the Person so
acquired;
(4) agreements existing on the Issue Date to the extent and in the manner
such agreements are in effect on the Issue Date;
(5) any contracts for the sale of assets, including, without limitation,
any restriction with respect to a Restricted Subsidiary imposed pursuant to an
agreement entered into for the sale or disposition of all or substantially all
of the Capital Stock or assets of such Restricted Subsidiary, pending the
closing of such sale
82
86
or disposition; provided that any such restriction relates solely to the assets
that are the subject of such agreement;
(6) restrictions on cash or other deposits or net worth and prohibitions on
assignment imposed by leases entered into in the ordinary course of business;
(7) customary provisions in joint venture agreements and other similar
agreements;
(8) the New Credit Facility and any instruments issued pursuant thereto;
(9) any agreement or instrument governing Capital Stock of any Person that
is acquired;
(10) purchase money obligations for assets acquired in the ordinary course
of business that impose restrictions of the nature described in (c) above on the
property so acquired;
(11) Liens permitted to be incurred pursuant to the provisions of the
covenant described under the caption "-- Limitation on Liens";
(12) any agreement relating to a Sale and Leaseback Transaction or
Capitalized Lease Obligation, but only on the property subject to such Sale and
Leaseback Transaction or such Capitalized Lease Obligation and only to the
extent that such restrictions or encumbrances are customary with respect to such
arrangements;
(13) any licensing or technology transfer agreement entered into in the
ordinary course of business, including, without limitation, those entered into
in connection with any European joint venture;
(14) applicable law; and
(15) any encumbrances or restrictions imposed by any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings of contracts, instruments or obligations referred
to in clauses (1) through (13); provided that the dividend and other transfer
restrictions imposed under such contract, instrument, agreement or obligation as
amended, modified, restated, renewed, increased, supplemented, refunded,
replaced or refinanced are, taken as a whole, in the good faith judgment of the
Board of Directors, whose judgment shall be conclusively binding, not materially
more restrictive than those contained in such contract, instrument, agreement or
obligation immediately prior to such amendment, modification, restatement,
renewal, increase, supplement, refunding, replacement or Refinancing.
Limitation on Preferred Stock of Restricted Subsidiaries.
We will not permit any of our Restricted Subsidiaries that are not
Guarantors to issue to any Person (other than the Company or a Wholly Owned
Restricted Subsidiary of the Company) Preferred Stock or permit any Person
(other than the Company or a Wholly Owned Restricted Subsidiary of the Company)
to own any Preferred Stock of any Restricted Subsidiary of the Company that is
not a Guarantor.
Limitation on Liens.
We will not, and will not cause or permit any of our Restricted
Subsidiaries to, directly or indirectly, create, incur, assume or permit or
suffer to exist any Liens of any kind against or upon any property or assets of
the Company or any of its Restricted Subsidiaries whether owned on the Issue
Date or acquired after the Issue Date, or any proceeds therefrom, or assign or
otherwise convey any right to receive income or profits therefrom unless:
(1) in the case of Liens securing Indebtedness that is expressly
subordinate or junior in right of payment to the Notes, the Notes are secured by
a Lien on such property, assets or proceeds that is senior in priority to such
Liens and
(2) in all other cases, the Notes are equally and ratably secured,
83
87
except in the case of either clause (1) or (2) for:
(a) Liens existing as of the Issue Date to the extent and in the manner
such Liens are in effect on the Issue Date;
(b) Liens securing Senior Indebtedness and Liens securing Guarantor Senior
Indebtedness;
(c) Liens securing the Notes and the Guarantees;
(d) Liens of the Company or a Wholly Owned Restricted Subsidiary of the
Company on assets of any Subsidiary of the Company;
(e) Liens securing Refinancing Indebtedness which is incurred to Refinance
any Indebtedness which has been secured by a Lien permitted under the Indenture
and which has been incurred in accordance with the provisions of the Indenture;
provided, however, that such Liens:
(i) are no less favorable to the Holders and are not more favorable to
the lienholders with respect to such Liens than the Liens in respect of the
Indebtedness being Refinanced and
(ii) do not extend to or cover any property or assets of the Company or
any of its Restricted Subsidiaries not securing the Indebtedness so
Refinanced; and
(f) Permitted Liens.
Prohibition on Incurrence of Senior Subordinated Debt.
Neither we nor the Guarantors will incur or suffer to exist Indebtedness
that is senior in right of payment to the Notes or the Guarantees, as the case
may be, and subordinate in right of payment to any other Indebtedness of the
Company or the Guarantors, as the case may be.
Merger, Consolidation and Sale of Assets.
We will not, in a single transaction or series of related transactions,
consolidate or merge with or into any Person (other than in connection with the
Recapitalization), or sell, assign, transfer, lease, convey or otherwise dispose
of (or cause or permit any Restricted Subsidiary of the Company to sell, assign,
transfer, lease, convey or otherwise dispose of) all or substantially all of our
assets (determined on a consolidated basis with our Restricted Subsidiaries)
whether as an entirety or substantially as an entirety to any Person unless:
(1) either
(a) the Company shall be the surviving or continuing corporation or
(b) the Person (if other than the Company) formed by such consolidation
or into which the Company is merged or the Person which acquires by sale,
assignment, transfer, lease, conveyance or other disposition the properties
and assets of the Company and of the Company's Restricted Subsidiaries
substantially as an entirety (the "SURVIVING ENTITY")
(x) shall be a corporation organized and validly existing under the
laws of the United States or any State thereof or the District of
Columbia and
(y) shall expressly assume, by supplemental indenture (in form and
substance satisfactory to the Trustee), executed and delivered to the
Trustee, the due and punctual payment of the principal of, and premium,
if any, and interest on all of the Notes and the performance of every
covenant of the Notes, the Indenture and the Registration Rights
Agreement on the part of the Company to be performed or observed;
(2) immediately after giving effect to such transaction and the
assumption contemplated by clause (1)(b)(y) above (including giving effect
to any Indebtedness and Acquired Indebtedness incurred or anticipated to be
incurred in connection with or in respect of such transaction), the Company
or such Surviving Entity, as the case may be, shall be able to incur at
least $1.00 of additional Indebtedness
84
88
(other than Permitted Indebtedness) pursuant to the "-- Limitation on
Incurrence of Additional Indebtedness" covenant;
(3) immediately before and immediately after giving effect to such
transaction and the assumption contemplated by clause (1)(b)(y) above
(including, without limitation, giving effect to any Indebtedness and
Acquired Indebtedness incurred or anticipated to be incurred and any Lien
granted in connection with or in respect of the transaction), no Default or
Event of Default shall have occurred or be continuing; and
(4) the Company or the Surviving Entity shall have delivered to the
Trustee an officers' certificate and an opinion of counsel, each stating
that such consolidation, merger, sale, assignment, transfer, lease,
conveyance or other disposition and, if a supplemental indenture is
required in connection with such transaction, such supplemental indenture,
comply with the applicable provisions of the Indenture and that all
conditions precedent in the Indenture relating to such transaction have
been satisfied.
Notwithstanding the foregoing clauses (2), (3) and (4):
- any Restricted Subsidiary may consolidate with, merge into or transfer
all or part of its property and assets to the Company or any other Restricted
Subsidiary and
- we may merge with an Affiliate incorporated solely for the purpose of our
reincorporation in another jurisdiction.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more our Restricted
Subsidiaries, the Capital Stock of which constitutes all or substantially all of
our properties and assets, shall be deemed to be the transfer of all or
substantially all of our properties and assets.
The Indenture provides that upon any consolidation, combination or merger
or any transfer of all or substantially all of our assets in accordance with the
foregoing, in which we are not the continuing corporation, the successor Person
formed by such consolidation or into which we are merged or to which such
conveyance, lease or transfer is made shall succeed to, and be substituted for,
and may exercise every right and power of, the Company under the Indenture and
the Notes with the same effect as if such surviving entity had been named as
such.
Each Guarantor will not, and we will not cause or permit any Guarantor to
(other than any Guarantor whose Guarantee is to be released in accordance with
the terms of the Guarantee and the Indenture in connection with any transaction
complying with the provisions of "-- Limitation on Asset Sales"), consolidate
with or merge with or into any Person other than the Company or any other
Guarantor unless:
(i) the entity formed by or surviving any such consolidation or merger
(if other than the Guarantor) or to which such sale, lease, conveyance or
other disposition shall have been made is a corporation organized and
existing under the laws of the United States or any State thereof or the
District of Columbia;
(ii) such entity assumes by supplemental indenture all of the
obligations of the Guarantor on the Guarantee;
(iii) immediately after giving effect to such transaction, no Default or
Event of Default shall have occurred and be continuing; and
(iv) immediately after giving effect to such transaction and the use of
any net proceeds therefrom on a pro forma basis, we could satisfy the
provisions of clause (ii) of the first paragraph of this covenant.
Notwithstanding the foregoing clause (iv):
- any Guarantor may consolidate with, merge into or transfer all or part of
its property and assets to the Company or any other Guarantor and
85
89
- any Guarantor formed solely for the purpose of merging with and into any
other Person, may merge with or into such Person.
Limitations on Transactions with Affiliates.
(a) We will not, and will not permit any of our Restricted Subsidiaries to,
directly or indirectly, enter into or permit to exist any transaction or series
of related transactions (including, without limitation, the purchase, sale,
lease or exchange of any property or the rendering of any service) with, or for
the benefit of, any of our Affiliates (each an "AFFILIATE TRANSACTION"), other
than:
- Affiliate Transactions permitted under paragraph (b) below and
- Affiliate Transactions on terms that, taken as a whole, are not
materially less favorable than those that might reasonably have been
obtained in a comparable transaction at such time on an arm's-length
basis from a Person that is not an Affiliate of ours or such Restricted
Subsidiary.
All Affiliate Transactions (and each series of related Affiliate
Transactions which are similar or part of a common plan) involving aggregate
payments or other property with a fair market value in excess of $2,500,000
shall be approved by the Board of Directors of the Company or such Restricted
Subsidiary, as the case may be, such approval to be evidenced by a Board
Resolution stating that such Board of Directors has determined that such
transaction complies with the foregoing provisions.
If the Company or any Restricted Subsidiary enters into an Affiliate
Transaction (or a series of related Affiliate Transactions related to a common
plan) that involves an aggregate fair market value of more than $7,500,000, the
Company or such Restricted Subsidiary, as the case may be, shall, prior to the
consummation thereof, obtain a favorable opinion as to the fairness of the
financial terms of such transaction or series of related transactions, taken as
a whole, to the Company or the relevant Restricted Subsidiary, as the case may
be, from a financial point of view, from an Independent Financial Advisor, and
file the same with the Trustee.
(b) The restrictions set forth in clause (a) above shall not apply to:
(1) reasonable fees and compensation paid to, indemnity provided for the
benefit of and benefit plans provided for, officers, directors, employees
or consultants of the Company or any Restricted Subsidiary as determined in
good faith by the Company's or such Restricted Subsidiary's Board of
Directors or senior management;
(2) transactions exclusively between or among the Company and any of its
Restricted Subsidiaries or exclusively between or among such Restricted
Subsidiaries, provided such transactions are not otherwise prohibited by
the Indenture;
(3) the transactions and payments contemplated by any agreement as in
effect as of the Issue Date (including, without limitation, the
Recapitalization Agreement) or any amendment thereto in any replacement
agreement therefor so long as any such amendment or replacement agreement,
taken as a whole, is not more disadvantageous to the Holders in any
material respect than the original agreement as in effect on the Issue
Date;
(4) the payment to the Principals or their Related Parties and
affiliates of annual management and advisory fees and related expenses up
to $1,000,000 in any fiscal year;
(5) loans and advances (or guarantees of third party loans) to officers
or employees of the Company or any of its Restricted Subsidiaries in the
ordinary course of business not to exceed $500,000 at any time outstanding;
(6) the payment of fees and expenses related to the Recapitalization;
(7) Permitted Investments and Restricted Payments permitted by the
Indenture;
86
90
(8) any employment agreement, collective bargaining agreement, employee
benefit plan, related trust agreement, indemnification agreement, benefit
plan or similar arrangement for the benefit of directors or officers
entered into in the ordinary course of business;
(9) our (expired) lease with the Placerita Land and Farming Company
relating to the Newhall Facility, on a month-to-month basis, as in effect
in all material respects on the Issue Date subject to annual increases
based on the Consumers Price Index; and
(10) purchases of parts and components from Ordnance Products, Inc. and
Multi-Screw, Inc. consistent with past practice.
(c) In addition, the last sentence of paragraph (a) shall not apply to
- payments by the Company or any of its Restricted Subsidiaries to the
Principals or their Related Parties and Affiliates for any financial
advisory, financing, underwriting or placement services or in respect of
other investment banking activities, including in connection with
acquisition or divestitures, which payments are approved by the Board of
Directors of the Company in good faith and
- Indebtedness permitted by paragraph (13) of the definition of "Permitted
Indebtedness" below.
Limitation of Guarantees by Restricted Subsidiaries.
We will not permit any of our Restricted Subsidiaries that are organized
under the laws of the United States or a subdivision thereof, directly or
indirectly, by way of the pledge of any intercompany note or otherwise, to
guarantee any of our Indebtedness unless, in any such case:
- such Restricted Subsidiary executes and delivers a supplemental indenture
to the Indenture providing a Guarantee by such Restricted Subsidiary and
- if any such guarantee of such Restricted Subsidiary is provided in
respect of Indebtedness that is expressly subordinated to the Notes, such
guarantee or other instrument provided by such Restricted Subsidiary in
respect of such subordinated Indebtedness shall be subordinated to the
Guarantee pursuant to subordination provisions no less favorable to the
Holders of the Notes than those contained in the Indenture.
Notwithstanding the foregoing, any such Guarantee by a Restricted
Subsidiary shall provide by its terms that it shall be automatically and
unconditionally released and discharged, without any further action required on
the part of the Trustee or any Holder, upon:
- the unconditional release of such Restricted Subsidiary from its
liability in respect of the Indebtedness in connection with which such
Guarantee was executed and delivered pursuant to the preceding paragraph;
- any sale or other disposition (by merger or otherwise) to any Person
which is not a Restricted Subsidiary of all of our Capital Stock in, or
all or substantially all of the assets of, such Restricted Subsidiary;
provided that such sale or disposition of such Capital Stock or assets is
otherwise in compliance with the terms of the Indenture;
- the designation of such Subsidiary as an Unrestricted Subsidiary in
accordance with the provisions of the Indenture; or
- the sale or other disposition of shares of Capital Stock of such
Subsidiary to a Person other than the Company or a Restricted Subsidiary
such that such Subsidiary ceases to constitute one of our Subsidiaries,
provided such disposition is otherwise in accordance with the provisions
of the Indenture.
Conduct of Business.
Neither we nor the Restricted Subsidiaries will engage in any businesses
which are not the same, similar or reasonably related or complementary to the
businesses in which we and the Restricted Subsidiaries are engaged on the Issue
Date (as determined in good faith by our Board of Directors).
87
91
Reports to Holders.
At all times from and after the earlier of:
- the date of the commencement of the exchange offer or the effectiveness
of the Shelf Registration Statement (the "REGISTRATION") and
- June 13, 1999,
in either case, whether or not we are then required to file reports with the
Commission, we will file with the Commission (to the extent accepted by the
Commission) annual reports containing the information required to be contained
in Form 10-K promulgated under the Exchange Act, quarterly reports containing
the information required to be contained in Form 10-Q promulgated under the
Exchange Act and from time to time such other information as is required to be
contained in Form 8-K promulgated under the Exchange Act. We will also be
required:
- to supply the Trustee and each Holder of Notes, or supply to the Trustee
for forwarding to each such Holder, without cost to such Holder, copies
of such reports and other documents within 15 days after the date on
which we file such reports and documents with the Commission or the date
on which we would be required to file such reports and documents if we
were so required and
- if filing such reports and documents with the Commission is not accepted
by the Commission or is prohibited under the Exchange Act, to supply, at
our own expense, copies of such reports and documents to any prospective
Holder of Notes promptly upon written request.
In addition, at all times prior to the earlier of the date of Registration
and June 13, 1999, we will, at our own expense, deliver to each Holder of the
Notes quarterly and annual reports substantially equivalent to those that would
be required by the Exchange Act. Furthermore, at all times prior to the date of
Registration, we will supply at our own expense copies of such reports and
documents to any prospective Holder of Notes promptly upon written request and
as required by Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "EVENTS OF DEFAULT":
(1) the failure to pay interest on any Notes when the same becomes due
and payable and the default continues for a period of 30 days (whether or
not such payment shall be prohibited by the subordination provisions of the
Indenture);
(2) the failure to pay the principal on any Notes, when such principal
becomes due and payable, at maturity, upon redemption or otherwise
(including the failure to make a payment to purchase Notes tendered
pursuant to a Change of Control Offer or a Net Proceeds Offer) (whether or
not such payment shall be prohibited by the subordination provisions of the
Indenture);
(3) a default in the observance or performance of any other covenant or
agreement contained in the Indenture which default continues for a period
of 60 days after we receive written notice specifying the default (and
demanding that such default be remedied) from the Trustee or the Holders of
at least 25% of the outstanding principal amount of the Notes (except in
the case of a default with respect to the "Merger, Consolidation and Sale
of Assets" covenant, which will constitute an Event of Default with such
notice requirement but without such passage of time requirement);
(4) the failure to pay at final maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount
of any Indebtedness of the Company or any Restricted Subsidiary and such
failure continues for a period of 20 days or more, or the acceleration of
the final stated maturity of any such Indebtedness (which acceleration is
not rescinded, annulled or otherwise cured within 20 days after receipt by
the Company or such Restricted Subsidiary of notice of any such
acceleration) if the aggregate principal amount of such Indebtedness,
together with the principal amount of any other such Indebtedness in
default for failure to pay principal at final maturity or which
88
92
has been accelerated, in each case with respect to which the 20-day period
described above has passed, aggregates $7,500,000 or more at any time;
(5) one or more judgments in an aggregate amount in excess of $7,500,000
(net of any amounts with respect to which a reputable insurance company has
acknowledged liability in writing) shall have been rendered against the
Company or any of its Significant Subsidiaries and such judgments remain
undischarged, unpaid or unstayed for a period of 60 days after such
judgment or judgments become final and nonappealable;
(6) certain events of bankruptcy affecting us or any of our Significant
Subsidiaries; or
(7) any of the Guarantees of a Guarantor that is a Significant
Subsidiary ceases to be in full force and effect or any of such Guarantees
is declared to be null and void and unenforceable or any of such Guarantees
is found to be invalid or any of such Guarantors denies its liability under
its Guarantee (other than by reason of release of a Guarantor in accordance
with the terms of the Indenture).
If an Event of Default (other than an Event of Default specified in clause
(6) above relating to the Company) shall occur and be continuing, the Trustee or
the Holders of at least 25% in principal amount of outstanding Notes may declare
the principal of and accrued interest on all the Notes to be due and payable by
notice in writing to the Company and the Trustee specifying the respective Event
of Default and that it is a "notice of acceleration" (the "ACCELERATION
NOTICE"), and the same:
(i) shall become immediately due and payable or
(ii) if there are any amounts outstanding under the New Credit Facility,
shall become immediately due and payable upon the first to occur of:
- an acceleration under the New Credit Facility or
- five business days after receipt by the Company and the Representative
under the New Credit Facility of such Acceleration Notice but only if
such Event of Default is then continuing.
If an Event of Default specified in clause (6) above relating to us occurs
and is continuing, then all unpaid principal of, and premium, if any, and
accrued and unpaid interest on all of the outstanding Notes shall become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holder.
The Indenture provides that, at any time after a declaration of
acceleration with respect to the Notes as described above, the Holders of a
majority in principal amount of the Notes may rescind and cancel such
declaration and its consequences:
(1) if the rescission would not conflict with any judgment or decree,
(2) if all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of
the acceleration,
(3) to the extent the payment of such interest is lawful, interest on
overdue installments of interest and overdue principal, which has become
due otherwise than by such declaration of acceleration, has been paid,
(4) if we have paid the Trustee its reasonable compensation and
reimbursed the Trustee for its expenses, disbursements and advances and
(5) in the event of the cure or waiver of an Event of Default of the
type described in clause (6) of the description above of Events of Default,
the Trustee shall have received an officers' certificate and an opinion of
counsel that such Event of Default has been cured or waived.
No such rescission shall affect any subsequent Default or impair any right
consequent thereto.
89
93
The Holders of a majority in principal amount of the Notes may waive any
existing Default or Event of Default under the Indenture, and its consequences,
except a default in the payment of the principal of or interest on any Notes.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture and under the Trust Indenture Act. Subject to the
provisions of the Indenture relating to the duties of the Trustee, the Trustee
is under no obligation to exercise any of its rights or powers under the
Indenture at the request, order or direction of any of the Holders, unless such
Holders have offered to the Trustee reasonable indemnity. Subject to all
provisions of the Indenture and applicable law, the Holders of a majority in
aggregate principal amount of the then outstanding Notes have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee.
Under the Indenture, we are required to provide an officers' certificate to
the Trustee promptly upon any such officer obtaining knowledge of any Default or
Event of Default that has occurred and describe such Default or Event of Default
and the status thereof (provided that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default)
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
We may, at our option and at any time, elect to have our obligations and
the Guarantors' obligations discharged with respect to the outstanding Notes,
the Indenture and the Guarantees (this is referred to as "LEGAL DEFEASANCE").
Such Legal Defeasance means that the Company and, if it so elects, each of the
Guarantors, shall be deemed to have paid and discharged the entire indebtedness
represented by the outstanding Notes and cured all then existing Defaults and
Events of Default, except for:
- the rights of Holders to receive payments in respect of the principal of,
premium, if any, and interest on the Notes when such payments are due,
- our obligations with respect to the Notes concerning issuing temporary
Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes
and the maintenance of an office or agency for payments,
- the rights, powers, trust, duties and immunities of the Trustee and our
obligations in connection therewith and
- the Legal Defeasance provisions of the Indenture.
In addition, we may, at our option and at any time, elect to have our
obligations and the Guarantors' obligations released with respect to certain
covenants that are described in the Indenture and thereafter any failure to
comply with such obligations shall not constitute a Default or Event of Default
with respect to the Notes (this is referred to as "COVENANT DEFEASANCE"). In the
event Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, reorganization and insolvency events) described under
"Events of Default" will no longer constitute an Event of Default with respect
to the Notes.
Concurrently with any Legal Defeasance or Covenant Defeasance, we may, at
our further option, cause to be terminated, as of the date on which such Legal
Defeasance or Covenant Defeasance occurs, all of the obligations under any or
all of the Guarantees, if any, then existing. In order to exercise such option
regarding a Guarantee, we will provide the Trustee with written notice of our
desire to terminate such Guarantee prior to the delivery of the opinion of
counsel referred to in clause (2) or (3) (as applicable) of the next succeeding
paragraph.
In order to exercise either Legal Defeasance or Covenant Defeasance,
(1) we must irrevocably deposit with the Trustee, in trust, for the
benefit of the Holders, cash in U.S. dollars, non-callable U.S. government
obligations, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, and interest
on the Notes on the stated date for payment thereof or on the applicable
redemption date, as the case may be;
90
94
(2) in the case of Legal Defeasance, we shall have delivered to the
Trustee an opinion of counsel in the United States reasonably acceptable to
the Trustee confirming that we have received from, or there has been
published by, the IRS a ruling or since the date of the Indenture, there
has been a change in the applicable federal income tax law, in either case
to the effect that, and based thereon such opinion of counsel shall confirm
that, the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such Legal Defeasance had
not occurred;
(3) in the case of Covenant Defeasance, we shall have delivered to the
Trustee an opinion of counsel in the United States reasonably acceptable to
the Trustee confirming that the Holders will not recognize income, gain or
loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be continuing
on the date of such deposit (other than a Default or an Event of Default
resulting from the borrowing of funds to be applied to such deposit and the
grant of any Lien securing such borrowing) or insofar as Events of Default
from bankruptcy or insolvency events are concerned, at any time in the
period ending on the 91st day after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under, the Indenture (other
than a Default or an Event of Default resulting from the borrowing of funds
to be applied to such deposit and the grant of any Lien securing such
borrowing) or any other material agreement or instrument to which we or any
of our Subsidiaries is a party or by which we or any of our Subsidiaries is
bound;
(6) we shall have delivered to the Trustee an officers' certificate
stating that the deposit was not made by us with the intent of preferring
the Holders over any of our other creditors or with the intent of
defeating, hindering, delaying or defrauding any of our other creditors or
others;
(7) we shall have delivered to the Trustee an officers' certificate and
an opinion of counsel, each stating that all conditions precedent provided
for or relating to the Legal Defeasance or the Covenant Defeasance have
been complied with;
(8) we shall have delivered to the Trustee an opinion of counsel to the
effect that, subject to customary assumptions and exclusions, after the
91st day following the deposit, the trust funds will not be, in the case of
Covenant Defeasance, subject to a Lien in favor of the Trustee for the
benefit of the Holders; and
(9) certain other customary conditions precedent are satisfied.
Notwithstanding the foregoing, the Opinion of Counsel required by clause
(2) above with respect to a Legal Defeasance need not be delivered if all Notes
not theretofore delivered to the Trustee for cancellation:
- have become due and payable,
- will become due and payable on the maturity date within one year or
- are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense, of the Company.
SATISFACTION AND DISCHARGE
The Indenture, the Notes and the Guarantees will be discharged and will
cease to be of further effect (except as to surviving rights or registration of
transfer or exchange of the Notes, as expressly provided for in the Indenture)
as to all outstanding Notes when
91
95
(1) either:
- all the Notes theretofore authenticated and delivered have been
delivered to the Trustee for cancellation (except lost, stolen or
destroyed Notes which have been replaced or paid and Notes for whose
payment money has theretofore been deposited in trust or segregated
and held in trust by us and thereafter repaid to us or discharged from
such trust) or
- all Notes not theretofore delivered to the Trustee for cancellation
have become due and payable and we have irrevocably deposited or
caused to be deposited with the Trustee funds in an amount sufficient
to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal
of, premium, if any, and interest on the Notes to the date of deposit
together with irrevocable instructions from us directing the Trustee
to apply such funds to the payment thereof at maturity or redemption,
as the case may be;
(2) we have paid all other sums payable by us under the Indenture; and
(3) we have delivered to the Trustee an officers' certificate and an
opinion of counsel stating that all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with.
MODIFICATION OF THE INDENTURE
From time to time, the Company, the Guarantors and the Trustee, without the
consent of the Holders, may amend the Indenture for any of the following
purposes:
(1) to evidence the succession of another person to the Company or any
Guarantor and the assumption by any such successor of the covenants of the
Company or any Guarantor in the Indenture and in the Notes;
(2) to add to the covenants of the Company or any Guarantor for the
benefit of the Holders, or to surrender any right or power herein conferred
upon the Company or any Guarantor;
(3) to add additional Events of Default;
(4) to provide for uncertificated Notes in addition to or in place of
the certificated Notes;
(5) to evidence and provide for the acceptance of appointment under the
Indenture by a successor Trustee;
(6) to secure the Notes or any Guarantee;
(7) to cure any ambiguity, to correct or supplement any provision in the
Indenture that may be defective or inconsistent with any other provisions
in the Indenture or to make any other provisions with respect to matters or
questions arising under the Indenture, provided that such actions taken
pursuant to this clause (7) do not, in the opinion of the Trustee,
adversely affect the interests of the Holders in any material respect;
(8) to comply with any requirements of the Commission in order to effect
and maintain the qualification of the Indenture under the Trust Indenture
Act; or
(9) to release any Guarantor from its Guarantee in accordance with the
provisions of the Indenture (including in connection with a sale of all of
the Capital Stock or all or substantially all of the assets of such
Guarantor).
In formulating its opinion on the matters in clause (7), the Trustee will be
entitled to rely on such evidence as it deems appropriate, including, without
limitation, solely on an opinion of counsel.
Other modifications and amendments of the Indenture may be made with the
consent of the Holders of a majority in principal amount of the then outstanding
Notes issued under the Indenture (including, without
92
96
limitation, consents obtained in connection with a purchase of, or tender offer
or exchange offer for, Notes), except that, without the consent of each Holder
affected thereby, no amendment may:
(a) reduce the amount of Notes whose Holders must consent to an
amendment;
(b) reduce the rate of or change the time for payment of interest,
including defaulted interest, on any Notes;
(c) reduce the principal of or change the fixed maturity of any Notes,
or change the scheduled date on which any Notes may be subject to
redemption or repurchase, or reduce the redemption or repurchase price
therefor;
(d) make any Notes payable in money other than that stated in the Notes;
(e) make any change in the express provisions of the Indenture
protecting the right of each Holder to receive payment of principal of and
interest on such Note on or after the due date thereof or to bring suit to
enforce such payment, or permitting Holders of a majority in principal
amount of Notes to waive Defaults or Events of Default;
(f) after our obligation to purchase Notes arises thereunder, amend,
change or modify in any material respect our obligation to make and
consummate a Change of Control Offer in the event of a Change of Control or
make and consummate a Net Proceeds Offer with respect to any Asset Sale
that has been consummated or, after such Change of Control has occurred or
such Asset Sale has been consummated, modify any of the provisions or
definitions with respect thereto;
(g) modify or change any provision of the Indenture or the related
definitions affecting the ranking of the Notes; or
(h) release any Guarantor from any of its obligations under its
Guarantee or the Indenture otherwise than in accordance with the terms of
the Indenture.
GOVERNING LAW
The Indenture provides that it, the Notes and the Guarantees will be
governed by, and construed in accordance with, the laws of the State of New York
but without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be required
thereby.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it by the Indenture, and use the same
degree of care and skill in its exercise as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the Trust Indenture Act contain certain
limitations on the rights of the Trustee, should it become one of the Company's
creditors, to obtain payments of claims in certain cases or to realize on
certain property received in respect of any such claim as security or otherwise.
Subject to the Trust Indenture Act, the Trustee will be permitted to engage in
other transactions; provided that if the Trustee acquires any conflicting
interest as described in the Trust Indenture Act, it must eliminate such
conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
93
97
"ACQUIRED INDEBTEDNESS" means Indebtedness of a Person or any of its
Subsidiaries:
- existing at the time such Person becomes a Restricted Subsidiary of the
Company or
- at the time it merges or consolidates with us or any of our Subsidiaries
or
- assumed in connection with the acquisition of assets from such Person,
and in each case not incurred by such Person in connection with, or in
anticipation or contemplation of, such Person becoming a Restricted Subsidiary
of the Company or such acquisition, merger or consolidation.
"AFFILIATE" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "CONTROLLING" and "CONTROLLED" have meanings correlative of the foregoing.
"ASSET ACQUISITION" means:
- an Investment by the Company or any Restricted Subsidiary of the Company
in any other Person pursuant to which such Person shall become a
Restricted Subsidiary of the Company or of any Restricted Subsidiary of
the Company, or shall be merged with or into the Company or any
Restricted Subsidiary of the Company, or
- the acquisition by the Company or any Restricted Subsidiary of the
Company of the assets of any Person (other than a Restricted Subsidiary
of the Company) which constitute all or substantially all of the assets
of such Person or comprises any division or line of business of such
Person or any other properties or assets of such Person, other than in
the ordinary course of business.
"ASSET SALE" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by us or any of our
Restricted Subsidiaries (including any Sale and Leaseback Transaction) to any
Person other than the Company or a Wholly Owned Restricted Subsidiary of the
Company of:
- any Capital Stock of any Restricted Subsidiary of the Company or
- any other property or assets of the Company or any Restricted Subsidiary
of the Company other than in the ordinary course of business;
provided, however, that Asset Sales shall not include:
(1) a transaction or series of related transactions for which we or one of
our Restricted Subsidiaries receive aggregate consideration of less than
$500,000,
(2) the sale, lease, conveyance, disposition or other transfer of all or
substantially all of our assets, or our consolidation or merger with any other
Person, in each case as permitted under "-- Merger, Consolidation and Sale of
Assets,"
(3) any disposition of property of the Company or any of its Restricted
Subsidiaries that, in our reasonable judgment, has become uneconomic, damaged,
obsolete or worn out,
(4) the sale of inventory in the ordinary course of business,
(5) the sale or discount, in each case without recourse (other than
recourse for a breach of a representation or warranty), of accounts receivable
arising in the ordinary course of business, but only in connection with the
compromise or collection thereof,
(6) sales of Cash Equivalents,
(7) surrender or waiver of contract rights or the settlement, release or
surrender of contract, tort or other claims of any kind,
94
98
(8) granting of Liens not prohibited by the Indenture,
(9) to the extent such would constitute an Asset Sale, transfers of
leasehold improvements, fixtures, consumables or other equipment made in
connection with our relocation to the Moorpark Facility,
(10) the licensing of intellectual property, including, without limitation,
licensing in connection with any European joint venture,
(11) the sale, lease, conveyance, disposition or other transfer of
Permitted Investments or the Capital Stock of or any Investment in any
Unrestricted Subsidiary,
(12) leases or subleases to third persons not interfering in any material
respect with the business of the Company or any of its Restricted Subsidiaries
and
(13) the making of any Permitted Investments or other Restricted Payments
permitted by the covenant described under the caption "-- Certain
Covenants -- Limitation on Restricted Payments."
"BOARD OF DIRECTORS" means, as to any Person, the board of directors of
such Person or any duly authorized committee thereof.
"BOARD RESOLUTION" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"CAPITALIZED LEASE OBLIGATION" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"CAPITAL STOCK" means:
- with respect to any Person that is a corporation, any and all shares,
interests, participations or other equivalents (however designated and
whether or not voting) of corporate stock, including each class of Common
Stock and Preferred Stock of such Person and
- with respect to any Person that is not a corporation, any and all
partnership, membership or other equity interests of such Person.
"CASH EQUIVALENTS" means:
(1) marketable direct obligations issued by, or unconditionally
guaranteed by, the United States Government or issued by any agency thereof
and backed by the full faith and credit of the United States, in each case
maturing within one year from the date of acquisition thereof;
(2) marketable direct obligations issued by any state of the United
States of America or any political subdivision of any such state or any
public instrumentality thereof maturing within one year from the date of
acquisition thereof and, at the time of acquisition, having one of the two
highest ratings obtainable from either Standard & Poor's Corporation
("S&P") or Moody's Investors Service, Inc. ("MOODY'S");
(3) commercial paper maturing no more than one year from the date of
creation thereof and, at the time of acquisition, having one of the two
highest ratings obtainable from S&P or Moody's;
(4) certificates of deposit or bankers' acceptances maturing within one
year from the date of acquisition thereof issued by any bank organized
under the laws of the United States of America or any state thereof or the
District of Columbia or any U.S. branch of a foreign bank or any U.S.
branch of a foreign bank having at the date of acquisition thereof combined
capital and surplus of not less than $250,000,000;
95
99
(5) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (1) above entered
into with any bank meeting the qualifications specified in clause (4)
above; and
(6) investments in money market funds with assets of $5,000,000 or
greater.
"CHANGE OF CONTROL" means the occurrence of one or more of the following
events:
(1) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets
of the Company and its Restricted Subsidiaries, taken as a whole, to any
Person or group of related Persons for purposes of Section 13(d) of the
Exchange Act (a "GROUP"), together with any Affiliates thereof (whether or
not otherwise in compliance with the provisions of the Indenture) other
than to a Subsidiary of the Company, the Principals and their Related
Parties;
(2) our liquidation or dissolution (whether or not otherwise in
compliance with the provisions of the Indenture);
(3) any Person or Group (other than the Principals and their Related
Parties) shall become the owner, directly or indirectly, beneficially or of
record, of shares representing more than 50% of the aggregate ordinary
voting power represented by our issued and outstanding Capital Stock; or
(4) the replacement of a majority of our Board of Directors over a
two-year period from the directors who constituted the Board of Directors
at the beginning of such period, and such replacement shall not have been
approved by a vote of at least a majority of the Board of Directors then
still in office who either were members of such Board of Directors at the
beginning of such period or whose election as a member of such Board of
Directors was previously so approved.
"COMMON STOCK" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"CONSOLIDATED EBITDA" means, with respect to any Person, for any period,
the sum (without duplication) of:
(1) Consolidated Net Income and
(2) to the extent Consolidated Net Income has been reduced thereby,
(a) all income taxes of such Person and its Restricted Subsidiaries
paid or accrued in accordance with GAAP for such period (other than
income taxes attributable to extraordinary or nonrecurring gains or
losses or taxes attributable to Asset Sales and other sales or
dispositions outside the ordinary course of business to the extent that
gains or losses from such transactions have been excluded from the
computation of Consolidated Net Income),
(b) Consolidated Interest Expense and
(c) Consolidated Non-cash Charges,
less any non-cash items increasing Consolidated Net Income for such period, all
as determined on a consolidated basis for such Person and its Restricted
Subsidiaries in accordance with GAAP.
"CONSOLIDATED FIXED CHARGE COVERAGE RATIO" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four full
fiscal quarters (the "FOUR QUARTER PERIOD") ending on or prior to the date of
the transaction giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio (the "TRANSACTION DATE") for which financial statements
are available to Consolidated Fixed Charges of such Person for the Four Quarter
Period. In addition to and without limitation of the foregoing,
96
100
for purposes of this definition, "Consolidated EBITDA" and "Consolidated Fixed
Charges" shall be calculated after giving effect on a pro forma basis for the
period of such calculation to:
- the incurrence or repayment of any Indebtedness of such Person or any of
its Restricted Subsidiaries (and the application of the proceeds thereof)
giving rise to the need to make such calculation and any incurrence or
repayment of other Indebtedness (and the application of the proceeds
thereof), other than the incurrence or repayment of Indebtedness in the
ordinary course of business for working capital purposes pursuant to
working capital facilities, occurring during the Four Quarter Period or
at any time subsequent to the last day of the Four Quarter Period and on
or prior to the Transaction Date, as if such incurrence or repayment, as
the case may be (and the application of the proceeds thereof), occurred
on the first day of the Four Quarter Period and
- any Asset Sales or other dispositions or Asset Acquisitions (including,
without limitation, any Asset Acquisition giving rise to the need to make
such calculation as a result of such Person or one of its Restricted
Subsidiaries (including any Person who becomes a Restricted Subsidiary as
a result of the Asset Acquisition) incurring, assuming or otherwise being
liable for Acquired Indebtedness and also including any Consolidated
EBITDA (including any pro forma expense and cost reductions calculated on
a basis consistent with Regulation S-X under the Exchange Act)
attributable to the assets which are the subject of the Asset Acquisition
or Asset Sale or other disposition during the Four Quarter Period)
occurring during the Four Quarter Period or at any time subsequent to the
last day of the Four Quarter Period and on or prior to the Transaction
Date, as if such Asset Sale or other disposition or Asset Acquisition
(including the incurrence, assumption or liability for any such Acquired
Indebtedness) occurred on the first day of the Four Quarter Period.
If such Person or any of its Restricted Subsidiaries directly or indirectly
guarantees Indebtedness of a third Person, the preceding sentence shall give
effect to the incurrence of such guaranteed Indebtedness as if such Person or
any Restricted Subsidiary of such Person had directly incurred or otherwise
assumed such guaranteed Indebtedness. If since the beginning of such period any
Person (that subsequently became a Restricted Subsidiary or was merged with or
into the Company or any Restricted Subsidiary since the beginning of such
period) shall have made any Asset Acquisition or Asset Sale or other disposition
that would have required adjustment pursuant to this definition, then the
Consolidated Fixed Charge Coverage Ratio shall be calculated giving pro forma
effect thereto as if such Asset Acquisition or Asset Sale or other disposition
had occurred at the beginning of the applicable Four Quarter Period.
Furthermore, in calculating Consolidated Fixed Charges for purposes of
determining the denominator (but not the numerator) of this "Consolidated Fixed
Charge Coverage Ratio,"
(1) interest on outstanding Indebtedness determined on a fluctuating
basis as of the Transaction Date and which will continue to be so
determined thereafter shall be deemed to have accrued at a fixed rate per
annum equal to the average rate of interest on such Indebtedness in effect
on the 30 business days preceding the Transaction Date;
(2) if interest on any Indebtedness actually incurred on the Transaction
Date may optionally be determined at an interest rate based upon a factor
of a prime or similar rate, a eurocurrency interbank offered rate, or other
rates, then the interest rate in effect on the Transaction Date will be
deemed to have been in effect during the Four Quarter Period; and
(3) notwithstanding clause (1) immediately above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest
is covered by agreements relating to Interest Swap Obligations, shall be
deemed to accrue at the rate per annum resulting after giving effect to the
operation of such agreements.
97
101
"CONSOLIDATED FIXED CHARGES" means, with respect to any Person for any
period, the sum, without duplication, of:
(1) Consolidated Interest Expense plus
(2) the product of:
(x) the amount of all dividend payments on any series of Preferred
Stock of such Person and, in the case of the Company, any series of
Preferred Stock of the Guarantors (other than dividends paid in
Qualified Capital Stock) paid, accrued or scheduled to be paid or
accrued during such period and
(y) a fraction, the numerator of which is one and the denominator of
which is one minus the then current effective consolidated federal,
state and local income tax rate of such Person, expressed as a decimal;
provided that Consolidated Fixed Charges shall not include:
(a) gain or loss from the extinguishment of debt, including, without
limitation, write-off of debt issuance costs, commissions, fees and
expenses,
(b) amortization of debt issuance costs, commissions, fees and expenses
or
(c) customary commitment, administrative and transaction fees or
charges.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person for any
period, the sum of, without duplication:
(1) the aggregate of the interest expense of such Person and its
Restricted Subsidiaries for such period determined on a consolidated basis
in accordance with GAAP, including without limitation,
(a) any amortization of debt discount and amortization or write-off
of deferred financing costs,
(b) the net costs under Interest Swap Obligations,
(c) all capitalized interest and
(d) the interest portion of any deferred payment obligation; and
(2) the interest component of Capitalized Lease Obligations accrued by
such Person and its Restricted Subsidiaries during such period as
determined on a consolidated basis in accordance with GAAP.
"CONSOLIDATED NET INCOME" means, with respect to any Person, for any
period, the aggregate net income (or loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP, excluding:
(1) after-tax gains or losses from Asset Sales or other sales of assets
outside the ordinary course of business or abandonments or reserves
relating thereto (other than after-tax gains from sales of Unrestricted
Subsidiaries and other Investments made in compliance with the Covenant
described under the caption "-- Limitation on Restricted Payments," but
only to the extent not already included in clause (z) under the caption
"-- Certain Covenants -- Limitation on Restricted Payments"),
(2) after-tax items classified as extraordinary or nonrecurring gains or
losses,
(3) solely for purposes of calculating Consolidated Net Income for the
covenant described under the caption "-- Certain Covenants -- Limitation on
Restricted Payments," the net income of any Person acquired in a "pooling
of interests" transaction accrued prior to the date it becomes a Restricted
Subsidiary of the referent Person or is merged or consolidated with the
referent Person or any Restricted Subsidiary of the referent Person,
(4) the net income (but not loss) of any Restricted Subsidiary of the
referent Person to the extent that the declaration of dividends or similar
distributions by that Restricted Subsidiary of that income is
98
102
restricted by a contract, operation of law or otherwise, except to the
extent that such net income is actually paid to the Company or one of its
Restricted Subsidiaries by loans, advances, intercompany transfers,
principal payments or otherwise; provided, however, that for purposes of
determining compliance with the covenant described under the caption
"-- Certain Covenants -- Limitation on Incurrence of Additional
Indebtedness," any net income of such Restricted Subsidiary, which net
income is subject to any restriction permitted under clause (8) in the
covenant described under the caption "-- Certain Covenants -- Limitation on
Dividend and Other Payment Restrictions Affecting Subsidiaries," shall be
included,
(5) the net income of any Person, other than a Restricted Subsidiary of
the referent Person, except to the extent of cash dividends or
distributions paid to the referent Person or to a Restricted Subsidiary of
the referent Person by such Person,
(6) any restoration to income of any contingency reserve, except to the
extent that provision for such reserve was made out of Consolidated Net
Income accrued at any time following the Issue Date,
(7) income or loss attributable to discontinued operations (including,
without limitation, operations disposed of during such period whether or
not such operations were classified as discontinued),
(8) in the case of a successor to the referent Person by consolidation
or merger or as a transferee of the referent Person's assets, any earnings
of the successor corporation prior to such consolidation, merger or
transfer of assets, and
(9) the fees, expenses and other costs incurred in connection with the
Recapitalization, including payments to management contemplated by the
Recapitalization Agreement.
"CONSOLIDATED NON-CASH CHARGES" means, with respect to any Person, for any
period:
(1) the sum of:
(a) the aggregate depreciation, amortization and other non-cash
expenses or charges of such Person and its Restricted Subsidiaries
reducing Consolidated Net Income of such Person and its Restricted
Subsidiaries for such period (including amortization of goodwill, the
non-cash costs of agreements evidencing Interest Swap Obligations,
Currency Agreements, license agreements, noncompetition agreements,
non-cash amortization of Capitalized Lease Obligations or management
fees and organization costs),
(b) expenses and charges relating to any equity offering or
incurrence of Indebtedness permitted to be incurred by the Indenture
(including any such expenses or charges relating to the
Recapitalization),
(c) the amount of any restructuring charge or reserve,
(d) unrealized gains and losses from hedging, foreign currency or
commodities translations and transactions and
(e) the amount of any reduction representing a minority interest in
Guarantors, minus
(2) any cash payment with respect to which a charge or reserve referred
to in clause (1) was taken in a prior period,
in each case, determined on a consolidated basis in accordance with GAAP.
"CURRENCY AGREEMENT" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary against fluctuations in currency values.
"DEFAULT" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
99
103
"DESIGNATED SENIOR INDEBTEDNESS" means:
- Indebtedness under or in respect of the New Credit Facility and
- any other Indebtedness constituting Senior Indebtedness which, at the
time of determination, has an aggregate principal amount of at least
$25,000,000 and is specifically designated in the instrument evidencing
such Senior Indebtedness as "Designated Senior Indebtedness" by the
Company.
"DISQUALIFIED CAPITAL STOCK" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable at the option of the holder), or upon the happening
of any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the sole option of the holder
thereof on or prior to the final maturity date of the Notes. Notwithstanding the
foregoing, any Capital Stock that would not constitute Disqualified Capital
Stock but for provisions therein giving holders thereof the right to cause the
issuer thereof to repurchase or redeem such Capital Stock upon the occurrence of
an "Asset Sale" or "Change of Control" occurring prior to the final stated
maturity of the Notes will not constitute Disqualified Capital Stock if the
"Asset Sale" or "Change of Control" provisions applicable to such Capital Stock,
taken as a whole, are not materially more favorable to the holders of such
Capital Stock than the provisions described under "-- Certain Covenants --
Change of Control" and "-- Certain Covenants -- Limitation on Assets Sales."
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or
any successor statute or statutes thereto.
"FAIR MARKET VALUE" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors acting in good faith and shall be
evidenced by a Board Resolution delivered to the Trustee.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.
"GUARANTEE" means the guarantee of our Obligations with respect to the
Notes by each Guarantor pursuant to the terms of the Indenture.
"GUARANTOR" means Scot, Incorporated and each of the Company's Restricted
Subsidiaries that in the future executes a supplemental indenture in which such
Restricted Subsidiary agrees to be bound by the terms of the Indenture as a
Guarantor; provided that any Person constituting a Guarantor as described above
shall cease to constitute a Guarantor when its respective Guarantee is released
in accordance with the terms of the Indenture.
"GUARANTOR SENIOR INDEBTEDNESS" means with respect to any Guarantor, the
principal of, premium, if any, and interest (including any interest accruing
subsequent to the filing of a petition of bankruptcy at the rate provided for in
the documentation with respect thereto, whether or not such interest is an
allowed claim under applicable law) on any Indebtedness of a Guarantor, whether
outstanding on the Issue Date or thereafter created, incurred or assumed,
unless, in the case of any particular Indebtedness, the instrument creating or
evidencing the same or pursuant to which the same is outstanding expressly
provides that such Indebtedness shall not be senior in right of payment to the
Guarantee of such Guarantor. Without limiting the generality of the foregoing,
"Guarantor Senior Indebtedness" shall also include the principal of, premium, if
any, interest (including any interest accruing subsequent to the filing of a
petition of bankruptcy at the rate
100
104
provided for in the documentation with respect thereto, whether or not such
interest is an allowed claim under applicable law) on, and all other amounts
owing in respect of:
- all obligations (including guarantees thereof) of every nature of such
Guarantor under the New Credit Facility, including, without limitation,
obligations to pay principal and interest, reimbursement obligations
under letters of credit, fees, expenses and indemnities,
- all Interest Swap Obligations (including guarantees thereof) and
- all obligations (including guarantees thereof) under Currency Agreements,
in each case whether outstanding on the Issue Date or thereafter
incurred.
Notwithstanding the foregoing, "Guarantor Senior Indebtedness" shall not
include:
- any Indebtedness of such Guarantor to a Restricted Subsidiary of such
Guarantor or any Affiliate of such Guarantor or any of such Affiliate's
Subsidiaries (other than an Affiliate which is also a lender or an
Affiliate of a lender under the New Credit Facility),
- Indebtedness to, or guaranteed on behalf of, any shareholder (other than
a shareholder which is also a lender or an Affiliate of a lender under
the New Credit Facility), director, officer or employee of such Guarantor
or any Restricted Subsidiary of such Guarantor (including, without
limitation, amounts owed for compensation),
- Indebtedness to trade creditors and other amounts incurred in connection
with obtaining goods, materials or services,
- Indebtedness represented by Disqualified Capital Stock,
- any liability for federal, state, local or other taxes owed or owing by
such Guarantor,
- that portion of any Indebtedness incurred in violation of the Indenture
provisions set forth under "Limitation on Incurrence of Additional
Indebtedness" (but, as to any such obligation, no such violation shall be
deemed to exist for purposes of this clause if the holder(s) of such
obligation or their representative and the Trustee shall have received an
officers' certificate of the Company to the effect that the incurrence of
such Indebtedness does not (or, in the case of revolving credit
indebtedness, that the incurrence of the entire committed amount thereof
at the date on which the initial borrowing thereunder is made would not)
violate such provisions of the Indenture),
- Indebtedness which, when incurred and without respect to any election
under Section 1111(b) of Title 11, United States Code, is without
recourse to the Company and
- any Indebtedness which is, by its express terms, subordinated in right of
payment to any other Indebtedness of such Guarantor.
"INDEBTEDNESS" means with respect to any Person, without duplication,
(1) all indebtedness of such Person for borrowed money,
(2) all indebtedness of such Person evidenced by bonds, debentures,
notes or other similar instruments,
(3) all Capitalized Lease Obligations of such Person,
(4) all obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations and all
obligations under any title retention agreement,
(5) all obligations for the reimbursement of any obligor on any letter
of credit, banker's acceptance or similar credit transaction,
(6) guarantees and other contingent obligations in respect of
Indebtedness referred to in clauses (1) through (5) above and clause (8)
below,
101
105
(7) all obligations of any other Person of the type referred to in
clauses (1) through (6) which are secured by any lien on any property or
asset of such Person, the amount of such obligation being deemed to be the
lesser of (a) the fair market value of such property or asset and (b) or
the amount of the obligation so secured,
(8) all obligations under currency agreements and interest swap
agreements of such Person and
(9) all Disqualified Capital Stock issued by such Person with the amount
of Indebtedness represented by such Disqualified Capital Stock being equal
to the greater of its (a) voluntary or involuntary liquidation preference
and (b) maximum fixed repurchase price, but excluding accrued dividends, if
any.
For purposes hereof, the "MAXIMUM FIXED REPURCHASE PRICE" of any
Disqualified Capital Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified Capital Stock as if
such Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the fair market value of such Disqualified
Capital Stock, such fair market value shall be determined in good faith by the
Board of Directors of the issuer of such Disqualified Capital Stock.
Notwithstanding the foregoing, the term "Indebtedness" shall not include:
- trade accounts payable and other accrued liabilities arising in the
ordinary course of business,
- Obligations of such Person other than principal,
- any liability for federal, state or local taxes or other taxes or by such
Person and
- Obligations of such Person with respect to performance and surety bonds
and completion guarantees in the ordinary course of business and
- the accretion of original issue discount.
"INDEPENDENT FINANCIAL ADVISOR" means a firm:
- which does not, and whose directors, officers and employees or Affiliates
do not, have a direct or indirect financial interest in the Company and
- which, in the judgment of our Board of Directors, is otherwise
independent and qualified to perform the task for which it is to be
engaged.
"INTEREST SWAP OBLIGATIONS" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"INVESTMENT" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any other Person. "Investment" shall exclude extensions of trade credit by
the Company and its Restricted Subsidiaries on commercially reasonable terms in
accordance with normal trade practices of the Company or such Restricted
Subsidiary, as the case may be. If the Company or any Restricted Subsidiary of
the Company sells or otherwise disposes of any Common Stock of any direct or
indirect Restricted Subsidiary of the Company such that, after giving effect to
any such sale or disposition, the Company no longer owns, directly or
indirectly, greater than 50% of the outstanding Common Stock of such Restricted
Subsidiary, the Company shall be deemed to have made an Investment on the date
of any such sale or disposition equal to the fair market value of the Common
Stock of such Restricted Subsidiary not sold or disposed of.
102
106
"ISSUE DATE" means December 15, 1998, the date of original issuance of the
Notes.
"LIEN" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"NET CASH PROCEEDS" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents (other
than the portion of any such deferred payment constituting interest or
dividends) received by the Company or any of its Restricted Subsidiaries from
such Asset Sale net of:
- reasonable out-of-pocket expenses and fees relating to such Asset Sale
(including, without limitation, legal, accounting and investment banking
fees and sales commissions),
- taxes paid or payable relating to such Asset Sale,
- repayment of Indebtedness that is secured by such assets or required to
be repaid in connection with such Asset Sale,
- appropriate amounts to be provided by the Company or any Restricted
Subsidiary, as the case may be, as a reserve, in accordance with GAAP,
against any liabilities associated with such Asset Sale and retained by
the Company or any Restricted Subsidiary, as the case may be, after such
Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated
with such Asset Sale and
- amounts required to be paid to any Person (other than the Company or any
Restricted Subsidiary) owning a beneficial interest in the assets that
are subject to the Asset Sale (by way of holding Capital Stock of the
Person owning such assets or otherwise).
"NEW CREDIT FACILITY" means the Credit Agreement dated as of the Issue
Date, among the Company, the lenders party thereto in their capacities as
lenders thereunder and Bankers Trust Company, as lead arranger, administrative
agent and a lender, together with the related documents thereto (including,
without limitation, any guarantee agreements and security documents), in each
case as such agreements may be amended (including any amendment and restatement
thereof), supplemented or otherwise modified from time to time, including any
agreement extending the maturity of, refinancing, replacing or otherwise
restructuring (including increasing the amount of available borrowings
thereunder or adding Restricted Subsidiaries of the Company as additional
borrowers or guarantors thereunder) all or any portion of the Indebtedness under
such agreement or any successor or replacement agreement and whether by the same
or any other agent, lender or group of lenders.
"OBLIGATIONS" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"PERMITTED INDEBTEDNESS" means, without duplication, each of the following:
(1) Indebtedness under the Notes issued in the Offering in an aggregate
principal amount of $100,000,000 and the related Guarantees;
(2) Indebtedness incurred pursuant to the New Credit Facility in an
aggregate principal amount at any time outstanding not to exceed:
(a) $70,000,000 with respect to Indebtedness under a term loan
facility, less the amount of all mandatory principal payments actually
made by the Company in respect of such term loans with the Net Cash
Proceeds of an Asset Sale pursuant to the covenant described under the
caption "-- Certain Covenants -- Limitation on Asset Sales" and
103
107
(b) the greater of:
(x) $25,000,000 (reduced by the amount of any required permanent
repayments or commitment reductions made with the Net Cash Proceeds
of an Asset Sale pursuant to the covenant described under the caption
"-- Certain Covenants -- Limitation on Asset Sales") and
(y) 60% of inventory plus 85% of accounts receivable (each as
determined in accordance with GAAP, but excluding accounts receivable
that are past due by more than 60 days, other than by reason of any
laws governing insolvency or bankruptcy) as of the end of the last
fiscal quarter for which financial statements have been prepared;
(3) other Indebtedness of the Company and its Restricted Subsidiaries
outstanding on the Issue Date reduced by the amount of any scheduled
amortization payments or mandatory prepayments when actually paid or
permanent reductions thereof;
(4) Interest Swap Obligations of the Company or any of its Restricted
Subsidiaries covering Indebtedness of the Company or any of its Restricted
Subsidiaries; provided, however, that such Interest Swap Obligations are
entered into to protect the Company and its Restricted Subsidiaries from
fluctuations in interest rates on Indebtedness incurred in accordance with
the Indenture to the extent the notional principal amount of such Interest
Swap Obligation does not exceed the principal amount of the Indebtedness to
which such Interest Swap Obligation relates;
(5) Indebtedness under Currency Agreements; provided that in the case of
Currency Agreements which relate to Indebtedness, such Currency Agreements
do not increase the Indebtedness of the Company and its Restricted
Subsidiaries outstanding other than as a result of fluctuations in foreign
currency exchange rates or by reason of fees, indemnities and compensation
payable thereunder;
(6) Indebtedness of a Restricted Subsidiary of the Company to the
Company or to a Wholly Owned Restricted Subsidiary of the Company for so
long as such Indebtedness is held by the Company, a Wholly Owned Restricted
Subsidiary of the Company or the lenders or collateral agent under any
senior secured Indebtedness permitted to be incurred under the Indenture,
in each case subject to no Lien held by a Person other than the Company or
such other lenders or collateral agent, a Wholly Owned Restricted
Subsidiary of the Company or such other lenders or collateral agent;
provided that if as of any date any Person other than the Company, a Wholly
Owned Restricted Subsidiary of the Company or the lenders or collateral
agent under the New Credit Facility owns or holds any such Indebtedness or
holds a Lien in respect of such Indebtedness, such date shall be deemed the
incurrence of Indebtedness not constituting Permitted Indebtedness by the
issuer of such Indebtedness pursuant to this clause (6);
(7) Indebtedness of the Company to a Wholly Owned Restricted Subsidiary
of the Company for so long as such Indebtedness is held by a Wholly Owned
Restricted Subsidiary of the Company or the lenders or collateral agent
under any senior secured Indebtedness permitted to be incurred under the
Indenture, in each case subject to no Lien held by such Person other than a
Wholly Owned Restricted Subsidiary or such other lenders or collateral
agent; provided that:
- any Indebtedness of the Company to any Wholly Owned Restricted
Subsidiary of the Company which is not a Guarantor is unsecured and
subordinated, pursuant to a written agreement, to the Company's
obligations under the Indenture and the Notes and
- if as of any date any Person other than a Wholly Owned Restricted
Subsidiary of the Company or such other lenders or collateral agent
owns or holds any such Indebtedness or any Person holds a Lien in
respect of such Indebtedness, such date shall be deemed the incurrence
of Indebtedness not constituting Permitted Indebtedness by the Company
pursuant to this clause (7);
(8) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except
in the case of daylight overdrafts) drawn against insufficient funds in the
ordinary course of business; provided, however, that such Indebtedness is
extinguished within five business days of incurrence;
104
108
(9) Indebtedness of the Company or any of its Restricted Subsidiaries
represented by letters of credit for the account of the Company or such
Restricted Subsidiary, as the case may be, issued in the ordinary course of
business of the Company or such Restricted Subsidiary, including, without
limitation, in order to provide security for workers' compensation claims
or payment obligations in connection with self-insurance or similar
requirements in the ordinary course of business and other Indebtedness with
respect to workers' compensation claims, self-insurance obligations,
performance, surety and similar bonds and completion guarantees provided by
the Company or any Restricted Subsidiary in the ordinary course of
business;
(10) Indebtedness (a) represented by Capitalized Lease Obligations and
(b) Purchase Money Indebtedness of the Company and its Restricted
Subsidiaries or under purchase money mortgages or secured by purchase money
security interests, in the case of (a) or (b) incurred for the purpose of
leasing or financing or refinancing all or any part of the purchase price
or cost of construction or improvement of any property (real or personal)
or other assets that are used or useful in the business of the Company or
such Restricted Subsidiary (whether through the direct purchase of assets
or the Capital Stock of any Person owning such assets and whether such
Indebtedness is owed to the seller or Person carrying out such construction
or improvement or to any third party), so long as:
(x) such Indebtedness is not secured by any property or assets of the
Company or any Restricted Subsidiary other than the property or assets
so leased, acquired (directly or indirectly), constructed or improved
and
(y) such Indebtedness is created within 90 days of the acquisition or
completion of construction or improvement of the related property or
asset provided that the aggregate principal amount of Indebtedness under
clauses (a) and (b) does not exceed $10,000,000 and any Refinancing of
Indebtedness permitted under clause (a) or (b) the aggregate of which
does not exceed $10,000,000;
(11) Refinancing Indebtedness;
(12) guarantees of Indebtedness otherwise permitted under the Indenture;
(13) additional Indebtedness of the Company and its Restricted
Subsidiaries in an aggregate principal amount not to exceed $10,000,000 at
any one time outstanding (which amount may, but need not, be incurred in
whole or in part under the New Credit Facility);
(14) Indebtedness arising from any agreement entered into by the Company
or any of its Restricted Subsidiaries providing for indemnification,
purchase price adjustment or similar obligations, in each case incurred or
assumed in connection with any Asset Sale;
(15) Indebtedness arising from a Sale and Leaseback Transaction or from
the creation of a mortgage, in either case with respect to the Company's
production facility in Moorpark, California in an amount not to exceed
$25,000,000; provided that the Net Cash Proceeds from such Sale and
Leaseback Transaction or from the creation of such mortgage are applied in
accordance with the provisions described under "-- Certain
Covenants -- Limitation on Asset Sales" as if such transaction were an
Asset Sale thereunder; provided, further, however, that any Net Cash
Proceeds remaining after the foregoing proviso is complied with shall be
applied in accordance with the other provisions described under "Certain
Covenants -- Limitation on Asset Sales" as if such transaction were an
Asset Sale thereunder; and
(16) Indebtedness arising from a Sale and Leaseback Transaction or from
the creation of a mortgage, in either case with respect to the Company's
facility in Mesa, Arizona in an amount not to exceed $15,000,000; provided
that the Net Cash Proceeds from such Sale and Leaseback Transaction or from
the creation of such mortgage are applied in accordance with the provisions
described under "-- Certain Covenants -- Limitation on Asset Sales" as if
such transaction were an Asset Sale thereunder; provided, further, however,
that any Net Cash Proceeds remaining after the foregoing proviso
105
109
is complied with shall be applied in accordance with the other provisions
described under "Certain Covenants -- Limitation on Asset Sales" as if such
transaction were an Asset Sale thereunder.
"PERMITTED INVESTMENTS" means:
(1) Investments by the Company or any Restricted Subsidiary of the
Company in any Person that is or will become immediately after such
Investment a Restricted Subsidiary of the Company or that will merge or
consolidate into the Company or a Restricted Subsidiary of the Company,
(2) Investments in the Company by any Restricted Subsidiary of the
Company; provided that any Indebtedness evidencing such Investment to the
extent held by a Restricted Subsidiary that is not a Guarantor is unsecured
and subordinated, pursuant to a written agreement, to the Company's
obligations under the Notes and the Indenture;
(3) investments in cash and Cash Equivalents;
(4) loans and advances to employees and officers of the Company and its
Restricted Subsidiaries in the ordinary course of business for bona fide
business purposes not in excess of $1,000,000 at any one time outstanding;
(5) Currency Agreements and Interest Swap Obligations entered into in
the ordinary course of the Company's or its Restricted Subsidiaries'
businesses and otherwise in compliance with the Indenture;
(6) Investments in securities of trade creditors or customers received
pursuant to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of such trade creditors or customers or in good
faith settlement of delinquent obligations of such trade creditors or
customers;
(7) Investments made pursuant to the Recapitalization;
(8) guarantees of Indebtedness otherwise permitted under the Indenture;
(9) obligations of one or more officers or other employees of the
Company or any of its Restricted Subsidiaries in connection with such
officer's or employee's acquisition of shares of Common Stock of the
Company so long as no cash is paid by the Company or any of its Restricted
Subsidiaries to such officers or employees in connection with the
acquisition of any such obligations;
(10) Investments made by the Company or its Restricted Subsidiaries as a
result of consideration received in connection with an Asset Sale made in
compliance with the "Limitation on Asset Sales" covenant;
(11) additional Investments not to exceed an amount equal to (a)
$10,000,000 plus (b) to the extent not previously reinvested under this
clause (11), any return of capital realized on a Permitted Investment made
pursuant to this clause (11); provided that in no event shall the aggregate
amount of Investments pursuant to clauses (a) and (b) of this clause (11)
exceed $10,000,000 in the aggregate at any one time outstanding;
(12) any acquisition of assets solely in exchange for the issuance of
Qualified Capital Stock of the Company;
(13) commission, travel, payroll, entertainment, relocation and similar
advances to officers and employees of the Company or any Restricted
Subsidiary made in the ordinary course of business; and
(14) Investments in one or more joint ventures relating to the Company's
expansion into the European market not to exceed an amount equal to (a)
$4,000,000 plus (b) to the extent not previously reinvested under this
clause (14) any return of capital realized on a Permitted Investment made
pursuant to this clause (14); provided that in no event shall the aggregate
amount of Investments pursuant to clauses (a) and (b) of this clause (14)
exceed $4,000,000 in the aggregate at any one time outstanding.
106
110
"PERMITTED LIENS" means the following types of Liens:
(1) Liens for taxes, assessments or governmental charges or claims
either (a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or its Restricted Subsidiaries
shall have set aside on its books such reserves as may be required pursuant
to GAAP;
(2) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(3) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, including any Liens securing letters of credit
issued in the ordinary course of business in connection therewith, or to
secure the performance of tenders, statutory obligations, surety and appeal
bonds, bids, leases, government contracts, performance and return-of-money
bonds and other similar obligations (exclusive of obligations for the
payment of borrowed money);
(4) judgment Liens not giving rise to an Event of Default;
(5) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company
or any of its Restricted Subsidiaries;
(6) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property or
assets which is not leased property subject to such Capitalized Lease
Obligation;
(7) purchase money Liens to finance property or assets of the Company or
any Restricted Subsidiary of the Company; provided, however, that:
(a) the related purchase money Indebtedness shall not exceed the cost
of the acquisition, construction or improvement of such property or
assets and shall not be secured by any property or assets of the Company
or any Restricted Subsidiary of the Company other than the property and
assets so acquired whether through the direct acquisition of such
property or assets or indirectly through the acquisition of the Capital
Stock of any Person owning such property or assets constructed or
improved and
(b) the Lien securing such Indebtedness shall be created within 90
days of such acquisition or completion of construction or improvement;
(8) Liens upon specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment or storage of such inventory or other goods;
(9) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;
(10) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and
set-off;
(11) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indenture;
107
111
(12) Liens securing Capitalized Lease Obligations and Purchase Money
Indebtedness permitted pursuant to the "Limitation on Incurrence of
Additional Indebtedness" covenant; provided, however, that in the case of
Purchase Money Indebtedness:
(a) the Indebtedness shall not exceed the cost of such property or
assets and shall not be secured by any property or assets of the Company
or any Restricted Subsidiary of the Company other than the property and
assets so acquired or constructed and
(b) the Lien securing such Indebtedness shall be created within 180
days of such acquisition or construction or, in the case of a
Refinancing of any Purchase Money Indebtedness, within 180 days of such
Refinancing;
(13) Liens securing Indebtedness under Currency Agreements;
(14) any lease or sublease to a third party;
(15) Liens placed upon assets of a Restricted Subsidiary of the Company
not organized under the laws of the United States or any subdivision
thereof to service the Indebtedness of such Restricted Subsidiary that is
otherwise permitted under the Indenture;
(16) Liens securing Acquired Indebtedness incurred in accordance with
the "Limitation on Incurrence of Additional Indebtedness" covenant;
provided that:
(a) such Liens secured such Acquired Indebtedness at the time of and
prior to the incurrence of such Acquired Indebtedness by the Company or
a Restricted Subsidiary of the Company and were not granted in
anticipation of the incurrence of such Acquired Indebtedness by the
Company or a Restricted Subsidiary of the Company and
(b) such Liens do not extend to or cover any property or assets of
the Company or of any of its Restricted Subsidiaries other than the
property or assets that secured the Acquired Indebtedness prior to the
time such Indebtedness became Acquired Indebtedness of the Company or a
Restricted Subsidiary of the Company;
(17) Liens on property existing at the time of acquisition thereof by
the Company or any Restricted Subsidiary of the Company; provided that such
Liens were not incurred in connection with, or in contemplation of, such
acquisition;
(18) Liens incurred in the ordinary course of business of the Company or
any Restricted Subsidiary of the Company with respect to obligations that
do not exceed $5,000,000 at any one time outstanding and that:
(a) are not incurred in connection with the borrowing of money or the
obtaining of advances of credit (other than trade credit in the ordinary
course of business) and
(b) do not in the aggregate materially detract from the value of the
property or materially impair the use thereof in the operation of
business by the Company or such Restricted Subsidiary;
(19) Liens on materials, inventory or consumables and the proceeds
therefrom securing trade payables relating to such materials, inventory or
consumables;
(20) Liens in favor of customs and revenues authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods;
(21) Liens in connection with workmen's compensation obligations and
general liability exposure of the Company and its Restricted Subsidiaries;
(22) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property or
assets which are not leased pursuant to such Capitalized Lease Obligation;
108
112
(23) Liens for judgments, attachments, seizures or levies not to exceed
$500,000 in the aggregate at any one time;
(24) Liens on property or assets of the Company or any of its Restricted
Subsidiaries securing Indebtedness incurred under clause (13) of the
definition of "Permitted Indebtedness" and any guarantees relating thereto;
and
(25) any extension, renewal or replacement, in whole or in part, of any
Lien described in the foregoing clauses (1) through (24) provided that the
Lien so extended, renewed or replaced does not extend to any additional
property or assets.
"PERSON" means an individual, partnership, corporation, unincorporated
organization, limited liability company, trust or joint venture, or a
governmental agency or political subdivision thereof.
"PREFERRED STOCK" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"PRINCIPALS" means:
(1) Lehman, JFL Equity and each Affiliate of Lehman and JFL Equity as of
the Issue Date,
(2) each officer or employee of Lehman or any such member referred to in
clause (1) as of the Issue Date and
(3) each of the foregoing's family members, legal representatives or
guardians, heirs and legatees and trusts, partnerships and
corporations the sole beneficiaries, partners or shareholders, as
the case may be, of which are family members.
"PURCHASE MONEY INDEBTEDNESS" means Indebtedness of the Company and its
Restricted Subsidiaries incurred in the normal course of business for the
purpose of financing all or any part of the purchase price, or the cost of
installation, construction or improvement, of property or equipment.
"QUALIFIED CAPITAL STOCK" means any Capital Stock that is not Disqualified
Capital Stock.
"QUALIFIED PROCEEDS" means any of the following or any combination of the
following:
(1) cash,
(2) Cash Equivalents,
(3) assets that are used or usable in the business of the Company and
its Subsidiaries as existing on the Issue Date or a business reasonably
related or complementary thereto and
(4) Capital Stock of any Person engaged primarily in the business of the
Company and its Subsidiaries as existing on the Issue Date or a business
reasonably related or complementary thereto if, in connection with the
receipt by the Company or any Restricted Subsidiary of the Company of such
Capital Stock (a) such Person becomes a Restricted Subsidiary or (b) such
Person is merged, consolidated or amalgamated with or into, or transfers or
conveys substantially all of its assets to, or is liquidated into, the
Company or any Restricted Subsidiary of the Company.
"REFINANCE" means, in respect of any security or Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue a security or Indebtedness (whose proceeds are applied within 60 days
after the incurrence thereof) in exchange or replacement for, such security or
Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have
correlative meanings.
"REFINANCING INDEBTEDNESS" means any Refinancing by the Company or any
Restricted Subsidiary of the Company of Indebtedness incurred in accordance with
the "Limitation on Incurrence of Additional Indebtedness" covenant (other than
pursuant to clause (2), (4), (5), (6), (7), (8), (9), (10), (12), (13), (14),
(15) or (16) of the definition of Permitted Indebtedness), in each case that
does not:
(1) result in an increase in the aggregate principal amount (or accreted
value, if applicable) of Indebtedness of such Person as of the date of such
proposed Refinancing (plus the amount of any
109
113
penalties, interest or premium required to be paid under the terms of the
instrument governing such Indebtedness and plus the amount of reasonable
fees, discounts, commissions and other expenses incurred by the Company in
connection with such Refinancing) or
(2) create Indebtedness with:
(a) a Weighted Average Life to Maturity that is less than the
Weighted Average Life to Maturity of the Indebtedness being Refinanced
or
(b) a final maturity earlier than the final maturity of the
Indebtedness being Refinanced; provided that:
(x) if such Indebtedness being Refinanced is solely Indebtedness
of the Company, then such Refinancing Indebtedness shall be
Indebtedness solely of the Company and
(y) if such Indebtedness being Refinanced is subordinate or
junior to the Notes, then such Refinancing Indebtedness shall be
subordinate or junior to the Notes at least to substantially the same
extent and in substantially the same manner as the Indebtedness being
Refinanced.
"RELATED PARTY" with respect to any Principal means:
(1) any controlling stockholder or 80% (or more) owned Subsidiary of
such Principal or
(2) any trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons beneficially
holding an 80% or more controlling interest of which consist of such
Principal and/or such other Persons referred to in the immediately
preceding clause (1).
"REPRESENTATIVE" means the indenture trustee or other trustee, agent or
representative in respect of any Designated Senior Indebtedness; provided that
if, and for so long as, any Designated Senior Indebtedness lacks such a
representative, then the Representative for such Designated Senior Indebtedness
shall at all times constitute the holders of a majority in outstanding principal
amount of such Designated Senior Indebtedness in respect of any Designated
Senior Indebtedness.
"RESTRICTED SUBSIDIARY" of any Person means any Subsidiary of such Person
which at the time of determination is not an Unrestricted Subsidiary.
"SALE AND LEASEBACK TRANSACTION" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether owned
by the Company or any Restricted Subsidiary at the Issue Date or later acquired,
which has been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such Property.
"SECURITIES ACT" means the Securities Act of 1933, as amended, or any
successor statute or statutes thereto.
"SENIOR INDEBTEDNESS" means the principal of, premium, if any, and interest
(including any interest accruing subsequent to the filing of a petition of
bankruptcy at the rate provided for in the documentation with respect thereto,
whether or not such interest is an allowed claim under applicable law) on any
Indebtedness of the Company, whether outstanding on the Issue Date or thereafter
created, incurred or assumed, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness shall
not be senior in right of payment to the Notes. Without limiting the generality
of the foregoing, "Senior Indebtedness" shall also include the principal of,
premium, if any, interest (including any interest accruing subsequent to the
filing of a petition of bankruptcy at the rate provided for in the documentation
with respect thereto, whether or not such interest is an allowed claim under
applicable law) on, and all other amounts owing in respect of:
- all obligations (including guarantees thereof) of every nature of the
Company under the New Credit Facility, including, without limitation,
obligations to pay principal and interest, reimbursement obligations
under letters of credit, fees, expenses and indemnities,
110
114
- all Interest Swap Obligations (including guarantees thereof) and
- all obligations (including guarantees thereof) under Currency Agreements,
in each case whether outstanding on the Issue Date or thereafter incurred.
Notwithstanding the foregoing, "Senior Indebtedness" shall not include:
(a) any Indebtedness of the Company to a Subsidiary of the Company or
any Affiliate of the Company or any of such Affiliate's Subsidiaries (other
than an Affiliate which is also a lender or an Affiliate of a lender under
the New Credit Facility),
(b) Indebtedness to, or guaranteed on behalf of, any shareholder (other
than a shareholder which is also a lender or an Affiliate of a lender under
the New Credit Facility), director, officer or employee of the Company or
any Subsidiary of the Company (including, without limitation, amounts owed
for compensation),
(c) Indebtedness to trade creditors and other amounts incurred in
connection with obtaining goods, materials or services,
(d) Indebtedness represented by Disqualified Capital Stock,
(e) any liability for federal, state, local or other taxes owed or owing
by the Company,
(f) that portion of any Indebtedness incurred in violation of the
Indenture provisions set forth under "Limitation on Incurrence of
Additional Indebtedness" (but, as to any such obligation, no such violation
shall be deemed to exist for purposes of this clause (f) if the holder(s)
of such obligation or their representative and the Trustee shall have
received an officers' certificate of the Company to the effect that the
incurrence of such Indebtedness does not (or, in the case of revolving
credit indebtedness, that the incurrence of the entire committed amount
thereof at the date on which the initial borrowing thereunder is made would
not) violate such provisions of the Indenture),
(g) Indebtedness which, when incurred and without respect to any
election under Section 1111(b) of Title 11, United States Code, is without
recourse to the Company and
(h) any Indebtedness which is, by its express terms, subordinated in
right of payment to any other Indebtedness of the Company.
"SIGNIFICANT SUBSIDIARY," with respect to any Person, means any Restricted
Subsidiary of such Person that satisfies the criteria for a "Significant
Subsidiary" set forth in Rule 1.02(w) of Regulation S-X under the Exchange Act.
"SUBSIDIARY" means:
- any corporation of which the outstanding Capital Stock having at least a
majority of the votes entitled to be cast in the election of directors
under ordinary circumstances shall at the time be owned, directly or
indirectly, by such Person or
- any other Person of which at least a majority of the voting interest
under ordinary circumstances is at the time, directly or indirectly,
owned by such Person.
"UNRESTRICTED SUBSIDIARY" of any Person means:
- any Subsidiary of such Person that at the time of determination shall be
or continue to be designated an Unrestricted Subsidiary by the Board of
Directors of such Person in the manner provided below and
- any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors may designate any Subsidiary (including any newly
acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless
such Subsidiary owns any Capital Stock of, or owns or
111
115
holds any Lien on any property of, the Company or any other Subsidiary of the
Company that is not a Subsidiary of the Subsidiary to be so designated; provided
that:
- the Company certifies to the Trustee that such designation complies with
the "Limitation on Restricted Payments" covenant and
- each Subsidiary to be so designated and each of its Subsidiaries has not
at the time of designation, and does not thereafter, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly
liable with respect to any Indebtedness pursuant to which the lender has
recourse to any of the assets of the Company or any of its Restricted
Subsidiaries.
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary only if:
- immediately after giving effect to such designation, the Company is able
to incur at least $1.00 of additional Indebtedness (other than Permitted
Indebtedness) in compliance with the "Limitation on Incurrence of
Additional Indebtedness" covenant and
- immediately before and immediately after giving effect to such
designation, no Default or Event of Default shall have occurred and be
continuing.
Any such designation by the Board of Directors shall be evidenced to the Trustee
by promptly filing with the Trustee a copy of the Board Resolution giving effect
to such designation and an officers' certificate certifying that such
designation complied with the foregoing provisions.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the then outstanding aggregate principal amount of such Indebtedness
into
(2) the sum of the total of the products obtained by multiplying:
(a) the amount of each then remaining installment, sinking fund,
serial maturity or other required payment of principal, including
payment at final maturity, in respect thereof, by
(b) the number of years (calculated to the nearest one-twelfth) which
will elapse between such date and the making of such payment.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means any Restricted
Subsidiary of such Person of which all the outstanding voting securities (other
than in the case of a foreign Restricted Subsidiary, directors' qualifying
shares or an immaterial amount of shares required to be owned by other Persons
pursuant to applicable law) are owned by such Person or any Wholly Owned
Restricted Subsidiary of such Person.
BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the New Notes initially will be issued in the
form of one or more permanent global certificates in definitive, fully
registered form without interest coupons (the "Global Notes"). The Global Notes
will be deposited with the Trustee as custodian for the DTC and registered in
the name of a nominee of such depositary.
The Global Notes. We expect that pursuant to procedures established by
DTC:
- upon the issuance of the Global Notes, DTC or its custodian will credit,
on its internal system, the principal amount of Notes of the individual
beneficial interests represented by such Global Notes to the respective
accounts of persons who have accounts with such depositary and
- ownership of beneficial interests in the Global Notes will be shown on,
and the transfer of such ownership will be effected only through, records
maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests
of persons other than participants).
112
116
So long as DTC, or its nominee, is the registered owner or holder of the
Notes, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Notes represented by such Global Notes for all purposes
under the Indenture. No beneficial owner of an interest in the Global Notes will
be able to transfer that interest except in accordance with DTC's procedures, in
addition to those provided for under the Indenture with respect to the Notes.
Payments of the principal of, premium (if any) and interest on the Global
Notes will be made to DTC or its nominee, as the case may be, as the registered
owner of the Notes. None of the Company, the Trustee or any Paying Agent will
have any responsibility or liability for any aspect of the records relating to
or payments made on account of beneficial ownership interests in the Global
Notes or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interest.
We expect that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, and interest on the Global Notes, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Notes as
shown on the records of DTC or its nominee. We also expect that payments by
participants to owners of beneficial interests in the Global Notes held through
such participants will be governed by standing instructions and customary
practice, as is now the case with securities held for the accounts of customers
registered in the names of nominees for such customers. Such payments will be
the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in same day funds. If a holder requires physical delivery of a
certificated security for any reason, including to sell Notes to persons in
states that require physical delivery of the Notes, or to pledge such
securities, such holder must transfer its interest in the Global Notes, in
accordance with the normal procedures of DTC and with the procedures set forth
in the Indenture.
DTC has advised us that it will take any action permitted to be taken by a
holder of Notes (including the presentation of Notes for exchange as described
below) only at the direction of one or more participants to whose account the
DTC interests in the Global Notes are credited and only in respect of such
portion of the aggregate principal amount of Notes as to which such participant
or participants has or have given such direction. However, if there is an Event
of Default under the Indenture, DTC will exchange the Global Notes for
certificated securities, which it will distribute to its participants.
DTC has advised the Company as follows:
- DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code
and a "clearing agency" registered pursuant to the provisions of Section
17A of the Exchange Act;
- DTC was created to hold securities for its participants and facilitate
the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of
certificates;
- Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and certain other organizations; and
- Indirect access to the DTC system is available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Notes among participants of DTC, it is
under no obligation to perform such procedures and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
113
117
Certificated Securities. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Notes and we do not appoint a successor
depositary within 90 days, certificated securities will be issued in exchange
for the Global Notes.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. We have agreed that, starting on the Expiration Date and
ending on the close of business 180 days after the Expiration Date, we will make
this prospectus, as amended or supplemented, available to any broker-dealer for
use in connection with any such resale. In addition, until September , 1999,
all dealers effecting transactions in the New Notes may be required to deliver a
prospectus.
We will not receive any proceeds from any sales of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the exchange offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit of any such resale of New Notes and any
commissions or concessions received by such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, we will promptly send
additional copies of this prospectus and any amendment or supplement to this
prospectus to any broker-dealer that requests such documents in the Letter of
Transmittal. We have agreed to pay all expenses incident to the exchange offer
(including the expenses of one counsel for the holders of the Notes) other than
commissions or concessions of any brokers or dealers and will indemnify the
holders of the Notes (including any broker-dealers) against certain liabilities,
including liabilities under the Securities Act.
LEGAL MATTERS
The legality of the New Notes will be passed upon for us by Gibson, Dunn &
Crutcher LLP, Los Angeles, California.
EXPERTS
The consolidated financial statements of the Company as of October 31, 1997
and 1998 and for each of the years in the three year period ended October 31,
1998 are included in this prospectus in reliance upon the report of KPMG LLP,
independent certified public accountants, appearing elsewhere herein and upon
the authority of said firm as experts in accounting and auditing.
114
118
INDEX TO FINANCIAL STATEMENTS
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
Audited Consolidated Financial Statements
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets as of October 31, 1997 and
1998................................................... F-3
Consolidated Statements of Earnings for the years ended
October 31, 1996, 1997 and 1998........................ F-4
Consolidated Statements of Stockholders' Equity for the
years ended October 31, 1996, 1997 and 1998............ F-5
Consolidated Statements of Cash Flows for the years ended
October 31, 1996, 1997 and 1998........................ F-6
Notes to Consolidated Financial Statements................ F-7
Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of October 31,
1998 and January 31, 1999 (unaudited).................. F-20
Condensed Consolidated Statements of Operations
(unaudited) for the three months ended February 2, 1998
and January 31, 1999................................... F-21
Condensed Consolidated Statements of Stockholders' Equity
(Deficit) (unaudited) for the three months ended
January 31, 1999....................................... F-22
Condensed Consolidated Statements of Cash Flows
(unaudited) for the three months ended February 2, 1998
and January 31, 1999................................... F-23
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................ F-24
F-1
119
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Special Devices, Incorporated:
We have audited the accompanying consolidated balance sheets of Special
Devices, Incorporated and subsidiary as of October 31, 1998 and 1997, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the years in the three-year period ended October 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Special
Devices, Incorporated and subsidiary as of October 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended October 31, 1998, in conformity with generally accepted
accounting principles.
KPMG LLP
Los Angeles, California
December 9, 1998
F-2
120
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, OCTOBER 31,
1997 1998
----------- ------------
ASSETS
Current assets:
Cash...................................................... $ 2,415,335 $ 1,248,130
Marketable securities..................................... 6,750,000 --
Accounts receivable, net of allowance of $44,126 in 1997
and $385,109 in 1998 for doubtful accounts (Note 2).... 18,192,877 19,410,344
Inventories (Note 3)...................................... 14,554,614 16,609,014
Prepaid expenses.......................................... 503,430 545,834
Deferred income taxes (Note 6)............................ 991,000 1,366,000
----------- ------------
Total current assets.............................. 43,407,256 39,179,322
----------- ------------
Property, plant and equipment, at cost:
Land...................................................... 1,611,331 1,611,331
Building.................................................. 7,963,637 9,332,173
Machinery and equipment................................... 44,080,413 59,482,401
Furniture and fixtures.................................... 2,844,116 3,337,788
Transportation equipment.................................. 2,486,034 331,069
Leasehold improvements.................................... 3,314,332 3,928,569
Construction in progress (includes land and related costs
of $9,440,000 in 1997 and $25,562,000 in 1998)......... 17,942,985 38,236,428
----------- ------------
80,242,848 116,259,759
Less accumulated depreciation and amortization............ 23,974,540 31,488,641
----------- ------------
56,268,308 84,771,118
----------- ------------
Other assets................................................ 148,716 668,678
----------- ------------
$99,824,280 $124,619,118
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 4)................ $ 944,793 $ 2,109,562
Trade accounts payable.................................... 6,175,501 9,361,350
Accounts payable to related parties (Note 9).............. 1,471,748 269,727
Accrued payroll and benefits.............................. 1,929,420 2,161,240
Accrued expenses.......................................... 1,491,360 5,015,987
Income taxes payable (Note 6)............................. 1,257,872 4,590,183
----------- ------------
Total current liabilities......................... 13,270,694 23,508,049
Long-term debt, less current portion (Note 4)............... 2,056,766 416,125
Deferred income taxes (Note 6).............................. 3,140,000 3,415,000
----------- ------------
Total liabilities................................. 18,467,460 27,339,174
----------- ------------
Commitments and contingencies (Note 7)...................... -- --
Stockholders' equity (Note 5):
Preferred stock, $.01 par value. Authorized 2,000,000
shares; no shares issued or outstanding................ -- --
Common stock, $.01 par value. Authorized 20,000,000
shares; issued and outstanding 7,771,167 shares in 1997
and 7,809,801 shares in 1998........................... 77,712 78,098
Additional paid-in capital................................ 50,887,737 51,363,891
Retained earnings......................................... 30,391,371 45,837,955
----------- ------------
Total stockholders' equity........................ 81,356,820 97,279,944
----------- ------------
$99,824,280 $124,619,118
=========== ============
See accompanying notes to consolidated financial statements
F-3
121
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED OCTOBER 31,
--------------------------------------------
1996 1997 1998
------------ ------------ ------------
Net sales........................................ $104,482,025 $140,502,420 $170,537,769
Cost of sales (Note 9)........................... 84,327,787 112,553,611 131,610,049
------------ ------------ ------------
Gross profit................................... 20,154,238 27,948,809 38,927,720
------------ ------------ ------------
Operating expenses............................... 8,110,025 10,721,536 13,023,137
------------ ------------ ------------
Earnings from operations....................... 12,044,213 17,227,273 25,904,583
------------ ------------ ------------
Other (expense) income:
Interest expense............................... (364,992) (258,678) (155,996)
Interest income................................ 493,818 369,299 107,997
------------ ------------ ------------
Net other income (expense)..................... 128,826 110,621 (47,999)
------------ ------------ ------------
Earnings before income taxes................... 12,173,039 17,337,894 25,856,584
Income taxes (Note 6)............................ 4,725,000 6,660,000 10,410,000
------------ ------------ ------------
Net earnings................................... $ 7,448,039 $ 10,677,894 $ 15,446,584
============ ============ ============
Basic net earnings per share..................... $ .97 $ 1.39 $ 1.98
============ ============ ============
Weighted average shares outstanding.............. 7,664,275 7,697,522 7,797,429
============ ============ ============
Diluted net earning per share.................... $ 0.96 $ 1.37 $ 1.90
============ ============ ============
Weighted average shares and dilutive share
equivalents outstanding........................ 7,755,286 7,821,600 8,114,323
============ ============ ============
See accompanying notes to consolidated financial statements
F-4
122
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1996, 1997 AND 1998
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------- ----------- ----------- -------------
Balance at October 31,
1995....................... 7,655,076 $76,551 $49,711,881 $12,265,438 $62,053,870
Issuance of common stock on
exercise of stock
options.................... 20,459 205 199,169 -- 199,374
Net earnings................. -- -- -- 7,448,039 7,448,039
--------- ------- ----------- ----------- -----------
Balance at October 31,
1996....................... 7,675,535 $76,756 $49,911,050 $19,713,477 $69,701,283
Issuance of common stock on
exercise of stock
options.................... 95,632 956 976,687 -- 977,643
Net earnings................. -- -- -- 10,677,894 10,677,894
--------- ------- ----------- ----------- -----------
Balance at October 31,
1997....................... 7,771,167 $77,712 $50,887,737 $30,391,371 $81,356,820
Issuance of common stock on
exercise of stock
options.................... 38,634 386 476,154 -- 476,540
Net earnings................. -- -- -- 15,446,584 15,446,584
--------- ------- ----------- ----------- -----------
Balance at October 31,
1998....................... 7,809,801 $78,098 $51,363,891 $45,837,955 $97,279,944
========= ======= =========== =========== ===========
See accompanying notes to consolidated financial statements
F-5
123
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31,
------------------------------------------
1996 1997 1998
------------ ------------ ------------
Cash flows from operating activities:
Net earnings....................................... $ 7,448,039 $ 10,677,894 $ 15,446,584
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization................... 5,402,314 6,376,824 8,520,340
Deferred income tax provision................... 300,000 50,000 (100,000)
Changes in assets and liabilities:
Increase in accounts receivable................. (101,148) (5,529,647) (1,217,467)
(Increase) decrease in inventories.............. (1,059,097) 3,744,091 (2,054,400)
Increase in prepaid expenses.................... (102,139) (101,785) (42,404)
Decrease (increase) in other assets............. 183,000 53,334 (519,962)
(Decrease) increase in accounts payable,
accounts payable to related parties and other
accrued expenses.............................. (1,077,681) 3,987,089 5,740,275
Increase (decrease) in income taxes payable..... 1,864,189 (733,418) 3,332,311
------------ ------------ ------------
Net cash provided by operating activities.......... 12,857,477 18,524,382 29,105,277
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property, plant and equipment......... (11,117,856) (22,544,145) (38,523,150)
(Purchases) sales of marketable securities......... (2,000,000) 3,950,000 6,750,000
------------ ------------ ------------
Net cash used in investing activities.............. (13,117,856) (18,594,145) (31,773,150)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock............. 199,374 977,643 476,540
Net borrowings under revolving line of credit...... -- 750,000 1,300,000
Repayment of long term debt........................ (1,274,602) (1,835,123) (275,872)
------------ ------------ ------------
Net cash (used in) provided by financing
activities...................................... (1,075,228) (107,480) 1,500,668
------------ ------------ ------------
Net decrease in cash............................... (1,335,607) (177,243) (1,167,205)
Cash at beginning of year............................ 3,928,185 2,592,578 2,415,335
------------ ------------ ------------
Cash at end of year.................................. $ 2,592,578 $ 2,415,335 $ 1,248,130
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest (net of amounts capitalized)........... $ 354,938 $ 269,004 $ 156,355
Income taxes.................................... 2,437,500 7,200,418 7,177,689
Non-cash financing activities:
Assignment of note payable...................... $ -- $ 530,000 $ --
Long term debt assumed by buyer on sale of
aircraft...................................... $ -- $ -- $ 1,500,000
============ ============ ============
See accompanying notes to consolidated financial statements
F-6
124
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of Special
Devices, Incorporated, a Delaware corporation, and its wholly owned subsidiary,
together collectively described as "the Company." All material intercompany
accounts and transactions have been eliminated.
Revenue Recognition
The Company has two operating divisions. The Automotive Products Division,
organized in 1989, manufactures products, to customer specifications, under
standard purchase orders. Sales are recognized when products are shipped. The
Aerospace Division manufactures products under fixed price, long-term contracts
directly for the Department of Defense, their prime contractors and commercial
companies. The contracts vary in length, but are generally completed within 12
to 24 months. Sales under long-term production contracts are recognized as units
are shipped or, in some cases, when accepted by the customer; sales under
significant engineering contracts are recognized under the percentage completion
method.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities and the reported amounts of
income and expenses for the periods presented. Actual results could differ from
those estimates.
Fair Value of Financial Instruments
The carrying amounts of the Company's cash, trade accounts receivable and
all current liabilities approximate the fair values due to the relatively short
maturities of these instruments.
Marketable securities consist of a tax-exempt mutual fund which is stated
at fair value based on market quotes. Accordingly, the cost basis of the
securities approximates the fair value.
The carrying amounts of the Company's long-term debt approximate the fair
value due to variable interest rates which approximate market rates associated
with the notes.
Inventories
Inventories, other than inventoried costs relating to long-term contracts,
are stated at the lower of cost (principally first-in, first-out) or market.
Inventoried costs relating to long-term contracts and programs are stated at the
actual production cost, including overhead incurred to date reduced by amounts
identified with revenue recognized on units delivered. Inventoried costs
relating to long-term contracts are further reduced by any amounts in excess of
estimated realizable value. The costs attributed to units delivered under
long-term contracts are based on the estimated average cost of all units
expected to be produced under existing contracts.
In accordance with industry practice, inventories are classified as current
assets although inventories may include amounts relating to contracts and
programs having production cycles longer than one year.
Property and Equipment
Property and equipment are recorded at cost. The cost of maintenance and
repairs is charged against results of operations as incurred. Depreciation is
charged against results of operations using the straight-line
F-7
125
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
method over the estimated service lives of the related assets. The principal
lives used in determining depreciation rates of various assets are as follows:
Building.......................................... 25 years
Machinery and equipment........................... 7.5 years
Furniture and fixtures............................ 5 years
Transportation equipment.......................... 4 years
Leasehold improvements are amortized over the lesser of the estimated
service life or the remaining life of the lease. Upon sale or retirement of the
depreciable property, the related cost and accumulated depreciation are
eliminated from the accounts and gains or losses are reflected in earnings.
Interest costs incurred during the period of construction of plant and
equipment are capitalized. The interest costs capitalized were $101,000 and
$112,600 in Fiscal 1997 and 1998, respectively, and no amounts of interest were
capitalized in Fiscal 1996.
Net Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No.
128 was adopted at the beginning of the Company's 1998 fiscal year and replaced
the calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to fully diluted earnings
per share. Earnings per share amounts for the prior periods have been restated
to conform to SFAS No. 128 requirements.
Basic net earnings per share is computed by dividing net earnings by the
weighted average number of common stock outstanding during the period. Diluted
net earnings per share is computed by dividing net earnings by the weighted
average number of common stock and dilutive stock equivalents outstanding during
the period.
The following table sets forth the computation of basic and diluted net
earnings per share:
1996 1997 1998
---------- ----------- -----------
Numerator:
Net earnings....................... $7,448,039 $10,677,894 $15,446,584
========== =========== ===========
Denominator:
Denominator for basic net earnings
per share --
Weighted average shares
outstanding................... 7,664,275 7,697,522 7,797,429
Effect of dilutive securities:
Employee stock options........ 91,011 124,078 316,894
---------- ----------- -----------
Denominator for dilutive
earnings per share -- weighted
average shares and dilutive
potential shares
outstanding................... 7,755,286 7,821,600 8,114,323
========== =========== ===========
Income Taxes
The Company accounts for income taxes under the asset and liability method
of accounting for income taxes whereby deferred income taxes are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
F-8
126
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effect on deferred taxes of a change in tax rates is recognized in income in
the period that includes the enactment date.
Impairment of Long-Lived Assets
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," on
November 1, 1997. SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount of fair value less costs to
sell. Adoption of SFAS No. 121 did not have a material impact on the Company's
financial position, results of operations, or liquidity.
Comprehensive Income
On November 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. The statement requires only additional disclosures in the
financial statements; it does not affect the Company's financial position or
results of operations. There is no difference between net earnings and
comprehensive income for the Company.
Segments of an Enterprise and Related Information
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. The Company believes that its adoption of SFAS
No. 131 will not have a material impact on its financial reporting.
Startup Activities
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-5, "Reporting on the Cost of Startup
Activities." This SOP requires that costs incurred during start-up activities,
including organization costs, be expensed as incurred. SOP 98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998. Initial
application of the SOP should be as of the beginning of the fiscal year in which
the SOP is first adopted and should be reported as a cumulative effect of a
change in accounting principles. We believe that the adoption of SOP 98-5 will
not have a material impact on our consolidated financial statements.
Derivative Instruments and Hedging Activities
In 1998, the FASB issued Statement of Financial Statements No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
modifies the accounting for derivative and hedging activities and is effective
for fiscal years beginning after December 15, 1999. We believe that the adoption
of SFAS No. 133 will not have a material impact on our financial reporting.
Stock-Based Compensation
Prior to November 1, 1997, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to
F-9
127
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Employees," and related interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. On November 1, 1997, the Company adopted SFAS
No. 123. "Accounting for Stock-Based Compensation," which permits entities to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma earnings per share disclosures for employee stock options
grants made in 1995 and future years as if the fair-value-based method defined
in SFAS No. 123 had been applied. The Company has elected to continue to apply
the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
2. ACCOUNTS RECEIVABLE
Accounts receivable are as follows:
OCTOBER 31,
--------------------------
1997 1998
----------- -----------
Commercial customers...................... $11,897,328 $13,591,228
U.S. Government........................... 1,295,349 2,273,366
U.S. Government contractors............... 5,044,326 3,930,859
----------- -----------
18,237,003 19,795,453
Less allowance for doubtful accounts...... 44,126 385,109
----------- -----------
$18,192,877 $19,410,344
=========== ===========
The activity relating to the allowance for doubtful accounts was as
follows:
Balance at October 31, 1995...................... $ 216,604
Additions charged to expense..................... 81,000
Write-offs and other............................. (141,645)
---------
Balance at October 31, 1996...................... 155,959
Additions charged to expense..................... 208,000
Write-offs....................................... (319,833)
---------
Balance at October 31, 1997...................... $ 44,126
Additions charged to expense..................... 510,000
Write-offs....................................... (169,017)
---------
Balance at October 31, 1998...................... $ 385,109
=========
3. INVENTORIES
Inventories and inventoried costs relating to long-term contracts are
classified as follows:
OCTOBER 31,
--------------------------
1997 1998
----------- -----------
Raw materials and component parts......... $ 4,840,722 $ 6,294,435
Work in process........................... 3,104,313 3,677,720
Finished goods............................ 1,627,523 1,650,654
Inventoried costs relating to long-term
contracts, net of amounts attributed to
revenues recognized to date............. 4,982,056 6,810,036
----------- -----------
14,554,614 18,432,845
Less progress payments related to
long-term contracts..................... -- 1,823,831
----------- -----------
$14,554,614 $16,609,014
=========== ===========
F-10
128
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventoried costs relate to costs of products currently in progress. There
are no significant inventoried costs relating to the production costs of
delivered units over the estimated average cost of all units expected to be
produced.
4. LONG-TERM DEBT
Long-term debt consists of the following:
OCTOBER 31,
------------------------
1997 1998
---------- ----------
Bank term notes............................. $ 530,530 $ 475,687
Bank revolver............................... 750,000 2,050,000
Finance company............................. 1,713,641 --
Other notes................................. 7,388 --
---------- ----------
3,001,559 2,525,687
Less current portion...................... 944,793 2,109,562
---------- ----------
$2,056,766 $ 416,125
========== ==========
The Company has a Credit Agreement with a bank, which was renewed in April
1998, and expires May 1, 2000. Borrowings under the Credit Agreement bear
interest at the bank's Reference Rate less 0.25%, or at the Company's option, at
LIBOR plus 0.75%. The Credit Agreement contains two revolving credit facilities.
The Company may borrow up to $10,000,000 under Facility No. 1, and may borrow up
to $12,000,000 under Facility No. 2. Facility No. 1 may be used for commercial
letters of credit not to exceed a total of $500,000 and for standby letters of
credit not to exceed $6,000,000 in the aggregate, which reduce the amount
available under Facility No. 1 when incurred. In addition, the Company has the
option of converting outstanding borrowings, in increments of not less than
$1,000,000, under Facility No. 2 to a 5-year term loan. Any amounts converted to
term debt under Facility No. 1 will bear interest at a fixed rate equal to the
bank's long-term interest rate in effect at the time of such conversion. At
October 31, 1997 and 1998, $750,000 and $2,050,000, respectively, were
outstanding under Facility No. 2, and no amounts were outstanding under Facility
No. 1. In addition, at October 31, 1998, the Company had outstanding
approximately $3,518,000 of performance bonds secured by standby letters of
credit related to development of new facilities (see Note 8). The Credit
Agreement contains certain covenants. The Company was in violation of certain of
these covenants for the period ended October 31, 1998. The Company has received
a waiver of such violations from the lender thereunder.
The Company's wholly owned subsidiary, Scot, Incorporated, has a term loan
with a bank, which was renewed in August, 1996, secured by certain real property
of Scot. The principal balance outstanding under the renewed loan at October 31,
1998, was $475,687. The loan is being amortized with monthly payments of
approximately $7,800, including interest, adjusted monthly, at 1.9% over the
bank's LIBOR rate (5.69% at October 31, 1998). Any unpaid principal is due on
August 1, 2001.
The finance company note was secured by related equipment. The note was
being amortized over 12 years with interest at prime plus one-half percent
through November 2006, when the note would have been fully amortized. Monthly
payments were approximately $23,100. The related equipment was sold in October
1998 and the note was paid. The unpaid balance at October 31, 1997 was
$1,713,641.
The scheduled principal payments of long-term debt outstanding at October
31, 1998 are as follows:
YEAR ENDING OCTOBER 31,
- -----------------------
1999.............................................. $ 59,562
2000.............................................. 64,345
2001.............................................. 351,780
F-11
129
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. STOCKHOLDERS' EQUITY
Preferred Stock
The Company is authorized to issue 2,000,000 shares of Preferred Stock,
$.01 par value. Shares of Preferred Stock may be issued from time to time in one
or more series and the Board of Directors, without further stockholder approval,
is authorized to fix the rights and terms, including dividends and liquidation
preferences and any other rights to each such series of Preferred Stock. At
October 31, 1997 and 1998, no shares of Preferred Stock were issued or
outstanding.
Stock Options and Grants
The Company's Amended and Restated 1991 Stock Incentive Plan (the "Plan")
is administered by a committee of the Board of Directors which determines the
amount, type, terms and conditions of the awards made pursuant to the Plan. The
Plan provides for issuance of restricted stock, grants of incentive and non-
qualified stock options, stock appreciation rights and performance share awards.
There are 560,000 shares of Common Stock reserved for issuance under the Plan.
Pursuant to the Plan, no option may be granted that is exercisable in less
than six months or more than ten years from the grant date. Certain events,
including a change in control of the Company, may accelerate exercise dates,
cause forfeiture of all shares of any restricted stock and terminate all
conditions relating to the realization of any performance awards.
During Fiscal 1998, 25,500 options were granted and 38,634 were exercised
at prices ranging from $9.50 to $18.00 per share. At October 31, 1998, there
were options outstanding to purchase 232,072 shares, which options were
exercisable with respect to 119,212 shares.
In December 1996, the Company's Stock Option Committee authorized stock
option grants to certain employees via a special grant which is not part of the
1991 Stock Option Plan. Under terms of this authorization, options to purchase
130,000 shares were granted which vest ratably over 5 years from the grant date,
and options to purchase 312,000 shares vest ratably over a period ranging from 5
to 8 years from the grant date. The grants for the latter options contain
vesting acceleration clauses during the first 36 months of the option; the
acceleration clauses are contingent upon the price of the Company's Common Stock
attaining a certain level, and upon the Company attaining certain earnings
levels. As of October 31, 1998, options to purchase 312,000 shares have vested
under the acceleration clauses, and options to purchase 26,000 shares have
vested due to the passage of time. The options were granted at the fair market
value of the stock on the grant date, which was $17.00 per share.
The Company adopted the requirements of SFAS No. 123, "Accounting for Stock
Based Compensation" in 1997. As permitted by SFAS No. 123, the Company has
elected to account for compensation expense pursuant to the provisions of APB
Opinion No. 25, "Accounting for Stock Issued to Employees." In accordance with
APB Opinion No. 25, no compensation expense has been charged to earnings in any
of the three years ended October 31, 1998.
Had compensation cost for the Company's stock-based compensation plan been
determined consistent with SFAS No. 123, the Company's net income and per share
would have been reduced to the pro forma amounts indicated below:
1997 1998
----------- -----------
Net Income......................... As Reported $10,677,894 $15,446,584
Pro forma 9,415,397 14,547,778
Basic earnings per share........... As Reported $1.39 $1.98
Pro Forma $1.22 $1.87
Diluted earnings per share......... As Reported $1.37 $1.90
Pro Forma $1.20 $1.79
F-12
130
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1997 and 1998, respectively: risk-free interest rates of 6.12%
and 5.68%; dividend yields of 0% and 0%; volatility factors of the expected
market price of the Company's common stock of 47.30% and 45.26%, and a
weighted-average expected life of the option of 6 years.
Stock option activity for the three years ended October 31, 1998 was as
follows:
WEIGHTED WEIGHTED
1991 STOCK AVERAGE AVERAGE
OPTION PLAN EXERCISE PRICE SPECIAL GRANT EXERCISE PRICE
----------- -------------- ------------- --------------
Shares authorized................. 560,000 442,000
======= =======
Shares under option:
Outstanding at October 31, 1995... 247,507 --
Granted......................... 117,000 $17.63 -- $ --
Exercised....................... 20,460 $ 9.75 -- $ --
Forfeited....................... 24,337 $11.54 -- $ --
-------
Shares under option:
Outstanding at October 31, 1996... 319,710 --
Granted......................... 33,000 $17.07 442,000 $17.00
Exercised....................... 95,632 $10.85 -- $ --
Forfeited....................... 10,672 $12.54 -- $ --
------- -------
Shares under option:
Outstanding at October 31, 1997... 246,406 442,000
Granted......................... 25,500 $23.80 $ --
Exercised....................... 38,634 $12.30 -- $ --
Forfeited....................... 1,200 $17.75 $ --
-------
Outstanding at October 31, 1998... 232,072 442,000
======= =======
Weighted average fair value of
options granted during the year:
1996............................ $ 9.38 $ --
1997............................ $ 9.19 $ 9.16
1998............................ $12.32 $ --
Options exercisable:
At October 31, 1996............. 149,200 --
At October 31, 1997............. 129,209 58,000
At October 31, 1998............. 119,212 338,000
The following table summarizes information about stock options outstanding
at October 31, 1998:
OPTIONS OUTSTANDING
----------------------------------------- OPTIONS EXERCISABLE
WEIGHTED AVERAGE ------------------------------------
AVERAGE EXERCISABLE NUMBER --------------------- NUMBER WEIGHTED
AT RANGE OF OUTSTANDING AT REMAINING EXERCISE EXERCISABLE AT AVERAGE EXERCISE
EXERCISE PRICE OCTOBER 31, 1998 LIFE PRICE OCTOBER 31, 1998 PRICE
------------------- ---------------- --------- -------- ---------------- ----------------
$ 6.50 - 10.00............ 77,905 4.87 $ 9.56 77,905 $ 9.56
$13.75 - 17.75............ 567,167 7.92 $17.12 373,307 $17.06
$18.00 - 24.75............ 29,000 8.73 $23.11 6,000 $18.67
------- -------
674,072 7.60 $10.14 457,212 $15.80
======= =======
F-13
131
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
The provisions for income taxes consist of the following for each
respective fiscal year ended October 31:
1996 1997 1998
---------- ---------- -----------
Current:
Federal............................. $3,558,000 $5,343,000 $ 8,492,000
State............................... 867,000 1,267,000 2,018,000
---------- ---------- -----------
$4,425,000 $6,610,000 $10,510,000
========== ========== ===========
Deferred:
Federal............................. $ 279,000 $ 77,000 $ (96,000)
State............................... 21,000 (27,000) (4,000)
---------- ---------- -----------
$ 300,000 $ 50,000 $ (100,000)
========== ========== ===========
Total:
Federal............................. $3,837,000 $5,420,000 $ 8,396,000
State............................... 888,000 1,240,000 2,014,000
---------- ---------- -----------
$4,725,000 $6,660,000 $10,410,000
========== ========== ===========
Temporary differences which give rise to deferred tax assets and
liabilities are as follows:
OCTOBER 31, OCTOBER 31,
1997 1998
----------- -----------
Deferred tax liabilities-non-current:
Depreciation...................................... $3,140,000 $3,415,000
---------- ----------
Deferred tax assets-current:
Allowance for doubtful accounts................... 22,000 117,000
Inventory......................................... 506,000 472,000
Vacation.......................................... 445,000 451,000
State taxes....................................... 18,000 326,000
---------- ----------
991,000 1,366,000
---------- ----------
Net deferred tax liability.......................... $2,149,000 $2,049,000
========== ==========
Management believes that it is more likely than not that future operations
will generate sufficient taxable income to realize the deferred tax assets.
The provisions for income taxes for the years ended October 31, 1996, 1997
and 1998 differ from the provisions that would have resulted by applying the
Federal statutory rates during such periods to the earnings before income taxes.
The reasons for these differences are as follows:
1996 1997 1998
---------- ---------- -----------
Income taxes at Federal rate.......... $4,139,000 $5,522,000 $ 9,050,000
State income taxes.................... 675,000 806,000 1,312,000
Other................................. (89,000) 332,000 48,000
---------- ---------- -----------
$4,725,000 $6,660,000 $10,410,000
========== ========== ===========
F-14
132
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
Leases
Land and Buildings
The Company is obligated under a month-to-month operating lease for the
property on which the Company's Newhall facility is located. This lease is with
a partnership which is composed of certain stockholders of the Company, one of
which is an officer of the company. Monthly rental expense as of October 31,
1998 was $43,706 per month with annual increases equal to any changes in the
Consumer Price Index.
In May 1997, the Company signed a 7-year lease for an approximate 25,000
square foot building in Moorpark, California, for its glass-sealing division.
Monthly rental expense as of October 31, 1998 was $13,208 per month with annual
increases equal to the change in the Consumer Price Index.
Other Operating Leases
The Company also has several non-cancelable operating leases, primarily for
transportation equipment and temporary office units, that expire through August,
1998. Rental expense for these operating leases for each of the fiscal years
ended October 31, 1996, 1997 and 1998 were $114,900, $286,000 and $236,065,
respectively.
Future minimum lease payments under non-cancelable operating leases are as
follows:
Year ending October 31,
- -------------------------------------------------
1999........................................... $ 232,049
2000........................................... 217,617
2001........................................... 205,840
2002........................................... 198,606
2003........................................... 172,439
2004........................................... 118,827
----------
Total minimum lease payments........... $1,145,378
==========
Other
The Company had commitments at October 31, 1998, to acquire capital
equipment, at cost aggregating approximately $3,071,000, primarily for
production and other support equipment required for the increased operations of
the Automotive Products Division. In addition, in order to improve manufacturing
efficiencies and to provide facilities for growth, the Company purchased in
October 1996, approximately 280 acres of land in the City of Moorpark, located
in Ventura County, north of Los Angeles, where the Company is currently building
new facilities. Total cost of the project is estimated at $32,500,000 of which
$25,562,000 had been spent at October 31, 1998 and is included in construction
in progress in the accompanying consolidated balance sheet. The Company
anticipates spending approximately $7,000,000 in fiscal year 1999 to complete
this project. The Company plans to sell two commercial lots being developed as
part of this project, the proceed of which are expected to reduce the net
project cost to approximately $27,000,000. The Company has committed to complete
the building construction, the total cost of which is estimated to be
approximately $7,000,000.
Litigation
The Company is a defendant in pending claims and lawsuits arising in the
normal course of business. In the opinion of the Company's management, after
consultation with counsel, these matters are not expected to have a material
adverse effect upon the financial statements taken as a whole.
F-15
133
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. EMPLOYEE BENEFIT PLANS
The Company supports a 401(k) plan that provides eligible employees the
opportunity to make tax deferred contributions to a retirement trust account in
amounts up to 15% of their gross wages. The Company can elect to make matching
contributions in amounts that can change from year to year. During the last
three fiscal years the Company matched 30% of the employees deferral up to the
first 5% of each participating employee's deferral. Employees vest immediately
in the Company's matching contributions. The Company's matching contributions
aggregated $221,400, $242,300 and $288,235 in 1996, 1997, and 1998,
respectively.
9. RELATED PARTY TRANSACTIONS
The Company purchased materials from two corporations owned by one of its
principal stockholders. During the years ended October 31, 1996, 1997 and 1998,
$2,361,500, $3,460,100 and $720,156 respectively, of materials were purchased
from such stockholder's corporations. At October 31, 1997 and 1998, $381,200 and
$269,727, respectively, were owed to the corporations owned by this principal
stockholder.
During 1990, the same principal stockholder of the Company acquired a
significant stockholding in the parent company of a corporation that supplies
materials to the Company. During the years ended October 31, 1996 and 1997,
$12,768,500 and, $11,464,400, respectively, of materials were purchased from
such corporation. At October 31, 1997, $1,090,548, was due to this corporation.
In January 1997, the principal stockholder sold his interest in this
corporation.
10. MAJOR CUSTOMERS
Sales to customers, in excess of 10% of net sales during any of the past
three years, as a percentage of net sales, were as follows:
1996 1997 1998
---- ---- ----
Automotive:
TRW, Incorporated.................................... 59.7% 49.1% 39.7%
Autoliv.............................................. -- 20.6% 24.9%
ARC.................................................. -- -- 11.3%
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for 1997 and 1998 (dollars in thousands, except per share data):
QUARTER ENDED
------------------------------------------------------------
FEBRUARY 2 MAY 4 AUGUST 3 OCTOBER 31 FULL YEAR
---------- ------- -------- ---------- ---------
1997
Net sales............................. $27,537 $32,792 $36,970 $43,203 $140,502
Gross profit.......................... 5,297 6,391 7,094 9,167 27,949
Earnings from operations.............. 3,071 3,932 4,543 5,681 17,227
Net earnings.......................... 1,914 2,462 2,795 3,507 10,678
Basic net earnings per share.......... $ .25 $ .32 $ .36 $ .46 $ 1.39
Diluted net earnings per share........ $ .25 $ .32 $ .36 $ .44 $ 1.37
F-16
134
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
QUARTER ENDED
------------------------------------------------------------
FEBRUARY 1 MAY 3 AUGUST 2 OCTOBER 31 FULL YEAR
---------- ------- -------- ---------- ---------
1998
Net sales............................. $40,732 $45,114 $43,400 $41,292 $170,538
Gross profit.......................... 8,209 10,146 10,503 10,070 38,928
Earnings from operations.............. 5,546 6,944 7,305 6,110 25,905
Net earnings.......................... 3,387 4,048 4,394 3,618 15,447
Basic net earnings per share.......... $ .43 $ .52 $ .56 $ .46 $ 1.98
Diluted net earnings per share........ $ .42 $ .50 $ .54 $ .44 $ 1.90
12. INDUSTRY SEGMENT INFORMATION
The Company operates primarily in two industry segments -- aerospace and
automotive. In the aerospace industry, the Company produces pyrotechnic devices
under long-term contracts for the Department of Defense and their prime
contractors. In the automotive industry, the Company produces air bag initiators
under trade terms for commercial companies. The Company has a multi-year
agreement to supply its largest customer that expires in 2000 and a multi-year
agreement to supply its second largest customer that expires in 1999.
Future changes in federal regulations, the rate of implementation of new
applications for air bags and initiators and the rate of sales of new
automobiles could adversely affect the success of the Automotive Products
Division. The Aerospace Division's reliance upon defense programs has inherent
risks. Some of these risks include uncertain economic conditions, dependence on
Congressional appropriations and administrative allotment of funds, changes in
government policies that reflect military and political developments, and other
facts characteristic of the defense industry.
Each division is allocated administrative operating expenses incurred by
the Company (which are not attributable to a particular division) on an
equitable basis to fairly reflect the benefit received by each operating
division. In Fiscal 1996 the allocation was made approximately equally to each
division. In Fiscal 1997, the allocation was made at 35% to the Aerospace
Division and 65% to the Automotive Products Division. In Fiscal 1998, the
allocation was made at 40% to the Aerospace Division and 60% to the Automotive
Products Division. Administrative operating expenses amounted to approximately
$2,704,000, $3,874,000 and $3,928,000 in Fiscal 1996, 1997 and 1998,
respectively.
The Company operates entirely within the United States and has no
intersegment sales. Corporate assets are primarily cash, prepaids and other
assets.
F-17
135
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Financial information for these segments is summarized in the table below:
1996 1997 1998
------------ ------------ ------------
Net sales:
Automotive Products............ $ 80,235,225 $111,930,660 $135,234,636
Aerospace...................... 24,246,800 28,571,760 35,303,133
------------ ------------ ------------
Total net sales........ $104,482,025 $140,502,420 $170,537,769
============ ============ ============
Earnings from operations:
Automotive Products............ $ 8,244,332 $ 13,648,127 $ 18,491,367
Aerospace...................... 3,799,881 3,579,146 7,413,216
------------ ------------ ------------
Total earnings from
operations........... $ 12,044,213 $ 17,227,273 $ 25,904,583
============ ============ ============
Depreciation and amortization:
Automotive Products............ $ 4,623,005 $ 5,593,108 $ 7,601,009
Aerospace...................... 429,809 518,188 592,417
Corporate...................... 349,500 265,528 326,914
------------ ------------ ------------
Total depreciation and
amortization......... $ 5,402,314 $ 6,376,824 $ 8,520,340
============ ============ ============
Capital expenditures:
Automotive Products............ $ 10,511,449 $ 10,911,242 $ 21,204,608
Aerospace...................... 346,367 680,962 1,269,708
Corporate...................... 260,040 10,421,941 16,048,834
------------ ------------ ------------
Total capital
expenditures......... $ 11,117,856 $ 22,014,145 $ 38,523,150
============ ============ ============
Identifiable assets:
Automotive Products............ $ 54,658,384 $ 53,996,681 $ 69,295,100
Aerospace...................... 14,445,201 18,422,308 21,736,616
Corporate...................... 17,055,610 27,405,291 33,587,402
------------ ------------ ------------
Total identifiable
assets............... $ 86,159,195 $ 99,824,280 $124,619,118
============ ============ ============
13. SUBSEQUENT EVENT (UNAUDITED)
On June 19, 1998, the Company entered into an agreement and plan of merger
with SDI Acquisition Corp. ("Acquisition"), an affiliate of J.F. Lehman &
Company (as subsequently amended, the "Merger Agreement") and a guaranty
agreement with J.F. Lehman Equity Investors L.P. ("JFL Equity"). Acquisition
will acquire all of the Company's outstanding common stock at $34.00 per share,
excluding certain shares and options held by certain members of management and
certain shareholders of the Company, and JFL Equity will guarantee certain
aspects of the transaction. This transaction was consumated on December 15,
1998.
In connection with the Merger Agreement, the Company issued $100,000,000
aggregate principal amount of its 11 3/8% Senior Subordinated Notes due 2008
pursuant to an offering exempt from registration under the Securities Act of
1933. The notes are unsecured obligations of the Company. The notes are fully
and unconditionally guaranteed, jointly and severally, on an unsecured, senior
subordinated basis by the Company's only wholly owned subsidiary, Scot,
Incorporated (the "Subsidiary Guarantor").
In connection with the Recapitalization, the Company entered into the New
Credit Facility, which provides for a Revolving Credit Facility of $25.0 million
and a $70.0 million Senior Term Loan.
F-18
136
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SCOT, INCORPORATED
Sections 13 and 15(d) of the Securities Exchange Act of 1934 require
presentation of the following audited summarized financial information of the
Subsidiary Guarantor. The Company has elected not to present separate financial
statements and other disclosures concerning the Subsidiary Guarantor because
management believes such information is not material to investors. There are no
significant contractual restrictions on distributions from the Subsidiary
Guarantor to the Company.
FISCAL YEAR ENDED OCTOBER 31,
-----------------------------------------
1996 1997 1998
----------- ----------- -----------
INCOME STATEMENT
Net Sales........................................... $10,574,130 $11,657,787 $17,271,753
Gross Profit........................................ 5,225,681 4,960,828 8,929,586
Income from continuing operations................... 3,085,298 2,258,896 4,704,166
Net income.......................................... 1,887,731 1,391,187 2,800,573
BALANCE SHEET (AS OF END OF PERIOD)
Current Assets...................................... $ 6,510,920 $ 6,687,854 $ 6,747,964
Non-current Assets.................................. 3,144,654 2,997,795 3,413,881
Current Liabilities................................. 3,414,910 1,311,995 3,124,766
Non-current Liabilities............................. 529,596 475,290 416,125
F-19
137
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
OCTOBER 31, JANUARY 31,
1998 1999
------------ -------------
(UNAUDITED)
ASSETS
Current assets:
Cash...................................................... $ 1,248,130 $ 87,681
Accounts receivable, net of allowance of $385,109 at
October 31, 1998 and $81,734 at January 31, 1999 for
doubtful accounts (Note 3)............................. 19,410,344 16,174,161
Inventories (Note 4)...................................... 16,609,014 18,974,334
Prepaid expenses.......................................... 545,834 2,769,613
Deferred income taxes (Note 6)............................ 1,366,000 1,366,000
------------ -------------
Total current assets.............................. 39,179,322 39,371,789
------------ -------------
Property, plant and equipment, at cost:
Land...................................................... 1,611,331 1,611,331
Buildings................................................. 9,332,173 9,351,991
Machinery and equipment................................... 59,482,401 61,842,197
Furniture and fixtures.................................... 3,337,788 3,443,138
Transportation equipment.................................. 331,069 331,069
Leasehold improvements.................................... 3,928,569 4,288,513
Construction in progress (includes land and related costs
of $25,562,000 at October 31, 1998 and $27,915,000 at
January 31, 1999)...................................... 38,236,428 42,316,758
------------ -------------
116,259,759 123,184,997
Less accumulated depreciation............................. 31,488,641 34,469,400
------------ -------------
84,771,118 88,715,597
------------ -------------
Other assets................................................ 668,678 8,823,504
------------ -------------
$124,619,118 $ 136,910,890
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt (Note 5)................ $ 2,109,562 $ 1,625,000
Trade accounts payable.................................... 9,361,350 10,976,418
Accounts payable to related parties....................... 269,727 227,053
Accrued payroll and benefits.............................. 2,161,240 2,199,399
Accrued expenses.......................................... 5,015,987 3,584,664
Income taxes payable (Note 6)............................. 4,590,183 --
------------ -------------
Total current liabilities......................... 23,508,049 18,612,534
Long-term debt, less current portion (Note 5)............... 416,125 169,125,000
Deferred income taxes (Note 6).............................. 3,415,000 3,415,000
------------ -------------
Total liabilities................................. 27,339,174 191,152,534
------------ -------------
Commitments and contingencies (Note 7)...................... -- --
Redeemable common stock..................................... -- 25,374,996
Stockholders' equity (deficit):
Preferred stock, $.01 par value. Authorized 2,000,000
shares; no shares issued or outstanding................ -- --
Common stock, $.01 par value. Authorized 20,000,000
shares; issued and outstanding 7,809,801 shares at
October 31, 1998 and 3,706,889 shares at January 31,
1999................................................... 78,098 29,716
Additional paid-in capital................................ 51,363,891 73,603,215
Retained earnings (accumulated deficit)................... 45,837,955 (153,249,571)
------------ -------------
Total net stockholders' equity (deficit).......... 97,279,944 (79,616,640)
------------ -------------
$124,619,118 $ 136,910,890
============ =============
See accompanying notes to condensed consolidated financial statements
F-20
138
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS -- UNAUDITED
THREE MONTHS ENDED
---------------------------
FEBRUARY 1, JANUARY 31,
1998 1999
----------- ------------
Net sales................................................... $40,732,373 $ 37,715,781
Cost of sales............................................... 32,523,427 30,723,875
----------- ------------
Gross profit.............................................. 8,208,946 6,991,906
----------- ------------
Operating expenses.......................................... 2,656,944 2,576,347
Recapitalization costs...................................... -- 15,637,389
----------- ------------
Total operating expenses.................................. 2,656,944 18,213,736
----------- ------------
Earnings (loss) from operations........................ 5,552,002 (11,221,830)
----------- ------------
Other income (expense):
Interest income........................................... 66,309 778
Interest expense.......................................... (50,487) (2,341,237)
Other..................................................... (5,846) (116,258)
----------- ------------
Net other income (expense)............................. 9,976 (2,456,717)
----------- ------------
Earnings (loss) before income taxes......................... 5,561,978 (13,678,547)
Income taxes................................................ 2,175,000 (3,300,000)
----------- ------------
Net earnings (loss).................................... $ 3,386,978 $(10,378,547)
=========== ============
See accompanying notes to condensed consolidated financial statements
F-21
139
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY (DEFICIT) -- UNAUDITED
FOR THE THREE MONTHS ENDED JANUARY 31, 1999
RETAINED NET
COMMON STOCK ADDITIONAL EARNINGS STOCKHOLDERS'
--------------------- PAID-IN (ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT) (DEFICIT)
---------- -------- ----------- ------------- -------------
Balance at October 31,
1998...................... 7,809,801 $ 78,098 $51,363,891 $ 45,837,955 $ 97,279,944
Record recapitalization
transaction............... (3,367,618) (41,029) 22,614,324 (163,716,336) (141,143,041)
Record redeemable common
stock..................... (735,294) (7,353) -- (24,992,643) (24,999,996)
Accreted put premium on
redeemable common stock... -- -- (375,000) -- (375,000)
Net loss.................... -- -- -- (10,378,547) (10,378,547)
---------- -------- ----------- ------------- -------------
Balance at January 31,
1999...................... 3,706,889 $ 29,716 $73,603,215 $(153,249,571) $ (79,616,640)
========== ======== =========== ============= =============
See accompanying notes to condensed consolidated financial statements
F-22
140
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS -- UNAUDITED
THREE MONTHS ENDED
----------------------------
FEBRUARY 1, JANUARY 31,
1998 1999
----------- -------------
Cash flows from operating activities:
Net earnings (loss)....................................... $ 3,386,978 $ (10,378,547)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 1,888,292 2,980,759
Changes in assets and liabilities:
(Increase) decrease in accounts receivable............. (1,513,172) 3,236,183
Increase in inventories................................ (817,656) (2,365,320)
Increase in prepaid expenses........................... (593,569) (2,223,779)
Decrease in other assets............................... 13,333 586,628
Increase in accounts payable, accounts payable to
related parties and other accrued expenses........... 764,154 179,230
Increase (decrease) in income taxes payable............ 851,000 (4,590,183)
----------- -------------
Increase in net deferred taxes......................... 125,000 --
Net cash provided by (used in) operating activities....... 4,104,360 (12,575,028)
----------- -------------
Cash flows from investing activities:
Purchase of property, plant and equipment................. (7,922,270) (6,925,238)
Sale of marketable securities............................. 2,000,000 --
----------- -------------
Net cash used in investing activities..................... (5,922,270) (6,925,238)
----------- -------------
Cash flows from financing activities:
Recapitalization costs.................................... -- (141,102,012)
Repurchase of common stock................................ -- (41,029)
Proceeds from issuance of common stock.................... 183,899 --
Draws on lines of credit.................................. -- 750,000
Proceeds from issuance of long-term debt.................. -- 170,000,000
Payment of deferred financing fees........................ -- (8,741,454)
Repayment of long term debt............................... (301,576) (2,525,687)
----------- -------------
Net cash (used in) provided by financing activities....... (117,677) 18,339,818
----------- -------------
Net decrease in cash...................................... (1,935,587) (1,160,449)
Cash at beginning of period................................. 2,415,335 1,248,130
----------- -------------
Cash at end of period....................................... $ 479,748 $ 87,681
=========== =============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest............................................... $ 50,683 $ 77,500
Income taxes........................................... 1,199,000 3,055,000
See accompanying notes to condensed consolidated financial statements
F-23
141
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED
1. COMPANY OPERATIONS
Special Devices, Incorporated, a Delaware corporation (the "Company"),
designs and manufactures highly reliable precision engineered pyrotechnic
devices. These devices are used predominantly in vehicle airbag and other
automotive safety systems as well as in various aerospace applications.
On December 15, 1998, the Company consummated a recapitalization (the
"Recapitalization") in which all shares of the Company's common stock, other
than those retained by certain members of management and certain other
shareholders (the "Continuing Shareholders"), were converted into the right to
receive $34 per share in cash. The Continuing Shareholders retained
approximately 41.3% of the common equity of the Company while new investors
acquired the balance of the equity interests in the Company.
The Company has the right on certain of the outstanding shares of common
stock held by the continuing shareholders (additional rollover shares) to
acquire all or any portion of the additional rollover shares prior to December
31, 2002. The owners of the additional rollover shares under certain conditions
have the right to require the Company to purchase all or a portion of the
additional rollover shares at a price per share equal to the call price.
Accordingly, the additional rollover shares have been recorded as temporary
equity or redeemable common stock.
2. INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements of
the Company include all adjustments (consisting of normal recurring entries)
which management believes are necessary for a fair presentation of the financial
position and results of operations for the periods presented. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. It is suggested that the accompanying financial statements
be read in conjunction with the Company's audited financial statements and
footnotes as of and for the year ended October 31, 1998. Operating results for
the three month period ended January 31, 1999 are not necessarily indicative of
the operating results which may be expected for the full fiscal year.
3. ACCOUNTS RECEIVABLE
Accounts receivable are as follows:
OCTOBER 31, JANUARY 31,
1998 1999
----------- -----------
Commercial customers.............................. $13,591,228 $13,512,444
U.S. Government................................... 2,273,366 1,072,011
U.S. Government contractors....................... 3,930,859 1,671,440
----------- -----------
19,795,453 16,255,895
Less allowance for doubtful accounts.............. 385,109 81,734
----------- -----------
$19,410,344 $16,174,161
=========== ===========
F-24
142
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED -- (CONTINUED)
4. INVENTORIES
Inventories and inventoried costs relating to long-term contracts are
classified as follows:
OCTOBER 31, JANUARY 31,
1998 1999
----------- -----------
Raw materials and component parts................. $ 6,294,434 $ 5,961,703
Work in process................................... 3,677,720 3,647,561
Finished goods.................................... 1,650,654 1,353,533
Inventoried costs relating to long-term contracts,
net of amounts attributed to revenues recognized
to date......................................... 6,810,036 8,341,027
----------- -----------
18,432,845 19,303,824
Less progress payments related to long-term
contracts....................................... 1,823,831 329,490
----------- -----------
$16,609,014 $18,974,334
=========== ===========
Inventoried costs relate to costs of goods currently in progress on
long-term contracts. There are no significant inventoried costs relating to the
production costs of delivered units over the estimated average cost of all units
expected to be produced.
5. LONG-TERM DEBT
Long-term debt consists of the following:
OCTOBER 31, JANUARY 31,
1998 1999
----------- ------------
Bank revolver..................................... $ 475,687 $ 750,000
Senior term loan.................................. 2,050,000 70,000,000
Senior Subordinated Notes......................... -- 100,000,000
---------- ------------
Total long-term debt............................ 2,525,687 170,750,000
Less current portion............................ 2,109,562 1,625,000
---------- ------------
Total long-term debt, less current
portion............................... $ 416,125 $169,125,000
========== ============
At October 31, 1998, $2,050,000, was outstanding under a credit agreement,
which was paid in full on December 15, 1998 in connection with the
Recapitalization. This credit agreement was then terminated. In addition, at
October 31, 1998, the Company had outstanding approximately $3,518,000 of
performance bonds secured by standby letters of credit.
The Company's wholly-owned subsidiary, Scot, Incorporated, had a term loan
with a bank, secured by certain real property of Scot. The principal balance
outstanding at October 31, 1998, was $475,687. The loan was repaid in full on
December 15, 1998.
As part of the Recapitalization, the Company entered into a new credit
facility (the "New Credit Facility") with a syndicate of banks, which consists
of a $25,000,000 Revolving Credit Facility ("Revolver") and a $70,000,000 Senior
Term Loan. The Senior Term Loan is a seven year loan which bears interest at the
Eurodollar Rate determined on a quarterly basis (8.375% at January 31, 1999).
F-25
143
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED -- (CONTINUED)
Principal payments under the Senior Term Loan are required as follows for
the fiscal years ended October 31:
FY ENDED OCTOBER 31, AMOUNT
- -------------------- -----------
1999............................................ $ 700,000
2000............................................ $ 700,000
2001............................................ $ 700,000
2002............................................ $10,000,000
2003............................................ $16,700,000
Thereafter...................................... $41,200,000
The Revolver bears interest at the bank's prime interest rate plus 175
basis points (9.75% at January 31, 1999). As of January 31, 1999, $750,000 was
outstanding under the Revolver. In addition, the Company had approximately
$2,500,000 of letters of credit outstanding under the Revolver, which reduces
the amount of additional borrowing available. The total amount available under
the Revolver at January 31, 1999 was $21,750.00.
The New Credit Facility contains several financial and operating covenants
with which the Company was in compliance at January 31, 1999. These covenants
consist of an EBITDA requirement, an interest coverage test and a leverage test.
Substantially all of the Company's assets are pledged as collateral under the
New Credit Facility.
In addition, as part of the Recapitalization, the Company sold $100,000,000
of Senior Subordinated Notes. The Notes are due in December 2008, and bear
interest at 11-3/8% per annum. Interest is payable semi-annually, commencing
June 15, 1999. The Company's obligations under the Notes are subordinate to its
obligations under the New Credit Facility.
6. INCOME TAXES
The provisions for income taxes (benefit) consist of the following for the
three-month periods presented below:
FEBRUARY 1, JANUARY 31,
1998 1999
----------- -----------
Current:
Federal.......................................... $1,662,000 $(2,700,000)
State............................................ 388,000 (600,000)
---------- -----------
$2,050,000 $(3,300,000)
========== ===========
Deferred:
Federal.......................................... $ 86,000 $ --
State............................................ 39,000 --
---------- -----------
$ 125,000 $ --
========== ===========
Total:
Federal.......................................... $1,748,000 $(2,900,000)
State............................................ 427,000 (400,000)
---------- -----------
$2,175,000 $(3,300,000)
========== ===========
F-26
144
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED -- (CONTINUED)
Recapitalization costs of approximately $5.6 million represent advisory
fees related to the Recapitalization which are not deductible for income tax
purposes.
Temporary differences which give rise to deferred tax assets and
liabilities are as follows:
OCTOBER 31, JANUARY 31,
1998 1999
----------- -----------
Deferred tax liabilities -- non-current:
Depreciation.................................... $(3,415,000) $(3,415,000)
=========== ===========
Deferred tax assets -- current:
Allowance for doubtful accounts................. 117,000 117,000
Inventory....................................... 472,000 472,000
Vacation........................................ 451,000 451,000
State taxes..................................... 326,000 326,000
----------- -----------
1,366,000 1,366,000
----------- -----------
Net deferred tax liability........................ $(2,049,000) $(2,049,000)
=========== ===========
Management believes that it is more likely than not that future operations
will generate sufficient taxable income to realize the deferred tax assets.
The provisions for income tax expense for the three month periods presented
below differ from the provisions that would have resulted from applying the
Federal statutory rates during such periods to the income before income taxes.
The reasons for these differences are as follows:
FEBRUARY 1, JANUARY 31,
1998 1999
----------- -----------
Income taxes at Federal rate....................... $1,613,000 $(4,787,000)
State income taxes, net of federal tax benefit..... 517,000 (390,000)
Non deductible expenses............................ -- 1,945,000
Other.............................................. 45,000 (68,000)
---------- -----------
$2,175,000 $(3,300,000)
========== ===========
7. COMMITMENTS AND CONTINGENCIES
The Company is a defendant in various pending claims and lawsuits. In the
opinion of the Company's management, after consultation with counsel,
disposition of such matters is not expected to have a material adverse effect
upon the results of operations or the financial position of the Company.
The Company had commitments at January 31, 1999 to acquire capital
equipment, at cost aggregating approximately $2,000,000, primarily for
production and other support equipment required for the increased operations of
the Automotive Products Division. In addition, in order to improve manufacturing
efficiencies and to provide facilities for growth, the Company purchased in
October 1996, approximately 280 acres of land in the City of Moorpark, located
in Ventura County, north of Los Angeles, where the Company is currently building
new facilities. Total cost of the project is estimated at $32,500,000 of which
$27,915,000 had been spent at January 31, 1999 and is included in construction
in progress in the accompanying condensed consolidated balance sheet. The
Company anticipates spending approximately $4,500,000 in fiscal year 1999 to
complete this project. The Company plans to sell two commercial lots being
developed as part of this project, the proceeds of which are expected to reduce
the net project cost to approximately $27,000,000.
The statements above regarding the land purchased by the Company in
Moorpark, the construction of facilities on that land by the Company, and the
amount and timing of expenditures are forward-looking
F-27
145
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED -- (CONTINUED)
statements. Actual results and the timing of those results may vary depending on
various factors including, for example, the ability of the Company to obtain
permits and approvals that do not contain conditions or restrictions that are
unduly restrictive or otherwise unacceptable to the Company, the Company's not
encountering any unforeseen conditions relating to the property that make
completion of the land infrastructure work or construction more expensive,
difficult or time intensive than is currently expected, the ability of the
contractors and subcontractors retained by the Company to complete the work on
the schedule and for the costs described above, and other factors which may
develop during the course of this project.
8. SUBSEQUENT EVENTS
On February 18, 1999, an accidental explosion occurred at the Company's
Newhall facility, resulting in the death of one employee. The Company suspended
all production at the Newhall facility for four days to conduct a thorough
investigation. Concurrently, the Company implemented contingency manufacturing
plans to meet customer demand from existing inventory and production from its
Mesa facility. No buildings or equipment, other than one transport vehicle, were
damaged in the accident. The Company resumed full production at Newhall on March
4, 1999. The Company is not aware of any litigation commenced in connection with
this event.
F-28
146
- ------------------------------------------------------
- ------------------------------------------------------
ALL TENDERED OLD NOTES, EXECUTED LETTERS OF TRANSMITTAL AND OTHER RELATED
DOCUMENTS SHOULD BE DIRECTED TO THE EXCHANGE AGENT. QUESTIONS AND REQUESTS FOR
ADDITIONAL COPIES OF THE PROSPECTUS, LETTER OF TRANSMITTAL AND OTHER RELATED
DOCUMENTS SHOULD BE ADDRESSED TO THE EXCHANGE AGENT AS FOLLOWS:
BY REGISTERED OR CERTIFIED MAIL:
UNITED STATES TRUST COMPANY OF NEW YORK
P.O. BOX 844
COOPER STATION
NEW YORK, NY 10276-0844
ATTN: CORPORATE TRUST SERVICES
BY FACSIMILE:
(212) 780-0592
BY OVERNIGHT COURIER:
UNITED STATES TRUST COMPANY OF NEW YORK
770 BROADWAY, 13TH FLOOR
NEW YORK, NEW YORK 10003
ATTN: CORPORATE TRUST SERVICES
BY HAND:
UNITED STATES TRUST COMPANY OF NEW YORK
111 BROADWAY
LOWER LEVEL
NEW YORK, NEW YORK 10006
ATTN: CORPORATE TRUST SERVICES
CONFIRM BY TELEPHONE 800-548-6565
(ORIGINALS OF ALL DOCUMENTS SUBMITTED BY FACSIMILE SHOULD BE SENT PROMPTLY
BY HAND, OVERNIGHT COURIER, OR REGISTERED OR CERTIFIED MAIL)
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
OFFER TO EXCHANGE ALL OUTSTANDING
11 3/8% SENIOR SUBORDINATED NOTES
DUE 2008, SERIES A
($100,000,000 PRINCIPAL AMOUNT)
FOR
11 3/8% SENIOR SUBORDINATED NOTES
DUE 2008, SERIES B
SPECIAL DEVICES,
INCORPORATED
PAYMENT OF PRINCIPAL AND INTEREST
UNCONDITIONALLY GUARANTEED BY
SCOT, INCORPORATED
------------------------
PROSPECTUS
------------------------
- ------------------------------------------------------
- ------------------------------------------------------
147
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware (the
"Delaware Corporation Law") gives Delaware corporations broad powers to
indemnify their present and former directors and officers against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with threatened, pending or
completed actions, suits or proceedings to which they are parties or are
threatened to be made parties by reason of being or having been such directors
or officers, subject to specified conditions and exclusions; gives a director or
officer who successfully defends an action the right to be so indemnified; and
permits a corporation to buy directors' and officers' liability insurance. Such
indemnification is not exclusive of any other rights to which those indemnified
may be entitled under any by-law, agreement, vote of stockholders or otherwise.
As permitted by Section 145 of the Delaware Corporation Law, Article 8 of
the Bylaws of the Company and Article 8 of the Certificate of Incorporation of
the Company provide for the indemnification by the Company of its directors,
officers, employees and agents against liabilities and expenses incurred in
connection with actions, suits or proceedings brought against them by a third
party or in the rights of the corporation, by reason of the fact that they were
or are such officers, employees or agents.
Article 7 of the Company's Certificate of Incorporation provides that to
the fullest extent permitted by the Delaware Corporation Law as the same exists
or may hereafter be amended, a director of the Company shall not be liable to
the Company or its stockholders for monetary damages for breach of fiduciary
duty as a director.
The Purchase Agreement by and among BT Alex. Brown Incorporated and Paribas
Corporation (together, the "Initial Purchasers") and the Company dated as of
December 11, 1998 (the "Purchase Agreement"), provides for indemnification of
the Company and persons who control the Company within the meaning of Section 15
of the Securities Act or Section 20 of the Securities Exchange Act of 1934 (the
"Exchange Act") for certain liabilities, including liabilities under the
Securities Act.
The Registration Rights Agreement by and among the Company and the Initial
Purchasers dated as of December 11, 1998 (the "Registration Rights Agreement"),
provides for indemnification of the Company, its directors and officers, and
persons who control the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act for certain liabilities,
including liabilities under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
II-1
148
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
EXHIBIT
NO. DESCRIPTION
- ------- -----------
1.1 Purchase Agreement, dated as of December 11, 1998, among SDI
Acquisition Corp. and BT Alex. Brown Incorporated and
Paribas Corporation.
2.1(a) Amended and Restated Agreement and Plan of Merger, dated as
of June 19, 1998, between the Company and SDI Acquisition
Corp.
2.2(b) Amendment No. 1, dated as of October 27, 1998, to the
Amended and Restated Agreement and Plan of Merger between
the Company and SDI Acquisition Corp.
2.3(c) Guaranty Agreement, dated as of June 19, 1998, between J.F.
Lehman Equity Investors I, L.P. and the Company
3.1 Certificate of Incorporation of the Company
3.2 Bylaws of the Company
3.3 Certificate of Incorporation of Scot, Incorporated
3.4 Bylaws of Scot, Incorporated
4.1 Indenture, dated as of December 15, 1998, among SDI
Acquisition Corp., the Guarantors named therein and United
States Trust Company of New York, as Trustee.
4.2 First Supplemental Indenture, dated as of December 15, 1998,
among the Company, the Guarantors named therein and the
United States Trust Company of New York, as Trustee.
4.3 Form of 11 3/8% Senior Subordinated Note due 2008, Series A
(see Exhibit A of the First Supplemental Indenture in
Exhibit 4.2).
4.4 Form of 11 3/8% Senior Subordinated Note due 2008, Series B
(see Exhibit B of the First Supplemental Indenture in
Exhibit 4.2).
4.5 Registration Rights Agreement, dated as of December 15,
1998, among SDI Acquisition Corp., as Issuer and BT Alex.
Brown Incorporated and Paribas Corporation as Initial
Purchasers.
5.1* Opinion of Gibson, Dunn & Crutcher LLP, including consent
8.1* Opinion of Gibson, Dunn & Crutcher LLP with regard to
federal income tax consequences of the Exchange Offer
10.1 Assumption Agreement, dated as of December 15, 1998, by the
Company and Scot, Incorporated, assuming, among other
things, the obligations of SDI Acquisition Corp. under the
Purchase Agreement and the Registration Rights Agreement
10.2 Credit Agreement, dated as of December 15, 1998, among the
Company, various banks and Bankers Trust Company, as Lead
Arranger and Administrative Agent.
10.3 Security Agreement, dated as of December 15, 1998, by the
Company and Scot, Incorporated in favor of Bankers Trust
Company.
10.4 Pledge Agreement, dated as of December 15, 1998, by the
Company and Scot, Incorporated in favor of Bankers Trust
Company.
10.5 Subsidiaries Guarantee, dated as of December 15, 1998, by
Scot, Incorporated in favor of Bankers Trust Company.
10.6 Management Agreement, dated as of December 15, 1998, between
the Company and J.F. Lehman & Company
10.7 Management Services Agreement, dated as of December 15,
1998, between the Company and J.F. Lehman & Company
10.8 Subscription Agreement, dated as of September 7, 1998, among
the Company, Paribas Principal Inc., J.F. Lehman Equity
Investors I, L.P. and JFL Co-Invest Partners I, L.P.
II-2
149
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.9 Amendment No. 1 to Subscription Agreement, dated as of
December 3, 1998, among the Company, Paribas Principal Inc.,
J.F. Lehman Equity Investors I, L.P. and JFL Co-Invest
Partners I, L.P.
10.10 Amendment No. 2 to Subscription Agreement, dated as of
December 15, 1998, among the Company, Paribas Principal
Inc., J.F. Lehman Equity Investors I, L.P. and JFL Co-Invest
Partners I, L.P.
10.11 Stockholders Agreement, dated as of December 15, 1998, among
the Company, J.F. Lehman & Co., J.F. Lehman Equity Investors
I, L.P., JFL Co-Invest Partners I, L.P., the Neubauer Family
Trust, by Walter Neubauer trustee, and the Treinen Family
Trust, by Thomas F. Treinen trustee.
10.12 Pledge Agreement, dated as of December 15, 1998, between the
Neubauer Family Trust, by Walter Neubauer, trustee and J.F.
Lehman & Company.
10.13 Rollover Stockholders Agreement, dated as of December 15,
1998, among the Company, J.F. Lehman & Co., the Neubauer
Family Trust, by Walter Neubauer trustee, and the Treinen
Family Trust, by Thomas F. Treinen trustee.
10.14 Pledge Agreement, dated as of December 15, 1998, between
Thomas Treinen Family Trust, by Thomas F. Treinen, trustee
and J.F. Lehman & Company.
10.15 Registration Rights Agreement, dated as of December 15,
1998, among the Company, J.F. Lehman Equity Investors I,
L.P., JFL Co-Invest Partners I, L.P., Paribas Principal
Inc., the Neubauer Family Trust, by Walter Neubauer trustee,
and the Treinen Family Trust, by Thomas F. Treinen trustee.
10.16(d) Lease dated May 1, 1991 between the Company and Placerita
Land and Farming Company.
10.17(d) Letter Agreement dated June 8, 1990 between the Company and
Hermetic Seal Corporation.
10.18(d) Master Purchase Agreement, dated May 15, 1990, between the
Company and TRW Inc. (confidential treatment granted as to
part).
10.19(d) Technology License Agreement dated November 7, 1990 between
the Company and Davey Bickford Smith.
10.20(e) Amended and Restated 1991 Stock Incentive Plan of the
Company
10.21(d) Special Devices, Incorporated 401(k) Plan.
10.22(e) First Amendment to Master Purchase Agreement, dated February
25, 1993, between the Company and TRW, Inc. (confidential
treatment granted as to part).
10.23(f) Letter Agreement, dated November 30, 1994 between the
Company and Hermetic Seal Corporation (confidential
treatment granted as to part).
10.24(f) Employment Agreement dated September 7, 1994, between the
Company, Scot, Incorporated and Samuel Levin.
10.25(g) Second Amendment to Master Purchase Agreement, dated March
8, 1995, between the Company and TRW, Inc. (confidential
treatment granted as to part).
10.26(h) Supply Agreement dated as of November 14, 1995 between the
Company and Autoliv International, Inc. (confidential
treatment requested as to part).
10.27(i) Development Agreement, dated August 28, 1996, between
Company and the City of Moorpark.
10.28(j) Purchase Agreement, dated September 30, 1997, between the
Company and Hermetic Seal Corporation (confidential
treatment requested as to part).
12.1 Statement of Computation of Ratios of Earnings to Fixed
Charges
21.1 Subsidiaries of the Company
23.1* Consent of Gibson, Dunn & Crutcher LLP (to be included in
Exhibit 5.1)
II-3
150
EXHIBIT
NO. DESCRIPTION
- ------- -----------
23.2 Consent of KPMG LLP
24.1 Powers of Attorney (see pages II-6 and II-8 of this
Registration Statement)
25.1 Form T-1 Statement of Eligibility of United States Trust
Company of New York to act as trustee under the Indenture
27 Financial Data Schedules
99.1* Form of Letter of Transmittal
99.2* Form of Notice of Guaranteed Delivery
- ---------------
* To be filed by amendment.
(a) Previously filed as Appendix A to the Company's Proxy Statement on Schedule
14A filed with the Commission on August 18, 1998 and incorporated by
reference herein.
(b) Previously filed as Appendix B to the Company's Proxy Statement on Schedule
14A filed with the Commission on December 10, 1998 and incorporated by
reference herein.
(c) Previously filed as Exhibit 2.3 to the Company's Current Report on Form 8-K
filed with the Commission on July 10, 1998 and incorporated by reference
herein.
(d) Previously filed as an exhibit to Registration Statement on Form S-1 (File
No. 33-40903) and incorporated herein by reference.
(e) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended October 31, 1994 and incorporated herein by
reference.
(f) Previously filed as an exhibit to Amendment No. 1 on Form 10-K/A for the
fiscal year ended October 31, 1994 and incorporated herein by reference.
(g) Previously filed as an exhibit to Registration Statement on Form S-1 (File
No. 33-89902) and incorporated herein by reference.
(h) Previously filed as an exhibit to Annual Report on Form 10-K for the fiscal
year ended October 31, 1995 and incorporated herein by reference.
(i) Previously filed as an exhibit to Annual Report on Form 10-K for the fiscal
year ended October 31, 1996 and incorporated herein by reference.
(j) Previously filed as an exhibit to Annual Report on Form 10-K for the fiscal
year ended October 31, 1997 and incorporated herein by reference.
II-4
151
ITEM 22. UNDERTAKINGS.
The undersigned registrants hereby undertake with respect to the securities
offered by them:
1. Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Act") may be permitted as to
directors, officers and controlling persons of any Registrant pursuant to
the provisions described in Item 20 or otherwise, the Registrants have been
advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is, therefore
unenforceable. In the event a claim for indemnification against such
liabilities (other than the payment by any Registrant of expenses incurred
or paid by a director, officer or controlling person of such Registrant in
the successful defense of any action, suit, or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, such Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
2. The undersigned Registrants hereby undertake to respond to requests
for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11 or 13 of this Form, within one business day
of receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
3. The undersigned Registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-5
152
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Newhall, State of
California on the 7th day of April, 1999.
SPECIAL DEVICES, INCORPORATED
By: /s/ JOHN M. CUTHBERT
------------------------------------
John M. Cuthbert,
President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints John M.
Cuthbert, Keith Oster and John T. Vinke his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or his substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JOHN M. CUTHBERT Director, President and Chief April 7, 1999
- --------------------------------------------------- Executive Officer (Principal
John M. Cuthbert Executive Officer)
/s/ JOHN T. VINKE Executive Vice President and Chief April 7, 1999
- --------------------------------------------------- Financial Officer (Principal
John T. Vinke Financial and Accounting Officer)
/s/ DONALD GLICKMAN Director and Vice President April 7, 1999
- ---------------------------------------------------
Donald Glickman
/s/ JOHN F. LEHMAN Director April 7, 1999
- ---------------------------------------------------
John F. Lehman
/s/ GEORGE SAWYER Chairman of the Board of Directors April 7, 1999
- ---------------------------------------------------
George Sawyer
/s/ KEITH OSTER Director and Secretary April 7, 1999
- ---------------------------------------------------
Keith Oster
II-6
153
SIGNATURE TITLE DATE
--------- ----- ----
Director April , 1999
- ---------------------------------------------------
Joseph A. Stroud
Director April , 1999
- ---------------------------------------------------
William Paul
Director April , 1999
- ---------------------------------------------------
Oliver C. Boileau, Jr.
Director April , 1999
- ---------------------------------------------------
Thomas G. Pownall
/s/ THOMAS F. TREINEN Director April 7, 1999
- ---------------------------------------------------
Thomas F. Treinen
/s/ JACK B. WATSON Director April 7, 1999
- ---------------------------------------------------
Jack B. Watson
Director April , 1999
- ---------------------------------------------------
Stephen Eisenstein
II-7
154
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Downers Grove, State of
Illinois, on the 7th day of April, 1999.
SCOT, INCORPORATED
By: /s/ SAMUEL LEVIN
------------------------------------
Samuel Levin, President
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Samuel
Levin, Keith Oster and John T. Vinke his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or his substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ SAMUEL LEVIN Director and President (Principal April 7, 1999
- --------------------------------------------------- Executive Officer)
Samuel Levin
/s/ MARY LOUISE GRAHAM Director and Vice President -- April 7, 1999
- --------------------------------------------------- Finance
Mary Louise Graham
/s/ JOHN T. VINKE Director April 7, 1999
- ---------------------------------------------------
John T. Vinke
/s/ THOMAS F. TREINEN Director April 7, 1999
- ---------------------------------------------------
Thomas F. Treinen
/s/ ROBERT S. RITCHIE Director April 7, 1999
- ---------------------------------------------------
Robert S. Ritchie
II-8
155
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
1.1 Purchase Agreement, dated as of December 11, 1998, among SDI
Acquisition Corp. and BT Alex. Brown Incorporated and
Paribas Corporation.
2.1(a) Amended and Restated Agreement and Plan of Merger, dated as
of June 19, 1998, between the Company and SDI Acquisition
Corp.
2.2(b) Amendment No. 1, dated as of October 27, 1998, to the
Amended and Restated Agreement and Plan of Merger between
the Company and SDI Acquisition Corp.
2.3(c) Guaranty Agreement, dated as of June 19, 1998, between J.F.
Lehman Equity Investors I, L.P. and the Company
3.1 Certificate of Incorporation of the Company
3.2 Bylaws of the Company
3.3 Certificate of Incorporation of Scot, Incorporated
3.4 Bylaws of Scot, Incorporated
4.1 Indenture, dated as of December 15, 1998, among SDI
Acquisition Corp., the Guarantors named therein and United
States Trust Company of New York, as Trustee.
4.2 First Supplemental Indenture, dated as of December 15, 1998,
among the Company, the Guarantors named therein and the
United States Trust Company of New York, as Trustee.
4.3 Form of 11 3/8% Senior Subordinated Note due 2008, Series A
(see Exhibit A of the First Supplemental Indenture in
Exhibit 4.2).
4.4 Form of 11 3/8% Senior Subordinated Note due 2008, Series B
(see Exhibit B of the First Supplemental Indenture in
Exhibit 4.2).
4.5 Registration Rights Agreement, dated as of December 15,
1998, among SDI Acquisition Corp., as Issuer and BT Alex.
Brown Incorporated and Paribas Corporation as Initial
Purchasers.
5.1* Opinion of Gibson, Dunn & Crutcher LLP, including consent
8.1* Opinion of Gibson, Dunn & Crutcher LLP with regard to
federal income tax consequences of the Exchange Offer
10.1 Assumption Agreement, dated as of December 15, 1998, by the
Company and Scot, Incorporated, assuming, among other
things, the obligations of SDI Acquisition Corp. under the
Purchase Agreement and the Registration Rights Agreement
10.2 Credit Agreement, dated as of December 15, 1998, among the
Company, various banks and Bankers Trust Company, as Lead
Arranger and Administrative Agent.
10.3 Security Agreement, dated as of December 15, 1998, by the
Company and Scot, Incorporated in favor of Bankers Trust
Company.
10.4 Pledge Agreement, dated as of December 15, 1998, by the
Company and Scot, Incorporated in favor of Bankers Trust
Company.
10.5 Subsidiaries Guarantee, dated as of December 15, 1998, by
Scot, Incorporated in favor of Bankers Trust Company.
10.6 Management Agreement, dated as of December 15, 1998, between
the Company and J.F. Lehman & Company
10.7 Management Services Agreement, dated as of December 15,
1998, by and between the Company and J.F. Lehman & Company
10.8 Subscription Agreement, dated as of September 7, 1998, among
the Company, Paribas Principal Inc., J.F. Lehman Equity
Investors I, L.P. and JFL Co-Invest Partners I, L.P.
1
156
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.9 Amendment No. 1 to Subscription Agreement, dated as of
December 3, 1998, among the Company, Paribas Principal Inc.,
J.F. Lehman Equity Investors I, L.P. and JFL Co-Invest
Partners I, L.P.
10.10 Amendment No. 2 to Subscription Agreement, dated as of
December 15, 1998, by and between the Company, Paribas
Principal Inc., J.F. Lehman Equity Investors I, L.P. and JFL
Co-Invest Partners I, L.P.
10.11 Stockholders Agreement, dated as of December 15, 1998, among
the Company, J.F. Lehman & Co., J.F. Lehman Equity Investors
I, L.P., JFL Co-Invest Partners I, L.P., the Neubauer Family
Trust, by Walter Neubauer trustee, and the Treinen Family
Trust, by Thomas F. Treinen trustee.
10.12 Pledge Agreement, dated as of December 15, 1998, between the
Neubauer Family Trust, by Walter Neubauer, trustee and J.F.
Lehman & Company.
10.13 Rollover Stockholders Agreement, dated as of December 15,
1998, among the Company, J.F. Lehman & Co., the Neubauer
Family Trust, by Walter Neubauer trustee, and the Treinen
Family Trust, by Thomas F. Treinen trustee.
10.14 Pledge Agreement, dated as of December 15, 1998, between
Thomas Treinen Family Trust, by Thomas F. Treinen, trustee
and J.F. Lehman & Company.
10.15 Registration Rights Agreement, dated as of December 15,
1998, among the Company, J.F. Lehman Equity Investors I,
L.P., JFL Co-Invest Partners I, L.P., Paribas Principal
Inc., the Neubauer Family Trust, by Walter Neubauer trustee,
and the Treinen Family Trust, by Thomas F. Treinen trustee.
10.16(d) Lease dated May 1, 1991 between the Company and Placerita
Land and Farming Company.
10.17(d) Letter Agreement dated June 8, 1990 between the Company and
Hermetic Seal Corporation.
10.18(d) Master Purchase Agreement, dated May 15, 1990, between the
Company and TRW Inc. (confidential treatment granted as to
part).
10.19(d) Technology License Agreement dated November 7, 1990 between
the Company and Davey Bickford Smith.
10.20(e) Amended and Restated 1991 Stock Incentive Plan of the
Company
10.21(d) Special Devices, Incorporated 401(k) Plan.
10.22(e) First Amendment to Master Purchase Agreement, dated February
25, 1993, between the Company and TRW, Inc. (confidential
treatment granted as to part).
10.23(f) Letter Agreement, dated November 30, 1994 between the
Company and Hermetic Seal Corporation (confidential
treatment granted as to part).
10.24(f) Employment Agreement dated September 7, 1994, between the
Company, Scot, Incorporated and Samuel Levin.
10.25(g) Second Amendment to Master Purchase Agreement, dated March
8, 1995, between the Company and TRW, Inc. (confidential
treatment granted as to part).
10.26(h) Supply Agreement dated as of November 14, 1995 between the
Company and Autoliv International, Inc. (confidential
treatment requested as to part).
10.27(i) Development Agreement, dated August 28, 1996, between
Company and the City of Moorpark.
10.28(j) Purchase Agreement, dated September 30, 1997, between the
Company and Hermetic Seal Corporation (confidential
treatment requested as to part).
12.1 Statement of Computation of Ratios of Earnings to Fixed
Charges
21.1 Subsidiaries of the Company
23.1* Consent of Gibson, Dunn & Crutcher LLP (to be included in
Exhibit 5.1)
2
157
EXHIBIT
NO. DESCRIPTION
- ------- -----------
23.2 Consent of KPMG LLP
24.1 Powers of Attorney (see pages II-6 or II-8 of this
Registration Statement)
25.1 Form T-1 Statement of Eligibility of United States Trust
Company of New York to act as trustee under the Indenture
27 Financial Data Schedules
99.1* Form of Letter of Transmittal
99.2* Form of Notice of Guaranteed Delivery
- ---------------
* To be filed by amendment.
(a) Previously filed as Appendix A to the Company's Proxy Statement on Schedule
14A filed with the Commission on August 18, 1998 and incorporated by
reference herein.
(b) Previously filed as Appendix B to the Company's Proxy Statement on Schedule
14A filed with the Commission on December 10, 1998 and incorporated by
reference herein.
(c) Previously filed as Exhibit 2.3 to the Company's Current Report on Form 8-K
filed with the Commission on July 10, 1998 and incorporated by reference
herein.
(d) Previously filed as an exhibit to Registration Statement on Form S-1 (File
No. 33-40903) and incorporated herein by reference.
(e) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended October 31, 1994 and incorporated herein by
reference.
(f) Previously filed as an exhibit to Amendment No. 1 on Form 10-K/A for the
fiscal year ended October 31, 1994 and incorporated herein by reference.
(g) Previously filed as an exhibit to Registration Statement on Form S-1 (File
No. 33-89902) and incorporated herein by reference.
(h) Previously filed as an exhibit to Annual Report on Form 10-K for the fiscal
year ended October 31, 1995 and incorporated herein by reference.
(i) Previously filed as an exhibit to Annual Report on Form 10-K for the fiscal
year ended October 31, 1996 and incorporated herein by reference.
(j) Previously filed as an exhibit to Annual Report on Form 10-K for the fiscal
year ended October 31, 1997 and incorporated herein by reference.
3