-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DPffyyP8zGdlgA6kXClFUpXn2O4cdHQYc83v2U8p+Z/X40GnVlj9aKX67s6ecrrz VFLBX0RmBxfVoRG7l3sTbg== 0000927356-99-001618.txt : 19991022 0000927356-99-001618.hdr.sgml : 19991022 ACCESSION NUMBER: 0000927356-99-001618 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990731 FILED AS OF DATE: 19991021 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OEA INC /DE/ CENTRAL INDEX KEY: 0000073864 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 362362379 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-06711 FILM NUMBER: 99731796 BUSINESS ADDRESS: STREET 1: 34501 E QUINCY AVE CITY: DENVER STATE: CO ZIP: 80250 BUSINESS PHONE: 3036931248 MAIL ADDRESS: STREET 1: P O BOX 100488 CITY: DENVER STATE: CO ZIP: 80250 10-K/A 1 FORM 10K/A ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _________________ FORM 10-K/A _________________ [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended July 31, 1999 ------------- OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________ to ________ Commission file number 1-6711. ------ OEA, INC. (Exact name of registrant as specified in its charter) ________________ Delaware 36-2362379 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) P. O. Box 100488 Denver, Colorado 80250 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (303) 693-1248 -------------- Securities registered pursuant to Section 12 (b) of the Act: ________________ Common Stock, Par Value $0.10 New York Stock Exchange (Title of each class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: ________________ NONE (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____. --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]. The aggregate market value of the voting stock held by nonaffiliates of the registrant as of October 15, 1999. Common Stock, $.10 par value - $144,284,147. The number of shares outstanding of the issuer's classes of common stock as of October 15, 1999. Common Stock $.10 par value - 20,612,021. Documents Incorporated By Reference Portions of the proxy statement for the annual shareholders meeting to be held on or before January 11, 2000, are incorporated by reference into Part III. (A definitive proxy statement will be filed with the Commission within the prescribed period.) ================================================================================ PART I Item 1 - Business - ----------------- General Development of Business - ------------------------------- OEA, Inc. ("OEA" or "the Company") is a technology leader in the development and production of high-reliability, propellant-actuated safety devices for the automotive and aerospace industries. The foundation of our growth is our core knowledge (over 2,000 man-years of experience) in propellants, interior ballistics and related mechanical design. Founded in 1957, our first three decades of growth came from developing and producing the aerospace industry's largest selection of propellant-actuated devices for (1) military aircraft escape systems, (2) satellites and satellite launch vehicles and (3) missiles. The growth over the last decade has come from adapting our proprietary aerospace technology to the automotive air bag market. We began producing air bag initiators in 1987 and have since shipped over 150 million initiators. In 1996, we added air bag inflators to our product mix. In our first full year of production, we sold 3 million inflators. By 1999, the annual volume had more than doubled to 7.6 million inflators. These inflators were the industry's first environmentally friendly production inflators, generating no smoke, dust or toxins. We were organized as a Delaware corporation on October 1, 1969. Our predecessor, Ordnance Engineering Associates, Inc., an Illinois corporation, was organized on July 13, 1957, and was merged into OEA on December 3, 1969. Our corporate headquarters are located 20 miles southeast of Denver, Colorado, with additional manufacturing facilities located in Utah, California and France. Our automotive operations are carried out through our Automotive Safety Products Division. This division includes OEA Europe S.A.R.L. (previously Pyroindustrie S.A.), which was organized on July 16/th/, 1999. OEA's aerospace operations are carried out through its subsidiary OEA Aerospace, Inc. Our principal executive offices are located at 34501 East Quincy Avenue, Denver, Colorado 80250 and our telephone number is (303) 693-1248. Glossary of Terms - ----------------- Propellant (solid propellant): A chemical mixture that can be ignited to produce gas rapidly and controllably. Air Bag Initiator: The air bag system's smallest propellant-actuated device, weighing about 5 grams and containing about 1/10 gram of propellant, which is ignited by an electrical signal (from the car's crash-sensing system) to activate the air bag inflator. Propellant-Actuated Device: A device that operates by the ignition of propellant. OEA's air bag inflators, air bag initiators and aircraft escape system components are propellant-actuated devices. Air Bag Inflator: The air bag system's largest propellant-actuated device, weighing between 200 and 1,500 grams. When activated by the initiator, the inflator produces gas to inflate the air bag. 2 Financial Information about Industry Segments - --------------------------------------------- (in thousands)
FY 1999 FY 1998 FY 1997 ----------- ----------- ----------- Sales to Unaffiliated Customers - ------------------------------- Automotive $ 203,963 $ 195,891 $ 168,869 Aerospace 44,842 49,484 42,688 ----------- ----------- ----------- Total $ 248,805 $ 245,375 $ 211,557 =========== =========== =========== Inter-Segment Sales or Transfers - -------------------------------- Automotive $ - $ 2 $ 20 Aerospace 29 240 141 ----------- ----------- ----------- Total $ 29 $ 242 $ 161 =========== =========== =========== Operating Profit - ---------------- Automotive $ (3,549) $ (8,765) $ 45,522 Aerospace 4,076 3,177 4,037 ----------- ----------- ----------- Total $ 527 $ (5,588) $ 49,559 =========== =========== =========== Identifiable Assets - ------------------- Automotive $ 252,556 $ 276,063 $ 275,153 Aerospace 45,802 52,696 56,403 ----------- ----------- ----------- Total $ 298,358 $ 328,759 $ 331,556 =========== =========== ===========
3 Automotive Safety Products - -------------------------- Introduction to Automotive Safety Products Our Automotive Safety Products Division was created to meet the growing demand for automotive air bags by taking advantage of technologies we developed in our aerospace business. We design, develop, test and manufacture propellant- actuated devices for use in automotive safety products, which are currently single-stage hybrid inflators (passenger, driver and side-impact) and electric initiators. These are sold to automotive module and inflator manufacturers, respectively, which, in turn, sell their products directly to automobile manufacturers. Our automotive segment accounted for approximately 82%, 80%, and 80% of consolidated net sales in fiscal 1999, 1998, and 1997, respectively, and is expected to continue to represent a similar percentage of our sales in the future. In an air bag system, the initiator activates the inflator, which produces gas to inflate the bag. We have designed a low-cost hybrid inflator that uses a combination of compressed gas and a non-azide propellant. These hybrid inflators are favored over sodium-azide inflators because they are smokeless and nontoxic, using a propellant that is very insensitive under normal handling conditions. Management believes that the air bag industry is shifting away from sodium-azide inflators to non-azide alternatives such as OEA's hybrid inflators. Growth through Technology Our strategy is to strengthen our leadership position in the initiator market and to become a world leader in inflator manufacturing by taking advantage of advanced technology to produce a high quality product at the lowest possible cost. Management believes that by using our technology to continually drive reductions in core product costs, it will encourage air bag system manufacturers to utilize our capacity instead of reinvesting in costly expansions of their own inflator manufacturing facilities. We have made a substantial capital investment in highly automated advanced technology equipment to produce inflators in our Denver facilities and to produce initiators in two manufacturing facilities located in Tremonton, Utah and Les Mureaux, France. Our new inflator production facility in Denver became fully operational late in fiscal 1998. Additionally, we are utilizing leading-edge technology to develop advanced products in both traditional and non-traditional areas of automotive safety. We believe we have market leading technology initiatives in products such as advanced curtain inflators for side impact collisions; "smart" or dual-stage inflators, which vary air bag inflation for the characteristics and severity of the impact and position of the occupant; micro-gas generators for seat belt pretensioner systems, which tighten seat belts in a collision; and "smart" initiators, which have an embedded micro-chip/capacitor that will be required for advanced safety systems of the future. These new concepts in various stages of development reflect our demonstrated excellence in rapidly delivering new products to market. While the advanced curtain inflators and smart initiators are still in early stages of development, we have been awarded contracts for micro gas generators, which are already in production and for "smart" inflators, expected to begin production in late fiscal year 2000. 4 We continue to make significant expenditures through research and development to maintain technology leadership. The estimated amounts spent by the automotive segment during each of the last three fiscal years for customer-sponsored and Company-sponsored research and development activities were:
Customer- Company- Sponsored Sponsored --------- ---------- Fiscal year 1999 $ -- $3,552,000 Fiscal year 1998 -- 1,373,000 Fiscal year 1997 200,000 1,428,000
The demand for air bag components (both domestic and worldwide) is expected to grow over the next several years, with increased demand for frontal and side air bags and additional air bag products. We believe that our technology provides a distinct competitive advantage in this market environment. Other Business and Industry Considerations Customers providing more than 10% of our consolidated sales for the fiscal year ended July 31, 1999, were Takata Corporation with 30%, Delphi Interior & Lighting with 20% and Daicel Chemical Industries, Ltd. with 11%. The loss of any of these customers would have a materially adverse effect on the automotive segment of OEA's business. As Daicel transitions to internal manufacture of inflators and initiators their purchases will decline; however, this volume is expected to be replaced by increased sales to existing customers. In addition, we will earn royalty payments on Daicel's internally manufactured inflators and initiators, as explained in the following paragraphs. There is no particular relationship with our customers other than that of supplier/customer, except for the following: 1. An agreement with Daicel Chemical Industries, Ltd., Tokyo, Japan, for the transfer of technology and manufacture of our automotive air bag initiators for the Asian market. This agreement provides for an exclusive license of such technology to Daicel for a term ending in 2007, for fixed royalties totaling $6 million (subject to possible increase if certain production volumes are achieved) and variable royalties at a rate of 5% of net sales, and 2. An agreement with Daicel Chemical Industries, Ltd., Tokyo, Japan, for the transfer of technology and manufacture of our single-stage (i.e., not "smart") hybrid inflators for passenger, driver and side-impact automotive air bags for manufacture in Asia for the Asian market. The initial annual fixed royalty payment for this fifteen-year agreement was received in 1995. Total fixed royalties under this agreement to date were $11 million, and we anticipate receiving $7 million in future fixed royalties. We also receive variable royalties at a rate of 3.5% of net sales. Daicel began the manufacture of OEA's second-generation passenger inflator in August 1998, and we receive variable royalty payments on these units. Auto manufacturers generally change designs every three to five years. We receive annual blanket purchase orders, but deliveries are specified by customers on weekly releases for 5 deliveries over the next 10 to 12 weeks. Because this is the accepted practice in the automotive industry, the amount of backlog at any given time is not representative of annual sales. We believe we are the larger of only two independent inflator manufacturers in the world not affiliated with, or owned by, an air bag module manufacturer. This independence gives us wide latitude to sell to all module manufacturers. We are aware of five major inflator manufacturers in the world: OEA, Autoliv, TRW, Takata, and BAICO (owned by Atlantic Research Corporation). Autoliv and TRW are the largest inflator manufacturers in the airbag market and consume the majority of their inflators for use in their own airbag modules. Management believes that we have the leading technology and are the largest independent inflator manufacturer in the industry. In addition to supplying an increasing portion of Autoliv and TRW's inflator requirements, we believe we are in an excellent position to grow our business in the segment of the airbag module/system market that has either limited or no internal inflator capacity (approximately 50% of the overall market). There are two major automotive initiator manufacturers in the United States: OEA and Special Devices, Inc. Additionally, there are four major automotive initiator manufacturers in Europe: OEA Europe (wholly owned by OEA), Davey Bickford Smith, Nouvelle Cartoucherie de Survilliers (owned by Autoliv), and Patvag. We are currently one of the world's leading producers of initiators for automotive air bags. Other companies may enter the automotive inflator and initiator markets; however, substantial financial resources, development, and qualification time would be required to achieve design and product verification. Contracts are generally awarded based upon competitive price, product reliability and production capacity. We believe that the major automotive manufacturers, in an effort to encourage price competition, are providing increased business opportunities to smaller second tier suppliers, and that this will provide increased opportunity to more fully utilize our manufacturing capacity. Raw materials we use include stamped and machined parts and commercially available propellants. We are not dependent upon any one source for purchased materials because alternate sources of supply are available in the marketplace. Customer payments are due on a current basis and extended terms or collateral have not been required. Our hybrid inflators and initiators are covered by several patents. Some of the patents have been issued and others are pending relating to technology used in these products. Our business is not seasonal. Compliance with federal, state, and local provisions regulating the discharge of materials into the environment is not expected to materially affect capital expenditures, earnings, or the competitive position of OEA, Inc. or its subsidiaries. Together with our consolidated subsidiaries and divisions we employ approximately 1,300 people in our automotive segment. 6 Aerospace Products - ------------------ Introduction to OEA Aerospace Products OEA Aerospace designs, develops, and manufactures propellant and explosive- actuated devices used in (1) personnel escape systems in high-speed aircraft, (2) separation and release devices for space vehicles and aircraft, (3) devices for control, separation, ejection, and jettison of missiles, and (4) flexible linear-shaped charges, mild detonating cord systems and other energy transfer systems. The principal customers for such products are the United States Government and major aircraft and aerospace companies. Other products and services include propellant-actuated valves, fluid control systems, and the largest neutron radiography inspection operation of its kind. Business Considerations Sales are made directly to the customer. The aerospace segment accounted for approximately 18%, 20% and 20% of our net sales for fiscal years 1999, 1998, and 1997, respectively, and is expected to continue to represent a similar percentage of its sales in the future. Our aerospace segment customers are primarily in the defense and space fields under prime government contracts. The major portion of this business comes from subcontracts that are generally awarded to us on a fixed-price basis. Each new contract involves either the design or manufacture of a new product to meet a specific requirement, or a follow-on order for additional items previously manufactured under other contracts. Inasmuch as our aerospace business involves constant development and engineering of products required by our customers, it would be inappropriate to classify each new item as a new product. Our aerospace products are produced in Fairfield, California. A smaller test facility is located in San Ramon, California. Raw materials used by our aerospace segment include aluminum, inconel, monel, molybdenum, rubbers, copper, alloy and stainless steel, ceramics, silver, titanium alloys, certain commercially available and special-order propellants and explosives, elastomeric seals and epoxy-sealants. This segment is not dependent upon any one source for purchased materials because alternate sources of supply are available in the marketplace. Our aerospace business is not dependent upon patented items, trademarks, franchises, concessions, or licenses thereunder. Our aerospace business is not seasonal. Products are manufactured to order and are shipped according to specified contract delivery dates. Customer payments are reasonably prompt and extended terms or collateral have not been required. We did not have a customer providing more than 10% of consolidated sales in the aerospace segment for the fiscal year 1999. Transactions with the United States Government are with several procurement agencies and/or prime contractors. Although the loss of all government 7 contracts would have an adverse effect, the loss of any one agency or prime contract would not have a materially adverse impact on the Company. There is no particular relationship between our aerospace segment and its customers other than that of supplier/customer. The aerospace segment's funded backlog of orders as of July 31, 1999, was $30.3 million. We estimate that $4.4 million of our backlog will not be recorded as a sale within the fiscal year ending July 31, 2000. The majority of our aerospace business with the United States Government is subject to termination of contracts for the convenience of the United States Government. Such termination, however, is an unusual occurrence. In addition, a significant portion of our aerospace sales for the current and prior years is subject to audit by the Defense Contract Audit Agency. Such audits may occur at any time up to three years after contract completion. Other companies, both larger and smaller than us, also have capabilities and resources to design and develop similar items. We are aware of nine competitors in our aerospace field of propellant and explosive devices. No individual competitor dominates the field. We believe we are in a good competitive position in this segment. On new development and qualification programs, contract awards are based upon technical and competitive price proposals. Subsequent production awards are both negotiated with the customer and subject to competitive bid. The estimated amounts spent by the aerospace segment during each of the last three fiscal years for customer-sponsored and Company-sponsored research and development activities were:
Customer- Company- Sponsored Sponsored ---------- --------- Fiscal year 1999 $1,326,000 $120,000 Fiscal year 1998 2,100,000 153,000 Fiscal year 1997 3,400,000 45,000
Compliance with federal, state, and local provisions regulating the discharge of materials into the environment is not expected to materially affect capital expenditures, earnings, or competitive position of OEA or its subsidiaries. Together with our subsidiaries and divisions, we employ approximately 400 people in our aerospace segment. 8 Financial Information about Foreign and Domestic Operations and Export Sales - ---------------------------------------------------------------------------- (in thousands)
Sales to Unaffiliated Customers FY 1999 FY 1998 FY 1997 - ------------------------------- ---------------- ---------------- --------------- United States $ 139,143 126,777 $ 131,201 Foreign Sales Asia 70,974 83,307 66,901 Europe 18,183 18,974 12,724 Other 20,505 16,317 731 ---------------- ---------------- --------------- Total Foreign Sales 109,662 118,598 80,356 ---------------- ---------------- --------------- Total Sales $ 248,805 245,375 $ 211,557 ================ ================ =============== Identifiable Assets - ------------------- United States $ 264,281 $ 294,614 $ 313,647 France 34,077 34,145 17,909 ---------------- ---------------- --------------- Total Assets $ 298,358 $ 328,759 $ 331,556 ================ ================ ===============
Notes: (1) There were no sales or transfers between the geographic areas reported above. 9 Item 2 - Properties - ------------------- Our properties are located in Arapahoe County, Colorado (near Denver); Fairfield, California; San Ramon, California; Tremonton/Garland, Utah; and Les Mureaux, France. The Arapahoe County facilities are located on 960 acres of land that we own. In fiscal year 1999, automotive operations were conducted in various one-story brick and steel buildings containing 400,000 square feet of floor space in the aggregate. This includes a 173,000 square foot inflator manufacturing facility that was completed in December 1996. The Fairfield, California, facilities are occupied by OEA Aerospace, Inc., our wholly owned subsidiary. Its operations are conducted in twenty buildings containing 180,000 square feet of floor space in the aggregate, located on 515 acres of land that we own. All parts of the various buildings are occupied and used in the operations of our business. The San Ramon, California, property consists of a 10,000 square foot steel building situated on approximately one acre of land that we own. It is occupied by Aerotest Operations, Inc., a wholly owned subsidiary of OEA Aerospace, Inc., which conducts neutron radiography therein. Also contained in this building, as a part of the premises, is a 250-kilowatt nuclear reactor used in the process. The property in Tremonton/Garland, Utah, consists of a 66,000 square foot manufacturing facility located on 160 acres which we own. This facility will accommodate the growing demand for air bag initiators and other automotive safety products for the foreseeable future. The property in Les Mureaux, France, consists of a 34,600 square foot manufacturing facility located on 6 acres and is occupied by OEA Europe S.A.R.L. In 1997 we purchased a 74-acre parcel of land upon which a new inflator facility is being built. The existing and new facilities will accommodate the growing demand for air bag initiators and inflators for the European market for the foreseeable future. The above-described properties are considered suitable and adequate for our operations. Item 3 - Legal Proceedings - -------------------------- The Company is not involved in any legal proceedings that are required to be reported herein. From time to time the Company is subject to minor lawsuits incidental to its operations. The Company believes it has meritorious defenses to all lawsuits in which it is currently a defendant and will vigorously defend against them. The resolution of current lawsuits, regardless of the outcome, will not have a material adverse effect on the Company's results of operations or financial position. Item 4 - Submission Of Matters To A Vote Of Security Holders - ------------------------------------------------------------ None 10 PART II Item 5 - Market For Registrant's Common Stock And Related Stockholder Matters - ----------------------------------------------------------------------------- The Company's common stock, $0.10 par value, is traded on the New York Stock Exchange, New York, New York, under the symbol "OEA." The following table presents the high and low sales prices, as reported in the consolidated transaction reporting system, for the periods indicated. These prices do not include retail markups, markdowns or commissions.
Fiscal Year 1999 High Low ---------------- ---- --- 1st Quarter $12.81 $ 7.75 2nd Quarter 15.06 11.31 3rd Quarter 13.75 8.25 4th Quarter 11.50 7.94 Fiscal Year 1998 High Low ---------------- ---- --- 1st Quarter $41.63 $32.81 2nd Quarter 41.25 26.63 3rd Quarter 29.56 16.63 4th Quarter 19.75 12.75
The approximate number of holders of record of OEA's issued and outstanding shares at October 15, 1999, was 995. The Board of Directors has declared dividends during the last three fiscal years as follows:
Amount Declared Payable Per Share -------- ------- --------- November 1, 1996 December 10, 1996 $.30 November 3, 1997 December 10, 1997 .33 November 24, 1998 December 23, 1998 .08
Any future cash dividends will depend on future earnings, capital requirements, our financial condition and other factors deemed relevant by the Board of Directors. Our credit facility includes financial covenants that could, in certain circumstances, limit our ability to pay dividends in the future. 11 ITEM 6 - SELECTED FINANCIAL DATA - -------------------------------- Consolidated Summary of Operations (in thousands, except per share data)
1999 1998 1997 1996 1995 ---------------- ---------------- ---------------- ---------------- ---------------- Net Sales $ 248,805 245,375 211,557 152,810 129,211 Operating Profit (Loss) 527 (5,588) 49,559 39,066 34,927 Earnings (Loss) Before Minority Interest and Income Taxes (4,154) (13,931) 55,304 40,683 36,226 Minority Interest ---- ---- ---- 25 519 Income Tax Expense (Benefit) 1,746 4,655 (19,863) (15,165) (15,469) ---------------- ---------------- ---------------- ---------------- ---------------- Net Earnings (Loss) Before Cumulative Effect of a Change in Accounting Principle (2,408) (9,276) 35,441 25,543 21,276 Cumulative Effect of a Change in Accounting Principle ---- (10,040) ---- ---- ---- ---------------- ---------------- ---------------- ---------------- ---------------- Net Earnings (Loss) $ (2,408) (19,316) 35,441 25,543 21,276 ================ ================ ================ ================ ================ Basic Earnings (Loss) Per Share Before Cumulative Effect of a Change in Accounting Principle $ (.12) (.45) 1.73 1.25 1.04 ================ ================ ================ ================ ================ Basic Earnings (Loss) Per Share $ (.12) (.94) 1.73 1.25 1.04 ================ ================ ================ ================ ================ Cash Dividends Per Share $ .08 .33 .30 .25 .20 ================ ================ ================ ================ ================ Weighted Average Number of Shares Outstanding During Year 20,602 20,581 20,540 20,499 20,480 ================ ================ ================ ================ ================ Total Number of Shares Outstanding at Year End 20,610 20,595 20,552 20,514 20,487 ================ ================ ================ ================ ================
12 Balance Sheet Data at July 31, (in thousands, except per share data)
1999 1998 1997 1996 1995 ---------- ---------- --------- -------- -------- Current Assets $ 95,875 117,578 127,319 77,579 74,871 Current Liabilities $ 34,192 31,461 36,031 33,524 12,160 Working Capital $ 61,683 86,117 91,288 44,055 62,711 Working Capital Ratio 2.8 to 1 3.7 to 1 3.5 to 1 2.3 to 1 6.2 to 1 Total Assets $ 298,358 328,759 331,556 203,208 160,902 Shareholders' Equity $ 156,574 161,506 186,778 160,448 140,352 Book Value Per Share $ 7.60 7.84 9.09 7.82 6.85
13 Item 7 - Management's Discussion And Analysis Of Financial Condition And Results - -------------------------------------------------------------------------------- Of Operations ------------- Disclosure Regarding Forward Looking Statements - ----------------------------------------------- This report contains certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding Company strategy, its soundness, the inflator and initiator market, inflator and initiator demand, sales volume increases, the benefits of cost reduction programs and improved manufacturing processes, market price levels, correction of quality issues, capacity utilization, new technologies and products, improved customer relations, and year 2000 compliance, as well as other statements or implications regarding future events. Actual results or events may differ materially from these forward-looking statements depending on a variety of factors. Reference is made to the cautionary statements reported on Form 8-K filed on June 4, 1998 for a description of various factors that might cause our actual results to differ materially from those contemplated by such forward-looking statements. Fiscal 1999 Summary - -------------------- During fiscal year 1999, our Automotive Safety Products division aggressively attacked its cost structure and reduced operating costs in all areas. Strengthening the management team with the addition of key personnel with automotive experience allowed us to achieve significant initial results in improving the cost structure in fiscal 1999. Through these efforts, we were able to offset the $48 million in price reductions experienced in fiscal year 1999. In addition to our cost reduction efforts, the Automotive Safety Products division achieved a 35% increase in inflator unit sales and a 30% increase in outside initiator unit sales. In fiscal year 1999, we received significant additional new automotive business awards which we believe will contribute significantly to additional growth in revenue in fiscal year 2000 and beyond. In order to position our business for continued long-term growth in automotive safety products, we hired a seasoned sales and marketing executive as Vice President of Sales and Marketing for our Automotive Safety Products division. We are also focusing on streamlining operations in our aerospace division in order to reduce cycle time and costs while strengthening our position with existing customers and developing new customers in new markets. In addition to improving net income year over year, we significantly strengthened our balance sheet by reducing long-term debt from $124 million a year ago to $91 million. This $33 million decrease in borrowings resulted from positive cash flow from operations and a reduction in working capital. An $11 million decrease in inventory, during a year of significant growth in automotive unit sales, accounted for the majority of the working capital reduction. Additionally, accounts receivable were reduced by nearly $6 million while sales increased. Although we reported a net loss of $.12 per share for the current year, overall net income, working capital, and long-term debt outstanding showed marked improvement from the prior year. 14 Results of Operations - --------------------- Fiscal Year 1999 vs. 1998 - ------------------------- Net Sales - --------- Net sales for fiscal year 1999 were $248.8 million, as compared with fiscal 1998 net sales of $245.4 million. Automotive segment sales were $204.0 million, as compared with the prior year sales of $195.9 million. This 4% growth in sales dollars does not reflect the significant growth in unit shipments for the year due to a weighted average price decrease of 23%, or $45 million. This price reduction was negotiated in 1995/1996 in order to meet competitive pricing. No further price decreases of this magnitude are presently expected. Inflator shipments continued a growth trend as unit shipments increased from 5.6 million units in fiscal 1998 to 7.6 million units in 1999. This 35% increase reflects continued strong demand for hybrid technology inflators worldwide. Initiator shipments to outside customers also increased sharply from fiscal 1998, increasing 30% from 18.4 million units to 24.1 million units in fiscal 1999. This unit sales increase for initiators was partially offset by price reductions of 6%, or $3 million. Aerospace segment sales decreased $4.7 million to $44.8 million in fiscal 1999 primarily due to fluctuations in foreign sales to customers in Asia, the United Kingdom, and Italy. Cost of Sales - ------------- Cost of sales for fiscal year 1999 was $231.0 million, as compared with fiscal 1998 cost of sales of $238.6 million. Automotive segment cost of sales was $194.2 million in fiscal 1999, as compared with $194.8 million in the prior year. The relatively flat cost of sales for the automotive segment reflects the successful implementation of an aggressive cost reduction program in fiscal 1999 and the effect of last year's $19.0 million one-time charges (See "Fiscal 1998 One-time Charges" below). These cost reductions were offset by higher costs associated with the increased inflator and initiator shipments. In order to overcome the effects of $48 million in automotive segment price reductions, we targeted cost improvement initiatives that included: 1) Material cost reductions via design improvements and supplier price reductions; 2) Operating cost reductions through manufacturing scrap improvements; and, 3) Productivity improvements through selective automation projects, product flow streamlining, and the consolidation of operations, including initiator manufacturing. Additional cost improvement was realized as utilization of our new inflator production facility improved from 20% in the fourth quarter of 1998 to 36% in the fourth quarter of 1999. Aerospace segment cost of sales was $36.7 million in fiscal 1999, as compared with $43.8 million in the prior year. This decrease primarily reflects reduced sales and higher 1998 costs including testing and replacement costs relating to a TLX (energy transfer line) performance issue and $1.4 million in one-time charges (see "Fiscal 1998 One-Time Charges" below). 15 Gross Margin - ------------ Gross margin improved to $17.9 million (7.2% of net sales) for fiscal 1999, as compared with $6.8 million (2.8% of net sales) for fiscal 1998. Automotive segment gross margin was $9.7 million (4.8% of net automotive sales) for fiscal 1998, up from $1.1 million (0.6% of net automotive sales) for fiscal 1998. The improved gross margin was a result of improved automotive costs as discussed in "Cost of Sales" above, and the effect of last year's $19.0 million one-time charges (See "Fiscal 1998 One-time Charges" below), partially offset by $48.0 million in price reductions. Aerospace segment gross margin was $8.1 million (18.1% of net aerospace sales) for fiscal 1999, as compared with $5.7 million (11.6% of net aerospace sales) for fiscal 1998. The improved gross margin as a percent of aerospace segment sales primarily resulted from the avoidance of testing and replacement costs relating to a TLX (energy transfer line) performance issue and $1.4 million in one-time charges (see "Fiscal 1998 One-Time Charges" below). Selling and General & Administrative Expenses - --------------------------------------------- General and administrative expenses for fiscal year 1999 were $13.7 million (5.5% of net sales), as compared with $10.9 million (4.4% of net sales), for fiscal year 1998. The 1998 figure included a $1.8 million one-time charge related to the settlement of a legal claim (see "Fiscal 1998 One-Time Charges" below). After adjusting for the one-time charge, the increase would have been $4.6 million. The adjusted increase was partially due to a reclassification from cost of sales of $2.4 million in outbound freight costs. Our normal terms are F.O.B. shipping point; therefore, any freight expenses incurred by us to satisfy customer delivery requirements are now considered a selling expense. A reserve was also established for uncollectible accounts related to one of our customers who filed for bankruptcy protection under chapter 11 after year-end. The remaining growth in expenditures in 1999 was money spent to establish an automotive sales and marketing office in Detroit, to recruit key executives at our aerospace subsidiary, and for corporate training initiatives. These expenses were incurred in order to diversify our automotive customer base and promote long-term growth in both the automotive and aerospace segments. Research and Development Expenses - --------------------------------- Research and development expenses were $3.7 million in fiscal 1999 as compared with $1.5 million in fiscal year 1998. This significant increase in R&D effort reflects continued work on our "smart" (dual-stage) inflators, curtain inflators, micro-gas generators for seat belt pretensioner systems, and other advanced products in early stages of development. Leading-edge technology has been an important part of our success over the years. Continued expenditures in R&D to maintain this competitive advantage is an important part of our long-term strategy. 16 Operating Profit (Loss) - ----------------------- We recorded a $0.5 million operating profit for fiscal year 1999 (0.2% of net sales), as compared with an operating loss of $5.6 million (-2.3% of net sales) for fiscal year 1998. The improved operating profit was a result of cost improvements implemented in 1999 (See "Cost of Sales" above) and higher costs in 1998 related to the one-time charges (See "Fiscal 1998 One-time Charges" below). These favorable items exceeded the negative effects of automotive price decreases and increases in G&A and R&D spending. Other Income and (Expense) - -------------------------- Total other expense was $4.7 million for fiscal year 1999, compared with $8.3 million of expense in the prior year. Fiscal 1998 included a $4.7 million one- time charge for the disposal of idle and obsolete automotive segment equipment (see "Fiscal 1998 One-Time Charges" below). When 1998 is adjusted for the $4.7 million one-time charge, the year over year increase in other expense is $1.1 million. Interest costs increased $1.7 million over the prior year due to a reduction in capitalized interest as significant capital investments were placed in service late in 1998 and into 1999. The increased interest expense was partially offset by an increase in royalty income from our Asian licensee, Daicel Chemical Industries. Cumulative Effect of a Change in Accounting Principle - ----------------------------------------------------- SOP 98-5, "Reporting on the Costs of Start-up Activities" was adopted in 1998 and therefore had no impact on 1999. Net Earnings (Loss) - ------------------- We recorded a $2.4 million net loss for fiscal year 1999 (-1.0% of net sales), as compared with a net loss of $19.3 million (7.9% of net sales) for fiscal year 1998. Basic loss per share was $.12 for fiscal 1999, as compared with a loss of $.94 for fiscal 1998. Fiscal Year 1998 vs. 1997 - ------------------------- Net Sales - --------- Net sales for fiscal year 1998 were $245.4 million, as compared with fiscal 1997 net sales of $211.6 million. The $33.8 million increase from the prior year reflected a 16% sales increase in both the automotive and aerospace segments of our business. Automotive segment sales increased $27.0 million to $195.9 million in fiscal 1998, primarily due to a $48.4 million increase in inflator sales (5.6 million units in fiscal 1998, as compared with 2.9 million units in fiscal 1997), partially offset by a $21.4 million decrease in initiator sales. The increased inflator sales reflected continued strong customer acceptance of our inflator program and increased demand for air bags from both domestic and foreign automobile manufacturers. The reduced initiator sales resulted from a temporary (one year) reduction in demand from a major customer. Aerospace segment sales increased $6.8 million to $49.5 million in fiscal 1998 primarily due to increases in engineering development contracts and the Delta satellite launcher program. 17 Cost of Sales - ------------- Cost of sales for fiscal year 1998 was $238.6 million, as compared with fiscal 1997 cost of sales of $153.2 million. Automotive segment cost of sales was $194.8 million in fiscal 1998, as compared with $116.5 million in the prior year. This increase primarily reflected increased inflator volume, partially offset by reduced initiator volume; a parts shortage resulting in periodic production shut-downs on passenger inflator lines; the impact of the General Motors strike; increased overhead and other costs associated with the new inflator production facility, which was only running at a 20% utilization level by the fiscal 1998 fourth quarter; and $19.0 million in one-time charges (see "Fiscal 1998 One-Time Charges" below). Additionally, automotive segment cost of sales was impacted by the adoption of the AICPA's Statement of Position 98-5, "Reporting the Costs of Start-up Activities." This resulted in expensing previously capitalized inflator start- up costs of $6.7 million in fiscal 1998, partially offset by the reversal of capitalized start-up amortization expense in the amount of $3.7 million. Refer to "Cumulative Effect of a Change in Accounting Principle" below for further detail on Statement of Position 98-5. Aerospace segment cost of sales was $43.8 million in fiscal 1998, as compared with $36.6 million in the prior year. This increase primarily reflected increased sales, testing and replacement costs relating to a TLX (energy transfer line) performance issue and $1.4 million in one-time charges (see "Fiscal 1998 One-Time Charges" below). The cause of the TLX performance problem was quickly identified and corrected and product shipments resumed shortly thereafter. Gross Margin - ------------ Gross margin was $6.8 million (2.8% of net sales) for fiscal 1998, as compared with $58.4 million (27.6% of net sales) for fiscal 1997. Automotive segment gross margin was $1.1 million (0.6% of net automotive sales) for fiscal 1998, as compared with $52.3 million (31.0% of net automotive sales) for fiscal 1997. This decrease in gross margin was primarily due to the increased inflator costs as discussed above, lower leverage of fixed initiator costs due to reduced volume, adoption of the AICPA's Statement of Position 98-5 relating to start-up costs and $19.0 million in one-time charges (see "Fiscal 1998 One-Time Charges" below). Excluding the adoption of SOP 98-5 and the one-time charges, automotive segment gross margin would have been $23.1 million (9.4% of net sales) for fiscal 1998. Aerospace segment gross margin was $5.7 million (11.6% of net aerospace sales) for fiscal 1998, as compared with $6.1 million (14.3% of net aerospace sales) for fiscal 1997. Excluding the $1.4 million one-time charge, aerospace segment gross margins would have been $7.1 million (14.4% of net sales) for fiscal 1998. General and Administrative Expenses - ----------------------------------- General and administrative expenses for fiscal year 1998 were $10.9 million (4.4% of net sales), as compared with $7.4 million (3.5% of net sales), for fiscal year 1997. This increase was primarily due to a $1.8 million one-time charge related to the settlement of a legal claim (see "Fiscal 1998 One-Time Charges" below) and to costs of establishing an infrastructure to service the European inflator market at our French subsidiary, OEA Europe. Excluding the one-time 18 charge, general and administrative expenses as a percentage of net sales would have been 3.7% for fiscal 1998. Research and Development Expenses - --------------------------------- Research and development expenses were $1.5 million for both fiscal year 1998 and fiscal year 1997. Operating Profit (Loss) - ----------------------- We experienced a $5.6 million operating loss for fiscal year 1998 (-2.3% of net sales), as compared with an operating profit of $49.6 million (23.4% of net sales) for fiscal year 1997. Excluding the adoption of SOP 98-5 and the one- time charges, operating profit would have been $19.7 million (8.0% of net sales) for fiscal year 1998. Other Income and (Expense) - -------------------------- Total other expense was $8.3 million for fiscal year 1998, as compared with $5.7 million of income in the prior year. Fiscal 1998 included a $4.7 million one- time charge for the disposal of idle and obsolete automotive segment equipment (see "Fiscal 1998 One-Time Charges" below), while fiscal 1997 included $3.2 million in income for the sale of our foreign joint venture, Pyrospace S.A. The remaining difference was primarily due to interest expense, which was $6.5 million in fiscal 1998, as compared with $0.1 million in fiscal 1997. Interest costs increased due to a higher debt level and the significant reduction in capitalized interest in fiscal 1998. We made substantial capital asset acquisitions (i.e., building and equipment) in fiscal 1997 for which related interest costs were capitalized. These assets were placed in service by fiscal 1998; therefore, a significant amount of interest costs were expensed, not capitalized in fiscal 1998. Cumulative Effect of a Change in Accounting Principle - ----------------------------------------------------- In April 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position 98-5, "Reporting on the Costs of Start-up Activities" (SOP 98-5). This Statement requires entities to expense costs of start-up activities as they are incurred and to report the initial adoption as a cumulative effect of a change in accounting principle as described in Accounting Principles Board Opinion No. 20, "Accounting Changes." Start-up activities are defined broadly as those one-time activities related to opening a new facility, introducing a new product or service, conducting business in a new territory, conducting business with a new class of customer or beneficiary, initiating a new process in an existing facility, or commencing some new operation. SOP 98-5 is effective for fiscal years beginning after December 15, 1998. However, in July 1998 we elected to adopt it retroactively to the first quarter of fiscal 1998. Accordingly, we wrote off in the first quarter the net book value ($10.0 million) of our start-up and related costs included in the scope of SOP 98-5 as a one-time adjustment referred to as a Cumulative Effect of a Change in Accounting Principle. 19 Net Earnings (Loss) - ------------------- We recorded a $19.3 million net loss for fiscal year 1998 (7.9% of net sales), as compared with net earnings of $35.4 million (16.8% of net sales) for fiscal year 1997. Basic loss per share was $.94 for fiscal 1998, as compared with earnings of $1.73 for fiscal 1997. Excluding the adoption of SOP 98-5 and the one-time charges, net earnings would have been $10.0 million and basic earnings per share would have been $.49 for fiscal year 1998. Fiscal 1998 One-Time Charges - ---------------------------- We recognized one-time charges in fiscal 1998 of $17.2 million, net of taxes, or $.83 per share. Explanations of the more significant charges are detailed below. Inventory Adjustments. We booked inventory adjustments totaling $11.3 million - --------------------- ($7.3 million after tax) in the fiscal 1998 third quarter primarily related to the start-up of its new inflator production lines. These adjustments resulted from a combination of the rapid expansion of the inflator program, including significant additions in personnel, and system conversion issues associated with the implementation of a new, fully integrated Enterprise Resource Planning (ERP) System for our automotive operations. Management took immediate action to resolve these problems including a complete re-implementation of the ERP system and quarterly physical counts to ensure performance. Disposal of Inflators. We disposed of early production inflators from our new - --------------------- facility for a total cost of $3.9 million ($2.5 million after tax) in the fiscal 1998 third quarter, which includes both production and disposal costs. This resulted from an unusual quality issue that affected one in ten thousand units. However, due to the unusual nature of the problem, the actual units affected could not be identified. Our automotive products are propellant-actuated, life- saving devices and only the highest level of quality is acceptable. Therefore, all potentially affected units (approximately 130,000 inflators) were disposed of to ensure that they would not be installed in air bag modules or automobiles. Corrective action, which management believes will prevent any future occurrences, was implemented immediately and has been approved by our customers. Production and customer shipments have resumed. Domestic Initiator Consolidation. We incurred costs totaling $5.1 million ($3.2 - -------------------------------- million after tax) in the fiscal 1998 third quarter related to the consolidation of its domestic initiator production operations into its Utah facility. These costs consisted of $0.5 million for equipment and personnel relocation and a $4.6 million charge for idled and/or obsolete equipment and inventory. Settlement of Legal Claim. In consideration of new business and improving - ------------------------- relations, we settled a lawsuit with a major initiator customer. This resulted in a fiscal 1998 third quarter charge of $2.5 million ($1.6 million after tax) for trade receivables and obsolete inventory. In return, the customer committed to significantly higher initiator purchases in fiscal 1999. This resolution was an important milestone toward improving our relationship with this customer. 20 Inflator Equipment Obsolescence. We wrote off $1.9 million ($1.2 million after - ------------------------------- tax) of low-volume inflator production equipment in the fiscal 1998 third quarter. This equipment was originally purchased to support customers' requirements by bridging the gap between prototype production and high-volume production. With our new high-volume inflator production lines becoming fully operational, this low-volume production equipment became idled and obsolete. Aerospace Inventory Obsolescence. As the aerospace business shifts from - -------------------------------- traditional defense/government business to commercial business (satellites and satellite launch vehicles), a more stringent obsolescence approach is required. The new approach was adopted during the fiscal 1998 third quarter and resulted in a charge of $1.4 million ($0.9 million after tax). Liquidity and Capital Resources - ------------------------------- Our working capital decreased $24.4 million during the year to $61.7 million at July 31, 1999 from $86.1 million at July 31, 1998. This 30% improvement primarily resulted from aggressive management of inventory and accounts receivable. We made capital expenditures totaling $17.3 million in fiscal 1999, which were funded from bank borrowings and operating cash flow. On April 10, 1998, we entered into a four-year, $180 million Amended and Restated Revolving Credit Agreement with a group of seven banks. This agreement was amended on June 11, 1998. At our request, this agreement was again amended on December 10, 1998 to reduce the amount of the facility to $150 million, to modify the financial debt covenants, and to pledge as collateral substantially all of our assets. The interest rate (applicable margin plus federal funds rate or LIBOR) is progressive and based upon our ratio of indebtedness to EBITDA. The margin will fluctuate up or down as determined by the above ratio. At July 31, 1999, the applicable interest rate was 7.32%. The agreement contains certain financial covenants including tangible net worth, indebtedness to EBITDA, indebtedness to total capitalization and minimum interest coverage. At our discretion, we may convert all or part of the total debt to Eurodollar or Alternate Base Rate loan(s). This credit facility expires on December 18, 2000, and provides for one twelve-month extension to the termination date. At July 31, 1999, we had reduced our borrowings on this credit facility to $91.0 million as compared with $124.0 million at July 31, 1998. This overall reduction in debt was due to the significant working capital improvement as discussed above and cash flow from operations which yielded a $33.5 million positive cash flow in fiscal year 1999 as compared with a negative $33.0 million in fiscal year 1998. Anticipated working capital requirements, capital expenditures, and facility expansions are expected to be met through bank borrowings and from internally generated funds. 21 Impact of the Year 2000 Issue - ----------------------------- The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. The problem is complicated and, in fact, consists of three different problems. Firstly, it has been common practice in computer programming to identify calendar dates only by the last two digits of the year and to assume that the first two digits are "19". As a result, automated systems may interpret "00" as 1900 instead of 2000, and do one of two things: shut down or make mistakes. Secondly, problems will arise from the fact that the year 2000 is an irregular leap year. If equipment is not programmed appropriately and the date February 29, 2000 does not exist in the software, software applications may malfunction. Finally, the codes "99" or "00", and "999" or "9999" could mean other things, like "error" or "miscellaneous". It can be concluded that computer problems may arise not only on January 1, 2000, but also before the turn of the century and afterwards. These problems could result in miscalculations or failures causing disruptions of operations, including, among other things, a temporary inability to maintain traceability, process transactions, send invoices, or engage in similar normal business activities. We recognize that the Year 2000 problem is a serious issue for businesses, and we are committed to making the transition to Year 2000 compliant systems. We have had a formal program in place to address and resolve potential issues associated with the Year 2000 problem since October 1997. We have devoted significant resources to the identification, remediation, and or replacement of systems that could be effected by the Year 2000 problem. Our goal is to prevent the impairment of our critical business operations and computer processes that we share with our customers and suppliers. Our Year 2000 Project has focused on the following four areas: 1) Products manufactured and distributed by us. 2) Information Systems such as computer hardware/software systems and business application software. 3) Non-Information Systems, such as manufacturing equipment and the mechanical systems in our facilities (including HVAC, security and safety systems). 4) Third party suppliers and customers. OEA Products Because our products do not contain any embedded microchips or date sensitive electronic components, we do not believe that our products will require remediation to address the Year 2000 problem. Information Systems We have conducted an inventory of our critical computer systems and have determined that approximately 99% of such systems now operate with hardware, operating software and basic business applications software that have been certified by third party vendors as Year 2000 compliant. 22 Our largest Year 2000 undertaking has been the replacement of our existing ERP system (Accounting, Inventory Control, and Manufacturing) with Year 2000 certified software. We have successfully implemented and tested the new system in our Denver and Utah operations. In addition, we have upgraded our Human Resources, Payroll, and Fixed-asset tracking software to the latest versions, each of which have been certified by the third-party vendor as Year 2000 compliant. We have also implemented network client management software that will allow us to audit our PC hardware and software and to allow for the rapid deployment of software updates and service packs that address any ancillary Year 2000 issues. Our fiscal Year 2000 began August 1, 1999 and all operations continued without a Year 2000 related issue or disruption. Non-Information Systems We have completed an exhaustive inventory, remediation, and certification of all manufacturing equipment, including factory automation devices. More than 98% of our manufacturing equipment has been tested and is Y2K ready. All telecommunications and environmental controls technology systems have been Year 2000 certified by third party vendors. Third Party Suppliers and Customers Our Year 2000 program also includes assessment of the business impact on us of the failure of third party suppliers and customers to provide needed products, services, information and payments. We are in the process of assessing the Year 2000 readiness of each of our suppliers who is deemed critical to our operations, as well as the Year 2000 status of our major customers. Our transportation providers and local utilities also have been included in our supplier surveys. We and many of our customers use EDI (Electronic Data Interchange) to effect business communications, including orders and shipping information. Our EDI software has been upgraded and certified by third party vendors as Year 2000 compliant. Our EDI VANs (Value Added Networks) have been polled and are Year 2000 ready. In addition to addressing the Year 2000 problem in these four areas, we expect to validate our remediation efforts with additional post-installation testing. We also expect to respond to and initiate requests to test with various external agents, including key suppliers and customers. Given our current state of readiness, if no further remediation effort was made, the most reasonably likely worst case scenario would be only minor disruptions in internal operations. However, external disruptions of our supplier base and the economy in general could have a materially adverse impact on the Company. The amount of potential worst case impact cannot be reasonably estimated at this time. Our current contingency planning efforts are focused on working to identify additional sources of supply for critical materials. We are planning on increasing raw material and finished goods inventories to ensure that our customers are not adversely effected by any unforeseen disruption in the supply chain. During these last few months of 1999, we will be assessing other potential business disruption risks and fine tuning contingency plans to mitigate such risks. We are also planning audits and creating formalized rollover plans. 23 Costs to Address Year 2000 Issues The total cost of our Year 2000 remediation project is currently expected to be approximately $1.6 million. To date we have spent approximately $1.5 million. Our cost projections do not include post installation testing and contingency planning. Additionally, it does not include any costs of business disruptions from supplier or customer non-performance, which cannot be quantified at this time. Independent Validation and Verification On February 9, 1999, BBK, Ltd., at the request of General Motors, performed a Year 2000 Readiness Assessment of OEA. The risk assessment score is based on a statistical model that uses several variables (acceptance testing, remediation, risk evaluation, planned completion of inventories, etc.). The assessor then gives a subjective score that results in a green (low risk), yellow (medium risk), or red (high-risk) rating. Based on this assessment, we received a green (low risk of Y2K failure) rating from BBK. Foreign Currency Translation - ---------------------------- Assets and liabilities of our foreign subsidiary are translated to U.S. dollars at period-end exchange rates. Income and expense items are translated at average exchange rates prevailing during the period. The local currency (French Francs) is used as the functional currency for the foreign subsidiary. A translation adjustment results from translating the foreign subsidiary's accounts from functional currencies to U.S. dollars. Exchange gains (losses) resulting from foreign currency transactions are included in the consolidated statements of earnings. 24 Item 8 - Financial Statements And Supplementary Data - ---------------------------------------------------- Report of Independent Auditors The Board of Directors and Stockholders OEA, Inc. We have audited the accompanying consolidated balance sheets of OEA, Inc. and subsidiaries as of July 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended July 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of OEA, Inc. and subsidiaries at July 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended July 31, 1999, in conformity with generally accepted accounting principles. As discussed in Note 1 to the financial statements, in 1998 the Company changed its method of accounting for start-up activities. ERNST & YOUNG LLP Denver, Colorado September 20, 1999 25 OEA, Inc. and Subsidiaries Consolidated Balance Sheets (in thousands, except per share data)
July 31 1999 1998 -------------------------- Assets Current assets: Cash and cash equivalents $ 2,445 $ 1,920 Accounts receivable 35,236 43,998 Unbilled costs and accrued earnings 6,302 3,190 Inventories 43,594 54,567 Income taxes receivable 3,858 12,040 Prepaid expenses and other 2,006 1,665 Deferred income taxes 2,434 198 ---------------------------- Total current assets 95,875 117,578 Property, plant, and equipment: Land and improvements 3,662 3,474 Buildings and improvements 68,145 64,827 Machinery and equipment 205,019 194,506 Furniture and fixtures 10,798 9,604 ---------------------------- 287,624 272,411 Accumulated depreciation and amortization 90,907 67,761 ---------------------------- 196,717 204,650 Long-term receivable 2,000 3,000 Investment in foreign joint venture 2,323 2,323 Other assets 1,443 1,208 ---------------------------- Total assets $298,358 $328,759 ============================
26
July 31 1999 1998 ------------------------ Liabilities and stockholders' equity Current liabilities: Accounts payable $ 25,665 $ 22,457 Accrued expenses: Salaries and wages 3,010 2,598 Profit sharing and pension contributions 1,741 2,109 Interest payable 2,137 2,368 Other 1,639 1,929 ------------------------ Total current liabilities 34,192 31,461 Long-term bank borrowings 91,000 124,000 Deferred income taxes 16,009 10,821 Other 583 971 Commitments and contingencies Stockholders' equity: Common stock, $0.10 par value: Authorized shares - 50,000,000 Issued and outstanding shares - 22,019,700 2,202 2,202 Additional paid-in capital 13,376 13,201 Retained earnings 146,333 150,440 Equity adjustment from translation (3,220) (2,195) Treasury stock, 1,408,379 and 1,424,943 shares in 1999 and 1998, respectively, at cost (2,117) (2,142) ------------------------ Total stockholders' equity 156,574 161,506 ------------------------ Total liabilities and stockholders' equity $298,358 $328,759 ========================
See accompanying notes. 27 OEA, Inc. and Subsidiaries Consolidated Statements of Operations (in thousands, except per share data)
Year ended July 31 1999 1998 1997 ----------------------------------------------- Net sales $248,805 $245,375 $211,557 Cost of sales 230,951 238,571 153,153 ----------------------------------------------- Gross profit 17,854 6,804 58,404 General and administrative expenses 13,655 10,866 7,372 Research and development expenses 3,672 1,526 1,473 ----------------------------------------------- Operating profit (loss) 527 (5,588) 49,559 Other income (expense): Interest income 206 317 248 Interest expense (8,079) (6,479) (102) Equity in earnings of foreign joint venture - - 302 Gain on sale of foreign joint venture - - 3,243 Royalty income 3,431 2,222 2,255 Loss on sale of property, plant, and Equipment (46) (4,676) (176) Other, net (193) 273 (25) ----------------------------------------------- (4,681) (8,343) 5,745 ----------------------------------------------- Earnings (loss) before income taxes (4,154) (13,931) 55,304 Income tax expense (benefit) (1,746) (4,655) 19,863 ----------------------------------------------- Earnings (loss) before cumulative effect of change in accounting principle (2,408) (9,276) 35,441 Cumulative effect of change in accounting Principle, net of tax benefit of $5,965 - (10,040) - ----------------------------------------------- Net earnings (loss) $ (2,408) $(19,316) $ 35,441 ===============================================
28 OEA, Inc. and Subsidiaries Consolidated Statements of Operations (continued) (in thousands, except per share data)
Year ended July 31 1999 1998 1997 --------------------------------------------------- Basic net earnings (loss) per share: Net earnings (loss) per share before cumulative effect of change in accounting principle $ (0.12) $ (0.45) $ 1.73 Cumulative effect of change in accounting Principle - (0.49) - --------------------------------------------------- Net earnings (loss) per share $ (0.12) $ (0.94) $ 1.73 =================================================== Diluted net earnings (loss) per share: Net earnings (loss) per share before cumulative effect of change in accounting principle $ (0.12) $ (0.45) $ 1.72 Cumulative effect of change in accounting Principle - (0.49) - --------------------------------------------------- Net earnings (loss) per share $ (0.12) $ (0.94) $ 1.72 =================================================== Weighted average number of shares outstanding: Basic 20,602 20,581 20,540 =================================================== Diluted 20,602 20,581 20,606 ===================================================
See accompanying notes. 29 OEA, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity (in thousands, except share data)
Accumulated Additional Other Total Common Stock Treasury Stock Paid-In Retained Comprehensive Stockholders' Shares Amount Shares Amount Capital Earnings Income Equity ------------------------------------------------------------------------------------------ Balances at July 31, 1996 22,019,700 $2,202 1,505,256 $(2,104) $12,467 $147,268 $ 615 $160,448 Purchase of common stock for Treasury - - 2,500 (117) - - - (117) Issuance of treasury stock for options exercised - - (40,225) 57 489 - - 546 Cash dividends ($0.30 per share) - - - - - (6,162) - (6,162) Net earnings - - - - - 35,441 - 35,441 Currency translation adjustment - - - - - - (3,378) (3,378) ------------ Comprehensive Income - - - - - - - 32,063 ----------------------------------------------------------------------------------------- Balances at July 31, 1997 22,019,700 2,202 1,467,531 (2,164) 12,956 176,547 (2,763) 186,778 Purchase of common stock for Treasury - - 1,162 (43) - - - (43) Issuance of treasury stock for options exercised - - (43,750) 65 245 - - 310 Cash dividends ($0.33 per share) - - - - - (6,791) - (6,791) Net loss - - - - - (19,316) - (19,316) Currency translation adjustment - - - - - - 568 568 ------------ Comprehensive Income - - - - - - - (18,748) ----------------------------------------------------------------------------------------- Balance at July 31, 1998 22,019,700 2,202 1,424,943 (2,142) $13,201 $150,440 (2,195) 161,506 Issuance of treasury stock for options exercised and sales of common stock - - (13,878) 21 72 - - 93 Deferred common stock and options to directors and officers - - (2,686) 4 103 - - 107 Cash dividends ($0.08 per share) - - - - - (1,699) - (1,699) Net loss - - - - - (2,408) - (2,408) Currency translation adjustment - - - - - - (1,025) (1,025) ------------ Comprehensive Income - - - - - - - (3,433) ----------------------------------------------------------------------------------------- Balances at July 31, 1999 22,019,700 $2,202 1,408,379 $(2,117) $13,376 $146,333 $(3,220) $156,574 =========================================================================================
See accompanying notes. 30 OEA, Inc. and Subsidiaries Consolidated Statements of Cash Flows (in thousands)
Year ended July 31 1999 1998 1997 --------------------------------------------------- Operating activities Net earnings (loss) $ (2,408) $(19,316) $ 35,441 Adjustments to reconcile net earnings (loss) to net cash Provided by operating activities: Cumulative effect of change in accounting principle - 10,040 - Undistributed earnings of foreign joint venture - - (302) Gain on sale of foreign joint venture - - (3,243) Depreciation and amortization 24,091 21,413 15,597 Deferred income taxes 2,952 (72) 6,337 Decrease in deferred compensation (388) - (177) Common stock and options issued to directors and officers for services 107 - - Loss on sale of property, plant, and equipment 46 4,676 176 Changes in operating assets and liabilities: Accounts receivable 9,013 1,305 (16,127) Unbilled costs and accrued earnings (3,112) 873 2,783 Inventories 10,914 15,901 (34,108) Prepaid expenses and other (139) (555) (40) Accounts payable and accrued expenses 2,843 (3,567) 17,323 Income taxes 8,774 (8,689) (1,735) --------------------------------------------------- Net cash provided by operating activities 52,693 22,009 21,925 Investing activities Capital expenditures (17,341) (48,985) (87,197) Cash proceeds from sale of joint venture - - 4,624 Proceeds from sale of property, plant, and equipment 239 403 - Decrease in cash value of life insurance - 297 - Increase in deferred charges - - (10,639) Increase in other assets, net (402) (116) (102) --------------------------------------------------- Net cash used in investing activities (17,504) (48,401) (93,314) Financing activities Purchase of common stock for treasury - (43) (117) Proceeds from issuance of treasury stock 93 310 546 Increase (decrease) in net bank borrowings (33,000) 30,800 79,200 Payment of dividends (1,699) (6,791) (6,162) --------------------------------------------------- Net cash provided by (used in) financing activities (34,606) 24,276 73,467 Effect of exchange rate changes on cash (58) (102) (500) --------------------------------------------------- Net increase (decrease) in cash and cash equivalents 525 (2,218) 1,578 Cash and cash equivalents at beginning of year 1,920 4,138 2,560 --------------------------------------------------- Cash and cash equivalents at end of year $ 2,445 $ 1,920 $ 4,138 =================================================== Supplemental information: Interest payments $ 8,551 $ 7,620 $ 2,348 Income tax payments - 3,843 15,017
See accompanying notes. 31 OEA, Inc. and Subsidiaries Notes to Consolidated Financial Statements July 31, 1999 1. Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts and transactions of OEA, Inc. (the "Company"), its wholly owned subsidiary, OEA Aerospace, Inc., and wholly owned foreign operating subsidiary, OEA Europe (previously named Pyroindustrie S.A.). All significant intercompany balances and transactions have been eliminated. The investment in affiliated companies in which the Company owns greater than 20%, but less than 50%, and can exercise significant influence over operating and financial policies is accounted for under the equity method. The investment in affiliated companies in which the Company does not have control or the ability to exercise significant influence over operating and financial policies, generally less than 20% ownership, is accounted for using the cost method (see also Note 3). Revenue Recognition Sales of products within the automotive segment are recognized as shipments are made. Sales of products within the aerospace segment are recognized as deliveries are made or when the products are completed and held on the Company's premises to meet specified contract delivery dates. Unbilled costs and accrued earnings are recorded as costs are incurred on aerospace contracts and relate to products anticipated to be delivered and billed within 12 months of the balance sheet date. Costs are based on the estimated average cost per unit. Cash Equivalents The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Inventories Inventories of raw materials and component parts are stated at the lower of cost (principally first-in, first-out) or market. Inventoried costs of work in process and finished goods are stated at average production costs consisting of materials, direct labor, and manufacturing overhead. 32 1. Accounting Policies (continued) Property, Plant, and Equipment Property, plant, and equipment are recorded at cost. Expenditures for maintenance and repairs are charged to earnings as incurred, and major renewals and betterments are capitalized. Upon sale or retirement, the cost of the assets and related accumulated depreciation are removed from the accounts, and the resulting gains or losses are reflected in operations. Depreciation is computed on the straight-line, double-declining balance, and units-of-production methods at rates calculated to amortize the cost of the depreciable assets over the related useful lives. Plant and equipment lives are estimated as follows: Buildings and improvements 10-30 years Machinery and equipment 5-10 years Furniture and fixtures 5-10 years Depreciation charged to costs and expenses was $23.9 million, $21.3 million, and $14.8 million in 1999, 1998, and 1997, respectively. Repairs and maintenance charged to costs and expenses was $8.5 million, $8.2 million, and $7.7 million in 1999, 1998, and 1997, respectively. Long-Lived Assets Long-lived assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is based upon future discounted cash flows from the use of the assets. If this review indicates that such assets will not be recoverable, the carrying amount of such assets is adjusted to fair value. Deferred Start-Up Costs During the initial phase of product introduction or development of significant new plant facilities for which prospective sales and cost recovery are based upon long-term commitments from customers, start-up costs were being deferred and amortized on a straight-line basis over periods not exceeding five years. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5 ("SOP 98-5"), Reporting on the Costs of Start-Up Activities, which requires the Company to expense start-up, preopening and organizational expenses as incurred. The Company early adopted SOP 98-5 as of August 1, 1997 and has reported the initial application as a cumulative effect of a change in accounting principle in the consolidated statement of operations for the year ended July 31, 1998. The effect of the change in accounting principle was to increase the net loss reported for 1998 by approximately $10.0 million (net of tax of $6.0 million), or $0.49 per share. 33 1. Accounting Policies (continued) Research and Development Expenses for new products or improvements of existing products, net of amounts reimbursed from others, are charged against operations in the year incurred. Foreign Currency Translation Assets and liabilities of the Company's foreign subsidiary (OEA Europe) are translated to U.S. dollars at period-end exchange rates. Income and expense items are translated at average exchange rates prevailing during the period. The local currency is used as the functional currency for the foreign subsidiary. A translation adjustment, which is recorded as a separate component of stockholders' equity, results from translating the foreign subsidiary's accounts from functional currencies to U.S. dollars. Exchange gains (losses) resulting from foreign currency transactions are included in the consolidated statements of operations. Stock-Based Compensation As permitted by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, the Company has chosen to continue to account for stock-based compensation to employees using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the options' exercise price. Earnings per Share Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Common equivalent shares consist of the shares issuable upon the exercise of stock options under the treasury stock method. Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. 34 1. Accounting Policies (continued) Fair Value of Financial Instruments The Company's financial instruments consist principally of cash and cash equivalents, receivables, unbilled costs and accrued earnings, accounts payable, and bank borrowings. The Company believes all of the financial instruments' recorded values approximate current values. Recently Issued Pronouncements In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 130, Reporting Comprehensive Income. The Statement establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The Company adopted Statement No. 130 during the first quarter of fiscal year 1999. The effect of the adoption was not material. In June 1997, the FASB issued Statement No. 131, Disclosures about Segments of an Enterprise and Related Information. The Statement requires public companies to report certain information about operating segments in complete sets of financial statements and in condensed financial statements of interim periods issued to stockholders. Under Statement No. 131, operating segments are to be determined based on how management measures performance and makes decisions about allocating resources. It also requires that public companies report certain information about their products and services, the geographic areas in which they operate, and their major customers. Statement No. 131 is effective for fiscal years beginning after December 15, 1997. The Company adopted Statement No. 131 in the fourth quarter of fiscal year 1999. The adoption of Statement No. 131 had no effect on the Company's determination of its operating segments. 2. Inventories Inventories are summarized as follows (in thousands):
July 31 1999 1998 ---------------------------- Raw materials and component parts $24,056 $25,954 Work in process 12,139 17,222 Finished goods 7,399 11,391 ---------------------------- $43,594 $54,567 ============================
35 3. Investment in Foreign Joint Ventures In 1986, the Company signed a joint venture agreement with two French companies for the establishment of a company in France, Pyrospace S.A. ("Pyrospace"). Pyrospace was engaged in the design, development, and manufacture of propellant and explosive devices for European space programs, as well as aircraft and missiles. Effective December 31, 1996, Pyrospace was merged with another French aerospace company, Pyromeca S.A., creating a new entity, PyroAlliance S.A. The Company sold its original ownership share of Pyrospace (45%) to SNPE S.A. (owner of Pyromeca S.A.) for 25 million French francs (approximately $4.8 million) and a 10% ownership in PyroAlliance S.A. This transaction resulted in a gain to the Company of approximately $3.2 million, which is reflected in "Other Income" in the year ended July 31, 1997. During 1993, a joint venture agreement was signed between the Company (80% owner) and Pyrospace (20% owner) for the establishment of a company in France, Pyroindustrie S.A. Pyroindustrie is engaged in the manufacture of initiators for the European air bag market. In 1996, the Company acquired the remaining 20% of Pyroindustrie, making Pyroindustrie a wholly owned subsidiary of the Company. In fiscal 1999, the Company changed the name of the wholly owned subsidiary from Pyroindustrie to OEA Europe. Net assets of OEA Europe at July 31, 1999 and 1998 totaled $34.1 million and $35.6 million, respectively. 4. Royalty Agreement During 1995, the Company entered into a fifteen-year agreement with Daicel Chemical Industries, Ltd., Tokyo, Japan ("Daicel"), for the transfer of technology and supply of the Company's single-stage hybrid inflators for passenger, driver and side-impact automotive air bags. Royalty payments totaling $3.0 million, $2.0 million, and $2.0 million, have been received related to this agreement during 1999, 1998, and 1997, respectively. 36 5. Bank Borrowings On April 10, 1998, the Company entered into a $180 million Amended and Restated Revolving Credit Agreement with a group of seven banks. This agreement was amended on June 11, 1998. At the Company's request, this agreement was again amended on December 10, 1998 to reduce the amount of the facility to $150 million, to modify the financial debt covenants, and to pledge as collateral substantially all of our assets. The Company's principal bank is acting as agent for this agreement. The interest rate, applicable margin plus federal funds or LIBOR, is progressive and based upon the Company's ratio of total indebtedness to earnings before interest, taxes, depreciation and amortization ("EBITDA") plus interest income. At July 31, 1999, the interest rate was approximately 7.3%. At the Company's discretion, it may convert all or part of the total debt to Eurodollar or Alternate Base rate loan(s). The line of credit expires on December 18, 2000 and provides for one twelve-month extension to the maturity date. At July 31, 1999, the total debt outstanding related to the line of credit facility was $91 million. All debt relating to this line of credit is classified as long term at July 31, 1999, since the expiration date for the line of credit is December 18, 2000 and none of the debt balance is either due or expected to be permanently repaid within the next twelve-month period. Prior to the above discussed Amended and Restated Agreement, the Company entered into an unsecured, four-year $100 million Revolving Credit Agreement with a group of four banks on December 18, 1996. This agreement was amended on September 10, 1997 to increase the revolving credit facility to $130 million. The interest rate was .625% above the federal funds rate when total indebtedness was equal to or less than 30% of total capitalization and increased to .7% above the federal funds rate when total indebtedness exceeded 30% of total capitalization. Additionally, the Company paid annual fees equal to .125% of the banks' total commitment. The above agreements contain certain financial covenants including tangible net worth, indebtedness to EBITDA, indebtedness to total capitalization and minimum interest coverage. The company has, from time to time, failed to meet a given financial covenant; however, it has successfully negotiated a temporary waiver or amendment to the agreement in each such instance. Interest costs incurred during fiscal years 1999 and 1998 were $9.3 million and $8.8 million, including capitalized interest of $1.2 million and $2.3 million, respectively. The weighted average interest rate on bank borrowings during fiscal years 1999 and 1998 was 6.8% and 6.4% respectively. 37 6. Commitments and Contingencies Contract disputes and other claims may arise in connection with government contracts and subcontracts. A substantial portion of the Company's aerospace sales for the current and prior years is subject to audit by the Defense Contract Audit Agency. Such audits may occur at any time up to three years after contract completion. In the opinion of the Company's management, a provision for government claims is not necessary. At July 31, 1999, the Company had commitments to purchase approximately $4.3 million of property, plant, and equipment. 7. Profit Sharing and Pension Plans The Company has noncontributory profit sharing and defined contribution pension plans covering all full-time employees. The Company is committed to contribute to the pension plans 5% of participants' eligible annual compensation as defined in the plan documents. Employer contributions to the profit sharing plans are discretionary, but are not to exceed 10% of eligible annual compensation. Combined contributions to these plans for the years ended July 31, 1999, 1998, and 1997 were $1.8 million, $2.0 million, and $2.2 million, respectively. 38 8. Income Taxes Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's net deferred tax liabilities as of July 31, 1999 and 1998 are as follows (in thousands):
1999 1998 ----------------------------- Current deferred tax liabilities: Unbilled receivables $ 83 $ 282 Deferred income - 387 Prepaid expenses 73 152 Other - 158 ----------------------------- Total current deferred tax liabilities 156 979 Long-term deferred tax liabilities: Plant and equipment 13,970 8,464 Deferred income 884 864 Capitalized interest expense 1,782 1,705 Other 248 73 ----------------------------- Total long-term deferred tax liabilities 16,884 11,106 ----------------------------- Total deferred tax liabilities 17,040 12,085 Current deferred tax assets: Inventory capitalization 2,286 - Allowances 304 1,151 Other - 26 ----------------------------- Total current deferred tax assets 2,590 1,177 Long-term deferred tax asset: Deferred compensation 279 285 State tax carryforwards 277 - Other 319 - ----------------------------- Total long-term deferred tax assets 875 285 ----------------------------- Total deferred tax assets 3,465 1,462 ------------------------------ Net deferred tax liabilities $13,575 $10,623 =============================
39 8. Income Taxes (continued) Components of income tax expense (benefit) are as follows (in thousands):
Current Deferred Total ------------------------------------------ 1999: Federal $(4,485) $2,659 $(1,826) State (213) 293 80 ------------------------------------------ $(4,698) $2,952 $(1,746) ========================================== 1998: Federal $(4,266) $ 75 $(4,191) State (355) (109) (464) ------------------------------------------ $(4,621) $ (34) $(4,655) ========================================== 1997: Federal $11,491 $5,515 $17,006 State 2,035 822 2,857 ------------------------------------------ $13,526 $6,337 $19,863 ==========================================
Actual tax expense for 1999, 1998, and 1997 differs from "expected" tax expense for those years (computed by applying the U.S. federal corporate tax rate of 35% to earnings before income taxes) as follows (in thousands):
1999 1998 1997 --------------------------------------- Computed "expected" tax expense (benefit) $ (1,454) $(4,876) $19,356 Increases (reductions) in taxes resulting from: State taxes, net of federal income tax benefit 52 (230) 1,877 Sales to foreign customers (345) (194) (494) Tax effect of joint venture operations - - (105) Income tax credits (269) (76) (915) Other 270 721 144 -------------------------------------- Actual tax expense (benefit) $ (1,746) $(4,655) $19,863 ======================================
40 9. Stock Options The Company follows APB No. 25 and related interpretations in accounting for its employee stock options, and has adopted the disclosure-only option under FASB Statement No. 123, Accounting for Stock-Based Compensation. The stockholders approved an Employees' Stock Option Plan (the "Employees' Plan") on January 13, 1995, and a Nonemployee Directors' Stock Option Plan (the "Directors' Plan") on January 12, 1996. These plans provide for stock options to be granted for a maximum of 1,350,000 shares of common stock under the Employees' Plan and a maximum of 50,000 shares of common stock under the Directors' Plan. Options may be granted to employees and nonemployee directors at prices not less than fair market value of the Company's common stock on the date of grant. Vesting of the options granted under the Employees' Plan and the Directors' Plan is established by the Board of Directors at the time of grant. Employee and Director stock options have a ten-year life from the date of the grant, except that any options granted to a recipient who owns more than 10% of the total combined voting power of the stock of the Company have a five-year life from the date of the grant. Shares may be granted from either authorized, but unissued, common stock or issued shares reacquired and held as treasury stock. Prior to July 28, 1994, the Company had a qualified incentive stock option plan for key employees of the Company whereby a total of 666,000 shares of common stock were reserved for issuance ("Previous Employees' Plan"). Options were granted to key employees at prices not less than the fair market value of the Company's common stock on the date of grant, and were exercisable after one year of continuous employment following the date of grant. Options had a ten-year life from the date of the grant, except that any option granted to a recipient who owned more than 10% of the total combined voting power of the stock of the Company had a five-year life from the date of the grant. 41 9. Stock Options (continued) The following schedule shows the activity in each of these plans for the past three years:
Previous Employees' Plan Employees' Plan Directors' Plan ------------------------------------------------------------------------------------------ Number of Weighted Number of Weighted Number of Weighted Shares Avg Price Shares Avg Price Shares Avg Price -------------------------- ---------------------------- --------------------------- Options outstanding at July 31, 1996 130,514 $14.21 25,272 $28.34 4,375 $27.75 Granted - - 25,800 38.34 4,375 45.13 Exercised (36,950) 12.11 (3,275) 28.34 - - Forfeited (1,836) 24.20 (2,293) 33.31 - - --------- ---------- ---------- Options outstanding at July 31, 1997 91,728 14.86 45,504 33.70 8,750 36.44 Granted - - 140,000 16.43 4,375 27.69 Exercised (43,250) 6.95 (500) 19.00 - - Forfeited (7,086) 28.69 (7,700) 35.05 - - --------- ---------- ---------- Options outstanding at July 31, 1998 41,392 20.99 177,304 19.93 13,125 33.52 Granted - - 437,000 9.66 6,491 12.96 Exercised (4,844) 4.67 - - - - Forfeited (2,286) 25.42 (9,518) 33.08 - - --------- ---------- ---------- Options outstanding at July 31, 1999 34,262 23.00 604,786 12.30 19,616 26.72 ========= ========== ==========
The following schedule shows the exercise prices, the quantities, and the weighted average remaining contractual lives for all options outstanding and exercisable at July 31, 1999:
Weighted Average Number of Options Weighted Average Exercise Price Outstanding Remaining Life (years) ------------------------------------------------------------------------ Previous Employees' Plan $19.00 - $30.00 $23.00 34,262 3.0 Employees' Plan $8.31 - $13.81 9.66 437,000 9.3 $14.19 - $19.06 16.43 140,000 8.9 $28.00 - $37.88 33.06 27,786 6.8 Directors' Plan $8.56- $13.81 12.96 6,491 9.5 $27.69 - $45.13 33.52 13,125 7.5
42 9. Stock Options (continued) If fair value accounting under Statement No. 123 had been adopted as of the beginning of fiscal year 1996, the pro forma effects on net earnings and earnings per share, as calculated using the Black-Scholes option-pricing model, would have been as follows:
1999 1998 1997 ----------------------------------------------------------- Estimated fair value per share of options granted to: Employees $4.67-$7.44 $ 5.70-$7.70 $ 14.52 Directors $4.74-$7.44 $ 11.07 $ 17.40 Effect on net earnings $ (547,221) $ (128,000) $(434,000) Effect on basic and diluted earnings per share $ (0.03) $ (0.01) $ (0.02) Assumptions: Annualized dividend yield 0.70% 0.70% 0.70% Common stock price volatility 62.1% 39.0% 35.40% Risk-free rate of return 4.41%-5.93% 5.39%- 5.65% 5.87% Expected option term (years) 5.0 5.0 5.0
10. Segment Information and Major Customers The Company operates primarily in two industry segments, automotive and aerospace. Financial information for each segment and major customers is summarized as follows (in thousands):
1999 -------------------------------------------- Automotive Aerospace Total -------------------------------------------- Net sales $203,963 $44,842 $248,805 Operating profit (loss) (3,549) 4,076 527 Identifiable assets 252,556 45,802 298,358 Depreciation and amortization expenses 22,916 1,175 24,091 Capital expenditures 15,730 1,611 17,341
43 10. Segment Information and Major Customers (continued)
1998 ---------------------------------------------- Automotive Aerospace Total ---------------------------------------------- Net sales $195,891 $49,484 $245,375 Operating profit (loss) (8,765) 3,177 (5,588) Identifiable assets 276,063 52,696 328,759 Depreciation and amortization expense 20,167 1,246 21,413 Capital expenditures 47,577 1,408 48,985
1997 ---------------------------------------------- Automotive Aerospace Total ---------------------------------------------- Net sales $168,869 $42,688 $211,557 Operating profit 45,522 4,037 49,559 Identifiable assets 275,153 56,403 331,556 Depreciation and amortization expense 13,842 1,755 15,597 Capital expenditures 85,304 1,893 87,197
The automotive segment includes the design, development and manufacture of propellant-actuated devices for use in automotive safety products. The products currently in production are inflators and electric initiators which are sold to automotive module and inflator manufacturers. The aerospace segment primarily includes the manufacture and sale of propellant and explosive-actuated devices for the U.S. government and prime contractors of the U.S. government and foreign governments, and the manufacture and sale of similar explosive-actuated devices for commercial aircraft. Customer payments of accounts receivable are reasonably prompt and collateral is not required. 44 10. Segment Information and Major Customers (continued) Customers representing 10% or more of consolidated net sales are as follows:
1999 1998 1997 ---------------------------------- Takata Corporation 30% 33% 24% Daicel Chemical Industries 11% 12% 7% Delphi Interior & Lighting 20% 15% 18%
Sales to foreign customers were 44%, 48%, and 38%, of consolidated net sales for the years 1999, 1998 and 1997, respectively, and consisted primarily of sales to Asian automotive module and inflator manufacturers. The Company ships product to its Asian automotive customers' manufacturing operations located both in the United States and Asia. Accounts receivable are summarized as follows (in thousands):
1999 1998 ------------------------ Automotive $27,812 $30,366 Aerospace 7,424 13,632 ------------------------ $35,236 $43,998 ========================
45 11. Quarterly Results of Operations (Unaudited)
October 31 January 31 April 30 July 31 ---------------------------------------------------------------- (in thousands, except share data) 1999 - ---- Net sales $56,793 $59,434 $ 66,700 $65,878 Gross profit (loss) 1,509 2,871 5,969 7,505 Net earnings (loss) (2,716) (1,001) 324 985 Earnings (loss) per share--basic and diluted $ (0.13) $ (0.05) $ 0.02 $ 0.05 1998 - ---- Net sales Gross profit (loss) $57,335 $59,414 $ 63,592 $65,034 Earnings (loss) before cumulative effect of 10,164 8,109 (12,908) 1,439 change in accounting principle Cumulative effect of change in accounting principle 4,632 2,378 (14,925) (1,361) Net earnings (loss) 10,040 - - - Earnings (loss) per share before cumulative (5,408) 2,378 (14,925) (1,361) effect of change in accounting principle--basic and diluted Cumulative effect of change in accounting principle--basic and diluted $ 0.23 $ 0.12 $ (0.72) $ (0.08) Earnings (loss) per share--basic and diluted $ (0.49) - - - $ (0.26) $ 0.12 $ (0.72) $ (0.08)
During the quarter ended July 31, 1999, the Company received a $2.8 million royalty payment net of tax related to the technology transfer agreement with Daicel. The royalty payment was recognized as other income ratably over the year ended July 31, 1999. During the quarters ended July 31, 1998, the Company recorded other income of $1.8 million net of tax, or $0.09 per share, related to royalty payments received under the technology transfer agreement with Daicel. During the quarter ended April 30, 1998, the Company recorded one-time charges of $17.2 million net of tax, or ($0.84) per share, related to inventory adjustments, disposal of early production inflators, domestic initiator consolidation, settlement of a legal claim, inflator equipment obsolescence, and aerospace inventory obsolescence. The Company adopted SOP 98-5, Reporting on the Costs of Start-up Activities, as of August 1, 1997, which was accounted for as a cumulative effect of change in accounting principle. 46 Item 9 - Changes In And Disagreements With Accountants On Accounting And - ------------------------------------------------------------------------- Financial Disclosure - -------------------- Not applicable 47 PART III Item 10 - Directors And Executive Officers Of The Registrant - ------------------------------------------------------------ The information required by this item will appear in, and is incorporated by reference from, the Registrant's definitive proxy statement for its 2000 annual shareholders' meeting to be filed with the Securities and Exchange Commission prior to November 29, 1999. Item 11 - Executive Compensation - -------------------------------- The information required by this item will appear in, and is incorporated by reference from, the Registrant's definitive proxy statement for its 2000 annual shareholders' meeting to be filed with the Securities and Exchange Commission prior to November 29, 1999. Item 12 - Security Ownership Of Certain Beneficial Owners And Management - ------------------------------------------------------------------------- The information required by this item will appear in, and is incorporated by reference from, the Registrant's definitive proxy statement for its 2000 annual shareholders' meeting to be filed with the Securities and Exchange Commission prior to November 29, 1999. Item 13 - Certain Relationships And Related Transactions - -------------------------------------------------------- The information required by this item, if any, will appear in, and is incorporated by reference from, the Registrant's definitive proxy statement for its 2000 annual shareholders' meeting to be filed with the Securities and Exchange Commission prior to November 29, 1999. 48 PART IV Item 14 - Exhibits, Financial Statement Schedules And Reports On Form 8-K - ------------------------------------------------------------------------- (a) Documents filed as a part of this report: (1) Financial Statements: Report of Independent Auditors Consolidated Balance Sheets - July 31, 1999 and 1998 Consolidated Statements of Operations Years ended July 31, 1999, 1998, and 1997 Consolidated Statements of Stockholders' Equity Years ended July 31, 1999, 1998, and 1997 Consolidated Statements of Cash Flows Years ended July 31, 1999, 1998, and 1997 Notes to Consolidated Financial Statements (2) Financial Statement Schedules required to be filed by Item 8 of Form 10-K and by paragraph (d) of this Item 14: The schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore, have been omitted. (3) Exhibits required to be filed by Item 601 of Regulation S-K and paragraph (c) of this Item 14: Exhibit 3.1 - Articles of Incorporation, as amended (filed herewith). Exhibit 3.2 - By-laws, as amended (filed herewith). Exhibit 10.1 - Amended and Restated Revolving Credit Agreement, dated April 10, 1998 (incorporated by reference from the Company's Form 10-Q for the period ended May 1, 1998). Exhibit 10.2 - First Amendment to Amended and Restated Revolving Credit Agreement dated June 11, 1998 (incorporated by reference from the Company's Form 10-K for the period ended July 31, 1998). 49 Exhibit 10.3 - Second Amendment to Amended and Restated Revolving Credit Agreement dated December 10, 1998 (incorporated by reference from the Company's Form 10-Q for the period ended October 30, 1998). Exhibit 10.4 - Retirement Agreement dated May 15, 1990 between the Company and Charles B. Kafadar (filed herewith). Exhibit 10.5 - Rights Agreement dated March 25, 1998 between the Company and Chase Mellon Shareholder Services, L.L.C. (incorporated by reference from the Company's Form 8-A filed April 8, 1998). Exhibit 10.6 - First Amendment to Rights Agreement dated February 19, 1999 between the Company and Chase Mellon Shareholder Services, L.L.C. (incorporated by reference from the Company's Form 8-K filed February 19, 1999). Exhibit 10.7 - Second Amendment to Rights Amendment dated August 23, 1999 among the Company, Chase Mellon Shareholder Services, L.L.C. and LaSalle Bank National Association (incorporated by reference from the Company's Form 8-K filed August 24, 1999). Exhibit 10.8 - OEA, Inc. 1997 Employee Stock Purchase Plan (incorporated by reference from the Company's Definitive Proxy Statement on Schedule 14A filed November 28, 1997). Exhibit 10.9 - OEA, Inc. Employee's Stock Option Plan (incorporated by reference from the Company's Form S-8 filed November 11, 1998). Exhibit 10.10 - OEA, Inc. Nonemployee Director's Stock Option Plan (incorporated by reference from the Company's Form S-8 filed November 11, 1998). Exhibit 10.11 - OEA, Inc. Director's Compensation Plan (incorporated by reference from the Company's Definitive Proxy Statement on Schedule 14A filed December 15, 1998). Exhibit 10.12 - Form of Change of Control Employment Agreement (filed herewith). 50 Exhibit 21 - During fiscal year 1999, the Registrant was the parent company of each of the following described companies:
Percent of Outstanding Corporation Stock Owned by Parent ----------- ---------------------- OEA Aerospace, Inc. a California corporation, which 100% owns 100% of Aerotest Operations, Inc., a California corporation OEA Europe S.A.R.L., a corporation in France 100%
The above entities are included in the consolidated financial statements of the Registrant being submitted herewith. Exhibit 23 - Consent of Ernst & Young LLP Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K during the quarter ended July 31, 1999. None 51 SIGNATURES ---------- Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: October 15, 1999 OEA, INC. Registrant By /s/ Robert J. Schultz ------------------------------------ Robert J. Schultz, Chairman Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated: Directors and Officers - ---------------------- /s/ Robert J. Schultz /s/ Charles B. Kafadar __________________________________ ______________________________________ Robert J. Schultz, Chairman Charles B. Kafadar, CEO, Principal Executive Officer, and Director /s/ George S. Ansell /s/ Philip E. Johnson __________________________________ ______________________________________ George S. Ansell, Director Philip E. Johnson, Director /s/ Donald E. Miller /s/ J. Thompson McConathy __________________________________ ______________________________________ Donald E. Miller, Director J. Thompson McConathy, Vice President Finance and Principal Financial Officer /s/ Jepson S. Fuller __________________________________ Jepson S. Fuller, Controller and Principal Accounting Officer 52 EX-3.1 2 ARTICLES OF INCORPORATION Exhibit 3.1 CERTIFICATE OF INCORPORATION OF OEA, INC. 1. The name of the corporation is OEA, INC. 2. The address of its registered office in the State of Delaware is No. 100 West Tenth Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. 3. The nature of the business or purposes to be conducted or promoted is: To engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. To manufacture, purchase or otherwise acquire, invest in, own, mortgage, pledge, sell, assign and transfer or otherwise dispose of, trade, deal in and deal with goods, wares and merchandise and personal property of every class and description. To acquire, and pay for in cash, stock or bonds of this corporation or otherwise, the good will, rights, assets and property, and to undertake or assume the whole or any part of the obligations or liabilities of any person, firm, association or corporation. To acquire, hold, use, sell, assign, lease, grant licenses in respect of, mortgage or otherwise dispose of letters patent of the United States or any foreign country, patent rights, licenses and privileges, inventions, improvements and processes, copyrights, trade-marks and trade names, relating to or useful in connection with any business of this corporation. To acquire by purchase, subscription or otherwise, and to receive, hold, own, guarantee, sell, assign, exchange, transfer, mortgage, pledge or otherwise dispose of or deal in and with any of the shares of the capital stock, or any voting trust certificates in respect of the shares of capital stock, scrip, warrants, rights, bonds, debentures, notes, trust receipts, and other securities, obligations, choses in action and evidences of indebtedness or interest issued or created by any corporations, joint stock companies, syndicates, associations, firms, trusts or persons, public or private, or by the government of the United States of America, or by any foreign government, or by any state, territory, province, municipality or other political subdivision or by any governmental agency, and as owner thereof to possess and exercise all the rights, powers and privileges of ownership, including the right to execute consents and vote thereon, and to do any and all acts and things necessary or advisable for the preservation, protection, improvement and enhancement in value thereof. To borrow or raise moneys for any of the purposes of the corporation and, from time to time without limit as to amount, to draw, make, accept, endorse, execute and issue promissory notes, drafts, bills of exchange, warrants, bonds, debentures and other negotiable or non-negotiable instruments and evidences of indebtedness, and to secure the payment of any thereof and of the interest thereon by mortgage upon or pledge, conveyance or assignment in trust of the whole or any part of the property of the corporation, whether at the time owned or thereafter acquired, and to sell, pledge or otherwise dispose of such bonds or other obligations of the corporation for its corporate purposes. To purchase, receive, take by grant, gift, devise, bequest or otherwise, lease, or otherwise acquire, own, hold, improve, employ, use and otherwise deal in and with real or personal property, or any interest therein, wherever situated, and to sell, convey, lease, exchange, transfer or otherwise dispose of, or mortgage or pledge, all or any of the corporation's property and assets, or any interest therein, wherever situated. In general, to possess and exercise all the powers and privileges granted by the General Corporation Law of Delaware or by any other law of Delaware or by this certificate of incorporation together with any powers incidental thereto, so far as such powers and privileges are necessary or convenient to the conduct, promotion or attainment of the business or purposes of the corporation. The business and purposes specified in the foregoing clauses shall, except where otherwise expressed, be in nowise limited or restricted by reference to, or inference from, the terms of any other clause in this certificate of incorporation, but the business and purposes specified in each of the foregoing clauses of this article shall be regarded as independent business and purposes. 4. The total number of shares of stock which the corporation shall have authority to issue is five million (5,000,000) shares of Common Stock of the par value of Ten Cents ($0.10) each, amounting in the aggregate to Five Hundred Thousand Dollars ($500,000.00). 5. The name and mailing address of each incorporator is as follows: NAME MAILING ADDRESS B. J. Consono 100 West Tenth Street Wilmington, Delaware F. J. Obara, Jr. 100 West Tenth Street Wilmington, Delaware J. L. Rivera 100 West Tenth Street Wilmington, Delaware 6. The corporation is to have perpetual existence. 7. In furtherance and not in limitation of the powers conferred by statute, the board of directors is expressly authorized: To make, alter or repeal the by-laws of the corporation. To authorize and cause to be executed mortgages and liens upon the real and personal property of the corporation. To set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and to abolish any such reserve in the manner in which it was created. By a majority of the whole board, to designate one or more committees, each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. The by-laws may provide that in the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors, or in the by-laws of the corporation, shall have and may exercise all the powers and authority of the board or directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the certificate of incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the by-laws of the corporation; and, unless the resolution or by-laws, expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. When and as authorized by the stockholders in accordance with statute, to sell, lease or exchange all or substantially all of the property and assets of the corporation, including its good will and its corporate franchises, upon such terms and conditions and for such consideration, which may consist in whole or in part of money or property including shares of stock in, and/or other securities of, any other corporation or corporations, as its board of directors shall deem expedient and for the best interests of the corporation. 8. Whenever a compromise or arrangement is proposed between this corporation and its creditors or any class of them and/or between this corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this corporation or of any creditor or stockholder thereof, or on the application of any receiver or receivers appointed for this corporation under the provisions of section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this corporation under the provisions of section 279 Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this corporation, as the case may be, and also on this corporation. 9. Meetings of stockholders may be held within or without the State of Delaware, as the by-laws may provide. The books of the corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the board of directors or in the by-laws of the corporation. Elections of directors need not be by written ballot unless the by-laws of the corporation shall so provide. 10. The corporation reserves the right to amend, alter, change or repeal any provision contained in this certificate of incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. WE, THE UNDERSIGNED, being each of the incorporators hereinbefore named, for the purpose of forming a corporation pursuant to the General Corporation Law of the State of Delaware, do make this certificate, hereby declaring and certifying that this is our act and deed and the facts herein stated are true, and accordingly have hereunto set our hands this 1st day of October, 1969. B. J. Consono F. J. Obara, Jr. J. L. Rivera STATE OF DELAWARE ) ) ss: COUNTY OF NEW CASTLE ) BE IT REMEMBERED that on this 1st day of October, 1969, personally came before me, a Notary Public for the State of Delaware, B. J. Consono, F. J. Obara, Jr. and J. L. Rivera all of the parties to the foregoing certificate of incorporation, known to me personally to be such, and severally acknowledged the said certificate to be the act and deed of the signers respectively and that the facts stated therein are true. GIVEN under my hand and seal of office the day and year aforesaid. A. Dana Atwell Notary Public EX-3.2 3 BY LAWS Exhibit 3.2 OEA, INC. AMENDED AND RESTATED BY-LAWS (Adopted January 14, 1999) ARTICLE I OFFICES Section 1. The registered office of the corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. Section 2. The corporation may also have offices at such other places both within and without the State of Delaware as the board of directors may from time to time determine or the business of the corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. All meetings of the stockholders for the election of directors shall be held in the City of Denver, State of Colorado, at such time and place as may be fixed from time to time by the board of directors, or at such other place either within or without the State of Delaware as shall be designated from time to time by the board of directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. The annual meeting of the stockholders of the corporation shall be held on such date and at such place and time as may be fixed by resolution of the Board of Directors. Section 3. Written or printed notice, stating the place, day and hour of the meeting and the purpose or purposes for which the meeting is called, shall be delivered by the corporation not less than ten (10) days nor more than sixty (60) days before the date of the meeting, either personally or by mail, to each stockholder of record entitled to vote at such meeting. Such further notice shall be given as may be required by law. Any previously scheduled meeting of the stockholders may be postponed, and any special meeting of the stockholders may be canceled, by resolution of the Board of Directors upon public notice given prior to the date previously scheduled for such meeting of stockholders. Section 4. The officer who has charge of the stock ledger of the corporation shall prepare and make available, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 5. Special meetings of the stockholders may be called only by the Chairman of the Board, the President or by the Board of Directors pursuant to a resolution adopted by a majority of the total number of directors which the corporation would have if there were no vacancies. Section 6. (a) The Chairman of the meeting or holders of a majority of the shares present in person or represented by proxy at a meeting may adjourn such meeting of stockholders from time to time, whether or not a quorum is present. No notice of the time and place of adjourned meetings need be given except as required by law. The stockholders present at a duly called meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. (b) The Board of Directors by resolution shall appoint one or more inspectors, which inspector or inspectors may include individuals who serve the corporation in other capacities, including, without limitation, as officers, employees, agents or representatives, to act at the meetings of stockholders and make a written report thereof. One or more persons may be designated as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate has been appointed to act or is able to act at a meeting of stockholders, the Chairman of the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before discharging his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspectors shall have the duties prescribed by law. (c) The Chairman of the meeting shall fix and announce at the meeting the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting. Section 7. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Section 8. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, by vote of holders of a majority of the shares present or represented, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. Section 9. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the General Corporation Law of the State of Delaware or of the certificate of incorporation a different vote is required, in which case such express provision shall govern and control the decision of such question. Section 10. Unless otherwise provided in the certificate of incorporation, each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, but no proxy shall be exercisable after three years from its date, unless the proxy expressly provides for a longer period. Section 11. (a) In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall, by written notice to the Secretary, request the Board of Directors to fix a record date. The Board of Directors shall promptly, but in all events within ten (10) days after the date on which such a request is received, adopt a resolution fixing the record date (unless a record date has previously been fixed by the Board of Directors pursuant to the first sentence of this Section 11(a) of this Article II). If no record date has been fixed by the Board of Directors pursuant to the first sentence of this Section 11(a) of this Article II or otherwise within ten (10) days of the date on which such a request is received, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in Delaware, its principal place of business, or to any officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by applicable law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the date on which the Board of Directors adopts the resolution taking such prior action. (b) In the event of the delivery, in the manner provided by Section 11(a) of this Article II, to the corporation of the requisite written consent or consents to take corporate action and/or any related revocation or revocations, the corporation shall engage independent inspectors of elections for the purpose of promptly performing a ministerial review of the validity of the consents and revocations. For the purpose of permitting the inspectors to perform such review, no action by written consent without a meeting shall be effective until such date as the independent inspectors certify to the corporation that the consents delivered to the corporation in accordance with Section 11(a) of this Article II represent at least the minimum number of votes that would be necessary to take the corporate action. Nothing contained in this Section 11(b) shall in any way be construed to suggest or imply that the Board of Directors or any stockholder shall not be entitled to contest the validity of any consent or revocation thereof, whether before or after such certification by the independent inspectors, or to take any other action (including, without limitation, the commencement, prosecution, or defense of any litigation with respect thereto, and the seeking of injunctive relief in such litigation). (c) Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty (60) days of the date of the earliest dated written consent delivered in accordance with Section 11(a) of this Article II, a written consent or consents signed by a sufficient number of holders to take such action are delivered to the corporation in the manner prescribed in Section 11(a) of this Article II. Section 12. (a) (1) Nominations of persons for election to the Board of Directors of the corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (A) pursuant to the corporation's notice of meeting, (B) by or at the direction of the Board of Directors or (C) by any stockholder of the corporation who was a stockholder of record at the time of giving of notice provided for in this By-Law, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this By-Law. (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (C) of paragraph (a)(1) of this By-Law, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the corporation not later than the close of business on the 60th day nor earlier than the close of business on the 90th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by the corporation. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (A) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (B) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (C) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the corporation's books, and of such beneficial owner and (ii) the class and number of shares of the corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (a)(2) of this By-Law to the contrary, in the event that the number of directors to be elected to the Board of Directors of the corporation is increased and there is no public announcement by the corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least 70 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this By-Law shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the corporation. (b) Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the corporation's notice of meeting (1) by or at the direction of the Board of Directors or (2) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the corporation who is a stockholder of record at the time of giving of notice provided for in this By-Law, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this By-Law. In the event the corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the corporation's notice of meeting, if the stockholder's notice required by paragraph (a)(2) of this By-Law shall be delivered to the Secretary at the principal executive offices of the corporation not earlier than the close of business on the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a stockholder's notice as described above. (c) (1) Only such persons who are nominated in accordance with the procedures set forth in this By-Law shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this By-Law. Except as otherwise provided by law, the Certificate of Incorporation or these By-Laws, the Chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this By-Law and, if any proposed nomination or business is not in compliance with this By-Law, to declare that such defective proposal or nomination shall be disregarded. (2) For purposes of this By-Law, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this By-Law, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this By-Law. Nothing in this By-Law shall be deemed to affect any rights of stockholders to request inclusion of proposals in the corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. ARTICLE III DIRECTORS Section 1. The number of directors shall be fixed by the Board of Directors from time to time. Each director shall hold office until his successor is duly elected and qualified. Section 2. Subject to applicable law, vacancies resulting from death, resignation, retirement, disqualification, removal from office or other cause, and newly created directorships resulting from any increase in the authorized number of directors, may be filled only by the affirmative vote of a majority of the remaining directors, though less than a quorum of the Board of Directors. Section 3. The business of the corporation shall be managed by its board of directors, which may exercise all such powers of the corporation and do all such lawful acts and things as are not by the General Corporation Law of the State of Delaware or by the certificate of incorporation or by these by-laws directed or required to be exercised or done by the stockholders. Section 4. The chairman shall be the chairman of the board of directors of the corporation, and shall preside at all meetings of the board of directors and stockholders, and shall see that all orders and resolutions of the board of directors are carried into effect. He may execute bonds, mortgages and other contracts requiring a seal, under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the board of directors to some other officer or agent of the corporation. MEETINGS OF THE BOARD OF DIRECTORS Section 5. The board of directors of the corporation may hold meetings, both regular and special, either within or without the State of Delaware. Section 6. The first meeting of each newly elected board of directors shall be held immediately following the annual meeting, unless otherwise scheduled by the chairman of the board, the president or a majority of the directors, and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected board of directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the board of directors, or as shall be specified in a written waiver signed by all of the directors. Section 7. Regular meetings of the board of directors may be held without notice at such time and at such place as shall from time to time be determined by the board. Section 8. Special meetings of the board may be called by the chairman or the president on one day's notice to each director, either personally, by telephone, by mail or by telegram; special meetings shall be called by the chairman, president or secretary in like manner and on like notice on the written request of two directors. Section 9. At all meetings of the board a majority of the directors shall constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by the General Corporation Law of the State of Delaware or by the certificate of incorporation. If a quorum shall not be present at any meeting of the board of directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 10. Unless otherwise restricted by the certificate of incorporation or these by-laws, any action required or permitted to be taken at any meeting of the board of directors or of any committee thereof may be taken without a meeting, if all members of the board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board or committee. Section 11. Unless otherwise restricted by the certificate of incorporation or these by-laws, members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of the board of directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting, provided that notice of such meeting shall have been duly given as required herein, and that a quorum is participating. COMMITTEES OF DIRECTORS Section 12. The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. A majority of the members of any such committee shall constitute a quorum for the conduct of business. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors establishing such committee, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the certificate of incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the by-laws of the corporation; and, unless the resolution or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors. Section 13. Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. COMPENSATION OF DIRECTORS Section 14. Unless otherwise restricted by the certificate of incorporation, the board of directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the board of directors and may be paid a fixed sum for attendance at each meeting of the board of directors or a stated salary as director, or any combination thereof. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. ARTICLE IV NOTICES Section 1. Whenever, under the provisions of the General Corporation Law of the State of Delaware or of the certificate of incorporation or of these by-laws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by telegram, facsimile and/or by telephone. Section 2. Whenever any notice is required to be given under the provisions of the statutes or of the certificate of incorporation or of these by-laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE V OFFICERS Section 1. The officers of the corporation shall be chosen by the board of directors at any regular or special meeting, and shall be a president and chief executive officer, a vice president, a secretary and a treasurer. The board of directors may also choose additional vice presidents, and one or more assistant secretaries and assistant treasurers. Any number of offices may be held by the same person, unless the certificate of incorporation or these by-laws otherwise provide. Section 2. The board of directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the board. Section 3. The salaries of all officers and agents of the corporation shall be fixed by the board of directors, except that from time to time the board of directors may authorize the president to establish such salaries. Section 4. The officers of the corporation shall hold office until their successors are chosen and qualify. Any officer elected or appointed by the board of directors may be removed at any time by the affirmative vote of a majority of the board of directors. Any vacancy occurring in any office of the corporation shall be filled by the board of directors. THE PRESIDENT AND CHIEF EXECUTIVE OFFICER Section 5. The president shall be the chief executive officer of the corporation and, in the absence of the chairman, shall preside at all meetings of the stockholders and the board of directors, shall have general and active management of the business of the corporation, and shall see that all orders and resolutions of the board of directors and the chairman are carried into effect. He shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the board of directors to some other officer or agent of the corporation. THE VICE PRESIDENTS Section 6. In the absence of the president or in the event of his inability or refusal to act, the vice president (or in the event there be more than one vice president, the vice presidents in the order designated by the board of directors, or in the absence of any designation, then in the order of their election) shall perform the duties of the president, and when so acting, shall have all the powers of and be subject to all the restrictions upon the president. The vice presidents shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. The designation of senior vice president, or of President of a division of the corporation, conferred by the board of directors on a person shall recognize the seniority of such person's position and shall be an expression of the confidence the board of directors places in him. Any person as designated shall have the power and authority of a vice president. THE SECRETARY AND ASSISTANT SECRETARIES Section 7. The secretary shall attend all meetings of the board of directors and all meetings of the stockholders and record all the proceedings of the meetings of the corporation and of the board of directors in a book to be kept for that purpose, and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the board of directors, and shall perform such other duties as may be prescribed by the board of directors or president, under whose supervision he shall be. He shall have custody of the corporate seal of the corporation and he, or an assistant secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by his signature or by the signature of such assistant secretary. The board of directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature. Section 8. The assistant secretary, or if there be more than one, the assistant secretaries in the order determined by the board of directors (or if there be no such determination, then in the order of their election), shall, in the absence of the secretary or in the event of his inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. THE TREASURER AND ASSISTANT TREASURERS Section 9. The treasurer shall have the custody of the corporation funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation, and shall deposit all monies and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the board of directors. Section 10. He shall disburse the funds of the corporation as may be ordered by the board of directors, taking proper vouchers for such disbursements, and shall render to the president and the board of directors, at its regular meetings, or when the board of directors so requires, an account of all his transactions as treasurer and of the financial condition of the corporation. Section 11. If required by the board of directors, he shall give the corporation a bond (which shall be maintained as the board determines) in such sum and with such surety or sureties as shall be satisfactory to the board of directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. Section 12. The assistant treasurer, or if there shall be more than one, the assistant treasurers in the order determined by the board of directors (or if there be no such determination, then in the order of their election), shall, in the absence of the treasurer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. ARTICLE VI CERTIFICATES OF STOCK Section 1. Every holder of stock in the corporation shall be entitled to have a certificate, signed by, or in the name of the corporation by, the chairman or vice chairman of the board of directors or the president or a vice president and the treasurer or an assistant treasurer, or the secretary or an assistant secretary of the corporation, certifying the number of shares owned by him in the corporation. Section 2. Where a certificate is countersigned (a) by a transfer agent other than the corporation or its employee, or, (b) by a registrar other than the corporation or its employee, any other signature on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. LOST CERTIFICATES Section 3. The board of directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. TRANSFER OF STOCK Section 4. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. FIXING RECORD DATE Section 5. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. The fixing of a record date for purposes of action by written consent without a meeting shall be as set forth in Article II, Section 11 hereof. REGISTERED STOCKHOLDERS Section 6. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VII GENERAL PROVISIONS DIVIDENDS Section 1. Dividends upon the capital stock of the corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the board of directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the certificate of incorporation. Section 2. Before payment of any dividends, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. CHECKS Section 3. All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the board of directors may from time to time designate. FISCAL YEAR Section 4. The fiscal year of the corporation shall be fixed by resolution of the board of directors. SEAL Section 5. The corporate seal shall have inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE VIII AMENDMENTS Section 1. These by-laws may be altered, amended or repealed or new by-laws may be adopted by the stockholders or by the board of directors, when such power is conferred upon the board of directors by the certificate of incorporation, at any regular meeting of the stockholders or of the board of directors or at any special meeting of the stockholders or of the board of directors if notice of such alteration, amendment, repeal or adoption of new by-laws be contained in the notice of such special meeting. ARTICLE IX INDEMNIFICATION Section 1. (a) Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit, or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she or a person of whom he or she is the legal representative is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans maintained or sponsored by the corporation, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the corporation to the fullest extent authorized by the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than said law permitted the corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that except as provided in paragraph (c) of this By-Law, the corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors. The right to indemnification conferred in this By-Law shall be a contract right and shall include the right to be paid by the corporation the expenses incurred in defending any such proceeding in advance of its final disposition, such advances to be paid by the corporation within 20 days after the receipt by the corporation of a statement or statements from the claimant requesting such advance or advances from time to time; provided, however, that if the General Corporation Law of the State of Delaware requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the corporation of an undertaking by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this By-Law or otherwise. (b) To obtain indemnification under this By-Law, a claimant shall submit to the corporation a written request, including therein or therewith such documentation and information as is reasonably available to the claimant and is reasonably necessary to determine whether and to what extent the claimant is entitled to indemnification. Upon written request by a claimant for indemnification pursuant to the first sentence of this paragraph (b), a determination, if required by applicable law, with respect to the claimant's entitlement thereto shall be made as follows: (1) if requested by the claimant, by Independent Counsel (as hereinafter defined), or (2) if no request is made by the claimant for a determination by Independent Counsel, (i) by the Board of Directors by a majority vote of a quorum consisting of Disinterested Directors (as hereinafter defined), or (ii) if a quorum of the Board of Directors consisting of Disinterested Directors is not obtainable or, even if obtainable, such quorum of Disinterested Directors so directs, by Independent Counsel in a written opinion to the Board of Directors, a copy of which shall be delivered to the claimant, or (iii) if a quorum of Disinterested Directors so directs, by the stockholders of the corporation. In the event the determination of entitlement to indemnification is to be made by Independent Counsel at the request of the claimant, the Independent Counsel shall be selected by the Board of Directors unless there shall have occurred within two years prior to the date of the commencement of the action, suit or proceeding for which indemnification is claimed a "Change of Control" as defined in any stock option plan of the corporation in which case the Independent Counsel shall be selected by the claimant unless the claimant shall request that such selection be made by the Board of Directors. If it is so determined that the claimant is entitled to indemnification, payment to the claimant shall be made within 10 days after such determination. (c) If a claim under paragraph (a) of this By-Law is not paid in full by the corporation within thirty days after a written claim pursuant to paragraph (b) of this By-Law has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the corporation) that the claimant has not met the standard of conduct which makes it permissible under the General Corporation Law of the State of Delaware for the corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the corporation. Neither the failure of the corporation (including its Board of Directors, Independent Counsel or stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware, nor an actual determination by the corporation (including its Board of Directors, Independent Counsel or stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. (d) If a determination shall have been made pursuant to paragraph (b) of this By-Law that the claimant is entitled to indemnification, the corporation shall be bound by such determination in any judicial proceeding commenced pursuant to paragraph (c) of this By-Law. (e) The corporation shall be precluded from asserting in any judicial proceeding commenced pursuant to paragraph (c) of this By-Law that the procedures and presumptions of this By-Law are not valid, binding and enforceable and shall stipulate in such proceeding that the corporation is bound by all the provisions of this By-Law. (f) The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this By-Law shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, By-Laws, agreement, vote of stockholders or Disinterested Directors or otherwise. No repeal or modification of this By-Law shall in any way diminish or adversely affect the rights of any director, officer, employee or agent of the corporation hereunder in respect of any occurrence or matter arising prior to any such repeal or modification. (g) The corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the General Corporation Law of the State of Delaware. To the extent that the corporation maintains any policy or policies providing such insurance, each such director or officer, and each such agent or employee to which rights to indemnification have been granted as provided in paragraph (h) of this By-Law, shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage thereunder for any such director, officer, employee or agent. (h) The corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification, and rights to be paid by the corporation the expenses incurred in defending any proceeding in advance of its final disposition, to any employee or agent of the corporation to the fullest extent of the provisions of this By-Law with respect to the indemnification and advancement of expenses of directors and officers of the corporation. (i) If any provision or provisions of this By-Law shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (1) the validity, legality and enforceability of the remaining provisions of this By-Law (including, without limitation, each portion of any paragraph of this By-Law containing any such provision held to be invalid, illegal or unenforceable, that is not itself held to be invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (2) to the fullest extent possible, the provisions of this By-Law (including, without limitation, each such portion of any paragraph of this By-Law containing any such provision held to be invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. (j) For purposes of this By-Law: (1) "Disinterested Director" means a director of the corporation who is not and was not a party to the matter in respect of which indemnification is sought by the claimant. (2) "Independent Counsel" means a law firm, a member of a law firm, or an independent practitioner, that is experienced in matters of corporation law and shall include any person who, under the applicable standards of professional conduct then prevailing, would not have a conflict of interest in representing either the corporation or the claimant in an action to determine the claimant's rights under this By-Law. (k) Any notice, request or other communication required or permitted to be given to the corporation under this By-Law shall be in writing and either delivered in person or sent by telecopy, telex, telegram, overnight mail or courier service, or certified or registered mail, postage prepaid, return receipt requested, to the Secretary of the corporation and shall be effective only upon receipt by the Secretary. EX-10.4 4 RETIREMENT AGREEMENT Exhibit 10.4 A G R E E M E N T THIS AGREEMENT, made and entered into this 15TH day of March 1990 by and between OEA, INC., a Delaware corporation with its principal offices at 34501 East Quincy Avenue, Denver, Colorado 80210 (hereinafter called "OEA"), and CHARLES B. KAFADAR of 9463 Pinyon Trail, Littleton, Colorado 80124 (hereinafter called "KAFADAR"); W I T N E S S E T H: WHEREAS, KAFADAR is the President, Chief Operating Officer, and a prime moving force of OEA; and WHEREAS, under the management and direction of KAFADAR and due in great part to his efforts and sacrifices, OEA has developed and expanded its business to where it is now the recognized leader in its field throughout the United States; and WHEREAS, the Board of Directors of OEA has considered the value of the payments to be made to KAFADAR upon his retirement against previous compensation paid to KAFADAR, the value and quality of all services rendered and to be rendered by him, the success of OEA due to the efforts and sacrifices of KAFADAR, his reputation, experience, qualifications and background in the fields involving OEA's business, the corporate policies of OEA both past and present, and the unique and highly technical nature of the business of OEA, and has arrived at the conclusions herein evidenced; and WHEREAS, OEA desires to retain the services of KAFADAR, realizing that the loss of his services would result in substantial financial losses to OEA; and WHEREAS, KAFADAR is desirous of continuing his employment with OEA on the terms and conditions hereinafter set out; and NOW, THEREFORE, in consideration of the promises of the parties hereinafter contained, it is agreed as follows: 1. PREAMBLE. The preamble hereto is made a part hereof by this reference. 2. EMPLOYMENT. OEA hereby employs KAFADAR as its President and its Chief Operating Officer for the term hereinafter set forth, to serve in such capacity and to perform the duties required of the President and Chief Operating Officer, and such additional duties as may be assigned to him from time to time by the Board of Directors (such services are hereinafter referred to as "Executive Employment"). KAFADAR agrees to accept such employment and agrees that he will serve OEA under the direction of the Board of Directors faithfully, diligently, competently and to the best of his ability, and further agrees that during the period of Executive Employment he shall devote full time thereto. During the period of his Executive Employment hereunder, KAFADAR agrees to serve as an officer or director of any of OEA's subsidiaries without additional compensation, and during the period of his Retirement, as hereinafter defined, KAFADAR agrees to serve as a director of any of OEA's subsidiaries without additional compensation. The duties which may be assigned by the Board of Directors shall not be inconsistent with the position and title KAFADAR shall hold in performing any duties hereunder. KAFADAR shall report directly to the Board of Directors of OEA through the Chairman of the Board. 3. TERM. The term of KAFADAR's Executive Employment shall be from the date hereof to the date upon which his executive employment is terminated. The term of KAFADAR's Retirement shall be from the date of commencement thereof, as set forth in Section 5 hereto, to the date of KAFADAR's death. 4. EXECUTIVE COMPENSATION. During the period of KAFADAR's Executive Employment, OEA shall pay to KAFADAR as Executive Compensation an amount equal to the base salary presently being paid to him, plus bonus or additional compensation, all as the Board of Directors shall determine from time to time, but in no event without KAFADAR's permission shall such compensation be less than the base salary presently established and being paid to KAFADAR. 5. RETIREMENT. At any time following the date of this Agreement that KAFADAR's Executive Employment and Executive Compensation is or becomes terminated pursuant to Sections 7 or 8 hereunder, but not otherwise, KAFADAR's Retirement shall commence, and KAFADAR shall be entitled to receive Retirement Compensation as defined and provided for herein. KAFADAR shall not, during his period of Retirement, directly or indirectly enter into the employ of, or advise, or otherwise assist, any other person, firm or corporation which is engaged in business competitive with that of OEA, and shall not himself engage in any such business on his own account or for the account of others. 6. RETIREMENT COMPENSATION. (a) During KAFADAR's lifetime after termination of his Executive Employment and Executive Compensation pursuant to Section 8 hereunder, but not otherwise, OEA shall pay to KAFADAR annually as Retirement Compensation an amount equal to seventy percent (70%) of the average of the last three (3) full years' total compensation paid to him by OEA (as reflected on KAFADAR's W-2 reporting forms), reduced by: (1) One-half (1/2) of KAFADAR's primary Social Security benefit as and when received; and (2) KAFADAR's net benefits from the OEA Employees' Profit Sharing Plan and the OEA Employees' Pension Plan, amortized over a ten (10) year period, but excluding any contributions made by KAFADAR to OEA's Section 401K Salary Reduction Plan; and (3) KAFADAR's net income from any other qualified pension, thrift plan, stock bonus or other qualified form of benefit or retirement plan which may be adopted by OEA or any of its subsidiaries, and from which plan KAFADAR receives benefits. Such amounts shall be determined at an annual rate, and shall be payable to KAFADAR in the same manner and at the same time that payments of compensation are made to other executives of OEA, unless otherwise agreed upon between OEA and KAFADAR. (b) In the event of KAFADAR's death while still engaged in Executive Employment and prior to his reaching the age of fifty-five (55), leaving his wife, Ursula Kafadar, surviving him, OEA will pay to her for a period of ten (10) years, or until her death, whichever is the shorter period, an amount equal to fifty percent (50%) of the average of the last three (3) full years' total compensation paid to KAFADAR by OEA (as reflected on KAFADAR's W-2 reporting forms), reduced by: (1) One-half (1/2) of Ursula Kafadar's social security benefit as and when received; and, (2) The net benefits from KAFADAR's OEA Employees' Profit Sharing Plan and the OEA Employees' Pension Plan, irrespective of the identity of the designated beneficiaries, amortized over a ten (10) year period, but excluding any contributions made by KAFADAR to OEA's Section 401K Salary Reduction Plans; and (3) The net income from KAFADAR's account in any other qualified pension, thrift plan, stock bonus or other qualified form of benefit or retirement plan which may be adopted by OEA or any of its subsidiaries, and from which plan any beneficiary designated by KAFADAR receives benefits. Such amounts shall be determined at an annual rate, and shall be payable to Ursula Kafadar in the same manner and at the same time that payments of compensation are made to executives of OEA, unless otherwise agreed upon between OEA and Ursula Kafadar. (c) If KAFADAR's Executive Employment and Executive Compensation are terminated pursuant to Section 7 hereunder at a time prior to KAFADAR attaining the age of sixty-five (65) and having given OEA thirty-three (33) years of continuous service, KAFADAR's retirement compensation shall be as described in paragraph 6(a) hereinabove multiplied by a fraction the numerator of which shall be the years of service provided OEA by KAFADAR and the denominator of which shall be thirty-three (33). (d) If KAFADAR's Executive Employment and Executive Compensation are terminated pursuant to Section 7 hereunder because of KAFADAR's physical or mental incapacity to perform the duties required of him, his retirement compensation shall be no less than that described in Paragraph 6(c) hereinabove, but shall be subject to negotiation with the Board of Directors of OEA toward a mutually acceptable arrangement. 7. TERMINATION OF EXECUTIVE EMPLOYMENT BY OEA. Anything herein to the contrary notwithstanding, the Board of Directors of OEA shall have the right or rights to terminate KAFADAR's Executive Employment: (a) If KAFADAR shall become unable to perform the duties required of him hereunder due to any incapacity continuing for a period of six (6) consecutive months; or if KAFADAR shall fail to perform his duties faithfully, diligently and competently in accordance with this Agreement, OEA may, upon such written notice as the directors regard as suitable, terminate KAFADAR's Executive Employment and shall place him on Retirement, and he shall then be entitled to receive Retirement Compensation; or (b) For any reason, with or without cause or justification, by giving KAFADAR written notice of such termination, and thereafter KAFADAR shall automatically be on Retirement and be entitled to receive Retirement Compensation. 8. ELECTION BY KAFADAR TO TERMINATE EXECUTIVE EMPLOYMENT. KAFADAR may, at any time on or after he attains the age of sixty-five (65) years and has given OEA thirty-three (33) years of continuous service, elect to terminate his Executive Employment with OEA and begin his Retirement. Such election may be made by KAFADAR giving written notice thereof to the Board of Directors of OEA not less than six (6) months prior to the elective date of such Retirement, if requested, to permit the Board of Directors of OEA to locate and employ a suitable replacement for KAFADAR. 9. OTHER PLANS. Nothing in this Agreement shall affect KAFADAR's right to participate in any stock option or stock purchase plan, or any group, life, health or accident insurance or other similar employees' benefit plans which may be adopted by OEA. 10. EXPENSES. OEA shall pay or reimburse KAFADAR for all expenses incurred or paid in carrying out his duties hereunder, whether for travel, entertainment or otherwise. 11. WAIVER. The failure of either party to insist, in any one or more instances, upon performance of any of the terms or conditions of this Agreement shall not be construed as a waiver or a relinquishment of any right granted hereunder or of the future performance of any such term, covenant or condition, but the obligations of either party with respect thereto shall continue in full force and effect. 12. NOTICES. Any notice to be given to OEA hereunder shall be deemed sufficient if addressed to OEA in writing and delivered or mailed by registered mail to its office at 34501 East Quincy Avenue, Denver, Colorado 80210, or such other address as OEA may hereafter designate. Any notice to be given to KAFADAR hereunder shall be deemed sufficient if addressed to him in writing and delivered or mailed by registered mail to him at 9463 Pinyon Trail, Littleton, Colorado 80124, or such other address as KAFADAR may hereafter designate. 13. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon any successor or successors of OEA. 14. ENTIRE AGREEMENT This Agreement is the entire Agreement between OEA and KAFADAR on the subject of KAFADAR's executive employment and retirement. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the day and date first above written. O E A: OEA, INC. ATTEST: /s/ John E. Banko By: /s/ Ahmed D. Kafadar John E Banko, Secretary (SEAL) K A F A D A R: /s/ Charles B. Kafadar CHARLES B. KAFADAR EX-10.12 5 FORM OF CONTROL AGREEMENT PRIVILEGED AND CONFIDENTIAL FORM OF CHANGE-OF-CONTROL EMPLOYMENT AGREEMENT THE ATTACHED FORM OF CHANGE OF CONTROL EMPLOYMENT AGREEMENT IS APPLICABLE FOR: DR. CHARLES B. KAFADAR MR. JOHN T. McCONATHY MR. WILLIAM R. BARKER MR. JIM T.FLANARY 16 ADDITIONAL EMPLOYEES FORM OF CHANGE-OF-CONTROL EMPLOYMENT AGREEMENT AGREEMENT by and between OEA, Inc., a ______ corporation (the "Company") and __________________ (the "Executive"), dated as of the ___ day of _______, 1998. The Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Certain Definitions. (a) The "Effective Date" shall mean the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control (as defined in Section 2) occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. b) The "Change of Control Period" shall mean the period commencing on the date hereof and ending on the third anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual 2 anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Change of Control Period shall be automatically extended so as to terminate three years from such Renewal Date, unless at least 60 days prior to the Renewal Date the Company shall give notice to the Executive that the Change of Control Period shall not be so extended. 2. Change of Control. For the purpose of this Agreement, a "Change of Control" shall mean : (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or 3 (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 3. Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the third anniversary of such date (the "Employment Period"). 4 4. Terms of Employment. (a) Position and Duties. (i) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location less than 50 miles from such location. ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) Compensation. (i) Base Salary. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and there- 5 after at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the "Annual Bonus") in cash at least equal to the Executive's highest aggregate annual bonus amount under the Company's annual cash incentive plans, programs and practices, for the last three full fiscal years prior to the Effective Date (annualized in the event that the Executive was not employed by the Company for the whole of such fiscal year) (the "Recent Annual Bonus"). Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. (iii) Incentive, Savings and Retirement Plans. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (iv) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies 6 and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (v) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vi) Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, tax and financial planning services, payment of club dues, and, if applicable, use of an automobile and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) Office and Support Staff. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided gener- 7 ally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (viii) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 5. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. (b) Cause. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: (i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically 8 identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. (c) Good Reason. The Executive's employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; 9 (ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than as provided in Section 4(a)(i)(B) hereof or the Company's requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement. For purposes of this Section 5(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. Anything in this Agreement to the contrary notwithstanding, a termination by the Executive for any reason during the 30-day period immediately following the first anniversary of the Effective Date shall be deemed to be a termination for Good Reason for all purposes of this Agreement. (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, 10 respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 6. Obligations of the Company upon Termination. (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the higher of (I) the Recent Annual Bonus and (II) the Annual Bonus paid or payable, including any bonus or portion thereof which has been earned but deferred (and annualized for any fiscal year consisting of less than twelve full months or during which the Executive was employed for less than twelve full months), for the most recently completed fiscal year during the Employment Period, if any (such higher amount being referred to as the "Highest Annual Bonus") and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 and (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the 11 amounts described in clauses (1), (2), and (3) shall be hereinafter referred to as the "Accrued Obligations"); and B. the amount equal to the product of (1) [three] [two] [one] and (2) the sum of (x) the Executive's Annual Base Salary, (y) the Highest Annual Bonus, and (z) the average of the aggregate amounts of employer contributions contributed for each of the three most recently completed plan years before the Date of Termination, or such lesser number of plan years during which the Executive was employed by the Company (annualized in the case of any plan year of less than 12 months) to the Executive's accounts in the Company's Profit Sharing Plan and Employees' Pension Plan or any successor to either of them, together with any related nonqualified plans; (ii) for [three] [two] [one] year[s] after the Executive's Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(iv) of this Agreement if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until the [third] [second] [first] anniversary of the Date of Termination and to have retired on such anniversary; (iii) the Company shall, at its sole expense as incurred, provide the Executive with outplacement services 12 the scope and provider of which shall be selected by the Executive in his sole discretion; and (iv) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include, without limitation, and the Executive's estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and affiliated companies to the estates and beneficiaries of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive's estate and/or the Executive's beneficiaries, as in effect on the date of the Executive's death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries. (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date 13 to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families. (d) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) his Annual Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other Benefits, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination 7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to Section 12(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies; provided, that the Executive shall not be eligible for any severance pay or benefits under any severance plan, program or policy of the Company or any of its affiliated companies as a result of a termination of employment on or after the Effective Date. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice 14 or program or contract or agreement except as explicitly modified by this Agreement. 8. Full Settlement. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). 9. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company or its affiliates to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross- 15 Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 9(a), if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of the greatest amount (the "Reduced Amount") that could be paid to the Executive such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by __________ or such other certified public accounting firm as may be designated by the Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if success- 16 ful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company 17 directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent 18 of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 11. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 12. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: 19 If to the Executive: -------------------- If to the Company: ----------------- OEA, Inc. P.O. Box 100488 Denver, Colorado 80250 Attention: or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, subject to Section 1(a) hereof, prior to the Effective Date, the Executive's employment and/or this Agreement may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement. From and after the Effective Date 20 this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof; provided, that this Agreement shall not supersede the Agreement Concerning Confidentiality of Trade Secrets and Ownership of Inventions between the Company and the Executive dated ________ 21 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. ________________________________________ [Executive] OEA, INC. By______________________________________ 22 EX-23 6 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8) pertaining to the OEA, Inc. Employees' Stock Option Plan and the OEA, Inc. Nonemployee Directors' Stock Option Plan of our report dated September 20, 1999, with respect to the consolidated financial statements of OEA, Inc. included in the Annual Report (Form 10-K/A) for the year ended July 31, 1999. ERNST & YOUNG LLP Denver, Colorado October 21, 1999 EX-27 7 FINANCIAL DATA SCHEDULE
5 12-MOS JUL-31-1999 AUG-01-1998 JUL-31-1999 2,445,000 0 35,236,000 0 43,594,000 95,875,000 287,624,000 90,907,000 298,358,000 34,172,000 0 0 0 2,202,000 154,372,000 298,358,000 248,805,000 248,805,000 230,951,000 248,278,000 4,681,000 0 8,079,000 (4,154,000) (1,746,000) (2,408,000) 0 0 0 (2,408,000) (.12) (.12)
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