-----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, RX3lhmYEBdXRhkHgdO4FFK5Te5JH+GlOJD2uWBvdSPxInHKltxTBZqZupxXalESx 2oL9YP2XV40+TX/KEfOlNQ== 0001047469-98-038598.txt : 19981030 0001047469-98-038598.hdr.sgml : 19981030 ACCESSION NUMBER: 0001047469-98-038598 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980731 FILED AS OF DATE: 19981029 SROS: NYSE 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 SEC ACT: SEC FILE NUMBER: 001-06711 FILM NUMBER: 98733158 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 1 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended July 31, 1998. [ ] 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 (IRS Employer Identification No.) incorporation or organization.) 34501 East Quincy Avenue, 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: Name of each exchange Title of each class on which registered: Common Stock, Par Value $0.10 New York Stock Exchange - --------------------------------------- -------------------------------------- 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 27, 1998. Common Stock, $.10 par value - $185,109,548. The number of shares outstanding of the issuer's classes of common stock as of October 27, 1998. Common Stock $.10 par value - 20,594,757. DOCUMENTS INCORPORATED BY REFERENCE Portions of the proxy statement for the annual shareholders meeting to be dated on or before January 30, 1999, 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 leader in the development and production of high-reliability, propellant-actuated devices for the automotive and aerospace industries. The foundation of OEA's growth is our core know-how (over 2,000 man years of experience) in propellants, interior ballistics and related mechanical design. Founded in 1957, OEA's first three decades of growth came from developing and producing the aerospace industry's largest selection of propellant-actuated devices for (1) escape systems for military aircraft, (2) satellites and satellite launchers and (3) missiles. Our growth over the last decade came from applying our aerospace know-how to the automotive air bag market. OEA began producing air bag initiators in 1987 and has since delivered over 110 million initiators. By 1996 OEA had the financial resources to begin manufacturing air bag inflators. Our know-how allowed us to deliver 3 million inflators in our first year of production. These inflators were the industry's first production inflators which were environmentally friendly and generated no smoke or dust, and were low-cost as well. OEA has headquarters 20 miles southeast of Denver, Colorado and employs 1,500 people in manufacturing facilities in Colorado, Utah, California and France. OEA was organized as a Delaware corporation on October 1, 1969. Its predecessor, Ordnance Engineering Associates, Inc., an Illinois corporation, was organized on July 13, 1957, and was merged into OEA on December 3, 1969. OEA's automotive operations are carried out through its Automotive Safety Products Division, including its French subsidiary, Pyroindustrie S.A. OEA's aerospace activities are carried out through its subsidiary OEA Aerospace, Inc. The Company's principal executive offices are located at 34501 East Quincy Avenue, Denver, Colorado 80250 and its telephone number at such address is (303) 693-1248. GLOSSARY OF TERMS PROPELLANT (SOLID PROPELLANT): A chemical mixture which 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 which 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 from 200 grams to 1,500 grams. When activated by the initiator, the inflator produces gas to inflate the air bag. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS (in thousands)
FY 1998 FY 1997 FY 1996 -------- -------- -------- SALES TO UNAFFILIATED CUSTOMERS Automotive $195,891 $168,869 $115,587 Nonautomotive 49,484 42,688 37,223 -------- -------- -------- Total $245,375 $211,557 $152,810 -------- -------- -------- -------- -------- -------- INTER-SEGMENT SALES OR TRANSFERS Automotive $2 $20 $123 Nonautomotive 240 141 139 -------- -------- -------- Total $242 $161 $262 -------- -------- -------- -------- -------- -------- OPERATING PROFIT Automotive $ (8,765) $45,522 $33,284 Nonautomotive 3,177 4,037 5,782 -------- -------- -------- Total $ (5,588) $49,559 $39,066 -------- -------- -------- -------- -------- -------- IDENTIFIABLE ASSETS Automotive $276,063 $275,153 $157,569 Nonautomotive 52,696 56,403 45,639 -------- -------- -------- Total $328,759 $331,556 $203,208 -------- -------- -------- -------- -------- --------
AUTOMOTIVE SAFETY PRODUCTS The Company established a separate Automotive Safety Products division in 1989 to take advantage of technologies developed in its aerospace activities to meet the rapid growth in demand for automotive air bags and related technologies. OEA designs, tests, develops, and manufactures 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. The automotive segment accounted for approximately 80%, 80%, and 76% of the Company's net sales for fiscal years 1998, 1997, and 1996, respectively, and is expected to continue to represent a similar percentage of the Company's sales in the future. In an air bag system, an initiator activates an inflator, which produces gas to inflate the air bag. OEA has designed a low-cost single-stage "hybrid" inflator which 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 non-toxic, using a propellant that is very insensitive under normal handling conditions. Two of the major inflator manufacturers (Autoliv and TRW) have historically relied, and continue to rely, on sodium azide inflators. Management believes that as demand continues to shift away from sodium azide inflators, the air bag system manufacturers will utilize more outside suppliers, such as the Company, to meet their inflator needs, instead of building new manufacturing facilities. OEA's strategy is to become a world leader in inflator manufacturing by taking advantage of its advanced technology to produce a high-quality product at the lowest possible cost. Management believes that by staking out the low-cost position it will encourage air bag system manufacturers to utilize OEA's capacity, instead of reinvesting in costly expansions of their inflator manufacturing capabilities. OEA recently announced significant new supply agreements with two major customers which are expected to generate approximately $21 million of additional revenue annually over the next four years on increased inflator sales volumes of approximately 1.1 million per year. The demand for air bag components (both domestic and worldwide) is expected to grow over the next few years, with additional air bag products (E.G., thorax, knee bolsters and window "curtains") and increased demand for frontal and side air bags. Further, it is expected that demand will increase for "smart" air bags, with multiple initiators, to adjust air bag inflation for the severity of the impact and the characteristics and position of the occupant. The Company believes that as a result of its technology position it is well-positioned to compete effectively in this market environment. OEA is also involved in the development of additional automotive safety products that take advantage of its inflator and initiator technologies, such as seatbelt pretensioners, which tighten seatbelts in a collision. The Company has made a substantial capital investment in highly automated equipment to produce inflators in its Denver facilities and to produce initiators in two manufacturing facilities located in Tremonton, Utah and Les Mureaux, France. The Company's new inflator production facility became fully operational late in fiscal 1998. Management believes that this highly automated approach may enable it to achieve a low manufacturing cost position which enhances its competitive ability. Raw materials used by the Company include stamped and machined parts and commercially available propellants. The Company is not dependent upon any one source for purchased materials because alternate sources of supply are available in the marketplace. The Company's single-stage hybrid inflator is covered by several patents, including a patent for use of its low-cost propellant. Some of the patents have been issued and others are pending relating to technology used in its inflators. The initiator business is not dependent upon patented items, trademarks, franchises, concessions, or licenses. The Company's business is not seasonal. Automotive segment inventories decreased $15.0 million during the year to $28.0 million at July 31, 1998. This represents a "normalization" of inventory after the fiscal 1998 launch of three new inflators (second generation passenger, driver, and side-impact). Customer payments are due on a current basis and extended terms or collateral have not been required. The Company's customers providing more than 10% of consolidated sales for the fiscal year ended July 31, 1998 were Takata Corporation with 33%, Delphi Interior & Lighting (a division of General Motors) with 15%, and Daicel Chemical Industries, Ltd. with 12%. The loss of any of these customers would have a materially adverse effect on the Company. There is no particular relationship between the Company and its 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 OEA's automotive air bag initiators for the Asian market, and 2. An agreement with Daicel Chemical Industries, Ltd., Tokyo, Japan, for the transfer of technology and manufacture of OEA's 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. Daicel began the manufacture of OEA's second generation passenger inflator in August 1998, and OEA will receive variable royalty payments on these units. Auto manufacturers generally change designs every three to five years. The Company receives annual blanket purchase orders, but deliveries are specified by customers on weekly releases for 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. The Company believes it is 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 the Company wide latitude to sell to all module manufacturers. By fiscal year 2000, OEA's Inflator division could be the largest customer of the OEA Initiator division. The Company is aware of five major inflator manufacturers in the world: Autoliv (merged with Morton International), TRW, Takata, BAICO (owned by Atlantic Research Corporation) and the Company. Autoliv and TRW currently dominate the worldwide market for air bag systems and produce a high percentage of their components internally. However, Autoliv and TRW's internal inflator capacity is dominated by sodium azide-type inflators. Sodium azide inflators use sodium azide as their propellant and are being phased out in favor of newer technologies, including the Company's hybrid inflators. There are two major automotive initiator manufacturers in the United States: Special Devices, Inc. and the Company. Additionally, there are four major automotive initiator manufacturers in Europe: Davey Bickford Smith, Nouvelle Cartoucherie de Survilliers (owned by Autoliv), Patvag and Pyroindustrie (wholly owned by OEA). The Company is 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. The Company believes 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 the Company to utilize its unused capacity. 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 1998 $ - $1,373,000 Fiscal year 1997 200,000 1,428,000 Fiscal year 1996 500,000 4,400,000
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 the competitive position of the Company or its subsidiaries. The Company, together with its consolidated subsidiaries and divisions, employs approximately 1,075 people in its automotive segment. NONAUTOMOTIVE PRODUCTS OEA Aerospace, Inc. 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. Sales are made directly to the customer. OEA's nonautomotive segment accounted for approximately 20%, 20% and 24% of the Company's net sales for fiscal years 1998, 1997, and 1996, respectively, and is expected to continue to represent a similar percentage of the Company's sales in the future. OEA's nonautomotive products are produced in Fairfield, California. A smaller test facility is located in San Ramon, California. OEA's nonautomotive segment customers are primarily in the defense and space fields under prime government contracts. The major portion of this business comes from subcontracts which are generally awarded to OEA on a fixed-price basis. Each new contract involves either the design and 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 the Company's nonautomotive business involves constant development and engineering of products required by its customers, it would be inappropriate to classify each new item as a new product. Raw materials used by the Company's nonautomotive 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. OEA's nonautomotive business is not dependent upon patented items, trademarks, franchises, concessions, or licenses thereunder. The Company does not pay any substantial royalties or similar payments in connection with any patents or license agreements. OEA's nonautomotive business is not seasonal. Products are manufactured to order and are shipped according to specified contract delivery dates. Nonautomotive segment inventories decreased $0.8 million during the year to $26.6 million at July 31, 1998. Customer payments are reasonably prompt and extended terms or collateral have not been required. The Company did not have a customer providing more than 10% of consolidated sales in the nonautomotive segment for the fiscal year ended July 31, 1998. Transactions with the United States Government are with several procurement agencies and/or prime contractors. Although the loss of all government contracts would have an adverse effect, the loss of any one agency or prime contract would not have a materially adverse effect on the Company. There is no particular relationship between the Company's nonautomotive segment and its customers other than that of supplier/customer. The Company's nonautomotive funded backlog of orders as of July 31, 1998, was $39.3 million. The Company estimates that $1.8 million of its backlog will not be recorded as a sale within its fiscal year ending July 31, 1999. The majority of the nonautomotive business of the Company 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 the Company's nonautomotive 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 the Company, also have capabilities and resources to design and develop similar items. The Company is aware of nine competitors in its nonautomotive field of propellant and explosive devices. No individual competitor dominates the field. The Company believes it is in a good competitive position. 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 nonautomotive 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 1998 $2,100,000 $153,000 Fiscal year 1997 3,400,000 45,000 Fiscal year 1996 2,600,000 50,000
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 the Company or its subsidiaries. The Company, together with its subsidiaries and divisions, employs approximately 450 people in its nonautomotive segment. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES (in thousands)
SALES TO UNAFFILIATED CUSTOMERS FY 1998 FY 1997 FY 1996 ------- ------- ------- United States $126,777 131,201 $117,386 Foreign Sales Asia 83,307 66,901 23,822 Europe 18,974 12,724 10,209 Other 16,317 731 1,393 -------- ------- -------- Total Foreign Sales 118,598 80,356 35,424 -------- ------- -------- Total Sales $245,375 211,557 $152,810 -------- ------- -------- -------- ------- --------
Notes: (1) There were no sales or transfers between the geographic areas reported above. (2) It is not possible, under the existing accounting systems, to isolate profits and identifiable assets by geographic areas. ITEM 2 - PROPERTIES The Company's 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 which the Company owns. In fiscal year 1998, 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 which was completed in December 1996. The Fairfield, California, facilities are occupied by OEA Aerospace, Inc., a wholly owned subsidiary of the Company. Its operations are conducted in twenty buildings containing 180,000 square feet of floor space in the aggregate, located on 515 acres of land which the Company owns. All parts of the various buildings are occupied and used in the operations of the Company's business. The San Ramon, California, property consists of a 10,000 square foot steel building situated on approximately one acre of land which the Company owns. 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 the Registrant owns. 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 Pyroindustrie S.A.. In 1997 the Company 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 the Company's operations. ITEM 3 - LEGAL PROCEEDINGS The Company is not involved in any legal proceedings which 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 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 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 FISCAL YEAR 1997 HIGH LOW ---------------- ---- --- 1st Quarter $42.50 $34.00 2nd Quarter 50.63 36.88 3rd Quarter 50.50 32.63 4th Quarter 40.88 34.00
The approximate number of holders of record of OEA's issued and outstanding shares at October 19, 1998, was 982. The Board of Directors has declared dividends during the last three fiscal years as follows:
AMOUNT DECLARED PAYABLE PER SHARE -------- ------- --------- November 3, 1995 December 8, 1995 $.25 November 1, 1996 December 10, 1996 .30 November 3, 1997 December 10, 1997 .33
Any future cash dividends will depend on future earnings, capital requirements and the Company's financial condition and other factors deemed relevant by the Board of Directors. The Company's credit facility includes financial covenants that could, in certain circumstances, limit the Company's ability to pay dividends in the future. ITEM 6 - SELECTED FINANCIAL DATA Consolidated Summary of Operations (in thousands, except per share data)
1998 1997 1996 1995 1994 -------- ------- ------- ------- ------- Net Sales $245,375 211,557 152,810 129,211 109,893 Operating Profit (Loss) (5,588) 49,559 39,066 34,927 30,071 Earnings (Loss) Before Minority Interest and Income Taxes (13,931) 55,304 40,683 36,226 29,465 Minority Interest -- -- 25 519 -- Income Taxes 4,655 (19,863) (15,165) (15,469) (11,513) -------- ------- ------- ------- ------- Net Earnings (Loss) Before Cumulative Effect of a Change in Accounting Principle (9,276) 35,441 25,543 21,276 17,952 Cumulative Effect of a Change in Accounting Principle (10,040) -- -- -- -- -------- ------- ------- ------- ------- Net Earnings (Loss) $(19,316) 35,441 25,543 21,276 17,952 -------- ------- ------- ------- ------- -------- ------- ------- ------- ------- Basic Earnings (Loss) Per Share Before Cumulative Effect of a Change in Accounting Principle $(.45) 1.73 1.25 1.04 .88 -------- ------- ------- ------- ------- -------- ------- ------- ------- ------- Basic Earnings (Loss) Per Share $(.94) 1.73 1.25 1.04 .88 -------- ------- ------- ------- ------- -------- ------- ------- ------- ------- Cash Dividends Per Share $.33 .30 .25 .20 .15 -------- ------- ------- ------- ------- -------- ------- ------- ------- ------- Weighted Average Number of Shares Outstanding During Year 20,581 20,540 20,499 20,480 20,439 -------- ------- ------- ------- ------- -------- ------- ------- ------- ------- Total Number of Shares Outstanding at Year End 20,595 20,552 20,514 20,487 20,466 -------- ------- ------- ------- ------- -------- ------- ------- ------- -------
Balance Sheet Data at July 31, (in thousands, except per share data)
1998 1997 1996 1995 1994 -------- ------- ------- ------- ------- Current Assets $117,578 127,319 77,579 74,871 62,389 Current Liabilities $31,461 36,031 33,524 12,160 8,883 Working Capital $86,117 91,288 44,055 62,711 53,506 Working Capital Ratio 3.7 to 1 3.5 to 1 2.3 to 1 6.2 to 1 7.0 to 1 Total Assets $328,759 331,556 203,208 160,902 135,315 Shareholders' Equity $161,506 186,778 160,448 140,352 121,854 Book Value Per Share $7.84 9.09 7.82 6.85 5.95
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 27E 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, implementation of ERP systems, 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 OEA's actual results to differ materially from those contemplated by such forward-looking statements. FUTURE OUTLOOK In July 1998, William R. Barker was appointed to the newly created executive position of President of the Automotive Safety Products division. He is responsible for all aspects of the Company's inflator and initiator business worldwide. Under Mr. Barker's direction, OEA's Automotive Safety Products division is focusing on a Four Phase Approach to growth. The first step is to aggressively attack the cost structure and reduce operating costs in all areas. This will be essential to offset the 23% weighted average inflator price reduction that became effective August 1, 1998. The second step is to obtain new business for OEA's current products. Initial new business awards were announced in September 1998 totaling 1.1 million inflators and $21.0 million on an annualized basis. With this new business, the utilization of OEA's new 173,000 square foot inflator production facility is expected to increase from 20% in the fiscal 1998 fourth quarter to 62% in the fiscal 1999 fourth quarter. The third step is to aggressively market new technology such as dual-stage ("smart") inflators and micro-gas generators for use in seat belt pretensioner systems. OEA's dual-stage ("smart") inflator was the first in the industry to receive preliminary approval from General Motors. The fourth step is to identify other commercially viable pyrotechnic products for automotive or other applications. Initial progress on this step is believed to be approximately one year away. The Company will also opportunistically analyze potential strategic acquisitions for OEA's Automotive Safety Products division, on a case-by-case basis. RESULTS OF OPERATIONS FISCAL YEAR 1998 VS. 1997 NET SALES Net sales for fiscal year 1998 were $245.4 million, as compared to fiscal 1997 net sales of $211.6 million. The $33.8 million increase from the prior year reflects a 16% sales increase in both the automotive and nonautomotive segments of the Company's 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 to 2.9 million units in fiscal 1997), partially offset by a $21.4 million decrease in initiator sales. The increased inflator sales reflect continued strong customer acceptance of the Company's 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. Management believes initiator volumes will return to expected levels in the coming year as this customer has agreed to significantly increase its commitments for fiscal 1999 (see "Settlement of Legal Claim" below for further detail). Nonautomotive 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. Management expects continued increases in automotive unit sales in fiscal year 1999, with modest dollar sales increases as a result of price decreases on its current initiator and inflator products. COST OF SALES Cost of sales for fiscal year 1998 was $238.6 million, as compared to fiscal 1997 cost of sales of $153.2 million. Automotive segment cost of sales was $194.8 million in fiscal 1998, as compared to $116.5 million in the prior year. This increase primarily reflects increased inflator volume, partially offset by reduced initiator volume; a parts shortage resulting in periodic production shut-downs on the Company's passenger inflator lines; the impact of the General Motors strike; increased overhead and other costs associated with the Company's 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 "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. Nonautomotive segment cost of sales was $43.8 million in fiscal 1998, as compared to $36.6 million in the prior year. This increase primarily reflects increased sales, testing and replacement costs relating to a TLX (energy transfer line) performance issue and $1.4 million in one-time charges (see "One-Time Charges" below). The cause of the TLX performance problem was quickly identified and corrected and product shipments have resumed. GROSS MARGIN Gross margin was $6.8 million (2.8% of net sales) for fiscal 1998, as compared to $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 to $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 "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. Management expects that automotive gross margin will be tight in the first half of fiscal 1999 as a result of price decreases, but that cost reductions undertaken in recent months will take effect and begin to be reflected in improved gross margins in the second half of the fiscal year. Nonautomotive segment gross margin was $5.7 million (11.6% of net nonautomotive sales) for fiscal 1998, as compared to $6.1 million (14.3% of net nonautomotive sales) for fiscal 1997. Excluding the $1.4 million one-time charge, nonautomotive 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 to $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 "One-Time Charges" below) and to costs of establishing an infrastructure to service the European inflator market at the Company's French subsidiary, Pyroindustrie. Excluding the one-time 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. Research and development costs are expected to increase significantly in fiscal year 1999 as the Company continues to develop and refine new products such as dual-stage inflators used in "smart" air bags, micro-gas generators used in seat belt pretensioner systems, and other advanced inflators. OPERATING PROFIT (LOSS) The Company experienced a $5.6 million operating loss for fiscal year 1998 (-2.3% of net sales), as compared to 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 income/(expense) was an $8.3 million expense for fiscal year 1998, as compared to $5.7 million of income in the prior year. Fiscal 1998 includes a $4.7 million one-time charge for the disposal of idle and obsolete automotive segment equipment (see "One-Time Charges" below), while fiscal 1997 includes $3.2 million in income for the sale of the Company's foreign joint venture, Pyrospace S.A. The remaining difference is primarily due to interest expense, which was $6.5 million in fiscal 1998, as compared to $0.1 million in fiscal 1997. Interest costs have increased due to the Company's higher debt level and the significant reduction in capitalized interest in fiscal 1998. The Company 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, 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 the Company elected to adopt it retroactively to the first quarter of fiscal 1998. Accordingly, the fiscal 1998 quarterly financial statements have been restated to expense start-up costs in the net amount of $3.0 million for the twelve months ended July 31, 1998 (see "Cost of Sales" above). Additionally, the Company wrote off in the first quarter the net book value ($10.0 million) of its 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. The total after-tax amount of these adjustments was $12.2 million for fiscal year 1998. NET EARNINGS (LOSS) The Company recorded a $19.3 million net loss for fiscal year 1998 (-7.9% of net sales), as compared to net earnings of $35.4 million (16.8% of net sales) for fiscal year 1997. Basic earnings (loss) per share was ($.94) for fiscal 1998, as compared to $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. ONE-TIME CHARGES The Company 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. The Company 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 the Company's automotive operations. The Company has completely re-implemented the ERP system and has brought in consultants to review the system set-up and procedures, and to re-train all employees. Management believes that this problem is resolved; however, physical inventories will be taken each quarter-end until it is fully demonstrated that the system is functioning properly. DISPOSAL OF INFLATORS. The Company disposed of early production inflators from its 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. The Company's 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 the Company's customers. Production and customer shipments have resumed. DOMESTIC INITIATOR CONSOLIDATION. The Company 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 consist of $0.5 million for equipment and personnel relocation and a $4.6 million charge for idled and/or obsolete equipment and inventory. This consolidation is expected to generate significant annual cost savings, while maintaining the Company's domestic initiator capacity of 45 million units. Additionally, the Company's French facility has a capacity of 20 million units, which supplies the European market and serves as a back up to its domestic production. SETTLEMENT OF LEGAL CLAIM. In consideration of new business and improving relations, the Company 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 is an important milestone toward improving the Company's relationship with this customer and should benefit both its initiator and inflator operations. INFLATOR EQUIPMENT OBSOLESCENCE. The Company 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 the Company's new high-volume inflator production lines becoming fully operational, this low-volume production equipment has become idled and obsolete. AEROSPACE INVENTORY OBSOLESCENCE. As the Company's 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). FISCAL YEAR 1997 VS. 1996 Net sales and operating profits for the fiscal year ended July 31, 1997, were $211.6 million and $49.6 million, respectively, compared to fiscal 1996 net sales of $152.8 million and operating profits of $39.1 million. Net earnings and earnings per share for fiscal year 1997 were $35.4 million and $1.73, respectively, compared to fiscal 1996 net earnings of $25.5 million and earnings per share of $1.25. Consolidated gross margin did, however, decrease from 33.3% in fiscal year 1996 to 27.6% in fiscal 1997. This principally reflected a major shift in product mix in the automotive segment. In fiscal year 1996, initiator sales represented 63% of total automotive segment sales, while they represented only 36% of total automotive segment sales in fiscal 1997. This shift was directly related to the Company's increased inflator sales. Initiators represent a more mature, higher-margin product line, whereas inflators were in the early production and start-up stages of the products' life cycles. The three new major product lines that moved from the start-up stage to the early production stage in fiscal 1997 were: 1) the driver side inflator, 2) the side-impact inflator, and 3) the second generation passenger side inflator. Initial mass-production of these inflators began late in the fourth quarter of fiscal 1997. The Automotive Safety Products division was the primary contributor to the sales and operating profit increases over fiscal year 1996. Automotive sales and operating profit increased 46% and 37%, respectively, due primarily to increased volume. Nonautomotive sales increased 15%; however, operating profit decreased 30% as a result of investments in new programs. Total operating profit as a percentage of sales for fiscal year 1997 was 23%, compared to 26% for fiscal 1996. Research and development expenditures decreased $2.9 million to $1.5 million in fiscal year 1997, as compared to fiscal 1996. This was the result of the Company completing the development of its driver side, side-impact, and second generation passenger side inflators and shifting its resources to product launch. Start-up costs of $10.6 million related to the product launches of the Company's new single-stage hybrid inflators were capitalized in fiscal 1997. These costs were amortized on a straight-line basis over a period not exceeding five years. Pyrospace S.A., the Company's foreign joint venture, was merged with another French aerospace company, Pyromeca S.A., effective December 31, 1996, creating a new entity, PyroAlliance S.A. OEA sold its 45% ownership share of the original Pyrospace to SNPE S.A. (owner of Pyromeca) for 25 million French francs (approximately $4.8 million) and a 10% ownership in PyroAlliance. This transaction resulted in a gain of approximately $3.2 million, which is reflected in "Other Income." Also included in "Other Income" in fiscal 1997 is a $2 million royalty payment from Daicel Chemical Industries, Ltd. This was the third annual payment under a fifteen year agreement for the transfer of technology and manufacture of OEA's single-stage hybrid inflators for passenger, driver and side-impact automotive air bags for manufacture in Asia for the Asian market. Fiscal year 1996 "Other Income" included a $1 million payment under the same agreement. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital decreased $5.2 million during the year to $86.1 million at July 31, 1998 from $91.3 million at July 31, 1997. The Company made capital expenditures totaling $49.0 million in fiscal 1998, which were funded from bank borrowings and internally generated funds. On April 10, 1998, the Company 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. 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 indebtedness to EBITDA. The margin will fluctuate up or down as determined by the above ratio. At July 31, 1998, the applicable interest rate was 6.6%. The agreement contains 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 individual financial covenants; however, it has successfully negotiated a temporary waiver or amendment to the agreement in each such instance. At the Company's discretion, it 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 two twelve-month extensions to the termination date. At July 31, 1998, the Company had $124.0 million of long-term debt drawn down on this credit facility. Anticipated working capital requirements, capital expenditures, and facility expansions are expected to be met through bank borrowings and from internally generated funds. 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. Any of the Company's computer programs that have date sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to maintain traceability, process transactions, send invoices, or engage in similar normal business activities. Based on current assessments, the Company is progressing with its modification and replacement of significant portions of its software so that its computer systems will properly utilize dates beyond December 31, 1999. The Company presently believes that with its modifications to existing software and conversions of new software, the Year 2000 Issue will be mitigated. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 Issue could have a material adverse effect on the Company's business, financial condition and results of operations. The Company is utilizing both internal and external resources to modify, replace, and test its software for Year 2000 compliance. The Company plans to complete the Year 2000 project by July 1999. To date, the Company has incurred approximately $1.1 million related to the assessment of, and efforts in connection with, its Year 2000 project. Approximately 75% of which are capitalized costs related to the purchase and implementation of new computer software and hardware. The total remaining costs for this project are currently being assessed and are unknown at this time. FOREIGN CURRENCY TRANSLATION Assets and liabilities of the Company's 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 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. 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, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended July 31, 1998. 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, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended July 31, 1998, 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 21, 1998 OEA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
JULY 31 1998 1997 ------------------------------ ASSETS Current assets: Cash and cash equivalents $ 1,920 $ 4,138 Accounts receivable 43,998 45,099 Unbilled costs and accrued earnings 3,190 4,062 Inventories 54,567 70,406 Income taxes receivable 12,040 2,568 Prepaid expenses and other 1,665 1,046 Deferred income taxes 198 -- ------------------------------ Total current assets 117,578 127,319 Property, plant, and equipment: Land and improvements 3,474 2,651 Buildings and improvements 64,827 52,449 Machinery and equipment 194,506 174,279 Furniture and fixtures 9,604 9,166 ------------------------------ 272,411 238,545 Accumulated depreciation and amortization 67,761 54,651 ------------------------------ 204,650 183,894 Long-term receivable 3,000 3,000 Investment in foreign joint venture 2,323 2,323 Deferred charges, net of accumulated amortization of $722 at July 31, 1997 -- 13,527 Other assets 1,208 1,493 ------------------------------ Total assets $328,759 $331,556 ------------------------------ ------------------------------
JULY 31 1998 1997 ------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 22,457 $ 27,043 Accrued expenses: Salaries and wages 2,598 2,703 Profit sharing and pension contributions 2,109 2,143 Interest payable 2,368 1,431 Other 1,929 1,405 Deferred income taxes -- 1,306 ------------------------------ Total current liabilities 31,461 36,031 Long-term bank borrowings 124,000 93,200 Deferred income taxes 10,821 14,562 Other 971 985 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 13,201 12,956 Retained earnings 150,440 176,547 Equity adjustment from translation (2,195) (2,763) Treasury stock, 1,424,943 and 1,467,531 shares in 1998 and 1997, respectively, at cost (2,142) (2,164) ------------------------------ Total stockholders' equity 161,506 186,778 ------------------------------ Total liabilities and stockholders' equity $328,759 $331,556 ------------------------------ ------------------------------
SEE ACCOMPANYING NOTES. OEA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JULY 31 1998 1997 1996 --------------------------------------------- Net sales $245,375 $211,557 $152,810 Cost of sales 238,571 153,153 101,953 --------------------------------------------- Gross profit 6,804 58,404 50,857 General and administrative expenses 10,866 7,372 7,375 Research and development expenses 1,526 1,473 4,416 --------------------------------------------- Operating profit (loss) (5,588) 49,559 39,066 Other income (expense): Interest income 317 248 685 Interest expense (6,479) (102) (72) Equity in earnings of foreign joint venture -- 302 573 Gain on sale of foreign joint venture -- 3,243 -- Royalty income 2,222 2,255 1,299 Loss on sale of property, plant, and equipment (4,676) (176) (211) Other, net 273 (25) (657) --------------------------------------------- (8,343) 5,745 1,617 --------------------------------------------- Earnings (loss) before minority interest and income taxes (13,931) 55,304 40,683 Minority interest in net loss of consolidated subsidiary -- -- 25 --------------------------------------------- Earnings (loss) before income taxes (13,931) 55,304 40,708 Income tax expense (benefit) (4,655) 19,863 15,165 --------------------------------------------- Earnings (loss) before cumulative effect of change in accounting principle (9,276) 35,441 25,543 Cumulative effect of change in accounting principle, net of tax benefit of $5,965 (10,040) -- -- --------------------------------------------- Net earnings (loss) $ (19,316) $ 35,441 $ 25,543 --------------------------------------------- ---------------------------------------------
OEA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JULY 31 1998 1997 1996 --------------------------------------------- Basic net earnings (loss) per share: Net earnings (loss) per share before cumulative effect of change in accounting principle $(0.45) $1.73 $1.25 Cumulative effect of change in accounting principle (0.49) -- -- --------------------------------------------- Net earnings (loss) per share $(0.94) $1.73 $1.25 --------------------------------------------- --------------------------------------------- Diluted net earnings (loss) per share: Net earnings (loss) per share before cumulative effect of change in accounting principle $(0.45) $1.72 $1.24 Cumulative effect of change in accounting principle (0.49) -- -- --------------------------------------------- Net earnings (loss) per share $(0.94) $1.72 $1.24 --------------------------------------------- --------------------------------------------- Weighted average number of shares outstanding: Basic 20,581 20,540 20,499 --------------------------------------------- --------------------------------------------- Diluted 20,581 20,606 20,545 --------------------------------------------- ---------------------------------------------
SEE ACCOMPANYING NOTES. OEA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT PER SHARE DATA)
COMMON STOCK TREASURY STOCK ------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------- Balances at July 31, 1995 22,019,700 $2,202 1,533,072 $(1,869) Purchase of common stock for treasury -- -- 9,254 (284) Issuance of treasury stock for options exercised -- -- (37,070) 49 Net earnings -- -- -- -- Cash dividends ($0.25 per share) -- -- -- -- Translation adjustment -- -- -- -- ------------------------------------------------------- Balances at July 31, 1996 22,019,700 2,202 1,505,256 (2,104) Purchase of common stock for treasury -- -- 2,500 (117) Issuance of treasury stock for options exercised -- -- (40,225) 57 Net earnings -- -- -- -- Cash dividends ($0.30 per share) -- -- -- -- Translation adjustment -- -- -- -- ------------------------------------------------------- Balances at July 31, 1997 22,019,700 2,202 1,467,531 (2,164) Purchase of common stock for treasury -- -- 1,162 (43) Issuance of treasury stock for options exercised -- -- (43,750) 65 Net loss -- -- -- -- Cash dividends ($0.33 per share) -- -- -- -- Translation adjustment -- -- -- -- ------------------------------------------------------- Balance at July 31, 1998 22,019,700 $2,202 1,424,943 $(2,142) ------------------------------------------------------- ------------------------------------------------------- EQUITY ADDITIONAL ADJUSTMENT TOTAL PAID-IN RETAINED FROM STOCKHOLDERS' CAPITAL EARNINGS TRANSLATION EQUITY ---------------------------------------------------------------- Balances at July 31, 1995 $12,012 $126,849 $ 1,158 $140,352 Purchase of common stock for treasury -- -- -- (284) Issuance of treasury stock for options exercised 455 -- -- 504 Net earnings -- 25,543 -- 25,543 Cash dividends ($0.25 per share) -- (5,124) -- (5,124) Translation adjustment -- -- (543) (543) ---------------------------------------------------------------- Balances at July 31, 1996 12,467 147,268 615 160,448 Purchase of common stock for treasury -- -- -- (117) Issuance of treasury stock for options exercised 489 -- -- 546 Net earnings -- 35,441 -- 35,441 Cash dividends ($0.30 per share) -- (6,162) -- (6,162) Translation adjustment -- -- (3,378) (3,378) ---------------------------------------------------------------- Balances at July 31, 1997 12,956 176,547 (2,763) 186,778 Purchase of common stock for treasury -- -- -- (43) Issuance of treasury stock for options exercised 245 -- -- 310 Net loss -- (19,316) -- (19,316) Cash dividends ($0.33 per share) -- (6,791) -- (6,791) Translation adjustment -- -- 568 568 ---------------------------------------------------------------- Balance at July 31, 1998 $13,201 $150,440 $(2,195) $161,506 ---------------------------------------------------------------- ----------------------------------------------------------------
SEE ACCOMPANYING NOTES. OEA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED JULY 31 1998 1997 1996 ---------------------------------------------- OPERATING ACTIVITIES Net earnings (loss) $(19,316) $35,441 $25,543 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) (572) Gain on sale of foreign joint venture -- (3,243) -- Depreciation and amortization 21,413 15,597 10,186 Deferred income taxes (72) 6,337 2,681 Minority interest in net loss of consolidated subsidiary -- -- (25) Decrease in deferred compensation -- (177) -- Loss on sale of property, plant, and equipment 4,676 176 211 Changes in operating assets and liabilities: Accounts receivable 1,305 (16,127) (6,164) Unbilled costs and accrued earnings 873 2,783 (2,871) Inventories 15,901 (34,108) (11,989) Prepaid expenses and other (555) (40) (228) Accounts payable and accrued expenses (3,567) 17,323 7,075 Income taxes (8,689) (1,735) 1,644 ---------------------------------------------- Net cash provided by operating activities 22,009 21,925 25,491 INVESTING ACTIVITIES Capital expenditures (48,985) (87,197) (45,500) Cash proceeds from sale of joint venture -- 4,624 -- Reductions to investments in and advances to affiliates -- -- (1,324) Proceeds from sale of property, plant, and equipment 403 -- 40 Decrease in cash value of life insurance 297 -- 46 Increase in deferred charges -- (10,639) (3,610) Increase in other assets, net (116) (102) (792) ---------------------------------------------- Net cash used in investing activities (48,401) (93,314) (51,140) FINANCING ACTIVITIES Purchase of common stock for treasury (43) (117) (284) Proceeds from issuance of treasury stock 310 546 504 Increase in net bank borrowings 30,800 79,200 14,000 Payment of dividends (6,791) (6,162) (5,124) ---------------------------------------------- Net cash provided by financing activities 24,276 73,467 9,096 Effect of exchange rate changes on cash (102) (500) (229) ---------------------------------------------- Net increase (decrease) in cash and cash equivalents (2,218) 1,578 (16,782) Cash and cash equivalents at beginning of year 4,138 2,560 19,342 ---------------------------------------------- Cash and cash equivalents at end of year $ 1,920 $ 4,138 $ 2,560 ---------------------------------------------- ---------------------------------------------- Supplemental information: Interest payments $ 7,620 $ 2,348 $ 220 Income tax payments 3,843 15,017 11,645
SEE ACCOMPANYING NOTES. OEA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JULY 31, 1998 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, 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 nonautomotive 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 nonautomotive 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. OEA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 $21.3 million, $14.8 million, and $10.2 million in 1998, 1997, and 1996, respectively. Repairs and maintenance charged to costs and expenses was $8.2 million, $7.7 million, and $5.1 million in 1998, 1997, and 1996, respectively. LONG-LIVED ASSETS In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present. The Company adopted Statement No. 121 in the first quarter of fiscal year 1997. The effect of the adoption was not material. 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. OEA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. ACCOUNTING POLICIES (CONTINUED) 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. SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998 and is applied as of the beginning of the fiscal year in which the SOP is first adopted. 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. 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 (Pyroindustrie S.A.) 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. OEA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. ACCOUNTING POLICIES (CONTINUED) EARNINGS PER SHARE Effective in the second quarter of fiscal 1998, the Company adopted FASB Statement No. 128, EARNINGS PER SHARE, which replaced the calculation of primary and fully diluted earnings per share with basic and diluted 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. Net earnings per share amounts for all periods have been presented and restated to conform to the Statement No. 128 requirements. Per share information is based on the weighted average number of common shares outstanding. 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. 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. Statement No. 130 will be effective for fiscal years beginning after December 15, 1997. The Company will adopt Statement No. 130 during the first quarter of fiscal year 1999, and does not expect the impact to be material. OEA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. ACCOUNTING POLICIES (CONTINUED) 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 shareholders. 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 will be effective for fiscal years beginning after December 15, 1997. The Company will adopt Statement No. 131 in its fiscal year 1999. RECLASSIFICATIONS Certain amounts in the 1997 financial statements have been reclassified to conform with the 1998 presentation. These reclassifications had no impact on the reported results of operations. 2. INVENTORIES Inventories are summarized as follows (in thousands):
JULY 31 1998 1997 --------------------------- Raw materials and component parts $25,954 $39,786 Work in process 17,222 21,107 Finished goods 11,391 9,513 --------------------------- $54,567 $70,406 --------------------------- ---------------------------
OEA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. INVESTMENT IN FOREIGN JOINT VENTURES On October 5, 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 October 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 January 1996, the Company acquired the remaining 20% of Pyroindustrie, making Pyroindustrie a wholly owned subsidiary of the Company. Net assets of Pyroindustrie at July 31, 1998 and 1997 totaled $35.6 million and $21.4 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 $2.0 million, $2.0 million, and $1.0 million have been received related to this agreement during 1998, 1997, and 1996, respectively. OEA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. 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, 1998, the interest rate was approximately 6.6%. 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 two twelve-month extensions to the maturity date. At July 31, 1998, the total debt outstanding related to the line of credit facility was $124 million. All debt relating to this line of credit is classified as long term at July 31, 1998, 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 1998 and 1997 were $8.8 million and $3.6 million, including capitalized interest of $2.3 million and $3.5 million, respectively. The weighted average interest rate on bank borrowings during fiscal years 1998 and 1997 was 6.4% and 6.5%, respectively. OEA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 nonautomotive 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, 1998, the Company had commitments to purchase approximately $6 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, 1998, 1997, and 1996 were $2.0 million, $2.2 million, and $1.4 million, respectively. OEA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, 1998 and 1997 are as follows (in thousands):
1998 1997 --------------------------- Current deferred tax liabilities: Unbilled receivables $ 282 $ 309 Inventory valuation -- 269 Prepaid expenses 152 272 Deferred income on Daicel agreement 387 376 Other 158 224 --------------------------- Total current deferred tax liabilities 979 1,450 Long-term deferred tax liabilities: Plant and equipment 8,464 8,804 Deferred income on Daicel agreement 864 878 Deferred charges -- 5,174 Capitalized interest expense 1,705 -- Other 73 -- --------------------------- Total long-term deferred tax liabilities 11,106 14,856 --------------------------- Total deferred tax liabilities 12,085 16,306 Current deferred tax assets: Allowances 1,151 -- Other 26 144 --------------------------- Total current deferred tax assets 1,177 144 Long-term deferred tax asset: Deferred compensation 285 294 --------------------------- Total deferred tax assets 1,462 438 --------------------------- Net deferred tax liabilities $10,623 $15,868 --------------------------- ---------------------------
8. INCOME TAXES (CONTINUED) Components of income tax expense (benefit) are as follows (in thousands):
CURRENT DEFERRED TOTAL ------------------------------------------ 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 ------------------------------------------ ------------------------------------------ 1996: Federal $10,840 $2,303 $13,143 State 1,644 378 2,022 ------------------------------------------ $12,484 $2,681 $15,165 ------------------------------------------ ------------------------------------------
Actual tax expense for 1998, 1997, and 1996 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):
1998 1997 1996 --------------------------------------- Computed "expected" tax expense (benefit) $(4,876) $19,356 $14,248 Increases (reductions) in taxes resulting from: State taxes, net of federal income tax benefit (230) 1,877 1,315 Sales to foreign customers (194) (494) -- Tax effect of joint venture operations -- (105) (297) Income tax credits (76) (915) (175) Other 721 144 74 --------------------------------------- Actual tax expense (benefit) $(4,655) $19,863 $15,165 --------------------------------------- ---------------------------------------
OEA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 600,000 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. Options granted under the Employees' Plan may be exercised at any time after the grant date and options issued under the Directors' Plan may be exercised after the first six months following the grant date. 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. OEA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, 1995 175,695 $14.67 -- $ -- -- $ -- Granted -- -- 27,472 28.34 4,375 27.75 Exercised (36,870) 13.65 (200) 28.34 -- -- Forfeited (8,311) 26.30 (2,000) 28.34 -- -- --------- -------- -------- 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 --------- -------- -------- --------- -------- --------
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, 1998:
WEIGHTED AVERAGE NUMBER OF OPTIONS WEIGHTED AVERAGE EXERCISE PRICE OUTSTANDING REMAINING LIFE (YEARS) ---------------- ----------------- ---------------------- Previous Employees' Plan $4.67 $ 4.67 4,844 .3 $19.00 - $30.00 23.15 36,548 4.0 Employees' Plan $14.19 - $19.06 16.43 140,000 7.8 $28.00 - $37.88 33.07 37,304 9.9 Directors' Plan $27.69 - $45.13 33.52 13,125 8.5
OEA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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:
1998 1997 1996 ------------- ------------- ------------- Estimated fair value per share of options granted to: Employees $5.70-$7.70 $14.52 $11.09 Directors $11.07 $17.40 $10.99 Effect on net earnings $(128,000) $(434,000) $(318,000) Effect on basic and diluted earnings per share $(0.01) $(0.02) $(0.02) Assumptions: Annualized dividend yield 0.70% 0.70% 0.72% Common stock price volatility 39.0% 35.40% 35.80% Risk-free rate of return 5.39%- 5.65% 5.87% 6.52% 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 nonautomotive. Financial information for each segment and major customers is summarized as follows (in thousands):
1998 ------------------------------------------------ AUTOMOTIVE NONAUTOMOTIVE 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
OEA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. SEGMENT INFORMATION AND MAJOR CUSTOMERS (CONTINUED)
1997 ------------------------------------------------ AUTOMOTIVE NONAUTOMOTIVE 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
1996 ------------------------------------------------ AUTOMOTIVE NONAUTOMOTIVE TOTAL ------------------------------------------------ Net sales $115,587 $37,223 $152,810 Operating profit 33,284 5,782 39,066 Identifiable assets 157,569 45,639 203,208 Depreciation and amortization expense 9,049 1,137 10,186 Capital expenditures 44,550 950 45,500
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 nonautomotive 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. OEA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. SEGMENT INFORMATION AND MAJOR CUSTOMERS (CONTINUED) Customers representing 10% or more of consolidated net sales are as follows:
1998 1997 1996 -------- -------- ------- Takata Corporation 33% 24% 6% Daicel Chemical Industries 12% 7% 3% Delphi Interior & Lighting 15% 18% 2% Autoliv ASP, Inc. (formerly Morton International) 8% 17% 49%
Sales to foreign customers were 48%, 38%, and 23% of consolidated net sales for the years 1998, 1997 and 1996, 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):
1998 1997 ------- ------- Automotive $30,366 $30,416 Nonautomotive 13,632 14,683 ------- ------- $43,998 $45,099 ------- ------- ------- -------
OEA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
OCTOBER 31 JANUARY 31 APRIL 30 JULY 31 ----------- ---------- -------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 Net sales $57,335 $59,414 $63,592 $65,034 Gross profit (loss) 10,164 8,109 (12,908) 1,439 Earnings (loss) before cumulative effect of change in accounting principle 4,632 2,378 (14,925) (1,361) Cumulative effect of change in accounting principle 10,040 -- -- -- Net earnings (loss) (5,408) 2,378 (14,925) (1,361) Earnings (loss) per share before cumulative effect of change in accounting principle-- basic and diluted $0.23 $0.12 $(0.72) $(0.08) Cumulative effect of change in accounting principle--basic and diluted $(0.49) -- -- -- Earnings (loss) per share--basic and diluted $(0.26) $0.12 $(0.72) $(0.08) 1997 Net sales $45,340 $51,486 $54,397 $60,334 Gross profit 14,515 14,457 14,507 14,925 Net earnings 7,105 7,804 10,094 10,438 Earnings per share--basic $0.35 $0.38 $0.49 $0.51 Earnings per share--diluted $0.34 $0.38 $0.49 $0.51
During the quarters ended July 31, 1998 and 1997, 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. OEA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED) 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. During the quarter ended April 30, 1997, the Company recorded a gain of $2.0 million net of tax, or $0.10 per share, related to the sale of its original ownership share of Pyrospace. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable 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 1999 annual shareholders' meeting to be filed with the Securities and Exchange Commission prior to November 29, 1998. 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 1999 annual shareholders' meeting to be filed with the Securities and Exchange Commission prior to November 29, 1998. 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 1999 annual shareholders' meeting to be filed with the Securities and Exchange Commission prior to November 29, 1998. 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 1999 annual shareholders' meeting to be filed with the Securities and Exchange Commission prior to November 29, 1998. PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K (a) Documents filed as a part of this report: (1) Financial Statements: Report of Independent Auditors Consolidated Balance Sheets - July 31, 1998 and 1997 Consolidated Statements of Operations Years ended July 31, 1998, 1997, and 1996 Consolidated Statements of Stockholders' Equity Years ended July 31, 1998, 1997, and 1996 Consolidated Statements of Cash Flows Years ended July 31, 1998, 1997, and 1996 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, (incorporated by reference) Exhibit 3.2 - By-laws, as amended (incorporated by reference). 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 (filed herewith). Exhibit 10.3 - Retirement Agreement dated May 15, 1990 between the Company and Charles B. Kafadar (incorporated by reference). Exhibit 21 - During fiscal year 1997, 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, 100% which owns 100% of Aerotest Operations, Inc.,a California corporation PYROINDUSTRIE S.A., a corporation in France 100%
The above entities are included in the consolidated financial statements of the Registrant being submitted herewith. Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K during the quarter ended July 31, 1998. Form 8-K filed June 4, 1998. Item 5 - Other Events-- Cautionary statement for the purpose of the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995. 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 27, 1998 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/ J. ROBERT BURNETT - ------------------------------------ ------------------------------------ George S. Ansell, Director J. Robert Burnett, Director /s/ PHILIP E. JOHNSON /s/ LEWIS W. WATSON - ------------------------------------ ------------------------------------ Philip E. Johnson, Director Lewis W. Watson, Director /s/ J. THOMPSON MCCONATHY /s/ JEPSON S. FULLER - ------------------------------------ ------------------------------------ J. Thompson McConathy, Vice President Jepson S. Fuller, Controller of Finance and Principal Financial Officer (Principal Accounting Officer) EX-10.2 2 EXHIBIT 10.2 FIRST AMENDMENT TO AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT FIRST AMENDMENT TO AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT dated as of June 11, 1998 (the "AMENDMENT") among OEA, INC., a Delaware corporation (the "COMPANY"), each of the banks named under the caption "Banks" on the signature pages hereof (individually, a "BANK" and, collectively, the "BANKS"), BANQUE NATIONALE DE PARIS, U.S. BANK NATIONAL ASSOCIATION and UNION BANK OF CALIFORNIA, N.A., as Co-Agents and THE NORTHERN TRUST COMPANY, as agent for the Banks (in such capacity, together with its successors in such capacity, the "AGENT"). WHEREAS, the Company, the Agent, the Co-Agents and the Banks have entered into an Amended and Restated Revolving Credit Agreement (the "EXISTING AGREEMENT") dated as of April 10, 1998 pursuant to which the Banks agreed to make Loans (as defined in the Existing Agreement) to the Company in an aggregate principal amount not to exceed $180,000,000 at any time outstanding, on and subject to the terms and conditions thereof; and WHEREAS, the parties wish to amend the Existing Agreement to (a) add a letter of credit facility, (b) modify certain covenants, and (c) increase pricing. NOW, THEREFORE, the parties agree as follows: SECTION 1. DEFINITIONS. Terms defined in the introductory paragraphs hereof shall have their respective defined meanings when used in this Amendment and, except as otherwise expressly provided herein, terms defined in the Existing Agreement shall have their respective defined meanings when used in this Amendment. In addition, the following terms shall have the following meanings (terms defined in the introductory paragraphs or this SECTION 1 in the singular to have correlative meanings when used in the plural and VICE VERSA): "EFFECTIVE DATE" shall mean the first date, if any, which occurs before the termination of this Amendment pursuant to SECTION 5 hereof and on which the conditions precedent in SECTION 3 shall have been satisfied. SECTION 2. AMENDMENTS TO EXISTING AGREEMENT. The following amendments are hereby made to the Existing Agreement with effect from and after the Effective Date: (a) DEFINITIONS. SECTION 1.1 of the Existing Agreement is amended by (i) amending and restating in its entirety the definition of "APPLICABLE MARGIN" as follows and (ii) adding the following new definitions in alphabetical order: "APPLICABLE MARGIN" shall mean, for any period and for the type of Loan or fee indicated below, the number of basis points per annum set forth below corresponding with the applicable ratio of consolidated Indebtedness of the Company and its Subsidiaries to EBITDA plus interest income as determined in accordance with SECTION 8.11 hereof: INDEBTEDNESS TO EBITDA RATIO
LEVEL I LEVEL II LEVEL III LEVEL IV LEVEL V - ----------------------------------------------------------------------------------------------------------------------------------- RATIO GREATER THAN OR LESS THAN 3.75:1.0 but LESS THAN 3.0:1.0 but LESS THAN 2.5:1.0 but LESS THAN 2.0:1.0 EQUAL TO 3.75:1.0 GREATER THAN OR EQUAL GREATER THAN OR EQUAL GREATER THAN OR EQUAL TO 3.0:1.0 TO 2.5:1.0 TO 2.0:1.0 - ----------------------------------------------------------------------------------------------------------------------------------- FACILITY FEE 25.0 25.0 12.5 12.5 12.5 - ----------------------------------------------------------------------------------------------------------------------------------- FED FUNDS RATE 125 100 80 70 60 - ----------------------------------------------------------------------------------------------------------------------------------- LIBOR RATE 125 100 80 70 60 - -----------------------------------------------------------------------------------------------------------------------------------
For purposes of determining the Applicable Margin, consolidated Indebtedness to EBITDA shall be calculated by the Company as provided in SECTION 8.11 hereof as of the end of each of its fiscal quarters and shall be reported to the Agent pursuant to a certificate executed by a senior financial officer of the Company and delivered concurrently with the certificate required by SECTION 8.1 hereof. The Applicable Margin shall be adjusted, if necessary, effective on and after the first Business Day after the date of receipt by the Agent of the certificate required to be delivered pursuant to SECTION 8.1 hereof; provided, however, that if such certificate, together with the financial statements to which such certificate relates, are not delivered by the required delivery date, then Level I pricing shall apply until the date such certificate is actually delivered and unless it indicates that a lower Level is applicable. Notwithstanding the foregoing, Level II pricing shall apply until the fiscal quarter ended on January 31, 1999. "CASH COLLATERALIZE" means, to pledge and deposit with or deliver to the Agent, for the benefit of the Agent, the Issuing Lender and the Banks, as collateral for the L/C Obligations, cash or deposit account balances pursuant to documentation in form and substance satisfactory to the Agent and the Issuing Lender (which documents are hereby consented to by the Banks). Derivatives of such term shall have corresponding meaning. "HONOR DATE" has the meaning specified in SECTION 2.12(c)(ii). "INSOLVENCY PROCEEDING" means, (a) any case, action or proceeding before any court or other governmental authority relating to bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution, winding-up or relief of debtors, or (b) any general assignment for the benefit of creditors, composition, marshaling of assets for creditors, or other, similar arrangement in respect of its creditors generally or any substantial portion of its creditors, undertaken under U.S. Federal, state or foreign law, including the Bankruptcy Code. "ISSUING LENDER" means, The Northern Trust Company in its capacity as issuer of one or more Letters of Credit hereunder, together with any replacement letter of credit issuer arising under SUBSECTION 10.1. -2- "L/C ADVANCE" means, each Bank's participation in any L/C Borrowing in accordance with its Pro Rata Share. "L/C AMENDMENT APPLICATION" means, an application form for amendment of outstanding standby or commercial documentary letters of credit as shall at any time be in use at the Issuing Lender, as the Issuing Lender shall request. "L/C APPLICATION" means, an application form for issuances of standby or commercial documentary letters of credit as shall at any time be in use at the Issuing Lender, as the Issuing Lender shall request. "L/C BORROWING" means, an extension of credit under SUBSECTION 2.12(c)(iv) resulting from a drawing under any Letter of Credit which shall not have been reimbursed on the date when made or converted into a borrowing of Loans. "L/C COMMITMENT" means, the commitment of the Issuing Lender to issue, and the commitment of the Banks severally to participate in Letters of Credit from time to time issued or outstanding under SECTION 2.12, in an aggregate amount not to exceed on any date the amount of $5,000,000, as the same shall be reduced as a result of a reduction in the L/C Commitment pursuant to SECTION 2.5; provided that the L/C Commitment is a part of the combined Commitments, rather than a separate, independent commitment. "L/C OBLIGATIONS" means, at any time the sum of the following reimbursement obligations (whether contingent or otherwise) of the Company (a) the aggregate undrawn amount of all Letters of Credit then outstanding, plus (b) the amount of all unreimbursed drawings under all Letters of Credit, including all outstanding L/C Borrowings. "L/C RELATED DOCUMENTS" means, the Letters of Credit, the L/C Applications, the L/C Amendment Applications and any other document relating to any Letter of Credit, including any of the Issuing Lender's standard form documents for letter of credit issuances. "LEVEL" mean any of the five ratio ranges applicable to the Indebtedness to EBITDA ratio as set forth in the table contained in the definition of "Applicable Margin." "LETTERS OF CREDIT" means, any letters of credit (whether standby letters of credit or commercial documentary letters of credit) issued by the Issuing Lender pursuant to SECTION 2.12. "PRO RATA SHARE" means, as to any Bank at any time, the percentage equivalent (expressed as a decimal, rounded to the ninth decimal place) at such time of such Bank's Commitment divided by the Commitments of all Banks. (b) DEFINITION OF EBITDA. The definition of "EBITDA" in SECTION 1.1 of the Existing Agreement is hereby amended to add the following sentence at the end thereof: "For purposes of calculating EBITDA for the fiscal quarter of the Company ended on May 1, 1998 only, including as such EBITDA amount for such quarter may be included in financial covenant calculations hereunder, EBITDA shall be increased by an amount of up to $22,500,000 of non-cash Special Charges only, and shall not be increased by any cash Special Charges. For purposes -3- hereof, "SPECIAL CHARGES" means charges of up to $26,900,000 taken by the Company during the fiscal quarter ended May 1, 1998 for (i) initiator consolidation, (ii) inflator quality, (iii) Autoliv settlement, (iv) equipment obsolescence, (v) inventory write down, (vi) aerospace obsolescence and (vii) other special charges." (c) AMENDMENT TO SECTION 2.3(a). The first sentence of SECTION 2.3(a) of the Existing Agreement is amended by adding the following phrase at the end thereof: "less such Banks' Pro Rata Share participation interest in L/C Obligations". (d) AMENDMENT TO SECTION 2.5(a). SECTION 2.5(a) of the Existing Agreement is amended by (i) adding the phrase "and L/C Obligations" at the end of CLAUSE (iii) thereof; (ii) deleting the word "and" before CLAUSE (iv); (iii) adding the phrase "and its participation interest in the L/C Obligations" to the end of CLAUSE (iv); and (v) adding new CLAUSE (v) as follows: "(v) the "L/C Obligations shall not exceed the L/C Commitment". (e) AMENDMENT TO SECTION 2.6(a). SECTION 2.6(a) of the Existing Agreement is hereby amended by deleting the phrase "at a rate of .125% per annum" and substituting the phrase "at the Applicable Margin specified for "Facility Fee" in the definition of Applicable Margin". (f) SECTION 2.11(a) THE EXISTING AGREEMENT. The last sentence of SECTION 2.11(a) of the Existing Agreement is amended by deleting everything after the reference to Section 5.5 therein and substituting the following therefor: "if any, and Cash Collateralize such Bank's Pro Rata Share of L/C Obligations, whereupon such Withdrawing Bank shall cease to be obligated to make further Loans hereunder, to participate in any Letter of Credit and its Commitment shall be reduced to zero and it shall be released from all its obligations under this Agreement". (g) SECTION 2.11(b) OF THE EXISTING AGREEMENT. SECTION 2.11(b) of the Existing Agreement is hereby amended by adding the phrase "and Cash Collateralize any such Bank's Pro Rata Share of L/C Obligations" before the phrase "in accordance with the provisio" appearing in the first sentence thereof. (h) SECTION 2.11(c) OF THE EXISTING AGREEMENT. SECTION 2.11(c) of the Existing Agreement is hereby amended by adding the phrase "and its Pro Rata Share of L/C Obligations has been Cash Collateralized" at the end of CLAUSE (ii) thereof. (i) SECTION 2.11(f) OF THE EXISTING AGREEMENT. The first two sentences of SECTION 2.11(f) of the Existing Agreement are amended and restated in their entirety as follows: "If any Loans or Letters of Credit shall be outstanding at the time an Assignment Agreement becomes effective, (i) the Company shall repay such portion of such Loans and borrow an equal principal amount of new Loans from the Bank which has acceded or increased its Commitment hereunder and (ii) the new Bank shall purchase participations in the outstanding L/C Obligations from the Banks, so that after giving effect to such prepayment and borrowing of Loans and participation in L/C Obligations, the Loans and L/C Obligations are held PRO RATA among the Banks in accordance with the Commitments. -4- The Banks shall make disbursements among themselves to give effect to such prepayment and borrowing and participations pursuant to instructions from the Agent." (j) SECTION 2.12 OF THE EXISTING AGREEMENT. A new SECTION 2.12 is hereby added to the Existing Agreement as follows: "2.12. LETTERS OF CREDIT. (a) THE LETTER OF CREDIT SUBFACILITY. (i) On the terms and conditions set forth herein (A) the Issuing Lender agrees, from time to time on any Business Day during the period from June 11, 1998 to the Termination Date to issue Letters of Credit for the account of the Company and/or the Company jointly and severally with any Subsidiary thereof, and to amend or renew Letters of Credit previously issued by it, in accordance with SUBSECTIONS 2.12(b)(iii) and (iv) and to honor drafts under the Letters of Credit; and (B) the Banks severally agree to participate in Letters of Credit issued for the account of the Company and/or the Company jointly and severally with any Subsidiary thereof; provided, that the Issuing Lender shall not be obligated to issue, and no Bank shall be obligated to participate in, any Letter of Credit if as of the date of issuance of such Letter of Credit (the "ISSUANCE DATE") (1) the amount of all L/C Obligations plus the amount of all Loans exceeds the combined Commitments of all the Banks, (2) the participation of any Bank in the amount of all L/C Obligations plus the amount of the Loans of such Bank exceeds such Bank's Commitment, or (3) the amount of L/C Obligations exceeds the L/C Commitment. Within the foregoing limits, and subject to the other terms and conditions hereof, the Company's ability to obtain Letters of Credit shall be fully revolving, and, accordingly, the Company may, during the foregoing period, obtain Letters of Credit to replace Letters of Credit which have expired or which have been drawn upon and reimbursed. (ii) The Issuing Lender is under no obligation to issue any Letter of Credit if: (A) any order, judgment or decree of any governmental authority or arbitrator shall by its terms purport to enjoin or restrain the Issuing Lender from issuing such Letter of Credit, or any requirement of law applicable to the Issuing Lender or any request or directive (whether or not having the force of law) from any governmental authority with jurisdiction over the Issuing Lender shall prohibit, or request that the Issuing Lender refrain from, the issuance of letters of credit generally or such Letter of Credit in particular or shall impose upon the Issuing Lender with respect to such Letter of Credit any restriction, reserve or capital requirement (for which the Issuing Lender is not otherwise compensated hereunder) not in effect on June 11, 1998, or shall impose upon the Issuing Lender any unreimbursed loss, cost or expense which was not applicable on June 11, 1998 and which the Issuing Lender in good faith deems material to it; (B) the Issuing Lender has received written notice from any Bank, the Agent or the Company, on or prior to the Business Day prior to the requested date of issuance of such Letter of Credit, that one or more of the applicable conditions contained in SECTION 6 is not then satisfied; -5- (C) the expiry date of any requested Letter of Credit is (1) more than 360 days after the date of issuance, unless the Majority Banks have approved such expiry date in writing, or (2) after the Termination Date, unless all of the Banks have approved such expiry date in writing; (D) the expiry date of any requested standby Letter of Credit is prior to the maturity date of any financial obligation to be supported by the requested Letter of Credit and the beneficiary thereof would have the right to draw the full amount thereof if the letter of credit is not renewed or replaced; (E) any requested Letter of Credit does not provide for drafts, or is not otherwise in form and substance acceptable to the Issuing Lender, or the issuance of a Letter of Credit shall violate any applicable policies of the Issuing Lender; (F) any standby Letter of Credit is for the purpose of supporting the issuance of any letter of credit by any other Person; or (G) such Letter of Credit is in an initial face amount less than $250,000 or to be used for a purpose other than in connection with the Company's existing lines of business or denominated in a currency other than Dollars. (b) ISSUANCE, AMENDMENT AND RENEWAL OF LETTERS OF CREDIT. (i) Each Letter of Credit shall be issued upon the irrevocable written request of the Company received by the Issuing Lender (with a copy sent by the Company to the Agent if different from the Issuing Lender) at least four days (or such shorter time as the Issuing Lender may agree in a particular instance in its sole discretion) prior to the proposed date of issuance. Each such request for issuance of a Letter of Credit shall be by facsimile, confirmed immediately in an original writing, in the form of an L/C Application, and shall specify in form and detail satisfactory to the Issuing Lender: (A) the proposed date of issuance of the Letter of Credit (which shall be a Business Day); (B) the face amount of the Letter of Credit; (C) the expiry date of the Letter of Credit; (D) the name and address of the beneficiary thereof; (E) the documents to be presented by the beneficiary of the Letter of Credit in case of any drawing thereunder; (F) the full text of any certificate to be presented by the beneficiary in case of any drawing thereunder; and (G) such other matters as the Issuing Lender may require. (ii) At least two Business Days prior to the issuance of any Letter of Credit, the Issuing Lender will confirm with the Agent (by telephone or in writing) that the Agent has received a copy of the L/C Application or L/C Amendment Application from the Company and, if not, the Issuing Lender will provide the Agent with a copy thereof. Unless the Issuing Lender has received notice on or before the second Business Day immediately preceding the date the Issuing Lender is to issue a requested Letter of Credit from the Agent directing the Issuing Lender not to issue such Letter of Credit because such issuance is not then permitted under SUBSECTION 2.12(a)(i) as a result of the limitations set forth in CLAUSES (1) THROUGH (3) thereof or SUBSECTION 2.12(a)(ii)(B), then, subject to the terms and conditions hereof, the Issuing Lender shall, on the requested date, issue a Letter of Credit for the account of the Company and/or the Company jointly and -6- severally with any Subsidiary thereof in accordance with the Issuing Lender's usual and customary business practices. (iii) From time to time while a Letter of Credit is outstanding and prior to the Termination Date, the Issuing Lender will, upon the written request of the Company received by the Issuing Lender (with a copy sent by the Company to the Agent) at least five days (or such shorter time as the Issuing Lender may agree in a particular instance in its sole discretion) prior to the proposed date of amendment, amend any Letter of Credit issued by it. Each such request for amendment of a Letter of Credit shall be made by facsimile, confirmed immediately in an original writing, made in the form of an L/C Amendment Application and shall specify in form and detail satisfactory to the Issuing Lender: (A) the Letter of Credit to be amended; (B) the proposed date of amendment of the Letter of Credit (which shall be a Business Day); (C) the nature of the proposed amendment; and (D) such other matters as the Issuing Lender may require. The Issuing Lender shall be under no obligation to amend any Letter of Credit if: (X) the Issuing Lender would have no obligation at such time to issue such Letter of Credit in its amended form under the terms of this Agreement; or (Y) the beneficiary of any such Letter of Credit does not accept the proposed amendment to the Letter of Credit. The Agent will promptly notify the Banks of the receipt by it of any L/C Application or L/C Amendment Application. (iv) The Issuing Lender and the Banks agree that, while a Letter of Credit is outstanding and prior to the Termination Date, at the option of the Company and upon the written request of the Company received by the Issuing Lender (with a copy sent by the Company to the Agent) at least five days (or such shorter time as the Issuing Lender may agree in a particular instance in its sole discretion) prior to the proposed date of notification of renewal, the Issuing Lender shall be entitled to authorize the automatic renewal of any Letter of Credit issued by it. Each such request for renewal of a Letter of Credit shall be made by facsimile, confirmed immediately in an original writing, in the form of an L/C Amendment Application, and shall specify in form and detail satisfactory to the Issuing Lender: (A) the Letter of Credit to be renewed; (B) the proposed date of notification of renewal of the Letter of Credit (which shall be a Business Day); (C) the revised expiry date of the Letter of Credit; and (D) such other matters as the Issuing Lender may require. The Issuing Lender shall be under no obligation so to renew any Letter of Credit if: (X) the Issuing Lender would have no obligation at such time to issue or amend such Letter of Credit in its renewed form under the terms of this Agreement; or (Y) the beneficiary of any such Letter of Credit does not accept the proposed renewal of the Letter of Credit. If any outstanding Letter of Credit shall provide that it shall be automatically renewed unless the beneficiary thereof receives notice from the Issuing Lender that such Letter of Credit shall not be renewed, and if at the time of renewal the Issuing Lender would be entitled to authorize the automatic renewal of such Letter of Credit in accordance with this SUBSECTION 2.12(B)(IV) upon the request of the Company but the Issuing Lender shall not have received any L/C Amendment Application from the Company with respect to such renewal or other written direction by the Company with respect thereto, the Issuing Lender shall nonetheless be permitted to allow such Letter of Credit to renew, and the Company and the Banks hereby authorize such renewal, and, -7- accordingly, the Issuing Lender shall be deemed to have received an L/C Amendment Application from the Company requesting such renewal. (v) The Issuing Lender may, at its election (or as required by the Agent at the direction of the Majority Banks), deliver any notices of termination or other communications to any Letter of Credit beneficiary or transferee, and take any other action as necessary or appropriate, at any time and from time to time, in order to cause the expiry date of such Letter of Credit to be a date not later than the Termination Date. (vi) This Agreement shall control in the event of any conflict with any L/C Related Document (other than any Letter of Credit). (vii) The Issuing Lender will also deliver to the Agent, concurrently or promptly following its delivery of a Letter of Credit, or amendment to or renewal of a Letter of Credit, to an advising bank or a beneficiary, a true and complete copy of each such Letter of Credit or amendment to or renewal of a Letter of Credit. (c) RISK PARTICIPATIONS, DRAWINGS AND REIMBURSEMENTS. (i) Immediately upon the issuance of each Letter of Credit, each Bank shall be deemed to, and hereby irrevocably and unconditionally agrees to, purchase from the Issuing Lender a participation in such Letter of Credit and each drawing thereunder in an amount equal to the product of (A) the Pro Rata Share of such Bank, times (B) the maximum amount available to be drawn under such Letter of Credit and the amount of such drawing, respectively. For purposes of SECTION 2.3(a), each Issuance of a Letter of Credit shall be deemed to utilize the Commitment of each Bank by an amount equal to the amount of such participation. (ii) In the event of any request for a drawing under a Letter of Credit by the beneficiary or transferee thereof, the Issuing Lender will promptly notify the Company. The Company shall reimburse the Issuing Lender prior to 10:00 a.m. Chicago time, on each date that any amount is paid by the Issuing Lender under any Letter of Credit (each such date, an "HONOR DATE"), in an amount equal to the amount so paid by the Issuing Lender. In the event the Company fails to reimburse the Issuing Lender for the full amount of any drawing under any Letter of Credit by 10:00 a.m., Chicago time, on the Honor Date, the Issuing Lender will promptly notify the Agent and the Agent will promptly notify each Bank thereof and the Company shall be deemed to have requested Alternate Base Rate Loan(s) be made by the Banks to be disbursed on the Honor Date under such Letter of Credit, subject to the amount of the unutilized portion of the Commitment and subject to the conditions set forth in SECTION 6. Any notice given by the Issuing Lender or the Agent pursuant to this SUBSECTION 2.12(c)(ii) may be oral if immediately confirmed in writing (including by facsimile); provided that the lack of such an immediate confirmation shall not affect the conclusiveness or binding effect of such notice. (iii) Each Bank shall upon any notice pursuant to SUBSECTION 2.12(c)(ii) make available to the Agent for the account of the Issuing Lender an amount in Dollars and in immediately available funds equal to its Pro Rata Share of the amount of the drawing, whereupon the participating Banks shall (subject to SUBSECTION 2.12(c)(iv)) each be -8- deemed to have made a Loan consisting of Alternate Base Rate Loan to the Company in that amount. If the aforesaid notice is received on or before 12:00 noon, Chicago, time, each Bank shall make its Pro Rata Share of the amount of the drawing available to the Agent on the Honor Date. If such notice is received after 12:00 noon, Chicago time, each Bank shall make its Pro Rata Share of the amount of the drawing available to the Agent before 12:00 noon, Chicago time, on the Business Day following the Honor Date. If any Bank so notified fails to make available to the Agent for the account of the Issuing Lender the amount of such Bank's Pro Rata Share of the amount of the drawing by the date and times specified in this SUBSECTION 2.12(c)(iii), then interest shall accrue on such Bank's obligation to make such payment, from the date due to the date such Bank makes such payment, at a rate per annum equal to the Federal Funds Rate in effect from time to time during such period. The Agent will promptly give notice of the occurrence of the Honor Date, but failure of the Agent to give any such notice on the Honor Date shall not relieve such Bank from its obligations under this SECTION 2.12(c). (iv) With respect to any unreimbursed drawing that is not converted into Loans consisting of Alternate Base Rate Loans to the Company in whole or in part, because of the Company's failure to satisfy the conditions set forth in SECTION 6.3 or for any other reason, the Company shall be deemed to have incurred from the Issuing Lender an L/C Borrowing in the amount of such drawing, which L/C Borrowing shall be due and payable on demand (together with interest) and shall bear interest at a rate per annum equal to the Alternate Base Rate plus 2% per annum, and each Bank's payment to the Issuing Bank pursuant to SUBSECTION 2.12(c)(iii) shall be deemed payment in respect of its participation in such L/C Borrowing and shall constitute an L/C Advance from such Bank in satisfaction of its participation obligation under this SECTION 2.12(c) (v) Each Bank's obligation in accordance with this Agreement to make the Loans or L/C Advances, as contemplated by this SECTION 2.12(c), as a result of a drawing under a Letter of Credit, shall be absolute and unconditional and without recourse to the Issuing Lender and shall not be affected by any circumstance, including (A) any set-off, counterclaim, recoupment, defense or other right which such Bank may have against the Issuing Lender, the Company or any other Person for any reason whatsoever; (B) the occurrence or continuance of a Default or an Event of Default or (C) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing; provided, however, that each Bank's obligation to make Loans under this SECTION 2.12(c) is subject to the conditions set forth in SECTION 6.3. Nothing in this subsection is intended to, and shall not preclude, any Bank's pursuing such rights and remedies as it may have against the Issuing Lender in the event a drawing is paid as a result of the Issuing Lender's gross negligence or willful misconduct. (d) REPAYMENT OF PARTICIPATION (i) Upon (and only upon) receipt by the Agent for the account of the Issuing Lender of immediately available funds from the Company (A) in reimbursement of any payment made by the Issuing Lender under the Letter of Credit with respect to which any Bank has paid the Agent for the account of the Issuing Lender for such Bank's participation in the Letter of Credit pursuant to SECTION 2.12(c) or (B) in payment of interest thereon, the Agent will pay to each Bank, in the same funds as those received by the Agent for the account of the Issuing Lender, the amount of such Bank's Pro Rata Share of such -9- funds, and the Issuing Lender shall receive the amount of the Pro Rata Share of such funds of any Bank that did not so pay the Agent for the account of the Issuing Lender. (ii) If the Agent or the Issuing Lender is required at any time to return to the Company, or to a trustee, receiver, liquidator, custodian, or any official in any Insolvency Proceeding, any portion of the payments made by the Company to the Agent for the account of the Issuing Lender pursuant to SUBSECTION 2.12(d) in reimbursement of a payment made under the Letter of Credit or interest or fee thereon, each Bank shall, on demand of the Agent, forthwith return to the Agent or the Issuing Lender the amount of its Pro Rata Share of any amounts so returned by the Agent or the Issuing Lender plus interest thereon from the date such demand is made to the date such amounts are returned by such Bank to the Agent or the Issuing Lender, at a rate per annum equal to the Federal Funds Rate in effect from time to time. (e) ROLE OF THE ISSUING BANK (i) Each Bank and the Company agree that, in paying any drawing under a Letter of Credit, the Issuing Lender shall not have any responsibility to obtain any document (other than any sight draft and certificates expressly required by the Letter of Credit) or to ascertain or inquire as to the validity or accuracy of any such document or the authority of the Person executing or delivering any such document. (ii) Neither the Agent nor the Issuing Lender or their respective officers, directors, employees or agents, nor any of the respective correspondents, participants or assignees of the Issuing Lender shall be liable to any Bank for: (A) any action taken or omitted in connection herewith at the request or with the approval of the Banks (including the Majority Banks, as applicable); (B) any action taken or omitted in the absence of gross negligence or willful misconduct; or (C) the due execution, effectiveness, validity or enforceability of any L/C Related Document. (iii) The Company hereby assumes all risks of the acts or omissions of any beneficiary or transferee with respect to its use of any Letter of Credit; provided, however, that this assumption is not intended to, and shall not, preclude the Company's pursuing such rights and remedies as it may have against the beneficiary or transferee at law or under any other agreement. Neither the Agent nor the Issuing Lender or their respective officers, directors, employees or agents, nor any of the respective correspondents, participants or assignees of the Issuing Lender, shall be liable or responsible for any of the matters described in CLAUSES (i) THROUGH (vii) of SECTION 2.12(f); provided, however, anything in such clauses to the contrary notwithstanding, that the Company may have a claim against the Issuing Lender, and the Issuing Lender may be liable to the Company, to the extent, but only to the extent, of any direct, as opposed to consequential or exemplary, damages suffered by the Company which the Company proves were caused by the Issuing Lender's willful misconduct or gross negligence or the Issuing Lender's willful failure to pay under any Letter of Credit after the presentation to it by the beneficiary of a sight draft and certificate(s) strictly complying with the terms and conditions of a Letter of Credit. In furtherance and not in limitation of the foregoing: (A) the Issuing Lender may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary; and (B) the Issuing Lender shall not be responsible for the validity or -10- sufficiency of any instrument transferring or assigning or purporting to transfer or assign a Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason. (f) OBLIGATIONS ABSOLUTE. The obligations of the Company under this Agreement and any L/C Related Document to reimburse the Issuing Lender for a drawing under a Letter of Credit, and to repay any L/C Borrowing and any drawing under a Letter of Credit converted into Loans, shall be unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement and each such other L/C Related Document under all circumstances, including the following: (i) any lack of validity or enforceability of this Agreement or any L/C Related Document; (ii) any change in the time, manner or place of payment of, or in any other term of, all or any of the obligations of the Company in respect of any Letter of Credit or any other amendment or waiver of or any consent to departure from all or any of the L/C Related Documents; (iii) the existence of any claim, set-off, defense or other right that the Company may have at any time against any beneficiary or any transferee of any Letter of Credit (or any Person for whom any such beneficiary or any such transferee may be acting), the Issuing Lender or any other Person, whether in connection with this Agreement, the transactions contemplated hereby or by the L/C Related Documents or any unrelated transaction; (iv) any draft, demand, certificate or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; or any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any Letter of Credit; (v) any payment by the Issuing Lender under any Letter of Credit against presentation of a draft or certificate that does not strictly comply with the terms of any Letter of Credit; or any payment made by the Issuing Lender under any Letter of Credit to any Person purporting to be a trustee in bankruptcy, debtor-in-possession, assignee for the benefit of creditors, liquidator, receiver or other representative of or successor to any beneficiary or any transferee of any Letter of Credit, including any arising in connection with any Insolvency Proceeding; (vi) any exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from any other guarantee, for all or any of the obligations of the Company in respect of any Letter of Credit; or (vii) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing, including any other circumstance that might otherwise constitute a defense available to, or a discharge of, the Company or a guarantor. -11- (g) CASH COLLATERAL PLEDGE. Upon (i) the request of the Agent, (A) if the Issuing Lender has honored any full or partial drawing request on any Letter of Credit and such drawing has resulted in an L/C Borrowing hereunder, or (B) if, as of the Termination Date, any Letters of Credit may for any reason remain outstanding and partially or wholly undrawn, or (ii) the occurrence of the circumstances described in SUBSECTION 3.2(c) requiring the Company to Cash Collateralize Letters of Credit, then, the Company shall immediately Cash Collateralize the L/C Obligations in an amount equal to such L/C obligations. In connection with its Cash Collateralization requirements under this SECTION 2.12 or under other provisions of this Agreement, the Company hereby grants the Agent, for the benefit of the Agent, the Issuing Lender and the Banks, a security interest in all such cash and deposit account balances. Cash Collateral shall be maintained in blocked, non-interest bearing deposit accounts at The Northern Trust Company. (H) LETTER OF CREDIT FEES. (i) The Company shall pay to the Agent for the account of each of the Banks a letter of credit fee with respect to each outstanding Letter of Credit equal to the Applicable Margin applicable to the "LIBOR Rate" category for the Level of pricing in effect at the time of issuance of such Letter of Credit times the average daily maximum amount available to be drawn on such Letter of Credit, computed on a quarterly basis in arrears on the last Business Day of each calendar quarter upon each Letter of Credit outstanding for that quarter as calculated by the Agent. Such letter of credit fees shall be due and payable quarterly in arrears on the Quarterly Dates during which Letters of Credit are outstanding, commencing on the first such Quarterly Date to occur after the issuance date, through the Termination Date (or such later date upon which the outstanding Letters of Credit shall expire), with the final payment to be made on the Termination Date (or such later expiration date). (ii) The Company shall pay to the Issuing Lender a letter of credit fronting fee for each Letter of Credit issued by the Issuing Lender equal to 1/8 of 1% of the face amount (or increased face amount, as the case may be) of such Letter of Credit. Such Letter of Credit fronting fee shall be due and payable on each date of issuance of a Letter of Credit. (iii) The Company shall pay to the Issuing Lender from time to time on demand the normal issuance, presentation, amendment, evergreen, drawing and other processing fees, and other standard costs and charges, of the Issuing Lender relating to letters of credit as from time to time in effect. (i) UNIFORM CUSTOMS AND PRACTICE The Uniform Customs and Practice for Documentary Credits as published by the International Chamber of Commerce most recently at the time of issuance of any Letter of Credit shall (unless otherwise expressly provided in the Letters of Credit) apply to the Letters of Credit." (k) SECTION 3.2(C) OF THE EXISTING AGREEMENT. A new SECTION 3.2(c) is hereby added to the Existing Agreement as follows: "(c) If on any date the amount of L/C Obligations exceeds the L/C Commitment, the Company shall Cash Collateralize on such date the outstanding Letters of Credit in an amount equal to the excess of the maximum amount then available to be drawn -12- under the Letters of Credit over the L/C Commitment. Subject to SECTION 5.5, if on any date after giving effect to any Cash Collateralization made on such date pursuant to the preceding sentence, the amount of all Loans then outstanding plus the amount of all L/C Obligations exceeds the combined Commitments, the Company shall immediately, and without notice or demand, prepay the outstanding principal amount of the Loans and L/C Advances by an amount equal to the applicable excess." (l) SECTION 3.3(b). SECTION 3.3(b) of the Existing Agreement is hereby amended by adding the phrase ", under any L/C Related Document" after the phrase "on any interest" appearing therein. (m) SECTION 4.1(a) AND (c) OF THE EXISTING AGREEMENT. SECTION 4.1(a) and (c) of the Existing Agreement is hereby amended by adding the phrase "and any L/C Obligations" after the word "Agreement", "Loan" or "Loans" each time they appear therein. (n) SECTION 4.3 OF THE EXISTING AGREEMENT. SECTION 4.3 of the Existing Agreement is hereby amended by adding the phrase "and any other fees" after the phrase "facility fees" appearing therein. (o) SECTION 5.1(a) OF THE EXISTING AGREEMENT. SECTION 5.1(a) of the Existing Agreement including CLAUSE (i) thereunder is hereby amended and restated in its entirety as follows: "(a) The Company shall pay directly to each Bank from time to time such amounts as such Bank may determine to be necessary to compensate it for any costs which such Bank determines are attributable to its making or maintaining of any Eurodollar Loans or participation in any Letter of Credit or its obligation to make any Eurodollar Loans hereunder or to participate in any Letters of Credit, or reduction in any amount receivable by such Bank hereunder in respect of any such Loans or such participation in any Letters of Credit, or in the case of the Issuing Lender, any increase in the cost to such Issuing Lender of agreeing to issue, issuing or maintaining any Letter of Credit or agreeing to make or making, funding or maintaining any unpaid drawing under any Letter of Credit (such increases in costs and reductions in amounts receivable being herein called "ADDITIONAL COSTS"), resulting from any Regulatory Change which: (i) changes the basis of taxation of any amounts payable to such Bank under this Agreement or its Note in respect of any of such Loans or under any L/C Related Document in respect of any L/C Obligation (other than taxes on the overall net income of such Bank or its Applicable Lending Office imposed by the jurisdiction in which such Bank has its principal office or such Applicable Lending Office); or". (p) SECTION 5.1(a)(iii) OF THE EXISTING AGREEMENT. SECTION 5.1(a)(iii) of the Existing Agreement is amended by adding the phrase ", any L/C Related Document" before the phrase "or Commitment" appearing therein. -13- (q) SECTION 5.1(c) OF THE EXISTING AGREEMENT. SECTION 5.1(c) of the Existing Agreement is amended by adding the phrase "or any L/C Obligation" after the word "Loan" or "Loans" each time they appear therein. (r) SECTION 5.1(f) OF THE EXISTING AGREEMENT. SECTION 5.1(f) of the Existing Agreement is hereby amended to add the phrase "and Cash Collateralize such Bank's Pro Rata Share of the L/C Obligations" at the end of CLAUSE (I) therein. (s) SECTION 5.6 OF THE EXISTING AGREEMENT. SECTION 5.6 of the Existing Agreement is hereby amended by (i) adding the phrase "or in participating in any Letter of Credit" after the phrase "Commitment hereunder" appearing therein and (ii) adding the phrase "or participation in such Letter of Credit" after the word "Loan" appearing in the last line thereof. (t) SECTION 5.7 OF THE EXISTING AGREEMENT. SECTION 5.7 of the Existing Agreement is hereby amended by adding the phrase "or under any L/C Obligation" after the word "Notes" or "Note" each time they appear therein. (u) SECTION 6.3 OF THE EXISTING AGREEMENT. SECTION 6.3 of the Existing Agreement is hereby amended and restated in its entirety as follows: "6.3. INITIAL AND SUBSEQUENT LOANS AND LETTERS OF CREDIT. The obligations of the Banks to make any Loan (including the initial Loan but other than Loans which would not increase the aggregate Dollar amount of Loans outstanding) and the obligation of the Issuing Lender to issue any Letters of Credit are subject to the further conditions precedent that, both immediately prior to such Loan or issuance of the Letter of Credit and also after giving effect thereto: (a) no Default shall have occurred and be continuing; (b) the representations and warranties in SECTION 7 hereof, in any Pledge Agreement or in any L/C Related Document shall be true and correct on and as of the date of the making of such Loans or issuance of the Letter of Credit with the same force and effect as if made on and as of such date except to the extent such representations and warranties state that they relate solely to a specified date; and (c) the Agent and the Issuing Lender shall have received an L/C Application or L/C Amendment Application, as required by SECTION 2.12. Each notice of borrowing by the Company hereunder or request for a Letter of Credit or amendment thereto shall constitute a certification by the Company to the effect set forth in the preceding sentence." (v) SECTION 6.4 OF THE EXISTING AGREEMENT. SECTION 6.4 of the Existing Agreement is hereby amended by adding the phrase "and the L/C Obligations" after the word "Notes" each time it appears therein. (w) SECTION 7.17 OF THE EXISTING AGREEMENT. A new SECTION 7.17 is hereby added to the Existing Agreement as follows: "Section 7.17. YEAR 2000 COMPLIANCE. (a) The Company and each Subsidiary has: -14- (i) conducted an analysis of all of its products, services, business and operations, including without limitation surveys of its Systems (as defined below) and surveys of and discussions with customers, suppliers and vendors, to determine the extent to which the Company or such Subsidiary may be adversely affected by its failure to be Year 2000 Compliant (as defined below); (ii) developed a plan (the "YEAR 2000 PLAN") to become Year 2000 Compliant and remedy any material loss it may suffer if it fails to be Year 2000 Compliant on a timely basis; and (iii) implemented and continues to proceed with the Year 2000 Plan materially in accordance with its terms and timetables. (b) Company and each Subsidiary reasonably believes that the Year 2000 Plan, if implemented in accordance with its terms, will result in it being Year 2000 Complaint on a timely basis. (c) Company and each Subsidiary reasonably believes that each of its customers, suppliers and vendors whose failure to be Year 2000 Compliant would have a material and adverse effect on the Company or such Subsidiary, is Year 2000 Compliant or has developed a plan to become Year 2000 Compliant and remedy any material loss such person may suffer if it fails to be Year 2000 Compliant on a timely basis with respect to all of its own computer systems and applications. The term "Year 2000 Compliant" means that all of such person(s) computer systems and applications, including without limitation software and hardware ("SYSTEMS"), will function prior to, during, and after the calendar Year 2000, and that no change in or to such calendar year will have a material adverse effect on the performance of the Systems or on the functioning of the Company's or such Subsidiary's business. Company acknowledges and agrees that the foregoing representations and any other representation, warranty, schedule, certificate, statement, report, notice or other writing now or hereafter furnished by or on behalf of Company or any Subsidiary to the Agent or any Bank in connection with being Year 2000 Compliant or its Year 2000 Plan is material to the Agent and the Banks and that the Agent and the Banks have relied and will continue to rely thereon. The Company agrees and shall cause each Subsidiary to provide such information, financial, technical, or otherwise, concerning the Company's or such Subsidiary's Year 2000 Plan as the Agent may reasonably request form time to time." (x) SECTIONS 7.3, 7.4, 7.5, 7.6, 7.12 AND 8.6(H). SECTIONS 7.3, 7.4, 7.5, 7.6, 7.12 AND 8.6(H) of the Existing Agreement are hereby amended by adding the phrase "the L/C Related Documents" after the phrase "OEA Pledge Agreement" or "Pledge Agreements" each time they appear in such Sections. (y) SECTION 8 OF THE EXISTING AGREEMENT. SECTION 8 of the Existing Agreement is hereby amended by adding the phrase "or any Letter of Credit is outstanding" after the phrase "Commitment is in effect" appearing therein. -15- (z) AMENDMENT TO SECTION 8.10. SECTION 8.10 of the Existing Agreement is hereby amended and restated in its entirety as follows: "8.10. TANGIBLE NET WORTH. The Company shall maintain, as at the last day of each fiscal quarter, a Consolidated Tangible Net Worth of not less than that specified below for the period indicated:
For Fiscal Quarter(s) Ending on Consolidated Tangible Net Worth ------------------------------- ------------------------------- Through January 31, 1999 $155,000,000 April 30, 1999 $160,000,000 July 31, 1999 $165,000,000 Thereafter $165,000,000 plus 50% of Net Income (if positive), for each fiscal quarter ended after July 31, 1999 through and including the fiscal quarter ended on a cumulative basis, plus the net proceeds of the issuance of any capital stock of the Company and its Subsidiaries."
(aa) AMENDMENT TO SECTION 8.11. SECTION 8.11 of the Existing Agreement is hereby amended and restated in its entirety as follows: "8.11 INDEBTEDNESS TO EBITDA. The Company will not permit the ratio of the consolidated Indebtedness of the Company and its Subsidiaries for the 12-month period ending on the last day of each fiscal quarter listed below to the sum of EBITDA plus interest income for the 12-month period ending on the last day of such fiscal quarter to be greater than the ratio specified for such quarter below, all calculated in accordance with GAAP:
12-Month Period Ending On Ratio ------------------------- ----- May 1, 1998 3.0:1.0 July 31, 1998 3.0:1.0 October 31, 1998 3.5:1.0 January 31, 1999 4.0:1.0 April 30, 1999 3.25:1.0 July 31, 1999 3.0:1.0 October 31, 1999 2.75:1.0 January 31, 2000 2.75:1.0 Thereafter 2.5:1.0"
(bb) SECTION 8.12 OF THE EXISTING AGREEMENT. SECTION 8.12 of the Existing Agreement is hereby amended and restated in its entirety as follows: -16- "8.12. INDEBTEDNESS TO TOTAL CAPITALIZATION. The Company will not permit, as at the last day of each fiscal quarter, the consolidated Indebtedness of the Company and its Subsidiaries to exceed the percentage of Total Capitalization specified below for the time period indicated, all calculated in accordance with GAAP:
For Fiscal Quarter(s) Ending On Percentage of Total Capitalization ------------------------------- ---------------------------------- Through October 31, 1998 50% January 31, 1999 52% April 30, 1999 52% July 31, 1999 50% October 31, 1999 47.5% January 31, 2000 47.5% April 30, 2000 45.0% July 31, 2000 45% Thereafter 40%"
(cc) SECTION 9 OF THE EXISTING AGREEMENT. SECTION 9 of the Existing Agreement is hereby amended by (i) adding the phrase "or any reimbursement obligation in connection with any L/C Obligation" after the word "Loan" in SECTION 9(a); (ii) adding the phrase "or any L/C Related Document" after the phrase "Pledge Agreement" appearing in SECTION 9(c) and, (iii) adding the phrase "or any L/C Related Document after the phrase "Pledge Agreement" each time it appears in SECTION 9(k). (dd) SECTION 9 OF THE EXISTING AGREEMENT. The clause beginning with "THEREUPON" in SECTION 9 of the Existing Agreement is hereby amended and restated in its entirety as follows: "THEREUPON: (i) in the case of an Event of Default (other than one referred to in SUBSECTION (g) or (h) of this SECTION 9 with respect to the Company), the Agent, upon request of the Majority Banks, may, by notice to the Company, cancel the Commitments, declare any obligation of the Issuing Lender to issue Letters of Credit to be terminated, declare the principal amount then outstanding of, and the accrued interest on, the Loans and all other amounts payable by the Company hereunder and under the Notes (including, without limitation, any amounts payable under SECTION 5.5 hereof) to be forthwith due and payable and/or declare an amount equal to the maximum aggregate amount that is or at any time thereafter may become available for drawing under any outstanding Letters of Credit (whether or not any beneficiary shall have presented, or shall be entitled at such time to present, the drafts or other documents required to draw under such Letters of Credit) to be immediately due and payable, whereupon such amounts shall be immediately due and payable without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Company; and (ii) in the case of the occurrence of an Event of Default referred to in SUBSECTION (g) or (h) of this SECTION 9 with respect to the Company, the Commitments shall automatically be canceled, the obligations of the Issuing Lender to issue Letters of Credit shall terminate automatically and the principal amount then outstanding of, and the accrued interest on, the Loans and all other amounts payable by the Company hereunder, under the Notes (including, without limitation, any amounts payable under SECTION 5.5 hereof) and as aforesaid with respect to Letters of Credit shall automatically become -17- immediately due and payable without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Company." (EE) SECTION 10 OF THE EXISTING AGREEMENT. SECTION 10 of the Existing Agreement is hereby amended by adding the phrase "L/C Related Documents" after the phrase "Pledge Agreements" each time it appears therein. (ff) SECTION 10.1 OF THE EXISTING AGREEMENT. SECTION 10.1 of the Existing Agreement is further amended by adding the following at the end thereof: "The Issuing Lender shall act on behalf of Banks with respect to any Letters of Credit issued by it and the documents associated therewith until such time and except for so long as the Agent may agree at the request of the Majority Banks to act for such Issuing Lender with respect thereto; provided, however, that the Issuing Lender shall have all of the benefits and immunities (x) provided to the Agent in this SECTION 10 with respect to any acts taken or omissions suffered by the Issuing Lender in connection with Letters of Credit issued by it or proposed to be issued by it and the application and agreements for letters of credit pertaining to the Letters of Credit as fully as if the term "Agent", as used in this SECTION 10, included the Issuing Lender with respect to such acts or omissions, and (y) as additionally provided in this Agreement with respect to the Issuing Lender." (gg) SECTION 11.1 OF THE EXISTING AGREEMENT. SECTION 11.1 of the Existing Agreement is hereby amended by adding the phrase "or L/C Related Documents" after the phrase "Pledge Agreements" appearing therein. (hh) SECTION 11.3 OF THE EXISTING AGREEMENT. SECTION 11.3 of the Existing Agreement is hereby amended by (i) adding the phrase "Issuing Lender" after the word "Agent" each time it appears therein and (ii) adding the phrase "L/C Related Documents" after the phrase "Pledge Agreements" each time it appears therein. (ii) SECTION 11.4 OF THE EXISTING AGREEMENT. SECTION 11.4 of the Existing Agreement is hereby amended in its entirety as follows: "11.4. AMENDMENTS, ETC. Except as otherwise expressly provided in this Agreement, any provision of this Agreement or L/C Related Document may be waived, amended or modified only by an instrument in writing signed by the Company, the Agent and the Majority Banks; provided that no amendment modification or waiver shall, unless by an instrument signed by the Agent, the Company and all of the Banks (a) increase or extend the term, or extend the time or waive any requirement for the reduction or termination, of any of the Commitments (except as specifically provided in SECTION 2.11), (b) extend the date fixed for the payment of principal of or interest on any Loan or L/C Obligation (except as specifically provided in SECTION 2.11), (c) reduce the amount of any payment of principal thereof or the rate at which interest is payable thereon or any fee payable hereunder or under any L/C Related Document, (d) alter the terms of this SECTION 11.4, (e) amend the definition of the term "Majority Banks", (f) waive any condition precedent set forth in SECTION 6 hereof, or (g) release the "Collateral" referred to in the -18- Pledge Agreements, the French Filing Documents or L/C Related Documents from the Lien in favor of the Agent, on behalf of the Banks or release any guaranty except for the release of any applicable Cash Collateral upon irrevocable repayment in full or expiration (assuming no draws have been made) of the related L/C Obligation; and provided further, that no amendment, waiver or consent shall, unless in writing and signed by the Issuing Lender in addition to the Majority Banks or all the Banks, as the case may be, affect the rights or duties of the Issuing Lender under this Agreement or any L/C Related Document relating to any Letter of Credit issued or to be issued by it. (jj) SECTION 11.6 OF THE EXISTING AGREEMENT. SECTION 11.6 of the Existing Agreement is hereby amended by adding the phrase "L/C Obligation" (i) after the word "Pledge Agreement" in CLAUSE (a) thereof; (ii) at the end of the first sentence in CLAUSE (b) thereof and after the word "Agreement" in the last sentence of said CLAUSE (b); (iii) after the word "Commitment" each time it appears in CLAUSE (c); (iv) at the end of the first sentence of CLAUSE (e); and (v) after the word "Commitment" each time it appears in CLAUSE (f) thereof. (kk) SECTION 11.7 OF THE EXISTING AGREEMENT. SECTION 11.7 of the Existing Agreement is hereby amended by adding the phrase "or L/C Obligation" after the word "Loans" appearing therein. (ll) SECTION 11.12 AND 11.13 OF THE EXISTING AGREEMENT. SECTIONS 11.12 and 11.13 of the Existing Agreement are hereby amended by adding the phrase "or L/C Related Documents" after the word "Notes" each time it appears therein. SECTION 3. CONDITIONS TO EFFECTIVE DATE. The occurrence of the Effective Date shall be subject to the satisfaction, on and as of the Effective Date, of the following conditions precedent: (a) AMENDMENT. The Company, the Agent, the Issuing Lender and all of the Banks shall have executed and delivered this Amendment. (b) NO DEFAULT. No Default shall have occurred and be continuing under the Existing Agreement and the representations and warranties of the Company in SECTION 7 of the Existing Agreement as amended hereby and in SECTION 7 hereof shall be true and correct on and as of the Effective Date (except to the extent such representations and warranties state that they relate solely to a specified date) and the Company shall have provided to the Agent a certificate of a senior officer of the Company to that effect. (c) ARTICLES OF INCORPORATION. The Company shall have provided to the Agent, in form and substance satisfactory to the Agent, a certificate of the secretary or assistant secretary of the Company (i) confirming that the articles of incorporation and by-laws of the Company have not been amended since April 10, 1998 or (ii) setting forth a true and correct copy of any amendment to the articles of incorporation or by-laws of the Company adopted on or after April 10, 1998. (d) COMPANY RESOLUTIONS. A copy, duly certified by the secretary or an assistant secretary of the Company, of (i) resolutions of the Company's Board of Directors -19- authorizing or ratifying the execution and delivery of this Amendment, authorizing the borrowings under the Existing Agreement, as amended hereby, and authorizing the execution and delivery of L/C Related Documents (ii) all documents evidencing other necessary corporate action, and (iii) all approvals or consents, if any, with respect to this Amendment. (e) COMPANY INCUMBENCY CERTIFICATE. A certificate of the secretary or an assistant secretary of the Company certifying the names of the Company's officers authorized to sign this Amendment, any L/C Related Documents and all other documents or certificates to be delivered hereunder, together with the true signatures of such officers. (f) LEGAL OPINION. The Company shall have delivered to the Agent an opinion of the Company's counsel, substantially in the form of EXHIBIT A hereto. (g) AMENDMENT FEE. The Company shall have paid to the Agent, for the account of the Banks, a non-refundable fee of $180,000. (h) OTHER. The Company shall have delivered such other documents as the Agent may reasonably request. SECTION 4. EFFECTIVE DATE NOTICE. Promptly following the occurrence of the Effective Date, the Agent shall give notice to the parties hereto of the occurrence of the Effective Date, which notice shall be conclusive, and all parties may rely thereon; provided, that such notice shall not waive or otherwise limit any right or remedy of the Agent or any Bank arising out of any failure of any condition precedent set forth in SECTION 3 to be satisfied. SECTION 5. TERMINATION. If the Effective Date shall not have occurred on or before June 15, 1998, the Agent on instructions of the Majority Banks may terminate this Amendment by notice in writing to the Company at any time before the occurrence of the Effective Date; provided, that the obligations of the Company under SECTION 12 shall survive such termination. SECTION 6. RATIFICATION. The parties agree that the Existing Agreement and the Notes have not lapsed or terminated, are in full force and effect, and are and from and after the Effective Date shall remain binding in accordance with their terms, as amended hereby. SECTION 7. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants to the Agent and the Banks that: (a) NO BREACH. The execution, delivery and performance of this Amendment, and the Existing Agreement as amended hereby, and the L/C Related Documents will not conflict with or result in a breach of, or cause the creation of a Lien or require any consent under, the articles of incorporation or by-laws of the Company, or any applicable law or regulation, or any order, injunction or decree of any court or governmental authority or agency, or any agreement or instrument to which the Company or any of its Subsidiaries is a party or by which any of them is bound. (b) INCORPORATION, CORPORATE POWER AND ACTION, BINDING EFFECT. The Company has been duly incorporated and is validly existing in good standing under the laws of -20- the State of Delaware and has all necessary corporate power and authority to execute, deliver and perform its obligations under this Amendment, the Existing Agreement as amended hereby and the L/C Related Documents; the execution, delivery and performance by the Company of this Amendment, the Existing Agreement, as amended hereby, and the L/C Related Documents have been duly authorized by all necessary corporate action on its part; and this Amendment has been duly and validly executed and delivered by the Company and constitutes a legal, valid and binding obligation, enforceable in accordance with its terms. (c) APPROVALS. No authorizations, approvals or consents of, and no filings or registrations with, any governmental or regulatory authority or agency are necessary for the execution, delivery or performance by the Company of this Amendment, the Existing Agreement as amended hereby or the L/C Related Documents or for the validity or enforceability thereof. SECTION 8. CERTAIN USAGES. From and after the Effective Date, each reference to the Existing Agreement in the Existing Agreement or in other agreements, documents or instruments referred to or provided for in or delivered under the Existing Agreement shall be deemed to refer to the Existing Agreement, as amended hereby. SECTION 9. SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon and inure to the benefit of the Company, the Agent, the Banks and their respective successors and assigns, except that the Company may not transfer or assign any of its rights or interest hereunder. SECTION 10. GOVERNING LAW. This Amendment shall be governed by, and construed and interpreted in accordance with, the internal laws of the State of Illinois. SECTION 11. COUNTERPARTS. This Amendment may be executed in any number of counterparts and any party hereto may execute any one or more of such counterparts, all of which shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Amendment by telecopier shall be as effective as delivery of a manually executed counterpart of this Amendment. SECTION 12. EXPENSES. Whether or not the Effective Date shall occur, without limiting the obligations of the Company under the Existing Agreement, the Company agrees to pay, or to reimburse on demand, all reasonable costs and expenses incurred by (i) the Agent in connection with the negotiation, preparation, execution, delivery, modification, amendment or enforcement of this Amendment, any L/C Related Document and the other agreements, documents and instruments referred to herein or therein, including the reasonable fees and expenses of Gardner, Carton & Douglas, special counsel to the Agent, and any other counsel engaged by the Agent, and (ii) any Bank in connection with enforcement of this Amendment, the Existing Agreement as amended hereby, any L/C Related Document and the agreements, documents and instruments referred to herein or therein, including the reasonable fees and expenses of counsel to such Bank. SECTION 13. WAIVER. On and after the Effective Date, the restriction limiting the amount of Loans outstanding to $150,000,000 contained in that certain Waiver to Amended and Restated Revolving Credit Agreement dated as of May 11, 1998 among the Company, the Banks, the Co-Agents and the Agent shall have no force or effect -21- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their duly authorized officers as of the day and year first above written. OEA, INC. By: /s/ J. Thompson McConathy ------------------------------------- Name: J. Thompson McConathy Title: Vice President Finance THE NORTHERN TRUST COMPANY, as Agent By: /s/ James F.T. Monhart ------------------------------------- Name: James F.T. Monhart Title: Senior Vice President THE NORTHERN TRUST COMPANY, as Issuing Lender By: /s/ James F.T. Monhart ------------------------------------- Name: James F.T. Monhart Title: Senior Vice President BANKS: THE NORTHERN TRUST COMPANY, individually By: /s/ James F.T. Monhart ------------------------------------- Name: James F.T. Monhart Title: Senior Vice President BANQUE NATIONALE DE PARIS, individually and as Co-Agent By: /s/ Clive Bettles ------------------------------------- Name: Clive Bettles Title: Senior Vice President & Manager By: /s/ Mitchell M. Ozawa ------------------------------------- Name: Mitchell M. Ozawa Title: Vice President U.S. BANK NATIONAL ASSOCIATION, individually and as Co-Agent By: /s/ William J. Sullivan ------------------------------------- Name: William J. Sullivan Title: Vice President UNION BANK OF CALIFORNIA, N.A., individually and as Co-Agent By: /s/ John C. Lee ------------------------------------- Name: John C. Lee Title: Assistant Vice President CREDIT AGRICOLE INDOSUEZ, individually By: /s/ David Bouhl ------------------------------------- Name: David Bouhl, F.V.P. Title: Head of Corporate Banking Chicago By: /s/ Dean Balice ------------------------------------- Name: Dean Balice Title: Senior Vice President Branch Manager LASALLE NATIONAL BANK, individually By: /s/ Michael Bryan ------------------------------------- Name: Michael Bryan Title: Vice President THE LONG-TERM CREDIT BANK OF JAPAN, LTD., individually By: /s/ Mark A. Thompson ------------------------------------- Name: Mark A. Thompson Title: Senior Vice President and Team Leader EX-27 3 EXHIBIT 27
5 12-MOS JUL-31-1998 AUG-01-1997 JUL-31-1998 1,920,000 0 43,998,000 0 54,567,000 117,578,000 272,411,000 67,761,000 328,759,000 31,461,000 0 0 0 2,202,000 159,304,000 328,759,000 245,375,000 245,375,000 238,571,000 250,963,000 8,343,000 0 6,479,000 (13,931,000) (4,655,000) (9,276,000) 0 0 (10,040,000) (19,316,000) (.94) (.94)
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