<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
SPECIAL DEVICES, INCORPORATED
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant):
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies: Common
Stock, par value $0.01 per share
2) Aggregate number of securities to which transaction applies: 6,279,382
3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined): $34.00
4) Proposed maximum aggregate value of transaction: $213,498,988
5) Total fee paid: $42,699.80
[ ] Fee paid previously with preliminary materials.
[X] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid: $51,835.00
2) Form, Schedule or Registration Statement No.: Schedule 14A
3) Filing Party: Special Devices, Incorporated
4) Date Filed: August 17, 1998
<PAGE> 2
SPECIAL DEVICES, INCORPORATED
16830 West Placerita Canyon Road
Newhall, California 91321
(805) 259-0753
Dear Special Devices Stockholders:
We previously sent you a proxy statement, dated August 17, 1998 (the
"August Proxy Statement") and a supplement to the August Proxy Statement, dated
September 11, 1998 (the "Proxy Supplement"), in connection with a Special
Meeting of Stockholders held on September 23, 1998 (the "September Special
Meeting"). At the September Special Meeting, over 80% of the stockholders of SDI
voted to approve the transactions contemplated by the Agreement and Plan of
Merger between Special Devices, Incorporated ("SDI") and SDI Acquisition Corp.
("Acquisition"), dated as of June 19, 1998 and amended and restated as of August
17, 1998 (the "August Merger Agreement").
As a result of developments since the time of the September Special
Meeting, we are providing you with the attached Proxy Statement, which includes
information about a new Special Meeting of Stockholders to be held to allow
stockholders of SDI to consider and vote upon the adoption of an amendment to
the August Merger Agreement pursuant to Amendment No. 1 ("Amendment No. 1"),
dated as of October 27, 1998 (the August Merger Agreement, as amended by
Amendment No. 1, the "Amended Merger Agreement"). The Amended Merger Agreement
provides for the acquisition of SDI by Acquisition, a newly-formed company
organized by J.F. Lehman & Company, Inc. In the amended acquisition, you will
receive $34.00 in cash for each share of SDI's Common Stock rather than the
$37.00 which was contemplated in the earlier transaction.
You are cordially invited to attend the Special Meeting of Stockholders
of SDI (the "Special Meeting") to be held at SDI's offices located at 16830 West
Placerita Canyon Road, Newhall, California 91321, on November __, 1998 at 10:00
a.m., local time.
Amendment No. 1 has been unanimously approved by your Board of
Directors, acting on the unanimous recommendation of an independent Special
Committee of the Board and based on an opinion by its financial advisor,
Donaldson, Lufkin & Jenrette Securities Corporation.
The Special Committee and the full Board of Directors have concluded
that the proposed acquisition and the Amended Merger Agreement are in the best
interests of SDI's stockholders, and, therefore, THE BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR OF ADOPTING AMENDMENT NO. 1.
The attached notice of meeting and Proxy Statement explain the proposed
acquisition and provide specific information concerning the Special Meeting.
Please read these materials carefully.
<PAGE> 3
Whether or not you plan to attend the Special Meeting, we urge you to
complete, sign and promptly return the enclosed proxy card to assure that your
shares will be voted at the meeting. The acquisition is an important step for
SDI and its stockholders. THE ACQUISITION CANNOT BE COMPLETED UNLESS SDI'S
STOCKHOLDERS ADOPT AMENDMENT NO. 1.
On behalf of the Board of Directors, we thank you for your support and
urge you to vote FOR adoption of Amendment No. 1.
Sincerely,
Thomas F. Treinen
Chairman of the Board of Directors
<PAGE> 4
SPECIAL DEVICES, INCORPORATED
16830 West Placerita Canyon Road
Newhall, California 91321
(805) 259-0753
To the Stockholders:
Notice is hereby given that a Special Meeting (the "Special Meeting") of
Stockholders of Special Devices, Incorporated ("SDI") will be held at SDI's
offices located at 16830 West Placerita Canyon Road, Newhall, California 91321,
on November __, 1998 at 10:00 a.m., local time, for the following purposes:
1. To consider and act upon a proposal to adopt an amendment to the
Agreement and Plan of Merger dated as of June 19, 1998 and amended and
restated as of August 17, 1998 (the "August Merger Agreement") pursuant
to Amendment No. 1 ("Amendment No. 1"), dated as of October 27, 1998
(the August Merger Agreement, as amended by Amendment No. 1, the
"Amended Merger Agreement"), to change the cash consideration from
$37.00 per share to $34.00 per share. Pursuant to the Amended Merger
Agreement, SDI Acquisition Corp. ("Acquisition"), a newly-formed company
organized by J.F. Lehman & Company, Inc., will be merged with and into
SDI (the "Merger"). If Amendment No. 1 is adopted by stockholders and
the other conditions to the Merger are satisfied or waived, each
stockholder of SDI will become entitled to receive $34.00 in cash for
each outstanding share of SDI's Common Stock owned immediately prior to
the effective time of the Merger (other than certain stockholders who
will continue to hold 1,530,419 shares of SDI and will receive $34.00
per share for the balance of their shares and other than stockholders
who are entitled to and have perfected their appraisal rights). A copy
of Amendment No. 1 is attached as Appendix A to and is described in the
accompanying Proxy Statement.
2. To consider and act upon such other matters as may properly come
before the Special Meeting or any adjournment or adjournments thereof.
The Board of Directors determined that only holders of SDI's Common
Stock of record at the close of business on October 15, 1998, will be entitled
to notice of, and to vote at, the Special Meeting or any adjournment or
adjournments thereof.
By Order of the Board of Directors,
Thomas F. Treinen
Chairman of the Board of Directors
i
<PAGE> 5
SPECIAL DEVICES, INCORPORATED
16830 West Placerita Canyon Road
Newhall, California 91321
(805) 259-0753
PROXY STATEMENT
INTRODUCTION
This Proxy Statement is being furnished to the stockholders of Special
Devices, Incorporated, a Delaware corporation ("SDI" or the "Company"), in
connection with the solicitation by its Board of Directors (the "Board") of
proxies to be used at a Special Meeting of Stockholders (the "Special Meeting")
to be held on November __, 1998, at 10:00 a.m. (local time) at SDI's offices
located at 16830 West Placerita Canyon Road, Newhall, California 91321, and at
any adjournment or adjournments thereof. This Proxy Statement, the Notice of
Special Meeting of Stockholders and the enclosed form of Proxy are first being
mailed to stockholders of SDI on or about __________, 1998.
The Special Meeting has been called to consider and vote on a proposal
to adopt an amendment to the Agreement and Plan of Merger, dated as of June 19,
1998 and amended and restated as of August 17, 1998 (the "August Merger
Agreement"), pursuant to Amendment No. 1 ("Amendment No. 1"), dated as of
October 27, 1998 (the August Merger Agreement, as amended by Amendment No. 1,
the "Amended Merger Agreement"). Pursuant to the Amended Merger Agreement, SDI
Acquisition Corp. ("Acquisition"), a newly-formed Delaware corporation organized
by J.F. Lehman & Company, Inc., a Delaware corporation ("JFLC"), will be merged
with and into SDI (the "Merger"), and each outstanding share of the common
stock, par value $0.01 per share, of SDI (the "Common Stock") will be canceled
and converted automatically into the right to receive $34.00 in cash (the
"Merger Consideration"), payable to the holder thereof, without interest, other
than certain of the shares (the "Continuing Shares") held by Walter Neubauer and
Thomas F. Treinen (the "Continuing Stockholders") which shall remain outstanding
(currently representing approximately 19.6% of the outstanding Common Stock) and
other than shares held by any stockholders who are entitled to and who have
perfected their appraisal rights. Amendment No. 1 is attached to this Proxy
Statement as Appendix A.
Consummating the Merger is subject to a number of conditions.
Accordingly even if stockholders adopt Amendment No. 1, there can be no
assurance that the Merger will be consummated.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR
MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
ii
<PAGE> 6
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE NO.
--------
<S> <C>
SUMMARY..................................................................... 1
Date, Time and Place of the Special Meeting............................ 1
Purpose of the Special Meeting......................................... 1
Record Date and Quorum................................................. 1
Vote Required.......................................................... 2
The Proposal........................................................... 2
Background of Amendment No. 1.......................................... 2
The Special Committee's and Board's Recommendation..................... 3
Opinions of Investment Bankers......................................... 3
Conflicts of Interest.................................................. 3
Certain Effects of the Merger.......................................... 4
Termination of the Amended Merger Agreement............................ 4
Financing of the Merger................................................ 5
Market Prices for Common Stock and Dividends........................... 5
Unaudited Results for the First Three Quarters of 1998................. 5
Summary Information in the August Proxy Statement...................... 5
TIME, PLACE AND PURPOSE OF THE SPECIAL MEETING.............................. 7
RECORD DATE AND VOTING OF COMMON STOCK...................................... 7
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE............................. 8
THE MERGER.................................................................. 8
Background of Amendment No. 1.......................................... 8
Recommendation of the Special Committee and the Board of Directors..... 10
Opinion of Financial Advisor to the Company............................ 11
Interests of Certain Persons in the Merger............................. 15
Revised Projections.................................................... 16
The Amended Merger Agreement........................................... 17
Litigation............................................................. 19
SELECTED FINANCIAL DATA FOR SPECIAL DEVICES
INCORPORATED............................................................. 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................................... 20
MARKET PRICE AND DIVIDEND INFORMATION....................................... 26
INDEPENDENT PUBLIC ACCOUNTANTS.............................................. 26
INFORMATION IN THE AUGUST PROXY STATEMENT................................... 26
WHERE YOU CAN FIND ADDITIONAL INFORMATION................................... 26
OTHER BUSINESS.............................................................. 28
</TABLE>
iii
<PAGE> 7
APPENDICES:
Appendix A -- Amendment No. 1, dated as of October 27, 1998, to the
Agreement and Plan of Merger dated as of June 19, 1998 and
amended and restated as of August 17, 1998
Appendix B -- August Proxy Statement dated August 17, 1998
Appendix C -- Supplement, dated September 11, 1998, to the August Proxy
Statement
Appendix D -- Opinion of Donaldson, Lufkin & Jenrette Securities
Corporation, dated October 27, 1998
Appendix E -- Letter Agreement, dated as of October 19, 1998
iv
<PAGE> 8
- - --------------------------------------------------------------------------------
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement. Reference is made to, and this Summary is qualified in its
entirely by, the more detailed information contained elsewhere in this Proxy
Statement and in the Appendices hereto. Stockholders are urged to read this
Proxy Statement and its Appendices in their entirety before voting.
DATE, TIME AND PLACE OF THE SPECIAL MEETING
A Special Meeting of Stockholders (the "Special Meeting") of Special
Devices, Incorporated (the "Company" or "SDI") will be held on November __,
1998, at 10:00 a.m., local time, at SDI's offices located at 16830 West
Placerita Canyon Road, Newhall, California 91321.
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, the stockholders will consider and vote on a
proposal to adopt an amendment to the Agreement and Plan of Merger, dated as of
June 19, 1998 and amended and restated as of August 17, 1998 (the "August Merger
Agreement"), pursuant to Amendment No. 1 ("Amendment No. 1"), dated as of
October 27, 1998 (the August Merger Agreement, as amended by Amendment No. 1,
the "Amended Merger Agreement"). Pursuant to the Amended Merger Agreement, SDI
Acquisition Corp. ("Acquisition"), a newly-formed Delaware corporation organized
by J.F. Lehman & Company, Inc., a Delaware corporation ("JFLC"), will be merged
with and into SDI (the "Merger"), and each outstanding share of Common Stock
will be converted automatically into the right to receive $34.00 in cash payable
to the holders thereof, without interest (the "Merger Consideration"), other
than certain of the shares (the "Continuing Shares") held by Walter Neubauer
(1,096,522 shares) and Thomas F. Treinen (433,897 shares) (the "Continuing
Stockholders") which shall remain outstanding and other than shares held by
stockholders who are entitled to and who have perfected their appraisal rights.
See "The Merger."
Amendment No. 1 is attached to this Proxy Statement as Appendix A. The
Company's proxy statement dated August 17, 1998 (the "August Proxy Statement")
is attached hereto as Appendix B. The August Merger Agreement is attached to the
August Proxy Statement.
RECORD DATE AND QUORUM
The Board of Directors of the Company (the "Board") has fixed the close
of business on October 15, 1998 as the record date (the "Record Date") for the
determination of stockholders entitled to notice of, and to vote at, the Special
Meeting and any adjournment or adjournments thereof. Each holder of record of
Common Stock at the close of business on the Record Date is entitled to one vote
for each share then held on each matter submitted to a vote of stockholders. At
the Record Date, there were 7,809,801 shares of Common Stock outstanding. The
holders of a majority of the outstanding shares entitled to vote at the Special
Meeting must be present in person or represented by proxy to constitute a quorum
for the transaction of business. See "Record Date and Voting of Common Stock."
- - --------------------------------------------------------------------------------
1
<PAGE> 9
- - --------------------------------------------------------------------------------
VOTE REQUIRED
The affirmative vote of the holders of a majority of the outstanding
shares of Common Stock entitled to vote at the Special Meeting pursuant to
Delaware law is required to adopt Amendment No. 1. Thus, a failure to vote or a
vote to abstain will have the same legal effect as a vote cast against adoption.
In addition, brokers who hold shares of Common Stock as nominees will not have
discretionary authority to vote such shares in the absence of instructions from
the beneficial owners. See "Record Date and Voting of Common Stock."
THE PROPOSAL
The Amended Merger Agreement provides that, subject to satisfaction of
certain conditions, Acquisition will be merged into SDI, and that following the
Merger, the separate existence of Acquisition will cease and SDI will continue
as the surviving corporation (the "Surviving Corporation"). At the Effective
Date (as defined in the August Proxy Statement) of the Merger and subject to the
conditions and procedures set forth in the Amended Merger Agreement, each share
of issued and outstanding Common Stock (other than the Continuing Shares and
shares as to which statutory appraisal rights are properly perfected and not
withdrawn) will, by virtue of the Merger, be converted into the right to receive
$34.00 in cash, without interest. See "The Merger."
BACKGROUND OF AMENDMENT NO. 1
At a special meeting held on September 23, 1998 (the "September Special
Meeting"), the stockholders of SDI approved the merger of Acquisition into SDI
by a vote of over 80% of the outstanding shares, whereby each outstanding share
of SDI Common Stock would be converted into the right to receive $37.00 in cash.
That approval occurred during a period of extreme stock and credit market
disruptions and business turmoil on a scale which is unprecedented in the recent
past. In addition, SDI began to refine its projections based on actual shipments
through September 27, 1998.
On September 29, 1998, JFLC advised the Board that recent events made it
extremely problematic as to whether the transactions contemplated by the August
Merger Agreement, as approved by the stockholders of SDI at the September
Special Meeting, could be completed in accordance with its terms. During the
period from September 29, 1998 through October 27, 1998, representatives of
Donaldson, Lufkin & Jenrette Securities Corporation, financial advisors to SDI
("DLJ"), Gibson, Dunn & Crutcher LLP, counsel to SDI ("Gibson, Dunn &
Crutcher"), and JFLC had various discussions and negotiations concerning the
alternatives available to the parties to the proposed transaction, and DLJ and
Gibson, Dunn & Crutcher reported to the Special Committee of the Board (the
"Special Committee") and the Board at meetings held on October 1, 1998, October
8, 1998, October 12, 1998 and October 27, 1998.
These discussions and negotiations resulted in the Board unanimously
approving Amendment No. 1 at a meeting held on October 27, 1998. For a more
complete discussion of the background of Amendment No. 1, see "The
Merger--Background of Amendment No. 1."
- - --------------------------------------------------------------------------------
2
<PAGE> 10
- - --------------------------------------------------------------------------------
THE SPECIAL COMMITTEE'S AND BOARD'S RECOMMENDATION
The Board unanimously determined that the proposed Amendment No. 1 is
the best available alternative and is fair to, and in the best interest of,
SDI's stockholders and recommends that the stockholders vote to adopt Amendment
No. 1. In reaching these conclusions, the Special Committee and the Board were
influenced by numerous factors, including, among others, the market conditions
existing at the current time, the analysis presented by DLJ, the time, costs and
uncertainty of litigation and the terms of Amendment No. 1.
For a more complete discussion of the factors considered by the Special
Committee and the Board, see "The Special Committee's and the Board's
Recommendation."
OPINIONS OF INVESTMENT BANKERS
SDI retained DLJ to act as its financial advisor to review any proposed
business combination and render its opinion to the Board. DLJ provided an
opinion dated October 27, 1998 to the Board that, as of that date, and subject
to the assumptions, limitations and qualifications set forth in such opinion,
the Merger Consideration to be received by the holders of Common Stock other
than the Continuing Stockholders pursuant to the Amended Merger Agreement is
fair to such stockholders from a financial point of view. The full text of the
written opinion of DLJ, which sets forth a description of assumptions made,
matters considered and limitations on the review undertaken by DLJ, is attached
as Appendix D to this Proxy Statement. Stockholders are urged to read such
opinion carefully in its entirety. See "The Merger--Opinion of the Financial
Advisor to the Company."
CONFLICTS OF INTEREST
In considering the recommendation of the Board with respect to the
Merger, stockholders should be aware that certain officers and directors of SDI
have interests in connection with the Merger which may present them with actual
or potential conflicts of interest. These interests include those described
below and those described in the August Proxy Statement, attached hereto as
Appendix B.
Continuing Stockholders. Certain of the shares of Common Stock held by
Walter Neubauer (1,096,522 shares) and Thomas F. Treinen (433,897 shares) will
not be converted in the Merger but will remain outstanding as shares of common
stock of the Surviving Corporation. Of the total number of shares held by the
Continuing Stockholders, 367,647 of the shares held by each of Messrs. Treinen
and Neubauer (the "Additional Rollover Shares") will be subject to certain terms
and restrictions pursuant to a letter agreement, dated as of October 19, 1998,
by and among Messrs. Treinen and Neubauer, JFLC, SDI and Acquisition (the
"Rollover Agreement"), attached hereto as Appendix E. Pursuant to the Rollover
Agreement, the Additional Rollover Shares will, for a period of four years
following the Effective Date, be subject to (i) an irrevocable proxy in favor of
JFLC and (ii) a call right in favor of JFLC at a price of (a) $34.00 per share,
plus (b) $2.04 per share for each full six-month period elapsed since the
Effective Date.
- - --------------------------------------------------------------------------------
3
<PAGE> 11
- - --------------------------------------------------------------------------------
The Continuing Stockholders will continue to have an equity interest in
the Surviving Corporation that will not be available to other stockholders. On a
fully diluted basis, after giving effect to the exercise of all stock options,
Walter Neubauer will own approximately 35.7% and Thomas F. Treinen will own
approximately 14.1% of the Surviving Corporation; however, approximately 33.5%
of Mr. Neubauer's shares and 84.7% of Mr. Treinen's shares will be subject to an
irrevocable proxy and a call provision, both in favor of JFLC, pursuant to the
Rollover Agreement, described above. Thomas F. Treinen is President and Chief
Executive Officer of SDI. Walter Neubauer is neither an officer nor a director
nor an affiliate (as such term is defined in the Exchange Act) of SDI; he did
not participate on behalf of SDI in the negotiations relating to the Merger.
Certain Stock Options. Stock options currently held by certain employees
(John M. Cuthbert - 50,000 shares; Jack B. Watson - 21,325 shares; Robert S.
Ritchie - 7,500 shares; Thomas J. Treinen - 7,500 shares; John Vinke - 7,500
shares; Mary Lou Graham - 4,000 shares; and Samuel Levin - 3,750 shares) will
continue in the Surviving Corporation and vest and be exercisable in accordance
with the terms of the stock option agreements currently in effect with respect
to such options. Therefore, these employees will continue to have an equity
interest in the Surviving Corporation that will not be available to other
stockholders. On a fully diluted basis, after giving effect to the exercise of
all stock options, John M. Cuthbert will have the right to acquire through
options approximately 1.6% of the common stock of the Surviving Corporation, and
Jack B. Watson, Robert S. Ritchie, Thomas J. Treinen, John Vinke, Mary Lou
Graham and Samuel Levin will each, through options, have the right to acquire
less than 1% of the common stock of the Surviving Corporation on a fully diluted
basis.
For a more complete discussion of the interests of certain persons in
the Merger, see "The Merger--Interests of Certain Persons in the Merger."
CERTAIN EFFECTS OF THE MERGER
As a result of the Merger, the entire equity interest in SDI will be
owned by affiliates of JFLC and the Continuing Stockholders. Stockholders other
than the Continuing Stockholders will no longer have any interest in, and will
not be stockholders of, SDI, and therefore will not participate in its future
earnings and growth; however pursuant to the Rollover Agreement, the Additional
Rollover Shares held by Messrs. Treinen and Neubauer will, for a period of four
years following the Effective Date, be subject to (i) an irrevocable proxy in
favor of JFLC and (ii) a call right in favor of JFLC at a price of (a) $34.00
per share, plus (b) $2.04 per share for each full six-month period elapsed since
the Effective Date. Instead, each such holder of Common Stock will have the
right to receive $34.00 in cash, without interest, for each share held (other
than shares in respect of which appraisal rights have been perfected). Although
an equity investment in SDI following the Merger involves substantial risk
resulting from the limited liquidity of any such investment and the high
debt-to-equity ratio and consequent substantial fixed charges that will apply to
SDI after the Merger, if SDI's projections are realized, the value of such an
equity investment would be considerably greater than the original cost thereof.
Further, even if the projections are not met, the investors in SDI may earn a
substantial return on their investment. In addition, the Common Stock will no
longer be traded on the Nasdaq National Market, price quotations will no longer
be available and the registration of the Common Stock under the
- - --------------------------------------------------------------------------------
4
<PAGE> 12
- - --------------------------------------------------------------------------------
Securities Exchange Act of 1934, as amended (the "Exchange Act"), will be
terminated. See "Certain Effects of the Merger."
TERMINATION OF THE AMENDED MERGER AGREEMENT
Either SDI or Acquisition may terminate the Amended Merger Agreement if
(i) they mutually consent in writing; (ii) a final order shall have been issued
prohibiting the Merger; or (iii) the Merger has not been consummated by the
second business day after SDI's stockholders have approved Amendment No. 1. See
"The Merger--Termination of the Amended Merger Agreement."
FINANCING OF THE MERGER
It is estimated that approximately $293.4 million will be required to
consummate the Merger and provide current and future working capital for SDI.
This sum will be provided by (i) affiliates of JFLC ($74.0 million), (ii) a
senior credit facility ($108.1 million), (iii) a senior subordinated bridge loan
($57.5 million), and (iv) rollover equity by the Continuing Stockholders ($53.8
million). See "The Amended Merger Agreement--Financing."
MARKET PRICES FOR COMMON STOCK AND DIVIDENDS
On October 26, 1998, the last trading day before the Board's approval of
Amendment No. 1, the closing price for the Common Stock was $26.88. The high and
low closing prices for the Common Stock for the fiscal fourth quarter (through
October 26, 1998) were $36.25 and $25.00, respectively.
See "Summary--Market Prices for Common Stock and Dividends" in the
August Proxy Statement attached hereto as Appendix B for further historical
trading and dividend information.
UNAUDITED RESULTS FOR THE FIRST THREE QUARTERS OF 1998
SDI announced that net sales for the third quarter of 1998 (three months
ended August 2, 1998) were $43,399,898 as compared with $36,970,324 for the
third quarter of 1997 (three months ended August 3, 1997); net sales for the
nine months ended August 2, 1998 were $129,246,332 as compared with $97,299,664
for the nine months ended August 3, 1997. Income (loss) from operations was
$7,305,464 for the third quarter of 1998 as compared with $4,546,944 for the
third quarter of 1997; income (loss) from operations was $19,795,277 for the
nine months ended August 2, 1998 as compared with $11,547,440 for the nine
months ended August 3, 1997. Net income (loss) was $4,393,975 for the third
quarter of 1998 as compared with $2,795,432 for the third quarter of 1997; net
income (loss) was $11,828,827 for the nine months ended August 2, 1998 as
compared with $7,171,747 for the nine months ended August 3, 1997. Net income
(loss) per share was $0.56 for the third quarter of 1998 as compared with $0.36
for the third quarter of 1997; net income (loss) per share was $1.46 for the
nine months ended August 2, 1998 as compared with $0.94 for the nine months
ended August 3, 1997. The weighted average shares outstanding was 8,156,109 for
the third quarter 1998 as compared with 7,760,565 for the third quarter 1997;
the weighted average shares outstanding was 8,091,403 for the nine months
ended August 2, 1998 as compared with 7,741,942 for the nine months ended
August 3, 1997.
- - --------------------------------------------------------------------------------
5
<PAGE> 13
- - --------------------------------------------------------------------------------
SUMMARY INFORMATION IN THE AUGUST PROXY STATEMENT
For each of the headings below, see the corresponding summary
information in the August Proxy Statement attached hereto as Appendix B:
Parties to the Merger Transaction
Effective Date of the Merger; Payment for Shares
Conditions to the Merger
Termination Fee and Payment of Expenses
The Guaranty Agreement
Federal Income Tax Consequences
Accounting Treatment
Rights of Dissenting Stockholders
Summary of Selected Consolidated Financial Data.
- - --------------------------------------------------------------------------------
6
<PAGE> 14
TIME, PLACE AND PURPOSE OF THE SPECIAL MEETING
This Proxy Statement and the accompanying proxy card are solicited by
the Board. These proxies will be used at the Special Meeting to be held at 10:00
a.m. local time, on November __, 1998 at SDI's offices located at 16830 West
Placerita Canyon Road, Newhall, California 91321, and at any and all
adjournments thereof. The purpose of the Special Meeting is to consider and vote
on a proposal to adopt Amendment No. 1, pursuant to which the August Merger
Agreement previously approved by the Board and the stockholders will be amended.
Pursuant to the Amended Merger Agreement, Acquisition will be merged into SDI
with SDI continuing as the Surviving Corporation. The Board has approved
Amendment No. 1. THE BOARD UNANIMOUSLY RECOMMENDS THAT SDI STOCKHOLDERS VOTE FOR
ADOPTION OF THE AMENDMENT NO. 1.
RECORD DATE AND VOTING OF COMMON STOCK
Stockholders of record at the close of business on October 15, 1998 (the
"Record Date") will be entitled to vote at the Special Meeting. On the Record
Date, there were outstanding 7,809,801 shares of Common Stock which were held by
approximately 126 stockholders of record. The presence, in person or by proxy,
of the holders of shares representing at least 3,904,901 votes at the Special
Meeting shall constitute a quorum.
All shares represented by properly executed and unrevoked proxies will
be voted at the Special Meeting. You may revoke your proxy before it is voted by
executing another proxy at a later date, by notifying the secretary of SDI in
writing of your revocation, or by attending the Special Meeting in person and
voting in person.
At the Special Meeting, the holders of Common Stock will vote on the
proposal to adopt Amendment No. 1 (the "Proposal"). Holders of a majority of all
the outstanding shares of Common Stock must vote in favor of Amendment No. 1 in
order for the Proposal to be adopted. Votes withheld, abstentions and "broker
non-votes" will not be counted as votes cast and will not be voted.
If the enclosed proxy is duly executed and received in time for the
Special Meeting, and if no contrary instructions are included on the proxy, it
is the intention of the persons named as proxies to vote the shares of Common
Stock represented thereby in favor of the Proposal to adopt Amendment No. 1, and
in the discretion of the persons named as proxies, in connection with any other
business that may properly come before the Special Meeting or any adjournment
thereof.
At this time, SDI knows of no other matters that may be presented for
stockholder action at the Special Meeting. However, if any matters, other than
approval of Amendment No. 1, should properly come before the Special Meeting, it
is the intention of the persons named in the enclosed proxy to vote such proxy
in accordance with their best judgment.
In the event that there are not sufficient votes to adopt the Proposal
raised at the Special Meeting, it is expected that the Special Meeting will be
postponed or adjourned in order to permit further solicitation of proxies by
SDI.
7
<PAGE> 15
The delivery of this Proxy Statement shall not, under any circumstances,
create any implication that the information contained herein is correct after
the date hereof.
THE BOARD RECOMMENDS A VOTE "FOR" THE APPROVAL AND ADOPTION OF AMENDMENT
NO. 1. THE AFFIRMATIVE VOTE OF HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES
OF COMMON STOCK IS REQUIRED TO ADOPT AMENDMENT NO. 1.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT IN CONNECTION
WITH SDI'S SOLICITATION OF PROXIES AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY SDI OR ANY
OTHER PERSON.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
Some statements contained in this Proxy Statement regarding future
financial performance and results and other statements that are not historical
facts are forward-looking statements. The words "expect," "project," "estimate,"
"predict," "anticipate," "believes" and similar expressions are also intended to
identify forward-looking statements. Such statements and SDI's results are
subject to numerous risks, uncertainties and assumptions, including but not
limited to: possible deficiencies in future liquidity levels, possible declines
in market growth rates, dependence on key customers, possible failure of product
development activities, the development of alternative technologies by
competitors of SDI or its customers, price pressures and other competitive
factors, volatility in the market for SDI's products, and legal proceedings.
These risk factors are more fully described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those indicated.
THE MERGER
BACKGROUND OF AMENDMENT NO. 1
At the September Special Meeting, the stockholders of SDI approved the
merger of Acquisition into SDI whereby each outstanding share of SDI Common
Stock would be converted into the right to receive $37.00 in cash, by a vote of
over 80% of the outstanding shares. That approval occurred during a period of
extreme stock and credit market disruptions and business turmoil on a scale
which is unprecedented in the recent past. In addition, SDI began to refine its
projections based on actual shipments through September 27, 1998. On September
29, 1998, representatives of JFLC advised management of SDI and representatives
of DLJ that these recent events made it extremely problematic as to whether the
merger could be completed in accordance
8
<PAGE> 16
with the terms previously approved by SDI stockholders. JFLC stated that, in
their opinion, some adjustment in the aggregate cash consideration might be
necessary in order to complete the transaction.
On October 1, 1998, the Special Committee of the Board of SDI met with
Thomas F. Treinen and representatives of DLJ and Gibson, Dunn & Crutcher to
explore the various alternatives available to SDI. The Special Committee was
mindful of the extreme volatility in the market and considered various
alternatives in light of the difficulties such market conditions imposed. Among
the alternatives considered were SDI asserting its rights under the August
Merger Agreement, changing the form of consideration to be received in the
Merger, providing for different considerations to be received by different
classes of stockholders and a possible amendment to reduce the price of the
transaction. The Special Committee concluded that as of October 1, 1988, it did
not have sufficient information upon which to base a decision and requested DLJ
to communicate to JFLC that JFLC should make a specific proposal to the Board
that contained specified information to enable the Board to determine its
feasibility and its attractiveness compared to other available alternatives.
On October 8, 1998, JFLC advised the Board that it would not complete a
transaction with SDI at $37.00 per share but that it had obtained new
commitments for financing a transaction at $34.00 per share and provided certain
information to the Board concerning the financing and the timing and structure
of the proposed amendment. Late in the day on October 8, 1998, the Special
Committee met with Thomas F. Treinen and representatives of DLJ and Gibson, Dunn
& Crutcher to discuss the JFLC proposal. The Special Committee concluded that
pursuing a transaction at a price of $34.00 per share or higher represented a
better alternative than asserting SDI's rights under the August Merger Agreement
which would most likely result in litigation concerning damages. The Special
Committee authorized and directed DLJ to negotiate with JFLC concerning an
increase in the price of $34.00 per share and alternative structures involving
unequal stockholders' amounts and differing consideration formulas. During
October 9, 1998 and over the ensuing weekend, DLJ and Gibson, Dunn & Crutcher
negotiated these matters with representatives of JFLC and their counsel.
On October 12, 1998, the Special Committee of the Board met to consider
a proposed amendment of the terms of the August Merger Agreement, providing
primarily for a reduction in the cash consideration from $37.00 per share to
$34.00 per share (the "Proposed Amendment No. 1") and the issuance of preferred
stock to an outside investor as a component of the financing. At this meeting,
DLJ discussed the financial aspects of Proposed Amendment No. 1 and stated it
would be in a position to deliver its opinion that the consideration to be
received by the stockholders of SDI other than the Continuing Stockholders
pursuant to the August Merger Agreement, as amended by Proposed Amendment No. 1,
is fair to such stockholders from a financial point of view upon receipt of the
commitment letters described below. Gibson, Dunn & Crutcher also gave a summary
of the proposed amendment and the negotiations leading up thereto. Thereafter
the Special Committee voted to unanimously recommend to the Board that the
proposed amendment be approved, subject to JFLC providing SDI with letters
confirming that JFLC had binding commitments to finance the Merger pursuant to
the August Merger Agreement, as amended by Proposed Amendment No. 1 (the
"Commitment Letters"), including issuing the preferred stock. Thereafter the
Board convened a special meeting at which the
9
<PAGE> 17
Special Committee delivered its recommendation. After discussion, the Board
unanimously approved Proposed Amendment No. 1, subject to JFLC providing the
Commitment Letters.
Following the October 12 Board meeting, JFLC continued to have
discussions with the Board, Messrs. Treinen and Neubauer and representatives of
DLJ and Gibson, Dunn & Crutcher, exploring alternative forms of consideration
through the issuance of shares of different classes of capital stock. Over the
weekend of October 17, 1998, JFLC discussed with SDI, Thomas F. Treinen and
Walter Neubauer and their counsel, Jeffer, Mangels, Butler & Marmaro LLP, having
Messrs. Treinen and Neubauer increase the number of their SDI shares to be
rolled over in order to finance the transaction. Pursuant to such discussions,
on October 19, 1998, Messrs. Treinen and Neubauer executed the Rollover
Agreement, attached hereto as Appendix E, whereby Messrs. Treinen and Neubauer
agreed to roll over an additional 367,647 shares each (the "Additional Rollover
Shares"). Pursuant to the Rollover Agreement, the Additional Rollover Shares
will, for a period of four years following the Effective Date, be subject to (i)
an irrevocable proxy in favor of JFLC and (ii) a call right in favor of JFLC at
a price of (a) $34.00 per share, plus (b) $2.04 per share for each full
six-month period elapsed since the Effective Date. On October 26, 1998, JFLC
provided SDI with the Commitment Letters to finance the Merger pursuant to the
August Merger Agreement, as amended by Amendment No. 1.
On October 27, 1998, the Board met to consider Amendment No. 1, the
Final Commitments and the Additional Rollover Shares agreed to by Messrs.
Treinen and Neubauer. At this meeting, Gibson, Dunn & Crutcher discussed the
terms of Amendment No. 1 and the terms of the Rollover Agreement concerning the
Additional Rollover Shares. In addition, at this meeting, DLJ discussed the
Commitment Letters and current market conditions and delivered its oral opinion,
subsequently confirmed in writing, that the consideration to be received by the
stockholders of SDI other than the Continuing Stockholders pursuant to the
Amended Merger Agreement is fair to such stockholders from a financial point of
view. After extensive discussion, including discussion about the terms of
Amendment No. 1, the Rollover Agreement, timing of the transaction and future
uncertainties, the Board unanimously approved Amendment No. 1.
For discussion of the background to the transactions contemplated under
the August Merger Agreement, see "The Merger--Background of the Merger" in the
August Proxy Statement attached hereto as Appendix B.
RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS
The Board, based on the recommendation of the Special Committee,
unanimously determined that Amendment No. 1 is the best alternative available to
the stockholders of SDI and is fair to and in the best interests of SDI's
stockholders. The Board recommends that the stockholders vote to adopt the
principal terms of Amendment No. 1 and the transactions contemplated by the
Amended Merger Agreement. In reaching these conclusions, the Special Committee
and the Board were influenced by the following factors:
1. The extreme market disruptions taking place and the fact that many
transactions similar to the one proposed to SDI's stockholders were either being
renegotiated or abandoned;
10
<PAGE> 18
2. The fact that the cash merger price of $34.00 per share was
determined by DLJ to be fair to the stockholders of SDI other than the
Continuing Stockholders from a financial point of view;
3. The fact that the NASDAQ composite index had decreased by 20.3% from
June 19, 1998 through October 8, 1998 and the market for new issuances of
corporate debt was also adversely impacted;
4. The fact that it appeared very unlikely that in the current market
conditions any other buyer could be found at a better price;
5. The fact that, although Messrs. Treinen and Neubauer will retain
additional equity through the Additional Rollover Shares, the return on that
equity is, in effect, limited by JFLC's call right during the first four years
to no more than 12% per annum and is subject to the ability of JFLC to finance
the purchase, which may be dependent on the future performance of SDI;
6. The fact that the guaranty (the "Guaranty") by J.F. Lehman Equity
Investors I, L.P., a Delaware limited partnership and a JFLC affiliate
("JFLEI"), in connection with the August Merger Agreement was limited to
$15,000,000 and litigation concerning a breach of the August Merger Agreement
could be time consuming, expensive and uncertain of result; and
7. The principal terms of the transaction, which included: (i) the fact
that SDI still had the ability to respond to unsolicited alternative proposals
to acquire SDI; (ii) the size of the breakup fee payable under the August Merger
Agreement and a circumstance that it is not payable unless SDI enters into an
acquisition transaction with another party within twelve months of the
termination of the August Merger Agreement; and (iii) the fact that the
Amendment No. 1 does not take effect until it is approved by a majority of SDI's
outstanding shares and it does not operate as a waiver of any of SDI's rights
under the August Merger Agreement.
In approving the transaction, the Special Committee and the Board were
also aware of the fact that the current market conditions could well be
temporary and that in the future conditions will stabilize. If the transaction
is approved, stockholders, other than the Continuing Stockholders, would no
longer participate in the future growth and earnings of SDI. It was aware of the
fact that the Common Stock of SDI could significantly increase in value if SDI's
market for initiators were to continue to expand as it has in the past. However,
taking into account the continuing pressure on unit sales prices experienced by
SDI and the revised projections based upon an expectation of a slower world
economic expansion and the continuing fact that SDI was a one-product,
two-customer company which was faced with the prospect of finding a replacement
for Mr. Treinen, the Board believed that a sale of SDI at a price of $34.00 per
share represented the best alternative for stockholders of SDI at the present
time.
OPINION OF FINANCIAL ADVISOR TO THE COMPANY
In its role as financial advisor to SDI, DLJ rendered a fairness opinion
dated June 19, 1998 (the "Original DLJ Opinion") and September 9, 1998 (the
"First DLJ Updated Opinion").
11
<PAGE> 19
The Board of Directors of SDI requested DLJ to provide an updated opinion as to
the fairness from a financial point of view to stockholders other than the
Continuing Stockholders of the consideration to be received by such stockholders
pursuant to the Amended Merger Agreement. On October 27, 1998, DLJ delivered its
written opinion (the "Second DLJ Updated Opinion") to the effect that, as of the
date of such opinion and based upon and subject to the assumptions, limitations
and qualifications set forth therein, the Merger Consideration to be received by
the stockholders other than the Continuing Stockholders pursuant to the Amended
Merger Agreement is fair to such stockholders from a financial point of view.
A COPY OF THE SECOND DLJ UPDATED OPINION IS ATTACHED HERETO AS APPENDIX
D. STOCKHOLDERS ARE URGED TO READ THE SECOND DLJ UPDATED OPINION CAREFULLY IN
ITS ENTIRETY FOR THE ASSUMPTIONS MADE, THE PROCEDURES FOLLOWED, THE MATTERS
CONSIDERED AND THE LIMITS OF THE REVIEW MADE BY DLJ IN CONNECTION WITH SUCH
SECOND UPDATED OPINION.
The assumptions, limitations and qualifications contained in the Second
DLJ Updated Opinion are substantially the same as those contained in the
Original DLJ Opinion and the First DLJ Updated Opinion. However, pursuant to the
Amended Merger Agreement, each share of Common Stock, other than the Continuing
Shares and shares held by stockholders who are entitled to and who have
perfected their dissenters' rights, will be converted into the right to receive
a cash payment per share equal to $34.00. The Merger Consideration was
determined in arm's-length negotiations between SDI and JFLC, in which
negotiations DLJ advised SDI.
In connection with the Second DLJ Updated Opinion, DLJ performed certain
procedures to update certain analyses made in connection with the delivery of
the Original DLJ Opinion and the First DLJ Updated Opinion and reviewed with the
management of SDI the assumptions on which such analyses were based. Included in
the information provided during discussions with SDI's management were certain
revised financial projections of SDI prepared by the management of SDI. DLJ
assumed that management's adjusted case projections were reasonably prepared on
the basis reflecting the best currently available estimates and judgments of the
management of SDI as to the future operating and financial performance of SDI.
The Second DLJ Updated Opinion is necessarily based on economic, market,
financial and other conditions as they existed on, and on the information made
available to it as of, the date of its opinion. It should be understood that,
although subsequent developments may affect its opinion, DLJ does not have any
obligation to update, revise or reaffirm the Second DLJ Updated Opinion.
The following is a summary of the presentation made by DLJ to the Board
at its October 12, 1998 board meeting.
Historical Stock Price Performance. To provide comparative market data,
DLJ examined SDI's historical common stock performance. DLJ's analysis consisted
of a historical analysis of closing prices and trading volumes from SDI's
initial public offering on August 9, 1991 through October 9, 1998. DLJ also
examined trading volumes at specified prices of SDI's common stock
12
<PAGE> 20
for the twelve months ended October 9, 1998. Since SDI's initial public offering
on August 9, 1991, SDI's common stock reached a high of $38.00 per share and a
low of $5.25 per share. On October 9, 1998, the closing price of the Company's
common stock was $29.25 per share.
Premium Analysis. DLJ reviewed publicly available information to
determine the premiums paid in (i) 64 selected transactions in the automotive
industry completed between January 1, 1995 and October 9, 1998 (the "Selected
Automotive Transactions") and (ii) 72 selected mergers and acquisitions
transactions involving manufacturing companies and ranging in size from $200
million to $400 million completed between January 1, 1996 and October 9, 1998
(the "Selected M&A Transactions"). For the Selected Automotive Transactions, DLJ
reviewed the percentage premium in each transaction represented by the offer
prices over the trading prices one week and one month prior to the announcement
date of each respective transaction. The mean percentage amount by which the
offer prices exceeded the closing stock prices one week and one month prior to
the announcement date for the Selected Automotive Transactions was approximately
38.0% and 48.4%, respectively. For the Selected M&A Transactions, DLJ reviewed
the percentage premium in each transaction represented by the offer prices over
the trading prices one day, one week and one month prior to the announcement
date of each respective transaction. The mean percentage amount by which the
offer prices exceeded the closing stock prices one day, one week and one month
prior to the announcement date for the Selected M&A Transactions was
approximately 28.4%, 34.6% and 42.1%, respectively. The percentage amount by
which the Merger Consideration exceeded the closing stock price of SDI's common
stock one day, one week and one month prior to January 21, 1998, the date of the
press release announcing that the Company had engaged DLJ to explore strategic
alternatives, was approximately 25.3%, 34.3% and 20.4%, respectively. The
percentage amount by which the Merger Consideration exceeded the closing stock
price of SDI's common stock one day, one week and one month prior to June 22,
1998, the date of the announcement of the Merger, was approximately (2.5)%, 1.9%
and 0.0%, respectively. The percentage by which the Merger Consideration
exceeded the closing stock price of SDI's common stock one day, one week and one
month prior to October 9, 1998 was 13.8%, 3.0% and (2.9)%, respectively.
Comparison of Selected Publicly Traded Comparable Companies. DLJ
analyzed SDI's operating performance relative to the Airbag Comparable
Companies. DLJ compared certain market trading statistics for SDI with the
Airbag Comparable Companies, including total enterprise value (defined as market
value of common equity plus book value of total debt less cash and cash
equivalents) (based on reported closing prices for the Airbag Comparable
Companies on October 9, 1998) as a multiple of latest twelve months ("LTM")
revenues, LTM earnings before interest, taxes, depreciation and amortization
("EBITDA") and LTM earnings before interest and taxes ("EBIT"), and price to
earnings ratios ("P/E") based on LTM earnings per share ("EPS") and book value
of common equity per share. As of October 9, 1998, this analysis resulted in (i)
a range of 0.7x to 1.2x and a mean (excluding high and low) of 0.9x total
enterprise value to LTM revenues compared to 1.6x for SDI's common stock based
on the Merger Consideration, (ii) a range of 5.3x to 9.9x and a mean (excluding
high and low) of 6.1x total enterprise value to LTM EBITDA compared to 8.4x for
SDI based on the Merger Consideration, (iii) a range of 8.0x to 72.9x and a mean
(excluding high and low) of 9.8x total enterprise value to LTM EBIT compared to
11.0x for SDI based on the Merger Consideration, (iv) a range of 8.2x to 20.0x
and a mean (excluding high and low) of 13.2x P/E based on LTM
13
<PAGE> 21
EPS compared to 17.9x for SDI based on the Merger Consideration, and (v) a range
of 1.0x to 3.2x and a mean (excluding high and low) of 1.5x price to book value
of common equity per share compared to 3.0x for SDI based on the Merger
Consideration.
Analysis of Selected Transactions in the Airbag OEM Supplier Sector. DLJ
reviewed publicly available information for the Selected Automotive
Transactions. DLJ reviewed the consideration paid in such transactions in terms
of the total enterprise value as a multiple of LTM revenues, EBITDA and EBIT of
the acquired entity prior to its acquisition as well as the equity value
(defined as market value of common equity) as a multiple of LTM net income and
book value of common equity of the acquired entity prior to its acquisition. The
analysis resulted in (i) a range of 0.3x to 2.1x and a mean (excluding high and
low) of 0.9x total enterprise value to LTM revenue compared to 1.6x for SDI
based on the Merger Consideration, (ii) a range of 4.6x to 14.4x and a mean
(excluding high and low) of 7.7x total enterprise value to LTM EBITDA compared
to 8.4x for SDI based on the Merger Consideration, (iii) a range of 5.3x to
37.1x and a mean (excluding high and low) of 11.4x total enterprise value to LTM
EBIT compared to 11.0x for SDI based on the Merger Consideration, (iv) a range
of 6.7x to 106.1x and a mean (excluding high and low) of 20.6x equity value to
LTM net income compared to 17.9x for SDI based on the Merger Consideration, and
(v) a range of (1.6)x to 11.8x and a mean (excluding high and low) of 4.1x
equity value to book value of common equity compared to 3.0x for SDI based on
the Merger Consideration.
Discounted Cash Flow Analysis. For purposes of this analysis, DLJ
performed a discounted cash flow analysis for SDI on a stand-alone basis based
on projections provided by management (the "Management Case"). In addition, DLJ
performed a discounted cash flow analysis for SDI based on projections provided
by management which were adjusted by management from the Management Case (the
"Management Adjusted Case") to reflect the following assumptions: (A) overall
unit prices decline 10% below the unit price forecast for each forecasted year
in the Management Case; (B) lower overall gross margins by two percentage points
in each forecasted year in the Management Case; and (C) higher overall selling,
general and administrative expense by one percentage point in each forecasted
year in the Management Case. In performing its analysis, DLJ calculated the
estimated "Free Cash Flow" based on stand-alone projected unleveraged operating
income adjusted for: (i) taxes; (ii) certain projected non-cash items (i.e.,
depreciation and amortization); (iii) projected changes in non-cash working
capital; and (iv) projected capital expenditures. DLJ analyzed the Management
Case and Management Adjusted Case projections and discounted the stream of Free
Cash Flows from fiscal 1999 to fiscal 2002, provided in such projections, back
to October 31, 1998 using discount rates ranging from 10.0% to 20.0%. DLJ based
the discount rate assumptions on the Company's weighted average cost of capital,
as adjusted to reflect potential adverse factors, including customer
concentration, the single product nature of the Company's business and
uncertainty concerning the future market for automotive airbags and airbag
initiators. To estimate the residual values of SDI on a stand-alone basis at the
end of the forecast period, DLJ applied terminal multiples of 6.0x to 8.0x
projected fiscal 2002 EBITDA and discounted such value estimates back to October
31, 1998 using discount rates ranging from 10.0% to 20.0%. DLJ then aggregated
the present values of the Free Cash Flows and the present values of the residual
values to derive a range of implied enterprise values for SDI on a stand-alone
basis. The range of implied enterprise values stand-alone were then adjusted for
SDI's net debt to yield implied
14
<PAGE> 22
equity values of SDI on a stand-alone basis. The range of equity values were
then divided by the number of fully diluted shares to determine a range of
equity values per share for SDI on a stand-alone basis. The Management Case
indicated a range of implied equity values of $30.85 to $53.20 per share. The
Management Adjusted Case indicated a range of implied equity values of $24.78 to
$42.85 per share.
The summary set forth above does not purport to be a complete
description of the analyses performed by DLJ, but describes, in summary form,
the principal elements of the presentation made by DLJ to the Board. The
preparation of a fairness opinion involves various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
these methods to the particular circumstances and, therefore, such an opinion is
not readily susceptible to summary description. Each of the analyses conducted
by DLJ was carried out in order to provide a different perspective on the
transaction and to add to the total mix of information available. DLJ did not
form a conclusion as to whether any individual analysis, considered in
isolation, supported or failed to support an opinion as to fairness from a
financial point of view. Rather, in reaching its conclusion, DLJ considered the
results of the analyses in light of each other and ultimately reached its
opinion based on the results of all analyses taken as a whole. DLJ did not place
particular reliance or weight on any individual analysis, but instead concluded
that its analyses, taken as a whole, supported its determination. Accordingly,
notwithstanding the separate factors summarized above, DLJ believes that its
analyses must be considered as a whole and that selecting portions of its
analysis and the factors considered by it, without considering all analyses and
factors, could create an incomplete or misleading view of the evaluation process
underlying its opinion. In performing its analyses, DLJ made numerous
assumptions with respect to industry performance, business and economic
conditions and other matters. The analyses performed by DLJ are not necessarily
indicative of actual values or future results, which may be significantly more
or less favorable than suggested by such analyses.
The Second DLJ Updated Opinion was provided pursuant to the DLJ
Engagement Letter described in the August Proxy Statement.
In the ordinary course of business, DLJ may actively trade SDI's
securities for its own account and for the account of its customers and,
accordingly, may at any time hold a long or short position in such securities.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Board with respect to the
Merger, stockholders should be aware that certain officers and directors of SDI
have interests in connection with the Merger which may present them with actual
or potential conflicts of interest. These interests include those described
below and those described in the August Proxy Statement, attached hereto as
Appendix B.
Continuing Stockholders. Certain of the shares of Common Stock held by
Walter Neubauer (1,096,522 shares) and Thomas F. Treinen (433,897 shares) will
not be converted in the Merger but will remain outstanding as shares of common
stock of the Surviving Corporation. Of the total number of shares held by the
Continuing Stockholders, only the Additional Rollover
15
<PAGE> 23
Shares will be subject to certain terms and restrictions pursuant to the letter
agreement, dated as of October 19, 1998, by and among Messrs. Treinen and
Neubauer, JFLC, SDI and Acquisition. The Additional Rollover Shares will be
subject to an irrevocable proxy, executed by each of Messrs. Treinen and
Neubauer, in favor of JFLC. Neither Walter Neubauer nor Thomas F. Treinen will
be able to transfer the Additional Rollover Shares except to parties who take
the shares subject to JFLC's rights in those shares. JFLC will have an option,
exercisable at any time (the "Call Right"), to acquire all or any portion of the
Additional Rollover Shares at a per share purchase price (the "Call Price") of
(a) $34.00 per share, plus (b) $2.04 for each full six-month period elapsed
since the Effective Date. If JFLC has not exercised its Call Right for all of
the Additional Rollover Shares within four years of the Effective Date, the Call
Right and the irrevocable proxies in favor of JFLC will terminate. Messrs.
Treinen and Neubauer will also have the right to require the Surviving
Corporation to purchase at a per share price equal to the Call Price all or any
portion of the outstanding Additional Rollover Shares upon the occurrence of
certain events such as a change of control or the repayment of certain of the
Surviving Corporation's financing. In addition, the Additional Rollover Shares
will be subject to customary tag-along and drag-along rights.
The Continuing Stockholders will continue to have an equity interest in
the Surviving Corporation that will not be available to other stockholders. On a
fully diluted basis, after giving effect to the exercise of all stock options,
Walter Neubauer will own approximately 35.7% and Thomas F. Treinen will own
approximately 14.1% of the Surviving Corporation; however, approximately 33.5%
of Mr. Neubauer's shares and 84.7% of Mr. Treinen's shares will be subject to an
irrevocable proxy and a call provision, both in favor of JFLC, pursuant to the
Rollover Agreement, described above. Thomas F. Treinen is President and Chief
Executive Officer of SDI. Walter Neubauer is neither an officer nor a director
nor an affiliate (as such term is defined in the Exchange Act) of SDI; he did
not participate on behalf of SDI in the negotiations relating to the Merger.
Certain Stock Options. Stock options currently held by certain employees
(John M. Cuthbert - 50,000 shares; Jack B. Watson - 21,325 shares; Robert S.
Ritchie - 7,500 shares; Thomas J. Treinen - 7,500 shares; John Vinke - 7,500
shares; Mary Lou Graham - 4,000 shares; and Samuel Levin - 3,750 shares) will
continue in the Surviving Corporation and vest and be exercisable in accordance
with the terms of the stock option agreements currently in effect with respect
to such options. Therefore, these employees will continue to have an equity
interest in the Surviving Corporation which will not be available to other
stockholders. On a fully diluted basis, after giving effect to the exercise of
all stock options, John M. Cuthbert will have the right to acquire through
options approximately 1.6% of the common stock of the Surviving Corporation, and
Jack B. Watson, Robert S. Ritchie, Thomas J. Treinen, John Vinke, Mary Lou
Graham and Samuel Levin will each, through options, have the right to acquire
less than 1% of the common stock of the Surviving Corporation on a fully diluted
basis.
16
<PAGE> 24
REVISED PROJECTIONS
Recently, SDI revised the updated set of projections referred to in the
Proxy Supplement (the "Management Projections") to reflect actual shipments
through September 27, 1998 (the "Revised Management Projections"). The Revised
Management Projections are $170.8 million and $202.7 million for fiscal 1998 and
1999 revenues, respectively, compared to Management Projections of $173.5
million and $195.8 million for fiscal 1998 and 1999 revenues, respectively, and
$34.2 million and $43.9 million for fiscal 1998 and 1999 EBITDA, respectively,
compared to Management Projections of $35.7 million and $43.3 million for fiscal
1998 and 1999 EBITDA, respectively.
SDI also recently revised the management adjusted case set projections
based upon the assumed failure by SDI to achieve some of SDI's management's
goals set forth in the Proxy Supplement (the "Management Adjusted Projections")
to reflect actual shipments through September 27, 1998 (the "Revised Management
Adjusted Projections"). The Revised Management Adjusted Projections are $170.8
million and $186.2 million for fiscal 1998 and 1999 revenues, respectively,
compared to Management Adjusted Projections of $173.5 million and $180.0 million
for fiscal 1998 and 1999 revenues, respectively, and $34.2 million and $35.6
million for fiscal 1998 and 1999 EBITDA, respectively, compared to Management
Adjusted Projections of $33.9 million and $ 35.3 million for fiscal 1998 and
1999 EBITDA, respectively.
The above revised projections are subject to the assumptions,
limitations and qualifications set forth in the Proxy Supplement. See
"Projections" in the Proxy Supplement attached hereto as Appendix C.
THE AMENDED MERGER AGREEMENT
See "The Merger--The Merger Agreement" in the August Proxy Statement
attached hereto as Appendix B and Amendment No. 1 attached hereto as Appendix A.
Termination of the Amended Merger Agreement
The Merger shall be effective at the time the certificate of merger is
filed with the Delaware Secretary of State or such other time as specified in
the certificate of merger (the "Effective Time"). The Amended Merger Agreement
may be terminated and the Merger may be abandoned at any time prior to the
Effective Time in the event of any of the following (i) by mutual written
consent of SDI and Acquisition; (ii) by SDI or Acquisition if any court of
competent jurisdiction in the United States or other United States governmental
authority shall have issued a final order, decree or ruling restraining,
enjoining or prohibiting the Merger and such order, decree or ruling is
nonappealable; (iii) by SDI or Acquisition if the Merger has not been
consummated by the second business after SDI's stockholders have approved
Amendment No. 1 (unless otherwise extended by the parties), unless the
terminating party's failure to fulfill any of its obligations under the Amended
Merger Agreement shall have been the reason that the Effective Time shall not
have occurred on or before such date; (iv) by SDI if Acquisition shall have
breached any of its representations or warranties set forth in the Amended
Merger
17
<PAGE> 25
Agreement or any representation or warranty of Acquisition shall have become
untrue, in either case if such would have a material adverse effect on
Acquisition or materially adversely affect (or delay) consummation of the
Merger; (v) by SDI if Acquisition shall have breached any of its covenants or
agreements set forth in the Amended Merger Agreement and such would have a
material adverse effect on Acquisition or materially adversely affect (or delay)
consummation of the Merger, and Acquisition has not cured such breach prior to
ten days following notice by SDI, provided that SDI has not breached any of its
obligations under the Amended Merger Agreement in a manner that proximately
contributed to such breach by Acquisition; (vi) by SDI if the Board determines
in its good faith judgment that it must do so in the exercise of its fiduciary
duties under the DGCL; (vii) by SDI if SDI's stockholders shall have failed to
adopt the Merger; (viii) by Acquisition if the Board withdraws or modifies its
approval or recommendation of the Merger in a manner adverse to Acquisition or
shall have recommended an acquisition (by any other person or entity other than
Acquisition or its affiliates) of (a) SDI by merger or otherwise, (b) more than
50% of the assets of SDI and its subsidiaries or (c) Common Stock resulting in
such person or entity holding at least 50% or more of the outstanding shares of
SDI's Common Stock (a "Third Party Acquisition"); (ix) by Acquisition if a Third
Party Acquisition occurs; (x) by Acquisition if SDI shall have breached any of
its representations or warranties set forth in the Amended Merger Agreement or
any representation or warranty of SDI shall have become untrue, in either case
if such would have a material adverse effect on SDI and its subsidiaries or
materially adversely affect (or delay) consummation of the Merger, and SDI has
not cured such breach prior to ten days following notice by Acquisition,
provided that Acquisition has not breached any of its obligations under the
Amended Merger Agreement in a manner that proximately contributed to such breach
by SDI; (xi) by Acquisition if SDI shall have breached any of its covenants or
agreements set forth in the Amended Merger Agreement and such would have a
material adverse effect on SDI and its subsidiaries or materially adversely
affect (or delay) consummation of the Merger, and SDI has not cured such breach
prior to ten days following notice by Acquisition, provided that Acquisition has
not breached any of its obligations under the Amended Merger Agreement in a
manner that proximately contributed to such breach by SDI; or (xii) by
Acquisition if Acquisition shall have discovered that any information supplied
to it by SDI (excluding, for such purposes, any projections or forecasts or
other forward looking information supplied by SDI) contained any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements not misleading at the time such information was provided to
Acquisition.
Financing
General. In order to (i) fund the payment of the Merger Consideration,
(ii) refinance certain outstanding indebtedness of SDI and (iii) pay the fees
and expenses incurred in connection with the Merger, SDI expects to obtain a
combination of debt and equity financing as follows:
<TABLE>
<CAPTION>
SOURCE AMOUNT
- - ------ ------
<S> <C>
Equity Contribution from Affiliates of
JFLC.................................. $74,000,000
Senior Credit Facility.................. 108,100,000
Senior Subordinated Bridge Loan......... 57,500,000
</TABLE>
18
<PAGE> 26
Equity Contribution from Affiliates of JFLC. JFLEI, J.F. Lehman
Co-Invest Partners I, L.P., a Delaware limited partnership ("JFLCP") and an
affiliate of JFLC, and Paribas Principal Inc. ("Paribas"), an affiliate of JFLC
and a limited partner of JFLCP, have committed to contribute an aggregate of
$74.0 million in equity financing (the "Equity Contribution") subject to the
satisfaction of the conditions to the consummation of the Merger set forth in
the Amended Merger Agreement and the closing of the Merger. JFLEI and JFLCP will
contribute their portion (currently expected to be $63.0 million) of the Equity
Contribution through subscription agreements with Acquisition. Paribas will
contribute its portion (currently expected to be $11.0 million) of the Equity
Contribution through a subscription with SDI (the "Paribas Subscription"). The
closing of the Paribas Subscription will take place immediately after the
Effective Time. Thereafter, the entire equity interest in SDI will be owned by
Acquisition, the Continuing Stockholders and Paribas. The ultimate investments
by each of the above-referenced affiliates of JFLC may vary but is not expected
to aggregate less than $74.0 million.
Term Loan Facility. The Surviving Corporation expects to enter into a
$130.0 million senior credit facility (the "Senior Credit Facility"), for which
Bankers Trust Company will act as arranger and administrative agent. The Senior
Credit Facility will be comprised of a $25.0 million revolving credit facility
and a $105.0 million term loan. At the Effective Time, the Surviving Corporation
expects to borrow approximately $108.1 million under the Senior Credit Facility,
although the ultimate amount of borrowings under the Senior Credit Facility may
vary.
Senior Subordinated Bridge Loan. The Surviving Corporation expects to
enter into a $57.5 million senior subordinated credit agreement (the "Senior
Subordinated Bridge Facility"), for which Bankers Trust Corporation will act as
agent. The ultimate amount of borrowings under the Senior Subordinated Bridge
Facility may vary.
LITIGATION
See "The Merger--Litigation" in the August Proxy Statement attached
hereto as Appendix B and "Stockholder Litigation" in the Proxy Supplement
attached hereto as Appendix C.
SELECTED FINANCIAL DATA FOR SPECIAL DEVICES, INCORPORATED
UNAUDITED RESULTS FOR THE FIRST THREE QUARTERS OF 1998
SDI announced that net sales for the third quarter of 1998 (three months
ended August 2, 1998) were $43,399,898 as compared with $36,970,324 for the
third quarter of 1997 (three months ended August 3, 1997); net sales for the
nine months ended August 2, 1998 were $129,246,332 as compared with $97,299,664
for the nine months ended August 3, 1997. Income (loss) from operations was
$7,305,464 for the third quarter of 1998 as compared with $4,546,944 for the
third quarter of 1997; income (loss) from operations was $19,795,277 for the
nine months ended August 2, 1998 as compared with $11,547,440 for the nine
months ended August 3, 1997. Net income (loss) was $4,393,975 for the third
quarter of 1998 as compared with $2,795,432 for the third quarter of 1997; net
income (loss) was $11,828,827 for the nine months ended
19
<PAGE> 27
August 2, 1998 as compared with $7,171,747 for the nine months ended August 3,
1997. Net income (loss) per share was $0.56 for the third quarter of 1998 as
compared with $0.36 for the third quarter of 1997; net income (loss) per share
was $1.46 for the nine months ended August 2, 1998 as compared with $0.94 for
the nine months ended August 3, 1997. The weighted average shares outstanding
was 8,156,109 for the third quarter 1998 as compared with 7,760,565 for the
third quarter 1997; the weighted average shares outstanding was 8,091,403 for
the nine months ended August 2, 1998 as compared with 7,741,942 for the nine
months ended August 3, 1997.
See "Summary--Summary of Selected Financial Data" in the August Proxy
Statement attached hereto as Appendix B for further information on SDI's
historical consolidated financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED AUGUST 2, 1998 TO THE THREE MONTHS ENDED
AUGUST 3 1997
Net Sales. Net sales for the Automotive Products Division were
$33,153,000 for the quarter ended August 2, 1998, compared to net sales of
$30,640,000 for the same period last year. The increase of $2,513,000, or 8.2%,
was due to a 31% increase in units shipped during the current year quarter
compared to the number of units shipped for the same period last year. The
increase in units shipped resulted primarily from increased shipments to Autoliv
ASP, Incorporated ("Autoliv") (formerly Morton International) under terms of a
supplier agreement signed in November 1995. The initiators sold to Autoliv are
generally sold at lower average unit selling prices than those sold to other
customers, due to simplicity of design, resulting in net sales increasing at a
slower rate than the increase in units sold. Net sales to TRW, Inc. ("TRW") as a
percent of Automotive Products Division net sales were 46.4% for the current
year third quarter compared to 60.9% for the same period last year, and were
35.4% of total Company net sales in the third quarter compared to 50.4% of total
Company net sales for the same period last year. Net sales to Autoliv were 36.3%
of Automotive Products Division net sales and were 27.7% of total Company net
sales for the current year third quarter, compared to 27.8% and 23.0%,
respectively, for the comparable periods last year.
Net sales for the Aerospace Division were $10,247,000 for the current
year third quarter, compared to net sales of $6,330,000 for the same period last
year. The increase of $3,917,000, or 61.9%, was due primarily to a contract for
production of a proprietary bomb ejector, which began in the current year, and
also due to increased demand for products used in commercial satellite launch
vehicles.
Cost of Sales. Cost of sales was $27,068,000 for the Automotive Products
Division for the quarter ended August 2, 1998, compared to cost of sales of
$25,388,000 for the same period last year. The increase of $1,680,000, or 6.6%,
was due to costs associated with increased net sales noted above. Gross profit
as a percent of sales was 18.4% in the current period, compared
20
<PAGE> 28
to 17.1% for the same period last year. The improvement in gross profit as a
percent of sales was due to reductions in scrap, improvements in automated
machine yields, and other manufacturing efficiencies achieved in the current
period.
Cost of sales was $5,828,000 for the Aerospace Division for the quarter
ended August 2, 1998, compared to cost of sales of $4,488,000 for the same
period last year. The increase of $1,340,000, or 29.9%, was due to costs
associated with increased net sales noted above. Gross profit as a percent of
sales was 43.1% in the current year period compared to a gross profit as a
percent of sales of 29.1% for the same period last year. The increase in gross
profit as a percent of sales in the current period was due to the mix of
products shipped (certain products such as spare parts realize higher gross
margins than some production products) compared to last year, and due to the
absorption of relatively stable overhead expenses over greater net sales in the
current period.
Operating Expenses. Operating expenses for each division (Automotive
Products and Aerospace) are comprised of two components. First, each division is
charged those operating expenses incurred directly by that division. Second,
each division is allocated administrative operating expenses incurred by the
Company (which are not directly attributable to a particular division) on an
equitable basis to fairly reflect the benefit received by each division.
Operating expenses for the Automotive Products Division were $1,550,000
for the quarter ended August 2, 1998, compared to operating expenses of
$1,458,000 for the same period last year. Operating expenses were comparable as
net sales did not exceed the threshold that would necessitate significant
additional operating expenses be incurred.
Operating expenses were $1,648,000 for the Aerospace Division for the
quarter ended August 2, 1998, compared to operating expenses of $1,089,000 for
the same period last year. The increase of $559,000, or 51.3%, was the result of
an increase in operating expenses incurred by the Corporate Division which were
allocated to the Aerospace Division in the current year period, and due to
increases in incentive bonus accruals in the current period. The increase in
Corporate Division expenses was primarily other professional services costs.
Net Interest Income (Expense). Net interest income (expense) consists of
interest expense on borrowings and interest income on short-term investments.
Interest expense was $46,400 for the quarter ended August 2, 1998, compared to
interest expense of $67,200 for the same period last year. The decrease of
$20,800 occurred due to reduction of long-term debt through scheduled monthly
principal payments. Interest income was $10,000 for the quarter ended August 2,
1998, compared to interest income of $75,700 for the same period last year. The
reduction in interest income was due to lower average amounts invested in
interest bearing securities during the current year third quarter.
COMPARISON OF THE NINE MONTHS ENDED AUGUST 2, 1998 TO THE NINE MONTHS ENDED
AUGUST 3, 1997
Net Sales. Net sales for the Automotive Products Division were
$104,995,000 for the nine months ended August 2, 1998, compared to net sales of
$79,079,000 for the same period last
21
<PAGE> 29
year. The increase of $25,916,000, or 32.8%, was due to a 58% increase in units
shipped during the first nine months of 1998 compared to the number of units
shipped for the same period last year. The increase in units shipped resulted
primarily from increased shipments to Autoliv under terms of a supplier
agreement signed in November 1995. The initiators sold to Autoliv are generally
sold at lower average unit selling prices than those sold to other customers,
due to simplicity of design, resulting in net sales increasing at a slower rate
than the increase in units sold. Net sales to TRW as a percent of Automotive
Products Division net sales were 48.9% for the nine months ended August 2, 1998,
compared to 64.0% for the same period last year, and were 39.7% of total Company
net sales in the current year compared to 52.0% of total Company net sales for
the same period last year. Net sales to Autoliv as a percent of Automotive
Products Division net sales were 32.2% for the nine months ended August 2, 1998,
compared to 23.9% for the same period last year, and were 26.1% of total Company
net sales in the current period compared to 19.4% for the same period last year.
Net sales for the Aerospace Division were $24,251,000 for the nine
months ended August 2, 1998, compared to net sales of $18,220,000 for the same
period last year. The increase of $6,031,000, or 33.1%, was due primarily to a
contract for production of a proprietary bomb ejector, which began in the
current year, and also due to increased demand for products used in commercial
satellite launch vehicles.
Cost of Sales. Cost of sales was $85,189,000 for the Automotive Products
Division for the nine months ended August 2, 1998, compared to cost of sales of
$65,787,000 for the same period last year, an increase of $19,402,000, or 29.5%.
The increase was due to costs associated with increased net sales noted above.
Gross profit as a percent of net sales was 18.9% for the current year period,
compared to gross profit as a percent of net sales of 16.8% for the same period
last year. The improvement in gross profit as a percent of sales was due to
reductions in scrap, improvements in automated machine yields, and other
manufacturing efficiencies achieved in the current period.
Cost of sales for the Aerospace Division was $15,200,000 for the nine
months ended August 2, 1998, compared to cost of sales of $12,730,000 for the
same period last year. The increase of $2,470,000, or 19.4%, was due to costs
associated with increased net sales during the first nine months of 1998. Gross
profit as a percent of net sales was 37.3% for the nine months ended August 2,
1998, compared to gross profit as a percent of sales of 30.1% for the same
period last year. The increase in gross profit as a percent of net sales in the
current period was due to the mix of products shipped compared to last year, and
due to the absorption of relatively stable overhead expenses over greater net
sales in the current period.
Operating Expenses. Operating expenses for each division (Automotive
Products and Aerospace) are comprised of two components. First, each division is
charged those operating expenses incurred directly by that division. Second,
each division is allocated administrative operating expenses incurred by the
Company (which are not attributable to a particular division) on an equitable
basis to fairly reflect the benefit received by each division.
Operating expenses for the Automotive Products Division were $5,012,000
for the nine months ended August 2, 1998, compared to operating expenses of
$3,778,000 for the same
22
<PAGE> 30
period last year. The increase of $1,234,000, or 32.7%, was due primarily to
labor related cost increases incurred by the Automotive Products Division, and,
to a lesser extent, to increases in Corporate expenses which were allocated to
the Automotive Products Division. The increase in Corporate expenses was
primarily other professional services costs.
Operating expenses for the Aerospace Division were $4,051,000 for the
nine months ended August 2, 1998, compared to operating expenses of $3,456,000
for the same period last year. The increase of $595,000, or 17.2%, was the
result primarily of an increase in incentive bonus accruals in the current
period.
Net Interest Income (Expense). Net interest income (expense) consists of
interest expense on borrowings and interest income earned on short-term
investments. Interest income was $104,900 for the nine months ended August 2,
1998, compared to interest income of $275,000 for the same period last year. The
decrease in interest income during the first nine months of the current year was
due to lower average amounts invested in interest bearing securities during the
year compared to the same period last year. Interest expense was $146,400 for
the nine months ended August 2, 1998, compared to interest expense of $201,000
for the same period last year. The decrease in the current year was due to lower
average debt balances resulting from scheduled monthly principal payments.
Liquidity and Capital Resources. The Company's primary sources of
capital since its initial public offering in 1991 have been cash from operations
and bank borrowings and, in fiscal year 1995, an additional public offering of
its Common Stock. In December 1996, the Company signed a credit agreement (the
"Credit Agreement") with a bank which was renewed in April 1998. The Credit
Agreement expires May 1, 2000. Any borrowings under the Credit Agreement bear
interest at the bank's Reference Rate (8.5% at August 2, 1998) less 0.25%, or at
the Company's option, at LIBOR (6.42% at August 2, 1998) plus 0.75%. The Credit
Agreement contains two revolving credit facilities. The Company may borrow up to
$10,000,000 under Facility No. 1, and may borrow up to $12,000,000 under
Facility No. 2. Borrowings under both facilities may be used for general and
other corporate purposes. Facility No. 1 may be used for commercial letters of
credit not to exceed a total of $500,000 and for stand by letters of credit not
to exceed $6,000,000 in the aggregate, which reduce the amount available under
the Facility when incurred. In addition, the Company has the option of
converting outstanding borrowings in increments of not less than $1,000,000,
under Facility No. 2, to a 5-year term loan. Any amounts converted to term debt
under Facility No. 2 will bear interest at a fixed rate equal to the bank's
long-term interest rate in effect at the time of such conversion.
Substantially all of the Company's assets are pledged as collateral
under the Credit Agreement. In addition, the Credit Agreement contains covenants
that include requirements to meet certain financial tests and ratios (including
minimum current ratio, debt service ratio, minimum tangible net worth, maximum
debt ratio and maintenance of profitable annual operations) and restrictions and
limitations on the sale of assets, new borrowings, mergers and purchases of the
Company's stock. The Company was in compliance with these provisions as of
August 2, 1998. As of August 2, 1998, $1,531,000 was outstanding under Facility
No. 2, and no amounts were outstanding under Facility No. 1.
23
<PAGE> 31
The Company's wholly owned subsidiary, Scot, Inc. has a term loan with a
bank, which was renewed in August 1996, secured by certain real property of
Scot. The principal balance outstanding under the renewed loan at August 2,
1998, was $489,500. The loan is being amortized with monthly payments of
approximately $7,800, including interest, adjusted monthly, at 1.9% over LIBOR
(5.72% at August 2, 1998). Any unpaid principal is due on August 1, 2001.
During the nine months ended August 2, 1998, the Company generated cash
from operations of $15,254,000. Capital expenditures, primarily for payments
related to automated manufacturing equipment and production facilities, amounted
to $25,382,000. Payments of contractual debt aggregated $142,000. These net cash
outflows were funded by cash flow from operations and the use of existing cash
on hand. At August 2, 1998, the Company had cash on hand of $150,500 and
additional borrowing capacity under its Credit Agreement of $14,969,000.
At August 2, 1998, the Company had working capital of $23,275,000
compared to working capital of $30,137,000 at October 31, 1997. The decrease of
$6,862,000 was due to a decrease in cash and marketable securities of
$9,015,000, an increase of $781,000 in borrowing under the Credit Agreement, an
increase in accounts payable of $1,617,000, an increase in accrued expenses of
$2,367,000, and an increase in income taxes payable of $2,219,000, partially
offset by an increase in accounts receivable of $2,742,000, an increase in
inventories of $5,496,000, an increase in prepaid expenses of $520,000, and an
increase in deferred income taxes of $100,000. The decrease in cash and
marketable securities, and the increase in bank borrowing, occurred primarily to
make progress payments on new production equipment for lines currently being
built for the Company and to pay for construction costs for the Company's new
facility at Moorpark, California (the "Moorpark facility") (see below). The
increase in accounts receivable was the result of increased net sales during the
nine months ended August 2, 1998. The increase in inventories occurred to
support higher net sales levels this year, especially in the Aerospace Division.
The increase in accounts payable was the result of increased inventory levels.
The increase in accrued expenses was due to increased levels of operations this
year and the increase in income taxes payable was the result of increases in
earnings before income taxes.
In order to improve manufacturing efficiencies and to provide facilities
for growth, the Company purchased in October 1996, approximately 280 acres of
land in the City of Moorpark, located in Ventura County, north of Los Angeles,
where the Company is currently building the Moorpark facility. Total net cost of
the project is estimated at approximately $27,000,000, of which $20,910,000 had
been spent at August 2, 1998 and is included in construction in progress in the
accompanying condensed consolidated balance sheet. The Company anticipates
spending approximately an additional $7,000,000 in fiscal year 1998 and
approximately $4,500,000 in fiscal year 1999 to complete this project. The
Company plans to sell two commercial lots being developed as part of this
project, and the expected proceeds of approximately $5,400,000 from these sales
will be used to reduce the net project cost to approximately $27,000,000. The
Company has committed to complete the building construction, the total cost of
which is estimated to be approximately $18,000,000. The Company believes it has
available adequate cash flow from operations and borrowing capacity to
adequately finance this project. The Company believes additional term financing
is available for this project to the extent required, however there can be no
assurance that such financing will be available when required.
24
<PAGE> 32
The Company anticipates that working capital requirements will increase
in fiscal 1998 as compared to fiscal 1997 to support the investment in
inventories and accounts receivable related to the anticipated increased demand
for initiators manufactured by the Company. The Company believes that it can
meet its expected working capital requirements for the foreseeable future from
cash provided from operations and borrowings under its Credit Agreement. The
Company had commitments to acquire capital equipment at August 2, 1998
aggregating approximately $3,800,000 related primarily to additional production
and other support equipment required for the increased operations of the
Automotive Products Division.
The statements above regarding the land purchase by the Company in
Moorpark, completion of the construction of the Moorpark facility, the amounts
and timing of expenditures, and the proposed sale of two commercial lots, are
forward-looking statements as defined in Section 27A of the Securities Act of
1933, as amended (the "Securities Act"), and Section 21E of the Exchange Act.
Actual results and the timing of those results may vary depending on various
factors including, for example, the ability of the Company to obtain permits and
approvals that do not contain conditions or restrictions that are unduly
restrictive or otherwise unacceptable to the Company; the Company's not
encountering any unforeseen conditions relating to the property that make
completion of the construction more expensive, difficult or time intensive than
is currently expected; the ability of the contractors and subcontractors
retained by the Company to complete the work on the schedule and for the costs
described above; the ability to sell two commercial lots at the expected sales
price; and other factors which may develop during the course of this project. In
addition, the Company's relocation of its operations to the Moorpark facility
may also cause unforeseen and foreseen production disruptions.
The statements above regarding the anticipated increased demand for
initiators, the anticipated increase in working capital requirements and the
Company's expectations regarding its ability to meet such requirements are
forward-looking statements as defined in Section 27A of the Securities Act and
Section 21E of the Exchange Act. Actual results may vary depending on various
factors including, for example, the development and acceptance of technologies
different from those employed by the Company for the initiation of airbag
systems; competition from new or existing companies for the Company's existing
or future customers; a slow-down in the world-wide rate of airbag
implementation; the inability of the Company to negotiate an extension of its
existing Credit Agreement or a replacement facility; the competitive environment
in the automotive and aerospace industries in general; reliance on major
customers, such as TRW and Autoliv; the number of new automobiles sold
(particularly in North America); continued acceptance of airbags as the
principal secondary restraint system incorporated in automobiles; voluntary
incorporation of side and rear airbags and other safety devices by automobile
manufacturers; market acceptance of new products developed by the Company; the
Company's ability to continue increasing the automation of its manufacturing
process in a timely and efficient manner; changes in prevailing interest rates
and the availability of favorable terms of financing to fund the anticipated
growth of the Company's business; inflation; labor disturbances; anticipated
expenditures exceeding amounts currently budgeted by the Company; and the
occurrence of unanticipated expenses.
25
<PAGE> 33
MARKET PRICE AND DIVIDEND INFORMATION
On October 26, 1998, the last trading day before the Board's
approval of Amendment No. 1, the closing price for the Common Stock was $26.88.
The high and low closing prices for the Common Stock for the fourth quarter
(through October 26, 1998) were $36.25 and $25.00, respectively.
See "Market Price and Dividend Information" in the August Proxy
Statement attached hereto as Appendix B for further historical trading and
dividend information.
INDEPENDENT PUBLIC ACCOUNTANTS
Representatives of KPMG Peat Marwick LLP, SDI's independent public
accountants are expected to be present at the Special Meeting, where they will
be available to respond to appropriate questions and have the opportunity to
make a statement if they so desire.
INFORMATION IN THE AUGUST PROXY STATEMENT
For each of the headings below, see the corresponding information in the
August Proxy Statement attached hereto as Appendix B:
Solicitation of Proxies
The Merger -- Appraisal Rights
-- Federal Income Tax Consequences
-- Certain Effects of the Merger
-- The Guaranty Agreement
Information Regarding Special Devices, Incorporated
Information Regarding J.F. Lehman & Company, Inc.
Security Ownership of Beneficial Owners and Management --
Principal Stockholders
Security Ownership of Beneficial Owners and Management --
Ownership by Management.
Appendix A to the August Proxy Statement contains a copy of the August
Merger Agreement approved by the stockholders of SDI at a special meeting held
on September 23, 1998, and to which Amendment No. 1 relates.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
As required by law, SDI files reports, Proxy Statements and other
information with the SEC. These reports, Proxy Statements and other information
contain additional information about SDI. You can inspect and copy these
materials at the public reference facilities maintained by the SEC at Room 1024,
450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the
following Regional Offices of the Commission: 500 West Madison Street, Suite
1400, Chicago, Illinois 60661; and 7 World Trade Center, Suite 1300, New York,
New York 10048. For further information concerning the SEC's public reference
rooms, you may call the SEC at
26
<PAGE> 34
1-800-SEC-0330. Some of this information may also be accessed on the World Wide
Web through the Commission's Internet address at "http://www.sec.gov."
The SEC allows SDI to "incorporate by reference" information into this
Proxy Statement, which means that SDI can disclose important information by
referring you to another document filed separately with the SEC. Information
incorporated by reference is considered part of this Proxy Statement, except to
the extent that the information is superseded by information in this Proxy
Statement. This Proxy Statement incorporates by reference the information
contained in the following documents previously filed by SDI with the SEC:
(a) SDI's Annual Report on Form 10-K for the fiscal year ended October
31, 1997;
(b) SDI's Quarterly Reports on Form 10-Q for the periods ended February
1, 1998, May 3, 1998 and August 2, 1998; and
(c) SDI's Current Report on Form 8-K dated June 19, 1998.
SDI also incorporates by reference the information contained in all
other documents SDI files with the SEC after the date of this Proxy Statement
and before the Special Meeting. The information contained in any such document
will be considered part of this Proxy Statement from the date the document is
filed.
If you are a stockholder of SDI and would like to receive a copy of any
document incorporated by reference into this Proxy Statement (which will not
include any of the exhibits to the document other than those exhibits that are
themselves specifically incorporated by reference into this Proxy Statement),
you should write to Special Devices, Incorporated at 16830 West Placerita Canyon
Road, Newhall, California 91321, Attention: John Vinke, Chief Financial Officer.
In order to ensure timely delivery of the documents you request, you should make
your request by November 3, 1998.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROXY STATEMENT. SDI
HAS NOT AUTHORIZED ANYONE TO GIVE ANY INFORMATION DIFFERENT FROM THE INFORMATION
CONTAINED IN THIS PROXY STATEMENT. THIS PROXY STATEMENT IS DATED NOVEMBER __,
1998. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT IS ACCURATE AS OF ANY LATER DATE, AND THE MAILING OF THIS PROXY
STATEMENT TO STOCKHOLDERS SHALL NOT CREATE ANY IMPLICATION TO THE CONTRARY.
27
<PAGE> 35
OTHER BUSINESS
SDI knows of no other matter to be presented at the Special Meeting.
However, if other matters should properly come before the Special Meeting, it is
the intention of the persons named in the enclosed proxy to vote the proxy with
respect to such matters in accordance with their best judgment.
By Order of the Board of Directors,
/s/ THOMAS F. TREINEN
-----------------------------------
Thomas F. Treinen,
Chairman of the Board of Directors
28
<PAGE> 36
APPENDIX A
AMENDMENT NO. 1
TO THE
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
BETWEEN
SPECIAL DEVICES, INCORPORATED
AND
SDI ACQUISITION CORP.
THIS AMENDMENT NO. 1 to the Agreement and Plan of Merger, dated as of
June 19, 1998 and amended and restated as of August 17, 1998, by and between
Special Devices, Incorporated, a Delaware corporation (the "Company") and SDI
Acquisition Corp., a Delaware corporation ("Acquisition") (the "Merger
Agreement"), is made by and between the Company and Acquisition as of this 27th
day of October, 1998 (this "Amendment").
In consideration of the mutual promises contained herein, and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company and Acquisition hereby agree as follows:
1. Amendments. Notwithstanding anything to the contrary contained in the
Merger Agreement, as of the effective date hereof, the Merger Agreement is
modified and amended as set forth below. All terms used in this Amendment shall
have the same definitions as set forth in the Merger Agreement unless otherwise
indicated herein.
(a) Section 1.5 of the Merger Agreement is hereby replaced in its entirety by
the following:
"Certificate of Incorporation and Bylaws. The Certificate of
Incorporation of the Surviving Corporation shall be amended at the Effective
Time to read in its entirety as set forth in Exhibit A attached hereto until
amended in accordance with applicable law. The Bylaws of Acquisition in effect
at the Effective Time shall be the Bylaws of the Surviving Corporation until
amended in accordance with applicable law."
(b) Section 1.8(a) of the Merger Agreement is hereby replaced in its entirety by
the following:
"(a) At the Effective Time, each share of common stock, par value $.01
per share, of the Company (the "Company Common Stock") issued and outstanding
immediately prior to the Effective Time (individually a "Share" and
collectively, the "Shares") (other than (i) Shares held by the Company or any
Subsidiaries (as defined in Section 2.1(c)) of the Company, (ii) Shares held by
Acquisition, (iii) Shares held by J.F. Lehman Equity Investors I, L.P., (iv) any
Shares to remain outstanding pursuant to Section 1.8(d), and (v) Company
Dissenting Shares (as defined in Section 1.9(a))) (collectively, the "Excluded
Shares") shall, by virtue of the Merger and without any action on the part of
Acquisition, the Company or the holder thereof, be converted into and shall
become the right to receive a cash payment per Share, without interest, equal to
$34.00 (the "Per Share Amount") upon the surrender of the certificate
representing such Share."
(c) Section 1.8(d) of the Merger Agreement is hereby replaced in its entirety by
the following:
<PAGE> 37
"(d) Shares in the amount and held by the Persons set forth in Exhibit B
shall not be converted as provided in Section 1.8(a), but shall remain
outstanding and become an equal number of shares of Surviving Corporation Common
Stock."
(d) Section 5.1(a) of the Merger Agreement is hereby replaced in its entirety by
the following:
"(a) this Agreement, as amended by the Amendment dated October 27, 1998,
shall have been approved and adopted by the requisite vote of the stockholders
of the Company;"
(e) Clause (ii) of Section 6.1(b) of the Merger Agreement is hereby replaced in
its entirety by the following:
"(ii) the Merger has not been consummated by the second business day
after approval of the Amendment to this Agreement dated October 27, 1998 (unless
otherwise extended by the parties); provided that no party may terminate this
Agreement pursuant to this clause (ii) if such party's failure to fulfill any of
its obligations under this Agreement shall have been the reason that the
Effective Time shall not have occurred on or before said date;"
(f) Exhibit A to the Merger Agreement is hereby replaced in its entirety by
Exhibit A to this Amendment.
(g) Exhibit B to this Amendment is hereby added in its entirety to the Merger
Agreement as Exhibit B.
2. No Other Amendments. Except as provided above, the Merger Agreement
shall remain in full force and effect.
3. Effective Time and Effect of Amendment. Pursuant to Section 6.5 of
the Merger Agreement, this Amendment requires the approval of the stockholders
of the Company. If this Amendment has not been approved by the stockholders of
the Company by February 19, 1999 (unless otherwise extended by the parties),
this Amendment shall become void and there shall be no liability or obligation
on the part of any party hereto or its affiliates, directors, officers or
stockholders with respect to this Amendment. Prior to such approval, this
Amendment shall have no effect on the Merger Agreement. The execution of this
Amendment is not a waiver by the Company or Acquisition of any of the terms or
provisions of the Merger Agreement.
4. Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same document.
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment
to be duly executed on its behalf as of the day and year first above written.
SPECIAL DEVICES, INCORPORATED
By: /s/ Thomas F. Treinen
--------------------------------
Name: Thomas F. Treinen
Title: President and CEO
2
<PAGE> 38
SDI ACQUISITION CORP.
By: /s/ Donald Glickman
--------------------------------
Name: Donald Glickman
Title: Vice President
3
<PAGE> 39
EXHIBIT A
---------
CERTIFICATE OF INCORPORATION
OF
SPECIAL DEVICES, INCORPORATED
1. Name. The name of the corporation is Special Devices, Incorporated
(the "Corporation").
2. Address; Registered Office and Agent. The address of the
Corporation's registered office is 1013 Centre Road, City of Wilmington, County
of New Castle, State of Delaware; and its registered agent at such address is
Corporation Service Company.
3. Purposes. The purpose of the Corporation is to engage in any lawful
act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
4. Number of Shares. The total number of shares of stock that the
Corporation shall have authority to issue is 22,000,000 consisting of two
classes of shares designated, respectively, "Common Stock" and "Preferred
Stock," and referred to herein either as Common Stock or Common Shares, and
Preferred Stock or Preferred Shares, respectively. The number of shares of
Common Stock shall be 20,000,000 and shall have a par value of $.01 per share,
and the number of shares of Preferred Stock shall be 2,000,000 and shall have a
par value of $.01 per share.
The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is authorized to fix or alter the number of
shares of any series of Preferred Stock, the designation of any such series, the
voting rights, full or limited, or any series of Preferred Stock and the other
rights, preferences, privileges and restrictions granted to or imposed upon any
wholly unissued series of Preferred Stock and, within the limits and
restrictions stated in any resolution or resolutions of the Board of Directors
originally fixing the number of shares constituting any series, to increase or
decrease (but not below the number of shares of such series then outstanding)
the number of shares of any such series subsequent to the issuance of shares of
that series.
5. Name and Mailing Address of Incorporator. The name and mailing
address of the incorporator are: Kasey R. Hume, 400 S. Hope Street, 15th Floor,
Los Angeles, California 90071.
6. Election of Directors. Members of the Board of Directors of the
Corporation (the "Board") may be elected either by written ballot or by voice
vote.
7. Limitation of Liability. No director of the Corporation shall be
personally liable to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, provided that this provision shall
not eliminate or limit the liability of a director (a) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (b) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of
<PAGE> 40
law, (c) under section 174 of the General Corporation Law or (d) for any
transaction from which the director derived any improper personal benefits.
Any repeal or modification of the foregoing provision shall not
adversely affect any right or protection of a director of the Corporation
existing at the time of such repeal or modification.
8. Indemnification.
9. To the extent not prohibited by law, the Corporation shall indemnify
any person who is or was made, or threatened to be made, a party to any
threatened, pending or completed action, suit or proceeding (a "Proceeding"),
whether civil, criminal, administrative or investigative, including, without
limitation, an action by or in the right of the Corporation to procure a
judgment in its favor, by reason of the fact that such person, or a person of
whom such person is the legal representative, is or was a director or officer of
the Corporation, or, at the request of the Corporation, is or was serving as a
director or officer of any other corporation or in a capacity with comparable
authority or responsibilities for any partnership, joint venture, trust,
employee benefit plan or other enterprise (an "Other Entity"), against
judgments, fines, penalties, excise taxes, amounts paid in settlement and costs,
charges and expenses (including attorneys' fees, disbursements and other
charges). Persons who are not directors or officers of the Corporation (or
otherwise entitled to indemnification pursuant to the preceding sentence) may be
similarly indemnified in respect of service to the Corporation or to an Other
Entity at the request of the Corporation to the extent the Board at any time
specifies that such persons are entitled to the benefits of this Section 8.
10. The Corporation shall, from time to time, reimburse or advance to
any director or officer or other person entitled to indemnification hereunder
the funds necessary for payment of expenses, including attorneys' fees and
disbursements, incurred in connection with any Proceeding, in advance of the
final disposition of such Proceeding; provided, however, that, if required by
the General Corporation Law, such expenses incurred by or on behalf of any
director or officer or other person may be paid in advance of the final
disposition of a Proceeding only upon receipt by the Corporation of an
undertaking, by or on behalf of such director or officer (or other person
indemnified hereunder), to repay any such amount so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right of appeal that such director, officer or other person is not
entitled to be indemnified for such expenses.
11. The rights to indemnification and reimbursement or advancement of
expenses provided by, or granted pursuant to, this Section 8 shall not be deemed
exclusive of any other rights to which a person seeking indemnification or
reimbursement or advancement of expenses may have or hereafter be entitled under
any statute, this Certificate of Incorporation, the By-laws of the Corporation
(the "By-laws"), any agreement, any vote of stockholders or disinterested
directors or otherwise, both as to action in his or her official capacity and as
to action in another capacity while holding such office.
12. The rights to indemnification and reimbursement or advancement of
expenses provided by, or granted pursuant to, this Section 8 shall continue as
to a person who has ceased
5
<PAGE> 41
to be a director or officer (or other person indemnified hereunder) and shall
inure to the benefit of the executors, administrators, legatees and distributees
of such person.
13. The Corporation shall have power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of an Other Entity, against any liability
asserted against such person and incurred by such person in any such capacity,
or arising out of such person's status as such, whether or not the Corporation
would have the power to indemnify such person against such liability under the
provisions of this Section 8, the By-laws or under section 145 of the General
Corporation Law or any other provision of law.
14. The provisions of this Section 8 shall be a contract between the
Corporation, on the one hand, and each director and officer who serves in such
capacity at any time while this Section 8 is in effect and any other person
entitled to indemnification hereunder, on the other hand, pursuant to which the
Corporation and each such director, officer, or other person intend to be, and
shall be, legally bound. No repeal or modification of this Section 8 shall
affect any rights or obligations with respect to any state of facts then or
theretofore existing or thereafter arising or any proceeding theretofore or
thereafter brought or threatened based in whole or in part upon any such state
of facts.
15. The rights to indemnification and reimbursement or advancement of
expenses provided by, or granted pursuant to, this Section 8 shall be
enforceable by any person entitled to such indemnification or reimbursement or
advancement of expenses in any court of competent jurisdiction. The burden of
proving that such indemnification or reimbursement or advancement of expenses is
not appropriate shall be on the Corporation. Neither the failure of the
Corporation (including its Board, its independent legal counsel and its
stockholders) to have made a determination prior to the commencement of such
action that such indemnification or reimbursement or advancement of expenses is
proper in the circumstances nor an actual determination by the Corporation
(including its Board, its independent legal counsel and its stockholders) that
such person is not entitled to such indemnification or reimbursement or
advancement of expenses shall constitute a defense to the action or create a
presumption that such person is not so entitled. Such a person shall also be
indemnified for any expenses incurred in connection with successfully
establishing his or her right to such indemnification or reimbursement or
advancement of expenses, in whole or in part, in any such proceeding.
16. Any director or officer of the Corporation serving in any capacity
of (a) another corporation of which a majority of the shares entitled to vote in
the election of its directors is held, directly or indirectly, by the
Corporation or (b) any employee benefit plan of the Corporation or any
corporation referred to in clause (a) shall be deemed to be doing so at the
request of the Corporation.
17. Any person entitled to be indemnified or to reimbursement or
advancement of expenses as a matter of right pursuant to this Section 8 may
elect to have the right to indemnification or reimbursement or advancement of
expenses interpreted on the basis of the applicable law in effect at the time of
the occurrence of the event or events giving rise to the
6
<PAGE> 42
applicable Proceeding, to the extent permitted by law, or on the basis of the
applicable law in effect at the time such indemnification or reimbursement or
advancement of expenses is sought. Such election shall be made, by a notice in
writing to the Corporation, at the time indemnification or reimbursement or
advancement of expenses is sought; provided, however, that if no such notice is
given, the right to indemnification or reimbursement or advancement of expenses
shall be determined by the law in effect at the time indemnification or
reimbursement or advancement of expenses is sought.
18. Adoption, Amendment and/or Repeal of By-Laws. The Board may from
time to time adopt, amend or repeal the By-laws of the Corporation; provided,
however, that any By-laws adopted or amended by the Board may be amended or
repealed, and any By-laws may be adopted, by the stockholders of the Corporation
by vote of a majority of the holders of shares of stock of the Corporation
entitled to vote in the election of directors of the Corporation.
7
<PAGE> 43
EXHIBIT B
---------
<TABLE>
<S> <C>
Walter Neubauer 1,096,522 shares
Thomas F. Treinen 433,897 shares
</TABLE>
<PAGE> 44
APPENDIX B
SPECIAL DEVICES, INCORPORATED
16830 West Placerita Canyon Road
Newhall, California 91321
(805) 259-0753
Dear Stockholders:
You are cordially invited to attend a Special Meeting of Stockholders
of Special Devices, Incorporated ("SDI") to be held at The Valencia Hilton
Garden Inn, 27710 The Old Road, Valencia, California 91355, on Wednesday,
September 23, 1998 at 10:00 a.m., local time.
At this meeting, you will be asked to vote on the adoption of a Merger
Agreement, dated as of June 19, 1998, providing for the acquisition of SDI by
SDI Acquisition Corp., a newly-formed company organized by J.F. Lehman &
Company, Inc. In the acquisition, you will receive $37.00 in cash for each share
of SDI's Common Stock.
A merger with SDI Acquisition Corp. has been unanimously approved by
your Board of Directors, acting on the unanimous recommendation of an
independent Special Committee of the Board and based on an opinion by its
financial advisor, Donaldson, Lufkin & Jenrette Securities Corporation.
The Special Committee and the full Board of Directors have concluded
that the proposed acquisition is in the best interests of SDI's stockholders
and, therefore, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN
FAVOR OF ADOPTING THE MERGER AGREEMENT DATED AS OF JUNE 19, 1998.
The attached notice of meeting and proxy statement explain the proposed
acquisition and provide specific information concerning the special meeting.
Please read these materials carefully.
Whether or not you plan to attend the special meeting, we urge you to
complete, sign and promptly return the enclosed proxy card to assure that your
shares will be voted at the meeting. The acquisition is an important step for
SDI and its stockholders. THE ACQUISITION CANNOT BE COMPLETED UNLESS SDI'S
STOCKHOLDERS ADOPT THE MERGER AGREEMENT DATED AS OF JUNE 19, 1998.
On behalf of the Board of Directors, we thank you for your support and
urge you to vote FOR adoption of the Merger Agreement.
Sincerely,
Thomas F. Treinen
Chairman of the Board of Directors
<PAGE> 45
SPECIAL DEVICES, INCORPORATED
16830 West Placerita Canyon Road
Newhall, California 91321
(805) 259-0753
To the Stockholders:
Notice is hereby given that a Special Meeting of Stockholders of
Special Devices, Incorporated ("SDI") will be held at The Valencia Hilton Garden
Inn, 27710 The Old Road, Valencia, California 91355, on Wednesday, September 23,
1998 at 10:00 a.m., local time, for the following purposes:
1. To consider and act upon a proposal to adopt a Merger Agreement
between SDI and SDI Acquisition Corp. ("Acquisition"), a newly-formed
company organized by J.F. Lehman & Company, Inc., pursuant to which
Acquisition will be merged with and into SDI (the "Merger"). If the
Merger Agreement is adopted by stockholders and the other conditions to
the Merger are satisfied or waived, each stockholder of SDI will become
entitled to receive $37.00 in cash for each outstanding share of SDI's
Common Stock owned immediately prior to the effective time of the
Merger (other than certain stockholders who will continue to hold
795,125 shares of SDI and will receive $37.00 per share for the balance
of their shares and other than stockholders who are entitled to and
have perfected their dissenters' rights). A copy of the Merger
Agreement is attached as Appendix A to and is described in the
accompanying proxy statement.
2. To consider and act upon such other matters as may properly come
before the Special Meeting or any adjournment or adjournments thereof.
The Board of Directors determined that only holders of SDI's Common
Stock of record at the close of business on August 10, 1998, will be entitled to
notice of, and to vote at, the Special Meeting or any adjournment or
adjournments thereof.
By Order of the Board of Directors,
Thomas F. Treinen
Chairman of the Board of Directors
i
<PAGE> 46
SPECIAL DEVICES, INCORPORATED
16830 West Placerita Canyon Road
Newhall, California 91321
(805) 259-0753
PROXY STATEMENT
INTRODUCTION
This proxy statement is being furnished to the stockholders of Special
Devices, Incorporated, a Delaware corporation ("SDI" or the "Company"), in
connection with the solicitation by its Board of Directors (the "Board") of
proxies to be used at a Special Meeting of Stockholders (the "Special Meeting")
to be held on September 23, 1998, at 10:00 a.m. (local time) at The Valencia
Hilton Garden Inn, 27710 The Old Road, Valencia, California 91355, and at any
adjournment or adjournments thereof. This proxy statement, the Notice of Special
Meeting of Stockholders and the enclosed form of Proxy are first being mailed to
stockholders of SDI on or about August 17, 1998.
The Special Meeting of Stockholders has been called to consider and
vote on a proposal to adopt an Agreement and Plan of Merger (the "Merger
Agreement") (attached to this proxy statement as Appendix A) pursuant to which
SDI Acquisition Corp. ("Acquisition"), a newly-formed Delaware corporation
organized by J.F. Lehman & Company, Inc., a Delaware corporation ("JFLC"), will
be merged with and into SDI (the "Merger") and each outstanding share of the
common stock, par value $0.01 per share, of SDI (the "Common Stock") will be
canceled and converted automatically into the right to receive $37.00 in cash
(the "Merger Consideration"), payable to the holder thereof, without interest,
other than certain of the shares (the "Continuing Shares") held by Walter
Neubauer and Thomas F. Treinen (the "Continuing Stockholders") which shall
remain outstanding (currently representing approximately 10.2% of the
outstanding Common Stock) and other than shares held by any stockholders who are
entitled to and who have perfected their dissenters' rights.
Consummating the Merger is subject to a number of conditions.
Accordingly even if stockholders adopt the Merger Agreement, there can be no
assurance that the Merger will be consummated.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR
MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
ii
<PAGE> 47
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE NO.
--------
<S> <C>
SUMMARY...................................................................................... 1
Date, Time and Place of the Special Meeting............................................ 1
Purpose of the Special Meeting......................................................... 1
Record Date and Quorum................................................................. 1
Vote Required.......................................................................... 1
Parties to the Merger Transaction...................................................... 2
The Proposal........................................................................... 3
Effective Date of the Merger; Payment for Shares....................................... 3
Background of the Merger Transaction................................................... 3
The Special Committee's and Board's Recommendation..................................... 4
Opinions of Investment Bankers......................................................... 5
Conflicts of Interest.................................................................. 5
Certain Effects of the Merger.......................................................... 5
Conditions to the Merger............................................................... 6
Termination of the Merger Agreement.................................................... 6
Termination Fee and Payment of Expenses................................................ 7
The Guaranty Agreement................................................................. 7
Federal Income Tax Consequences........................................................ 8
Accounting Treatment................................................................... 8
Financing of the Merger................................................................ 8
Market Prices for Common Stock and Dividends........................................... 9
Rights of Dissenting Stockholders...................................................... 9
Summary of Selected Consolidated Financial Data........................................ 10
TIME, PLACE AND PURPOSE OF THE SPECIAL MEETING............................................... 12
RECORD DATE AND VOTING OF COMMON STOCK....................................................... 12
SOLICITATION OF PROXIES...................................................................... 13
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE.............................................. 13
THE MERGER................................................................................... 14
Background of the Merger............................................................... 14
Recommendation of the Special Committee and the Board of Directors..................... 17
Opinion of Financial Advisor to the Company............................................ 18
Interests of Certain Persons in the Merger............................................. 23
The Merger Agreement................................................................... 24
Appraisal Rights....................................................................... 33
Federal Income Tax Consequences........................................................ 35
Certain Effects of the Merger.......................................................... 36
The Guaranty Agreement................................................................. 37
Litigation............................................................................. 37
INFORMATION REGARDING SPECIAL DEVICES, INCORPORATED.......................................... 37
INFORMATION REGARDING J.F. LEHMAN & COMPANY, INC............................................. 38
SELECTED FINANCIAL DATA FOR SPECIAL DEVICES
INCORPORATED.............................................................................. 40
iii
</TABLE>
<PAGE> 48
<TABLE>
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................................................... 41
MARKET PRICE AND DIVIDEND INFORMATION........................................................ 48
SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND
MANAGEMENT................................................................................ 49
Principal Stockholders................................................................. 49
Ownership by Management................................................................ 50
INDEPENDENT PUBLIC ACCOUNTANTS............................................................... 51
WHERE YOU CAN FIND ADDITIONAL INFORMATION.................................................... 51
OTHER BUSINESS............................................................................... 53
</TABLE>
APPENDICES:
Appendix A--Agreement and Plan of Merger
Appendix B--Opinion of Donaldson, Lufkin & Jenrette
Appendix C--Guaranty Agreement
Appendix D--Appraisal Rights Statute
iv
<PAGE> 49
SUMMARY
The following is a summary of certain information contained elsewhere
in this proxy statement. Reference is made to, and this Summary is qualified in
its entirely by, the more detailed information contained elsewhere in this proxy
statement. Stockholders are urged to read this proxy statement and its
appendices in their entirety before voting.
DATE, TIME AND PLACE OF THE SPECIAL MEETING
A Special Meeting of Stockholders (the "Special Meeting") of Special
Devices, Incorporated (the "Company" or "SDI") will be held on September 23,
1998, at 10:00 a.m., local time, at The Valencia Hilton Garden Inn, 27710 The
Old Road, Valencia, California 91355.
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, the stockholders will consider and vote on a
proposal to adopt an Agreement and Plan of Merger (the "Merger Agreement")
(attached to this proxy statement as Appendix A) pursuant to which SDI
Acquisition Corp. ("Acquisition"), a newly-formed Delaware corporation organized
by J.F. Lehman & Company, Inc., a Delaware corporation ("JFLC"), will be merged
with and into SDI (the "Merger") and each outstanding share of Common Stock will
be converted automatically into the right to receive $37.00 in cash payable to
the holders thereof, without interest (the "Merger Consideration"), other than
certain of the shares (the "Continuing Shares") held by Walter Neubauer (728,875
shares) and Thomas F. Treinen (66,250 shares) (the "Continuing Stockholders")
which shall remain outstanding and other than shares held by stockholders who
are entitled to and who have perfected their dissenters' rights. See "The
Merger."
RECORD DATE AND QUORUM
The Board of Directors of the Company (the "Board") has fixed the close
of business on August 10, 1998 as the record date (the "Record Date") for the
determination of stockholders entitled to notice of, and to vote at, the Special
Meeting and any adjournment or adjournments thereof. Each holder of record of
Common Stock at the close of business on the Record Date is entitled to one vote
for each share then held on each matter submitted to a vote of stockholders. At
the Record Date, there were 7,809,801 shares of Common Stock outstanding. The
holders of a majority of the outstanding shares entitled to vote at the Special
Meeting must be present in person or represented by proxy to constitute a quorum
for the transaction of business. See "Record Date and Voting of Common Stock."
VOTE REQUIRED
The affirmative vote of the holders of a majority of the outstanding
shares of Common Stock entitled to vote at the Special Meeting pursuant to
Delaware law is required to adopt the Merger Agreement. Thus, a failure to vote
or a vote to abstain will have the same legal effect as a vote cast against
adoption. In addition, brokers who hold shares of Common Stock as nominees will
not have discretionary authority to vote such shares in the absence of
instructions from the beneficial owners. See "Record Date and Voting of Common
Stock."
1
<PAGE> 50
PARTIES TO THE MERGER TRANSACTION
The Company. SDI is a leader in the design and manufacture of highly
reliable pyrotechnic devices used by the automotive industry as initiators in
airbag systems and the aerospace industry, primarily in tactical missile
systems, propellant and explosive actuated devices and military aircraft crew
ejection systems. SDI operates through two separate divisions, Automotive
Products and Aerospace.
SDI formed the Automotive Products Division as a separate division in
fiscal 1989 to concentrate on the Company's strategic decision to apply its
expertise in pyrotechnic products beyond the defense-related markets
traditionally serviced by its Aerospace Division. The Automotive Products
Division's principal products are initiators, the pyrotechnic output of which is
used to ignite the inflation system in automotive airbag systems.
The Automotive Products Division contributed 71%, 77% and 80% of SDI's
net sales during the fiscal years ended October 31, 1995, 1996 and 1997,
respectively. The magnitude of this percentage is due primarily to master
purchase agreements with TRW, Inc. and Autoliv ASP Incorporated (formerly Morton
International). SDI's initiators are sold to four domestic manufacturers of
airbag systems or inflators (TRW, Autoliv, Atlantic Research Corporation and
Breed Technologies), and are also sold on a more limited basis to two foreign
manufacturers, and they are incorporated into driver and passenger-side airbag
systems used in a wide variety of automobile models manufactured by
substantially all of the automobile manufacturers that sell automobiles, light
trucks and vans in the United States, including the three major domestic
manufacturers (Chrysler, Ford and GM), as well as BMW, Fiat, Kia, Mazda,
Mitsubishi, Nissan, Toyota and Volkswagen. In addition, one foreign buyer of the
Company's initiators uses them for application in seat belt pre-tensioners.
SDI's Aerospace Division has been designing and manufacturing products
for the aerospace industry for over 30 years. Its customers are primarily the
United States government and its prime contractors. The Aerospace Division
contributed 29%, 23% and 20% of the Company's net sales during the fiscal years
ended October 31, 1995, 1996 and 1997, respectively. The decline in percentage
from 1995 to 1996 was the result of (i) higher sales levels achieved by the
Automotive Products Division and (ii) high sales levels of products used in a
certain missile program in 1995 that did not repeat in 1996. The decline in
percentage from 1996 to 1997 was due to sales by the Automotive Products
Division increasing at a higher rate than sales by the Aerospace Division.
J.F. Lehman & Company, Inc. JFLC was established by John F. Lehman,
Donald Glickman and George Sawyer (the "Managing Principals") to acquire niche
manufacturing and service companies with significant engineering and technical
content. JFLC's portfolio companies typically serve those industries in which
the Managing Principals have significant operating and investing experience,
including the aviation, space, automotive, semiconductor equipment and marine
industries.
The Managing Principals are the managing members of JFL Investors LLC,
the general partner of J.F. Lehman Equity Investors I, L.P. ("JFLEI"), a private
equity investment fund formed in 1997. JFLC is the manager of JFLEI.
2
<PAGE> 51
JFLC through JFLEI has sponsored two transactions over the past
eighteen months. In August 1997, JFLC led the recapitalization of Burke
Industries, Inc., a leading manufacturer of engineered elastometric products for
the aerospace, heavy-duty truck and commercial building markets. In February
1998, JFLC recapitalized Elgar Holdings, Inc. which, through its subsidiary,
Elgar Electronics Corporation, is a leader in the design and manufacture of
programmable power equipment and systems to test semiconductor test equipment,
satellite ground testing systems, weapons systems, avionics, communication
systems, medical equipment and consumer electronics.
Prior to the formation of JFLEI, JFLC sponsored both the 1993
acquisition of Sperry Marine, Inc., a recognized world leader in the design and
manufacture of advanced electronic maritime instruments and sensors, and the
1992 acquisition of Astra Holdings Corporation, a leading manufacturer of
electronic and electromechanical devices and subsystems for military and
commercial uses, including various pyrotechnic applications.
THE PROPOSAL
The Merger Agreement provides that, subject to satisfaction of certain
conditions, Acquisition will be merged into SDI, and that following the Merger,
the separate existence of Acquisition will cease and SDI will continue as the
surviving corporation (the "Surviving Corporation"). At the Effective Date (as
defined below) of the Merger and subject to the conditions and procedures set
forth in the Merger Agreement, each share of issued and outstanding Common Stock
(other than the Continuing Shares and shares as to which statutory dissenters'
rights are properly perfected and not withdrawn) will, by virtue of the Merger,
be converted into the right to receive $37.00 in cash, without interest. See
"The Merger."
EFFECTIVE DATE OF THE MERGER; PAYMENT FOR SHARES
The Merger will become effective (the "Effective Date") at the time and
date when a copy of a certificate of merger is filed with the Secretary of State
of the State of Delaware pursuant to the Delaware General Corporation Law (the
"DGCL"). The time of such filing is currently expected to occur as soon as
practicable after the Special Meeting, subject to approval of the principal
terms of the Merger Agreement at the Special Meeting and satisfaction or waiver
of the terms and conditions of the Merger Agreement. Detailed instructions with
regard to the surrender of certificates, together with a letter of transmittal,
will be forwarded to stockholders by U.S. Trust Company of New York (the
"Payment Agent") promptly following the Effective Date. Stockholders should not
submit their certificates to the Payment Agent until they have received such
materials. Payment for shares will be made to stockholders as promptly as
practical following receipt by the Payment Agent of their certificates and other
required documents. No interest will be paid or accrued on the cash payable upon
the surrender of certificates. See "The Merger Agreement--Payment for Shares."
STOCKHOLDERS SHOULD NOT SEND ANY SHARE CERTIFICATES AT THIS TIME.
BACKGROUND OF THE MERGER TRANSACTION
The Board and management have, from time to time, considered strategic
alternatives for SDI, including acquisitions within its business segments,
diversification of its business into
3
<PAGE> 52
strategically complementary areas and other courses of action. In January 1998,
SDI engaged Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") to serve
as its financial advisor to explore strategic alternatives available to SDI,
including the possible sale of SDI. Following the preparation and distribution
of an Offering Memorandum, and after reviewing the preliminary indications of
interest, seven parties were invited to present formal proposals.
On June 5, 1998, the Board met to consider two formal proposals,
including one from JFLC. While each of the proposals provided for cash to the
public stockholders and were very close in terms of price, each one provided for
a different level of participation in the continuing ownership of SDI by the
Continuing Stockholders. Neither proposal provided a viable alternative for a
continuing public market for SDI's Common Stock. The Board determined that
although the JFLC proposal included a slightly lower purchase price per share as
compared to the other proposal, the JFLC proposal was preferable because it
appeared more likely to be successful given JFLC's transaction structure. The
Board unanimously recommended that DLJ and Gibson, Dunn & Crutcher be authorized
and directed to negotiate with JFLC to increase its proposed offer price and to
prepare a definitive agreement. Over the weekend of June 6, DLJ contacted both
parties to negotiate the terms of their offers, and JFLC increased its offer to
$37.00 per share (which was equal to the other proposal).
On June 18, 1998, the Board held a special meeting to consider the
proposed Merger Agreement and the Guaranty Agreement. At this meeting, DLJ
discussed the financial aspects of the proposed transaction and delivered its
oral opinion that the consideration to be received by SDI stockholders other
than the Continuing Stockholders pursuant to the Merger Agreement is fair to
such stockholders from a financial point of view as of such date. Thereafter,
the Board unanimously approved the Merger Agreement and the Guaranty Agreement
subject to certain changes and the resolution of certain remaining issues.
Following this meeting, representatives of SDI negotiated the remaining issues
with representatives of JFLC, and on June 19, 1998, the Merger Agreement and the
Guaranty Agreement were signed.
For a more complete discussion of the background, see "Background of
the Merger Transaction."
THE SPECIAL COMMITTEE'S AND BOARD'S RECOMMENDATION
The Board unanimously determined that the proposed transaction is fair
to, and in the best interest of, SDI's stockholders and recommends that the
stockholders vote to adopt the principal terms of the Merger Agreement. In
reaching these conclusions, the Special Committee and the Board were favorably
influenced by numerous factors, including, among others the analysis presented
by DLJ, the extensive solicitation process conducted by DLJ in seeking a buyer
for SDI, and the fact that the cash merger price of $37.00 per share represented
a premium of 36.4% over the price of SDI's Common Stock on the date of the
announcement of the engagement of DLJ and 6.1% above the price of SDI's Common
Stock on the day before the announcement of the merger.
For a more complete discussion of the factors considered by the Board,
see "The Special Committee's and the Board's Recommendation."
4
<PAGE> 53
OPINIONS OF INVESTMENT BANKERS
SDI retained DLJ to act as its financial advisor to review any proposed
business combination and render its opinion to the Board. DLJ provided an
opinion dated June 19, 1998 to the Board that, as of that date, and subject to
the assumptions, limitations and qualifications set forth in such opinion, the
Merger Consideration to be received by the holders of Common Stock other than
the Continuing Stockholders pursuant to the Merger Agreement is fair to such
stockholders, from a financial point of view. The full text of the written
opinion of DLJ, which sets forth a description of assumptions made, matters
considered and limitations on the review undertaken by DLJ, is attached as
Appendix B to this proxy statement. Stockholders are urged to read such opinion
carefully in its entirety. See "Special Factors--Opinion of DLJ."
CONFLICTS OF INTEREST
In considering the recommendation of the Board with respect to the
Merger, stockholders should be aware that certain officers and directors of SDI
have interests in connection with the Merger which may present them with actual
or potential conflicts of interest. These interests include those described
below. See "The Merger--Interests of Certain Persons in the Merger."
Change of Control Stay Bonuses. Upon closing of the Merger, two
executive officers of SDI, John Vinke and Thomas J. Treinen, will receive lump
sum payments of $100,000 and $20,000 respectively, assuming that they are still
employed by SDI at that time.
Continuing Stockholders. Certain of the shares of Common Stock held by
Walter Neubauer (728,875 shares) and Thomas F. Treinen (66,250 shares) shall not
be converted in the Merger but shall remain outstanding as shares of common
stock of the Surviving Corporation. Immediately prior to the Merger, Walter
Neubauer will sell 728,875 shares for $37.00 per share to JFLEI, an affiliate of
JFLC, which shares shall be canceled in the Merger. The Continuing Stockholders
will continue to have an equity interest in the Surviving Corporation that will
not be available to other stockholders. Thomas J. Treinen is President and Chief
Executive Officer of SDI. Walter Neubauer is neither an officer nor a director
nor an affiliate (as such term is defined in the Exchange Act) of SDI; he did
not participate on behalf of SDI in the negotiations relating to the Merger.
Certain Stock Options. Stock options currently held by certain
employees (John M. Cuthbert - 50,000 shares; Jack B. Watson - 21,325 shares;
Robert S. Ritchie - 7,500 shares; Thomas J. Treinen - 7,500 shares; John Vinke -
7,500 shares; Mary Lou Graham - 4,000 shares; and Samuel Levin - 3,750 shares)
will continue in the Surviving Corporation and vest and be exercisable in
accordance with the terms of the stock option agreements currently in effect
with respect to such options. Therefore, these employees will continue to have
an equity interest in the Surviving Corporation which will not be available to
other stockholders.
CERTAIN EFFECTS OF THE MERGER
As a result of the Merger, the entire equity interest in SDI will be
owned by Acquisition and the Continuing Stockholders. Stockholders other than
the Continuing Stockholders will no longer have any interest in, and will not be
stockholders of, SDI, and therefore will not
5
<PAGE> 54
participate in its future earnings and growth. Instead, each such holder of
Common Stock will have the right to receive $37.00 in cash, without interest,
for each share held (other than shares in respect of which dissenters' rights
have been perfected). Although an equity investment in SDI following the Merger
involves substantial risk resulting from the limited liquidity of any such
investment and the high debt-to-equity ratio and consequent substantial fixed
charges that will apply to SDI after the Merger, if SDI's projections are
realized, the value of such an equity investment would be considerably greater
than the original cost thereof. Further, even if the projections are not met,
the investors in SDI may earn a substantial return on their investment. In
addition, SDI's Common Stock will no longer be traded on the Nasdaq National
Market, price quotations will no longer be available and the registration of
SDI's Common Stock under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), will be terminated. See "Certain Effects of the Merger."
CONDITIONS TO THE MERGER
The obligations of SDI and Acquisition to complete the Merger are
subject to a number of conditions. If these conditions are not satisfied or
waived, the Merger will not be completed. The most important of these conditions
are (i) obtaining the approval of SDI's stockholders; (ii) no order being
entered in any action or proceeding or other legal restraint or prohibition that
prevents the consummation of the Merger; (iii) the expiration of any applicable
waiting period applicable to the Merger; (iv) the accuracy in all material
respects of the representations and warranties of SDI and Acquisition; and (v)
the performance in all material respects by SDI and Acquisition of all
obligations and covenants required to be performed or complied with under the
Merger Agreement. See "The Merger Agreement -- Conditions to the Merger."
TERMINATION OF THE MERGER AGREEMENT
Either SDI or Acquisition may terminate the Merger Agreement if (i)
they mutually consent in writing; (ii) a final order shall have been issued
prohibiting the Merger; (iii) the Merger has not been consummated by October 31,
1998 (unless otherwise extended).
Acquisition may terminate the Merger Agreement if: (i) The Board
withdraws its recommendation of the Merger or shall have recommended an
acquisition by another party; (ii) an acquisition by another party occurs; (iii)
SDI shall have breached any of its representations or warranties set forth in
the Merger Agreement or any representation or warranty of SDI shall have become
untrue; (iv) SDI shall have breached any of its covenants or agreements set
forth in the Merger Agreement ; or (v) Acquisition shall have discovered that
any information supplied to it by SDI contained any untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements not misleading at the time such information was provided to
Acquisition.
SDI may terminate the Merger Agreement if: (i) Acquisition shall have
breached any of its representations or warranties set forth in the Merger
Agreement or any representation or warranty of Acquisition shall have become
untrue; (ii) Acquisition shall have breached any of its covenants or agreements
set forth in the Merger Agreement; (iii) the Board determines that it must do so
in the exercise of its fiduciary duties; or (iv) SDI's stockholders shall have
failed to adopt the Merger Agreement.
6
<PAGE> 55
For a more complete discussion of these termination provisions, see
"The Merger Agreement -- Termination of the Merger Agreement."
TERMINATION FEE AND PAYMENT OF EXPENSES
SDI will be required to pay $6,000,000, as liquidated damages, to
Acquisition in the event that SDI is acquired by another party within twelve
months of a termination of the Merger Agreement for any of the following
reasons: (i) because the Board determines that it must terminate the Merger
Agreement pursuant to the exercise of its fiduciary duties; (ii) because the
Board withdraws its recommendation of the Merger or shall have recommended an
acquisition of SDI by another party; (iii) because SDI shall have breached any
of its covenants or agreements set forth in the Merger Agreement; or (iv)
Acquisition shall have discovered that any information supplied to it by SDI
contained any untrue statement of a material fact or omitted to state a material
fact necessary to make the statements not misleading at the time such
information was provided to Acquisition.
In addition, SDI will be required to pay Acquisition $6,000,000, as
liquidated damages, in the event that the Merger Agreement is terminated because
SDI's stockholders fail to adopt the Merger and SDI is acquired by another party
within six months of such termination.
In the event that the Merger Agreement is terminated for any of the
reasons set forth immediately above and SDI is not acquired by another party
within the applicable time frame, SDI will be required to reimburse Acquisition
for its out-of-pocket fees and expenses up to $750,000.
Acquisition shall reimburse SDI for its out-of-pocket fees and expenses
up to $750,000 in the event that the Merger Agreement is terminated for any of
the following reasons: (i) because Acquisition shall have breached any of its
representations or warranties set forth in the Merger Agreement or any
representation or warranty of Acquisition shall have become untrue; or (ii)
because Acquisition shall have breached any of its covenants or agreements set
forth in the Merger Agreement.
The Merger Agreement caps the liability of any breaching party by
providing that in the event of a breach of the Merger Agreement by either SDI or
Acquisition, the breaching party shall be liable for no more than $15,000,000
for the consequences of such breach.
For a more complete discussion of these termination fees and expenses,
see "The Merger Agreement --Termination Fee and Payment of Expenses."
THE GUARANTY AGREEMENT
The Guaranty Agreement (attached to this proxy statement as Appendix C)
provides that JFLEI, an affiliate of JFLC, unconditionally guarantees, for the
benefit of SDI, the full payment by Acquisition of any final judgment or
settlement obtained against Acquisition (or pursuant to any other agreement
signed by Acquisition admitting liability), in each case relating to and arising
from the failure of Acquisition to fully perform its obligations under the
Merger Agreement or the breach of any of Acquisition's representations and
warranties contained in the
7
<PAGE> 56
Merger Agreement. The Guaranty Agreement is subject to the terms, conditions and
limitations set forth in the Merger Agreement, and the damages recoverable
against JFLEI under this Guaranty Agreement are limited to $15,000,000. The
Guaranty Agreement terminates upon the closing of the Merger. See "The Guaranty
Agreement."
FEDERAL INCOME TAX CONSEQUENCES
The receipt of the Merger Consideration by holders of Common Stock
pursuant to the Merger will be a taxable transaction for federal income tax
purposes. For a more detailed discussion of the federal income tax consequences
of the Merger, see "Federal Income Tax Consequences." All holders of Common
Stock are urged to consult their tax advisors to determine the effect of the
Merger on such holders under federal, state, local and foreign tax laws.
ACCOUNTING TREATMENT
The Merger will be treated as a recapitalization for accounting
purposes.
FINANCING OF THE MERGER
It is estimated that approximately $284.2 million will be required to
consummate the Merger and provide current and future working capital for SDI.
This sum will be provided by (i) affiliates of JFLC ($79 million), (ii) the sale
of debt securities ($190 million), and (iii) a revolving credit facility ($15.2
million drawn from a $30 million facility). Acquisition has received proposals
and letters from various sources to provide this financing, but these proposals
and letters are subject to numerous conditions. See "The Merger
Agreement--Financing."
8
<PAGE> 57
MARKET PRICES FOR COMMON STOCK AND DIVIDENDS
SDI's Common Stock is quoted on the Nasdaq National Market System under
the symbol "SDII." The following tables present historical trading information
about SDI's Common Stock closing share prices:
<TABLE>
<CAPTION>
Period High Low
- - ----------------------------------------------------------------------------------
<S> <C> <C>
1995
First Quarter $ 20.000 $ 15.500
Second Quarter 19.000 16.250
Third Quarter 25.250 18.000
Fourth Quarter 21.750 16.000
1996
First Quarter 18.000 13.000
Second Quarter 21.250 14.750
Third Quarter 23.750 15.000
Fourth Quarter 18.000 12.500
1997
First Quarter 21.000 12.500
Second Quarter 20.500 15.500
Third Quarter 19.125 14.875
Fourth Quarter 29.500 18.500
1998
First Quarter 29.250 22.750
Second Quarter 34.750 24.750
Third Quarter 38.000 33.375
Fourth Quarter (through August 13, 1998) 34.500 33.750
</TABLE>
On June 18, 1998 (the last trading day before the Board's approval of
the Merger) the closing share price was $34.50. No cash dividends have been paid
on the Common Stock by SDI since its shares were publicly distributed in 1991,
and SDI does not currently intend to pay cash dividends on its Common Stock.
RIGHTS OF DISSENTING STOCKHOLDERS
Any stockholder who does not wish to accept the Merger Consideration
has the right under the DGCL to receive the "fair value" of his or her shares of
Common Stock as determined by a Delaware court. This "appraisal right" is
subject to a number of restrictions and technical requirements. Generally, in
order to perfect appraisal rights (i) you must not vote in favor of adopting the
Merger Agreement; and (ii) you must make a written demand for appraisal before
the vote on the Merger Agreement.
9
<PAGE> 58
Merely voting against the Merger Agreement will not protect your right
of appraisal. Appendix D to this proxy statement contains the applicable
provisions of the DGCL relating to appraisal rights. See "Appraisal Rights."
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents certain summary selected consolidated
financial data of SDI as of and for each of the five years in the period ended
October 31, 1997. This financial data was derived from the audited historical
consolidated financial statements of SDI and should be read in conjunction with
the "Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained elsewhere in this proxy statement.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------
1993 1994(1) 1995 1996 1997
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales:
Automotive Products ...... $ 24,339 $ 49,460 $ 71,253 $ 80,235 $ 111,930
Aerospace ................ 13,112 15,049 29,339 24,247 28,572
--------- --------- --------- --------- ---------
Total ............... 37,451 64,509 100,592 104,482 140,502
Cost of sales:
Automotive Products ...... 22,367 43,388 63,241 68,113 92,758
Aerospace ................ 9,814 11,037 19,730 16,215 19,795
--------- --------- --------- --------- ---------
Total ............... 32,181 54,425 82,971 84,328 112,553
Gross profit:
Automotive Products ...... 1,972 6,072 8,012 12,123 19,172
Aerospace ................ 3,298 4,012 9,609 8,031 8,777
--------- --------- --------- --------- ---------
Total ................ 5,270 10,084 17,621 20,154 27,949
Operating expenses:
Automotive Products ...... 1,564 2,914 3,412 3,878 5,524
Aerospace ................ 1,139 1,438 4,270 4,232 5,198
--------- --------- --------- --------- ---------
Total ................ 2,703 4,352 7,682 8,110 10,722
Earnings from operations:
Automotive Products ...... 408 3,158 4,600 8,245 13,648
Aerospace ................ 2,159 2,574 5,339 3,799 3,579
--------- --------- --------- --------- ---------
Total ................ 2,567 5,732 9,939 12,044 17,227
Other income (expense), net ....... (315) (452) (639) 129 111
Earnings before income taxes ...... 2,252 5,280 9,300 12,173 17,338
Provision for income taxes ........ 920 2,111 3,720 4,725 6,660
--------- --------- --------- --------- ---------
Net earnings ...................... $ 1,332 $ 3,169 $ 5,580 $ 7,448 $ 10,678
Net earnings per share ............ $ .23 $ .55 $ .82 $ .96 $ 1.37
Weighted average common and common
equivalent shares outstanding ... 5,764 5,786 6,832 7,763 7,822
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------
1993 1994(1) 1995 1996 1997
--------- --------- --------- --------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Current assets ............ $14,762 $25,154 $43,320 $45,326 $43,407
Total assets .............. 33,939 51,689 78,621 86,159 99,824
Current liabilities ....... 6,221 10,613 10,150 10,369 13,271
Long-term debt,
less current portion ... 3,608 12,568 4,027 3,320 2,057
Stockholders' equity ...... 23,222 26,659 62,054 69,701 81,357
</TABLE>
- - -------
(1) Effective July 31, 1994, the Company acquired all of the assets of
Scot, Inc. Accordingly, the results of operations for the year ended
October 31, 1994, and all subsequent years, include the results of
Scot, Inc. from that effective date.
10
<PAGE> 59
UNAUDITED RESULTS FOR THE FIRST TWO QUARTERS OF 1998
SDI announced that net sales for the second quarter of 1998 (three
months ended May 3, 1998) were $45,114,061 as compared with $32,791,946 for the
second quarter of 1997 (three months ended May 4, 1997); net sales for the six
months ended May 3, 1998 were $85,846,434 as compared with $60,329,340 for the
six months ended May 4, 1997. Income (loss) from operations was $6,947,734 for
the second quarter of 1998 as compared with $3,931,942 for the second quarter of
1997; income (loss) from operations was $18,354,451 for the six months ended May
3, 1998 as compared with $11,687,962 for the six months ended May 4, 1997. Net
income (loss) was $4,047,874 for the second quarter of 1998 as compared with
$2,462,186 for the second quarter of 1997; net income (loss) was $7,434,852 for
the six months ended May 3, 1998 as compared with $4,376,315 for the six months
ended May 4, 1997. Net income (loss) per share was $0.52 for the second quarter
of 1998 as compared with $0.32 for the second quarter of 1997; net income (loss)
per share was $0.96 for the six months ended May 3, 1998 as compared with $0.57
for the six months ended May 4, 1997. The weighted average shares outstanding
was 8,084,704 for the second quarter 1998 as compared with 7,782,193 for the
second quarter 1997; the weighted average shares outstanding was 8,052,886 for
the six month ended May 3, 1998 as compared with 7,747,637 for the six months
ended May 4, 1997.
11
<PAGE> 60
TIME, PLACE AND PURPOSE OF THE SPECIAL MEETING
This proxy statement and the accompanying proxy card are solicited by
the Board. These proxies will be used at the Special Meeting to be held at 10:00
a.m. local time, on September 23, 1998 at The Valencia Hilton Garden Inn, 27710
The Old Road, Valencia, California 91355, and at any and all adjournments
thereof. The purpose of the Special Meeting is to consider and vote on a
proposal to adopt the Merger Agreement, pursuant to which Acquisition will be
merged into SDI with SDI continuing as the Surviving Corporation. The Board
approved the Merger Agreement. THE BOARD OF DIRECTORS OF SDI UNANIMOUSLY
RECOMMENDS THAT SDI STOCKHOLDERS VOTE FOR ADOPTION OF THE MERGER AGREEMENT.
RECORD DATE AND VOTING OF COMMON STOCK
Stockholders of record at the close of business on August 10, 1998 (the
"Record Date") will be entitled to vote at the Special Meeting. On the Record
Date, there were outstanding 7,809,801 shares of Common Stock which were held by
approximately 126 stockholders of record. The presence, in person or by proxy,
of the holders of shares representing at least 3,904,901 votes at the Special
Meeting shall constitute a quorum.
All shares represented by properly executed and unrevoked proxies will
be voted at the Special Meeting. You may revoke your proxy before it is voted by
executing another proxy at a later date, by notifying the secretary of SDI in
writing of your revocation, or by attending the Special Meeting in person and
voting in person.
At the Special Meeting, the holders of Common Stock will vote on the
proposal to adopt the Merger Agreement (the "Proposal"). In order to be adopted,
holders of a majority of all the outstanding shares of Common Stock must vote in
favor of approving the Merger Agreement in order for the Proposal to be adopted.
Votes withheld, abstentions and "broker non-votes" will not be counted as votes
cast and will not be voted.
If the enclosed proxy is duly executed and received in time for the
Special Meeting, and if no contrary instructions are included on the proxy, it
is the intention of the persons named as proxies to vote the shares of Common
Stock represented thereby in favor of the Proposal to adopt the Merger
Agreement, and in the discretion of the persons named as proxies in connection
with any other business that may properly come before the Special Meeting or any
adjournment thereof.
At this time, SDI knows of no other matters that may be presented for
stockholder action at the Special Meeting. However, if any matters, other than
approval of the Merger Agreement, should properly come before the Special
Meeting, it is the intention of the persons named in the enclosed proxy to vote
such proxy in accordance with their best judgment.
In the event that there are not sufficient votes to adopt the Proposal
raised at the Special Meeting, it is expected that the Special Meeting will be
postponed or adjourned in order to permit further solicitation of proxies by
SDI.
12
<PAGE> 61
The delivery of this proxy statement shall not, under any
circumstances, create any implication that the information contained herein is
correct after the date hereof, August 17, 1998.
THE BOARD OF DIRECTORS OF SPECIAL DEVICES, INCORPORATED UNANIMOUSLY
RECOMMENDS A VOTE "FOR" THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. THE
AFFIRMATIVE VOTE OF HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES OF COMMON
STOCK IS REQUIRED TO ADOPT THE MERGER AGREEMENT.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT IN CONNECTION
WITH SPECIAL DEVICES, INCORPORATED'S SOLICITATION OF PROXIES AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY SPECIAL DEVICES, INCORPORATED OR ANY OTHER PERSON.
SOLICITATION OF PROXIES
Officers and regular employees of SDI may solicit proxies from
stockholders by telephone, telegram, facsimile or in person. SDI will not pay
these individuals any additional compensation for such services, except for the
reimbursement of any reasonable out-of-pocket expenses that they incur. SDI will
pay all additional expenses of the solicitation of proxies for the Special
Meeting, including the cost of mailing.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
Some statements contained in this proxy statement regarding future
financial performance and results and other statements that are not historical
facts are forward-looking statements. The words "expect," "project," "estimate,"
"predict," "anticipate," "believes" and similar expressions are also intended to
identify forward-looking statements. Such statements and SDI's results are
subject to numerous risks, uncertainties and assumptions, including but not
limited to: possible deficiencies in future liquidity levels, possible declines
in market growth rates, dependence on key customers, possible failure of product
development activities, the development of alternative technologies by
competitors of SDI or its customers, price pressures and other competitive
factors, volatility in the market for SDI's products, and legal proceedings.
These risk factors are more fully described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those indicated.
13
<PAGE> 62
THE MERGER
BACKGROUND OF THE MERGER
Given the fact that SDI is essentially a one product, two customer
business, the Board and management have, from time to time, considered strategic
alternatives for SDI, including acquisitions within its business segments,
diversification of its business into strategically complementary areas and other
courses of action. In November 1996, management received an inquiry from one of
its customers concerning whether SDI would have any interest in exploring ways
to become more closely aligned with that customer. In January 1997, with the
Board's consent, management met with this customer and discussed potential
licensing arrangements and the possibility of being acquired by the customer. In
February 1997, the customer signed a confidentiality agreement and received
certain information concerning SDI.
In May 1997, SDI engaged Austin Pierce & Co. as financial adviser to
explore a possible merger with this customer or one other specifically
identified potential strategic buyer. During the next several months, Austin
Pierce and SDI's management held discussions with these two potential strategic
buyers. At a meeting of the Board on August 19, 1997, Austin Pierce advised the
Board of the current status of the discussions with potential strategic buyers
and informed the Board that it did not appear that at that time an attractive
business combination could be structured with either of the two potential
strategic buyers. Austin Pierce advised that it was aware of a financial buyer
who would most likely be interested and suggested that it be allowed to conduct
discussions with that financial buyer to determine whether an attractive
alternative for SDI's stockholders could be obtained.
Austin Pierce advised that this potential buyer would likely desire the
participation of management in the transaction and therefore, on August 19,
1997, the Board appointed a Special Committee comprised of Messrs. Hoffman and
Bendix (the "Special Committee") to work with Austin Pierce and Gibson, Dunn &
Crutcher to negotiate any possible transaction on behalf of SDI with the
potential buyer. During the next four weeks, after the potential financial buyer
signed a confidentiality agreement, Austin Pierce, management, the Special
Committee and Gibson, Dunn & Crutcher held discussions with the potential buyer
concerning the valuation of SDI and a potential structure for the transaction.
At a meeting of the Board on September 17, 1997, Austin Pierce and the Special
Committee advised that it appeared that the best transaction SDI would be able
to negotiate with this financial buyer was a cash merger transaction or
recapitalization at a price in the range of $25.00 to $27.00 per share, although
no formal proposal or offer was ever made. The Special Committee recommended and
the Board determined that, given the then current market price of the Common
Stock, its future prospects and other factors, such an alternative was not
preferable to SDI remaining independent. On September 17, 1997, SDI announced
that it was not in discussions concerning any possible merger or sale and
terminated the engagement of Austin Pierce.
During the next two months, SDI focused its efforts on construction of
the Moorpark, California facility and plans to move operations from Newhall to
Moorpark. Some directors of SDI discussed with Mr. Treinen his long-term plans,
future management structure, and a clear line of succession upon Mr. Treinen's
retirement. At a meeting on November 17, 1997, the
14
<PAGE> 63
Board discussed the desirability of conducting a search for a successor for Mr.
Treinen. The Board also discussed whether or not a further in-depth
consideration of strategic alternatives available to SDI should be conducted. At
the conclusion of this discussion, the Board determined to proceed along two
parallel lines, the first to begin the initial steps in selecting an executive
recruiting firm to conduct a search for Mr. Treinen's successor and the second
to conduct a search for investment banking firms to assist SDI in a further
in-depth exploration of its strategic alternatives. The Special Committee was
charged with the responsibility and authority of implementing the first proposal
and a committee comprised of Mr. Treinen, Mr. Watson and John Vinke was
instructed to interview potential investment bankers who could be retained by
SDI to render advice with respect to strategic alternatives. After conducting
interviews with a variety of executive search and investment banking firms, at a
meeting on December 19, 1997, the Board determined that the two courses of
action were at that time mutually exclusive. The Board then decided to
concentrate first on exploring strategic alternatives and, from the several
investment banking firms proposed, authorized the engagement of DLJ to assist
the Special Committee and the Board in that regard. The Board determined to hold
discussions of a successor for Mr. Treinen in abeyance until completion of that
study.
On January 21, 1998, SDI publicly announced that it had engaged DLJ to
assist in a review of strategic alternatives for SDI.
In February 1998, an Offering Memorandum was prepared, and DLJ was
authorized to contact potential strategic and financial buyers identified by DLJ
and management. Contact was made with 93 prospects, including 45 potential
strategic buyers and 48 potential financial buyers. A total of 49 prospects
signed confidentiality agreements (16 strategic and 33 financial) and received
information concerning SDI. Indications of interest were received from eight
prospects (two strategic and six financial). After reviewing the preliminary
indications of interest, seven parties were given access to further information
and a draft contract and requested to present formal proposals.
On June 5, 1998, the Board met to consider the two formal proposals
which had been received from financial buyers, each providing for the cash
purchase of substantially all of the outstanding public stockholders' Common
Stock in a transaction to be accounted for as a leveraged recapitalization. The
JFLC proposal contemplated a cash purchase of $36.50 per share for approximately
90% of the outstanding shares of Common Stock, required Mr. Neubauer to retain
approximately 50% of his holdings of Common Stock, required Mr. Treinen to
retain 66,250 shares of his Common Stock and contemplated that management retain
some options in the Surviving Corporation. The other proposal contemplated a
cash purchase of $37.00 per share for approximately 75.6% of the outstanding
shares of Common Stock and required Mr. Neubauer to retain approximately 100% of
his holdings of Common Stock and management to retain 542,250 shares of Common
Stock. In addition, the financing for the other proposal included an investment
of preferred stock with warrants, whereas JFLC was prepared to make a common
stock investment as part of its financing. DLJ presented a summary of the two
proposals, a summary of other strategic options available to SDI including
remaining independent, and a preliminary valuation analysis of SDI. Gibson, Dunn
& Crutcher presented a summary of the proposed agreements included with each of
the two formal proposals. After discussion, the Board concluded that each of the
formal proposals presented SDI with a possible transaction that
15
<PAGE> 64
the Board felt could be an attractive alternative to remaining independent.
While each of the proposals provided for cash to the public stockholders and
were very close in terms of price, each one provided for different levels of
participation in the continuing ownership of SDI by the Continuing Stockholders.
Neither proposal provided a viable alternative for a continuing public market
for the Common Stock. The Board determined that the appropriate way to consider
the proposals was for all of the directors other than the Special Committee to
leave the meeting and determine whether they could support both proposals and
for the Special Committee to discuss with DLJ and Gibson, Dunn & Crutcher which
proposal appeared to be most favorable to SDI. The Special Committee concluded
that while the JFLC proposal (then contemplating a cash purchase at $36.50 per
share), included a slightly lower purchase price per share than the other
proposal, the JFLC proposal was preferable because it involved a common equity
contribution as opposed to preferred stock and it involved a higher number of
outstanding shares to be purchased. The management directors rejoined the
meeting and advised the Board that they were unable to support the other
proposal in its then current format. The Special Committee unanimously
recommended that DLJ and Gibson, Dunn & Crutcher be authorized and directed to
negotiate with JFLC to increase its proposed purchase price and to prepare a
definitive agreement and requested DLJ to negotiate with the other party to
determine if the number of shares proposed to be purchased in their proposal
could be increased and if the preferred stock structure could be altered. Over
the weekend of June 6, DLJ contacted both parties to negotiate the terms of
their offers. DLJ was advised by the other party that they were unable to
increase or revise their offer. JFLC increased its offer to $37.00 per share
(which was equal to the other proposal). For the next two weeks, representatives
of SDI and JFLC met or had telephone discussions daily to provide JFLC and its
lenders with information concerning SDI and to complete negotiations of the
terms and conditions of the Merger Agreement and the Guaranty Agreement.
On June 18, 1998, the Board of SDI held a special meeting to consider
the proposed Merger Agreement and the Guaranty Agreement. At this meeting, DLJ
discussed the financial aspects of the proposed transaction and the procedures
they had undertaken to evaluate the proposal from a financial point of view to
the stockholders of SDI other than the Continuing Stockholders and addressed
questions from members of the Board. Gibson, Dunn & Crutcher made a presentation
regarding the structure of the proposed transaction, the negotiations
surrounding the Merger Agreement and then discussed the agreements and the
exhibits and disclosure schedules thereto with the Board. DLJ delivered its oral
opinion to the effect that, as of the date of such opinion, and based upon and
subject to the assumptions, limitations and qualifications set forth in such
opinion, the Merger Consideration to be received by SDI stockholders other than
the Continuing Stockholders pursuant to the Merger Agreement was fair to such
stockholders from a financial point of view. Following such discussion, all of
the members of the Board, other than the Special Committee and representatives
of DLJ and Gibson, Dunn & Crutcher left the meeting and the members of the
Special Committee discussed the terms and conditions of the proposed transaction
including the shares to be retained in the transaction by Mr. Neubauer and Mr.
Treinen and the options in the Surviving Corporation to be granted to the
management of SDI in exchange for certain of management's current options.
Thereafter, the Special Committee unanimously determined to recommend the
proposed transaction to the full Board subject to certain changes and the
resolution of certain remaining issues. Thereafter, the full Board was
reconvened, the Special Committee made its
16
<PAGE> 65
recommendation and the Board unanimously approved the Merger Agreement and the
Guaranty Agreement subject to certain changes and the resolution of certain
remaining issues. Thereafter, representatives of SDI negotiated the remaining
issues with representatives of JFLC, and on June 19, 1998, the Merger Agreement
and the Guaranty Agreement were signed.
RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS
The Board, based on the recommendation of the Special Committee,
unanimously determined that the proposed transaction is fair to, and in the best
interest of, SDI's stockholders and recommends that the stockholders vote to
adopt the principal terms of the Merger Agreement. In reaching these
conclusions, the Special Committee and the Board were favorably influenced by
the following factors:
1. The analysis presented by DLJ and the opinion of DLJ to the effect
that, as of the date of such opinion and based upon and subject to the
assumptions, limitations and qualifications set forth in such opinion, the
Merger Consideration to be received by the stockholders other than the
Continuing Stockholders in the merger transaction was fair to such stockholders
from a financial point of view;
2. The extensive solicitation process conducted by DLJ in seeking a
buyer for SDI;
3. The prior solicitations held with the assistance of Austin Pierce
and the fact that SDI had announced, on January 21, 1998, that it had engaged
DLJ to assist it in seeking strategic alternatives;
4. The fact that the negotiations concerning the merger transaction
were at arms-length between representatives of JFLC and representatives of DLJ
and Gibson, Dunn & Crutcher, who reported to the Special Committee;
5. The fact that the cash merger price of $37.00 per share represented
a premium of 36.4% over the price of SDI's Common Stock on the date of the
announcement of the engagement of DLJ and 6.1% above the price of SDI's Common
Stock on the day before the announcement of the merger;
6. The principal terms of the Merger Agreement which included: (i)
although SDI agreed not to solicit additional offers, it had the ability to
respond to unsolicited alternative proposals to acquire SDI; (ii) the size of
the breakup fee payable under the Merger Agreement and the circumstance that it
is not payable unless SDI enters into an acquisition transaction with another
party within twelve (12) months of termination of the Merger Agreement; and
(iii) the fact that the transaction is subject to the approval of a majority of
SDI's outstanding shares; and
7. The fact that SDI is essentially a one-product, two customer
company, and the likelihood of continued consolidation in the industry in which
SDI operates.
In approving the transaction, the Special Committee and the Board were
aware of and considered as a negative factor that as a result of the merger,
stockholders other than the Continuing Stockholders would no longer participate
in the future growth and earnings of SDI. It
17
<PAGE> 66
considered the possibility that the Common Stock of SDI could significantly
increase in value if SDI's market for initiators were to continue to expand as
it has in the recent past. However, taking into account the recent increase in
SDI's stock price, the continuing pressure on unit sales prices experienced by
SDI, the fact that SDI was a one-product, two customer company, and the fact
that SDI was faced with the prospect of finding a replacement for Mr. Treinen,
the Board believed that a sale of SDI would eliminate the risks associated with
such factors and therefore would achieve greater value at this time for
stockholders other than the Continuing Stockholders as compared with remaining a
public company.
OPINION OF FINANCIAL ADVISOR TO THE COMPANY
In its role as financial advisor to SDI, DLJ was asked by SDI to render
an opinion as to the fairness from a financial point of view to stockholders
other than the Continuing Stockholders of the consideration to be received by
such stockholders pursuant to the terms of the Merger Agreement. Pursuant to the
Merger Agreement, each share of Common Stock, other than the Continuing Shares
and shares held by stockholders who are entitled to and who have perfected their
dissenters' rights, will be converted into the right to receive a cash payment
per share equal to $37.00. On June 19, 1998, DLJ delivered its written opinion
(the "DLJ Opinion") to the effect that, as of the date of such opinion, and
based upon and subject to the assumptions, limitations and qualifications set
forth in such opinion, the Merger Consideration to be received by stockholders
other than the Continuing Stockholders pursuant to the terms of the Merger
Agreement is fair to such stockholders from a financial point of view.
A COPY OF THE DLJ OPINION IS ATTACHED HERETO AS APPENDIX B.
STOCKHOLDERS ARE URGED TO READ THE DLJ OPINION CAREFULLY IN ITS ENTIRETY FOR THE
ASSUMPTIONS MADE, THE PROCEDURES FOLLOWED, THE MATTERS CONSIDERED AND THE LIMITS
OF THE REVIEW MADE BY DLJ IN CONNECTION WITH SUCH OPINION.
The DLJ Opinion was prepared for the Board and addresses only the
fairness of the Merger Consideration to be received by stockholders other than
the Continuing Stockholders from a financial point of view. The DLJ Opinion does
not constitute a recommendation to any stockholder as to how such stockholder
should vote on the Merger. DLJ was not retained as an adviser or agent to SDI's
stockholders or any other persons, other than as an advisor to SDI. The Merger
Consideration was determined in arm's-length negotiations between SDI and JFLC,
in which negotiations DLJ advised SDI. No restrictions or limitations were
imposed by SDI upon DLJ with respect to the investigations made or the
procedures followed by DLJ in rendering the DLJ Opinion. As part of its
investment banking business, DLJ is regularly engaged in the valuation of
businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes.
In arriving at its opinion, DLJ reviewed the Merger Agreement and the
exhibits thereto. DLJ also reviewed financial and other information that was
publicly available or furnished to it by SDI, including information provided
during discussions with SDI's management. Included in the information provided
during discussions with SDI's management were certain financial
18
<PAGE> 67
projections of SDI prepared by the management of SDI. In addition, DLJ compared
certain financial and securities data of SDI with similar data of various other
companies whose securities are traded in public markets, reviewed the historical
stock prices and trading volumes of SDI's Common Stock, reviewed prices and
premiums paid in certain other business combinations and conducted such other
financial studies, analyses and investigations as DLJ deemed appropriate for
purposes of rendering its opinion.
In rendering its opinion, DLJ relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
it from public sources, that was provided to it by SDI or its representatives or
that was otherwise reviewed by it. With respect to the financial projections
supplied to it, DLJ assumed that management's adjusted case projections were
reasonably prepared on the basis reflecting the best currently available
estimates and judgments of the management of SDI as to the future operating and
financial performance of SDI. DLJ did not assume any responsibility for making
an independent evaluation of any assets or liabilities or for making any
independent verification of any of the information reviewed by it. DLJ relied as
to certain legal matters on advice of counsel to SDI.
The DLJ Opinion is necessarily based on economic, market, financial and
other conditions as they existed on, and on the information made available to it
as of, the date of its opinion. It should be understood that, although
subsequent developments may affect its opinion, DLJ does not have any obligation
to update, revise or reaffirm the DLJ Opinion.
The following is a summary of the presentation made by DLJ to the Board
at its June 18, 1998 board meeting.
Historical Stock Price Performance. To provide comparative market data,
DLJ examined SDI's historical Common Stock performance. DLJ's analysis consisted
of a historical analysis of closing prices and trading volumes (i) from SDI's
initial public offering on August 9, 1991 through June 12, 1998 and (ii) for the
twelve months ended June 17, 1998. DLJ also examined trading volumes at
specified prices of SDI's Common Stock for the twelve months ended June 17,
1998. In addition, DLJ compared the performance of SDI's Common Stock for the
twelve months ended June 17, 1998 to (i) the S&P 500 Index, (ii) an index
comprised of six automotive airbag suppliers deemed to be reasonably comparable
to SDI because they possess general business, operating and financial
characteristics similar to SDI (the "Airbag Comparable Companies") and (iii) an
index comprised of 21 automotive OEM suppliers deemed comparable to SDI because
of their similarity to SDI as suppliers to automotive original equipment
manufacturers (the "OEM Comparable Companies"). The Airbag Comparable Companies
consisted of Autoliv, Inc., Breed Technologies, Inc., OEA, Inc., Safety
Components International, Inc., Simula, Inc. and TRW, Inc.. The OEM Comparable
Companies consisted of Arvin Industries, Inc., Borg-Warner Automotive, Inc.,
Citation Corporation, Collins and Aikman Corporation, Dana Corporation, Donnelly
Corporation, Dura Automotive Systems, Inc., Echlin Inc., Excel Industries, Inc.,
Exide Corporation, Federal-Mogul Corporation, Gentex Corporation, Intermet
Corporation, Lear Corporation, Magna International Inc., MascoTech, Inc.,
Simpson Industries, Inc., Standard Products Company, Superior Industries
International, Tower Automotive, Inc. and Walbro Corporation. Since SDI's
initial public offering on August 9, 1991, SDI's Common Stock reached a high of
$38.00 per share and a low of $5.75 per share. In the
19
<PAGE> 68
twelve months ended June 17, 1998, SDI's Common Stock reached a high of $38.00
per share and a low of $14.88 per share. On June 17, 1998, the closing price of
SDI's Common Stock was $35.00 per share. During the twelve months ended June 17,
1998, over 99% of the trading volume in SDI's Common Stock was at $37.00 or
below. During the twelve months ended June 17, 1998, SDI's Common Stock
substantially outperformed the S&P 500 Index, the Airbag Comparable Companies
index and the OEM Comparable Companies index. DLJ's review of the data showed
that a $100.00 investment on June 17, 1997 in each of SDI's Common Stock, the
S&P 500 Index, the Airbag Comparable Companies index and the OEM Comparable
Companies index (assuming that all dividends were reinvested) would have
amounted on June 17, 1998 to $222.22 for SDI's Common Stock, $123.78 for the S&P
500 Index, $88.44 for the Airbag Comparable Companies index and $125.69 for the
OEM Comparable Companies index.
Premium Analysis. DLJ reviewed publicly available information to
determine the premiums paid in (i) 60 selected transactions in the automotive
industry completed between January 1, 1995 and June 5, 1998 (the "Selected
Automotive Transactions") and (ii) 491 mergers and acquisitions transactions
ranging in size from $200 million to $400 million completed between January 1,
1996 and May 26, 1998 (the "Selected M&A Transactions"). For the Selected
Automotive Transactions, DLJ reviewed the percentage premium in each transaction
represented by the offer prices over the trading prices one week and one month
prior to the announcement date of each respective transaction. The mean
percentage amount by which the offer prices exceeded the closing stock prices
one week and one month prior to the announcement date for the Selected
Automotive Transactions was approximately 37.7% and 49.0%, respectively. For the
Selected M&A Transactions, DLJ reviewed the percentage premium in each
transaction represented by the offer prices over the trading prices one day, one
week and one month prior to the announcement date of each respective
transaction. The mean percentage amount by which the offer prices exceeded the
closing stock prices one day, one week and one month prior to the announcement
date for the Selected M&A Transactions was approximately 27.3%, 31.9% and 38.1%,
respectively. The percentage amount by which the Merger Consideration exceeded
the closing stock price of SDI's Common Stock one day, one week and one month
prior to January 21, 1998, the date of the press release announcing that SDI had
engaged DLJ to explore strategic alternatives, was approximately 36.4%, 46.2%
and 31.0%, respectively. The percentage amount by which the Merger Consideration
exceeded the closing stock price of SDI's Common Stock one day, one week and one
month prior to June 18, 1998, the date of the board meeting of the Special
Devices Board, was approximately 5.7%, 10.9% and 7.1%, respectively.
Comparison of Selected Publicly Traded Comparable Companies. DLJ
analyzed SDI's operating performance relative to the Airbag Comparable
Companies. DLJ compared certain market trading statistics for SDI with the
Airbag Comparable Companies, including total enterprise value (defined as market
value of common equity plus book value of total debt less cash and cash
equivalents) (based on reported closing prices for the Airbag Comparable
Companies on June 17, 1998) as a multiple of latest twelve months ("LTM")
revenues, LTM earnings before interest, taxes, depreciation and amortization
("EBITDA") and LTM earnings before interest and taxes ("EBIT"), and price to
earnings ratios ("P/E") based on LTM earnings per share ("EPS"), estimated
calendar year ending 1998 EPS (as estimated by First Call Corporation) and book
value of common equity per share. As of June 17, 1998, this analysis
20
<PAGE> 69
resulted in (i) a range of 0.8x to 2.1x, a median of 1.0x and a mean (excluding
high and low) of 1.3x total enterprise value to LTM revenues compared to 1.8x
for SDI's Common Stock based on the Merger Consideration, (ii) a range of 5.9x
to 18.7x, a median of 6.4x and a mean (excluding high and low) of 6.7x total
enterprise value to LTM EBITDA compared to 10.2x for SDI based on the Merger
Consideration, (iii) a range of 8.6x to 45.9x, a median of 10.2x and a mean
(excluding high and low) of 10.1x total enterprise value to LTM EBIT compared to
13.4x for SDI based on the Merger Consideration, (iv) a range of 12.1x to 28.2x,
and a median and mean (excluding high and low) of 20.5x P/E based on LTM EPS
compared to 21.5x for SDI based on the Merger Consideration, (v) a range of
12.6x to 29.7x, a median of 16.4x and a mean (excluding high and low) of 17.0x
P/E based on calendar year 1998 EPS estimates compared to 19.7x for SDI based on
the Merger Consideration and (vi) a range of 1.8x to 24.7x, and a median and
mean (excluding high and low) of 2.8x price to book value of common equity per
share compared to 3.5x for SDI based on the Merger Consideration.
Analysis of Selected Transactions in the Airbag OEM Supplier Sector.
DLJ reviewed publicly available information for the Selected Automotive
Transactions. DLJ reviewed the consideration paid in such transactions in terms
of the total enterprise value as a multiple of LTM revenues, EBITDA and EBIT of
the acquired entity prior to its acquisition as well as the equity value
(defined as market value of common equity) as a multiple of LTM net income and
book value of common equity of the acquired entity prior to its acquisition. The
analysis resulted in (i) a range of 0.3x to 2.1x, a median of 0.8x and a mean
(excluding high and low) of 0.9x total enterprise value to LTM revenue compared
to 1.8x for SDI based on the Merger Consideration, (ii) a range of 4.6x to
12.6x, a median of 7.4x and a mean (excluding high and low) of 7.6x total
enterprise value to LTM EBITDA compared to 10.2x for SDI based on the Merger
Consideration, (iii) a range of 5.3x to 19.9x, a median of 11.4x and a mean
(excluding high and low) of 11.2x total enterprise value to LTM EBIT compared to
13.4x for SDI based on the Merger Consideration, (iv) a range of 6.7x to 40.6x,
a median of 17.3x and a mean (excluding high and low) of 22.9x equity value to
LTM net income compared to 21.5x for SDI based on the Merger Consideration and
(v) a range of (1.6)x to 8.2x, and a median and mean (excluding high and low) of
3.5x equity value to book value of common equity compared to 3.5x for SDI based
on the Merger Consideration.
Discounted Cash Flow Analysis. For purposes of this analysis, DLJ
performed a discounted cash flow analysis for SDI on a stand-alone basis based
on projections provided by management (the "Management Case"). In addition, DLJ
performed a discounted cash flow analysis for SDI based on projections provided
by management which were adjusted by management from the Management Case (the
"Management Adjusted Case") to reflect the following assumptions: (A) overall
unit prices decline 10% below the unit price forecast for each forecasted year
in the Management Case; (B) lower overall gross margins by two percentage points
in each forecasted year in the Management Case; and (C) higher overall selling,
general and administrative expense by one percentage point in each forecasted
year in the Management Case. In performing its analysis, DLJ calculated the
estimated "Free Cash Flow" based on stand-alone projected unleveraged operating
income adjusted for: (i) taxes; (ii) certain projected non-cash items (i.e.,
depreciation and amortization); (iii) projected changes in non-cash working
capital; and (iv) projected capital expenditures. DLJ analyzed the Management
Case and Management Adjusted Case projections and discounted the stream of Free
Cash Flows from
21
<PAGE> 70
fiscal 1999 to fiscal 2002, provided in such projections, back to October 31,
1998 using discount rates ranging from 10.0% to 15.0%. DLJ based the discount
rate assumptions on SDI's weighted average cost of capital, as adjusted to
reflect potential adverse factors, including customer concentration, the single
product nature of SDI's business and uncertainty concerning the future market
for automotive airbags and airbag initiators. To estimate the residual values of
SDI on a stand-alone basis at the end of the forecast period, DLJ applied
terminal multiples of 6.0x to 8.0x projected fiscal 2002 EBITDA and discounted
such value estimates back to October 31, 1998 using discount rates ranging from
10.0% to 15.0%. DLJ then aggregated the present values of the Free Cash Flows
and the present values of the residual values to derive a range of implied
enterprise values for SDI on a stand-alone basis. The range of implied
enterprise values stand-alone were then adjusted for SDI's net debt to yield
implied equity values on a stand-alone basis. The range of equity values were
then divided by the number of fully diluted shares to determine a range of
equity values per share for SDI on a stand-alone basis. The Management Case
indicated a range of implied equity values of $36.53 to $53.98 per share. The
Management Adjusted Case indicated a range of implied equity values of $29.27 to
$43.32 per share.
The summary set forth above does not purport to be a complete
description of the analyses performed by DLJ, but describes, in summary form,
the principal elements of the presentation made by DLJ to the Board. The
preparation of a fairness opinion involves various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
these methods to the particular circumstances and, therefore, such an opinion is
not readily susceptible to summary description. Each of the analyses conducted
by DLJ was carried out in order to provide a different perspective on the
transaction and to add to the total mix of information available. DLJ did not
form a conclusion as to whether any individual analysis, considered in
isolation, supported or failed to support an opinion as to fairness from a
financial point of view. Rather, in reaching its conclusion, DLJ considered the
results of the analyses in light of each other and ultimately reached its
opinion based on the results of all analyses taken as a whole. DLJ did not place
particular reliance or weight on any individual analysis, but instead concluded
that its analyses, taken as a whole, supported its determination. Accordingly,
notwithstanding the separate factors summarized above, DLJ believes that its
analyses must be considered as a whole and that selecting portions of its
analysis and the factors considered by it, without considering all analyses and
factors, could create an incomplete or misleading view of the evaluation process
underlying its opinion. In performing its analyses, DLJ made numerous
assumptions with respect to industry performance, business and economic
conditions and other matters. The analyses performed by DLJ are not necessarily
indicative of actual values or future results, which may be significantly more
or less favorable than suggested by such analyses.
Pursuant to the terms of an engagement letter dated January 16, 1998
(the "DLJ Engagement Letter"), SDI agreed to pay DLJ (i) a retainer fee of
$100,000, payable upon execution of the DLJ Engagement Letter (the "DLJ Retainer
Fee"), (ii) a fee of $500,000 upon notification that DLJ is prepared to deliver
the DLJ Opinion and an additional fee of $100,000 for each update of a prior
opinion delivered by DLJ with respect to a transaction (the "DLJ Opinion Fee")
and (iii) a transaction fee equal to 0.85% of the total enterprise value of SDI
up to $260 million and 2.0% of the total enterprise value of SDI in excess of
$260 million in a transaction, less the DLJ Retainer Fee and the DLJ Opinion
Fee, to be paid upon consummation of the Merger. Pursuant to the terms of the
DLJ Engagement Letter and based on the Merger
22
<PAGE> 71
Consideration, the total fee payable to DLJ upon consummation of the Merger
equals approximately $3.1 million. SDI also agreed to reimburse DLJ promptly for
all out-of-pocket expenses (including the reasonable fees and expenses of
counsel) incurred by DLJ in connection with its engagement, and to indemnify DLJ
and certain related persons against certain liabilities in connection with its
engagement, including liabilities under the federal securities laws. The terms
of the fee arrangement with DLJ, which DLJ and SDI believe are customary in
transactions of this nature, were negotiated at arm's length between SDI and
DLJ, and the Board was aware of such arrangement, including the fact that a
significant portion of the aggregate fee payable to DLJ is contingent upon
consummation of the Merger.
In the ordinary course of business, DLJ may actively trade SDI's
securities for its own account and for the accounts of its customers and,
accordingly, may at any time hold a long or short position in such securities.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the Merger, stockholders should be aware that certain
directors and officers of SDI have interests in the Merger, as described below.
Change of Control Stay Bonuses. Upon closing of the Merger, two
executive officers of SDI, John Vinke and Thomas J. Treinen, will receive lump
sum payments of $100,000 and $20,000 respectively, assuming that they are still
employed by SDI at that time.
Continuing Stockholders. Certain shares of Common Stock held by Walter
Neubauer (728,875 shares) and Thomas F. Treinen (66,250 shares) shall not be
converted in the Merger but shall remain outstanding as shares of common stock
of the Surviving Corporation. Immediately prior to the Merger, Walter Neubauer
will sell 728,875 shares for $37.00 per share to JFLEI, which shares shall be
canceled in the Merger. The Continuing Stockholders will continue to have an
equity interest in the Surviving Corporation which will not be available to
other stockholders. Thomas J. Treinen is President and Chief Executive Officer
of SDI. Walter Neubauer is neither an officer nor a director nor an affiliate
(as such term is defined in the Exchange Act) of SDI; he did not participate on
behalf of SDI in the negotiations relating to the Merger.
Certain Stock Options. Stock options currently held by certain
employees (John M. Cuthbert - 50,000 shares; Jack B. Watson - 21,325 shares;
Robert S. Ritchie - 7,500 shares; Thomas J. Treinen - 7,500 shares; John Vinke -
7,500 shares; Mary Lou Graham - 4,000 shares; and Samuel Levin - 3,750 shares)
will continue in the Surviving Corporation and vest and be exercisable in
accordance with the terms of the stock option agreements currently in effect
with respect to such options. Therefore, these employees will continue to have
an equity interest in the Surviving Corporation which will not be available to
other stockholders.
Indemnification. The Merger Agreement provides that all rights to
indemnification or exculpation existing in favor of any directors or officers of
SDI, as provided in SDI's Certificate of Incorporation or bylaws as in effect on
the date of the Merger Agreement, shall survive the Merger with respect to
matters occurring at or prior to the Effective Time. Acquisition has
23
<PAGE> 72
agreed to maintain the existing SDI policy of directors' and officers' liability
and fiduciary insurance for a period of five years after the Effective Time,
subject to certain premium limitations.
THE MERGER AGREEMENT
The following summary of the Merger Agreement is subject to, and
qualified in its entirety by, the complete text of the Merger Agreement which is
attached to this proxy statement as Appendix A. The terms of the Merger
Agreement are the result of arm's-length negotiations between SDI and
Acquisition.
Terms of the Merger
At the Effective Time, subject to the terms, conditions and procedures
set forth in the Merger Agreement and the DGCL, Acquisition will be merged with
and into SDI, the separate corporate existence of Acquisition will cease, and
SDI will continue as the Surviving Corporation.
Subject to and immediately following the receipt of the requisite vote
of stockholders of SDI and the satisfaction or waiver of the conditions to the
consummation of the Merger set forth in the Merger Agreement, the parties shall
cause the Merger to be consummated by filing a certificate of merger as
contemplated by the DGCL. The Merger shall be effective at the time the
certificate of merger is filed with the Delaware Secretary of State or such
other time as specified in the certificate of merger (the "Effective Time").
The Merger Agreement provides that the certificate of incorporation and
the bylaws of Acquisition, as in effect immediately prior to the Effective Time,
shall be the certificate of incorporation and the bylaws of the Surviving
Corporation immediately after the Effective Time.
The Merger Agreement provides that the directors of Acquisition
immediately prior to the Effective Time shall be the directors of the Surviving
Corporation immediately after the Effective Time, and the Merger Agreement
further provides that the officers of SDI immediately prior to the Effective
Time shall be the officers of the Surviving Corporation immediately after the
Effective Time.
Conversion of Common Stock
At the Effective Time, each share of Common Stock that is issued and
outstanding immediately prior to the Effective Time (other than (i) shares held
by SDI and Acquisition or their affiliates, (ii) the Continuing Shares and (iii)
shares as to which dissenters' rights have been perfected) shall, by virtue of
the Merger and without any action on the part of the holder thereof, be
converted into and represent the right to receive, in cash, the Merger
Consideration. Except for the right to receive the Merger Consideration, from
and after the Effective Date, all such shares, by virtue of the Merger and
without any action on the part of the holders, will no longer be outstanding and
will be canceled and retired and will cease to exist. Each holder of a
certificate formerly representing any such shares will after the Effective Date
cease to have any rights with respect to such shares other than the right to
receive the Merger Consideration for
24
<PAGE> 73
such shares upon surrender of the certificate. At the Effective Time, each share
of Common Stock held in the treasury of SDI immediately prior to the Effective
Time shall be canceled and cease to exist, and no payment shall be made with
respect thereto.
Treatment of Stock Options
Except for options that will remain outstanding after the Merger
pursuant to the stock option agreement letters between the Company and each of
John M. Cuthbert, Jack B. Watson, Robert S. Ritchie, Thomas J. Treinen, John
Vinke, Mary Lou Graham and Samuel Levin (each such letter, a "Stock Option
Agreement Letter"), all vested and unvested options (the "Stock Rights") to
purchase shares of Common Stock that were granted under any employee stock
option or compensation plan, or other arrangement shall be canceled at or
immediately prior to the Effective Time, and each holder of a Stock Right shall
be entitled to receive in cancellation of such Stock Right a cash payment from
the Surviving Corporation equal to the amount, if any, by which the per share
Merger Consideration exceeds the per share exercise price of such Stock Right,
multiplied by the number of shares of Common Stock then subject to such Stock
Right (the "Option Consideration"). Each Stock Right shall be canceled upon
payment of the Option Consideration.
The Stock Option Agreement Letters provide that the options granted to
the persons and in the amounts listed below will continue in the Surviving
Corporation to vest and be exercisable in accordance with the terms of the stock
option agreements currently in effect with respect to such options.
<TABLE>
<CAPTION>
Name Options Retained
---- ----------------
<S> <C>
John M. Cuthbert 50,000
Jack B. Watson 21,325
Robert S. Ritchie 7,500
Thomas J. Treinen 7,500
John Vinke 7,500
Mary Lou Graham 4,000
Samuel Levin 3,750
</TABLE>
Appraisal Rights
Notwithstanding any provision of the Merger Agreement to the contrary,
any shares of Common Stock outstanding immediately prior to the Effective Time
held by a holder who has demanded and perfected the right of appraisal of those
shares in accordance with the provisions of Section 262 of the DGCL and as of
the Effective Time has not withdrawn or lost such right to such appraisal, shall
not be converted into or represent a right to receive the Merger Consideration
pursuant to the Merger Agreement, but the holder shall only be entitled to such
rights as are granted by the DGCL (the "Dissenting Shares"). See "Appraisal
Rights." If a holder of shares of Common Stock who demands appraisal of those
shares under the DGCL effectively withdraws or loses (through failure to perfect
or otherwise) the right of appraisal, then, as of the Effective Time or the
occurrence of such event, whichever last occurs, those shares shall be converted
into and represent only the right to receive the Merger Consideration, without
interest,
25
<PAGE> 74
upon compliance with the provisions, and subject to the limitations, of the
Merger Agreement. The Merger Agreement requires that SDI shall give Acquisition
(a) prompt notice of any demands for appraisal of any shares of Common Stock and
(b) the opportunity to participate in all negotiations and proceedings with
respect to demands for appraisal under the DGCL. The Merger Agreement further
provides that SDI shall not voluntarily make any payment with respect to any
demands for appraisal of Common Stock or offer to settle or settle any such
demands.
Payment for Shares
At the Effective Time, Acquisition shall deposit, or shall cause to be
deposited, with the Payment Agent, cash in U.S. dollars in an amount equal to
the Merger Consideration multiplied by the aggregate outstanding shares of
Common Stock (other than the Continuing Shares) (such sum being hereinafter
referred to as the "Merger Fund"). Out of the Merger Fund, the Payment Agent
shall, pursuant to instructions from the holders of Common Stock, make the
payments of the Merger Consideration referred to in the Merger Agreement. Any
amount remaining in the Merger Fund six months after the Effective Time shall be
refunded to the Surviving Corporation, and the Surviving Corporation shall
remain liable for payment of the Merger Consideration for two years after the
Effective Time.
In the event any certificate or certificates representing Common Stock
are lost, stolen or destroyed, then the person claiming such fact must provide
(i) an affidavit to that effect to the Surviving Corporation and the Payment
Agent and (ii) as may be required by the Surviving Corporation, in its
discretion, a written indemnity agreement in form and substance satisfactory to
the Surviving Corporation or a bond in such sum as the Surviving Corporation may
direct as indemnity against any claim that may be made against the Surviving
Corporation with respect to the certificate or certificates of Common Stock
alleged to have been lost, stolen or destroyed. Upon receipt and processing of
such documents, the amount owing to such person shall be paid to such person.
At and after the Effective Time, all shares of Common Stock issued and
outstanding immediately prior to the Effective Time (other than the Continuing
Shares or shares as to which dissenters' rights have been perfected) shall be
canceled and cease to exist, and each such holder of a certificate or
certificates that represented shares of Common Stock issued and outstanding
immediately prior to the Effective Time shall cease to have any rights as a
stockholder of SDI with respect to the shares of Common Stock represented by
such certificate or certificates, except for the right to surrender such
holder's certificate or certificates in exchange for the payment provided
pursuant to the Merger Agreement or to perfect such holder's right to receive
payment for such holder's shares pursuant to the DGCL if such holder has validly
exercised and not withdrawn or lost such holder's right to receive payment for
such holder's shares pursuant to the DGCL. No transfer of shares of Common Stock
issued and outstanding immediately prior to the Effective Time shall be made on
the stock transfer books of SDI after the Effective Time.
DETAILED INSTRUCTIONS, INCLUDING A TRANSMITTAL LETTER, WILL BE MAILED
TO STOCKHOLDERS AND HOLDERS OF STOCK RIGHTS PROMPTLY FOLLOWING THE EFFECTIVE
TIME AS TO THE METHOD OF EXCHANGING CERTIFICATES FORMERLY REPRESENTING SHARES OF
26
<PAGE> 75
COMMON STOCK OR STOCK RIGHTS FOR THE MERGER CONSIDERATION OR OPTION
CONSIDERATION, AS APPLICABLE. STOCKHOLDERS AND HOLDERS OF STOCK RIGHTS SHOULD
NOT SEND CERTIFICATES REPRESENTING THEIR SHARES OF COMMON STOCK OR STOCK RIGHTS
TO THE PAYMENT AGENT OR SPECIAL DEVICES, INCORPORATED PRIOR TO RECEIPT OF THE
TRANSMITTAL LETTER.
Representations and Warranties
SDI has made various representations and warranties in the Merger
Agreement, in respect of itself and its subsidiaries, relating to the following
matters (which representations and warranties are subject, in certain cases, to
specified exceptions): (i) corporate organization and qualification; (ii)
capitalization; (iii) authority; (iv) Securities and Exchange Commission ("SEC")
reports and financial statements; (v) information provided in this proxy
statement; (vi) consents and approvals; (vii) title to assets; (viii) company
products; (ix) potential conflicts of interest; (x) absence of defaults; (xi)
absence of undisclosed liabilities and certain changes; (xii) litigation; (xiii)
compliance with applicable law; (xiv) employee plans; (xv) environmental laws
and regulations; (xvi) intellectual property and software; (xvii) year 2000
compliance; (xviii) government contracts; (xix) certain business practices; (xx)
vote required; (xxi) labor matters; (xxii) insurance; (xxiii) tax matters;
(xxiv) absence of brokers; and (xxv) restrictions on business activities.
Acquisition has made various representations and warranties in the
Merger Agreement relating to the following matters (which representations and
warranties are subject, in certain cases, to specific exceptions): (i)
organization; (ii) authority; (iii) information supplied; (iv) consents,
approvals and absence of violations; (v) absence of default; (vi) availability
of financing; and (vii) absence of prior activities.
None of the representations or warranties of either SDI or Acquisition
survive the consummation of the Merger.
Conduct of Business Pending the Merger
The Merger Agreement provides that, from the date of the Merger
Agreement through the Effective Time, SDI will conduct its operations only in
the ordinary course of business consistent with past practices. Without limiting
the generality of the foregoing, the Merger Agreement provides that, from the
date of the Merger Agreement through the Effective Time, SDI will not do any of
the following without the prior written consent of Acquisition (except as
otherwise permitted or required by the Merger Agreement): (i) amend its
certificate of incorporation or bylaws; (ii) grant, amend or modify any Stock
Rights or issue, sell or otherwise dispose of any of its capital stock (except
upon the exercise of Stock Rights outstanding as of the date of the Merger
Agreement); (iii) split, combine, reclassify, repurchase, declare or pay any
dividends on its capital stock; (iv) incur any indebtedness for borrowed money
except for short-term bank borrowings; (v) reduce its cash or short-term
investments; (vi) waive any material right under any contract or agreement;
(vii) materially change any of its business policies; (viii) make any loan or
other advance to any of its stockholders, employees, officers, directors or
other representatives
27
<PAGE> 76
other than travel advances; (ix) terminate or fail to renew any contract or
agreement, the termination of which or failure to renew would have a material
adverse effect on SDI; (x) incur or assume any long-term or short-term debt or
issue any debt securities except for borrowings under existing lines of credit
and not exceeding $10,000,000 in the aggregate; (xi) except as required by law,
enter into, adopt or amend or terminate any employment agreement or any bonus,
profit sharing, compensation, severance, termination, stock option or other
arrangement for the benefit or welfare of any director, officer or employee;
(xii) sell, lease or dispose of any assets that have a value in excess of
$1,000,000; (xiii) except as may be required as a result of a change in law or
generally accepted accounting principles, change any of its accounting
principles or practices; (xiv) acquire any corporation, partnership or other
business organization or equity interest therein in excess of $5,000,000 in the
aggregate, or authorize or make any new capital expenditure in excess of
$1,000,000 individually or $5,000,000 in the aggregate, except for expenditures
included in SDI's 1998 capital expenditure budget; (xv) make any material tax
election or settle or compromise any material income tax liability; (xvi) pay,
discharge or satisfy any claims, liabilities or obligations other than in the
ordinary course of business; (xvii) settle or compromise any pending or
threatened suit, action or claim relating to the transactions contemplated by
the Merger Agreement; or (xviii) take or agree in writing to take, any of the
actions described above or any actions that would make any of SDI's
representations or warranties untrue or incorrect as of the date when made.
Other Potential Acquirers
SDI has agreed that neither it, nor any of its subsidiaries, respective
officers, directors, employees, agents and representatives will solicit,
initiate or encourage (including by way of furnishing information), the
submission of any proposals relating to any merger, sale of assets, sale of or
tender offer for SDI's Common Stock or similar transactions (an "Acquisition
Transaction"), or participate in any discussions or negotiations regarding any
such Acquisition Transaction. Notwithstanding the foregoing, SDI and its
respective directors and officers may, in response to an unsolicited written
proposal with respect to an Acquisition Transaction, furnish information to a
financially capable person or entity (a "Potential Acquirer") and may
participate in any discussions or negotiations with such Potential Acquirer if
SDI gives at least two business days' advance written notice to Acquisition and
if SDI is advised by its independent financial advisor that providing
information to the Potential Acquirer is likely to lead to an Acquisition
Transaction on terms that would yield a higher value to SDI's stockholders than
the Merger and is in the best interests of SDI's stockholders. In the event that
SDI provides information to or negotiates with a Potential Acquirer, SDI has
agreed to immediately provide Acquisition with copies of all such information
provided and to furnish Acquisition with a description of the material terms of
any request, inquiry or offer received from a Potential Acquirer unless SDI
concludes that such disclosure is inconsistent with its fiduciary duties.
Additional Covenants
Pursuant to the Merger Agreement, SDI has covenanted to: (i) prepare
and file with the SEC this proxy statement; (ii) convene a special meeting of
its stockholders as soon as practicable to vote upon adoption of the Merger
Agreement; (iii) prepare and file all materials required by federal and state
securities laws and the Nasdaq Stock Market; and (iv) permit
28
<PAGE> 77
Acquisition to have access to its officers, employees, agents, independent
auditors, representatives, properties, books and records.
Acquisition has covenanted to: (i) hold in confidence all documents and
information concerning SDI and its subsidiaries furnished to Acquisition in
connection with the transactions contemplated by the Merger Agreement; and (ii)
cause the Surviving Corporation to maintain all rights to indemnification or
exculpation now existing in favor of the directors, officers or other employees
and agents of SDI and its subsidiaries as provided in their respective
certificates of incorporation or bylaws with respect to matters occurring prior
to the Effective Time, and to cause the Surviving Corporation to maintain in
effect for at least five years following the Effective Time (within certain
premium limits), the policies of the directors' and officers' liability and
fiduciary insurance most recently maintained by SDI with respect to matters
occurring prior to the Effective Time.
SDI and Acquisition each have covenanted to: (i) use all commercially
reasonable efforts to take all actions and to do all things necessary in order
to consummate and make effective the transactions contemplated by the Merger
Agreement; (ii) cooperate in preparing and filing this proxy statement and any
filings required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976;
(iii) use all commercially reasonable efforts to obtain consents and/or waivers
of all third parties or governmental entities necessary or advisable for the
consummation of the transactions contemplated by the Merger Agreement; (iv)
contest any legal proceeding relating to the Merger; (v) execute any additional
instruments necessary to consummate the transactions contemplated by the Merger
Agreement; (vi) consult with one another before issuing any press release or
otherwise making any public announcement; (vii) give prompt notice to one
another concerning breaches of its own representations and warranties or the
failure to comply with or satisfy any covenant, condition or agreement under the
Merger Agreement; (viii) promptly provide one another copies of all filings made
with the SEC or other governmental entity in connection with the Merger
Agreement; and (ix) promptly notify one another concerning any notice or other
communication (a) alleging that consent may be required, (b) from any
governmental or regulatory agency or (c) with respect to any actions, suits,
claims or investigations against SDI, in each case that relates to the
consummation of the transactions contemplated by the Merger Agreement.
Conditions to the Merger
The obligations of SDI and Acquisition to complete the Merger are
subject to the fulfillment of the following conditions: (i) the Merger shall
have been adopted by the stockholders of SDI; (ii) no statute, rule, regulation,
order, stipulation or injunction shall have been enacted, promulgated, entered,
enforced by any United States court or United States governmental authority that
prohibits, restrains or restricts the consummation of the Merger; and (iii) any
applicable waiting period applicable to the Merger and the other transactions
contemplated by the Merger Agreement shall have terminated or expired, and any
other required governmental or regulatory notices or approvals shall have been
either filed or received.
The obligations of Acquisition to complete the Merger are further
subject to the fulfillment of the following conditions, any one or more of which
may be waived by Acquisition:
29
<PAGE> 78
(i) the representations and warranties of SDI set forth in the Merger Agreement
are true and correct in all material respects at and as of the Effective Time,
unless the failure of the representations and warranties to be true and correct
is unlikely in the aggregate to have a material adverse effect on SDI and its
subsidiaries; and (ii) SDI shall have performed and complied with, in all
material respects, all obligations and covenants required to be performed or
complied with by it under the Merger Agreement.
The obligations of SDI to complete the Merger are further subject to
the fulfillment of the following conditions, any one or more of which may be
waived by SDI: (i) the representations and warranties of Acquisition set forth
in the Merger Agreement are true and correct in all material respects at and as
of the Effective Time, unless the failure of the representations and warranties
to be true and correct is unlikely in the aggregate to have a material adverse
effect on Acquisition; and (ii) Acquisition shall have performed and complied
with, in all material respects, all obligations and covenants required to be
performed or complied with by it under the Merger Agreement.
Termination of Merger Agreement
The Merger Agreement may be terminated and the Merger may be abandoned
at any time prior to the Effective Time in the event of any of the following (i)
by mutual written consent of SDI and Acquisition; (ii) by SDI or Acquisition if
any court of competent jurisdiction in the United States or other United States
governmental authority shall have issued a final order, decree or ruling
restraining, enjoining or prohibiting the Merger and such order, decree or
ruling is nonappealable; (iii) by SDI or Acquisition if the Merger has not been
consummated by October 31, 1998 (unless otherwise extended by the parties),
unless the terminating party's failure to fulfill any of its obligations under
the Merger Agreement shall have been the reason that the Effective Time shall
not have occurred on or before such date; (iv) by SDI if Acquisition shall have
breached any of its representations or warranties set forth in the Merger
Agreement or any representation or warranty of Acquisition shall have become
untrue, in either case if such would have a material adverse effect on
Acquisition or materially adversely affect (or delay) consummation of the
Merger; (v) by SDI if Acquisition shall have breached any of its covenants or
agreements set forth in the Merger Agreement and such would have a material
adverse effect on Acquisition or materially adversely affect (or delay)
consummation of the Merger, and Acquisition has not cured such breach prior to
ten days following notice by SDI, provided that SDI has not breached any of its
obligations under the Merger Agreement in a manner that proximately contributed
to such breach by Acquisition; (vi) by SDI if the Board determines in its good
faith judgment that it must do so in the exercise of its fiduciary duties under
the DGCL; (vii) by SDI if SDI's stockholders shall have failed to adopt the
Merger; (viii) by Acquisition if the Board withdraws or modifies its approval or
recommendation of the Merger in a manner adverse to Acquisition or shall have
recommended an acquisition (by any other person or entity other than Acquisition
or its affiliates) of (a) SDI by merger or otherwise, (b) more than 50% of the
assets of SDI and its subsidiaries or (c) Common Stock resulting in such person
or entity holding at least 50% or more of the outstanding shares of SDI's Common
Stock (a "Third Party Acquisition"); (ix) by Acquisition if a Third Party
Acquisition occurs; (x) by Acquisition if SDI shall have breached any of its
representations or warranties set forth in the Merger Agreement or any
representation or warranty of SDI shall have become untrue, in either case if
such would
30
<PAGE> 79
have a material adverse effect on SDI and its subsidiaries or materially
adversely affect (or delay) consummation of the Merger, and SDI has not cured
such breach prior to ten days following notice by Acquisition, provided that
Acquisition has not breached any of its obligations under the Merger Agreement
in a manner that proximately contributed to such breach by SDI; (xi) by
Acquisition if SDI shall have breached any of its covenants or agreements set
forth in the Merger Agreement and such would have a material adverse effect on
SDI and its subsidiaries or materially adversely affect (or delay) consummation
of the Merger, and SDI has not cured such breach prior to ten days following
notice by Acquisition, provided that Acquisition has not breached any of its
obligations under the Merger Agreement in a manner that proximately contributed
to such breach by SDI; or (xii) by Acquisition if Acquisition shall have
discovered that any information supplied to it by SDI contained any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements not misleading at the time such information was provided to
Acquisition.
Termination Fee and Payment of Expenses
In the event that the Merger Agreement is terminated because a Third
Party Acquisition occurs or pursuant to clauses (vi), (viii), (x), (xi) or (xii)
as set forth in the preceding subsection, and within twelve months thereafter,
SDI enters into an agreement with respect to a Third Party Acquisition or a
Third Party Acquisition occurs, SDI shall pay $6,000,000, as liquidated damages,
to Acquisition. A fee in that amount shall also be paid by SDI to Acquisition in
the event that the Merger Agreement is terminated pursuant to clause (vii) as
set forth in the preceding subsection, and within six months thereafter, SDI
enters into an agreement with respect to a Third Party Acquisition or a Third
Party Acquisition occurs.
In the event that the Merger Agreement is terminated pursuant to
clauses (vii), (viii), (x), (xi) or (xii) as set forth in the preceding
subsection and no Third Party Acquisition occurs within the applicable time
period, SDI shall reimburse Acquisition for its documented out-of-pocket fees
and expenses up to $750,000 that were reasonably incurred in connection with the
Merger Agreement and the consummation of the transactions contemplated therein.
In the event that the Merger Agreement is terminated pursuant to clauses (iv)
and (v) as set forth in the preceding subsection, Acquisition shall reimburse
SDI for all documented out-of-pocket fees and expenses up to $750,000 that were
reasonably incurred in connection with the Merger Agreement and the consummation
of the transactions contemplated therein.
The Merger Agreement further provides that in the event of a breach of
the Merger Agreement by any party, the breaching party shall be liable, in
accordance with the provisions of the Merger Agreement, for no more than
$15,000,000 for the consequences of such breach.
Amendment
Subject to applicable law, SDI and Acquisition may amend the Merger
Agreement in writing at any time before or after approval of the Merger by SDI's
stockholders (if required by applicable law), but, after such stockholder
approval, no amendment shall be made that requires the approval of such
stockholders under applicable law without such approval. Subject to applicable
law, SDI and Acquisition may modify or amend any provision of the Merger
31
<PAGE> 80
Agreement at any time prior to the Effective Time by written agreement executed
and delivered by duly authorized officers of the respective parties.
Financing
General. In order to (i) fund the payment of the Merger Consideration,
(ii) refinance certain outstanding indebtedness of SDI and (iii) pay the fees
and expenses incurred in connection with the Merger, SDI expects to obtain a
combination of debt and equity financing as follows:
<TABLE>
<CAPTION>
SOURCE AMOUNT
- - ------ ------
<S> <C>
Equity Contribution from Affiliates of JFLC...... $ 79,000,000
Sale of Debt Securities.......................... 190,000,000
Borrowings Under the Revolving Credit Facility... 15,200,000
</TABLE>
Acquisition Financing. J.F. Lehman Equity Investors I, L.P., a Delaware
limited partnership ("JFLEI") and an affiliate of JFLC, has committed that,
subject to the satisfaction of the conditions to the consummation of the Merger
set forth in the Merger Agreement and the closing of the Merger, it will
contribute $32,500,000 of the equity portion of the Merger financing. JFL
Co-Invest Partners I, L.P., a Delaware limited partnership ("JFLCP") and an
affiliate of JFLC, has committed that, subject to the satisfaction of the
conditions to the consummation of the Merger set forth in the Merger Agreement
and the closing of the Merger, it will fund $46,500,000 of the equity portion of
the Merger financing.
Debt Financing. The Surviving Corporation expects to issue an aggregate
of $190,000,000 in gross proceeds of debt securities in a private placement for
resale pursuant to Rule 144A under the Securities Act of 1933, as amended.
Depending on pricing and other market conditions at the time of the offering of
the debt securities, JFLC may determine that in order to have the optimal
financing under these conditions, the actual gross proceeds could be higher or
lower than $190,000,000. To the extent that the gross proceeds differ from
$190,000,000, the amount of equity contributions and/or the amount of borrowings
under the new Revolving Credit Facility (as defined below) will be adjusted, or
other financing arrangements will be made, in order to result in the same total
proceeds from such offering and other sources in the aggregate.
Revolving Credit Facility. The Surviving Corporation expects to enter
into a $30,000,000 revolving credit facility (the "Revolving Credit Facility"),
for which Bankers Trust Company will act as agent. At the Effective Time, the
Surviving Corporation expects to borrow approximately $15,200,000 under the
Revolving Credit Facility. The Revolving Credit Facility will enable the
Surviving Corporation to obtain revolving credit loans and the issuance of
letters of credit for the account of the Surviving Corporation from time to time
for working capital, acquisitions and general corporate purposes. The Revolving
Credit Facility will have a term of five years, unless terminated sooner upon an
event of default, and outstanding revolving credit
32
<PAGE> 81
loans will be payable on such date or such earlier date as may be accelerated
following the occurrence of any event of default.
Regulatory Compliance
A certificate of merger must be filed on behalf of SDI and Acquisition
with the Secretary of State of Delaware in order to effect the Merger.
Except as described above, SDI is not aware of any licenses or
regulatory permits that are material to its business that might be adversely
affected by the Merger, or of any approval or other action by any governmental,
administrative or regulatory agency or authority which would be required prior
to the Effective Time.
Accounting Treatment
The Merger will be treated as a recapitalization for accounting
purposes.
APPRAISAL RIGHTS
If the Merger is consummated, a holder of record of shares of Common
Stock who objects to the terms of the Merger may seek an appraisal under Section
262 of the Delaware General Corporation law of the "fair value" of such holder's
shares. The following is a summary of the principal provisions of Section 262
and does not purport to be a complete description. A copy of Section 262 is
attached to this proxy statement as Appendix D. Failure to take any action
required by Section 262 will result in a termination or waiver of a
stockholder's rights under Section 262.
1. A stockholder electing to exercise Appraisal Rights must (a) deliver
to SDI, before SDI stockholders vote on the Merger Agreement, a written demand
for appraisal that is made by or on behalf of the person who is the holder of
record of Common Stock for which appraisal is demanded and (b) not vote in favor
of adopting the Merger Agreement. The demand must be delivered to Special
Devices, Incorporated at 16830 West Placerita Canyon Road, Newhall, California
91321, Attention: John Vinke, Chief Financial Officer. A proxy or vote against
adopting the Merger Agreement does not constitute a demand. A stockholder
electing to take such action must do so by a separate written demand that
reasonably informs SDI of the identity of the holder of record and of such
stockholder's intention to demand appraisal of such holder's Common Stock.
Because a proxy left blank will, unless revoked, be voted FOR adoption of the
Merger Agreement, a stockholder electing to exercise Appraisal Rights who votes
by proxy must not leave the proxy blank but must vote AGAINST adoption of the
Merger Agreement or ABSTAIN from voting for or against adoption of the Merger
Agreement.
2. Only the holder of record of Common Stock is entitled to demand
Appraisal Rights for Common Stock registered in that holder's name. The demand
must be executed by or for the holder of record, fully and correctly, as the
holder's name appears on the holder's stock certificates. If Common Stock is
owned of record in a fiduciary capacity, such as by a trustee, guardian or
custodian, the demand should be executed in that capacity. If Common Stock is
owned of record by more than one person, as in a joint tenancy or tenancy in
common, the
33
<PAGE> 82
demand should be executed by or for all owners. An authorized agent, including
one of two or more joint owners, may execute the demand for appraisal for a
holder of record; however, the agent must identify the owner or owners of record
and expressly disclose the fact that, in executing the demand, the agent is
acting as agent for the owner or owners of record.
A holder of record, such as a broker, who holds Common Stock as nominee
for beneficial owners may exercise a holder's right of appraisal with respect to
Common Stock held for all or less than all of such beneficial owners. In such
case, the written demand should set forth the number of shares of Common Stock
covered by the demand. Where no number of shares of Common Stock is expressly
mentioned, the demand will be presumed to cover all shares of Common Stock
standing in the name of the holder of record.
3. Within 10 days after the Effective Time, SDI will send notice of the
effectiveness of the Merger to each person who prior to the Effective Time
satisfied the foregoing conditions.
4. Within 120 days after the Effective Time, SDI or any stockholder who
has satisfied the foregoing conditions may file a petition in the Delaware Court
of Chancery demanding a determination of the fair value of the Common Stock.
Stockholders seeking to exercise Appraisal Rights should not assume that SDI
will file a petition to appraise the value of their Common Stock or that SDI
will initiate any negotiations with respect to the "fair value" of such Common
Stock. Accordingly, Common Stockholders should initiate all necessary action to
perfect their Appraisal Rights within the time periods prescribed in Section
262.
5. Within 120 days after the Effective Time, any stockholder who has
complied with the requirements for exercise of Appraisal Rights, as discussed
above, is entitled, upon written request, to receive from SDI a statement
setting forth the aggregate number of shares of Common Stock not voted in favor
of the Merger and with respect to which demands for appraisal have been made and
the aggregate number of holders of such Common Stock. SDI is required to mail
such statement within 10 days after it receives a written request to do so.
6. If a petition for an appraisal is timely filed, after a hearing on
the petition, the Delaware Court of Chancery will determine the stockholders
entitled to Appraisal Rights and will appraise the Common Stock owned by such
stockholders, determining its "fair value" exclusive of any element of value
arising from the accomplishment or expectation of the Merger and will determine
the amount of interest, if any, to be paid upon the value of the Common Stock of
the stockholders entitled to appraisal. Any such judicial determination of the
"fair value" of Common Stock could be based upon considerations other than or in
addition to the price paid in the Merger and the market value of Common Stock,
including asset values, the investment value of the Common Stock and any other
valuation considerations generally accepted in the investment community. The
value so determined for Common Stock could be more than, less than or the same
as the consideration paid pursuant to the Merger Agreement. The Court may also
order that all or a portion of any stockholder's expenses incurred in connection
with an appraisal proceeding, including, without limitation, reasonable
attorneys' fees and fees and expenses of experts utilized in the appraisal
proceeding, be charged pro rata against the value of all Common Stock entitled
to appraisal.
34
<PAGE> 83
7. Any stockholder who has duly demanded an appraisal in compliance
with Section 262 will not, after the Effective Time, be entitled to vote the
shares subject to such demand for any purpose or be entitled to dividends or
other distributions on that Common Stock (other than those payable or deemed to
be payable to stockholders of record as of a date prior to the Effective Time).
8. Holders of Common Stock lose the right to appraisal if no petition
for appraisal is filed within 120 days after the Effective Time, or if a
stockholder delivers to SDI a written withdrawal of such stockholder's demand
for an appraisal and an acceptance of the Merger, except that any such attempt
to withdraw made more than 60 days after the Effective Time requires SDI's
written approval. If Appraisal Rights are not perfected or a demand for
Appraisal Rights is withdrawn, a stockholder will be entitled to receive the
consideration otherwise payable pursuant to the Merger Agreement.
9. If an appraisal proceeding is timely instituted, such proceeding may
not be dismissed as to any stockholder who has perfected a right of appraisal
without the approval of the Delaware Court of Chancery.
FEDERAL INCOME TAX CONSEQUENCES
Upon consummation of the Merger each outstanding share of Common Stock
(except for the Continuing Shares and those shares with respect to which
statutory appraisal rights are exercised) will be converted into the right to
receive the Merger Consideration. The following discussion is a summary of the
principal federal income tax consequences of the Merger to stockholders of SDI
whose shares of Common Stock are surrendered pursuant to the Merger (including
any cash amounts received by dissenting stockholders pursuant to the exercise of
appraisal rights). The discussion applies only to stockholders in whose hands
shares of Common Stock are capital assets, and may not apply to shares of Common
Stock received pursuant to the exercise of employee stock options or otherwise
as compensation or to stockholders who are not citizens or residents of the
United States.
THE FEDERAL INCOME TAX CONSEQUENCES SET FORTH BELOW ARE INCLUDED FOR
GENERAL INFORMATIONAL PURPOSES ONLY AND ARE BASED UPON PRESENT LAW. BECAUSE
INDIVIDUAL CIRCUMSTANCES MAY DIFFER, EACH STOCKHOLDER IS URGED TO CONSULT SUCH
STOCKHOLDER'S OWN TAX ADVISOR TO DETERMINE THE APPLICABILITY OF THE RULES
DISCUSSED BELOW TO SUCH STOCKHOLDER AND THE PARTICULAR TAX EFFECTS OF THE
MERGER, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND OTHER TAX LAWS.
The receipt of cash pursuant to the Merger (including any cash amounts
received by dissenting stockholders pursuant to the exercise of appraisal
rights) will be a taxable transaction for federal income tax purposes under the
Internal Revenue Code of 1986, as amended (the "Code"). In general, for federal
income tax purposes, a stockholder will recognize gain or loss equal to the
difference between the cash received by the stockholder pursuant to the Merger
Agreement and the stockholder's adjusted tax basis in the shares of Common Stock
surrendered
35
<PAGE> 84
pursuant to the Merger Agreement. Such gain or loss will be a capital gain or
loss. The rate at which any such gain will be taxed to noncorporate stockholders
(including individuals, estates and trusts) will, as a general matter, depend
upon each stockholder's holding period in the shares of Common Stock at the
Effective Time. If a noncorporate stockholder has net capital gain (the excess
of net long-term capital gain over net short-term capital loss) for his or her
taxable year in which the gain is recognized and such stockholder's holding
period for the shares of Common Stock is more than 12 months, either a 20
percent or a 10 percent capital gains rate generally will apply to such gain,
depending on the amount of taxable income of such stockholder for such year. If
the stockholder's holding period for the shares of Common Stock is one year or
less, such gain will be taxed at the same rates as ordinary income. This would
effectively eliminate the 28 percent capital gains rate. Capital loss generally
is deductible only to the extent of capital gain plus $3,000. Net capital loss
in excess of $3,000 may be carried forward to subsequent taxable years.
For corporations, capital losses are allowed only to the extent of
capital gains, and net capital gain is taxed at the same rate as ordinary
income. Corporations generally may carry capital losses back up to three years
and forward up to five years.
Payments in connection with the Merger may be subject to "backup
withholding" at a 31% rate. Backup withholding generally applies if the
stockholder fails to furnish such stockholder's social security number or other
taxpayer identification number ("TIN"), or furnishes an incorrect TIN. Backup
withholding is not an additional tax but merely a creditable advance payment
which may be refunded to the extent it results in an overpayment of tax. Certain
persons generally are exempt from backup withholding, including corporations and
financial institutions. Certain penalties apply for failure to furnish correct
information and for failure to include reportable payments in income.
Stockholders should consult with their own tax advisors as to the qualifications
and procedures for exemption from backup withholding.
CERTAIN EFFECTS OF THE MERGER
Upon consummation of the Merger, Acquisition will be merged into SDI,
the separate corporate existence of Acquisition will cease, and SDI will
continue as the Surviving Corporation. After the Effective Time, the present
holders of Common Stock (other than the Continuing Stockholders) will no longer
have any equity interest in SDI, will not share in the future earnings or growth
of SDI and will no longer have rights to vote on corporate matters. SDI is
currently subject to the information filing requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, is required to file reports and other information with the SEC
relating to its business, financial statements and other matters. As a result of
the Merger, there will cease to be any public market for Common Stock, and,
after the Effective Time, Common Stock will be delisted from the Nasdaq Stock
Market. Upon such event, SDI will apply to the SEC for the deregistration of
Common Stock under the Exchange Act. The termination of the registration of
Common Stock under the Exchange Act would make certain provisions of the
Exchange Act (including the proxy solicitation provisions of Section 14(a), and
the short-swing trading provisions of Section 16(b)) no longer applicable to
SDI.
36
<PAGE> 85
THE GUARANTY AGREEMENT
The following summary of the Guaranty Agreement is subject to, and
qualified in its entirety by, the complete text of the Guaranty Agreement which
is attached to this proxy statement as Appendix C. The terms of the Guaranty
Agreement are the result of arm's-length negotiations between SDI and JFLEI, an
affiliate of JFLC. The Guaranty Agreement provides that JFLEI unconditionally
guarantees, for the benefit of SDI, the full payment by Acquisition of any final
judgment or settlement obtained against Acquisition (or pursuant to any other
agreement signed by Acquisition admitting liability), in each case relating to
and arising from the failure of Acquisition to fully perform its obligations
under the Merger Agreement or the breach of any of Acquisition's representations
and warranties contained in the Merger Agreement. The Guaranty Agreement is
subject to the terms, conditions and limitations set forth in the Merger
Agreement, and the damages recoverable against JFLEI under the Guaranty
Agreement are limited to $15,000,000. The Guaranty Agreement terminates upon the
closing of the Merger. The Guaranty Agreement contains customary representations
and warranties in respect of JFLEI relating to the following matters: (i)
organization and qualification and (ii) authority, approvals and consents.
LITIGATION
Three purported stockholder class action lawsuits have recently been
filed in the Delaware Court of Chancery challenging the Merger. On June 22,
1998, David Finkelstein filed a purported stockholder class action lawsuit
against J. Nelson Hoffman, Robert S. Ritchie, Jack B. Watson, Thomas F. Treinen,
Walter Neubauer, Samuel Levin, Donald A. Bendix, John M. Cuthbert, SDI. and
JFLC. Also on June 22, 1998, a purported stockholder class action complaint was
filed by Harbor Finance Partners against Messrs. Treinen, Hoffman, Ritchie,
Watson, Levin, Bendix, Cuthbert, as well as SDI. Finally, on June 25, 1998, a
purported stockholder class action lawsuit was filed by Timothy Hawkins against
Messrs. Hoffman, Watson, Treinen, Levin, Bendix, Cuthbert, as well as SDI, and
JFLC. Each of these lawsuits charges the individual defendants with breaching
their fiduciary duties to the public stockholders of SDI by allegedly failing to
obtain adequate consideration for the Merger. The complaints allege, inter alia,
that the terms of the Merger are unfair, that the defendants failed to consider
other potential purchasers of SDI, and that the individual defendants are
favoring their own interests at the expense of the stockholders. No trial date
has been set for any of the three lawsuits and the defendants have not yet filed
responsive pleadings. The current due date for responses is September 9, 1998.
Management disputes all of the plaintiffs' material allegations and believes
that this litigation is without merit.
INFORMATION REGARDING SPECIAL DEVICES, INCORPORATED
SDI is a leader in the design and manufacture of highly reliable
pyrotechnic devices used by the automotive industry as initiators in airbag
systems and the aerospace industry, primarily in tactical missile systems,
propellant and explosive actuated devices and military aircraft crew ejection
systems. SDI operates through two separate divisions, Automotive Products and
Aerospace.
37
<PAGE> 86
SDI formed the Automotive Products Division as a separate division in
fiscal 1989 to concentrate on SDI's strategic decision to apply its expertise in
pyrotechnic products beyond the defense-related markets traditionally serviced
by its Aerospace Division. The Automotive Products Division's principal products
are initiators, the pyrotechnic output of which is used to ignite the inflation
system in automotive airbag systems.
The Automotive Products Division contributed 71%, 77% and 80% of SDI's
net sales during the fiscal years ended October 31, 1995, 1996 and 1997,
respectively. The magnitude of this percentage is due primarily to Master
Purchase Agreements with TRW, Inc. and Autoliv ASP Incorporated (formerly Morton
International). SDI's initiators are sold to four domestic manufacturers of
airbag systems or inflators (TRW, Autoliv, Atlantic Research Corporation and
Breed Technologies), and are also sold on a more limited basis to two foreign
manufacturers, and are incorporated into driver and passenger-side airbag
systems used in a wide variety of automobile models manufactured by
substantially all of the automobile manufacturers that sell automobiles, light
trucks and vans in the United States, including the three major domestic
manufacturers (Chrysler, Ford and GM), as well as BMW, Fiat, Kia, Mazda,
Mitsubishi, Nissan, Toyota and Volkswagen. In addition, one foreign buyer of
SDI's initiators uses them for application in seat belt pre-tensioners.
SDI's Aerospace Division has been designing and manufacturing products
for the aerospace industry for over 30 years. Its customers are primarily the
United States government and its prime contractors. The Aerospace Division
contributed 29%, 23% and 20% of SDI's net sales during the fiscal years ended
October 31, 1995, 1996 and 1997, respectively. The decline in percentage from
1995 to 1996 was the result of (i) higher sales levels achieved by the
Automotive Products Division and (ii) high sales levels of products used in a
certain missile program in 1995 which did not repeat in 1996. The decline in
percentage from 1996 to 1997 was due to sales by the Automotive Products
Division increasing at a higher rate than sales by the Aerospace Division.
INFORMATION REGARDING J.F. LEHMAN & COMPANY, INC.
JFLC was established by John F. Lehman, Donald Glickman and George
Sawyer (the "Managing Principals") to acquire niche manufacturing and service
companies with significant engineering and technical content. JFLC's portfolio
companies typically serve those industries in which the Managing Principals have
significant operating and investing experience, including the aviation, space,
automotive, semiconductor equipment and marine industries.
The Managing Principals are the managing members of JFL Investors LLC,
the general partner of JFLEI, a private equity investment fund formed in 1997.
JFLC is the manager of JFLEI. JFLCP was formed to enable certain partners of
JFLEI to participate in the Merger.
JFLC through JFLEI has sponsored two transactions over the past
eighteen months. In August 1997, JFLC led the recapitalization of Burke
Industries, Inc., a leading manufacturer of engineered elastometric products for
the aerospace, heavy-duty truck and commercial building markets. In February
1998, JFLC recapitalized Elgar Holdings, Inc. which, through its subsidiary,
Elgar Electronics Corporation, is a leader in the design and manufacture of
38
<PAGE> 87
programmable power equipment and systems to test semiconductor test equipment,
satellite ground testing systems, weapons systems, avionics, communication
systems, medical equipment and consumer electronics.
Prior to the formation of JFLEI, JFLC sponsored both the 1993
acquisition of Sperry Marine, Inc., a recognized world leader in the design and
manufacture of advanced electronic maritime instruments and sensors, and the
1992 acquisition of Astra Holdings Corporation, a leading manufacturer of
electronic and electromechanical devices and subsystems for military and
commercial uses, including various pyrotechnic applications.
39
<PAGE> 88
SELECTED FINANCIAL DATA FOR SPECIAL DEVICES, INCORPORATED
The following table presents certain summary selected consolidated
financial data of SDI as of and for each of the five years in the period ended
October 31, 1997. This financial data was derived from the audited historical
consolidated financial statements of SDI and should be read in conjunction with
the "Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained elsewhere in this proxy statement.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------------
1993 1994(1) 1995 1996 1997
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales:
Automotive Products ..... $ 24,339 $ 49,460 $ 71,253 $ 80,235 $ 111,930
Aerospace ............... 13,112 15,049 29,339 24,247 28,572
--------- --------- --------- --------- ---------
Total .............. 37,451 64,509 100,592 104,482 140,502
Cost of sales:
Automotive Products ..... 22,367 43,388 63,241 68,113 92,758
Aerospace ............... 9,814 11,037 19,730 16,215 19,795
--------- --------- --------- --------- ---------
Total .............. 32,181 54,425 82,971 84,328 112,553
Gross profit:
Automotive Products ..... 1,972 6,072 8,012 12,123 19,172
Aerospace ............... 3,298 4,012 9,609 8,031 8,777
--------- --------- --------- --------- ---------
Total ............... 5,270 10,084 17,621 20,154 27,949
Operating expenses:
Automotive Products ..... 1,564 2,914 3,412 3,878 5,524
Aerospace ............... 1,139 1,438 4,270 4,232 5,198
--------- --------- --------- --------- ---------
Total ............... 2,703 4,352 7,682 8,110 10,722
Earnings from operations:
Automotive Products ..... 408 3,158 4,600 8,245 13,648
Aerospace ............... 2,159 2,574 5,339 3,799 3,579
--------- --------- --------- --------- ---------
Total ............... 2,567 5,732 9,939 12,044 17,227
Other income (expense), net ...... (315) (452) (639) 129 111
Earnings before income taxes ..... 2,252 5,280 9,300 12,173 17,338
Provision for income taxes ....... 920 2,111 3,720 4,725 6,660
--------- --------- --------- --------- ---------
Net earnings ..................... $ 1,332 $ 3,169 $ 5,580 $ 7,448 $ 10,678
Net earnings per share ........... $ .23 $ .55 $ .82 $ .96 $ 1.37
Weighted average common and common
equivalent shares outstanding .. 5,764 5,786 6,832 7,763 7,822
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------------------------------
1993 1994(1) 1995 1996 1997
------- ------ ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets ........ $14,762 $25,154 $43,320 $45,326 $43,407
Total assets .......... 33,939 51,689 78,621 86,159 99,824
Current liabilities ... 6,221 10,613 10,150 10,369 13,271
Long-term debt,
less current portion 3,608 12,568 4,027 3,320 2,057
Stockholders' equity .. 23,222 26,659 62,054 69,701 81,357
</TABLE>
- - -------
(1) Effective July 31, 1994, the Company acquired all of the assets of Scot,
Inc. Accordingly, the results of operations for the year ended October 31,
1994, and all subsequent years, include the results of Scot, Inc.
from that effective date.
40
<PAGE> 89
UNAUDITED RESULTS FOR THE FIRST TWO QUARTERS OF 1998
SDI announced that net sales for the second quarter of 1998 (three
months ended May 3, 1998) were $45,114,061 as compared with $32,791,946 for the
second quarter of 1997 (three months ended May 4, 1997); net sales for the six
months ended May 3, 1998 were $85,846,434 as compared with $60,329,340 for the
six months ended May 4, 1997. Income (loss) from operations was $6,947,734 for
the second quarter of 1998 as compared with $3,931,942 for the second quarter of
1997; income (loss) from operations was $18,354,451 for the six months ended May
3, 1998 as compared with $11,687,962 for the six months ended May 4, 1997. Net
income (loss) was $4,047,874 for the second quarter of 1998 as compared with
$2,462,186 for the second quarter of 1997; net income (loss) was $7,434,852 for
the six months ended May 3, 1998 as compared with $4,376,315 for the six months
ended May 4, 1997. Net income (loss) per share was $0.52 for the second quarter
of 1998 as compared with $0.32 for the second quarter of 1997; net income (loss)
per share was $0.96 for the six months ended May 3, 1998 as compared with $0.57
for the six months ended May 4, 1997. The weighted average shares outstanding
was 8,084,704 for the second quarter 1998 as compared with 7,782,193 for the
second quarter 1997; the weighted average shares outstanding was 8,052,886 for
the six month ended May 3, 1998 as compared with 7,747,637 for the six months
ended May 4, 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MAY 3, 1998 TO THE THREE MONTHS ENDED MAY
4, 1997
Net Sales. The majority of air-bag initiators sold by SDI are sold to
TRW and Autoliv ASP Incorporated (formerly Morton International). The initiators
sold to TRW are more complex, and contain a higher material content, than the
initiators sold to Autoliv, and consequently are sold for a higher average unit
price than the initiators sold to Autoliv.
Net sales for the Automotive Products Division increased by
$11,232,000, or 45.2%, to $36,095,000 for the quarter ended May 3, 1998 compared
to sales of $24,863,000 for the same quarter of the previous year. The increase
in sales represents an approximate 68.8% increase in units shipped in the
current year quarter compared to the same quarter last year, offset by a
reduction in the average unit selling price of an initiator, and by a greater
number of initiators sold to Autoliv as a percent of total initiators sold
during the quarter. The increase in the number of initiators sold was due to the
use of airbags as the primary means of compliance with the federal regulations
which require automatic frontal crash protection systems for the driver and
front passenger. Sales to TRW as a percent of Automotive Products Division sales
were 49.7% for the second quarter, compared to 62.2% for the same period last
year, and were 39.7% of total Company sales in the second quarter compared to
47.2% of total Company sales for the same period last year. Sales to Autoliv
were 28.5% of Automotive Products Division sales and were 22.8% of total Company
sales for the current year second quarter, compared to 23.1% of Automotive
Products Division and 17.5% of total Company sales for the same period last
year.
41
<PAGE> 90
Net sales for the Aerospace Division were $9,019,000 for the second
quarter, an increase of $1,090,000, or 13.8% compared to sales of $7,929,000 for
the second quarter last year. The increase in sales was the result of increased
shipments of products used on several missile programs and due to entering the
production phase of the bomb ejector program in the current year.
Cost of Sales. Cost of sales for the Automotive Products Division
increased by $8,230,000, or 39.5%, to $29,073,000 for the three months ended May
3, 1998, compared to cost of sales of $20,843,000 for the same period of 1997.
Gross profit as a percent of sales was 19.5% for the second quarter compared to
16.1% for the same period last year. The increase in margin reflects the effects
of continuing improved yields from automated equipment, reduced material costs,
and a larger revenue base over which overhead costs were spread, partially
offset by a 14% decrease in the average sales price in the second quarter of the
current year compared to the same period last year. In addition to the effort to
reduce average unit production cost by improving yields from existing automated
equipment, the Automotive Products Division is continuing its focus on cost
reduction by: a) reducing material cost through vertical integration and
strategic alliances with key vendors; b) reducing scrap; and c) redesigning
certain initiator parts.
Cost of sales for the Aerospace Division increased by $338,000, or 6.1%
to $5,896,000, compared to cost of sales of $5,558,000 for the same period last
year. Gross profit as a percent of sales was 34.6% in the second quarter
compared to 29.9% for the same quarter last year. The increase in gross profit
percent during the current quarter was due to the mix of products shipped, as
well as increased efforts to review and control variable production overhead
expenses.
Operating Expenses. Operating expenses for each division (Automotive
Products and Aerospace) are comprised of two components. First, each division is
charged directly those operating expenses incurred by that division. Second,
each division is allocated administrative operating expenses incurred by SDI
(which are not attributable to a particular division) on an equitable basis to
fairly reflect the benefit received by each operating division. Total
administrative expenses (which are allocated) for the second quarter of 1998
were approximately the same as total administrative expenses (which are
allocated) for the same period last year. In 1998 these costs have been
allocated approximately 70% to the Automotive Products Division; in 1997 these
costs were allocated approximately equally to each division.
Operating expenses for the Automotive Products Division increased by
$489,000, or 40.3%, to $1,702,000 for the three months ended May 3, 1998
compared to operating expenses of $1,213,000 for the same period in 1997. As a
percentage of sales, operating expenses were 4.7% compared to 4.9% for the same
period last year. The dollar increase in operating expenses was incurred to
support the 68.8% increase in units shipped in the current year quarter. The
improved margin reflects the effects of fixed operating expenses being spread
across a higher level of sales in the current year quarter, as well as the
results of efforts to control variable expenses.
Operating expenses for the Aerospace Division increased by $250,000, or
20.1%, to $1,496,000 in the second quarter compared to operating expenses of
$1,246,000 for the same
42
<PAGE> 91
quarter last year. As a percentage of sales, operating expenses were 16.6%
compared to 15.7% for the same period last year. The increase in operating
expenses occurred to support the higher level of sales in the current year
quarter.
Other Income and Expense. Other income (expense) consists primarily of
interest income and interest expense. Net other income (expense) was $25,000
expense in the second quarter of 1998, compared to other income of $25,000 for
the same period last year. Interest income was $29,000 in the second quarter of
1998 compared to interest income of $82,000 for the second quarter of last year.
The reduction in interest income was the result of lower average balances of
invested funds during the current year quarter. Interest expense was $49,000 in
the second quarter of 1998, compared to interest expense of $56,000 for the same
period last year. The decrease of $7,000 was the result of lower average
balances outstanding for long-term debt in the current period as a result of
scheduled principal payments.
COMPARISON OF THE SIX MONTHS ENDED MAY 3, 1998 TO THE SIX MONTHS ENDED MAY 4,
1997
Net Sales. The majority of air-bag initiators sold by SDI are sold to
TRW and Autoliv ASP Incorporated (formerly Morton International). The initiators
sold to TRW are more complex, and contain a higher material content, than the
initiators sold to Autoliv, and consequently are sold for a higher average unit
price than the initiators sold to Autoliv.
Sales for the Automotive Products Division were $71,843,000 for the six
months ended May 3, 1998, compared to sales of $48,439,000 for the comparable
period of the preceding year. The increase in sales represents an approximate
76.5% increase in units shipped for the first six months of the current fiscal
year compared to the same period last year, offset partially by a reduction in
the average unit selling price of an initiator due primarily to the mix of
products sold to TRW and Autoliv. The increase of $23,404,000, or 48.3%, was the
result of the increased demand for initiators which reflects increasing
implementation of airbags for cars produced in the United States and
accelerating rates of implementation of airbags in European and Pacific Rim
countries. Sales to TRW as a percent of the Division's total sales were 50.1%
for the first six months of the current fiscal year compared to 66.0% for the
same period last year, and were 41.9% of total Company sales this year compared
to 53.0% for the same period last year. Sales to Autoliv were 30.3% of
Automotive Products Division sales and were 25.3% of total company sales for the
six months ended May 3, 1998, compared to 21.5% of Automotive Products Division
and 17.2% of total Company sales for the same period last year.
Sales for the Aerospace Division were $14,004,000 for the first six
months of the current year, compared to sales of $11,890,000 for the same period
last year, an increase of $2,114,000 or 17.8%. The increase in sales was the
result of continued shipments of products used on several missile programs and
due to entering the production phase of the bomb ejector program in the current
year.
Cost of Sales. Cost of sales for the Automotive Products Division was
$58,121,000 for the first six months of the current fiscal year, compared to
cost of sales of $40,399,000 for the same period last year. The increase of
$17,722,000, or 43.9%, was the result of increased costs
43
<PAGE> 92
associated with increased sales during the same period. Gross profit as a
percent of sales was 19.1% for the current six month period compared to 16.6%
for the same period last year. The increase was due to a) improved yields from
automated equipment; b) reduced material costs; and c) a larger revenue base
over which overhead costs were spread, offset partially by a reduction of 16% in
the average sales price of an initiator in the current year period compared to
the same period last year. The reduction in average unit selling price was due
primarily to a change in mix of products sold to TRW and Autoliv.
Cost of sales for the Aerospace Division increased $1,129,000, or
13.7%, to $9,371,000 for the first six months of the current year, compared to
cost of sales of $8,242,000 for the same period last year. Gross profit as a
percent of sales was 33.1% in the current period, compared to 30.7% last year,
due to the mix of products shipped in the current year.
Operating Expenses. Operating expenses for each division (Automotive
Products and Aerospace) are comprised of two components. First, each division is
charged directly those operating expenses incurred by that division. Second,
each division is allocated administrative operating expenses incurred by SDI
(which are not attributable to a particular division) on an equitable basis to
fairly reflect the benefit received by each operating division. Total
administrative expenses (which are allocated) for the first six months of 1998
were approximately the same as total administrative expenses (which are
allocated) for the same period last year. In 1998 these costs have been
allocated approximately 70% to the Automotive Products Division; in 1997 these
costs were allocated approximately equally to each division.
Operating expenses for the Automotive Products Division were $3,457,000
for the first six months of the current fiscal year, an increase of $1,138,000,
or 49.1%, compared to operating expenses of $2,319,000 for the same period last
year. As a percentage of sales, operating expenses were 4.8% compared to 4.8%
for the same period last year. The increase in expenses occurred primarily for
more personnel required to support the 76.5% increase in the number of
initiators sold during the current year period and from an increase in allocated
Corporate expenses. The increase in Corporate expenses occurred primarily in
increased personnel required to support the increased level of operations this
year.
Operating expenses for the Aerospace Division were $2,397,000 for the
first six months of the current fiscal year, an increase of $31,000, or 1.3%,
compared to operating expenses of $2,366,000 last year. As a percentage of
sales, operating expenses were 17.1% compared to 19.9% for the same period last
year. The Aerospace Division incurred small increases in certain operating costs
in 1998, offset by a smaller percent of Corporate expenses allocated.
Other Income and Expense. Other income (expense) consists primarily of
interest income and interest expense. Net other income (expense) was $15,000
expense in the first six months of 1998, compared to other income of $63,000 for
the same period last year. Interest income was $95,000 in the first six months
of 1998 compared to interest income of $200,000 for the same period last year.
The reduction in interest income was due to lower average balances invested in
the current year period. Interest expense was $100,000 in the first six months
of 1998, compared to interest expense of $134,000 for the same period last year.
The decrease of $34,000 was the
44
<PAGE> 93
result of the average balance outstanding for long-term debt being reduced with
regularly scheduled principal payments.
Liquidity and Capital Resources. SDI's primary sources of capital since
its initial public offering in 1991 have been cash from operations and bank
borrowings and, in fiscal year 1995, an additional public offering of its common
stock. In December 1996, SDI signed a credit agreement (the "Credit Agreement")
with a bank which was renewed in April 1998. The Credit Agreement expires May 1,
2000. Any borrowings under the Credit Agreement bear interest at the bank's
Reference Rate (8.5% at May 3, 1998) less .25 percentage point, or at SDI's
option, at LIBOR (5.63% at May 3, 1998) plus .75 percentage point. The Credit
Agreement contains two revolving credit facilities. SDI may borrow up to
$10,000,000 under Facility No. 1, and may borrow up to $12,000,000 under
Facility No. 2. Borrowings under both facilities may be used for general and
other corporate purposes. Facility No. 1 may be used for commercial letters of
credit not to exceed $500,000 and for stand by letters of credit not to exceed
$6,000,000, which reduce the amount available under the agreement. In addition,
SDI has the option of converting outstanding borrowings in increments of not
less that $1,000,000, under Facility No. 2, to a 5-year term loan. Any amounts
converted to term debt under Facility No. 2 will bear interest at the bank's
long-term interest rate in effect at the time of such conversion.
Substantially all of SDI's assets are pledged as collateral under the
Credit Agreement. In addition, the Credit Agreement contains covenants that
include requirements to meet certain financial tests and ratios (including
minimum current ratio, debt service ratio, minimum tangible net worth, maximum
debt ratio and maintenance of profitable annual operations) and restrictions and
limitations on the sale of assets, new borrowings, mergers and purchases of
stock. SDI was in compliance with these provisions as of May 3, 1998. As of May
3, 1998, $1,500,000 was outstanding under Facility No. 2, and no amounts were
outstanding under Facility No. 1.
SDI's wholly owned subsidiary, Scot, Inc. has a term loan with a bank,
which was renewed in August 1996, secured by certain real property of Scot. The
principal balance outstanding under the renewed loan at May 3, 1998, was
$503,500. The loan is being amortized with monthly payments of approximately
$7,800, including interest, adjusted monthly, at 1.9% over the bank's LIBOR rate
(5.72% at May 3, 1998). Any unpaid principal is due on August 1, 2001.
In November 1994, SDI purchased a new airplane from United Beechcraft,
Inc. for $2,210,000. SDI made an initial payment of $110,500 for the plane and
delivered a promissory note with Beech Acceptance Corporation, Inc. to finance
the remaining balance of $2,099,500 over a 12-year period with interest at prime
plus one-half percent. The unpaid balance of this note at May 3, 1998 was
$1,652,100. The plane is being used primarily to transport Company officials
between its Newhall, California and Mesa, Arizona facilities. In addition, SDI
leases the airplane for use by third parties when not in use by SDI in order to
defray a portion of the costs.
During the six months ended May 3, 1998, SDI generated cash flow from
operations of $6,576,200. Capital expenditures, primarily for payments related
to automated manufacturing
45
<PAGE> 94
equipment and new production facilities, amounted to $16,246,200. Principal
payments of long-term debt aggregated $88,600. These net cash outflows were
funded by cash flow from operations and the use of existing cash on hand. At May
3, 1998, SDI had cash and marketable securities on hand of $498,000 and
additional borrowing capacity available under its Credit Agreement of
$15,000,000.
At May 3, 1998, SDI had working capital of $26,505,000 as compared to
working capital of $30,137,000 at October 31, 1997. The decrease of $3,632,000
was due primarily to a decrease in cash and marketable securities of $8,667,000,
an increase in accounts payable of $329,000, and an increase in accrued
liabilities of $1,138,000, offset partially by an increase in accounts
receivable of $3,095,000, an increase in inventories of $2,739,000 and an
increase in prepaid expenses of $399,000. The decrease in cash was the result of
increased expenditures for capital equipment and the completion of the Moorpark
facility currently under construction. The increase in accounts payable and
accrued liabilities, and in accounts receivable and inventories, occurred to
support the increased level of operations this year.
In order to improve manufacturing efficiencies and to provide
facilities for growth, SDI purchased in October 1996, approximately 280 acres of
land in the City of Moorpark, located in Ventura County, north of Los Angeles,
where SDI is currently building new facilities. Total net cost of the project is
estimated at approximately $28,000,000, of which $14,800,000 had been spent at
May 3, 1998 and is included in construction in progress in the accompanying
condensed consolidated balance sheet. SDI anticipates spending approximately an
additional $12,000,000 in fiscal year 1998 and approximately $5,200,000 in
fiscal year 1999 to complete this project. SDI plans to sell two commercial lots
being developed as part of this project, the proceeds of which are expected to
reduce the net project cost to approximately $28,000,000. SDI has committed to
complete the building construction, the total cost of which is estimated to be
approximately $16,000,000. SDI believes it has available adequate cash and
marketable securities, cash flow from operations, and borrowing capacity to
adequately finance this project. SDI believes additional term financing is
available for this project to the extent required, however there can be no
assurance that such financing will be available when required.
SDI anticipates that working capital requirements will increase in 1998
as compared to 1997 to support the investment in inventories and accounts
receivable related to the anticipated increased demand for initiators
manufactured by SDI. SDI believes that it can meet its expected working capital
requirements for the foreseeable future from existing cash and marketable
securities on hand, cash flow from operations and borrowings under its Credit
Agreement. SDI had commitments to acquire capital equipment at May 3, 1998
aggregating approximately $3,900,000 related primarily to additional production
equipment, and other support equipment required for the increased operations of
the Automotive Products Division.
The statements above regarding the land purchased by SDI in Moorpark,
the construction of facilities on that land by SDI, and the amounts and timing
of expenditures are forward-looking statements. Actual results and the timing of
those results may vary depending on various factors including, for example, the
ability of SDI to obtain permits and approvals that do not contain conditions or
restrictions that are unduly restrictive or otherwise unacceptable to SDI, SDI's
not encountering any unforeseen conditions relating to the property that make
completion of the land
46
<PAGE> 95
infrastructure work or construction more expensive, difficult or time intensive
that is currently expected, and the ability of the contractors and
subcontractors retained by SDI to complete the work on the schedule and for the
costs described above, and other factors which may develop during the course of
this project.
The statements above regarding the anticipated increased demand for
initiators, the anticipated increase in working capital requirements and SDI's
expectations regarding its ability to meet such requirements are forward-looking
statements. Actual results may vary depending on various factors including, for
example, the development and acceptance of technologies different from those
employed by SDI for the initiation of airbag systems, competition from new or
existing companies for SDI's existing or future customers, a slow-down in the
world-wide rate of airbag implementation, the inability of SDI to negotiate an
extension of its existing credit agreement or a replacement facility,
anticipated expenditures exceeding amounts currently budgeted by SDI, and the
occurrence of unanticipated expenses.
47
<PAGE> 96
MARKET PRICE AND DIVIDEND INFORMATION
SDI's Common Stock is quoted on the Nasdaq National Market System under
the symbol "SDII." The following tables present historical trading information
about SDI's Common Stock closing share prices:
<TABLE>
<CAPTION>
Period High Low
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1995
First Quarter $20.000 $15.500
Second Quarter 19.000 16.250
Third Quarter 25.250 18.000
Fourth Quarter 21.750 16.000
1996
First Quarter 18.000 13.000
Second Quarter 21.250 14.750
Third Quarter 23.750 15.000
Fourth Quarter 18.000 12.500
1997
First Quarter 21.000 12.500
Second Quarter 20.500 15.500
Third Quarter 19.125 14.875
Fourth Quarter 29.500 18.500
1998
First Quarter 29.250 22.750
Second Quarter 34.750 24.750
Third Quarter 38.000 33.375
Fourth Quarter (through August 13, 1998) 34.500 33.750
</TABLE>
On June 18, 1998 (the last trading day before the Board's approval of
the Merger) the closing share price was $34.50. No cash dividends have been paid
on SDI's Common Stock by SDI since its shares were publicly distributed in 1991,
and SDI does not currently intend to pay cash dividends on its Common Stock.
48
<PAGE> 97
SECURITY OWNERSHIP OF BENEFICIAL OWNERS
AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth as of the Record Date for the Special
Meeting, the stockholders known to management to be the beneficial owners of
more than five percent of SDI's Common Stock:
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES PERCENT OF
OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) CLASS OUTSTANDING
------------------- --------------------- -----------------
<S> <C> <C>
Walter Neubauer 1,457,750(2) 18.7%
Ordnance Products, Inc.
21200 S. Figueroa Street
Carson, CA 90745
Thomas F. Treinen 1,325,000(3) 17.0%
Special Devices, Incorporated
16830 W. Placerita Canyon Road
Newhall, CA 91321
Mt. Everest Fund, L.P. 754,000(4) 9.7%
600 Atlantic Avenue, Suite 2800
Boston, MA 02110
Conner Clark & Company, Ltd. 609,750(5) 7.8%
40 King Street
Suite 5110, Box 125
Toronto, Ontario M5H 3Y2
</TABLE>
- - -----------------
(1) Based on 7,809,801 shares of SDI's Common Stock outstanding on August 10,
1998. Except as indicated otherwise in the following notes, shares shown as
beneficially owned are those as to which the named persons possess sole
voting and investment power. However, under California law, personal
property owned by a married person may be community property that either
spouse may manage and control. SDI has no information as to whether any
shares shown in this table are subject to California community property
law.
(2) Based on information contained in a Schedule 13G filed with the Securities
and Exchange Commission on February 14, 1997. The Neubauer Family Trust
dated March 7, 1985 owns 339,373 of such shares and the Neubauer Family
Trust dated May 19, 1993 owns 906,750 of such shares. Under both of these
trusts, Mr. Neubauer is the sole trustee and has sole voting and investment
power over such shares. The remaining 211,627 of such shares are owned by
the Neubauer Trust dated December 3, 1992, under which George Ota is the
sole trustee and has sole voting and investment power over such shares.
(3) 203,000 of such shares are owned by the Thomas F. Treinen Charitable Trust
dated May 24, 1998, under which Mr. Treinen is the sole trustee and has
sole voting and investment power. All of the remaining shares are owned by
the Treinen Family Trust dated December 2, 1981, as restated on November 3,
1986, under which Mr. Treinen is the sole trustee and has sole voting and
investment power.
(4) Based on information contained in an Amendment No. 2 to Schedule 13G filed
with the Securities and Exchange Commission on February 11, 1998.
(5) Based on information contained in an Amendment No. 2 to Schedule 13G filed
with the Securities and Exchange Commission on March 23, 1998.
49
<PAGE> 98
OWNERSHIP BY MANAGEMENT
The following table sets forth as of the Record Date for the Special
Meeting, the number of shares of Common Stock of SDI and the percent of Common
Stock owned beneficially by each director and executive officer of SDI, and by
all directors and executive officers of SDI as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
AND NATURE OF CLASS
NAME BENEFICIAL OWNERSHIP(1) OUTSTANDING
- - --------------------------------------------------- ----------------------- -----------
<S> <C> <C>
Thomas F. Treinen.................................. 1,325,000(2) 17.0%
John M. Cuthbert................................... 149,100(3)(4) 1.8%
Robert S. Ritchie.................................. 12,200(4) *
Samuel Levin....................................... 6,000(4)(5) *
Donald A. Bendix................................... 14,800(4) *
J. Nelson Hoffman.................................. 14,800(4)(6) *
Jack B. Watson..................................... 220,900(4) 2.7%
John T. Vinke...................................... 19,700(4) *
All directors and executive officers
as a group (eight persons)(4).................. 1,762,500 21.5%
</TABLE>
- - --------------
* Indicates ownership of less than one percent of outstanding shares.
(l) Based on 7,809,801 shares of SDI's Common Stock outstanding on August 10,
1998. Except as indicated otherwise in the following notes, shares shown as
beneficially owned are those as to which the named persons possess sole
voting and investing power. However, under California law, personal
property owned by a married person may be community property which either
spouse may manage and control, and SDI has no information as to whether any
shares shown in this table are subject to California community property
law.
(2) All of such shares are owned by the Treinen Family Trust dated December 2,
1981, as restated on November 3, 1986, under which Mr. Treinen is the sole
trustee and has sole voting and investment power.
(3) All of such shares are owned by the Cuthbert Family Trust dated June 9,
1993, under which Mr. Cuthbert is co-trustee with his wife. Mr. and Mrs.
Cuthbert, as co-trustees, have shared voting and investment power with
respect to such shares.
(4) Includes stock options currently exercisable or exercisable within 60 days
of 110,600, 12,200, 4,000, 14,800, 11,467, 212,800 and 19,700 for Messrs.
Cuthbert, Ritchie, Levin, Bendix, Hoffman, Watson and Vinke, respectively.
(5) All of the shares are held by The Samuel Levin Trust dated July 18, 1994,
under which Mr. Levin is sole trustee and has sole voting and investment
power with respect to such shares.
(6) All of the shares are held by The Hoffman Family Trust dated September 30,
1991, under which Mr. Hoffman is co-trustee with his wife. Mr. and Mrs.
Hoffman, as co-trustees, have shared voting and investment power with
respect to such shares.
50
<PAGE> 99
INDEPENDENT PUBLIC ACCOUNTANTS
Representatives of KPMG Peat Marwick LLP, SDI's independent public
accountants are expected to be present at the Special Meeting, where they will
be available to respond to appropriate questions and have the opportunity to
make a statement if they so desire.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
As required by law, SDI files reports, proxy statements and other
information with the SEC. These reports, proxy statements and other information
contain additional information about SDI. You can inspect and copy these
materials at the public reference facilities maintained by the SEC at Room 1024,
450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the
following Regional Offices of the Commission: 500 West Madison Street, Suite
1400, Chicago, Illinois 60661; and 7 World Trade Center, Suite 1300, New York,
New York 10048. For further information concerning the SEC's public reference
rooms, you may call the SEC at 1-800-SEC-0330. Some of this information may also
be accessed on the World Wide Web through the Commission's Internet address at
"http://www.sec.gov."
The SEC allows SDI to "incorporate by reference" information into this
proxy statement, which means that SDI can disclose important information by
referring you to another document filed separately with the SEC. Information
incorporated by reference is considered part of this proxy statement, except to
the extent that the information is superseded by information in this proxy
statement. This proxy statement incorporates by reference the information
contained in the following documents previously filed by SDI with the SEC:
(a) SDI's Annual Report on Form 10-K for the fiscal year ended October
31, 1997;
(b) SDI's Quarterly Reports on Form 10-Q for the periods ended February
1, 1998 and May 3, 1998; and
(c) SDI's Current Report on Form 8-K dated June 19, 1998.
SDI also incorporates by reference the information contained in all
other documents SDI files with the SEC after the date of this proxy statement
and before the Special Meeting. The information contained in any such document
will be considered part of this proxy statement from the date the document is
filed.
If you are a stockholder of SDI and would like to receive a copy of any
document incorporated by reference into this proxy statement (which will not
include any of the exhibits to the document other than those exhibits that are
themselves specifically incorporated by reference into this proxy statement),
you should write to Special Devices, Incorporated at 16830 West Placerita Canyon
Road, Newhall, California 91321, Attention: John Vinke, Chief Financial Officer.
In order to ensure timely delivery of the documents you request, you should make
your request by September 9, 1998.
51
<PAGE> 100
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROXY STATEMENT. SDI
HAS NOT AUTHORIZED ANYONE TO GIVE ANY INFORMATION DIFFERENT FROM THE INFORMATION
CONTAINED IN THIS PROXY STATEMENT. THIS PROXY STATEMENT IS DATED AUGUST 17,
1998. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT IS ACCURATE AS OF ANY LATER DATE, AND THE MAILING OF THIS PROXY
STATEMENT TO STOCKHOLDERS SHALL NOT CREATE ANY IMPLICATION TO THE CONTRARY.
52
<PAGE> 101
OTHER BUSINESS
SDI knows of no other matter to be presented at the Special Meeting.
However, if other matters should properly come before the Special Meeting, it is
the intention of the persons named in the enclosed proxy to vote the proxy with
respect to such matters in accordance with their best judgment.
By Order of the Board of Directors,
Thomas F. Treinen,
Chairman of the Board of Directors
53
<PAGE> 102
APPENDIX A
- - --------------------------------------------------------------------------------
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
BETWEEN
SPECIAL DEVICES, INCORPORATED
AND
SDI ACQUISITION CORP.
DATED AS OF JUNE 19, 1998
- - --------------------------------------------------------------------------------
<PAGE> 103
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
ARTICLE 1 THE MERGER..............................................................................................1
Section 1.1. The Merger.........................................................................1
Section 1.2. Effective Time.....................................................................1
Section 1.3. Closing of the Merger..............................................................1
Section 1.4. Effects of the Merger..............................................................2
Section 1.5. Certificate of Incorporation and Bylaws............................................2
Section 1.6. Directors..........................................................................2
Section 1.7. Officers...........................................................................2
Section 1.8. Conversion of Shares...............................................................2
Section 1.9. Shares of Dissenting Holders.......................................................3
Section 1.10. Exchange of Certificates..........................................................3
Section 1.11. Company Stock Options.............................................................5
ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY...........................................................6
Section 2.1. Organization and Qualification; Subsidiaries.......................................6
Section 2.2. Capitalization of the Company and its Subsidiaries.................................7
Section 2.3. Authority Relative to this Agreement; Consents and Approvals.......................8
Section 2.4. SEC Reports; Financial Statements..................................................8
Section 2.5. Information Supplied...............................................................9
Section 2.6. Consents and Approvals; No Violations..............................................9
Section 2.7. Title to Assets...................................................................10
Section 2.8. Company Products..................................................................10
Section 2.9. Potential Conflicts of Interest...................................................11
Section 2.10. No Default.......................................................................11
Section 2.11. No Undisclosed Liabilities; Absence of Changes...................................11
Section 2.12. Litigation.......................................................................12
Section 2.13. Compliance with Applicable Law...................................................12
Section 2.14. Employee Plans...................................................................13
Section 2.15. Environmental Laws and Regulations...............................................14
Section 2.16. Intellectual Property; Software..................................................14
Section 2.17. Year 2000 Compliance.............................................................15
Section 2.18. Government Contracts.............................................................15
Section 2.19. Certain Business Practices.......................................................16
Section 2.20. Vote Required....................................................................17
Section 2.21. Labor Matters....................................................................17
Section 2.22. Insurance........................................................................17
Section 2.23. Suppliers and Customers..........................................................17
Section 2.24. Tax Matters......................................................................17
Section 2.25. Brokers..........................................................................18
Section 2.26. Restrictions on Business Activities..............................................19
i
</TABLE>
<PAGE> 104
<TABLE>
<S> <C>
Section 2.27. No Other Representations or Warranties...........................................19
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF ACQUISITION..........................................................19
Section 3.1. Organization......................................................................19
Section 3.2. Authority Relative to this Agreement..............................................20
Section 3.3. Information Supplied..............................................................20
Section 3.4. Consents and Approvals; No Violations.............................................20
Section 3.5. No Default........................................................................21
Section 3.6. Availability of Financing.........................................................21
Section 3.7. No Prior Activities...............................................................21
Section 3.8. No Other Representations or Warranties............................................21
ARTICLE 4 COVENANTS..............................................................................................21
Section 4.1. Conduct of Business of the Company................................................21
Section 4.2. Other Potential Acquirers.........................................................24
Section 4.3. Access to Information.............................................................25
Section 4.4. Stockholders Meeting..............................................................25
Section 4.5. Additional Agreements; Reasonable Efforts.........................................26
Section 4.6. Consents..........................................................................26
Section 4.7. Public Announcements..............................................................26
Section 4.8. Indemnification; Directors' and Officers' Insurance...............................26
Section 4.9. Notification of Certain Matters...................................................27
Section 4.10. SEC Filings......................................................................27
Section 4.11. Notice of Certain Events.........................................................27
ARTICLE 5 CONDITIONS TO CONSUMMATION OF THE MERGER...............................................................28
Section 5.1. Conditions to Each Party's Obligations to Effect the Merger.......................28
Section 5.2. Conditions to Obligations of Acquisition..........................................28
Section 5.3. Conditions to Obligations of the Company..........................................29
ARTICLE 6 TERMINATION; AMENDMENT; WAIVER.........................................................................29
Section 6.1. Termination.......................................................................29
Section 6.2. Effect of Termination.............................................................30
Section 6.3. Fees and Expenses.................................................................31
Section 6.4. Limitation on Damages.............................................................32
Section 6.5. Amendment.........................................................................32
Section 6.6. Extension; Waiver.................................................................32
ARTICLE 7 MISCELLANEOUS..........................................................................................32
Section 7.1. Nonsurvival of Representations and Warranties.....................................32
Section 7.2. Entire Agreement; Assignment......................................................32
Section 7.3. Validity..........................................................................33
ii
</TABLE>
<PAGE> 105
<TABLE>
<S> <C>
Section 7.4. Notices...........................................................................33
Section 7.5. Governing Law.....................................................................33
Section 7.6. Construction; Interpretation......................................................34
Section 7.7. Parties in Interest...............................................................34
Section 7.8. Severability......................................................................34
Section 7.9. Counterparts......................................................................34
iii
</TABLE>
<PAGE> 106
<TABLE>
<CAPTION>
TABLE OF DEFINED TERMS
Term Cross Reference in Agreement Page
- - ---- ---------------------------- ----
<S> <C> <C>
Acquisition..........................................Preamble.....................................................2
Acquisition Material Adverse Effect..................Section 3.1(a)..............................................17
Acquisition Transactions.............................Section 4.2(a)..............................................22
Agreement............................................Preamble.....................................................2
Bid..................................................Section 2.14(d)(i)..........................................15
Business Day.........................................Section 1.3..................................................2
Certificates.........................................Section 1.10(a)..............................................4
Closing..............................................Section 1.3..................................................2
Closing Date.........................................Section 1.3..................................................2
Code.................................................Section 2.24................................................16
Commitment...........................................Section 3.6.................................................19
Company..............................................Preamble.....................................................2
Company Board........................................Recitals.....................................................2
Company Common Stock.................................Section 1.8(a)...............................................2
Company Disclosure Schedule..........................Section 1.11.................................................5
Company Dissenting Shares............................Section 1.9(a)...............................................3
Company Material Adverse Effect......................Section 2.1(b)...............................................6
Company Permits......................................Section 2.13................................................12
Company Plan.........................................Section 1.11(a)..............................................5
Company Securities...................................Section 2.2(a)...............................................7
Company Stock Option.................................Section 1.11(a)..............................................5
Continuing Shareholder Shares........................Section 1.8(a)...............................................2
DGCL.................................................Section 1.1..................................................1
Effective Time.......................................Section 1.2..................................................2
Employee Plans.......................................Section 2.14(a).............................................12
Environmental Claim..................................Section 2.12(a).............................................13
Environmental Laws...................................Section 2.12(a).............................................13
ERISA................................................Section 2.14(a).............................................12
Exchange Agent.......................................Section 1.10(a)..............................................3
Excluded Shares......................................Section 1.8(a)...............................................2
Government Contract..................................Section 2.14(d)(ii).........................................15
Governmental Entity..................................Section 2.6..................................................9
HSR Act..............................................Section 2.6..................................................9
Insurance Policies...................................Section 2.22................................................16
Intellectual Property Rights.........................Section 2.13................................................14
Liabilities..........................................Section 2.11................................................11
Lien.................................................Section 2.2(b)...............................................8
Merger...............................................Section 1.1..................................................2
Merger Consideration.................................Section 1.10(b)..............................................4
Per Share Amount.....................................Section 1.8(a)...............................................3
Potential Acquirer...................................Section 4.2(b)..............................................22
Proxy Statement......................................Section 4.4(a)..............................................23
SEC..................................................Section 2.04(a)..............................................8
SEC Reports..........................................Section 2.4(a)...............................................8
Securities Act.......................................Section 2.4(a)...............................................8
Shares...............................................Section 1.8(a)...............................................2
Stockholders Meeting.................................Section 4.4(a)..............................................23
Subsidiary(ies)......................................Section 2.1(b)...............................................6
iv
</TABLE>
<PAGE> 107
<TABLE>
<S> <C> <C>
Surviving Corporation................................Section 1.1..................................................2
Surviving Corporation Common Stock...................Section 1.8(b)...............................................3
System...............................................Section 2.17................................................14
Tax Return...........................................Section 2.24................................................16
Taxes................................................Section 2.24................................................16
Third Party..........................................Section 6.3(a)..............................................29
Third Party Acquisition..............................Section 6.3(a)..............................................29
Title IV Plan........................................Section 2.14(a).............................................12
U.S. Government......................................Section 2.14(d)(iii)........................................15
v
</TABLE>
<PAGE> 108
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of the
19th day of June, 1998 (this "Agreement"), is made by and between SPECIAL
DEVICES, INCORPORATED, a Delaware corporation (the "Company"), and SDI
ACQUISITION CORP., a Delaware corporation ("Acquisition").
R E C I T A L S
WHEREAS, the Board of Directors of the Company (the "Company Board")
has, in light of and subject to the terms and conditions set forth herein, (i)
determined that the Merger (as defined in Section 1.1) is fair to, and in the
best interests of, its stockholders and (ii) approved and adopted this Agreement
and the transactions contemplated hereby and resolved to recommend and adoption
of this Agreement by the stockholders of the Company.
A G R E E M E N T
NOW, THEREFORE, in consideration of the premises and the mutual
promises contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and
Acquisition hereby agree as follows:
ARTICLE 1
THE MERGER
SECTION 1.1. THE MERGER. At the Effective Time (as defined below) and
upon the terms and subject to the conditions of this Agreement and in accordance
with the Delaware General Corporation Law (the "DGCL"), Acquisition shall be
merged with and into the Company (the "Merger"). Following the Merger, the
Company shall continue as the surviving corporation of the Merger (the
"Surviving Corporation"), and the separate corporate existence of Acquisition
shall cease.
SECTION 1.2. EFFECTIVE TIME. Subject to the terms and conditions set
forth in this Agreement, on the Closing Date (as defined in Section 1.3), a
Certificate of Merger shall be duly executed and acknowledged by Acquisition and
the Company and thereafter delivered to the Secretary of State of the State of
Delaware for filing pursuant to the DGCL. The Merger shall become effective at
the time when the Certificate of Merger has been duly filed with the Secretary
of State of Delaware (the time the Merger becomes effective being referred to
herein as the "Effective Time").
SECTION 1.3. CLOSING OF THE MERGER. The closing of the Merger (the
"Closing") shall take place at a time and on a date to be specified by the
parties, which shall be no later than the second Business Day after satisfaction
(or waiver) of the latest to occur of the conditions precedent set forth in
Article 5 (the "Closing Date"), at the offices of Gibson, Dunn & Crutcher LLP,
333 South Grand Avenue, Los Angeles, California 90071, unless another time, date
or
1
<PAGE> 109
place is agreed to in writing by the parties. "Business Day" means any day
other than Saturday, Sunday or a federal holiday.
SECTION 1.4. EFFECTS OF THE MERGER. The Merger shall have the effects
set forth in the DGCL. Without limiting the generality of the foregoing, and
subject thereto, at the Effective Time, all the properties, rights, privileges,
powers and franchises of the Company and Acquisition shall vest in the Surviving
Corporation, and all debts, liabilities and duties of the Company and
Acquisition shall become the debts, liabilities and duties of the Surviving
Corporation.
SECTION 1.5. CERTIFICATE OF INCORPORATION AND BYLAWS. The Certificate
of Incorporation of Acquisition in effect at the Effective Time shall be the
Certificate of Incorporation of the Surviving Corporation until amended in
accordance with applicable law. The Bylaws of Acquisition in effect at the
Effective Time shall be the Bylaws of the Surviving Corporation until amended in
accordance with applicable law.
SECTION 1.6. DIRECTORS. The directors of Acquisition at the Effective
Time shall be the initial directors of the Surviving Corporation, each to hold
office in accordance with the Certificate of Incorporation and Bylaws of the
Surviving Corporation until such director's successor is duly elected or
appointed and qualified.
SECTION 1.7. OFFICERS. The officers of the Company at the Effective
Time shall be the initial officers of the Surviving Corporation, each to hold
office in accordance with the Certificate of Incorporation and Bylaws of the
Surviving Corporation until such officer's successor is duly elected or
appointed and qualified.
SECTION 1.8. CONVERSION OF SHARES.
(a) At the Effective Time, each share of common stock, par value $0.01
per share, of the Company (the "Company Common Stock") issued and outstanding
immediately prior to the Effective Time (individually a "Share" and,
collectively, the "Shares") (other than (i) Shares held by the Company or any
Subsidiaries (as defined in Section 2.1(c)) of the Company, (ii) Shares held by
Acquisition, (iii) Shares held by J.F. Lehman Equity Investors I, L.P., (iv) any
Shares to remain outstanding pursuant to Section 1.8(d) and (v) Company
Dissenting Shares (as defined in Section 1.9(a)) (collectively, the "Excluded
Shares") shall, by virtue of the Merger and without any action on the part of
Acquisition, the Company or the holder thereof, be converted into and shall
become the right to receive a cash payment per Share, without interest, equal to
$37.00 (the "Per Share Amount") upon the surrender of the certificate
representing such Share.
(b) At the Effective Time, each issued and outstanding share of the
common stock, par value $0.01 per share, of Acquisition shall be converted into
one share of common stock, par value $0.01 per share, of the Surviving
Corporation (the "Surviving Corporation Common Stock").
(c) At the Effective Time, each Share held by the Company as treasury
stock or held by Acquisition, J.F. Lehman Equity Investors I., L.P. or the
Company immediately prior to the
2
<PAGE> 110
Effective Time shall, by virtue of the Merger and without any action on the part
of Acquisition, the Company or the holder thereof, be canceled, retired and
cease to exist, and no consideration shall be delivered with respect thereto.
(d) Shares in the amount and held by the Persons set forth in Exhibit A
shall not be converted as provided in Section 1.8(a), but shall remain
outstanding and become an equal number of shares of Surviving Corporation Common
Stock as set forth in Section 1.8(b).
SECTION 1.9. SHARES OF DISSENTING HOLDERS.
(a) Notwithstanding anything to the contrary contained in this
Agreement, any holder of Shares with respect to which dissenters' rights, if
any, are granted by reason of the Merger under the DGCL and who does not vote in
favor of the Merger and who otherwise complies with the DGCL ("Company
Dissenting Shares") shall not be entitled to receive any Merger Consideration
pursuant to Section 1.8(a), unless such holder fails to perfect, effectively
withdraws or loses his or her right to dissent from the Merger under the DGCL.
If any such holder so fails to perfect, effectively withdraws or loses his or
her dissenters' rights under the DGCL, each Company Dissenting Share of such
holder shall thereupon be deemed to have been converted, as of the Effective
Time, into the right to receive the Per Share Amount pursuant to Section 1.8(a).
(b) Any payments relating to Company Dissenting Shares shall be made
solely by the Surviving Corporation and no funds or other property have been or
will be provided by Acquisition or Acquisition's other direct or indirect
subsidiaries for such payment, nor shall the Company make any payment with
respect to, or settle or offer to settle, any such demands.
(c) The Company shall give Acquisition prompt notice of any demands
received by the Company for the payment of fair value for shares, and
Acquisition shall have the right to participate in all negotiations and
proceedings with respect to such demands.
SECTION 1.10. EXCHANGE OF CERTIFICATES.
(a) A bank or trust company to be designated by Acquisition and
reasonably acceptable to the Company, shall act as the exchange agent (in such
capacity, the "Exchange Agent"), for the benefit of the holders of Shares, for
the exchange of a certificate or certificates which immediately prior to the
Effective Time represented Shares (the "Certificates") that were converted into
the right to receive the Per Share Amount pursuant to Section 1.8(a), all in
accordance with this Article 1. At the Effective Time, Acquisition shall
deposit, or shall cause to be deposited, with the Exchange Agent, for the
benefit of the holders of Shares, cash in U.S. dollars in an amount equal to the
Per Share Amount multiplied by the aggregate outstanding Shares (other than the
Excluded Shares) to be paid pursuant to Section 1.8(a).
(b) As soon as reasonably practicable after the Effective Time, the
Exchange Agent shall mail to each holder of record of Certificates: (i) a letter
of transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such other
3
<PAGE> 111
provisions as Acquisition and the Company may reasonably specify) and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for a cash payment of the proper Merger Consideration (as defined below)
pursuant to Section 1.8(a). Upon surrender of a Certificate for cancellation to
the Exchange Agent or to such other agent or agents as may be appointed by
Acquisition, together with such letter of transmittal, duly executed, the holder
of such Certificate shall be entitled to receive in exchange therefor by check
an amount equal to the Merger Consideration, which such holder has the right to
receive pursuant to the provisions of this Article 1, and the Certificate so
surrendered shall forthwith be canceled. No interest shall be paid or accrued on
any Merger Consideration upon the surrender of any Certificates. In the event of
a transfer of ownership of Shares which is not registered in the transfer
records of the Company, payment of the proper Merger Consideration may be paid
to a transferee if the Certificate representing such Shares is presented to the
Exchange Agent, accompanied by all documents required to evidence and effect
such transfer and by evidence that any applicable stock transfer or other taxes
required as a result of such payment to a Person other than the registered
holder of such shares have been paid. Until surrendered and exchanged as
contemplated by this Section 1.10, each Certificate shall be deemed at any time
after the Effective Time to represent only the right to receive upon such
surrender an amount equal to the Merger Consideration, as contemplated by this
Section 1.10.
"Merger Consideration" means an amount equal to (A) the Per Share
Amount, multiplied by (B) the number of Shares represented by any Certificate or
Certificates held by the holder of Shares.
(c) In the event that any Certificate shall have been lost, stolen or
destroyed, the Exchange Agent shall pay, upon the making of an affidavit of that
fact by the holder thereof, the proper Merger Consideration as may be required
pursuant to this Section 1.10; provided, however, that the Surviving Corporation
may, in its discretion, require the delivery of a suitable bond and/or
indemnity.
(d) The Merger Consideration paid upon the surrender for exchange of
Shares in accordance with the terms hereof shall be deemed to have been paid in
full satisfaction of all rights pertaining to such Shares, subject, however, to
the Surviving Corporation's obligation to pay any dividends or make any other
distributions with a record date prior to the Effective Time which may have been
declared or made by the Company on such Shares in accordance with the terms of
this Agreement or prior to the date hereof and which remain unpaid at the
Effective Time, and there shall be no further registration of transfers on the
stock transfer books of the Surviving Corporation of the Shares which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation for any reason,
they shall be canceled and exchanged as provided in this Article 1, except as
otherwise provided by law.
(e) Any portion of the Merger Consideration set aside for any holder of
Shares that remains undistributed to any holder of Shares for six months after
the Effective Time shall be delivered to the Surviving Corporation, upon demand,
and any holder of Shares who has not theretofore complied with this Article 1
shall thereafter look only to the Surviving Corporation for payment of their
claim for any Merger Consideration.
4
<PAGE> 112
(f) Notwithstanding Section 1.11(e), neither the Surviving Corporation
nor the Company shall be liable to any holder of Shares for any Merger
Consideration delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
(g) Any amounts remaining unclaimed by any holder of Shares two years
after the Effective Time (or such earlier date immediately prior to such time as
such amounts would otherwise escheat to or become property of any governmental
entity) shall to the extent permitted by applicable law, become the property of
the Surviving Corporation free and clear of any claim or interest of any Person
previously entitled thereto.
(h) Any portion of the Merger Consideration made available to the
Exchange Agent pursuant to Section 1.10(a) to pay for shares for which
dissenters' rights have been perfected shall be returned to the Surviving
Corporation upon demand.
SECTION 1.11. COMPANY STOCK OPTIONS.
(a) At the Effective Time, each outstanding option to purchase shares
of Company Common Stock reflected in Section 1.11 (a "Company Stock Option" or
collectively, "Company Stock Options") of the Company Disclosure Schedule
previously delivered by the Company to Acquisition (the "Company Disclosure
Schedule") issued pursuant to the Amended and Restated 1991 Stock Incentive Plan
of the Company (the "Company Plan") or issued outside the Company Plan via
special grants by the Company's Stock Option Committee to certain employees,
whether vested or unvested, shall be converted into and shall become the right
to receive a cash payment per Company Stock Option, without interest, determined
by multiplying (i) the excess, if any, of the Per Share Amount over the
applicable per share exercise price of such Company Stock Option (without taking
into account whether such Company Stock Option was in fact exercisable at such
time), by (ii) the number of shares of Company Common Stock underlying the
Company Stock Options, whether vested or unvested, immediately prior to the
Effective Time. At the Effective Time, all Company Stock Options (including
those options with an exercise price equal to or in excess of the Per Share
Amount) shall be canceled and be of no further force or effect except for the
right to receive cash to the extent provided in this Section 1.11. Prior to the
Effective Time, the Company shall take all actions (including, if appropriate,
amending the terms of the Company Plan) that are necessary to give effect to the
transactions contemplated by this Section 1.11. Notwithstanding the foregoing,
the Company, with the consent of Acquisition, may, by separate agreement with
one or more holders of Company Stock Options, agree with such holders on
alternate treatment of such Company Stock Options.
(b) As soon as practicable after the Effective Time (but no later than
thirty (30) days following the Effective Time), the Surviving Corporation shall
establish a procedure to effect the surrender of Company Stock Options in
exchange for the cash payment to which the holder of a Company Stock Option
shall be entitled under Section 1.11(a), and, upon surrender of such Company
Stock Option, the Surviving Corporation shall pay to the holder thereof in cash
the amount, if any, to which such holder shall be entitled thereunder.
5
<PAGE> 113
ARTICLE 2
REPRESENTATIONS AND
WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Acquisition as follows:
SECTION 2.1. ORGANIZATION AND QUALIFICATION; SUBSIDIARIES.
(a) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the jurisdiction of its incorporation and has
all requisite corporate power and authority to own, lease and operate its
properties and to carry on its businesses as presently conducted.
(b) The Company has heretofore delivered to Acquisition true and
complete copies of the Articles of Incorporation and By-laws, or comparable
instruments, of the Company and each of the Subsidiaries as in effect on the
date hereof. The minute books, or comparable records, of the Company and each of
the Subsidiaries heretofore have been made available to Acquisition for its
inspection and contain true and complete records of all meetings and consents in
lieu of meeting of the Board of Directors (and any committee thereof) and
stockholders of the Company and each of the Subsidiaries since the time of the
Company's organization or any such Subsidiary's organization, as the case may
be, and accurately reflect all transactions referred to in such minutes and
consents in lieu of meeting.
(c) Except as set forth in Section 2.1 of the Company Disclosure
Schedule, the Company has no equity interests in any corporations, partnerships,
limited liability companies, trusts or similar business entities. Each of the
subsidiaries listed in Section 2.1 of the Company Disclosure Schedule (each a
"Subsidiary" and, collectively, "Subsidiaries") is a corporation or a limited
partnership, as the case may be, duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or
organization, and has all requisite corporate or other power and authority to
own, lease and operate its properties and to carry on its businesses as now
being conducted, except where the failure to be so organized, existing and in
good standing or to have such power and authority would not have a Company
Material Adverse Effect (as defined below). When used in connection with the
Company or its Subsidiaries, the term "Company Material Adverse Effect" means a
material adverse effect on the financial condition, properties, business or
results of operations of the Company and its Subsidiaries, taken as a whole, it
being understood that none of the following shall be deemed by itself or by
themselves, either alone or in combination, to constitute a Company Material
Adverse Effect: (i) a change in the market price or trading volume of the
Company Common Stock or (ii) a failure by the Company to meet internal earnings
or revenue projections or the revenue or earnings predictions of equity analysts
for any period ending (or for which earnings are released) on or after the date
of this Agreement and prior to the Effective Date.
(d) Each of the Company and its Subsidiaries is duly qualified or
licensed and in good standing to do business in each jurisdiction in which the
property owned, leased or operated by it or the nature of the business conducted
by it makes such qualification or licensing necessary,
6
<PAGE> 114
except in such jurisdictions where the failure to be so duly qualified or
licensed and in good standing would not have, individually or in the aggregate,
a Company Material Adverse Effect.
(e) The Company has heretofore delivered to Acquisition accurate and
complete copies of the Certificate of Incorporation and Bylaws, as currently in
effect, of the Company.
SECTION 2.2. CAPITALIZATION OF THE COMPANY AND ITS SUBSIDIARIES.
(a) The authorized capital stock of the Company consists of: 20,000,000
shares of Company Common Stock, of which, as of June 15, 1998, 7,809,801 shares
of Company Common Stock were issued and outstanding, and 2,000,000 shares of
preferred stock, par value $0.01 per share, no shares of which are issued or
outstanding. All of the shares of Company Common Stock have been validly issued,
and are fully paid, nonassessable and free of preemptive rights. As of June 15,
1998, approximately 675,272 shares of Company Common Stock were reserved for
issuance and issuable upon or otherwise deliverable in connection with the
exercise of outstanding Company Stock Options. Since May 4, 1998, no shares of
the Company's capital stock have been issued other than pursuant to Company
Stock Options already in existence on such date, and, since May 4, 1998, no
stock options have been granted. Except as set forth above, there are
outstanding (i) no shares of capital stock or other voting securities of the
Company, (ii) no securities of the Company or its Subsidiaries convertible into
or exchangeable for shares of capital stock or voting securities of the Company,
(iii) no options or other rights to acquire from the Company or its
Subsidiaries, and no obligations of the Company or its Subsidiaries to issue,
any capital stock, voting securities or securities convertible into or
exchangeable for capital stock or voting securities of the Company, and (iv) no
equity equivalents, interests in the ownership or earnings of the Company or its
Subsidiaries or other similar rights (collectively, "Company Securities"). There
are no outstanding obligations of the Company or its Subsidiaries to repurchase,
redeem or otherwise acquire any Company Securities.
(b) Except as set forth in Section 2.2(b) of the Company Disclosure
Schedule, all of the outstanding capital stock of each Subsidiary is owned by
the Company, directly or indirectly, free and clear of any Lien (as hereinafter
defined) or any other limitation or restriction (including any restriction on
the right to vote or sell the same, except as may be provided as a matter of
law). There are no securities of the Company or its Subsidiaries issued and
outstanding that are convertible into or exchangeable for, no options or other
rights to acquire from the Company or its Subsidiaries, and no other contract,
understanding, arrangement or obligation (whether or not contingent) providing
for the issuance or sale, directly or indirectly, of any capital stock or other
ownership interests in, or any other securities of, any Subsidiary. There are no
outstanding contractual obligations of the Company or its Subsidiaries to
repurchase, redeem or otherwise acquire any outstanding shares of capital stock
or other ownership interests in any Subsidiary. For purposes of this Agreement,
"Lien" means, with respect to any asset (including, without limitation, any
security) any mortgage, lien, pledge, charge, security interest or encumbrance
of any kind in respect of such asset.
(c) The Company Common Stock constitutes the only class of equity
securities of the Company registered or required to be registered under the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
7
<PAGE> 115
SECTION 2.3. AUTHORITY RELATIVE TO THIS AGREEMENT; CONSENTS AND
APPROVALS.
(a) The Company has all necessary corporate power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by the Company Board and no other corporate proceedings on the part
of the Company are necessary to authorize this Agreement or to consummate the
transactions contemplated hereby (other than, with respect to the Merger, the
approval and adoption of this Agreement by the holders of a majority of the then
outstanding shares of Company Common Stock). This Agreement has been duly and
validly executed and delivered by the Company and constitutes a valid, legal and
binding agreement of the Company, enforceable against the Company in accordance
with its terms.
(b) The Company Board has duly and validly approved, and taken all
corporate actions required to be taken by the Company Board for the consummation
of the transactions contemplated hereby and resolved to recommend that the
stockholders of the Company approve and adopt this Agreement; provided, however,
that such approval and recommendation may be withdrawn, modified or amended
subject to Section 4.2 and Article 6 of this Agreement.
SECTION 2.4. SEC REPORTS; FINANCIAL STATEMENTS.
(a) The Company has filed all required forms, reports and documents
with the Securities and Exchange Commission ("SEC") since October 31, 1995 (the
"SEC Reports"), each of which has complied in all material respects with all
applicable requirements of the Securities Act of 1933, as amended (the
"Securities Act"), and the Exchange Act, each as in effect on the dates such
forms, reports and documents were filed. The Company has delivered to
Acquisition, in the form filed with the SEC (including any amendments thereto),
(i) its Annual Reports on Form 10-K for each of the fiscal years ended October
31, 1996 and 1997, (ii) all definitive proxy statements relating to the
Company's meetings of stockholders (whether annual or special) held since
December 31, 1995, and (iii) all other reports or registration statements filed
by the Company with the SEC since October 31, 1995. None of such forms, reports
or documents, including, without limitation, any financial statements or
schedules included or incorporated by reference therein, contained, when filed,
any untrue statement of a material fact or omitted to state a material fact
required to be stated or incorporated by reference therein or necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading. The consolidated financial statements of the Company
and its Subsidiaries included in the Annual Reports on Form 10-K referred to in
the second sentence of this Section 2.4(a) and the unaudited consolidated
interim financial statements of the Company and its Subsidiaries included in the
Quarterly Report on Form 10-Q for the fiscal quarter ended May 4, 1998 fairly
present, in conformity with generally accepted accounting principles applied on
a consistent basis (except as may be indicated in the notes thereto), the
consolidated financial position of the Company and its Subsidiaries as of the
dates thereof and their consolidated results of operations and changes in
financial position for the periods then ended (subject, in the case of the
unaudited interim financial statements, to normal year-end adjustments).
8
<PAGE> 116
(b) The Company has heretofore made available to Acquisition a complete
and correct copy of any amendments or modifications, which have not yet been
filed with the SEC, to agreements, documents or other instruments which
previously had been filed by the Company with the SEC pursuant to the Exchange
Act.
SECTION 2.5. INFORMATION SUPPLIED. None of the information supplied or
to be supplied by the Company for inclusion or incorporation by reference in the
Proxy Statement (as defined in Section 4.4(a)) will, at the respective times
that the Proxy Statement or any amendments or supplements thereto are filed with
the SEC and are first published or sent or given to holders of Shares, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
SECTION 2.6. CONSENTS AND APPROVALS; NO VIOLATIONS. Except for filings,
permits, authorizations, consents and approvals as may be required under, and
other applicable requirements of, the Securities Act, the Exchange Act, state
securities or blue sky laws, the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act") and the filing and recordation of a Certificate
of Merger as required by the DGCL, no filing with or notice to, and no permit,
authorization, consent or approval of, any court or tribunal or administrative,
governmental or regulatory body, agency or authority (a "Governmental Entity")
is necessary for the execution and delivery by the Company of this Agreement or
the consummation by the Company of the transactions contemplated hereby, except
where the failure to obtain such permits, authorizations, consents or approvals
or to make such filings or give such notice would not have a Company Material
Adverse Effect. Neither the execution, delivery and performance of this
Agreement by the Company nor the consummation by the Company of the transactions
contemplated hereby will (a) conflict with or result in any breach of any
provision of the Certificate of Incorporation or Bylaws (or similar governing
documents) of the Company, (b) except as set forth in Section 2.6 of the Company
Disclosure Schedule, result in a violation or breach of, or constitute (with or
without due notice or lapse of time or both) a default (or give rise to any
right of termination, amendment, cancellation or acceleration) under, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, lease,
license, contract, agreement or other instrument or obligation to which the
Company or any of its Subsidiaries is a party or by which any of them or any of
their respective properties or assets may be bound, or (c) violate any order,
writ, injunction, decree, law, statute, Company Permit (as defined in Section
2.13), rule or regulation applicable to the Company or any of its Subsidiaries
or any of their respective properties or assets, except in the case of (b) or
(c) for violations, breaches or defaults which would not have, individually or
in the aggregate, a Company Material Adverse Effect.
SECTION 2.7. TITLE TO ASSETS. The Company and each of its Subsidiaries
has good and marketable title in fee simple to all its real property and good
title to all its leasehold interests and other properties, as reflected in the
most recent balance sheet, except for properties and assets that have been
disposed of in the ordinary course of business since the date of such balance
sheet, free and clear of all mortgages, liens, pledges, charges or encumbrances
of any nature whatsoever, except (i) the lien of current taxes, payments of
which are not yet delinquent, (ii) such imperfections in title and easements and
encumbrances, if any, as are not substantial in
9
<PAGE> 117
character, amount or extent and do not materially detract from the value, or
interfere with the present use of the property subject thereto or affected
thereby, or otherwise materially impair the Company's business operations (in
the manner presently carried on by the Company), (iii) as disclosed in the
Company SEC Reports, (iv) mortgages incurred in the ordinary course of business,
or (v) except as set forth in Section 2.7 of the Company Disclosure Schedule and
except for such matters which, singly or in the aggregate, could not reasonably
be expected to cause a Company Material Adverse Effect. All leases under which
the Company leases real or personal property have been delivered to Acquisition
and are in good standing, valid and effective in accordance with their
respective terms, and there is not, under any of such leases, any existing
default or event which with notice or lapse of time or both would become a
default other than defaults under such leases which in the aggregate will not
have a Company Material Adverse Effect.
SECTION 2.8. COMPANY PRODUCTS. Except as set forth in Section 2.8 of
the Company Disclosure Schedule, there are no statements, citations or decisions
by any Governmental Entity specifically stating that any company product is
defective or unsafe or fails to meet any standards promulgated by any such
Governmental Entity. Except as set forth in Section 2.8 of the Company
Disclosure Schedule, there have been no recalls ordered by any such Governmental
Entity with respect to any company product. Except as set forth in Section 2.8
of the Company Disclosure Schedule, to the knowledge of the Company or any of
its Subsidiaries, there is no (a) fact relating to any company product that may
impose upon the Company or any of its Subsidiaries a duty to recall any company
product or a duty to warn customers of a defect or of any hazardous substance in
any company product, (b) latent or overt design, manufacturing or other defect
in any company product, (c) company product, the reasonably foreseeable use of
which may expose any person to any hazardous substance or (d) material liability
for warranty claims or returns with respect to any company product not fully
reflected in the SEC Reports.
SECTION 2.9. POTENTIAL CONFLICTS OF INTEREST. Except as set forth in
Section 2.9 of the Company Disclosure Schedule, (a) no officer, director or
affiliate of the Company or any of its Subsidiaries, (b) no relative or spouse
(or relative of such spouse) of any such officer, director and (c) no entity
controlled by one or more of the foregoing:
(A) owns, directly or indirectly, any interest in (excepting
less than 1% stock holdings for investment purposes in securities of publicly
held and traded companies), or is an officer, director, employee or consultant
of, any person which is, or is engaged in business as, a competitor, lessor,
lessee, supplier, distributor, sales agent or customer of the Company or any of
its Subsidiaries;
(B) owns, directly or indirectly, in whole or in part, any
property that the Company or any of its Subsidiaries uses in the conduct of its
business;
(C) has any claim whatsoever against, or owes any amount to,
the Company or any of its Subsidiaries, except for claims in the ordinary course
of business such as for accrued vacation pay, accrued benefits under benefit
plans, and similar matters and agreements existing on the date hereof; or
10
<PAGE> 118
(D) is party to a transaction that is required to be disclosed
under Item 404 of Regulation S-K.
SECTION 2.10. NO DEFAULT. Except as set forth in Section 2.10 of the
Company Disclosure Schedule, none of the Company or its Subsidiaries is in
default or violation (and no event has occurred which with notice or the lapse
of time or both would constitute a default or violation) of any term, condition
or provision of (a) its Certificate of Incorporation or Bylaws (or similar
governing documents), (b) any note, bond, mortgage, indenture, lease, license,
contract, agreement or other instrument or obligation to which the Company or
any of its Subsidiaries is now a party or by which any of them or any of their
respective properties or assets may be bound or (c) any order, writ, injunction,
decree, law, statute, rule or regulation applicable to the Company, its
Subsidiaries or any of their respective properties or assets, except in the case
of (b) or (c) for violations, breaches or defaults that would not have,
individually or in the aggregate, a Company Material Adverse Effect.
SECTION 2.11. NO UNDISCLOSED LIABILITIES; ABSENCE OF CHANGES. Except as
set forth in Section 2.11 of the Company Disclosure Schedule, as of May 4, 1998,
none of the Company or its Subsidiaries had any liabilities or obligations of
any nature, whether or not accrued, contingent or otherwise, that would be
required by generally accepted accounting principles to be reflected on a
consolidated balance sheet of the Company and its Subsidiaries ("Liabilities")
(including the notes thereto) or which would have, individually or in the
aggregate, a Company Material Adverse Effect. Except as publicly disclosed by
the Company and except as set forth in Section 2.11 of the Company Disclosure
Schedule, since May 4, 1998, none of the Company or its Subsidiaries has
incurred any Liabilities of any nature, whether or not accrued, contingent or
otherwise, which would have, and there have been no events, changes or effects
with respect to the Company or its Subsidiaries having, individually or in the
aggregate, a Company Material Adverse Effect. Except as publicly disclosed and
except as disclosed in Section 2.11 of the Company Disclosure Schedule and
Section 4.1 of the Company Disclosure Schedule, since May 4, 1998, the Company
and its Subsidiaries have conducted their business in the ordinary course
consistent with past practice and there has not been any event, occurrence or
development or state of circumstances or facts as described in Sections 4.1(a)
through 4.1(r).
For the purposes of this Agreement, "publicly disclosed" means
information included in the Company's Quarterly Reports on Form 10-Q or Annual
Reports on Form 10-K.
SECTION 2.12. LITIGATION. Except as set forth in Section 2.12 of the
Company Disclosure Schedule, there is no suit, claim, action, proceeding or
investigation pending or, to the knowledge of the Company, threatened against
the Company or any of its Subsidiaries or any of their respective properties or
assets before any Governmental Entity that could reasonably be expected to be
adversely determined, and if adversely determined, could reasonably be expected
to have a Company Material Adverse Effect or which would prevent or
substantially delay the consummation of the transactions contemplated by this
Agreement. Except as set forth in Section 2.12, none of the Company or its
Subsidiaries is subject to any outstanding order, writ, injunction, decree or
order of any Governmental Entity that would have, individually or in the
aggregate, a Company Material Adverse Effect or would prevent or delay the
consummation of the transactions contemplated hereby.
11
<PAGE> 119
SECTION 2.13. COMPLIANCE WITH APPLICABLE LAW. Except as set forth in
Section 2.13 of the Company Disclosure Schedule, the Company and its
Subsidiaries hold all permits, licenses, variances, exemptions, orders and
approvals of all Governmental Entities necessary for the lawful conduct of their
respective businesses (the "Company Permits"), except for failures to hold such
permits, licenses, variances, exemptions, orders and approvals which would not
have, individually or in the aggregate, a Company Material Adverse Effect.
Except as publicly disclosed by the Company, the Company and its Subsidiaries
are in compliance with the terms of the Company Permits, except where the
failure so to comply would not have a Company Material Adverse Effect. Except as
publicly disclosed by the Company, the businesses of the Company and its
Subsidiaries are not being conducted in violation of any law, ordinance,
injunction, writ or regulation of any Governmental Entity except that no
representation or warranty is made in this Section 2.13 with respect to
Environmental Laws (as defined in Section 2.15) and except for violations or
possible violations which do not, and, insofar as reasonably can be foreseen, in
the future will not have, individually or in the aggregate, a Company Material
Adverse Effect. Except as set forth in Section 2.13 of the Company Disclosure
Schedule, no investigation or review by any Governmental Entity with respect to
the Company or its Subsidiaries is pending or, to the best knowledge of the
Company, threatened, nor, to the best knowledge of the Company, has any
Governmental Entity indicated an intention to conduct the same, other than, in
each case, those which the Company reasonably believes will not have a Company
Material Adverse Effect.
SECTION 2.14. EMPLOYEE PLANS.
(a) Section 2.14 of the Company Disclosure Schedule identifies each
employment, severance or similar contract or arrangement and each plan, policy,
fund, program or contract or arrangement (whether or not written) providing for
compensation, bonus, profit-sharing, stock option, or other stock related rights
or other forms of incentive or deferred compensation, vacation benefits,
insurance coverage (including any self-insured arrangements) health or medical
benefits, disability benefits, worker's compensation, supplemental unemployment
benefits, severance benefits and post-employment or retirement benefits
(including compensation, pension, health, medical or life insurance or other
benefits) under which the Company or any of its Subsidiaries has or in the
future could have any liability ("Employee Plans"). There is no Employee Plan
which (i) is a multiemployer plan (within the meaning of Section 3(37) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), (ii) is a
plan, other than a multiemployer plan, subject to Title IV of ERISA (a "Title IV
Plan") or (iii) is maintained in connection with any trust described in Section
501(c)(9) of the Code.
(b) The Company has furnished to Acquisition copies of the Employee
Plans (and, if applicable, related trust agreements) and all amendments thereto
and written interpretations thereof together with the most recent annual report
(Form 5500 including, if applicable, Section B thereto), the most recent
actuarial valuation report prepared in connection with any Employee Plan.
(c) No transaction prohibited by Section 406 of ERISA or Section 4975
of the Code, has occurred with respect to any employee benefit plan or
arrangement which is covered by Title I of ERISA which transaction has or can
reasonably be expected to cause the Company or
12
<PAGE> 120
any of its Subsidiaries to incur any liability under ERISA, the Code or
otherwise, excluding transactions effected pursuant to and in compliance with a
statutory or administrative exemption.
(d) Each Employee Plan that is intended to be qualified under Section
401(a) of the Code is so qualified and has been so qualified during the period
since its adoption; each trust created under any such Plan is exempt from tax
under Section 501(a) of the Code and has been so exempt since its creation. Each
Employee Plan has been maintained in compliance with its terms and with the
requirements prescribed by any and all applicable statutes, orders, rules and
regulations, including but not limited to ERISA and the Code.
(e) Neither the Company nor any subsidiaries has any current or
projected liability in respect of post-employment or post-retirement health or
medical or life insurance benefits for retired, former or current employees of
the Company, except as required under applicable law.
(f) Other than as described in Section 2.14 of the Company Disclosure
Schedule, no employee or former employee of the Company or any subsidiary will
become entitled to any bonus, retirement, severance, job security or similar
benefit or enhanced such benefit (including acceleration of vesting or exercise
of an incentive award) as a result of the transactions contemplated hereby.
(g) There are no unfunded obligations under any Employee Plan which are
not fully reflected on the most recent financial statements of the Company.
SECTION 2.15. ENVIRONMENTAL LAWS AND REGULATIONS.
(a) Except as set forth in Section 2.15 of the Company Disclosure
Schedule, (i) each of the Company and its Subsidiaries is in compliance with all
applicable federal, state and local laws and regulations relating to pollution
or protection of human health or the environment (including, without limitation,
ambient air, surface water, ground water, land surface or subsurface strata)
(collectively, "Environmental Laws"), except for non-compliance that could not
reasonably be expected to be adversely determined, and if adversely determined,
could not reasonably be expected to have a Company Material Adverse Effect,
which compliance includes, but is not limited to, the possession by the Company
and its Subsidiaries of all material permits and other governmental
authorizations required under applicable Environmental Laws, and compliance with
the terms and conditions thereof; (ii) since July 1, 1992, none of the Company
or its Subsidiaries has received written notice of, or, to the best knowledge of
the Company, is the subject of, any material action, cause of action, claim,
investigation, demand or notice by any person or entity alleging liability under
or non-compliance with any Environmental Law (an "Environmental Claim"); and
(iii) to the best knowledge of the Company, there are no circumstances that are
reasonably likely to prevent or interfere with such material compliance in the
future.
(b) There are no Environmental Claims that could reasonably be expected
to be adversely determined, and if adversely determined, could reasonably be
expected to have a Company Material Adverse Effect that are pending or, to the
best knowledge of the Company, threatened against the Company or its
Subsidiaries or, to the best knowledge of the Company,
13
<PAGE> 121
against any person or entity whose liability for any Environmental Claim the
Company or any of its Subsidiaries has or may have retained or assumed either
contractually or by operation of law.
(c) There is no condition on, in or under any property currently or
formerly owned, leased or operated by the Company or its Subsidiaries in
violation of, or for which there is an obligation under, Environmental Laws
where such violation or obligation is reasonably likely to result in a Company
Material Adverse Effect.
SECTION 2.16. INTELLECTUAL PROPERTY; SOFTWARE.
(a) Each of the Company and its Subsidiaries owns or possesses adequate
licenses or other valid rights to use, practice, sell, license and dispose of,
without restriction, all United States and foreign patents, trademarks, trade
names, service marks, copyrights, trade secrets (the "Intellectual Property
Rights") and applications therefor that are necessary to or are used in
connection with the business of the Company and its Subsidiaries, free and clear
of any Liens, except where the failure to own or possess valid rights to use
such Intellectual Property Rights would not have a Company Material Adverse
Effect.
(b) The validity, enforceability, ownership of or the right to use,
sell, license or dispose of any Intellectual Property Rights of the Company or
its Subsidiaries is not being questioned in any pending, or to the knowledge of
the Company, threatened claim, proceeding, office action or litigation, and
except as set forth in Section 2.16(b) of the Company Disclosure Schedule, the
conduct of the business of the Company and its Subsidiaries as now conducted
does not, to the best knowledge of the Company, infringe any Intellectual
Property Rights of others except in each case where such would not have a
Company Material Adverse Effect. The consummation of the transactions completed
hereby will not result in the loss or impairment of any Company Intellectual
Property Rights.
(c) Except as set forth on Section 2.16(b) of the Company Disclosure
Schedule, and except where it would not reasonably be expected to have a Company
Material Adverse Effect, to the knowledge of the Company, no third party is
infringing upon or otherwise violating any Intellectual Property Rights of the
Company or its Subsidiaries.
SECTION 2.17. YEAR 2000 COMPLIANCE. The Company believes that its
ongoing computer system upgrading program will result in each system, comprised
of software, hardware, databases or embedded control systems (microprocessor
controlled, robotic or other device) (collectively, a "System"), that
constitutes any material part of, or is used in connection with the use,
operation or enjoyment of, any material tangible or intangible asset or real
property of the Company and its Subsidiaries not being materially adversely
affected by the advent of the year 2000, the advent of the twenty-first century
or the transition from the twentieth century through the year 2000 and into the
twenty-first century, and that all material Systems will operate to accurately
process date data (including but not limited to calculating, comparing and
sequencing) from, into and between year 1999 and 2000. The Company believes that
neither the Company nor any of its Subsidiaries will incur material expenses
arising from or relating to the failure of any of its Systems as a result of the
advent of the year 2000, the advent of the twenty-first century or the
transition from the twentieth century through the year 2000.
14
<PAGE> 122
SECTION 2.18. GOVERNMENT CONTRACTS.
(a) Neither the Company, any affiliate of the Company, nor any of the
Company's directors, officers, employees, agents or consultants is (or for the
last three years has been) (i) except as set forth in Section 2.18(a) of the
Company Disclosure Schedule, under administrative, civil or criminal
investigation, indictment or information, audit or internal investigation with
respect to any alleged irregularity, misstatement or omission regarding a
Government Contract or Bid; or (ii) suspended or debarred from doing business
with the U.S. Government or any state or local government or declared
nonresponsible or ineligible for government contracting. Except as set forth in
Section 2.18(a) of the Company Disclosure Schedule, neither the Company nor any
affiliate of the Company has made a voluntary disclosure to any U.S. Government,
state or local government entity with respect to any alleged irregularity,
misstatement or omission arising under or relating to any Government Contract or
Bid. Except as set forth in Section 2.18(a) of the Company Disclosure Schedule,
the Company knows of no circumstances that would warrant the institution of
suspension or debarment proceedings or the finding of nonresponsibility or
ineligibility on the part of the Company in the future.
(b) Neither the U.S. Government, any state or local government nor any
prime contractor, subcontractor or vendor has asserted any claim or initiated
any dispute proceeding against the Company, nor has the Company asserted any
claim or initiated any dispute proceeding, directly or indirectly, against any
such party, concerning any Government Contract or Bid. There are no facts of
which the Company is aware upon which such a claim or dispute proceeding may be
based in the future.
(c) For purposes of this Agreement, the following terms shall have the
meanings set forth below:
(i) "Bid" means any quotation, bid or proposal by the Company
or any of its Affiliates which, if accepted or awarded, would lead to a contract
with the U.S. Government or any other entity, including a prime contractor or a
higher tier subcontractor to the U.S. Government, for the design, manufacture or
sale of products or the provision of services by the Company.
(ii) "Government Contract" means any prime contract,
subcontract, teaming agreement or arrangement, joint venture, basic ordering
agreement, letter contract, purchase order, delivery order, Bid, change order,
arrangement or other commitment of any kind relating to the business of the
Company between the Company and (a) the U.S. Government, (b) any prime
contractor to the U.S. Government or (c) any subcontractor with respect to any
contract described in clause (a) or (b).
(iii) "U.S. Government" means the United States government
including any and all agencies, commissions, branches, instrumentalities and
departments thereof.
SECTION 2.19. CERTAIN BUSINESS PRACTICES. None of the Company, any of
its Subsidiaries or any directors, officers, agents or employees of the Company
or any of its Subsidiaries has (i) used any funds for unlawful contributions,
gifts, entertainment or other
15
<PAGE> 123
unlawful expenses related to political activity, (ii) made any unlawful payment
to foreign or domestic government officials or employees or to foreign or
domestic political parties or campaigns or violated any provision of the Foreign
Corrupt Practices Act of 1977, as amended, or (iii) made any other unlawful
payment.
SECTION 2.20. VOTE REQUIRED. The affirmative vote of the holders of a
majority of the outstanding Shares is the only vote of the holders of any class
or series of the Company's capital stock necessary to approve and adopt this
Agreement.
SECTION 2.21. LABOR MATTERS. Neither the Company nor any of its
Subsidiaries is a party to or otherwise bound by any collective bargaining
agreement, contract or other agreement or understanding with a labor union or
labor organization, nor is the Company or any of its Subsidiaries the subject of
any proceeding asserting that the Company or any of its Subsidiaries has
committed an unfair labor practice or is seeking to compel it to bargain with
any labor union or labor organization, nor is there pending or, to the knowledge
of the Company, threatened, any labor strike, dispute, walkout, work stoppage,
slow-down or lockout involving the Company or any of its Subsidiaries.
SECTION 2.22. INSURANCE. The Company maintains insurance policies (the
"Insurance Policies") against all risks of a character and in such amounts as
are usually insured against by similarly situated companies in the same or
similar businesses. Each Insurance Policy is in full force and effect and is
valid, outstanding and enforceable, and all premiums due thereon have been paid
in full. None of the Insurance Policies will terminate or lapse (or be affected
in any other materially adverse manner) by reason of the transactions
contemplated by this Agreement. The Company and its Subsidiaries have complied
in all material respects with provisions of each Insurance Policy under which it
is the insured party. No insurer under any Insurance Policy has canceled or
generally disclaimed liability under any such policy or, to the Company's
knowledge, indicated any intent to do so or not to renew any such policy. All
material claims under the Insurance Policies have been filed in a timely
fashion.
SECTION 2.23. SUPPLIERS AND CUSTOMERS. The documents and information
supplied by the Company to Acquisition in connection with this Agreement with
respect to the relationships and volumes of business done with significant
suppliers and customers was accurate in all material respects. During the last
twelve months, the Company has received no notices of termination or written
threats of termination from any of the five largest suppliers or the five
largest customers of the Company and its Subsidiaries.
SECTION 2.24. TAX MATTERS. Except as set forth in Section 2.24 of the
Company Disclosure Schedule:
(a) All federal, state, local and foreign Tax Returns (as defined
below) required to be filed by or on behalf of any of the Company or its
Subsidiaries have been timely filed and all such Tax Returns are true and
complete in all material respects. All material Taxes (as defined below) owed by
the Company or its Subsidiaries for each taxable period have been paid. "Tax
Return" means any return, report or information statement required to be filed
with respect to Taxes. "Taxes" means all federal, state, local and foreign
taxes, including, without limitation,
16
<PAGE> 124
income, profits, franchise, employment, transfer, withholding, property, excise,
sales and use taxes (including interest and penalties thereon and additions
thereto).
(b) No audit examination, deficiency assessment, refund litigation or
other administrative or court proceeding with respect to any Tax Returns or
Taxes of the Company or its Subsidiaries is pending or, to the knowledge of the
Company, threatened. There are no material unpaid Tax deficiency assessments or
adjustments concerning any Tax Return or any Tax liability of the Company or its
Subsidiaries.
(c) There are no outstanding agreements or waivers to extend the period
of limitations for the filing of any Tax Return of the Company or its
Subsidiaries or the assessment or collection of any Tax from the Company or its
Subsidiaries and no power of attorney relating to any Tax matters is currently
in force. There are no closing agreements pursuant to Section 7121 of the
Internal Revenue Code of 1986, as amended (the "Code"), currently in force with
respect to the Company or any of its Subsidiaries.
(d) Each of the Company and its Subsidiaries has withheld and timely
deposited or paid all material Taxes required to have been withheld and
deposited or paid in connection with amounts paid or owing to any independent
contractor, stockholder or other third party.
(e) Neither the Company nor its Subsidiaries has filed a consent
pursuant to Section 341(f) of the Code or agreed to have Section 341(f)(2) of
the Code apply to any disposition of a subsection (f) asset (as such term is
defined in Section 341(f)(4) of the Code) owned by any of them.
(f) No property owned by the Company or its Subsidiaries is property
that Acquisition or the Company or its Subsidiaries is or will be required to
treat as being owned by another Person pursuant to the provisions of Section
168(f)(8) of the Internal Revenue Code of 1954, as amended and in effect
immediately prior to the enactment of the Tax Reform Act of 1986, is tax-exempt
use property within the meaning of Section 168(h)(1) of the Code or tax-exempt
bond financed property within the meaning of Section 168(g) of the Code.
(g) Neither the Company nor its Subsidiaries is now, or during the
applicable period specified in Section 897(c)(1)(A)(ii) of the Code, was, a
United States real property holding corporation within the meaning of Section
897 of the Code.
(h) Neither the Company nor any of its Subsidiaries is a party to,
bound by or subject to any obligations to indemnify or reimburse any other
person (excluding the Company or any of its Subsidiaries) for Taxes.
(i) Neither the Company nor any of its Subsidiaries has agreed to or is
required to make any adjustments under Section 481(a) of the Code by reason of a
change in accounting method or otherwise.
SECTION 2.25. BROKERS. No broker, finder or investment banker (other
than Donaldson, Lufkin & Jenrette Securities Corporation (the "Financial
Advisor") pursuant to an arrangement that has been disclosed to Acquisition
prior to the date hereof) is entitled to any brokerage,
17
<PAGE> 125
finder's or other fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by and on behalf of
the Company.
SECTION 2.26. RESTRICTIONS ON BUSINESS ACTIVITIES. There is no
judgment, injunction, order or decree binding upon the Company or any of its
Subsidiaries which has or could reasonably be expected to have the effect of
prohibiting or materially impairing any business practice of the Company or any
of its Subsidiaries, any acquisition of property by the Company or any of its
Subsidiaries or the conduct of business by the Company or any of its
Subsidiaries as currently conducted.
SECTION 2.27. NO OTHER REPRESENTATIONS OR WARRANTIES. No
representations or warranties have been made by or on behalf of the Company or
any of its Subsidiaries in connection with the Merger and the transactions
contemplated by this Agreement other than those expressly set forth in this
Article 2. Without limiting the generality of the foregoing, no representations
or warranties are being made with respect to financial projections or the future
financial performance or prospects of the Company, its Subsidiaries or their
respective businesses.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
OF ACQUISITION
Acquisition hereby represents and warrants to the Company as follows:
SECTION 3.1. ORGANIZATION.
(a) Acquisition is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization and has all
requisite power and authority to own, lease and operate its properties and to
carry on its businesses as now being conducted, except where the failure to be
so organized, existing and in good standing or to have such power and authority
would not have a Material Adverse Effect (as defined below) on Acquisition. When
used in connection with Acquisition, the term "Acquisition Material Adverse
Effect" means any change or effect that is or is reasonably likely to be
materially adverse to the business, assets, results of operations or condition
(financial or otherwise) of Acquisition and its subsidiaries, taken as a whole,
other than any change or effect arising out of general economic conditions
unrelated to any businesses in which Acquisition or any of its subsidiaries is
engaged.
(b) Acquisition has heretofore delivered to the Company accurate and
complete copies of the Certificate of Incorporation and Bylaws, as currently in
effect, of Acquisition. Each of Acquisition and its subsidiaries is duly
qualified or licensed and in good standing to do business in each jurisdiction
in which the property owned, leased or operated by it or the nature of the
business conducted by it makes such qualification or licensing necessary, except
in such jurisdictions where the failure to be so duly qualified or licensed and
in good standing would not have an Acquisition Material Adverse Effect.
18
<PAGE> 126
SECTION 3.2. AUTHORITY RELATIVE TO THIS AGREEMENT. Acquisition has all
necessary power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby have
been duly and validly authorized, and no other proceedings on the part of
Acquisition is necessary to authorize this Agreement or to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by Acquisition and constitutes a valid, legal and binding
agreement of Acquisition, enforceable against Acquisition in accordance with its
terms.
SECTION 3.3. INFORMATION SUPPLIED. None of the information supplied or
to be supplied by Acquisition for inclusion or incorporation by reference in the
Proxy Statement (as defined in Section 4.4(a)) will, at the respective times
that the Proxy Statement or any amendments or supplements thereto are filed with
the SEC and are first published or sent or given to holders of shares of Company
Common Stock, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are made,
not misleading.
SECTION 3.4. CONSENTS AND APPROVALS; NO VIOLATIONS. Assuming the truth
and accuracy of the Company's representations and warranties contained in
Section 2.6, except for filings, permits, authorizations, consents and approvals
as may be required under, and other applicable requirements of, the Securities
Act, the Exchange Act, state securities or blue sky laws, the HSR Act and the
filing and recordation of a Certificate of Merger as required by the DGCL, no
filing with or notice to, and no permit, authorization, consent or approval of,
any Governmental Entity is necessary for the execution and delivery by
Acquisition of this Agreement or the consummation by Acquisition of the
transactions contemplated hereby, except where the failure to obtain such
permits, authorizations, consents or approvals or to make such filings or give
such notice would not have an Acquisition Material Adverse Effect or have a
material adverse affect on the ability of Acquisition to consummate the Merger.
Neither the execution, delivery and performance of this Agreement by Acquisition
nor the consummation by Acquisition of the transactions contemplated hereby will
(i) conflict with or result in any breach of any provision of the respective
certificate or articles of incorporation or Bylaws (or similar governing
documents) of Acquisition or any of its subsidiaries, (b) result in a violation
or breach of, or constitute (with or without due notice or lapse of time or
both) a default (or give rise to any right of termination, amendment,
cancellation or acceleration) under, any of the terms, conditions or provisions
of any note, bond, mortgage, indenture, lease, license, contract, agreement or
other instrument or obligation to which Acquisition or any of its subsidiaries
is a party or by which any of them or any of their respective properties or
assets may be bound or (c) violate any order, writ, injunction, decree, law,
statute, rule or regulation applicable to Acquisition or any of its subsidiaries
or any of its respective properties or assets, except in the case of (b) or (c)
for violations, breaches or defaults which would not have an Acquisition
Material Adverse Effect or have a material adverse effect on the ability of
Acquisition to consummate the Merger.
SECTION 3.5. NO DEFAULT. Acquisition is not in default or violation
(and no event has occurred which with notice or the lapse of time or both would
constitute a default or violation) of any term, condition or provision of (a)
its certificate or articles of incorporation or Bylaws (or similar governing
documents), (b) any note, bond, mortgage, indenture, lease, license, contract,
19
<PAGE> 127
agreement or other instrument or obligation to which Acquisition is now a party
or by which it or any of its respective properties or assets may be bound or (c)
any order, writ, injunction, decree, law, statute, rule or regulation applicable
to Acquisition or any of its respective properties or assets, except in the case
of (b) or (c) for violations, breaches or defaults that would not have an
Acquisition Material Adverse Effect or have a material adverse effect on the
ability of Acquisition to consummate the Merger.
SECTION 3.6. AVAILABILITY OF FINANCING. Acquisition has received valid
and enforceable commitments from Bankers Trust Company and Bankers Trust
Corporation (the "Commitments"), copies of which have been delivered to the
Company, to provide an aggregate of $203,000,000, including approximately
$10,500,000 to cover fees and expenses, of the funds necessary to purchase
shares of Company Common Stock in the Merger, which Commitments are conditioned
only upon the satisfaction of Acquisition's conditions contained herein.
SECTION 3.7. NO PRIOR ACTIVITIES. Except for obligations incurred in
connection with its incorporation or organization, the negotiation and
consummation of this Agreement and the transactions contemplated hereby,
Acquisition has neither incurred any obligation or liability or engaged in any
business or activity of any type or kind whatsoever or entered into any
agreement or arrangement with any person or entity.
SECTION 3.8. NO OTHER REPRESENTATIONS OR WARRANTIES. No representations
or warranties are made by or on behalf of Acquisition in connection with the
transactions contemplated by this Agreement other than those expressly set forth
in this Article 3. Without limiting the generality of the foregoing, no
representations or warranties are being made with respect to financial
projections or the future financial performance or prospects of Acquisition or
its business.
ARTICLE 4
COVENANTS
SECTION 4.1. CONDUCT OF BUSINESS OF THE COMPANY. Except as contemplated
by this Agreement, during the period from the date hereof to the Effective Time,
the Company will not, and will not permit any of its Subsidiaries to conduct
their operations otherwise than in the ordinary course of business consistent
with past practice. Without limiting the generality of the foregoing, and except
as otherwise expressly provided in this Agreement, prior to the Effective Time,
the Company will not, without the prior written consent of Acquisition, and will
not permit any of its Subsidiaries to:
(a) amend its Certificate of Incorporation or Bylaws (or other similar
governing instrument);
(b) amend or modify (except as contemplated herein) the terms of the
Company Plan or authorize for issuance, issue, sell, deliver or agree or commit
to issue, sell or deliver (whether through the issuance or granting of options,
warrants, commitments, subscriptions, rights to purchase or otherwise) any stock
of any class or any other securities or equity equivalents
20
<PAGE> 128
(including, without limitation, any stock options or stock appreciation rights),
except for the issuance or sale of shares of Company Common Stock pursuant to
the exercise of Company Stock Options;
(c) split, combine or reclassify any shares of its capital stock,
declare, set aside or pay any dividend or other distribution (whether in cash,
stock or property or any combination thereof) or make any direct or indirect
redemption, retirement or purchase in respect of its capital stock, or redeem or
otherwise acquire any Company Securities or any securities of its Subsidiaries;
(d) except for short-term bank borrowings in the ordinary course of
business, incur any indebtedness for borrowed money;
(e) reduce its cash or short-term investment or their equivalent, other
than to meet cash needs arising in the ordinary course of business, consistent
with past practices;
(f) waive any material right under any contract or other agreement of
the type required to be set forth on any Section hereto;
(g) materially change any of its business policies, including
advertising, investment, marketing, pricing, purchasing, production, personnel,
sales, returns, budget or product acquisition policies;
(h) make any loan or advance to any of its stockholders, officers,
directors, employees, consultants, agents or other representatives (other than
travel advances made in the ordinary course of business), or make any other loan
or advance otherwise than in the ordinary course of business;
(i) terminate or fail to renew any contract or other agreement, the
termination of which or failure to renew would have a Company Material Adverse
Effect;
(j) (i) incur or assume any long-term or short-term debt or issue any
debt securities, except for borrowings under existing lines of credit in the
ordinary course of business and in amounts not material to the Company and its
Subsidiaries taken as a whole and except for indebtedness not exceeding
$10,000,000 in the aggregate; (ii) except as described in Section 4.1 of the
Company Disclosure Schedule, assume, guarantee, endorse or otherwise become
liable or responsible (whether directly, contingently or otherwise) for the
obligations of any other person, except in the ordinary course of business
consistent with past practice and in amounts not material to the Company and its
Subsidiaries taken as a whole and except for obligations of its Subsidiaries;
(iii) except for investments not exceeding $5,000,000 in the aggregate, make any
loans, advances or capital contributions to, or investments in, any other person
(other than to its Subsidiaries of the Company or customary loans or advances to
employees in the ordinary course of business consistent with past practice and
in amounts not material to the maker of such loan or advance); (iv) except as
described in Section 4.1 of the Company Disclosure Schedule, pledge or otherwise
encumber shares of capital stock of the Company or its Subsidiaries; or (v)
except as described in Section 4.1, mortgage or pledge any of its material
assets, tangible or intangible, or
21
<PAGE> 129
create or suffer to exist any material Lien thereupon except for Liens securing
indebtedness not exceeding $10,000,000 in the aggregate;
(k) except as may be required by law or as contemplated by this
Agreement, enter into, adopt or amend or terminate any bonus, profit sharing,
compensation, severance, termination, stock option, stock appreciation right,
restricted stock, performance unit, stock equivalent, stock purchase agreement,
pension, retirement, deferred compensation, employment, severance or other
employee benefit agreement, trust, plan, fund or other arrangement for the
benefit or welfare of any director, officer or employee in any manner, or
(except for normal increases in the ordinary course of business consistent with
past practice that, in the aggregate, do not result in a material increase in
benefits or compensation expense to the Company, except as required under
existing agreements and except for the payment of bonuses and severance payments
in the ordinary course of business generally consistent with past practice)
increase in any manner the compensation or fringe benefits of any director,
officer or employee or pay any benefit not required by any plan and arrangement
as in effect as of the date hereof (including, without limitation, the granting
of stock appreciation rights or performance units);
(l) except as described in Section 4.1 of the Company Disclosure
Schedule or with the consent of Acquisition acquire, sell, lease or dispose of
any assets outside the ordinary course of business or any assets which have a
value in excess of $1,000,000;
(m) except as may be required as a result of a change in law or in
generally accepted accounting principles, change any of the accounting
principles or practices used by it;
(n) (i) acquire (by merger, consolidation or acquisition of stock or
assets) any corporation, partnership or other business organization or division
thereof or any equity interest therein (except for transactions having an
aggregate value not exceeding $5,000,000 in the aggregate); (ii) authorize or
make any new capital expenditure or expenditures which, individually, is in
excess of $1,000,000 or, in the aggregate, are in excess of $5,000,000;
provided, however, that none of the foregoing shall limit any capital
expenditure already included in the Company's 1998 capital expenditure budget
previously provided to Acquisition; or (iii) enter into or amend any contract,
agreement, commitment or arrangement providing for the taking of any action that
would be prohibited hereunder;
(o) make any tax election or settle or compromise any income tax
liability material to the Company and its Subsidiaries taken as a whole;
(p) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction in the ordinary course of business of
liabilities reflected or reserved against in, or contemplated by, the
consolidated financial statements (or the notes thereto) of the Company and its
Subsidiaries at May 4, 1998 or incurred in the ordinary course of business
consistent with past practice;
(q) settle or compromise any pending or threatened suit, action or
claim relating to the transactions contemplated hereby; or
22
<PAGE> 130
(r) take, or agree in writing or otherwise to take, any of the actions
described in Sections 4.1(a) through 4.1(r) or any action which would make any
of the representations or warranties of the Company contained in this Agreement
untrue or incorrect as of the date when made.
SECTION 4.2. OTHER POTENTIAL ACQUIRERS.
(a) After the date hereof and prior to the Effective Time or earlier
termination of this Agreement, the Company shall not, and shall not permit any
of its Subsidiaries (including officers, directors, representatives and agents
of the Company and its Subsidiaries) to, directly or indirectly, encourage,
solicit, participate in or initiate discussions or negotiations with or provide
information to any corporation, partnership, person or other entity or group
except Acquisition concerning any merger, sale of assets, sale of or tender
offer for its common stock or similar actions (any such transactions being
referred to herein as "Acquisition Transactions") provided, however, that
nothing herein shall prevent the Board of Directors of the Company from taking
and disclosing to the Company's stockholders a position contemplated by Rules
14d-9 and 14e-2 promulgated under the Exchange Act with regard to any tender
offer.
(b) Notwithstanding the provisions of paragraph (a) above, the Company
may, in response to an unsolicited written proposal with respect to an
Acquisition Transaction, furnish information to a financially capable
corporation, partnership, person or other entity or group (a "Potential
Acquirer") pursuant to appropriate confidentiality agreements and may
participate in discussions and negotiate with such Potential Acquirer concerning
any inquiry or proposal to acquire the Company in an Acquisition Transaction or
negotiate with such Potential Acquirer if (i) the Company shall have given not
less than two (2) business days' advance written notice to Acquisition of the
Company's intention to do so and (ii) the Company Board is advised by one or
more of its independent financial advisors that providing information to the
Potential Acquirer is likely to lead to an Acquisition Transaction on terms that
would yield a higher value to the Company's stockholders than the Merger and is
in furtherance of the best interests of the Company's stockholders.
(c) In the event the Company shall determine to provide any information
or negotiate as described in paragraph (b) above, or shall receive any request,
inquiry proposals or offer of the type referred to in paragraph (b) above, it
shall (i) immediately provide Acquisition with a copy of all information being
provided to the third party, (ii) promptly inform Acquisition that information
is to be provided, that negotiations are to take place or that an offer has been
received and (iii) if a request, inquiry, proposal or offer has been received,
furnish to Acquisition a description of the material terms thereof and, unless
the Company Board concluded that such disclosure is inconsistent with its
fiduciary duties under applicable law, furnish to Acquisition the identity of
the person receiving such information or the proponent of such offer, if
applicable.
(d) The Company agrees not to release any third party from, or waive
any provisions of, any confidentiality or standstill agreement to which the
Company is a party, unless the Company Board shall have determined in good
faith, that failing to release such third party or waive such provisions would
constitute a breach of the fiduciary duties of the Company Board under
applicable law.
23
<PAGE> 131
SECTION 4.3. ACCESS TO INFORMATION.
(a) Between the date hereof and the Effective Time, the Company will
provide to Acquisition and its authorized representatives reasonable access to
all employees, plants, offices, warehouses and other facilities and to all books
and records of the Company and its Subsidiaries, will permit Acquisition to make
such inspections as Acquisition may reasonably require and will cause the
Company's officers and those of its subsidiaries to furnish Acquisition with
such financial and operating data and other information with respect to the
business and properties of the Company and its Subsidiaries as Acquisition may
from time to time reasonably request.
(b) Acquisition will hold and will cause its consultants and advisors
to hold in confidence all documents and information concerning the Company and
its Subsidiaries furnished to Acquisition in connection with the transactions
contemplated by this Agreement pursuant to the terms of that certain
Confidentiality Agreement entered into between the Company and J.F. Lehman &
Company dated March 1, 1998.
SECTION 4.4. STOCKHOLDERS MEETING.
(a) The Company shall, as promptly as practicable, take, in accordance
with applicable law and its articles of incorporation and by-laws, all action
necessary to convene a meeting of holders of shares of Company Common Stock (the
"Stockholders Meeting") to consider and vote upon the approval of this
Agreement. The Company shall promptly prepare and file with the SEC a proxy
statement for the solicitation of a vote of holders of shares of Company Common
Stock approving the Merger (the "Proxy Statement"), which shall include the
recommendation of the Company Board that stockholders of the Company vote in
favor of the approval and adoption of this Agreement and the written opinion of
the Financial Advisor that the cash consideration to be received by the
stockholders of the Company, other than those set forth on Exhibit A, pursuant
to the Merger is fair to such stockholders from a financial point of view. The
Company shall use all reasonable efforts to have the Proxy Statement cleared by
the SEC as promptly as practicable after such filing, and promptly thereafter
mail the Proxy Statement to the stockholders of the Company. The Company shall
also use its best efforts to obtain all necessary state securities law or "blue
sky" permits and approvals required in connection with the Merger and to
consummate the other transactions contemplated by this Agreement and will pay
all expenses incident thereto.
SECTION 4.5. ADDITIONAL AGREEMENTS; REASONABLE EFFORTS. Subject to the
terms and conditions herein provided, each party agrees to use all commercially
reasonable efforts to take, or cause to be taken, all action, and to do, or
cause to be done, all things reasonably necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement, including, without limitation, (a)
cooperation in the preparation and filing of the Proxy Statement, any filings
that may be required under the HSR Act and any amendments thereto; (b) the
taking of all action reasonably necessary, proper or advisable to secure any
necessary consents under existing debt obligations of the Company and its
Subsidiaries or to amend the notes, indentures or agreements relating thereto to
the extent required by such notes, indentures or agreements or redeem or
repurchase such debt obligations; (c) contesting any legal proceeding relating
to the Merger and (d) the execution of any additional
24
<PAGE> 132
instruments necessary to consummate the transactions contemplated hereby.
Subject to the terms and conditions of this Agreement, Acquisition agrees to use
all reasonable efforts to cause the Effective Time to occur as soon as
practicable after the shareholder vote with respect to the Merger. In case at
any time after the Effective Time any further action is necessary to carry out
the purposes of this Agreement, the proper officers and directors of each party
hereto shall take all such necessary action.
SECTION 4.6. CONSENTS. Acquisition and the Company each will use all
commercially reasonable efforts to obtain consents and/or waivers of all third
parties and Governmental Entities necessary, proper or advisable for the
consummation of the transactions contemplated by this Agreement.
SECTION 4.7. PUBLIC ANNOUNCEMENTS. Acquisition and the Company, as the
case may be, will consult with one another before issuing any press release or
otherwise making any public statements with respect to the transactions
contemplated by this Agreement and shall not issue any such press release or
make any such public statement prior to such consultation, except as may be
required by applicable law or by obligations pursuant to any listing agreement
with the Nasdaq Stock Market, as determined by Acquisition or the Company, as
the case may be.
SECTION 4.8. INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE.
(a) Acquisition agrees that all rights to indemnification or
exculpation now existing in favor of the directors, officers, employees and
agents of the Company and its Subsidiaries as provided in their respective
charters or bylaws (or other similar governing instruments) or otherwise in
effect as of the date hereof with respect to matters occurring prior to the
Effective Time shall survive the Merger and shall continue in full force and
effect. To the maximum extent permitted by the DGCL, such indemnification shall
be mandatory rather than permissive and the Surviving Corporation shall advance
expenses in connection with such indemnification (subject to the Surviving
Corporation's receipt of an undertaking by the indemnified party to return such
advanced expenses to the Surviving Corporation if it is determined by a final,
non-appealable order of a court of competent jurisdiction that such indemnified
party is not entitled to retain such advanced expenses).
(b) Acquisition shall cause the Surviving Corporation to maintain in
effect for not less than five (5) years from the Effective Time the policies of
the directors' and officers' liability and fiduciary insurance most recently
maintained by the Company (provided that the Surviving Corporation may
substitute therefor policies of at least the same coverage containing terms and
conditions which are no less advantageous to the beneficiaries thereof so long
as such substitution does not result in gaps or lapses in coverage) with respect
to matters occurring prior to the Effective Time; provided, however, that in
satisfying its obligation under this Section, the Surviving Corporation shall
not be obligated to pay premiums in excess of 150% of the amount per annum
incurred by the Company in the twelve months ended at the Effective Time with
respect to such insurance, which amount has been disclosed to Acquisition.
(c) In the event the Surviving Corporation or its successor (i) is
consolidated with or merges into another person and is not the continuing or
surviving corporation or entity of such
25
<PAGE> 133
consolidation or merger or (ii) transfers all or substantially all of its
properties and assets to any other person in a single transaction or a series of
related transactions, then in each such case Acquisition shall make or cause the
successor or transferee of the Surviving Corporation agree to comply in all
material respects with the terms of this Section 4.8.
SECTION 4.9. NOTIFICATION OF CERTAIN MATTERS. The Company shall give
prompt notice to Acquisition and Acquisition shall give prompt notice to the
Company concerning, (a) the occurrence or nonoccurrence of any event the
occurrence or nonoccurrence of which would be likely to cause any representation
or warranty of the notifying party contained in this Agreement to be untrue or
inaccurate in any material respect as if made at the Effective Time and (b) any
material failure of the notifying party to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder;
provided, however, that the delivery of any notice pursuant to this Section 4.9
shall not cure such breach or non-compliance or limit or otherwise affect the
remedies available hereunder to the party receiving such notice.
SECTION 4.10. SEC FILINGS. Each of Acquisition and the Company shall
promptly provide the other party (or its counsel) with copies of all filings
made by the other party or any of its subsidiaries with the SEC or any other
state or federal Governmental Entity in connection with this Agreement and the
transactions contemplated hereby.
SECTION 4.11. NOTICE OF CERTAIN EVENTS. The Company shall promptly
notify Acquisition, and Acquisition shall promptly notify the Company, of:
(a) any notice or other communication from any Person alleging that the
consent of such Person is or may be required in connection with the transactions
contemplated by this Agreement;
(b) any notice or other communication from any governmental or
regulatory agency or authority in connection with the transactions contemplated
by this Agreement; and
(c) with respect only to the Company, any actions, suits, claims,
investigations or proceedings commenced or, to the best of its knowledge,
threatened which, if pending on the date of this Agreement, would have been
required to have been disclosed pursuant to Section 3.9 or which relate to the
consummation of the transactions contemplated by this Agreement.
ARTICLE 5
CONDITIONS TO CONSUMMATION OF THE MERGER
SECTION 5.1. CONDITIONS TO EACH PARTY'S OBLIGATIONS TO EFFECT THE
MERGER. The respective obligations of each party to effect the Merger is subject
to the satisfaction at or prior to the Effective Time of the following
conditions:
(a) this Agreement shall have been approved and adopted by the
requisite vote of the stockholders of the Company;
26
<PAGE> 134
(b) no statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or enforced by any
United States court or United States governmental authority which prohibits,
restrains, enjoins or restricts the consummation of the Merger;
(c) any waiting period applicable to the Merger and the other
transactions described in the recitals to this Agreement under the HSR Act shall
have terminated or expired, and any other governmental or regulatory notices or
approvals required with respect to the transactions contemplated hereby shall
have been either filed or received; and
SECTION 5.2. CONDITIONS TO OBLIGATIONS OF ACQUISITION. The obligation
of Acquisition to effect the Merger are also subject to the satisfaction or
waiver by Acquisition prior to the Effective Time of the following conditions:
(a) The representations and warranties of the Company set forth in this
Agreement shall be true and correct in all material respects as of the date of
this Agreement and (except to the extent such representations and warranties
speak as of an earlier date) as of the Closing Date as though made on and as of
the Closing Date it being understood that representations and warranties shall
be deemed to be true and correct unless the respects in which the
representations and warranties (without giving effect to any "materiality"
limitations or references to "material adverse effect" set forth therein) are
untrue or incorrect in the aggregate is likely to have a Company Material
Adverse Effect.
(b) The Company shall have performed in all material respects all
obligations required to be performed by it under this Agreement at or prior to
the Closing Date.
SECTION 5.3. CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligation
of the Company to effect the Merger is also subject to the satisfaction or
waiver by the Company prior to the Effective Time of the following conditions:
(a) The representations and warranties of Acquisition set forth in this
Agreement shall be true and correct in all materials respects as of the date of
this Agreement and (except to the extent such representations and warranties
speak as of an earlier date) as of the Closing Date as though made on and as of
the Closing Date it being understood that representations and warranties shall
be deemed to be true and correct unless the respects in which the
representations and warranties (without giving effect to any "materiality"
limitations or references to "material adverse effect" set forth therein) are
untrue or incorrect in the aggregate is likely to have an Material Adverse
Effect on Acquisition
(b) Acquisition shall have performed in all material respects all
obligations required to be performed by it under this Agreement at or prior to
the Closing Date.
27
<PAGE> 135
ARTICLE 6
TERMINATION; AMENDMENT; WAIVER
SECTION 6.1. TERMINATION. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time:
(a) by mutual written consent of Acquisition and the Company;
(b) by Acquisition or the Company if (i) any court of competent
jurisdiction in the United States or other United States governmental authority
shall have issued a final order, decree or ruling or taken any other final
action restraining, enjoining or otherwise prohibiting the Merger and such
order, decree, ruling or other action is or shall have become nonappealable or
(ii) the Merger has not been consummated by October 31, 1998 (unless otherwise
extended by the parties); provided that no party may terminate this Agreement
pursuant to this clause (ii) if such party's failure to fulfill any of its
obligations under this Agreement shall have been the reason that the Effective
Time shall not have occurred on or before said date;
(c) by the Company if (i) there shall have been a breach of any
representation or warranty on the part of Acquisition set forth in this
Agreement, or any representation or warranty of Acquisition shall have become
untrue, in either case if the respects in which the representations and
warranties made by Acquisition are inaccurate would in the aggregate have an
Acquisition Material Adverse Effect or materially adversely affect (or delay)
the consummation of the Merger, (ii) there shall have been a breach on the part
of Acquisition of any of their respective covenants or agreements hereunder
having an Acquisition Material Adverse Effect or materially adversely affecting
(or materially delaying) the consummation of the Merger, and Acquisition has not
cured such breach prior to ten (10) days following notice by the Company
thereof, provided that the Company has not breached any of its obligations
hereunder in a manner that proximately contributed to such breach by
Acquisition, (iii) the Company Board by a majority vote shall have determined in
its good faith judgment that it must do so in the exercise of its fiduciary
duties under the DGCL, provided that such termination under this clause (iii)
shall not be effective until payment of the fee required by Section 6.3(a) or
(iv) the Company shall have convened a meeting of its stockholders to vote upon
the merger and shall have failed to obtain the requisite vote of the
stockholders;
(d) by Acquisition if (i) the Company Board withdraws or modifies in a
manner materially adverse to Acquisition the approval or recommendation of the
Merger or shall have recommended a Third Party Acquisition (as defined below),
(ii) a Third Party Acquisition occurs, (iii) there shall have been a breach of
any representation or warranty on the part of Company set forth in this
Agreement, or any representation or warranty of the Company shall have become
untrue, in either case if the respects in which the representations and
warranties made by the Company are inaccurate would in the aggregate have a
Company Material Adverse Effect or materially adversely affect (or delay) the
consummation of the Merger, (iv) there shall have been a breach on the part of
the Company of its covenants or agreements hereunder having, individually or in
the aggregate, a Company Material Adverse Effect or materially adversely
affecting (or materially delaying) the consummation of the Merger, and, with
respect to clauses
28
<PAGE> 136
(iii) and (iv) above, the Company has not cured such breach prior to ten (10)
days following notice by Acquisition thereof, provided that, with respect to
clauses (iii) and (iv) above, Acquisition has not breached any of its respective
obligations hereunder in a manner that proximately contributed to such breach by
the Company or (v) Acquisition shall have discovered that any information
supplied to it by the Company (excluding, for such purposes, any projections or
forecasts or other forward looking information supplied by the Company), at the
time provided to Acquisition, contained any untrue statement of a material fact
or omitted to state a material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, and such
misstatement or omission would have a Company Material Adverse Effect.
SECTION 6.2. EFFECT OF TERMINATION. In the event of the termination of
this Agreement by either Acquisition or the Company as provided in Section 6.1,
this Agreement shall forthwith become void and there shall be no liability or
obligation on the part of any party or its affiliates, directors, officers or
stockholders except (a) with respect to Sections 4.3(b), 6.2, 6.3 and 6.4 and
(b) to the extent that such termination results from the willful breach by a
party hereto of any of its representations, warranties, covenants or agreements
set forth in this Agreement.
SECTION 6.3. FEES AND EXPENSES.
(a) In the event that this Agreement shall be terminated pursuant to
Sections 6.1(c)(iii) or 6.1(d) and, within twelve (12) months thereafter, or
Section 6.1(c)(iv) and, within six (6) months thereafter, the Company enters
into an agreement with respect to a Third Party Acquisition, or a Third Party
Acquisition occurs, then Acquisition would suffer direct and substantial
damages, which damages cannot be determined with reasonable certainty. To
compensate Acquisition for such damages, the Company shall pay to Acquisition
the amount of $6,000,000 as liquidated damages. It is specifically agreed that
the amount to be paid pursuant to this Section 6.3(a) represents liquidated
damages and not a penalty.
"Third Party Acquisition" means the occurrence of any of the following
events: (i) the acquisition of the Company by merger or otherwise by any person
(which includes a "person" as such term is defined in Section 13(d)(3) of the
Exchange Act) or entity other than Acquisition or any affiliate thereof (a
"Third Party"); (ii) the acquisition by a Third Party of 50% or more of the
total assets of the Company and its Subsidiaries, taken as a whole; or (iii) the
acquisition by a Third Party of shares of Company Common Stock resulting in such
person holding at least 50% or more of the outstanding shares of Company Common
Stock.
(b) Upon the termination of this Agreement pursuant to Sections 6.1(d)
or 6.1(c)(iv) (unless such termination is also covered by Section 6.3(a)), the
Company shall reimburse Acquisition and its affiliates (not later than ten (10)
Business Days after submission of statements therefor) for all documented
out-of-pocket fees and expenses, not to exceed $750,000, reasonably incurred by
any of them or on their behalf in connection with the Merger and the
consummation of all transactions contemplated by this Agreement (including,
without limitation, filing fees, printing and mailing costs, fees payable to
investment bankers, counsel to any of the foregoing, and accountants).
Acquisition has provided the Company with an estimate of the amount of such
29
<PAGE> 137
fees and expenses and, if Acquisition shall have submitted a request for
reimbursement hereunder, will provide the Company in due course with invoices or
other reasonable evidence of such expenses upon request. The Company shall in
any event pay the amount requested (not to exceed $200,000), within ten (10)
Business Days of such request, subject to the Company's right to demand a return
of any portion as to which invoices are not received in due course. Nothing in
this Section 6.3(b) shall relieve any party from any liability for breach of
this Agreement.
(c) Upon the termination of this Agreement pursuant to Sections
6.1(c)(i) or (ii) Acquisition shall reimburse the Company and its affiliates
(not later than ten (10) Business Days after submission of statements therefor)
for all documented out-of-pocket fees and expenses, not to exceed $750,000,
reasonably incurred by any of them or on their behalf in connection with the
Merger and the consummation of all transactions contemplated by this Agreement
(including, without limitation, filing fees, printing and mailing costs, fees
payable to investment bankers, counsel to any of the foregoing, and
accountants). The Company has provided Acquisition with an estimate of the
amount of such fees and expenses and, if the Company shall have submitted a
request for reimbursement hereunder, will provide Acquisition in due course with
invoices or other reasonable evidence of such expenses upon request. Acquisition
shall in any event pay the amount requested (not to exceed $200,000) within ten
(10) Business Days of such request, subject to Acquisition's right to demand a
return of any portion as to which invoices are not received in due course.
Nothing in this Section 6.3(c) shall relieve any party from any liability for
breach of this Agreement.
(d) Except as specifically provided in this Section 6.3, each party
shall bear its own expenses in connection with this Agreement and the
transactions contemplated hereby.
SECTION 6.4. LIMITATION ON DAMAGES In the event of a breach of this
Agreement by any party hereto, the breaching party shall be liable, in
accordance with the provisions of this Agreement, for the consequences of such
breach (in addition to all documented out-of-pocket fees and expenses
reimbursable under Sections 6.3(b) or (c)); provided that, no breaching party
shall be liable for more than $15,000,000.
SECTION 6.5. AMENDMENT. This Agreement may be amended by action taken
by the Company and Acquisition at any time before or after approval of the
Merger by the stockholders of the Company (if required by applicable law) but,
after any such approval, no amendment shall be made which requires the approval
of such stockholders under applicable law without such approval. This Agreement
may not be amended except by an instrument in writing signed on behalf of the
parties.
SECTION 6.6. EXTENSION; WAIVER. At any time prior to the Effective
Time, each party may (a) extend the time for the performance of any of the
obligations or other acts of the other party or parties, (b) waive any
inaccuracies in the representations and warranties of the other parties
contained herein or in any document, certificate or writing delivered pursuant
hereto or (c) waive compliance by the other parties with any of the agreements
or conditions contained herein. Any agreement on the part of any party to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. The failure of any party to assert any
of its rights hereunder shall not constitute a waiver of such rights.
30
<PAGE> 138
ARTICLE 7
MISCELLANEOUS
SECTION 7.1. NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties made herein shall not survive beyond the
Effective Time or a termination of this Agreement.
SECTION 7.2. ENTIRE AGREEMENT; ASSIGNMENT. This Agreement (a)
constitutes the entire agreement among the parties with respect to the subject
matter hereof and supersedes all other prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof
and (b) shall not be assigned by operation of law or otherwise; provided,
however, that Acquisition may assign any or all of its rights and obligations
under this Agreement to any wholly owned subsidiary of Acquisition, but no such
assignment shall relieve Acquisition of its obligations hereunder if such
assignee does not perform such obligations.
SECTION 7.3. VALIDITY. If any provision of this Agreement, or the
application thereof to any person or circumstance, is held invalid or
unenforceable, the remainder of this Agreement, and the application of such
provision to other persons or circumstances, shall not be affected thereby, and
to such end, the provisions of this Agreement are agreed to be severable.
SECTION 7.4. NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by cable,
telegram, facsimile or telex, or by registered or certified mail (postage
prepaid, return receipt requested), to the other party as follows:
if to Acquisition: SDI Acquisition Corp.
c/o J.F. Lehman & Company
450 Park Avenue
New York, NY 10022
Attention: Keith Oster
with a copy to: Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, NY 10019
Attention: Neale M. Albert, Esq.
if to the Company to: Special Devices, Incorporated
16830 West Placerita Canyon Road
Newhall, CA 91321
Attention: The President
31
<PAGE> 139
with a copy to: Gibson, Dunn & Crutcher LLP
333 S. Grand Avenue
Los Angeles, CA 90071
Attention: Richard A. Strong, Esq.
or to such other address as the person to whom notice is given may have
previously furnished to the other in writing in the manner set forth above.
SECTION 7.5. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without regard
to the principles of conflicts of law thereof.
SECTION 7.6. CONSTRUCTION; INTERPRETATION. The headings contained in
this Agreement are inserted for convenience only and shall not affect in any way
the meaning or interpretation of this Agreement. Article, section, exhibit,
Section, annex, party, preamble and recital references are to this Agreement
unless otherwise stated. No party, nor its respective counsel, shall be deemed
the drafter of this Agreement for purposes of construing the provisions hereof,
and all provisions of this Agreement shall be construed according to their fair
meaning, and not strictly for or against any party.
SECTION 7.7. PARTIES IN INTEREST. This Agreement shall be binding upon
and inure solely to the benefit of each party and its successors and permitted
assigns, and except as provided in Section 7.2, nothing in this Agreement,
express or implied, is intended to or shall confer upon any other person any
rights, benefits or remedies of any nature whatsoever under or by reason of this
Agreement.
SECTION 7.8. SEVERABILITY. If any term or other provision of this
Agreement is invalid, illegal or unenforceable, all other provisions of this
Agreement shall remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party.
SECTION 7.9. COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same agreement.
32
<PAGE> 140
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
duly executed on its behalf as of the day and year first above written.
SPECIAL DEVICES, INCORPORATED,
a Delaware corporation
By:_______________________________________
Name:_____________________________________
Title:____________________________________
SDI ACQUISITION CORP.,
a Delaware corporation
By:_______________________________________
Name:_____________________________________
Title:____________________________________
33
<PAGE> 141
EXHIBIT A
Walter Neubauer 728,875 shares
Thomas F. Treinen 66,250 shares
34
<PAGE> 142
[DONALDSON, LUFKIN & JENRETTE LETTERHEAD]
APPENDIX B
June 19, 1998
Board of Directors
Special Devices, Incorporated
16830 West Placerita Canyon Road
Newhall, CA 91321
Dear Sirs:
You have requested our opinion as to the fairness from a financial point
of view to the stockholders other than the stockholders set forth in Exhibit A
to the Agreement described herein (the "Public Stockholders") of Special
Devices, Incorporated (the "Company") of the consideration to be received by
such stockholders pursuant to the terms of the Agreement and Plan of Merger,
dated as of June 19, 1998 (the "Agreement"), between the Company and SDI
Acquisition Corp. ("Acquisition Sub"), an affiliate of J.F. Lehman & Company
("J.F. Lehman"), pursuant to which Acquisition Sub will be merged (the "Merger")
with and into the Company.
Pursuant to the Agreement, each share of common stock of the Company,
other than certain shares specified in the Agreement, will be converted into the
right to receive a cash payment per share equal to $37.00.
In arriving at our opinion, we have reviewed the Agreement and the
exhibits thereto. We also have reviewed financial and other information that was
publicly available or furnished to us by the Company, including information
provided during discussions with the Company's management. Included in the
information provided during discussions with the Company's management were
certain financial projections of the Company for the period beginning November
1, 1997 and ending October 1, 2002 prepared by the management of the Company. In
addition, we have compared certain financial and securities data of the Company
with various other companies whose securities are traded in public markets,
reviewed the historical stock prices and trading volumes of the common stock of
the Company, reviewed prices and premiums paid in certain other business
combinations and conducted such other financial studies, analyses and
investigations as we deemed appropriate for purposes of this opinion.
In rendering our opinion, we have relied upon and assumed the accuracy
and completeness of all of the financial and other information that was
available to us from public sources, that was provided to us by the Company or
its representatives, or that was otherwise reviewed by us. With respect to the
financial projections supplied to us, we have assumed that management's adjusted
case projections have been reasonably prepared on the basis reflecting the best
currently available estimates and judgments of the management of the Company as
to the future operating and financial performance of the Company. We have not
assumed any responsibility for making an independent evaluation of any assets or
liabilities or for making any independent verification of any of the information
reviewed by us. We have relied as to certain legal matters on advice of counsel
to the Company.
<PAGE> 143
Board of Directors
Special Devices, Incorporated
Page 2 June 19, 1998
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. Our opinion does not address the relative
merits of the Merger and the other business strategies being considered by the
Company's Board of Directors, nor does it address the Board's decision to
proceed with the Merger. Our opinion does not constitute a recommendation to any
stockholder as to how such stockholder should vote on the proposed transaction.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of
its investment banking services, is regularly engaged in the valuation of
businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes.
Based upon the foregoing and such other factors as we deem relevant, we
are of the opinion that the consideration to be received by the Public
Stockholders of the Company pursuant to the Agreement is fair to such
stockholders from a financial point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ JEFFREY A. RAICH
----------------------------------
Jeffrey A. Raich
Senior Vice President
<PAGE> 144
APPENDIX C
GUARANTY AGREEMENT
THIS GUARANTY AGREEMENT (this "Agreement") is made as of this 19th day
of June, 1998 by and between J.F. Lehman Equity Investors I, L.P., a Delaware
limited partnership (the "Guarantor"), and Special Devices, Incorporated, a
Delaware corporation (the "Seller").
W I T N E S S E T H:
WHEREAS, to induce the Seller to enter into an Agreement and Plan of
Merger, dated as of June 19, 1998 (the "Merger Agreement") with SDI Acquisition
Corp., a Delaware corporation ("Acquisition"); and
WHEREAS, the Guarantor or affiliates of the Guarantor (i) have
negotiated the Merger Agreement with the Seller and (ii) own an equity interest
in Acquisition.
NOW, THEREFORE, for good and valuable consideration, the receipt of
which is hereby acknowledged, the Seller and the Guarantor hereby agree as
follows:
1. Guaranty. The Guarantor hereby unconditionally and irrevocably
guarantees for the benefit of the Seller the full payment by Acquisition of any
final judgment or settlement obtained against Acquisition, or any waiver or
other agreement admitting liability signed by Acquisition, in either case
relating to the failure of Acquisition to fully and faithfully perform each and
all of its respective obligations (direct or contingent) to be performed
pursuant to the Merger Agreement or the breach of any of its representations and
warranties contained in the Merger Agreement, subject to all of the conditions
and limitations set forth therein. It is expressly understood and agreed by the
Seller that: (i) the damages recoverable against the Guarantor under this
Guaranty Agreement shall be limited by, and shall not exceed, the sum of
$15,000,000 in the aggregate, (ii) this is guaranty of collection and not a
guaranty of payment and performance, and (iii) this Guaranty Agreement shall
terminate upon the closing of the Merger pursuant to the Merger Agreement. It is
expressly understood and agreed by the Guarantor that the obligations of the
Guarantor hereunder shall not be discharged or otherwise affected by any
bankruptcy, reorganization, dissolution or similar proceeding commenced by or
against Acquisition.
2. Organization and Good Standing of the Guarantor. The Guarantor
represents and warrants that (i) it is a limited partnership duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization and (ii) it is qualified to do business and is in good standing in
all jurisdictions where it is required to be qualified except for such failures
to be so qualified as have not had, and would not be reasonably expected to
have, a material adverse effect on (a) the financial condition of the Guarantor
or (b) the Guarantor's ability to perform its obligations hereunder.
<PAGE> 145
3. Authority, Approvals and Consents. The Guarantor represents and
warrants that (i) it has the power and authority to enter into, execute, deliver
and perform this Agreement, (ii) the execution, delivery and performance of this
Agreement have been duly authorized and approved and no other actions or
proceedings on the part of the Guarantor are necessary to authorize and approve
this Agreement, (iii) this Agreement has been duly executed and delivered by the
Guarantor and constitutes a valid and binding obligation of the Guarantor,
enforceable against the Guarantor in accordance with its terms, and (iv) the
execution, delivery and performance of this Agreement by the Guarantor do not
and will not:
(a) contravene or otherwise violate any provisions of the certificate
of formation or agreement of limited partnership of the Guarantor;
(b) (after notice or lapse of time or both) conflict with, result in a
breach of any provision of, constitute a default under, result in the
modification or cancellation of, or give rise to any right of termination in
respect of, any contract, agreement, commitment, understanding or arrangement of
any kind to which the Guarantor is a party except for such conflicts, breaches,
defaults, modifications, cancellations or terminations as have not had, and
would not be reasonably expected to have, a material adverse effect on (y) the
financial condition of the Guarantor or (z) the Guarantor's ability to perform
its obligations hereunder;
(c) violate or conflict with any statutes, laws, ordinances, codes,
rules, regulations, standards, judgments, decrees, writs, rulings, injunctions,
orders, decisions and other legal requirements of any governmental authority
applicable to the Guarantor, except for such violations or conflicts as have not
had, or would not be reasonably expected to have, a material adverse effect on
(y) the financial condition of the Guarantor or (z) the Guarantor's ability to
perform its obligations hereunder; or
(d) require the approval of any governmental authority the absence of
which would be reasonably expected to have a material adverse effect on (y) the
financial condition of the Guarantor or (z) the Guarantor's ability to perform
its obligations hereunder.
4. Definitions. Any capitalized term in this Agreement that is not
herein defined shall have the meaning given to such term in the Merger
Agreement.
5. Notices. All notices to be given pursuant to this Agreement to any
party must be in writing and will be deemed to have been validly given:
(a) if delivered by hand to an officer or agent of such party at its
address given below;
(b) if delivered by overnight commercial courier (such as Federal
Express); or
(c) if delivered by telecopier transmission, to such party at its
address given below.
The address of each party for the purposes of this Agreement is as
follows:
If to the Guarantor:
2
<PAGE> 146
J.F. Lehman Equity Investors I, L.P.
450 Park Avenue
New York, NY 10022
Attention: Keith Oster
Facsimile: (212) 634-1155
With a copy to (which shall constitute notice and is the address to be
used for purpose of service of process):
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, NY 10019-6064
Attention: Neale M. Albert, Esq.
Facsimile: (212) 757-3990
If to the Seller:
Special Devices, Incorporated
16830 West Placerita Canyon Road
Newhall, CA 91321
Attention: The President
Facsimile: (805) 254-4721
With a copy to (which shall constitute notice and is the address to be
used for purpose of service of process):
Gibson, Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, CA 90071
Attention: Richard A. Strong, Esq.
Facsimile: (213) 229-7520
Each party shall by notice to the other change its address for notice whenever
its existing address or facsimile number for notice changes.
6. Assignment. This Agreement and all provisions hereof will be binding
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns; provided, however, that neither this Agreement
nor any right, interest, or obligation hereunder may be assigned by Guarantor
without the prior written consent of the Seller.
7. Integration; Amendment; Waiver.
(a) This Guaranty represents the agreement of the Guarantor and the
Seller with respect to the subject matter hereof and there are no promises or
representations by the Guarantor or the Seller relative to the subject matter
hereof not reflected herein.
3
<PAGE> 147
(b) None of the terms or provisions of this Guaranty may be waived,
amended supplemented or otherwise modified except by a written instrument
executed by the Guarantor and Seller, provided that any provision of this
Guaranty may be waived by Seller in a letter or agreement executed by Seller or
by telex or facsimile transmission from Seller.
8. Counterparts. This Agreement may be executed in one or more
counterparts, all of which will be considered one and the same agreement and
each of which will be deemed an original.
9. Governing Law; Enforcement of Rights. This Agreement will be
governed by the laws of the State of California (regardless of the laws that
might be applicable under principles of conflicts of law) as to all matters,
including but not limited to matters of validity, construction, effect and
performance.
10. Severability. If any one or more of the provisions of this
Agreement is held to be invalid, illegal or unenforceable, the validity,
legality or enforceability of the remaining provisions of this Agreement will
not be affected thereby, and the Guarantor and the Seller will use their
commercially reasonable efforts to substitute one or more valid, legal and
enforceable provisions which insofar as practicable implement the purposes and
intent hereof. To the extent permitted by applicable law, each party waives any
provision of law which renders any provision of this Agreement invalid, illegal
or unenforceable in any respect
11. Third Party Beneficiaries. This Agreement is not intended to confer
upon any other Person any rights or remedies hereunder.
[The remainder of this page is intentionally left blank]
4
<PAGE> 148
IN WITNESS WHEREOF, the parties hereto have caused this Guaranty
Agreement to be duly executed as of the day and year first above written.
J.F. LEHMAN EQUITY INVESTORS I, L.P.
By:
----------------------------------------
Name:
Title:
SPECIAL DEVICES, INCORPORATED
By:
----------------------------------------
Name:
Title:
5
<PAGE> 149
APPENDIX D
DELAWARE CODE ANNOTATED
SECTION 262. APPRAISAL RIGHTS
TITLE 8. CORPORATIONS
CHAPTER 1. GENERAL CORPORATION LAW
SUBCHAPTER IX. MERGER OR CONSOLIDATION
8 DEL.
SECTION 262. APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to section 251 (other than a merger effected pursuant to
section 251(g) of this title), section 252, section 254, section 257, section
258, section 263 or section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock,
which stock, or depository receipts in respect thereof, at the record
date fixed to determine the stockholders entitled to receive notice of
and to vote at the meeting of stockholders to act upon the agreement of
merger or consolidation, were either (i) listed on a national
securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of
Securities Dealers, Inc. or (ii) held of record by more than 2,000
holders; and further provided that no appraisal rights shall be
available for any shares of stock of the constituent
<PAGE> 150
corporation surviving a merger if the merger did not require for its
approval the vote of the stockholders of the surviving corporation as
provided in subsection (f) of section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or
series of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation
pursuant to section 251, 252, 254, 257, 258, 263 and 264 of this title
to accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting
from such merger or consolidation, or depository receipts in
respect thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or
depository receipts in respect thereof) or depository receipts
at the effective date of the merger or consolidation will be
either listed on a national securities exchange or designated
as a national market system security on an interdealer
quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of
this paragraph; or
d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a., b. and
c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under section 253 of this title is not owned
by the parent corporation immediately prior to the merger, appraisal
rights shall be available for the shares of the subsidiary Delaware
corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior
to the meeting, shall notify each of its stockholders who was such on
the record date for such meeting
2
<PAGE> 151
with respect to shares for which appraisal rights are available
pursuant to subsection (b) or (c) hereof that appraisal rights are
available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each
stockholder electing to demand the appraisal of his shares shall
deliver to the corporation, before the taking of the vote on the merger
or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of his shares. A proxy or vote against
the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate
written demand as herein provided. Within 10 days after the effective
date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that
the merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to section 228
or section 253 of this title, each constituent corporation, either
before the effective date of the merger or consolidation or within ten
days thereafter, shall notify each of the holders of any class or
series of stock of such constituent corporation who are entitled to
appraisal rights of the approval of the merger or consolidation and
that appraisal rights are available for any or all shares of such class
or series of stock of such constituent corporation, and shall include
in such notice a copy of this section; provided that, if the notice is
given on or after the effective date or the merger or consolidation,
such notice shall be given by the surviving or resulting corporation to
all such holders of any class or series of stock of a constituent
corporation that are entitled to appraisal rights. Such notice may,
and, if given on or after the effective date of the merger or
consolidation, shall, also notify such stockholders of the effective
date of the merger or consolidation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of such
notice, demand in writing from the surviving or resulting corporation
the appraisal of such holder's shares. Such demand will be sufficient
if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation,
either (i) each such constituent corporation shall send a second notice
before the effective date of the merger or consolidation notifying each
of the holders of any class or series of stock of such constituent
corporation that are entitled to appraisal rights of the effective date
of the merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such holders on or
within 10 days after such effective date; provided, however, that if
such second notice is sent more than 20 days following the sending of
the first notice, such second notice need only be sent to each
stockholder who is entitled to appraisal rights and who has demanded
appraisal of such holder's shares in accordance with this subsection.
An affidavit of the secretary or
3
<PAGE> 152
assistant secretary or of the transfer agent of the corporation that is
required to give either notice that such notice has been given shall,
in the absence of fraud, be prima facie evidence of the facts stated
therein. For purposes of determining the stockholders entitled to
receive either notice, each constituent corporation may fix, in
advance, a record date that shall be not more than 10 days prior to the
date the notice is given, provided, that if the notice is given on or
after the effective date of the merger or consolidation, the record
date shall be such effective date. If no record date is fixed and the
notice is given prior to the effective date, the record date shall be
the close of business on the day next preceding the day on which the
notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold
4
<PAGE> 153
stock represented by certificates to submit their certificates of stock to the
Register in Chancery for notation thereon of the pendency of the appraisal
proceedings; and if any stockholder fails to comply with such direction, the
Court may dismiss the proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
5
<PAGE> 154
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation
6
<PAGE> 155
PROXY
SPECIAL DEVICES, INCORPORATED
Proxy Solicited on Behalf of the Board of Directors
The undersigned, revoking all previous proxies, hereby appoints THOMAS F.
TREINEN, JOHN M. CUTHBERT and JOHN T. VINKE (the "Proxies"), or any of them
acting individually, as the proxy of the undersigned, with full power of
substitution, to vote, as indicated below and in their discretion upon such
other matters as may properly come before the meeting, all shares which the
undersigned would be entitled to vote at the Special Meeting of Special
Devices, Incorporated ("SDI") to be held at The Valencia Hilton Garden Inn,
27710 The Old Road, Valencia, California 91355, on Wednesday, September 23,
1998 at 10:00 a.m., local time and at any postponement or adjournment thereof.
Please date and sign your Proxy on the reverse side and return it promptly.
(Continued and to be signed on reverse side.)
- - -------------------------------------------------------------------------------
-- FOLD AND DETACH HERE --
<PAGE> 156
<TABLE>
<CAPTION>
Please mark
your votes [X]
as indicated
in this sample.
<S> <C> <C> <C> <C> <C> <C> <C>
FOR AGAINST ABSTAIN FOR AGAINST ABSTAIN
1. To approve and adopt an Agreement 2. In accordance with their best judgment, the
and Plan of Merger, dated as of [ ] [ ] [ ] Proxies are authorized to transact and vote [ ] [ ] [ ]
June 19, 1998 (the "Merger Agreement"), upon such other business as may properly
by and between SDI and SDI Acquisition come before the Special Meeting and any
Corp. ("Acquisition"), and the merger postponement or adjournment thereof.
of Acquisition into SDI as provided
for therein. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
UNLESS OTHERWISE SPECIFIED, THE SHARES WILL BE VOTED "FOR"
THE APPROVAL OF THE MERGER AND THE MERGER AGREEMENT
DESCRIBED HEREIN. THIS PROXY ALSO DELEGATES DISCRETIONARY
AUTHORITY WITH RESPECT TO ANY OTHER BUSINESS WHICH MAY
PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT OR
POSTPONEMENT THEREOF.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE
OF SPECIAL MEETING AND PROXY STATEMENT.
Signature(s)_______________________________________________________________________________________________ Date_______________
NOTE: Please sign this proxy exactly as name(s) appear on your stock certificate. When signing as attorney-in-fact, executor,
administrator, trustee or guardian, please add your title as such, and if signer is a corporation, please sign with full
corporate name by a duly authorized officer or officers and affix the corporate seal. Where stock is issued in the name
of two (2) or more persons, all such persons should sign.
- - ------------------------------------------------------------------------------------------------------------------------------
-- FOLD AND DETACH HERE --
</TABLE>
<PAGE> 157
APPENDIX C
SPECIAL DEVICES, INCORPORATED
16830 West Placerita Canyon Road
Newhall, California 91321
(805) 259-0753
September 11, 1998
Dear Special Devices Stockholder:
We previously sent you a Proxy Statement dated August 18, 1998 relating
to a Special Meeting of Stockholders of Special Devices, Incorporated ("SDI") to
be held at The Valencia Hilton Garden Inn, 27710 The Old Road, Valencia,
California 91355, on Wednesday, September 23, 1998 at 10:00 a.m., local time. As
described in the Proxy Statement, the Special Meeting was called to allow SDI
stockholders to consider and vote upon the adoption of a Merger Agreement (the
"Merger Agreement"), dated as of June 19, 1998, providing for the acquisition of
SDI by SDI Acquisition Corp. ("Acquisition"), a newly-formed company organized
by J.F. Lehman & Company, Inc. ("J.F. Lehman").
As a result of developments since the time of the mailing of the Proxy
Statement, we are providing you with the attached supplement to the Proxy
Statement (the "Supplement"), which includes additional information for your
consideration of the Merger Agreement.
As discussed in greater detail in the Supplement, SDI'S BOARD OF
DIRECTORS REAFFIRMS ITS VIEW THAT THE MERGER AGREEMENT IS FAIR TO AND IN THE
BEST INTERESTS OF SDI AND ITS STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT YOU
VOTE IN FAVOR OF ADOPTING THE MERGER AGREEMENT DATED AS OF JUNE 19, 1998.
Your vote is important, and we urge you to give the Proxy Statement and
this Supplement your immediate attention. You have already received a proxy card
on which you can vote, and you may have already returned the card. HOWEVER, WE
HAVE ENCLOSED A SECOND PROXY CARD (AND A RETURN ENVELOPE) FOR YOUR USE, IN CASE
YOU HAVE MISPLACED THE PROXY PREVIOUSLY SENT OR YOU WISH TO CHANGE YOUR VOTE. IF
YOU HAVE ALREADY VOTED YOUR PROXY AND YOU DO NOT WISH TO CHANGE YOUR VOTE, YOU
DO NOT NEED TO RETURN THIS SECOND PROXY CARD.
On behalf of the Board of Directors, we thank you for your support and
urge you to vote FOR adoption of the Merger Agreement.
Sincerely,
Thomas F. Treinen
Chairman of the Board of Directors
<PAGE> 158
SUPPLEMENT TO
PROXY STATEMENT DATED AUGUST 18, 1998
This is a Supplement to the Proxy Statement dated August 18, 1998 (the
"Proxy Statement"). This Supplement contains additional information for your
consideration of the Merger Agreement. The capitalized terms used in this
Supplement and not defined herein shall have the meanings ascribed them in the
Proxy Statement.
Opinion of Financial Advisor to the Company
As part of this decision to provide further information with respect to
the Merger, the Board of Directors of SDI requested Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ") to provide an updated opinion as to the fairness
from a financial point of view to stockholders other than the Continuing
Stockholders of the consideration to be received by such stockholders pursuant
to the terms of the Merger Agreement. On September 9, 1998, DLJ delivered its
written opinion (the "DLJ Updated Opinion") to the effect that, as of the date
of such opinion and based upon and subject to the assumptions, limitations and
qualifications set forth therein, the merger consideration to be received by
stockholders other than Continuing Stockholders pursuant to the Merger Agreement
is fair to such stockholders from a financial point of view.
A COPY OF THE DLJ UPDATED OPINION IS ATTACHED HERETO AS APPENDIX A.
STOCKHOLDERS ARE URGED TO READ THE DLJ OPINION CAREFULLY IN ITS ENTIRETY FOR THE
ASSUMPTIONS MADE, THE PROCEDURES FOLLOWED, THE MATTERS CONSIDERED AND THE LIMITS
OF THE REVIEW MADE BY DLJ IN CONNECTION WITH SUCH UPDATED OPINION.
The assumptions, limitations and qualifications contained in the DLJ
Updated Opinion are substantially the same as those contained in the opinion
dated June 19, 1998 (the "Original DLJ Opinion").
In connection with the DLJ Updated Opinion, DLJ performed certain
procedures to update certain analyses made in connection with the delivery of
the Original DLJ Opinion and reviewed with the management of SDI the assumptions
on which such analyses were based. The following is a summary of the results of
such analyses made by DLJ in connection with the DLJ Updated Opinion.
Historical Stock Price Performance. To provide comparative market data,
DLJ examined SDI's historical common stock performance. DLJ's analysis consisted
of a historical analysis of closing prices and trading volumes from SDI's
initial public offering on August 9, 1991 through August 28, 1998. DLJ also
examined trading volumes at specified prices of SDI's common stock for the
twelve months ended September 1, 1998. Since SDI's initial public offering on
August 9, 1991, SDI's common stock reached a high of $38.00 per share and a low
of $5.25 per share. On September 1, 1998, the closing price of the Company's
common stock was $34.25 per
<PAGE> 159
share. During the twelve months ended September 1, 1998, over 99% of the
trading volume in SDI's common stock was at $37.00 or below.
Premium Analysis. DLJ reviewed publicly available information to
determine the premiums paid in (i) 64 selected transactions in the automotive
industry completed between January 1, 1995 and August 31, 1998 (the "Selected
Automotive Transactions") and (ii) 518 mergers and acquisitions transactions
ranging in size from $200 million to $400 million completed between January 1,
1996 and August 31, 1998 (the "Selected M&A Transactions"). For the Selected
Automotive Transactions, DLJ reviewed the percentage premium in each transaction
represented by the offer prices over the trading prices one week and one month
prior to the announcement date of each respective transaction. The mean
percentage amount by which the offer prices exceeded the closing stock prices
one week and one month prior to the announcement date for the Selected
Automotive Transactions was approximately 38.0% and 48.4%, respectively. For the
Selected M&A Transactions, DLJ reviewed the percentage premium in each
transaction represented by the offer prices over the trading prices one day, one
week and one month prior to the announcement date of each respective
transaction. The mean percentage amount by which the offer prices exceeded the
closing stock prices one day, one week and one month prior to the announcement
date for the Selected M&A Transactions was approximately 27.0%, 32.9% and 40.5%,
respectively. The percentage amount by which the Merger Consideration exceeded
the closing stock price of SDI's common stock one day, one week and one month
prior to January 21, 1998, the date of the press release announcing that the
Company had engaged DLJ to explore strategic alternatives, was approximately
36.4%, 46.2% and 31.0%, respectively. The percentage amount by which the Merger
Consideration exceeded the closing stock price of SDI's common stock one day,
one week and one month prior to June 22, 1998, the date of the announcement of
the Merger, was approximately 6.1%, 10.9% and 8.8%, respectively. The percentage
by which the Merger Consideration exceeded the closing stock price of SDI's
common stock one day, one week and one month prior to September 1, 1998 was
7.6%, 3.9% and 8.2%, respectively.
Comparison of Selected Publicly Traded Comparable Companies. DLJ
analyzed SDI's operating performance relative to the Airbag Comparable
Companies. DLJ compared certain market trading statistics for SDI with the
Airbag Comparable Companies, including total enterprise value (defined as market
value of common equity plus book value of total debt less cash and cash
equivalents) (based on reported closing prices for the Airbag Comparable
Companies on September 1, 1998) as a multiple of latest twelve months ("LTM")
revenues, LTM earnings before interest, taxes, depreciation and amortization
("EBITDA") and LTM earnings before interest and taxes ("EBIT"), and price to
earnings ratios ("P/E") based on LTM earnings per share ("EPS") and book value
of common equity per share. As of September 1, 1998, this analysis resulted in
(i) a range of 0.7x to 1.3x, and a median and mean (excluding high and low) of
1.0x total enterprise value to LTM revenues compared to 1.8x for SDI's common
stock based on the Merger Consideration, (ii) a range of 5.5x to 9.4x, a median
of 5.5x and a mean (excluding high and low) of 6.0 x total enterprise value to
LTM EBITDA compared to 9.2x for SDI based on the Merger Consideration, (iii) a
range of 7.5x to 94.9x, a median of 10.4x and a mean (excluding high and low) of
15.2x total enterprise value to LTM EBIT compared to 12.0x for SDI based on the
Merger Consideration, (iv) a range of 8.6x to 19.6x and a median and mean
(excluding high and low) of 14.1x P/E based on LTM EPS compared to 19.5x for SDI
based on
4
<PAGE> 160
the Merger Consideration, and (v) a range of 1.0x to 17.8x, a median of 2.1x and
a mean (excluding high and low) of 2.2x price to book value of common equity per
share compared to 3.2x for SDI based on the Merger Consideration.
Analysis of Selected Transactions in the Airbag OEM Supplier Sector.
DLJ reviewed publicly available information for the Selected Automotive
Transactions. DLJ reviewed the consideration paid in such transactions in terms
of the total enterprise value as a multiple of LTM revenues, EBITDA and EBIT of
the acquired entity prior to its acquisition as well as the equity value
(defined as market value of common equity) as a multiple of LTM net income and
book value of common equity of the acquired entity prior to its acquisition. The
analysis resulted in (i) a range of 0.3x to 2.1x, a median of 0.8x and a mean
(excluding high and low) of 0.9x total enterprise value to LTM revenue compared
to 1.8x for SDI based on the Merger Consideration, (ii) a range of 4.6x to
14.4x, a median of 7.5x and a mean (excluding high and low) of 7.7x total
enterprise value to LTM EBITDA compared to 9.2x for SDI based on the Merger
Consideration, (iii) a range of 5.3x to 37.1x, a median of 11.5x and a mean
(excluding high and low) of 11.4x total enterprise value to LTM EBIT compared to
12.0x for SDI based on the Merger Consideration, (iv) a range of 6.7x to 106.1x,
a median of 17.6x and a mean (excluding high and low) of 20.6x equity value to
LTM net income compared to 19.5x for SDI based on the Merger Consideration, and
(v) a range of (1.6)x to 11.8x, a median of 3.4x and a mean (excluding high and
low) of 4.1x equity value to book value of common equity compared to 3.2x for
SDI based on the Merger Consideration.
Discounted Cash Flow Analysis. For purposes of this analysis, DLJ
performed a discounted cash flow analysis for SDI on a stand-alone basis based
on projections provided by management (the "Management Case"). In addition, DLJ
performed a discounted cash flow analysis for SDI based on projections provided
by management which were adjusted by management from the Management Case (the
"Management Adjusted Case") to reflect the following assumptions: (A) overall
unit prices decline 10% below the unit price forecast for each forecasted year
in the Management Case; (B) lower overall gross margins by two percentage points
in each forecasted year in the Management Case; and (C) higher overall selling,
general and administrative expense by one percentage point in each forecasted
year in the Management Case. In performing its analysis, DLJ calculated the
estimated "Free Cash Flow" based on stand-alone projected unleveraged operating
income adjusted for: (i) taxes; (ii) certain projected non-cash items (i.e.,
depreciation and amortization); (iii) projected changes in non-cash working
capital; and (iv) projected capital expenditures. DLJ analyzed the Management
Case and Management Adjusted Case projections and discounted the stream of Free
Cash Flows from fiscal 1999 to fiscal 2002, provided in such projections, back
to October 31, 1998 using discount rates ranging from 10.0% to 20.0%. DLJ based
the discount rate assumptions on the Company's weighted average cost of capital,
as adjusted to reflect potential adverse factors, including customer
concentration, the single product nature of the Company's business and
uncertainty concerning the future market for automotive airbags and airbag
initiators. To estimate the residual values of SDI on a stand-alone basis at the
end of the forecast period, DLJ applied terminal multiples of 6.0x to 8.0x
projected fiscal 2002 EBITDA and discounted such value estimates back to October
31, 1998 using discount rates ranging from 10.0% to 20.0%. DLJ then aggregated
the present values of the Free Cash Flows and the present values of the residual
values to derive a range of implied enterprise values for SDI on a stand-alone
basis. The range of
5
<PAGE> 161
implied enterprise values stand-alone were then adjusted for SDI's net debt to
yield implied equity values of SDI on a stand-alone basis. The range of equity
values were then divided by the number of fully diluted shares to determine a
range of equity values per share for SDI on a stand-alone basis. The Management
Case indicated a range of implied equity values of $31.42 to $54.27 per share.
The Management Adjusted Case indicated a range of implied equity values of
$25.24 to $43.68 per share.
The summary set forth above does not purport to be a complete
description of the analyses performed by DLJ, but describes, in summary form,
the principal elements of the analysis made by DLJ in connection with the DLJ
Updated Opinion. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of these methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to summary
description. Each of the analyses conducted by DLJ was carried out in order to
provide a different perspective on the transaction and to add to the total mix
of information available. DLJ did not form a conclusion as to whether any
individual analysis, considered in isolation, supported or failed to support an
opinion as to fairness from a financial point of view. Rather, in reaching its
conclusion, DLJ considered the results of the analyses in light of each other
and ultimately reached its opinion based on the results of all analyses taken as
a whole. DLJ did not place particular reliance or weight on any individual
analysis, but instead concluded that its analyses, taken as a whole, supported
its determination. Accordingly, notwithstanding the separate factors summarized
above, DLJ believes that its analyses must be considered as a whole and that
selecting portions of its analysis and the factors considered by it, without
considering all analyses and factors, could create an incomplete or misleading
view of the evaluation process underlying its opinion. In performing its
analyses, DLJ made numerous assumptions with respect to industry performance,
business and economic conditions and other matters. The analyses performed by
DLJ are not necessarily indicative of actual values or future results, which may
be significantly more or less favorable than suggested by such analyses.
The DLJ Updated Opinion was provided pursuant to the DLJ Engagement
Letter described in the Proxy Statement.
Projections
In connection with the solicitation of bids for the Company, SDI made
available to interested parties access to certain financial projections prepared
by SDI's management. These projections were prepared by SDI's management to
assist in financial planning and analysis and not with a view to publication.
Such projections were prepared based on historical information available at such
time and estimates as to the future financial performance of SDI. The
projections encompassed estimates of future revenues, expenses, taxes and
income. The projections were not prepared in accordance with the guidelines
established by the American Institute of Certified Public Accountants for
preparation and presentation of financial forecasts, nor have they been audited,
compiled or otherwise examined by independent accountants or auditors.
6
<PAGE> 162
These projections were also delivered to DLJ as part of the information
reviewed by DLJ in rendering its opinion as to the fairness from a financial
point of view to stockholders other than the Continuing Stockholders of the
consideration to be received by such stockholders pursuant to the Merger
Agreement.
Projections are based upon forecasts of future financial performance,
and the projections as well as the assumptions on which they are based are
inherently subject to substantial uncertainties. Consequently, projections are
not indicative of actual future results, which may be significantly more or less
favorable than suggested by the projections. The projections provided to
potential bidders and to DLJ were based upon the assumed realization in full of
all SDI's management's goals. SDI updated its projections following the end of
its third fiscal quarter. This set of management projections projected fiscal
year 1998 revenues of $173.5 million and fiscal year 1999 revenues of $195.8
million. In addition, this set of management projections projected fiscal year
1998 EBITDA of $35.7 million and fiscal year 1999 EBITDA of $43.3 million.
In connection with its analysis of the terms of the Merger, SDI's
management also prepared and provided to DLJ a management adjusted case set of
projections based upon the assumed failure by SDI to achieve some of SDI's
management's goals in full. This set of management adjusted projections
projected fiscal year 1998 revenues of $173.5 million and fiscal year 1999
revenues of $180.0 million. In addition, this set of management adjusted
projections projected fiscal year 1998 EBITDA of $33.9 million and fiscal year
1999 EBITDA of $35.3 million.
Neither the original projections nor the management adjusted case
projections were intended by management to be indicative of actual future
results. They were prepared to assist in financial planning and analysis, and
the management adjusted case projections show the impact of changing certain
assumptions upon the original projections. The Board of Directors did not assume
that either set of projections was indicative of actual future results but
understood that the management adjusted case projections represented a more
conservative set of assumptions that assumed that SDI's management was not able
to achieve 100% of its goals in the future and reflected the best currently
available estimates and judgments of management as to the future operating and
financial performance of SDI.
Continuing Ownership in SDI by Certain Stockholders and Optionholders
As disclosed in the Proxy Statement certain stockholders of SDI will
continue to own an equity interest in the Surviving Corporation. On a fully
diluted basis, after giving effect to the exercise of all stock options, Walter
Neubauer will own approximately 24.0% and Thomas F. Treinen will own
approximately 2.2%. In addition, John M. Cuthbert will have the right to acquire
through options approximately 1.6% of the common stock of the Surviving
Corporation on a fully diluted basis, and Jack B. Watson, Robert S. Ritchie,
Thomas J. Treinen, John Vinke, Mary Lou Graham and Samuel Levin will each,
through options, have the right to acquire less than 1% of the common stock of
the Surviving Corporation on a fully diluted basis.
7
<PAGE> 163
Third Quarter Financial Results
Since the mailing of the Proxy Statement, the unaudited financial
results of SDI for the third quarter of 1998 (three months ended August 2, 1998)
have become available. A copy of SDI's Quarterly Report on Form 10-Q as filed
with the SEC for the third quarter is attached hereto as Appendix B.
Transaction Structure
Affiliates of JFLC have committed to contribute an aggregate of
$79,000,000 in equity financing (the "Equity Contribution") towards the Merger
financing referred to under "The Merger -- The Merger Agreement --Financing --
Acquisition Financing" in the Proxy Statement. JFLEI and JFLCP, Affiliates of
JFLC, will provide $68,000,011 of the Equity Contribution. The remaining
$10,999,989 of the Equity Contribution will be provided by Paribas Principal
Inc. ("Paribas"), an Affiliate of JFLC that will be one of the limited partners
of JFLCP, through a subscription by Paribas (the "Paribas Subscription") for
297,297 shares of Common Stock of SDI at the price of $37.00 per share. The
closing of the Paribas Subscription will take place immediately after the
Effective Time. Thereafter, the entire equity interest in SDI will be owned by
Acquisition, the Continuing Stockholders and Paribas. The ultimate investments
by each of the above-referenced Affiliates of JFLC may vary but is not expected
to be less than $79,000,000 in the aggregate.
Financing
SDI now expects that the debt portion of the acquisition financing, in
the amount of approximately $210,000,000, will come from a combination of the
sale of debt securities in a private placement, borrowings under a bank term
loan and borrowings under the Revolving Credit Facility. The ultimate amount of
debt financing may vary.
Stockholder Litigation
As reported in the Proxy Statement, three purported stockholder class
action lawsuits were filed in the Delaware Court of Chancery challenging the
Merger. These lawsuits alleged, among other things, that the directors of SDI
violated their fiduciary duties to the company by failing to obtain sufficient
consideration for the Merger. On August 21, 1998, David Finkelstein, the
plaintiff in one of these class action lawsuits, filed an amended complaint
against the same defendants as the original complaint in which he charges the
individual defendants with failing to disclose material information in the
original Proxy Statement. These alleged omissions include, among other things,
the failure to disclose third quarter financial statements, information
concerning the projections made available to bidders and DLJ, and the interest
of certain persons in the equity of the continuing entity. As with the initial
lawsuits, the amended complaint also charges the defendants with breaching their
fiduciary duties to the public stockholders of SDI by allegedly failing to
obtain adequate consideration for the Merger.
The plaintiffs and defendants have agreed to enter into a memorandum of
understanding ("MOU") evidencing the parties' agreement on the material terms of
a settlement of the litigation.
8
<PAGE> 164
The MOU provides that SDI will (1) promptly supplement its Proxy Statement to
include SDI's 1998 third quarter financials; (2) provide additional disclosures
concerning the financial projections disclosed to J.F. Lehman and DLJ; (3)
supplement its Proxy Statement to include additional disclosures concerning
options and other compensation to be received by the members of SDI's Board of
Directors as a result of the merger by specifying the percentage of equity
interest that each director will have in the surviving entity; and (4) obtain an
updated fairness opinion of the merger from DLJ. SDI has agreed to bear the cost
of notice to the class members in connection with the settlement of the Action
and the settlement hearing. This settlement is subject to approval by the
Delaware Court of Chancery. SDI believes that this settlement is fair and
reasonable and in the best interests of SDI and its stockholders.
9
<PAGE> 165
APPENDIX A
[DONALDSON, LUFKIN & JENRETTE LETTERHEAD]
September 9, 1998
Board of Directors
Special Devices, Incorporated
16830 West Placerita Canyon Road
Newhall, CA 91321
Dear Sirs:
You have requested our opinion as to the fairness from a financial point
of view to the stockholders other than the stockholders set forth in Exhibit A
to the Agreement described herein (the "Public Stockholders") of Special
Devices, Incorporated (the "Company") of the consideration to be received by
such stockholders pursuant to the terms of the Agreement and Plan of Merger,
dated as of June 19, 1998 (the "Agreement"), between the Company and SDI
Acquisition Corp. ("Acquisition Sub"), an affiliate of J.F. Lehman & Company
("J.F. Lehman"), pursuant to which Acquisition Sub will be merged (the
"Merger") with and into the Company.
Pursuant to the Agreement, each share of common stock of the Company,
other than certain shares specified in the Agreement, will be converted into
the right to receive a cash payment per share equal to $37.00.
In arriving at our opinion, we have reviewed the Agreement and the
exhibits thereto. We also have reviewed financial and other information that
was publicly available or furnished to us by the Company, including information
provided during discussions with the Company's management. Included in the
information provided during discussions with the Company's management were
certain financial projections of the Company for the period beginning November
1, 1997 and ending October 1, 2002 prepared by the management of the Company.
In addition, we have compared certain financial and securities data of the
Company with various other companies whose securities are traded in public
markets, reviewed the historical stock prices and trading volumes of the common
stock of the Company, reviewed prices and premiums paid in certain other
business combinations and conducted such other financial studies, analyses and
investigations as we deemed appropriate for purposes of this opinion.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available
to us from public sources, that was provided to us by the Company or its
representatives, or that was otherwise reviewed by us. With respect to the
financial projections supplied to us, we have assumed that management's
adjusted case projections have been reasonably prepared on the basis reflecting
the best currently available estimates and judgments of the management of the
Company as to the future operating and financial performance of the Company. We
have not assumed any responsibility for making an independent evaluation of any
assets or liabilities or for making any independent verification of any of the
information reviewed by us. We have relied as to certain legal matters on
advice of counsel to the Company.
<PAGE> 166
Board of Directors
Special Devices, Incorporated
Page 2 September 9, 1998
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do no have any obligation to update,
revise or reaffirm this opinion. Our opinion does not address the relative
merits of the Merger and the other business strategies being considered by the
Company's Board of Directors, nor does it address the Board's decision to
proceed with the Merger. Our opinion does not constitute a recommendation to
any stockholder as to how such stockholder should vote on the proposed
transaction.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of
its investment banking services, is regularly engaged in the valuation of
businesses and securities in connection with mergers, acquisition,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes.
Based upon the foregoing and such other factors as we deem relevant, we
are of the opinion that the consideration to be received by the Public
Stockholders of the Company pursuant to the Agreement is fair to such
stockholders from a financial point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ JEFFREY A. RAICH
-------------------------------------
Jeffrey A. Raich
Senior Vice President
<PAGE> 167
APPENDIX B
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended: AUGUST 2, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number: 0-19330
SPECIAL DEVICES, INCORPORATED
(Exact name of Registrant as specified in its charter)
DELAWARE 95-3008754
- - ------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16830 W. PLACERITA CANYON ROAD, NEWHALL, CALIFORNIA 91321
(Address of principal executive offices)
(805) 259-0753
(Registrant's telephone number, including area code)
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. [X] YES [ ] NO
At August 31, 1998, the total number of outstanding shares of registrant's
common stock was 7,809,801.
<PAGE> 168
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
October 31, August 2,
1997 1998
------------- --------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 2,415,335 $ 150,548
Marketable securities 6,750,000 -
Accounts receivable, net of allowance of
$44,126 at October 31, 1997 and $210,028 at
August 2, 1998 for doubtful accounts 18,192,877 20,934,689
Inventories 14,554,614 20,050,993
Prepaid expenses 503,430 1,023,277
Deferred income taxes 991,000 1,366,000
------------- --------------
Total current assets 43,407,256 43,525,507
------------- --------------
Property, plant and equipment, at cost:
Land 1,611,331 1,611,331
Buildings 7,963,637 7,981,594
Machinery and equipment 44,080,413 52,450,128
Furniture and fixtures 2,844,116 3,263,209
Transportation equipment 2,486,034 2,538,580
Leasehold improvements 3,314,332 3,830,482
Construction in progress (includes land and facility costs of
$9,440,000 at October 31, 1997 and $20,910,000 at August 2, 1998) 17,942,985 33,949,946
------------- --------------
80,242,848 105,625,270
Less accumulated depreciation 23,974,540 30,014,109
------------- --------------
56,268,308 75,611,161
Other assets 148,716 108,716
------------- --------------
$ 99,824,280 $ 119,245,384
============= ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-2-
<PAGE> 169
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
October 31, August 2,
1997 1998
------------- --------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 194,793 $ 190,747
Bank revolver 750,000 1,531,000
Trade accounts payable 6,175,501 8,983,324
Accounts payable to related parties 1,471,748 280,920
Accrued payroll and benefits 1,929,420 1,904,086
Accrued expenses 1,491,360 3,883,978
Income taxes 1,257,872 3,476,871
------------- --------------
Total current liabilities 13,270,694 20,250,926
Long-term debt, less current portion 2,056,766 1,918,646
Deferred income taxes 3,140,000 3,415,000
------------- --------------
Total liabilities 18,467,460 25,584,572
------------- --------------
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $.01 par value. Authorized
2,000,000 shares; no shares issued or outstanding - -
Common stock, $.01 par value. Authorized
20,000,000 shares; issued and outstanding
7,771,167 shares at October 31, 1997, and
7,809,801 shares at August 2, 1998
77,712 78,098
Additional paid-in capital 50,887,737 51,362,516
Retained earnings 30,391,371 42,220,198
------------- --------------
Total stockholders' equity 81,356,820 93,660,812
------------- --------------
$ 99,824,280 $ 119,245,384
============= ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-3-
<PAGE> 170
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS - UNAUDITED
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------------------- -------------------------------
August 3, August 2, August 3, August 2,
1997 * 1998 1997 * 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 36,970,324 $ 43,399,898 $ 97,299,664 $ 129,246,332
Cost of sales 29,876,026 32,896,662 78,517,404 100,388,645
------------- ------------- ------------- -------------
Gross profit 7,094,298 10,503,236 18,782,260 28,857,687
------------- ------------- ------------- -------------
Operating expenses 2,547,354 3,197,772 7,234,820 9,062,410
------------- ------------- ------------- -------------
Earnings from operations 4,546,944 7,305,464 11,547,440 19,795,277
------------- ------------- ------------- -------------
Net interest income (expense):
Interest (expense) (67,229) (46,439) (201,157) (146,389)
Interest income 75,717 9,950 275,464 104,939
------------- ------------- ------------- -------------
Net interest income (expense) 8,488 (36,489) 74,307 (41,450)
------------- ------------- ------------- -------------
Earnings before income taxes 4,555,432 7,268,975 11,621,747 19,753,827
Income taxes 1,760,000 2,875,000 4,450,000 7,925,000
------------- ------------- ------------- -------------
Net earnings $ 2,795,432 $ 4,393,975 $ 7,171,747 $ 11,828,827
============= ============= ============= =============
Basic net earnings per share $ .36 $ .56 $ .94 $ 1.52
============= ============= ============= =============
Weighted average shares outstanding 7,685,087 7,792,730 7,664,627 7,786,755
============= ============= ============= =============
Diluted net earnings per share $ .36 $ .54 $ .93 $ 1.46
============= ============= ============= =============
Weighted average shares outstanding 7,760,565 8,156,109 7,741,942 8,091,403
============= ============= ============= =============
</TABLE>
* Certain amounts have been re-classified to conform with 1998 classifications.
See accompanying notes to condensed consolidated financial statements.
-4-
<PAGE> 171
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - UNAUDITED
FOR THE NINE MONTHS ENDED AUGUST 2, 1998
<TABLE>
<CAPTION>
Additional Total
Common Stock paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at October 31, 1997 7,771,167 $ 77,712 $50,887,737 $30,391,371 $81,356,820
Issuance of common stock on
exercise of stock options 38,634 386 474,779 -- 475,165
Net earnings (unaudited) -- -- 11,828,827 11,828,827
----------- ----------- ----------- ----------- -----------
Balance at August 2, 1998 7,809,801 $ 78,098 $51,362,516 $42,220,198 $93,660,812
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-5-
<PAGE> 172
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
<TABLE>
<CAPTION>
Nine months ended
-----------------------------------
August 3, August 2,
1997 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 7,171,747 $ 11,828,827
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation 4,657,994 6,039,569
Changes in assets and liabilities:
(Increase) in accounts receivable (1,962,585) (2,741,812)
Decrease (increase) in inventories 603,740 (5,496,379)
(Increase) in prepaid expenses (305,606) (519,847)
(Increase) in deferred income taxes (100,000) (100,000)
Decrease in other assets 40,000 40,000
Increase in accounts payable,
accounts payable to related parties and
other accrued expenses 760,857 3,984,279
(Decrease) increase in income taxes payable (100,000) 2,218,999
------------ ------------
Net cash provided by operating activities 10,766,147 15,253,636
------------ ------------
Cash flows from investing activities:
(Purchases) of property, plant and equipment (13,816,986) (25,382,422)
Sales of marketable securities 4,500,000 6,750,000
------------ ------------
Net cash (used in) investing activities (9,316,986) (18,632,422)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 224,145 475,165
Payments of long-term debt (146,735) (101,158)
Net borrowings under revolving line of credit -- 781,000
Net (repayment) of notes payable to bank (2,164,886) (41,008)
------------ ------------
Net cash (used in) provided by financing activities (2,087,476) 1,113,999
------------ ------------
Net (decrease) in cash (638,315) (2,264,787)
Cash at beginning of period 2,592,578 2,415,335
------------ ------------
Cash at end of period $ 1,954,263 $ 150,548
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 211,572 $ 146,760
Income taxes 4,907,000 5,806,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-6-
<PAGE> 173
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 2, 1998
(UNAUDITED)
(1) INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements of
Special Devices, Incorporated, a Delaware corporation, include all adjustments
(consisting of normal recurring entries) which management believes are necessary
for a fair presentation of the financial position and results of operations for
the periods presented. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is recommended that the
accompanying financial statements be read in conjunction with the Company's
audited financial statements and footnotes as of and for the year ended October
31, 1997. Operating results for the nine month period ended August 2, 1998 are
not necessarily indicative of the operating results for the full fiscal year.
(2) ACCOUNTS RECEIVABLE
Accounts receivable from long-term contracts are as follows:
<TABLE>
<CAPTION>
October 31, August 2,
1997 1998
------------- -------------
<S> <C> <C>
U.S. Government $ 1,295,349 $ 1,838,604
U.S. Government contractors 5,044,326 5,247,639
Commercial customers 11,897,328 14,058,474
------------- -------------
18,237,003 21,144,717
Less allowance for doubtful accounts 44,126 210,028
------------- -------------
Total $ 18,192,877 $ 20,934,689
============= =============
</TABLE>
-7-
<PAGE> 174
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 2, 1998
(UNAUDITED)
(3) INVENTORIES
Inventories and inventoried costs relating to long-term contracts are
classified as follows:
<TABLE>
<CAPTION>
October 31, August 2,
1997 1998
------------- -------------
<S> <C> <C>
Raw materials and components $ 4,840,722 $ 6,339,742
Work in process 6,234,248 11,513,154
Finished goods 920,809 329,211
Inventoried costs relating to
long term contracts, net of
amounts attributed to revenues
recognized to date 2,558,835 3,813,401
------------- -------------
14,554,614 21,995,508
Less progress payments related
to long-term contracts -- 1,944,515
------------- -------------
$ 14,554,614 $ 20,050,993
============= =============
</TABLE>
Inventoried costs relate to costs of goods currently in progress. There are no
significant inventoried costs relating to the production costs of delivered
units over the estimated average cost of all units expected to be produced.
(4) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
October 31, August 2,
1997 1998
---------- ----------
<S> <C> <C>
Bank borrowings $ 530,530 $ 489,522
Finance company note 1,713,641 1,619,871
Other notes 7,388 --
---------- ----------
2,251,559 2,109,393
Less current portion 194,793 190,747
---------- ----------
$2,056,766 $1,918,646
========== ==========
</TABLE>
The Company has a Credit Agreement with a bank, which was renewed in April
1998, which expires May 1, 2000. Borrowings under the Credit Agreement bear
interest at the bank's Reference Rate less 0.25%, or at the Company's option, at
LIBOR plus 0.75%. The Credit Agreement contains two revolving credit facilities.
The Company may borrow up to $10,000,000 under Facility No. 1, and may borrow up
to $12,000,000 under Facility No. 2. Facility No. 1 may be used for commercial
letters of credit not to exceed a total of $500,000 and for standby letters of
credit not to exceed $6,000,000 in the aggregate, which reduce the amount
available under the
-8-
<PAGE> 175
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 2, 1998
(Unaudited)
Facility when incurred. In addition, the Company has the option of converting
outstanding borrowings, in increments of not less than $1,000,000, under
Facility No. 2 to a 5-year term loan. Any amounts converted to term debt under
Facility No. 2 will bear interest at a fixed rate equal to the bank's long-term
interest rate in effect at the time of such conversion. At October 31, 1997, and
August 2, 1998, $750,000 and $1,531,000, respectively, were outstanding under
Facility No. 2, and no amounts were outstanding under Facility No. 1. In
addition, at August 2, 1998, the Company had outstanding approximately
$5,500,000 of performance bonds secured by standby letters of credit related to
development of new facilities (see Footnote 8).
The Company's wholly-owned subsidiary, Scot, Inc. has a term loan with a
bank, secured by certain real property of Scot. The principal amount outstanding
at October 31, 1997, was $530,500, and at August 2, 1998 was $489,500. The loan
is being amortized with monthly payments of approximately $7,800, including
interest at 1.9% over LIBOR (5.72% at August 2, 1998), adjusted monthly through
August 2001, at which time the remaining balance is due.
The finance company note is secured by related equipment. The note is
being amortized over 12 years with interest at prime plus one-half percent
through November 2006, when the note will be fully amortized. Monthly payments
are approximately $23,100. The unpaid balance at October 31, 1997 was
$1,713,600, and at August 2, 1998 was $1,619,900.
(5) STOCK INCENTIVE PLAN
The Company's amended and restated 1991 Stock Incentive Plan (the "Plan")
is administered by a committee of the Board of Directors which determines the
amount, type, terms and conditions of the awards made pursuant to the Plan. The
Plan provides for issuance of restricted stock, grants of incentive and
non-qualified stock options, stock appreciation rights and performance share
awards. There are 560,000 shares of Common Stock reserved for issuance under the
Plan.
Pursuant to the Plan, no option may be granted that is exercisable in less
than six months or more than ten years from the grant date. Certain events,
including a change in control of the Company, may accelerate exercise dates,
cause forfeiture of all shares of any restricted stock and terminate all
conditions relating to the realization of any performance awards.
No options were granted during the quarter ended August 2, 1998 and 10,000
options were exercised at prices ranging from $9.50 to $18.00 per share. At
August 2, 1998, there were options outstanding to purchase 232,072 shares, which
options were exercisable with respect to 117,605 shares.
In December 1996, the Company's Stock Option Committee authorized stock
option grants to certain employees via a special grant which is not part of the
1991 Stock Option Plan. Under terms of this authorization, options to purchase
130,000 shares were granted which vest ratably over 5 years from the grant date,
and options to purchase 312,000 shares vest ratably over a period ranging from 5
to 8 years from the grant date. The grants for the latter options contain
vesting acceleration clauses during the first 36 months of the option; the
acceleration clauses are contingent upon the price of the Company's Common Stock
attaining a certain level, and upon the Company attaining certain earnings
levels. As of August 2, 1998, options to purchase 312,000 shares have vested
under the acceleration clauses, and options to purchase 26,000 shares have
vested due to the passage of time. The options were granted at the fair market
value of the stock on the grant date, which was $17.00 per share.
-9-
<PAGE> 176
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 2, 1998
(Unaudited)
(6) NET INCOME PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share." Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to fully diluted earnings per share. Earnings
per share amounts for the prior period have been restated to conform to the
Statement 128 requirements.
Basic net earnings per share is computed by dividing net earnings by the
weighted average number of common stock outstanding during the period. Diluted
net earnings per share is computed by dividing net earnings by the weighted
average number of common stock and dilutive stock equivalents outstanding during
the period.
(7) INCOME TAXES
The provisions for income taxes consist of the following for each
respective nine months ended:
<TABLE>
<CAPTION>
August 3, August 2,
1997 1998
------------- -------------
<S> <C> <C>
Current:
Federal $ 3,868,000 $ 6,476,000
State 941,000 1,562,000
------------- -------------
$ 4,809,000 $ 8,038,000
============= =============
Deferred:
Federal $ (309,000) $ (126,000)
State (50,000) 13,000
------------- -------------
$ (359,000) $ (113,000)
============= =============
Total:
Federal $ 3,559,000 $ 6,350,000
State 891,000 1,575,000
------------- -------------
$ 4,450,000 $ 7,925,000
============= =============
</TABLE>
-10-
<PAGE> 177
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 2, 1998
(Unaudited)
Temporary differences which give rise to deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
October 31, August 2,
Deferred tax liabilities: 1997 1998
------------------------- ------------- --------------
<S> <C> <C>
Depreciation $ (3,140,000) $ (3,415,000)
============= ==============
Deferred tax assets:
--------------------
Allowance for doubtful accounts 22,000 80,000
Inventory 506,000 751,000
Vacation accrual 445,000 364,000
State taxes 18,000 171,000
------------- -------------
991,000 1,366,000
------------- -------------
Net deferred tax liability $ (2,149,000) $ (2,049,000)
============= =============
</TABLE>
Management believes it is more likely than not that future operations will
generate sufficient taxable income to realize deferred tax assets.
The provisions for income taxes for the nine months ended 1997 and 1998
differ from the provisions that would have resulted by applying the Federal
statutory rates during such periods to the income before income taxes. The
reasons for these differences are as follows:
<TABLE>
<CAPTION>
August 3, August 2,
1997 1998
------------- -------------
<S> <C> <C>
Income taxes at Federal rate $ 3,837,000 $ 6,162,000
State income taxes 959,000 1,629,000
Other (346,000) 134,000
------------- -------------
$ 4,450,000 $ 7,925,000
============= =============
</TABLE>
(8) COMMITMENTS AND CONTINGENCIES
The Company is a defendant in various pending claims and lawsuits. In the
opinion of the Company's management, after consultation with counsel,
disposition of such matters are not expected to have a material adverse effect
upon the results of operations or the financial position of the Company.
The Company had commitments at August 2, 1998 to acquire capital
equipment, at cost aggregating approximately $3,800,000, primarily for
production and other support equipment required for the increased operations of
the Automotive Products Division. In addition, in order to improve manufacturing
efficiencies and to provide facilities for growth, the Company purchased in
October 1996, approximately 280 acres of land in the City of Moorpark, located
in Ventura County, north of Los Angeles, where the Company is currently building
new facilities. Total net cost of the project is estimated at approximately
$27,000,000 of which $20,910,000 had been spent at August 2, 1998 and is
included in construction in progress in the accompanying condensed consolidated
balance sheet. The Company anticipates spending approximately an additional
$7,000,000 in fiscal
-11-
<PAGE> 178
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 2, 1998
(Unaudited)
year 1998 and approximately $4,500,000 in fiscal year 1999 to complete this
project. The Company plans to sell two commercial lots being developed as part
of this project, the proceeds of which are expected to reduce the net project
cost to approximately $27,000,000. The Company has committed to complete the
building construction, the total cost of which is estimated to be approximately
$18,000,000.
-12-
<PAGE> 179
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED AUGUST 2, 1998 TO THE THREE MONTHS ENDED
AUGUST 3, 1997
Net Sales
Net sales for the Automotive Products Division were $33,153,000 for the
quarter ended August 2, 1998, compared to net sales of $30,640,000 for the same
period last year. The increase of $2,513,000, or 8.2%, was due to a 31% increase
in units shipped during the current year quarter compared to the number of units
shipped for the same period last year. The increase in units shipped resulted
primarily from increased shipments to Autoliv ASP, Incorporated ("Autoliv")
(formerly Morton International) under terms of a supplier agreement signed in
November 1995. The initiators sold to Autoliv are generally sold at lower
average unit selling prices than those sold to other customers, due to
simplicity of design, resulting in net sales increasing at a slower rate than
the increase in units sold. Net sales to TRW, Inc. ("TRW") as a percent of
Automotive Products Division net sales were 46.4% for the current year third
quarter compared to 60.9% for the same period last year, and were 35.4% of total
Company net sales in the third quarter compared to 50.4% of total Company net
sales for the same period last year. Net sales to Autoliv were 36.3% of
Automotive Products Division net sales and were 27.7% of total Company net sales
for the current year third quarter, compared to 27.8% and 23.0%, respectively,
for the comparable periods last year.
Net sales for the Aerospace Division were $10,247,000 for the current year
third quarter, compared to net sales of $6,330,000 for the same period last
year. The increase of $3,917,000, or 61.9%, was due primarily to a contract for
production of a proprietary bomb ejector, which began in the current year, and
also due to increased demand for products used in commercial satellite launch
vehicles.
Cost of Sales
Cost of sales was $27,068,000 for the Automotive Products Division for the
quarter ended August 2, 1998, compared to cost of sales of $25,388,000 for the
same period last year. The increase of $1,680,000, or 6.6%, was due to costs
associated with increased net sales noted above. Gross profit as a percent of
sales was 18.4% in the current period, compared to 17.1% for the same period
last year. The improvement in gross profit as a percent of sales was due to
reductions in scrap, improvements in automated machine yields, and other
manufacturing efficiencies achieved in the current period.
Cost of sales was $5,828,000 for the Aerospace Division for the quarter
ended August 2, 1998, compared to cost of sales of $4,488,000 for the same
period last year. The increase of $1,340,000, or 29.9%, was due to costs
associated with increased net sales noted above. Gross profit as a percent of
sales was 43.1% in the current year period compared to a gross profit as a
percent of sales of 29.1% for the same period last year. The increase in gross
profit as a percent of sales in the current period was due to the mix of
products shipped (certain products such as spare parts realize higher gross
margins than some production products) compared to last year, and due to the
absorption of relatively stable overhead expenses over greater net sales in the
current period.
Operating Expenses
Operating expenses for each division (Automotive Products and Aerospace)
are comprised of two components. First, each division is charged those operating
expenses incurred directly by that division. Second, each division is allocated
administrative operating expenses incurred by the Company (which are not
directly attributable to a particular division) on an equitable basis to fairly
reflect the benefit received by each division.
-13-
<PAGE> 180
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
Operating expenses for the Automotive Products Division were $1,550,000
for the quarter ended August 2, 1998, compared to operating expenses of
$1,458,000 for the same period last year. Operating expenses were comparable as
net sales did not exceed the threshold that would necessitate significant
additional operating expenses be incurred.
Operating expenses were $1,648,000 for the Aerospace Division for the
quarter ended August 2, 1998, compared to operating expenses of $1,089,000 for
the same period last year. The increase of $559,000, or 51.3%, was the result of
an increase in operating expenses incurred by the Corporate Division which were
allocated to the Aerospace Division in the current year period, and due to
increases in incentive bonus accruals in the current period. The increase in
Corporate Division expenses was primarily other professional services costs.
Net Interest Income (Expense)
Net interest income (expense) consists of interest expense on borrowings
and interest income on short-term investments. Interest expense was $46,400 for
the quarter ended August 2, 1998, compared to interest expense of $67,200 for
the same period last year. The decrease of $20,800 occurred due to reduction of
long-term debt through scheduled monthly principal payments. Interest income was
$10,000 for the quarter ended August 2, 1998, compared to interest income of
$75,700 for the same period last year. The reduction in interest income was due
to lower average amounts invested in interest bearing securities during the
current year third quarter.
COMPARISON OF THE NINE MONTHS ENDED AUGUST 2, 1998 TO THE NINE MONTHS ENDED
AUGUST 3, 1997
Net Sales
Net sales for the Automotive Products Division were $104,995,000 for the
nine months ended August 2, 1998, compared to net sales of $79,079,000 for the
same period last year. The increase of $25,916,000, or 32.8%, was due to a 58%
increase in units shipped during the first nine months of 1998 compared to the
number of units shipped for the same period last year. The increase in units
shipped resulted primarily from increased shipments to Autoliv under terms of a
supplier agreement signed in November 1995. The initiators sold to Autoliv are
generally sold at lower average unit selling prices than those sold to other
customers, due to simplicity of design, resulting in net sales increasing at a
slower rate than the increase in units sold. Net sales to TRW as a percent of
Automotive Products Division net sales were 48.9% for the nine months ended
August 2, 1998, compared to 64.0% for the same period last year, and were 39.7%
of total Company net sales in the current year compared to 52.0% of total
Company net sales for the same period last year. Net sales to Autoliv as a
percent of Automotive Products Division net sales were 32.2% for the nine months
ended August 2, 1998, compared to 23.9% for the same period last year, and were
26.1% of total Company net sales in the current period compared to 19.4% for the
same period last year.
Net sales for the Aerospace Division were $24,251,000 for the nine months
ended August 2, 1998, compared to net sales of $18,220,000 for the same period
last year. The increase of $6,031,000, or 33.1%, was due primarily to a contract
for production of a proprietary bomb ejector, which began in the current year,
and also due to increased demand for products used in commercial satellite
launch vehicles.
Cost of Sales
Cost of sales was $85,189,000 for the Automotive Products Division for the
nine months ended August 2, 1998, compared to cost of sales of $65,787,000 for
the same period last year, an increase of $19,402,000, or 29.5%. The increase
was due to costs associated with increased net sales noted above. Gross profit
as a percent of net sales was 18.9% for the current year period, compared to
gross profit as a percent of net sales of 16.8% for the same period last year.
The improvement in gross profit as a percent of sales was due to reductions in
scrap, improvements in automated machine yields, and other manufacturing
efficiencies achieved in the current period.
-14-
<PAGE> 181
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
Cost of sales for the Aerospace Division was $15,200,000 for the nine
months ended August 2, 1998, compared to cost of sales of $12,730,000 for the
same period last year. The increase of $2,470,000, or 19.4%, was due to costs
associated with increased net sales during the first nine months of 1998. Gross
profit as a percent of net sales was 37.3% for the nine months ended August 2,
1998, compared to gross profit as a percent of sales of 30.1% for the same
period last year. The increase in gross profit as a percent of net sales in the
current period was due to the mix of products shipped compared to last year, and
due to the absorption of relatively stable overhead expenses over greater net
sales in the current period.
Operating Expenses
Operating expenses for each division (Automotive Products and Aerospace)
are comprised of two components. First, each division is charged those operating
expenses incurred directly by that division. Second, each division is allocated
administrative operating expenses incurred by the Company (which are not
attributable to a particular division) on an equitable basis to fairly reflect
the benefit received by each division.
Operating expenses for the Automotive Products Division were $5,012,000
for the nine months ended August 2, 1998, compared to operating expenses of
$3,778,000 for the same period last year. The increase of $1,234,000, or 32.7%,
was due primarily to labor related cost increases incurred by the Automotive
Products Division, and, to a lesser extent, to increases in Corporate expenses
which were allocated to the Automotive Products Division. The increase in
Corporate expenses was primarily other professional services costs.
Operating expenses for the Aerospace Division were $4,051,000 for the nine
months ended August 2, 1998, compared to operating expenses of $3,456,000 for
the same period last year. The increase of $595,000, or 17.2%, was the result
primarily of an increase in incentive bonus accruals in the current period.
Net Interest Income (Expense)
Net interest income (expense) consists of interest expense on borrowings
and interest income earned on short-term investments. Interest income was
$104,900 for the nine months ended August 2, 1998, compared to interest income
of $275,000 for the same period last year. The decrease in interest income
during the first nine months of the current year was due to lower average
amounts invested in interest bearing securities during the year compared to the
same period last year. Interest expense was $146,400 for the nine months ended
August 2, 1998, compared to interest expense of $201,000 for the same period
last year. The decrease in the current year was due to lower average debt
balances resulting from scheduled monthly principal payments.
Liquidity and Capital Resources
The Company's primary sources of capital since its initial public offering
in 1991 have been cash from operations and bank borrowings and, in fiscal year
1995, an additional public offering of its Common Stock. In December 1996, the
Company signed a credit agreement (the "Credit Agreement") with a bank which was
renewed in April 1998. The Credit Agreement expires May 1, 2000. Any borrowings
under the Credit Agreement bear interest at the bank's Reference Rate (8.5% at
August 2, 1998) less 0.25%, or at the Company's option, at LIBOR (6.42% at
August 2, 1998) plus 0.75%. The Credit Agreement contains two revolving credit
facilities. The Company may borrow up to $10,000,000 under Facility No. 1, and
may borrow up to $12,000,000 under Facility No. 2. Borrowings under both
facilities may be used for general and other corporate purposes. Facility No. 1
may be used for commercial letters of credit not to exceed a total of $500,000
and for stand by letters of credit not to exceed $6,000,000 in the aggregate,
which reduce the amount available under the Facility when incurred. In addition,
the Company has the option of converting outstanding borrowings in increments of
-15-
<PAGE> 182
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
not less than $1,000,000, under Facility No. 2, to a 5-year term loan. Any
amounts converted to term debt under Facility No. 2 will bear interest at a
fixed rate equal to the bank's long-term interest rate in effect at the time of
such conversion.
Substantially all of the Company's assets are pledged as collateral under
the Credit Agreement. In addition, the Credit Agreement contains covenants that
include requirements to meet certain financial tests and ratios (including
minimum current ratio, debt service ratio, minimum tangible net worth, maximum
debt ratio and maintenance of profitable annual operations) and restrictions and
limitations on the sale of assets, new borrowings, mergers and purchases of the
Company's stock. The Company was in compliance with these provisions as of
August 2, 1998. As of August 2, 1998, $1,531,000 was outstanding under Facility
No. 2, and no amounts were outstanding under Facility No. 1.
The Company's wholly owned subsidiary, Scot, Inc. has a term loan with a
bank, which was renewed in August 1996, secured by certain real property of
Scot. The principal balance outstanding under the renewed loan at August 2,
1998, was $489,500. The loan is being amortized with monthly payments of
approximately $7,800, including interest, adjusted monthly, at 1.9% over LIBOR
(5.72% at August 2, 1998). Any unpaid principal is due on August 1, 2001.
In November 1994, the Company purchased a new airplane from United
Beechcraft, Inc. for $2,210,000. The Company made an initial payment of $110,500
for the plane and delivered a promissory note with Beech Acceptance Corporation,
Inc. to finance the remaining balance of $2,099,500 over a 12-year period with
interest at prime plus one-half percent. The unpaid balance of this note at
August 2, 1998 was $1,619,900. The plane is being used primarily to transport
Company officials between its Newhall, California and Mesa, Arizona facilities.
In addition, the Company leases the airplane for use by third parties when not
in use by the Company in order to defray a portion of the costs.
During the nine months ended August 2, 1998, the Company generated cash
from operations of $15,254,000. Capital expenditures, primarily for payments
related to automated manufacturing equipment and production facilities, amounted
to $25,382,000. Payments of contractual debt aggregated $142,000. These net cash
outflows were funded by cash flow from operations and the use of existing cash
on hand. At August 2, 1998, the Company had cash on hand of $150,500 and
additional borrowing capacity under its Credit Agreement of $14,969,000.
At August 2, 1998, the Company had working capital of $23,275,000 compared
to working capital of $30,137,000 at October 31, 1997. The decrease of
$6,862,000 was due to a decrease in cash and marketable securities of
$9,015,000, an increase of $781,000 in borrowing under the Credit Agreement, an
increase in accounts payable of $1,617,000, an increase in accrued expenses of
$2,367,000, and an increase in income taxes payable of $2,219,000, partially
offset by an increase in accounts receivable of $2,742,000, an increase in
inventories of $5,496,000, an increase in prepaid expenses of $520,000, and an
increase in deferred income taxes of $100,000. The decrease in cash and
marketable securities, and the increase in bank borrowing, occurred primarily to
make progress payments on new production equipment for lines currently being
built for the Company and to pay for construction costs for the Company's new
facility at Moorpark, California (the "Moorpark facility") (see below). The
increase in accounts receivable was the result of increased net sales during the
nine months ended August 2, 1998. The increase in inventories occurred to
support higher net sales levels this year, especially in the Aerospace Division.
The increase in accounts payable was the result of increased inventory levels.
The increase in accrued expenses was due to increased levels of operations this
year and the increase in income taxes payable was the result of increases in
earnings before income taxes.
-16-
<PAGE> 183
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
In order to improve manufacturing efficiencies and to provide facilities
for growth, the Company purchased in October 1996, approximately 280 acres of
land in the City of Moorpark, located in Ventura County, north of Los Angeles,
where the Company is currently building the Moorpark facility. Total net cost of
the project is estimated at approximately $27,000,000, of which $20,910,000 had
been spent at August 2, 1998 and is included in construction in progress in the
accompanying condensed consolidated balance sheet. The Company anticipates
spending approximately an additional $7,000,000 in fiscal year 1998 and
approximately $4,500,000 in fiscal year 1999 to complete this project. The
Company plans to sell two commercial lots being developed as part of this
project, and the expected proceeds of approximately $5,400,000 from these sales
will be used to reduce the net project cost to approximately $27,000,000. The
Company has committed to complete the building construction, the total cost of
which is estimated to be approximately $18,000,000. The Company believes it has
available adequate cash flow from operations and borrowing capacity to
adequately finance this project. The Company believes additional term financing
is available for this project to the extent required, however there can be no
assurance that such financing will be available when required.
The Company anticipates that working capital requirements will increase in
fiscal 1998 as compared to fiscal 1997 to support the investment in inventories
and accounts receivable related to the anticipated increased demand for
initiators manufactured by the Company. The Company believes that it can meet
its expected working capital requirements for the foreseeable future from cash
provided from operations and borrowings under its Credit Agreement. The Company
had commitments to acquire capital equipment at August 2, 1998 aggregating
approximately $3,800,000 related primarily to additional production and other
support equipment required for the increased operations of the Automotive
Products Division.
The statements above regarding the land purchase by the Company in
Moorpark, completion of the construction of the Moorpark facility, the amounts
and timing of expenditures, and the proposed sale of two commercial lots, are
forward-looking statements as defined in Section 27A of the Securities Act of
1933 (the "Securities Act") and Section 21E of the Securities Exchange Act of
1934 (the "Exchange Act"). Actual results and the timing of those results may
vary depending on various factors including, for example, the ability of the
Company to obtain permits and approvals that do not contain conditions or
restrictions that are unduly restrictive or otherwise unacceptable to the
Company; the Company's not encountering any unforeseen conditions relating to
the property that make completion of the construction more expensive, difficult
or time intensive than is currently expected; the ability of the contractors and
subcontractors retained by the Company to complete the work on the schedule and
for the costs described above; the ability to sell two commercial lots at the
expected sales price; and other factors which may develop during the course of
this project. In addition, the Company's relocation of its operations to the
Moorpark facility may also cause unforeseen and foreseen production disruptions.
The statements above regarding the anticipated increased demand for
initiators, the anticipated increase in working capital requirements and the
Company's expectations regarding its ability to meet such requirements are
forward-looking statements as defined in Section 27A of the Securities Act and
Section 21E of the Exchange Act. Actual results may vary depending on various
factors including, for example, the development and acceptance of technologies
different from those employed by the Company for the initiation of airbag
systems; competition from new or existing companies for the Company's existing
or future customers; a slow-down in the world-wide rate of airbag
implementation; the inability of the Company to negotiate an extension of its
existing Credit Agreement or a replacement facility; the competitive environment
in the automotive and aerospace industries in general; reliance on major
customers, such as TRW and Autoliv; the number of new automobiles sold
(particularly in North America); continued acceptance of airbags as the
principal secondary restraint system incorporated in automobiles; voluntary
incorporation of side and rear airbags and other safety devices by automobile
manufacturers; market acceptance of new products developed by the Company; the
Company's ability to continue increasing the automation of its manufacturing
process in a timely and efficient manner; changes in prevailing interest rates
and the availability of favorable terms of financing to fund the anticipated
growth of the Company's business; inflation; labor disturbances; anticipated
expenditures exceeding amounts currently budgeted by the Company; and the
occurrence of unanticipated expenses.
-17-
<PAGE> 184
PART II - OTHER INFORMATION
Items 1 through 4 are omitted as they are not applicable.
Item 5. Other Information
As described in Item 6. (b) below, the Company entered into an
Agreement and Plan of Merger with SDI Acquisition Corp., an affiliate
of J.F. Lehman & Company on June 19, 1998. A shareholders meeting is
scheduled on September 23, 1998 to vote regarding the proposed
merger.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Statement RE: Computation of Per Share Earnings
(b) Reports on Form 8-K
Form 8-K was filed on July 10, 1998. Disclosure was made that the
Registrant entered into an Agreement and Plan of Merger with SDI
Acquisition Corp. ("Acquisition"), an affiliate of J.F. Lehman &
Company (the "Merger Agreement") and a Guaranty Agreement with J.F.
Lehman Equity Investors I, L.P. ("JFLEI") whereby Acquisition will
acquire all of the Registrant's outstanding common stock at $37.00
per share, excluding certain shares held by certain members of
management and affiliates of the Registrant, and JFLEI will guarantee
certain aspects of the transaction.
SIGNATURES
Pursuant to the requirements 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.
SPECIAL DEVICES, INCORPORATED
DATED: September 9, 1998 /s/ THOMAS F. TREINEN
-------------------- ---------------------------------------
Chairman of the Board and
President
DATED: September 9, 1998 /s/ JOHN T. VINKE
-------------------- ---------------------------------------
Vice President Finance and
Chief Financial Officer
-18-
<PAGE> 185
PROXY
SPECIAL DEVICES, INCORPORATED
Proxy Solicited on Behalf of the Board of Directors
The undersigned, revoking all previous proxies, hereby appoints THOMAS F.
TREINEN, JOHN M. CUTHBERT and JOHN T. VINKE (the "Proxies"), or any of them
acting individually, as the proxy of the undersigned, with full power of
substitution, to vote, as indicated below and in their discretion upon such
other matters as may properly come before the meeting, all shares which the
undersigned would be entitled to vote at the Special Meeting of Special
Devices, Incorporated ("SDI") to be held at The Valencia Hilton Garden Inn,
27710 The Old Road, Valencia, California 91355, on Wednesday, September 23,
1998 at 10:00 a.m., local time and at any postponement or adjournment thereof.
Please date and sign your Proxy on the reverse side and return it promptly.
(Continued and to be signed on reverse side.)
- - -------------------------------------------------------------------------------
-- FOLD AND DETACH HERE --
<PAGE> 186
<TABLE>
<CAPTION>
Please mark
your votes [X]
as indicated
in this sample.
<S> <C> <C> <C> <C> <C> <C> <C>
FOR AGAINST ABSTAIN FOR AGAINST ABSTAIN
1. To approve and adopt an Agreement 2. In accordance with their best judgment, the
and Plan of Merger, dated as of [ ] [ ] [ ] Proxies are authorized to transact and vote [ ] [ ] [ ]
June 19, 1998 (the "Merger Agreement"), upon such other business as may properly
by and between SDI and SDI Acquisition come before the Special Meeting and any
Corp. ("Acquisition"), and the merger postponement or adjournment thereof.
of Acquisition into SDI as provided
for therein. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
UNLESS OTHERWISE SPECIFIED, THE SHARES WILL BE VOTED "FOR"
THE APPROVAL OF THE MERGER AND THE MERGER AGREEMENT
DESCRIBED HEREIN. THIS PROXY ALSO DELEGATES DISCRETIONARY
AUTHORITY WITH RESPECT TO ANY OTHER BUSINESS WHICH MAY
PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT OR
POSTPONEMENT THEREOF.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE
OF SPECIAL MEETING AND PROXY STATEMENT.
Signature(s)_______________________________________________________________________________________________ Date_______________
NOTE: Please sign this proxy exactly as name(s) appear on your stock certificate. When signing as attorney-in-fact, executor,
administrator, trustee or guardian, please add your title as such, and if signer is a corporation, please sign with full
corporate name by a duly authorized officer or officers and affix the corporate seal. Where stock is issued in the name
of two (2) or more persons, all such persons should sign.
- - ------------------------------------------------------------------------------------------------------------------------------
-- FOLD AND DETACH HERE --
</TABLE>
<PAGE> 187
APPENDIX D
[DONALDSON, LUFKIN & JENRETTE LETTERHEAD]
October 27, 1998
Board of Directors
Special Devices, Incorporated
16830 West Placerita Canyon Road
Newhall, CA 91321
Dear Sirs:
You have requested our opinion as to the fairness from a financial point
of view to the stockholders other than the stockholders set forth in Exhibit A
to the Agreement described herein (the "Public Stockholders") of Special
Devices, Incorporated (the "Company") of the consideration to be received by
such stockholders pursuant to the Amended and Restated Agreement and Plan of
Merger, dated as of June 19, 1998 and amended by Amendment No. 1 thereto dated
as of October 27, 1998 (the "Agreement"), between the Company and SDI
Acquisition Corp. ("Acquisition Sub"), an affiliate of J.F. Lehman & Company
("J.F. Lehman"), pursuant to which Acquisition Sub will be merged (the "Merger")
with and into the Company.
Pursuant to the Agreement, each share of common stock of the Company,
other than certain shares specified in the Agreement, will be converted into the
right to receive a cash payment per share equal to $34.00.
In arriving at our opinion, we have reviewed the Agreement and the
exhibits thereto. We also have reviewed financial and other information that was
publicly available or furnished to us by the Company, including information
provided during discussions with the Company's management. Included in the
information provided during discussions with the Company's management were
certain revised financial projections of the Company for the period beginning
November 1, 1997 and ending October 1, 2002 prepared by the management of the
Company. In addition, we have compared certain financial and securities data of
the Company with various other companies whose securities are traded in public
markets, reviewed the historical stock prices and trading volumes of the common
stock of the Company, reviewed prices and premiums paid in certain other
business combinations and conducted such other financial studies, analyses and
investigations as we deemed appropriate for purposes of this opinion.
In rendering our opinion, we have relied upon and assumed the accuracy
and completeness of all of the financial and other information that was
available to us from public sources, that was provided to us by the Company or
its representatives, or that was otherwise reviewed by us. With respect to the
revised financial projections supplied to us, we have assumed that management's
revised adjusted case projections have been reasonably prepared on the basis
reflecting the best currently available estimates and judgments of the
management of the Company as to the future operating and financial performance
of the Company. We have not assumed any responsibility for making an independent
evaluation of any
<PAGE> 188
Board of Directors
Special Devices, Incorporated
Page 2 October 27, 1998
assets or liabilities or for making any independent verification of any of the
information reviewed by us. We have relied as to certain legal matters on advice
of counsel to the Company.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. Our opinion does not address the relative
merits of the Merger and the other business strategies being considered by the
Company's Board of Directors, nor does it address the Board's decision to
proceed with the Merger. Our opinion does not constitute a recommendation to any
stockholder as to how such stockholder should vote on the proposed transaction.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of
its investment banking services, is regularly engaged in the valuation of
businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes.
Based upon the foregoing and such other factors as we deem relevant, we
are of the opinion that the consideration to be received by the Public
Stockholders of the Company pursuant to the Agreement is fair to such
stockholders from a financial point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ JEFFREY A. RAICH
-----------------------------
Jeffrey A. Raich
Senior Vice President
<PAGE> 189
APPENDIX E
EXECUTION COPY
SPECIAL DEVICES, INCORPORATED J.F. LEHMAN & CO.
16830 West Placerita Canyon Road 450 Park Avenue
Newhall, California 91321 New York, New York 10022
SDI ACQUISITION CORP.
450 Park Avenue
New York, New York 10022
October 19, 1998
To: To:
Mr. Walter Neubauer Mr. Thomas F. Treinen
c/o Ordnance Products, Inc. c/o Special Devices, Incorporated
21200 S. Figueroa Street 16830 West Placerita Canyon Road
Carson, California 90745 Newhall, California 91321
Rollover of shares of common stock,
par value $0.01 per share (the "Common Stock"),
of Special Devices, Incorporated ("SDI")
Dear Messrs. Neubauer and Treinen:
As you know, SDI has proposed to consummate a recapitalization
(the "Recapitalization") through a merger with SDI Acquisition Corp., as
contemplated by the Amended and Restated Agreement and Plan of Merger, dated as
of August 17, 1998 (the "Merger Agreement"). After the consummation of the
Recapitalization and the transactions contemplated by this letter, affiliates of
J.F. Lehman & Co. ("Lehman") will hold an aggregate of 2,176,470 shares of
common stock of the Surviving Corporation (as defined in the Merger Agreement),
par value $0.01 per share ("Survivor Common Stock"), Mr. Neubauer will hold an
aggregate of 1,096,522 shares of Survivor Common Stock, and Mr. Treinen will
hold an aggregate of 433,897 shares of Survivor Common Stock.
Upon consummation of the Recapitalization:
1. Each of you agrees that 367,647 shares of Common Stock held by
Mr. Neubauer and 367,647 shares of Common Stock held by Mr. Treinen shall be
"rolled over" and shall become 367,647 shares and 367,647 shares, respectively
(collectively, the
<PAGE> 190
"Additional Rollover Shares"), of Survivor Common Stock in the same manner as
the shares of Common Stock described in Section 1.8(d) of the Merger Agreement
are rolled over.
2. Each of you shall execute a proxy (each, a "JFL Proxy") with
respect to all Additional Rollover Shares held by each in favor of J.F. Lehman &
Co. ("Lehman") or another party designated by Lehman. Each JFL Proxy shall be
irrevocable except as provided in Annex 1 hereto, and you shall together cause
reputable counsel to provide to Lehman an opinion in form and substance
acceptable to Lehman and its counsel as to the validity and enforceability of
the JFL Proxies.
3. Each of you shall into an agreement or agreements relating to
the Additional Rollover Shares having terms substantially as set forth in Annex
1 hereto under the captions "Voting Rights," "Restrictions on Transfer," "Call
Right of Lehman," "Put Right" and "Other Provisions."
Should the Recapitalization not be consummated, all of the shares
of Common Stock held by each of you shall remain outstanding according to their
original terms, and this letter shall have no effect.
Each of you agrees to use your respective commercially reasonable
efforts to cause the Merger Agreement to be amended to take account of the
transactions contemplated by this letter. Each of you also agrees to take all
further actions as may be reasonably required or desirable to carry out the
provisions hereof, the transactions described in Annex 1 hereto and the
transactions and other actions contemplated hereby, including, without
limitation, voting each of your respective shares of Common Stock in favor of
such transactions.
Each of your obligations under this letter shall be conditioned
upon your reasonable satisfaction that you are indemnified (by SDI, by insurance
or otherwise) against any claims, actions, proceedings, expenses, damages or
losses arising prior to the closing of the Recapitalization resulting from the
acquisition by you of the Additional Rollover Shares.
This letter shall be governed by and construed in accordance
with, the laws of the State of New York applicable to agreements made in and to
be performed entirely within, such State.
This letter may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same document.
Sincerely,
SPECIAL DEVICES, INCORPORATED
By: /s/ Thomas F. Treinen
--------------------------------
Name: Thomas F. Treinen
Title: President and CEO
2
<PAGE> 191
J.F. LEHMAN & CO.
By: /s/ Donald Glickman
--------------------------------
Name: Donald Glickman
Title: Partner
SDI ACQUISITION CORP.
By: /s/ Donald Glickman
--------------------------------
Name: Donald Glickman
Title: Vice President
Agreed to and accepted
as of the date first written
above:
/s/ Walter Neubauer
- - --------------------------------
Mr. Walter Neubauer
/s/ Thomas F. Treinen
- - --------------------------------
Mr. Thomas F. Treinen
3
<PAGE> 192
SPECIAL DEVICES, INCORPORATED
Proxy Solicited on Behalf of the Board of Directors
The undersigned, revoking all previous proxies, hereby appoints Thomas F.
Treinen, John M. Cuthbert and John T. Vinke (the "Proxies"), or any of them
acting individually, as the proxy of the undersigned, with full power of
substitution, to vote, as indicated below and in their discretion upon such
other matters as may properly come before the meeting, all shares which the
undersigned would be entitled to vote at the Special Meeting of Special Devices,
Incorporated ("SDI") to be held at SDI's offices located at 16830 West Placerita
Canyon Road, Newhall, California 91321, on November __, 1998 at 10:00 a.m.,
local time and at any postponement or adjournment thereof.
1. To approve and adopt an amendment to the Agreement and Plan of Merger, dated
as of June 19, 1998 and amended and restated as of August 17, 1998 (the "August
Merger Agreement"), by and between SDI and SDI Acquisition Corp.
("Acquisition"), pursuant to Amendment No. 1 ("Amendment No. 1), dated as of
October 27, 1998 (the August Merger Agreement, as amended by Amendment No. 1,
the "Amended Merger Agreement"), and the merger of Acquisition into SDI as
provided for in the Amended Merger Agreement.
[ ] For [ ] Against [ ] Abstain
2. In accordance with their best judgment, the Proxies are authorized to
transact and vote upon such other business as may properly come before the
Special Meeting and any postponement or adjournment thereof.
Please date and sign your Proxy on the reverse side and return it promptly.
<PAGE> 193
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. UNLESS OTHERWISE
SPECIFIED, THE SHARES WILL BE VOTED "FOR" THE APPROVAL OF AMENDMENT NO. 1 AND
THE MERGER DESCRIBED ON THE REVERSE SIDE HEREOF. THIS PROXY ALSO DELEGATES
DISCRETIONARY AUTHORITY WITH RESPECT TO ANY OTHER BUSINESS WHICH MAY PROPERLY
COME BEFORE THE MEETING OR ANY ADJOURNMENT OR POSTPONEMENT THEREOF.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF SPECIAL MEETING AND
PROXY STATEMENT.
Signature(s) Date:
---------------------------------------------- ----------------
NOTE: PLEASE SIGN THIS PROXY EXACTLY AS NAME(S) APPEAR ON YOUR STOCK
CERTIFICATE. WHEN SIGNING AS ATTORNEY-IN-FACT, EXECUTOR, ADMINISTRATOR, TRUSTEE
OR GUARDIAN, PLEASE ADD YOUR TITLE AS SUCH, AND IF SIGNER IS A CORPORATION,
PLEASE SIGN WITH FULL CORPORATE NAME BY A DULY AUTHORIZED OFFICER OR OFFICERS
AND AFFIX THE CORPORATE SEAL. WHERE STOCK IS ISSUED IN THE NAME OF TWO (2) OR
MORE PERSONS, ALL SUCH PERSONS SHOULD SIGN.
