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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:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[X] 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
[ ] 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: 7,004,676
shares of Common Stock
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): $37.00 (cash merger
consideration per share of Common Stock).
4) Proposed maximum aggregate value of transaction: $259,173,012
5) Total fee paid: $51,835
[X] Fee paid previously with preliminary materials.
[ ] 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:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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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
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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
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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
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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
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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.
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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.
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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.
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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
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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.
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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> 12
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> 13
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> 14
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> 15
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> 16
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> 17
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> 18
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> 19
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> 20
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> 21
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> 22
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> 23
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> 24
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> 25
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> 26
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
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<PAGE> 27
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.
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<PAGE> 28
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.
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<PAGE> 29
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
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<PAGE> 30
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.)
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<PAGE> 31
<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.
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-- FOLD AND DETACH HERE --
</TABLE>
