<PAGE> 1
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> 2
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> 3
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> 4
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> 5
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> 6
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> 7
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> 8
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> 9
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> 10
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> 11
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> 12
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> 13
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> 14
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> 15
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> 16
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> 17
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> 18
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> 1
Exhibit 11.1
Computation of Earnings per Share
<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>
Basic net earnings per share:
Weighted average common shares
outstanding during the period 7,685,087 7,792,730 7,664,627 7,786,755
=========== =========== =========== ===========
Net earnings for the period - unaudited $ 2,795,432 $ 4,393,975 $ 7,171,747 $11,828,827
----------- ----------- ----------- -----------
Basic net earnings per share $ .36 $ .56 $ .94 $ 1.52
=========== =========== =========== ===========
Diluted net earnings per share
Weighted average common shares
outstanding during the period 7,685,087 7,792,730 7,664,627 7,786,755
Common stock equivalents 75,478 363,379 77,315 304,648
----------- ----------- ----------- -----------
7,760,565 8,156,109 7,741,942 8,091,403
=========== =========== =========== ===========
Net earnings for the period - unaudited $ 2,795,432 $ 4,393,975 $ 7,171,747 $11,828,827
=========== =========== =========== ===========
Diluted net earnings per share $ .36 $ .54 $ .93 $ 1.46
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT AUGUST 2, 1998, AND THE CONDENSED
CONSOLIDATED STATEMENT OF EARNINGS FOR THE NINE MONTHS ENDED AUGUST 2, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> AUG-02-1998
<CASH> 150,548
<SECURITIES> 0
<RECEIVABLES> 20,934,689
<ALLOWANCES> (210,028)
<INVENTORY> 20,050,993
<CURRENT-ASSETS> 43,525,507
<PP&E> 105,625,270
<DEPRECIATION> (30,014,109)
<TOTAL-ASSETS> 119,245,384
<CURRENT-LIABILITIES> 20,250,926
<BONDS> 0
0
0
<COMMON> 78,098
<OTHER-SE> 93,582,714
<TOTAL-LIABILITY-AND-EQUITY> 119,245,384
<SALES> 129,246,332
<TOTAL-REVENUES> 129,246,332
<CGS> 100,388,645
<TOTAL-COSTS> 109,451,055
<OTHER-EXPENSES> (41,450)
<LOSS-PROVISION> 306,234
<INTEREST-EXPENSE> 146,389
<INCOME-PRETAX> 19,753,827
<INCOME-TAX> 7,925,000
<INCOME-CONTINUING> 11,828,827
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,828,827
<EPS-PRIMARY> 1.52
<EPS-DILUTED> 1.46
</TABLE>
