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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED: OCTOBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM
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COMMISSION FILE NUMBER: 0-19330
SPECIAL DEVICES, INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 95-3008754
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
16830 WEST PLACERITA CANYON ROAD, 91321
NEWHALL, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 259-0753
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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COMMON STOCK PAR VALUE $.01 NASDAQ, NATIONAL MARKET
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value
Indicate by check mark whether the registrant: (l) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant on January 22, 1998 based on the closing price
on The Nasdaq National Market of such stock on such date was $131,527,074.
Registrant's Common Stock outstanding at January 22, 1998 was 7,773,667
shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the registrant's 1998 Annual
Stockholders Meeting are incorporated by reference in Part III.
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SPECIAL DEVICES, INCORPORATED
INDEX TO ANNUAL REPORT ON FORM I0-K
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PART I
Item 1. Business.................................................................. 2
Item 2. Properties................................................................ 13
Item 3. Legal Proceedings......................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders....................... 14
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters................................................................. 15
Item 6. Selected Financial Data................................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 17
Item 8. Financial Statements and Supplementary Data............................... 23
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.............................................................. 41
PART III
Item 10. Directors and Executive Officers of the Registrant........................ 41
Item 11. Executive Compensation.................................................... 41
Item 12. Security Ownership of Certain Beneficial Owners and Management............ 41
Item 13. Certain Relationships and Related Transactions............................ 41
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......... 41
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PART I
ITEM 1. BUSINESS
The Company is a leader in the design and manufacture of highly reliable
pyrotechnic devices used by the automotive industry as initiators in airbag
systems, and the aerospace industry, primarily in tactical missile systems,
propellant and explosive actuated devices and military aircraft crew ejection
systems. The Company operates through two separate divisions, Automotive
Products and Aerospace.
The Company was incorporated in California in 1976 as the successor to a
business begun in 1960 and was reincorporated in Delaware in May 1991. The
principal executives offices of the Company are located at 16830 West Placerita
Canyon Road, Newhall, California 91321, and its telephone number is (805)
259-0753.
AUTOMOTIVE PRODUCTS DIVISION
GENERAL
The Company's Automotive Products Division was created as a separate
division in fiscal 1989 to concentrate on the Company's strategic decision to
apply its expertise in pyrotechnic products beyond the defense-related markets
traditionally serviced by its Aerospace Division. The Automotive Products
Division's principal products are initiators, the pyrotechnic output of which is
used to ignite the inflation system in automotive airbag systems.
The Automotive Products Division contributed 71%, 77% and 80% of the
Company's net sales during the fiscal years ended October 31, 1995, 1996 and
1997. The magnitude of this percentage is due primarily to Master Purchase
Agreements with TRW, Inc. (the "TRW Agreement"), and with Autoliv ASP
Incorporated (formerly Morton International) (the "Autoliv Agreement"). See
"-- Marketing" below. The Company's initiators are sold to four domestic
manufacturers of airbag systems or inflators (TRW, Autoliv, Atlantic Research
Corporation ("ARC") and Breed Technologies), and are also sold on a more limited
basis to two foreign manufacturers, and are incorporated into driver and
passenger-side airbag systems used in a wide variety of automobile models
manufactured by substantially all of the automobile manufacturers that sell
automobiles, light trucks and vans in the United States, including the three
major domestic manufacturers (Chrysler, Ford and GM), as well as BMW, Fiat, Kia,
Mazda, Mitsubishi, Nissan, Toyota and Volkswagen. In addition, one foreign buyer
of the Company's initiators uses them for application in seat belt
pre-tensioners.
See Item 6 -- Selected Financial Data and Footnote 12 of Notes to
Consolidated Financial Statements for certain financial information about the
Automotive Products Division.
INDUSTRY OVERVIEW
One of the major reasons for the establishment of the Automotive Products
Division was the adoption by the National Highway Traffic Safety Administration
of regulations that initially required all passenger automobiles manufactured on
or after September l, 1989 for sale in the United States to have automatic
frontal crash protection systems for the driver and front passenger. Similar
requirements for light trucks and vans began being phased in on September l,
1994 and became fully effective on September 1, 1997. Airbags and automatic seat
belts were the two initial means of compliance with the regulations.
On March 1, 1994, the regulations were amended to require that airbags be
the automatic frontal crash protection system used for both the driver and front
passenger in at least 95% of passenger automobiles manufactured from September
1, 1996 to August 31, 1997 for sale in the United States, and in 100% of
passenger automobiles manufactured on or after September l, 1997 for sale in the
United States. For light trucks and vans, the amended regulations require that
airbags be the automatic frontal crash protection system used for at least the
driver in no less than 80% of light trucks and vans manufactured from September
l, 1997 to August 31, 1998 for sale in the United States, and for both the
driver and front passenger in 100% of light trucks and vans manufactured on or
after September l, 1998 for sale in the United States.
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In response to recent concerns over deaths caused by airbag deployment,
research is currently under way for a "smart" airbag system which eventually may
have the ability to sense the weight and position of passengers in automobiles.
Current research is directed toward deploying an airbag at different forces
based upon the severity of the crash. The next generation of smart airbags is
being designed to sense the weight and in some cases, the position of the
passenger. Most current smart airbags have "dual chambers" each of which
requires an initiator. In addition, certain automobile manufacturers are
currently producing a limited number of vehicles with an optional switch which
allows the automobile operator to disengage the passenger-side airbag.
Although not mandated by law, pyrotechnically based safety systems are also
employed in automobiles produced and sold in Europe and Asia. These systems
include airbag systems similar to those in use in the United States and seat
belt retractors that employ initiators similar to the initiators produced by the
Company. In the United States, a limited number of automobile manufacturers have
begun using side airbag systems and seat belt retractors as an additional means
of protecting automobile occupants. Research is also currently in process for
rear seat airbag systems.
Automotive airbag systems consist of six basic components: sensors, a
diagnostic and firing module, an initiator, a combustion chamber, gas generant
and a specially treated fabric bag. Once the sensors detect an impact of the
vehicle of sufficient severity, the diagnostic and firing module transmits an
electrical charge to the initiator. The initiator then fires, igniting the gas
generant in the combustion chamber which burns very rapidly producing a gas
which inflates the bag. The entire process takes approximately 40 milliseconds.
The diagnostic module also tests the initiator each time the automobile is
started.
Autoliv, TRW, Bendix Atlantic Inflator Company ("BAICO"), Takata and Breed
Technologies are the current domestic manufacturers and suppliers of automotive
airbag systems or sub-systems, each of whom incorporates the Company's
initiators in certain of its airbag systems or sub-systems. Other companies have
indicated that they may enter the domestic automotive airbag market and
reportedly are working on the development of airbag systems. None of the current
manufacturers produces all of the components of an airbag system. Most
components of the system are purchased from suppliers such as the Company, and
the manufacturers concentrate on the design, assembly, testing and qualification
of the airbag systems.
The major non-U.S. manufacturers of airbag systems are Temic (Germany),
Autoliv (Sweden), Daicel Chemical Industries (Japan) and Takata (Japan). The
Company is one of the two major suppliers of airbag initiators in the United
States. In addition, there are two major suppliers of airbag initiators in
Europe and one major supplier of initiators in Japan. See "-- Competition."
PRODUCTS
The Automotive Products Division currently produces over 50 different
airbag initiators for the four domestic manufacturers of airbag systems and has
a variety of other initiator products that are currently at various stages of
the qualification process. An initiator is a device that receives a low-energy
electrical signal from an electronic firing module and converts that signal to a
high-energy output by a thermal reaction of tightly compacted pyrotechnic
materials. Electrical systems and performance requirements differ among
automobile models and airbag systems. In addition, airbag systems differ between
passenger and driver-side applications. Therefore, the electrical and physical
characteristics of the different initiators are customized for the airbag system
in which they are used. Each of these versions is similar in design and utilizes
many of the same basic components and production techniques. However, each
initiator and airbag system must complete the design and process validation
requirements before it can be installed in automobiles. During 1997, the Company
developed and is currently testing a new, low cost initiator (the "AGI"), which,
like its other initiators is glass-sealed. The Company plans to have the AGI
available in production quantities by the late Fall of 1998. The AGI will be
priced to compete favorably with lower cost "plastic sealed" initiators which
currently dominate the European initiator market, and is currently targeted to
sell below current prices for glass-sealed initiators which dominate the U.S.
market. See "Manufacturing" below.
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The Company has focused its efforts on developing pyrotechnic initiators
that are glass-sealed, and electrically triggered, due to the Company's belief
that airbag system initiators that incorporate these technologies are both
reliable and cost-effective.
All of the Company's automotive initiators use high-temperature pyrotechnic
material that is formulated not to ignite below 800 degrees Fahrenheit. This
characteristic reduces the chance of accidental ignition from stray electrical
signals such as static electricity or radio waves. Each of the Company's
initiators is protected from such radio waves by means of an RF filter. In
addition, each initiator is hermetically sealed using glass-metal seal
technology and stainless steel welded construction, which protects the initiator
from environmental forces, such as weather and dirt, and ensures that the life
of the initiator exceeds the life of the airbag system.
MANUFACTURING
Production of the Company's initiators is accomplished using primarily
automatic and semiautomatic production equipment located at the Company's
Newhall, California and Mesa, Arizona facilities. As of October 31, 1997, these
two facilities were producing at a combined annualized rate of approximately 36
million initiators per year, working approximately 3 shifts per day, 7 days a
week. As of such date, the Company had four production lines in its Newhall
facility and four production lines in its Mesa facility. At the close of fiscal
1996, the Company had only two production lines at the Newhall facility. The
Company added the two additional lines in 1997 in its Newhall facility in
response to increased demand for its automotive initiators. The Company has
ordered 2 additional production lines for its Newhall facility, and one
additional production line for its Mesa Facility. The 2 additional Newhall lines
are expected to be operational by February 1998 and the one additional Mesa line
is expected to be operational by the Fall of 1998. In addition, the Company has
ordered 2 additional lines for delivery to its new Moorpark facility; these
lines are expected to be delivered to the new facility late in 1998, and are
expected to be operational in early 1999. At that time, the Company will have a
total of 13 production lines with expected total annual production capacity in
excess of 60 million initiators.
In addition to the above mentioned production lines, the Company has
ordered 3 production lines which would be dedicated to the manufacture of the
new AGI initiator. See Section 1 -- "Products." One AGI production line will be
added to each of the Newhall and Mesa facilities, and one AGI line will be
delivered to the facility for the new, proposed joint venture with Davey
Bickford Smith ("DBS"). See Section 1 -- "Marketing." The Company expects to
have annual production capacity of over 70 million initiators after the two AGI
lines are operational. In addition, the joint venture with Davey Bickford is
expected to begin operations with annual capacity of approximately 5 million
initiators. The existing non-AGI production lines can be converted to AGI
production lines; the Company plans to convert the existing production lines to
AGI production lines based upon market demand for the AGI initiator. While the
Company has ordered what it believes to be high-quality equipment for its
production needs, no assurance can be given that the equipment will perform as
designed and produce the number of units stated above until the new equipment
has been operated at full rate for an extended period of time.
The Company is presently operating at close to full capacity by employing
three shifts daily, seven days a week. The Company expects to be able to meet
anticipated production requirements upon completion of the additional production
lines noted above. The Company's Newhall facility currently consists of several
buildings that are configured in a manner that is no longer conducive to
achieving optimal manufacturing efficiencies. In addition, under a conditional
use permit, the Company may not expand on its current Newhall location. The
Company, therefore, believes that the construction of a new consolidated
manufacturing facility offers the potential of improved operating efficiencies
and space for potential growth. As a result, in October 1996, the Company
purchased approximately 280 acres of land in the city of Moorpark, located in
Ventura County, north of Los Angeles, on which the Company is building new
facilities. Development of the land infrastructure began in January 1997, and
building construction began in November 1997. Construction is expected to be
completed by the Fall of 1998, and the Company plans to move its entire
California-based operations, including Automotive Products, Aerospace and its
administrative offices to these new facilities shortly after completion of
construction. Some operations of the Company may remain at the present Newhall
facility, contingent upon customer demand for certain products produced by the
Company.
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Production of the Company's products consists of fabricating and assembling
the hardware components and separately preparing the pyrotechnic charge.
Production of the assemblies involves the purchase of machined components, seals
and other materials, the mechanical assembly of the components and the testing
of the completed units. Throughout the entire process, strict quality assurance
controls are maintained. After assembly, the products are functionally tested on
a sample basis as required by each customer.
The Company manufactures the pyrotechnic charge from raw generic chemicals
and has handled and processed these fuels and oxidizers for over 30 years. The
principal pyrotechnic fuels used by the Company are zirconium, titanium hydride
and boron. Some of the pyrotechnic fuels are delivered to the Company in bulk in
a wet and non-volatile form. The Company dries the pyrotechnic fuels before use.
These fuels are then mixed with oxidizers (usually potassium perchlorate or
potassium nitrate) and pressed in small quantities into the metal housings of
the specific product being made. Handling and processing pyrotechnic materials
requires extensive experience and expertise as well as the proper equipment and
facilities.
Each type of initiator must qualify for use by passing numerous tests
established by the automobile and airbag system manufacturers relating to its
design and its ability to work in the airbag unit in which it is installed. The
initial test phase is design validation ("DV"), which incorporates a number of
tests intended to demonstrate that the design of the initiator is capable of
performing the required function within the stated specifications. The second
test phase is process validation ("PV"), which is intended to demonstrate that
the manufacturer has the management, personnel, equipment and facilities to
produce the initiator to its design specifications. The DV and PV qualification
phases must be repeated for each new initiator design. The PV qualification
phase must also be repeated for each facility at which initiators are produced.
The initial qualification procedures for new products or vendors are very costly
and timeconsuming. The PV qualification phase, for example, requires a supplier
to have in place its management, personnel, equipment and facilities prior to
the time they would otherwise be required for production. The Company believes
that the PV qualification for its new Moorpark facility will be accomplished in
a timely manner and will not create an economic hardship for the Company since
the current, approved Newhall production equipment and existing, approved
manufacturing processes will be moved to the new Moorpark facility.
The Company has completed the DV and PV qualification phases for initiators
used in TRW airbags for certain models manufactured by several different
automobile manufacturers, for an Atlantic Research Corporation ("ARC") hybrid
inflator for certain Chrysler and General Motors applications, for several
initiators used in Autoliv airbags for several automobile manufacturer models
and for an initiator used in Breed Technologies' airbag systems used in certain
Ford, Opel and Fiat models. The Company is continually working on variations of
initiators, including the AGI, in response to customer needs. In addition, the
Company from time to time is in the DV and PV process for new airbag system
platforms for its customers.
In 1997, the Company leased a facility in Moorpark, California and
purchased equipment to begin manufacturing glass-sealed initiator bodies (header
sub assemblies) internally. All of these initiator bodies have historically been
purchased from outside sources, primarily from one manufacturer, and the Company
expects to continue to purchase a majority of its requirements for these
initiator bodies from outside sources in the future. The Company plans to be in
production for these items by the Summer of 1998.
The Company purchases the components for its products from various
subcontractors. The Company does not believe that it is dependent upon any one
source for its supplies because alternative sources of supply are generally
available. The Company has a long-term supply contract with a company for header
sub-assemblies used by the Automotive Products Division for incorporation into
initiators. This supply contract was amended in 1997 to extend through December
31, 2000. The amended agreement reduced significantly the Company's price for
the headers purchased effective September 1997 and provides that such prices
will be further reduced at the beginning of the 1999 and 2000 calendar years. In
return for the extension and price reductions, the Company is required to
purchase a substantial majority of its requirements for sub-assemblies from the
supplier. The Company is not obligated to make such minimum purchases in the
event certain competitive pricing, quality or delivery issues arise. The Company
believes that alternative sources of the component are available in the event of
any disruption in delivery by the supplier. In addition,
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the Company plans to have internal production capacity for header sub-assembies,
as discussed above, by the Summer of 1998.
MARKETING
The Company's marketing efforts are coordinated by the President of its
Automotive Products Division. Different engineers and other personnel are
assigned responsibility for the design, development and manufacture of the
various initiator models. The Automotive Products Division's management,
engineers and personnel maintain close contact with each of the manufacturers of
airbag systems that incorporate the Company's initiators and monitor
developments in the automotive industry (particularly the status of products
such as side and rear seat airbag systems and seat belt pretensioners) and the
domestic and international airbag system markets in order to exploit marketing
opportunities as they become available.
In July 1997 the Company signed a Letter of Intent with Davey Bickford SNC,
a French corporation, ("DBS") to produce airbag initiators in France for
European distribution. The initiator to be sold by this proposed joint venture
is the new low cost glass sealed initiator, the AGI, currently being developed
by the Company. The Company will be a 40% owner of the proposed joint venture. A
facility has been identified in Cugny, France and a production line has been
ordered for the joint venture. Operations are scheduled to begin in the Fall of
1998 with expected initial production capacity of approximately 5 million
initiators annually. The Company expects to sign a definitive agreement for the
joint venture by the Spring of 1998.
The TRW Agreement which expires at the end of automotive model year 2000
obligates TRW to purchase a majority of its initiator requirements from the
Company at prices per unit that vary based on the type of initiator purchased
and the model year and requires that the Company have certain specified minimum
production capacities during the term. The prices for each model year have been
negotiated as part of the TRW Agreement. Prices may be increased through
negotiation if TRW requests a design change. The ultimate effect on the average
unit selling price will be determined by the mix of products ordered. The mix of
products ordered in August 1995 for 1996 model year production resulted in a
price reduction of over 12%; the effect of the mix of products ordered in August
1996 for 1997 model year production had an insignificant effect on prices to be
paid by TRW as compared to prices paid for model year 1996 purchases. The effect
of this mix of products ordered in August 1997 for 1998 model year production
also resulted in an insignificant reduction in prices compared to the prior year
for initiators sold to TRW. The TRW Agreement does not require TRW to purchase a
minimum number of units nor is TRW obligated to purchase the specified
percentage of its requirements unless the Company's prices are competitive with
those offered by other suppliers and the Company's technology and quality are
equivalent or better than that of other suppliers. In general, the TRW Agreement
may be terminated by TRW if the Company (i) breaches its obligations under the
TRW Agreement, (ii) becomes insolvent, bankrupt or dissolves or (iii) fails to
provide TRW with reasonable assurances of the Company's ability to perform under
the TRW Agreement. In addition, TRW may terminate a particular purchase order or
any part of it by written notice to the Company, in which case TRW is obligated
to pay the Company for all goods that (i) are ready for shipment prior to the
Company's receipt of the notice of termination, (ii) conform to all requirements
of the purchase order and (iii) are free and clear of all encumbrances. The
Company determines manufacturing schedules and ships products to TRW based upon
delivery orders, specifying the desired quantities and delivery dates which are
released several weeks in advance of delivery.
In November 1995, the Company entered into a three-year Supplier Agreement
with Autoliv whereby Autoliv is required to purchase a substantial portion of
its airbag system initiators from the Company. The Company successfully
completed qualification requirements, and Autoliv began ordering a substantial
volume of initiators under this agreement in August 1996 for 1997 model year
production. The Autoliv agreement contains pricing for the 1997 model year.
Prices may be increased through negotiation if Autoliv requests a design change.
The Company is obligated to maintain pricing, terms, delivery, service and
quality consistent with industry standards. The agreement with Autoliv may be
terminated by Autoliv if, among other things, the Company commits a material
breach of its obligations or the Company is declared bankrupt or makes an
assignment for the benefit of creditors.
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In addition, the Company has an agreement with ARC similar to the TRW
Agreement pursuant to which ARC agreed to purchase a majority of its initiator
requirements from the Company through June 1997. In May 1997 the Company and ARC
agreed to a three year renewal of this agreement under which the Company will
continue to supply a majority of ARC's initiator requirements through 2000.
The Company has been shipping initiators to Autoliv since June 1990 and
began shipments to TRW in November 1991. TRW accounted for approximately 59.9%,
59.7%, and 49.1% of the Company's net sales during fiscal years 1995, 1996, and
1997 respectively. Autoliv accounted for 1.9%, 6.1%, and 20.6% of the Company's
net sales during 1995, 1996, and 1997.
BACKLOG
The majority of sales for the Automotive Products Division are achieved
under long-term agreements ranging from three to five years, specifying minimum
customer requirements to be supplied by the Company during the term of the
agreements. Purchase order releases against those agreements are updated weekly
by each customer and include "firm" shipping requirements for the next 12 to 16
weeks. The Automotive Products Division does not reflect an order in backlog
until it has received a purchase order from a customer that specifies the
quantity ordered and the delivery dates required. Since these orders are
generally shipped within 12 to 16 weeks of receipt of the order, the amount of
"firm" backlog for the Automotive Products Division at any given time is not
indicative of sales levels expected to be achieved over a 12-month period.
COMPETITION
Currently there are two large volume manufacturers of airbag initiators in
the United States, OEA, Inc. and the Company. The Company believes it holds the
largest share of the domestic airbag initiator market; OEA, the next largest
producer of domestic airbag initiators may have greater financial resources than
the Company. Imperial Chemical Industries, Inc. ("ICI") also produces airbag
initiators, however, they hold only a small share of the domestic initiator
market. Other companies may choose to enter the automotive initiator market in
the future. However, there are substantial monetary and time costs associated
with DV and PV qualifications as well as development and start-up.
Currently, Davey Bickford Smith ("DBS") and Nouvelle Cartoucherie de
Survilliers are the major suppliers of airbag initiators in Europe. In November
1990 the Company entered into a technology license agreement with DBS whereby
DBS may sell initiators using the Company's technology to any manufacturer of
airbags except TRW. Until 1999, DBS must pay royalties to the Company for airbag
initiators sold using the Company's technology. After January l, 1999, DBS may
continue to use the licensed technology royalty-free. The agreement also places
limits upon the Company's ability to license its technology to other companies
or persons. To date, DBS has not sold any initiators incorporating the Company's
technology and therefore has not paid royalties to the Company pursuant to this
license. Because DBS failed to satisfy certain minimum requirements relating to
the delivery of initiators, the Company is entitled to license the technology
licensed to DBS to other third parties. However, DBS is entitled to continue
using the licensed technology perpetually.
In July 1997 the Company signed a Letter of Intent with DBS to produce
airbag initiators in France for European distribution. The initiator to be sold
by this proposed joint venture is the new low cost glass sealed initiator, the
AGI, which is currently being developed by the Company. The Company and DBS
believe the AGI will compete favorably with the plastic initiators which are
currently the dominant initiator used in automobiles sold in Europe. The Company
believes the AGI is not included in the 1990 technology license agreement with
DBS, and DBS and the Company have verbally agreed that the 1990 agreement will
be terminated upon signing the Definitive Agreement for the proposed joint
venture. The 1990 technology license agreement permits DBS to incorporate the
Company's present glass seal technology in initiators produced by DBS and sell
such initiators to any person or entity other than to TRW in the United States.
Consequently, if a Definitive Agreement is not reached with DBS for the proposed
joint venture, the Company may in the future face direct competition in Europe,
the United States or elsewhere from initiators sold by DBS incorporating the
Company's present glass seal technology with no obligation on the part of DBS to
pay royalties after January l, 1999. In the event that DBS elects to incorporate
the Company's present glass seal
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technology into DBS initiators on a larger scale than DBS has to date, the
Company's ability to market and sell its initiators in the European market could
be adversely affected.
AEROSPACE DIVISION
GENERAL
The Company's Aerospace Division has been designing and manufacturing
products for the aerospace industry for over 30 years. Its customers are
primarily the United States government and its prime contractors. The Aerospace
Division contributed 29%, 23% and 20% of the Company's net sales during the
fiscal years ended October 31, 1995, 1996 and 1997, respectively. The decline in
percentage from 1995 to 1996 was the result of a) higher sales levels achieved
by the Automotive Products Division, and b) high sales levels of products used
in the TOW missile program in 1995 which did not repeat in 1996. The decline in
percentage from 1996 to 1997 was due to sales by the Automotive Products
Division increasing at a higher rate than sales by the Aerospace Division.
See Item 6 -- Selected Financial Data and Footnote 12 of Notes to
Consolidated Financial Statements for certain financial information about the
Aerospace Division.
INDUSTRY OVERVIEW
The aerospace market is comprised of a large number of companies that
manufacture a wide variety of products and provide a diverse group of services.
The Aerospace Division has focused its efforts primarily on the design and
manufacture of highly reliable ordnance and pyrotechnic products incorporated in
tactical missiles and crew safety systems. The number of new and emerging
programs, as well as the number of customers for the Company's products, have
been shrinking due to consolidations within the aerospace industry. Similarly,
the number of the Company's competitors has also decreased through both
attrition and acquisitions by the remaining companies. The current trend of the
Company's customers is to reduce their supplier base to a few proven, reliable
sources. During the past several years, such determinations have been made based
on historical performance, audits and an analysis of the future viability of the
supplier.
The Company believes that the pyrotechnic technology used by the Company
performs functions that are not likely to be replaced in the foreseeable future.
The Company bases its belief on two factors. First, as the amount of funding for
new programs has been reduced, the amount of funding available for research and
development relating to new technologies has also been reduced, decreasing the
likelihood that alternative technologies will be discovered. Second, the other
existing technologies for the products manufactured by the Company -- including
solid state electronics, fiber optics and laser energy sources -- have generally
proven to be unreliable under severe environmental conditions and are more
expensive than the conventional pyrotechnics employed by the Company. The
expertise required to design and manufacture products incorporating pyrotechnic
technology requires significant experience. Consequently, the Company does not
anticipate that the number of competitors who produce products incorporating
pyrotechnic technology will increase in any significant respect for the
foreseeable future.
PRODUCTS
The Aerospace Division designs and manufactures highly reliable pyrotechnic
devices used primarily in tactical missile systems, spacecraft launch vehicles
and military aircraft crew ejection systems. In September 1994, the Company
acquired Scot, Inc., a manufacturer of propellant, explosive and life support
devices for government and commercial purposes. Prior to the acquisition of
Scot, the Aerospace Division's primary products were state-of-the-art initiators
and mechanical devices that incorporate these initiators such as explosive
bolts, cutters, actuators, valves, pin pullers and arm-fire devices used in
tactical missile systems. With the acquisition of the assets of Scot, the
Aerospace Division's product line expanded to include cutters and gas generators
used in military aircraft escape systems employed by the F-15, F-16, F-18,
AV-8B, T-38, T-45, T-48 and B-lB aircraft, automatic parachute releases, time
delays, separation nuts, thrusters, valves, actuators and retractors used to
lock landing gear, jettison the manipulator arm on the Space Shuttle, and deploy
the drogue chute for the Space Shuttle upon landing. In addition, during the
fiscal year ended
8
<PAGE> 10
October 1997 Scot began selling a portable oxygen flow/communications tester
used by Air Force pilots and also began the re-design of a proprietary ejector.
Production of the ejector is expected to begin in fiscal 1998.
Aerospace Division initiators are used to ignite larger pyrotechnic
charges, such as rocket propellant, or to activate mechanical devices. Missiles,
other weapon systems and aircraft incorporate initiators for several purposes,
such as igniting the fuel which propels the missile, releasing directional fins,
triggering automatic parachutes, ejecting crew members from military aircraft
and opening or closing valves. An arm-fire device is an electro-mechanical
device that prevents a rocket motor from being fired accidentally. This device
prevents the initiator from receiving the electric current or other signal
necessary to ignite the pyrotechnic material unless the system has been
intentionally armed. An arm-fire device also prevents the ignition of the rocket
motor if the initiator is accidentally fired by confining the high energy output
of the initiator. When intentionally armed, the initiator included in the
arm-fire device reliably ignites the rocket motor. Ejectors are used on aircraft
to allow for sequential release of missiles and bombs, and they employ
cartridges and initiators to trigger the release.
The proposal and development phases require the Company and its competitors
to respond to specification requirements by devoting significant engineering,
development and testing resources. Each of the devices manufactured by the
Aerospace Division is a component in a larger product of its customer. The
Company's products are rarely incorporated for the purpose of performing an end
function. With respect to certain products used for aircraft escape systems, the
military requires these parts to be replaced every three or more years as an
additional quality control measure implemented to protect the safety of crew
members relying on such systems, thus providing a source of recurring revenue
for the Company.
Major programs for the Aerospace Division in fiscal year 1997 included the
following: Crew Safety Systems, BRU-44, AMRAAM, Atlas, Delta, Hellfire Missile,
Sensor Fuse Weapon (SFW), and Tomahawk Missile.
Crew Safety Systems. The Company, through Scot, manufactures and sells a
variety of different devices used in crew safety systems and parachute releases
for various aircraft including, among others, the F-15, F-16, F-18, AV-8B, T-38,
T-45, T-48 and B-1. The Company is the sole source supplier of many of these
devices. Aggregate sales of these products were $4,603,000, $7,266,000 and
$5,042,000 during fiscal years 1995, 1996 and 1997.
BRU-44. The Company, through Scot, is the sole supplier of, and owns the
rights to, the BRU-44 ejector which is in use on the B-2 rotary launcher. The
Company completed substantially all the redesign of the ejector during the 1997
fiscal year, generating sales of $2,708,000. The redesigned ejector can now be
used for conventional, non-nuclear weapons, and production is expected to
commence during the Company's 1998 fiscal year.
AMRAAM. The Company is the sole supplier of a Company-patented arm-fire
device for the AMRAAM air-to-air missile. This program contributed sales of
$1,752,000, $1,238,000 and $1,439,000 during 1995, 1996 and 1997.
Atlas. The Company provides two versions of a safe and arm device and thru
Scot, supplies thrusters and separation devices for the boosters. The Atlas
missile uses between two and ten safe and arm devices per missile, depending on
the Atlas configuration and each launch requires four fore and eight aft
thrusters and 32 separation nuts. The program contributed sales of $2,001,000,
$840,000, and $2,174,000 during 1995, 1996, and 1997.
Delta. The Company provides a safe and arm device for various functions in
the Delta II and III launch vehicle. This program contributed sales of $378,000,
$471,000 and $1,067,000 during 1995, 1996 and 1997.
Hellfire. The Company provides the rocket motor arm-fire device for each
Hellfire missile. Production of U.S. scheduled requirements ended in fiscal year
1997, however, unscheduled U.S. Government and foreign military sales (FMS) are
expected to extend production several years. This program contributed
$2,119,000, $1,305,000 and $1,678,000 during 1995, 1996 and 1997.
9
<PAGE> 11
Sensor Fuse Weapon (SFW). The Company manufactures four individual
pyrotechnic devices for the SFW which are sold to three separate customers. Full
rate production (FRP) began in fiscal year 1996 with deliveries in fiscal year
1997 and should continue beyond 2001. This program contributed sales of
$1,269,000, $1,376,000 and $3,037,000 in 1995, 1996 and 1997.
Tomahawk. The Company is the sole supplier of 13 initiators (as well as
various devices incorporating certain of those initiators, such as an arm-fire
device, a three-way pyrotechnic valve, a cable cutter, a vertical launch
separation nut and a pressure switch) for the Tomahawk cruise missile, which can
be launched from land, air or sea (including submarines) and flies along a
preprogrammed flight path to its target. This program contributed $1,784,000,
$1,167,000 and $1,265,000 to net sales during 1995, 1996 and 1997.
No program of the Aerospace Division accounted for more than 10% of the
Company's net sales during any of the three fiscal years ended October 31, 1997.
MANUFACTURING
Manufacture of the division's products is accomplished by means of a
variety of semiautomatic and automatic production equipment and manual work
stations. The Company's manufacturing facilities for its Aerospace Division are
located in Newhall, California and Downers Grove, Illinois. Upon completion of a
new facility currently under construction in Moorpark, California -- see
"Automotive Products Division -- Manufacturing" above, the Newhall-based
Aerospace operations, including administration, will relocate to the new
facility. Some labor intensive operations may remain in the present Newhall
facility contingent upon demand for certain products produced by this division.
For most contracts, the Aerospace Division receives a request for bid from
a customer that defines the task to be performed and the specifications and
requirements that the product must meet. The Company then designs a device or
product to accomplish the task and meet the stated specifications and
requirements. The design of new products requires substantial engineering, time,
know-how and expense. The Company maintains a staff of experienced engineers to
design and test new products.
Production of the Company's products consists of fabricating and assembling
the hardware components and separately preparing the pyrotechnic charge.
Production of the electro-mechanical assemblies involves the purchase of
machined components, electrical switches, connectors, seals and other materials,
the mechanical assembly of the components and the testing of the completed
units. Throughout the entire process, strict quality-assurance controls are
maintained including customer and government inspection. After assembly,
products are functionally tested on a sample basis as required by the contract.
The Company manufactures the pyrotechnic charge from raw generic chemicals.
The principal pyrotechnic constituents used by the Company are zirconium,
titanium hydride, boron and potassium perchlorate. Handling and processing
pyrotechnic materials require extensive experience and expertise as well as the
proper equipment and facilities. The Company has been handling and processing
these fuels and oxidizers for over 30 years.
Products manufactured for government programs must meet rigorous standards
and specifications for workmanship, process, raw materials, procedures and
testing. Customers, and in some cases the United States Government as the end
user, perform periodic quality audits of the manufacturing process. Certain
customers and the United States Government maintain representatives at the
Company's facilities to monitor quality assurance.
The Company purchases the components for its products from various
subcontractors. While some of the components, such as flexible circuits,
mechanical parts, connectors, seals and certain chemicals are purchased from
single suppliers, they are generally available from several sources. Most
components are manufactured specifically for the Company to its specifications.
10
<PAGE> 12
MARKETING
The Company's marketing efforts for its Aerospace Division are focused on
identifying emerging new programs that have long-term production potential and
the customers who are likely to receive contracts for such programs. The end
user of the Aerospace Division's products is generally the United States
Government. In most cases, the Company is a subcontractor to the
non-governmental prime contractor or other subcontractor of the project. The
Company responds to customer inquiries with firm quotations and extensive cost,
technical and management proposals. In some cases, the Company will provide
prototype hardware for the customer's evaluation prior to source selection. The
Aerospace Division has a full-time Director of Marketing and his duties include
identifying and pursuing new program opportunities, customers, potential teaming
arrangements and new business development strategies. In addition, he prepares
long-range forecasts and develops promotional literature to be provided to
customers and potential customers. Scot also employs two full-time employees
whose primary responsibilities are to market Scot's products.
For new programs, the Aerospace Division generally receives a request for
bids from its customer. The Company believes that customers award contracts
based upon the technical proposals submitted, which include design innovation,
analysis and compliance with specifications, in addition to pricing. Once the
initial bid has been awarded to the Company, subsequent or follow-on contracts
for additional pyrotechnic devices are generally entered into on a negotiated
price basis between the Company and its customer and are subject to competitive
bidding as is the case with new programs.
A majority of the Company's present contracts are fixed-price contracts.
The Company's fixed-price contracts generally specify a fixed price per unit
which varies with different quantities. Fixed-price contracts carry certain
inherent risks, including underestimating costs, problems with new technologies
and economic and other changes that may occur over the contract period. However,
because of economies of scale that may be realized during the contract term,
fixed price contracts may offer significant profit potential.
All proposals with respect to United States Government programs involving
amounts in excess of $500,000 are subject to audit by the United States
Government. During the bid process for initial contracts, the Company must
substantiate the basis for its bid and, in the case of new products, the Company
must disclose the basis and rationale used to determine the bid price. In most
major projects, the bids of the Company are subject to negotiation prior to the
final awarding of the contract. For contracts relating to the order of
additional pyrotechnic devices, the Company generally must disclose the basis
for any price increases.
Most of the Company's contracts with respect to United States Government
programs are subject to unilateral termination at the Government's convenience.
Should a contract be so terminated, the Company would be entitled to be paid for
certain costs incurred to the date of termination plus a reasonable termination
amount. As a result of these contracts, the books and records of the Company are
subject to audit by various governmental agencies. Generally, the Company's
contracts do not require that the Company provide performance bonds.
The Company is performing classified work on a small number of programs.
The Company and certain of its employees have security clearances to the
"Secret" level.
The Aerospace Division did not have any customers that accounted for 10% or
more of the Company's total revenues in fiscal years 1995, 1996 or 1997.
BACKLOG
Aerospace Division backlog was $38,007,000 at October 31, 1997 (of which
$23,344,000 was attributable to Scot) as compared to $19,787,000 at October 31,
1996 (of which $7,589,000 was attributable to Scot). Aerospace Division backlog
includes the remaining contract amount for units yet to be shipped (excluding
renewals or extensions which are at the discretion of the customer) for signed
contracts or contract award notifications with firm delivery dates and prices.
Backlog is calculated without regard to possible adjustments for scope change or
potential cancellations until such changes or cancellations occur. Of the total
Aerospace Division backlog at October 31, 1997, the Company expects that
approximately $10,700,000 will not be delivered until after fiscal year 1998.
11
<PAGE> 13
For a further discussion of Aerospace Division backlog, see Item
7 -- Management's Discussion and Analysis of Financial Condition and Results of
Operations.
COMPETITION
During the bid process for the initial contract for a program, the
Aerospace Division competes with several firms, some with greater financial
resources than the Company. Once the initial contract is awarded, contracts for
additional products of the Company are generally entered into on a negotiated
price basis and are not competitively bid.
Although the Company has very few patents, there are practical barriers to
entry for potential new competitors of the Company. Each of the Aerospace
Division's products is made to precise technical specifications and must be
thoroughly tested before being used in a customer's products. Testing and
approval is a costly and time-consuming process. Not only must each of the
Division's products be tested individually, but all such products must be tested
in conjunction with the larger product into which they are intended to be
placed. After commencement of a program, it is costly for the Aerospace
Division's competitors to design, and the customers to change suppliers of, the
components manufactured by the Company since the customer would be required to
re-qualify its products using a new subcontractor's components.
RISK MANAGEMENT AND INSURANCE
The drying, sifting, mixing and processing of pyrotechnic materials
involves certain risks and potential liabilities. The Company's safety and
health programs provide specialized training to employees working with
pyrotechnic materials. Pyrotechnic chemicals are generally delivered to the
Company and are stored by the Company in a non-volatile form. The pyrotechnic
materials are then dried, sifted and blended at a remote location. Work stations
are designed to shield employees from any accidental explosion. Furthermore, the
Company's machines are designed so that an accidental explosion will be
contained in a protective enclosure to minimize damage.
The Company maintains a liability insurance program covering a number of
risks. The Company's insurance program includes comprehensive general liability
and products liability coverage in the amount of $30 million for the Aerospace
Division, including Scot, and $30 million for the Automotive Products Division.
The Company also has casualty and fire insurance with various coverage limits
for damage to personal property and buildings, business interruption,
earthquakes, boilers and machinery and automobile liability. Pollution liability
is excluded from the Company's comprehensive general liability insurance policy.
The Company is engaged in a business which could expose it to possible
claims for injury resulting from the failure of products sold by it, notably
initiators for airbag systems. Although the Company is not aware of any claims
for injury resulting from its airbag initiators, they have only been in general
use for approximately eight years. The Company maintains product liability
insurance coverage as described above. However, there can be no assurance that
claims will not arise in the future, that the proceeds of such policy will be
sufficient to pay future claims or that the Company will be able to maintain the
same level of insurance.
REGULATION
As a contractor and subcontractor of the United States Government, the
Company is subject to various laws and regulations more restrictive than those
applicable to non-government contractors. The Company is subject to periodic
audits and investigations to confirm compliance with those laws. Violations can
result in civil and/or criminal liability as well as suspension or debarment
from eligibility for awards of new government contracts or contract renewals.
The Company uses various hazardous and toxic substances in its
manufacturing processes, including organic solvents, photochemical and
pyrotechnic material. The Company's operations are subject to numerous Federal,
state and local laws, regulations and permit requirements relating to the
handling, storage and disposal of those substances. In general, organic solvents
and photochemicals are recycled by a licensed disposal company and reused by the
Company. The pyrotechnic charge contained in products which are
12
<PAGE> 14
rejected in the quality-control process is eliminated by discharge pursuant to
government regulations. The Company believes it is in substantial compliance
with these laws and regulations and has obtained all necessary permits. While
compliance with these laws and regulations has the effect of increasing the
Company's costs of operations, these costs must also be incurred by the
Company's competitors and therefore do not materially adversely affect the
Company's competitive position.
To date, compliance by the Company with applicable environmental laws has
not had a material adverse effect on the Company's financial condition, results
of operations or competitive position and the Company does not believe that
compliance with presently existing environmental laws will have such a material
adverse effect in the future or require material capital expenditures, although
no assurances can be given.
The Company has a facility security clearance from the United States
Department of Defense. A portion of the Company's sales and other revenues
during the last three fiscal years was derived from work for which this
clearance was required. Continuation of this clearance requires that the Company
remain free from foreign ownership, control or influence ("FOCI"). Management
does not believe that there is presently any substantial risk of FOCI that will
cause its facility security clearance to be revoked. Loss of such security
clearance and related loss of contracts relating to the United States Government
could result in a decline in the Company's revenues.
EMPLOYEES
At October 31, 1997, the Company had approximately 575 full-time employees
in Newhall, California, approximately 635 full-time employees in Mesa, Arizona,
approximately 70 full-time employees in Downers Grove, Illinois and one fulltime
employee in Ogden, Utah. None of the Company's employees is represented by a
collective bargaining unit. The Company considers its relationship with its
employees to be good.
ITEM 2. PROPERTIES
The Company's principal executive offices are located on approximately 140
acres of land in Newhall, California. This space is leased from a partnership
(consisting of certain stockholders of the Company) under a Master Lease
Agreement that expired on April 30, 1996. The Company is continuing on these
facilities on a month-to-month rental basis. The Company is operating under a
non-conforming use permit, issued by the Los Angeles County Regional Planning
Commission, which expires December 31, 2001. The Company's Newhall facility
consists of approximately 35 buildings, modular units and other structures
aggregating approximately 70,000 square feet. The Company currently intends to
relocate its Newhall, California facility and corporate offices to a larger and
more site-efficient location. In October 1996, the Company purchased
approximately 280 acres of land in the City of Moorpark, located in Ventura
County, north of Los Angeles, on which the Company is currently building new
facilities. Development of the land infrastructure began in January 1997, and
building construction began in November 1997. Construction is expected to be
completed by the Fall of 1998, and the Company plans to move its entire
California-based operations, including Automotive Products, Aerospace and its
administrative offices to these new facilities shortly after completion of
construction. Some operations of the Company may remain at the present Newhall
facility contingent upon customer demand for certain products produced by the
Company.
The Company has an additional facility in Mesa, Arizona on approximately 21
acres of land used for its Automotive Products Division. The Mesa facility is
owned by the Company and consists of several buildings aggregating approximately
60,000 square feet, including a second blending facility and an approximately
12,000-square-foot warehouse. The Company currently has four lines of production
equipment in operation at the Mesa facility. See Item
1 -- Business -- Automotive Products Division -- Manufacturing.
Scot's manufacturing facilities and principal offices are located in
Downers Grove, Illinois and consist of approximately 47,000 square feet of
office and manufacturing facilities located on three and one-half acres of land
that are owned by Scot. Scot also owns 29 acres of land in Ogden, Utah, on which
Scot tests various products.
13
<PAGE> 15
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings generally incidental
to its business. While the ultimate disposition of these proceedings is not
presently determinable, the Company does not believe that the outcome of these
proceedings will have a material adverse effect on the financial position or the
results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1997.
14
<PAGE> 16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded in The Nasdaq National Market under
the symbol "SDII." The following table sets forth the high and low closing
prices of the Company's Common Stock on Nasdaq National Market for the two
fiscal years ended October 31, 1997.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1996
November 1 through January 28................................ $18 $13
January 29 through April 28.................................. 21 3/4 14 1/2
April 29 through July 28..................................... 24 14 1/8
July 29 through October 31................................... 18 1/4 12 1/2
1997
November 1 through February 2................................ $21 3/4 $12 1/8
February 3 through May 4..................................... 20 3/4 15 1/4
May 5 through August 3....................................... 19 1/2 14 5/16
August 4 through October 31.................................. 29 7/8 18
</TABLE>
At January 20, 1998, there were approximately 144 holders of record of the
Company's Common Stock and approximately 3,200 beneficial owners. On January 20,
1998, the closing price of the Company's Common Stock on The Nasdaq National
Market was $27 1/8.
No dividend was declared by the Company during the two fiscal years ended
October 31, 1997. The Company does not currently anticipate declaring or paying
any cash dividends in the foreseeable future. The policy of the Company is to
retain earnings to provide funds for use in the operation and expansion of the
Company's business.
15
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company as of
and for each of the five fiscal years ended October 31, 1997. The financial data
for the five years ended October 31, 1997 is derived from the Consolidated
Financial Statements of the Company, which consolidated statements have been
audited by KPMG Peat Marwick LLP, independent certified public accountants. The
consolidated financial statements as of October 31, 1997 and 1996, and for each
of the years in the three-year period ended October 31, 1997, and the report of
KPMG Peat Marwick LLP thereon, are included elsewhere herein. The data set forth
below should be read in conjunction with the Financial Statements and related
Notes thereto appearing elsewhere herein and Item 7 -- Management's Discussion
and Analysis of Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------------------------
1993 1994(1) 1995 1996 1997
------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales:
Automotive Products......................... $24,339 $49,460 $ 71,253 $ 80,235 $111,930
Aerospace................................... 13,112 15,049 29,339 24,247 28,572
------- ------- -------- -------- --------
Total............................... 37,451 64,509 100,592 104,482 140,502
Cost of sales:
Automotive Products......................... 22,367 43,388 63,241 68,113 92,758
Aerospace................................... 9,814 11,037 19,730 16,215 19,795
------- ------- -------- -------- --------
Total............................... 32,181 54,425 82,971 84,328 112,553
Gross profit:
Automotive Products......................... 1,972 6,072 8,012 12,123 19,172
Aerospace................................... 3,298 4,012 9,609 8,031 8,777
------- ------- -------- -------- --------
Total............................... 5,270 10,084 17,621 20,154 27,949
Operating expenses:
Automotive Products......................... 1,564 2,914 3,412 3,878 5,524
Aerospace................................... 1,139 1,438 4,270 4,232 5,198
------- ------- -------- -------- --------
Total............................... 2,703 4,352 7,682 8,110 10,722
Earnings from operations:
Automotive Products......................... 408 3,158 4,600 8,245 13,648
Aerospace................................... 2,159 2,574 5,339 3,799 3,579
------- ------- -------- -------- --------
Total............................... 2,567 5,732 9,939 12,044 17,227
Other income (expense), net................... (315) (452) (639) 129 111
Earnings before income taxes.................. 2,252 5,280 9,300 12,173 17,338
Provision for income taxes.................... 920 2,111 3,720 4,725 6,660
------- ------- -------- -------- --------
Net earnings.................................. $ 1,332 $ 3,169 $ 5,580 $ 7,448 $ 10,678
Net earnings per share........................ $ .23 $ .55 $ .82 $ .96 $ 1.37
Weighted average common and common equivalent
shares outstanding.......................... 5,764 5,786 6,832 7,763 7,822
</TABLE>
16
<PAGE> 18
<TABLE>
<CAPTION>
AT OCTOBER 31,
--------------------------------------------------
1993 1994 1995 1996 1997
------- ------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets.............................. $14,762 $25,154 $ 43,320 $ 45,326 $ 43,407
Total assets................................ 33,939 51,689 78,621 86,159 99,824
Current liabilities......................... 6,221 10,613 10,150 10,369 13,271
Long-term debt, less current portion........ 3,608 12,568 4,027 3,320 2,057
Stockholders' equity........................ 23,222 26,659 62,054 69,701 81,357
</TABLE>
- ---------------
(1) Effective July 31, 1994, the Company acquired all of the assets of Scot,
Inc. Accordingly, the results of operations for the year ended October 31,
1994, and all subsequent years, include the results of Scot, Inc. from that
effective date. See Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- General -- Aerospace
Division.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion should be read in conjunction with the information
contained in the Financial Statements and Notes thereto of the Company appearing
elsewhere herein. Unless otherwise stated, all references to years means the
Company's fiscal years ending October 31.
GENERAL
AUTOMOTIVE PRODUCTS DIVISION
The Automotive Products Division was formed in 1989 as a result of the
Company's strategic decision to participate in the anticipated demand for airbag
systems arising from new federal regulations. Demand for initiators produced by
the division has grown steadily since 1992 as U.S. automobile manufacturers have
installed airbags in automobiles for both the driver and front passenger. Even
though installation of the front driver and passenger airbags is now mostly
implemented in the United States, demand appears to be continuing to grow as
U.S. automobile manufacturers are now installing airbags for side-impact
protection and for seat belt pre-tensioners which also employ an initiator. In
addition, European and Pacific Rim automobile manufacturers have over the last
few years, accelerated the rate of airbag implementation for automobiles
produced in these countries. The Company has invested in, and continues to
invest in, facilities and production equipment to meet these increases in
demand. Beginning in fiscal year 1992, gross profit margins and operating income
amounts achieved by the Company have improved as a result of the Company's
automation of the manufacturing process of initiators, and because of
improvements in manufacturing techniques, reduction in the prices of certain
purchased raw materials, and a larger base of business to absorb overhead costs.
No assurance can be given that the foregoing trends during fiscal years
1993 through 1997 will continue. The Company's future results of operation,
financial position and cash flows are dependent on a variety of factors that are
inherently difficult to predict including, by way of example only: (1) the
number of automobiles sold (particularly in North America); (2) continued
acceptance of air bags as the principal secondary restraint system incorporated
in automobiles; (3) the impact of pressure from the Company's customers and
actions by the Company's competitors on the Company's abilities to sell its
initiators at acceptable average sales prices; (4) voluntary incorporation of
side and rear air bags by automobile manufacturers; and (5) the Company's
ability to continue increasing the automation of its manufacturing processes in
a timely and effective manner.
AEROSPACE DIVISION
Demand for the Company's products is driven primarily by the United States
Government's purchases of missiles and other weapon systems and commercial
launch vehicles for satellite communications that incorporate initiators,
arm-fire devices and other pyrotechnic components, and by demand for replacement
17
<PAGE> 19
parts used in military crew safety systems. In most cases, the Company is a
subcontractor to the non-governmental prime contractor or other subcontractor of
the program. The Aerospace Division's contracts provide for a specific number of
deliveries over a period of time. Revenue is recognized for these production
contracts as completed units are shipped. Cost of sales for units shipped is
computed based on the expected total unit cost of all units required to be
produced under the contract through completion, which amount includes all
estimated costs to complete the contract. Accordingly, the results of the
Aerospace Division for any particular accounting period, or period-to-period
comparisons, may be significantly affected by the timing of production
deliveries and may not be indicative of future operating results. Unlike most of
the Company's products, demand for certain of Scot's products is affected by the
government's need to purchase directly from Scot replacement components whose
service life has expired. The most significant factor affecting the gross profit
margin for the Aerospace Division is the mix of products being delivered during
a particular reporting period.
RESULTS OF OPERATIONS
The following table is derived from the Company's statement of earnings
data and sets forth, for the periods indicated, certain statement of earnings
data as a percentage of net sales.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER
31,
-------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Automotive Products Division
Net sales......................................... 100.0% 100.0% 100.0%
Cost of sales..................................... 88.8 84.9 82.9
----- ----- -----
Gross profit...................................... 11.2 15.1 17.1
Operating expenses................................ 4.8 4.8 4.9
----- ----- -----
Earnings from operations.......................... 6.4% 10.3% 12.2%
===== ===== =====
Aerospace Division
Net sales......................................... 100.0% 100.0% 100.0%
Cost of sales..................................... 67.3 66.9 69.3
----- ----- -----
Gross profit...................................... 32.7 33.1 30.7
Operating expenses................................ 14.5 17.4 18.2
----- ----- -----
Earnings from operations.......................... 18.2% 15.7% 12.5%
===== ===== =====
</TABLE>
COMPARISON OF FISCAL YEARS 1995, 1996 AND 1997
Net Sales
Net sales for the Automotive Products Division increased by $8,982,000, or
12.6%, between 1995 and 1996 and increased by $31,695,000, or 39.5%, between
1996 and 1997. The increases were due primarily to significant increases
throughout the three-year period in initiator shipments to TRW pursuant to the
TRW Agreement and, in 1997, to increases in shipments to Autoliv. In December
1995, the Company signed a three-year supplier agreement with Autoliv whereby
the Company is required to supply a substantial portion of Autoliv's initiator
requirements. The Autoliv agreement became effective with model year 1997
production, approximately August 1996, and therefore did not have a substantial
impact on 1996 fiscal year operations. Increases in initiator unit sales during
the three-year period were partially offset by decreases in initiator prices
pursuant to the TRW Agreement. During 1995, 1996, and 1997, sales to TRW
accounted for 80.1%, 77.7%, and 61.6%, respectively, of the Automotive Products
Division's sales and 59.9%, 59.7%, and 49.1%, respectively, of the combined
sales of the Company. During 1995 and 1996, sales to Autoliv were not
significant. In 1997, sales to Autoliv accounted for 25.9% of the Automotive
Products Division's sales and 20.6% of the Company's combined sales. The Company
expects TRW and Autoliv to be the Automotive Products Division's largest
customers for the foreseeable future.
Net sales for the Aerospace Division decreased $5,092,000, or 17.4%,
between 1995 and 1996, and increased $4,325,000, or 17.8%, between 1996 and
1997. The decrease in sales between 1995 and 1996 was the
18
<PAGE> 20
result of the TOW missile programs having a substantial buy in 1995 which was
not repeated in 1996, and sales of products for the Hellfire missile program
declining in 1996 as this missile program neared completion of its production
life cycle. The increase in sales between 1996 and 1997 was due to increased
shipments of parts used for commercial satellite launch vehicles, and due to an
engineering contract in 1997 to re-design a proprietary ejector.
During 1993, revenues and new orders for the Aerospace Division were
adversely affected by reduced levels of spending for defense programs in the
United States. To date, no production program from which the Company has
received any significant revenues during the past three fiscal years has been
canceled. It is unclear whether the programs in which the Company is involved,
or would propose to become involved, will be significantly affected by any
future decrease in defense spending and if so, to what extent. Accordingly, the
effect, if any, on the future results of operations of the Company from possible
future decreases in defense spending cannot be determined at this time.
Cost of Sales
Cost of sales for the Automotive Products Division increased $4,872,000, or
7.7%, between 1995 and 1996, and increased by $24,645,000, or 36.2%, between
1996 and 1997. The increases throughout the three-year period were related
primarily to the increased volume of initiators shipped. Automotive Products
Division gross profit margins improved from 11.2% in 1995 to 15.1% in 1996, and
improved to 17.1% in 1997. In 1995, 1996 and 1997, the Company achieved greater
recovery of overhead costs from the increases in levels of production, and in
1997, achieved an increase in production machine utilization. In addition, in
1996 and 1997, the Company achieved a reduction in the cost of certain raw
materials used to manufacture initiators, all of which contributed to improved
gross margins. These improvements were partially offset by decreases in the
sales price of initiators during the above periods. Average unit selling prices
are different to various customers depending upon complexity of design and the
value of added components, and in any period the total average selling price is
affected by the mix of quantity sold to each customer. In 1997 this was
especially true as sales to Autoliv became a significantly larger percent of
total sales than in prior years. Although the Company has experienced a
reduction in total in average unit selling price, improvements in machine
utilization and manpower efficiency, reductions in raw material costs, and
greater absorption of overhead have more than offset selling price reductions.
In addition, these improvements in manufacturing operations have allowed the
Company to absorb higher depreciation expense as productive capacity has been
expanded. See Item 1 -- Business -- Manufacturing, and Item 2 -- Business
Properties.
The Company amended, effective September 1, 1997, the Automotive Products
Division's only long-term supply contract with the supplier of a key component
for the Company's initiators. The contract relates to a primary component (a
glasssealed body) used in the production of initiators and this amendment
significantly reduced the unit prices paid by the Company effective September 1,
1997. The amendment also extends the term of the contract through the end of
calendar year 2000 and provides that such prices will be further reduced at the
beginning of the 1999 and 2000 calendar year through the end of such term. See
Item 1 -- Business -- Automotive Products Division -- Manufacturing.
Cost of sales for the Aerospace Division decreased $3,515,000, or 17.8%,
between 1995 and 1996, and increased $3,580,000, or 22.1%, between 1996 and
1997. The decrease in 1996 was the result of a decrease in sales, and the
increase in 1997 was the result of an increase in sales. Gross profit as a
percent of the Aerospace Division's sales increased from 32.7% in 1995 to 33.1%
in 1996, and decreased to 30.7% in 1997. Fluctuations in gross profit as a
percent of sales occur primarily due to the mix of products sold during any
period. Mature product lines, in general, earn a higher gross profit than newer,
developing product lines due to the benefits of learning and the reduction of
start-up type costs. In addition, replacement spares, in general, earn a higher
gross profit than other products.
Operating Expenses
Operating expenses, in total, increased $428,000, or 5.6%, between 1995 and
1996, and increased $2,612,000, or 32.2%, between 1996 and 1997. A certain level
of operating expenses is incurred by the
19
<PAGE> 21
Company to support operations within ranges of sales levels, and accordingly,
these expenses do not increase or decrease ratably as sales increase or
decrease. The operating expenses for each division (Automotive Products and
Aerospace) are comprised of two components. First, each division is charged
those operating expenses directly incurred 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
which the Company believes fairly reflects the benefit received by each
operating division. In fiscal years 1995 and 1996, the allocation was made
approximately equally to each Division. In fiscal year 1997, the allocation of
administrative expenses was made at 35% to the Aerospace Division and 65% to the
Automotive Products Division . If the allocation had been made equally, the
Aerospace Division operating expenses would have increased, and the Automotive
Products Division operating expenses would have decreased by $581,000.
Administrative operating expenses amounted to $2,550,000, $2,704,000, and
$3,874,000 in fiscal years 1995, 1996 and 1997, respectively.
The increase in operating expenses in 1996 compared to 1995 was due to
increases in most expense categories required to support the increase in sales.
The increase in operating expenses in 1997 compared to 1996 was due primarily to
2 categories, a) an increase in corporate administrative expenses, and b) an
increase in discretionary bonuses paid by the Company, and secondarily to
increases in expenses incurred by each division. The increase in corporate
administrative expenses occurred primarily in salary and salary related expenses
as more staff was required to support the large increase in sales, in outside
professional costs, and in public relations costs.
Operating expenses for the Automotive Products Division increased $466,000,
or 13.7%, between 1995 and 1996, and increased $1,646,000, or 42.4%, between
1996 and 1997. As a percentage of the Automotive Products Division net sales,
these expenses have remained relatively constant for the past three fiscal
years.
Operating expenses for the Aerospace Division decreased by $38,000, or .9%,
between 1995 and 1996, and increased by $966,000, or 18.6%, between 1996 and
1997. As a percentage of sales, operating expenses for the Aerospace Division
increased from 14.5% in 1995 to 17.4% in 1996, and increased to 18.2% in 1997.
The increase in operating expenses as a percentage of sales in 1996 resulted
from the reduction in sales in 1996 compared to 1995 without a corresponding
reduction in operating expenses. The increase in operating expenses as a
percentage of sales in 1997 resulted from increases in operating expenses,
primarily at the Company's Scot division, at a faster rate than sales increased.
Other Income and Expense
Other income (expense), net, consists primarily of interest income and
interest expense. In May 1995, the Company received approximately $29,400,000
(before offering-related expenses) from the sale of 1,770,000 shares of its
Common Stock in an underwritten public offering. Approximately $14,000,000 of
the proceeds was used to pay debt incurred under the Company's bank revolving
line of credit and approximately $11,400,000 was invested in short-term,
interest-bearing, marketable securities. In 1995, other income (expense), net,
was $639,000 expense, which consisted primarily of interest expense of $964,000,
offset partially by interest income of $297,000 earned on short-term investments
and by $28,000 of other income. In 1996, other income (expense), net, was
$129,000 income, which consisted primarily of interest income earned on
short-term investments of $485,000, and other income of $9,000, offset partially
by interest expense of $365,000. The increase in interest income in 1996,
compared to 1995, was the result of interest earned for a full-year on
short-term investments in 1996 compared to approximately five months on interest
income in 1995. The decrease in interest expense in 1996 was the result of no
outstanding short-term borrowings in 1996, and because of lower average
outstanding balances on long-term debt in 1996 due to scheduled reductions of
principal balances. In 1997, other income (expense) net, was $111,000 income,
which consisted of interest income earned on short-term investments of $353,000,
and other income of $16,000, offset partially by interest expense of $259,000.
The decrease in interest income in 1997 compared to 1996 was the result of lower
average amounts invested in 1997 as some cash resources were used to finance
capital additions. The reduction in interest expense in 1997 was the result of
scheduled monthly principal payments of long-term debt.
20
<PAGE> 22
SEASONALITY
The airbag manufacturers' requirements for the Company's initiators are
dependent on the requirements of automobile manufacturers. The Company believes
that the airbag initiator market in the United States has become, and will for
the foreseeable future remain, closely tied with the seasonal fluctuations of
the automotive market. This trend may be offset partially as new applications
for airbags and initiators, such as airbags for side-impact protection and seat
belt pre-tensioners, are installed by automobile manufacturers. In addition,
research is currently being conducted for "smart" airbags which will have the
ability to sense the weight and position of an automobile occupant, and then
deploy the airbag at corresponding different speeds.
The Aerospace Division recognizes sales upon the shipment of units or
completion of a task. While there is no identifiable seasonality to the
aerospace business, there can be quarter-to-quarter changes in shipment volume
that result from customer requirements or other factors beyond the Company's
control. Historically, during the past several year, the trend has been that
customer shipment requirements are greater in the second half of the Company's
fiscal year.
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.
During the fiscal year ended October 31, 1996, the Company maintained a
credit agreement (the "Old Credit Agreement") with a bank under which the
Company had in place a revolving credit facility and a $5,000,000, five-year
term loan. In December 1996, the Company signed a new credit agreement (the
"Credit Agreement") with a different bank. The outstanding balances under the
Old Credit Agreement were paid at that time. The Credit Agreement expires May 1,
1998, and any borrowings under the Credit Agreement bear interest at the bank's
Reference Rate less .25 percentage point, or at the Company's option, at LIBOR
plus .75 percentage point. 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 $500,000 and for
standby letters of credit not-to-exceed $6,000,000, which reduce the amount
available under the agreement. 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 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
stock. The Company was in compliance with these provisions as of October 31,
1997. As of October 31, 1997, $750,000 was outstanding under Facility No. 2, and
no amounts were outstanding under Facility No. 1. As of October 31, 1997, the
Company had outstanding approximately $5,500,000 of performance bonds secured by
standby letters of credit, related to the development of new facilities.
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 October 31,
1997, was $530,500. The loan is being amortized with monthly payments of
approximately $7,800, including interest, adjusted monthly, at 1.9% over the
bank's LIBOR rate. 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. The
unpaid balance of this note at October 31, 1997 was $1,713,000. In December
1994, the Company purchased a
21
<PAGE> 23
second airplane from United Beechcraft, Inc. for $669,419. The Company entered
into a promissory note with Beech Acceptance, Inc. to finance the purchase over
a 10-year period. The unpaid balance of this note at October 31, 1997 was
$501,000. In May 1997, the Company entered into an agreement with its chairman
whereby the chairman assumed responsibility for the note, and agreed to buy the
second airplane at its then fair market value. The Company has guaranteed
collectibility to Beechcraft Acceptance under the promissory note in the event
the chairman defaults. The net book value ($523,000) and the promissory note
($530,000) were removed from the Company's books in May 1997 to reflect this
sale and transfer of liability. No gain or loss was recognized by the Company as
a result of this transaction. The remaining plane is being used primarily to
transport Company officials between its Newhall, California and Mesa, Arizona
facilities. In addition, the Company leases this airplane for use by third
parties when not in use by the Company in order to defray a portion of the
costs.
During 1997, the Company generated cash flow from operations of
$18,524,000. Capital expenditures for payments related to automated
manufacturing equipment amounted to approximately $16,000,000 and for payments
related to the purchase of 280 acres of land in the City of Moorpark and
development of the land infra-structure (see below), amounted to approximately
$6,000,000. Principal payments and assignment of long-term bank debt aggregated
$2,365,000. These net cash outflows were funded by cash flow from operations and
from cash on hand. At October 31, 1997, the Company had cash and marketable
securities on hand of $9,165,000 and had additional borrowing capacity of
$15,750,000 available under the New Agreement.
At October 31, 1997, the Company had working capital of $30,137,000 as
compared to working capital of $34,957,000 at October 31, 1996. The decrease of
$4,820,000 is due primarily to a decrease in cash and marketable securities of
$4,127,000, a decrease in inventories of $3,744,000, an increase in accounts
payable of $2,277,000, and an increase in accrued expenses of $1,710,000, offset
partially by an increase in accounts receivable of $5,530,000, an increase in
prepaid expenses and deferred taxes of $423,000, and a decrease in current
income taxes payable of $733,000. The decrease in cash and marketable securities
occurred to finance capital equipment additions and the on-going construction of
the new Moorpark facility. The reduction in inventories occurred as the Company
was able to improve inventory turnover through increased manufacturing
efficiencies in its Automotive Products Division. The increase in accounts
payable and accrued expenses occurred due to timing of payment of these items.
The increase in accounts receivable occurred as the result of increased sales in
1997.
The Company anticipates that working capital requirements will increase in
1998 as compared to 1997 to support the investment in inventories and accounts
receivable related to the anticipated increased demand for initiators
manufactured by the Company, although future demand is inherently difficult to
predict and affected by a variety of factors including the factors discussed in
the second paragraph under "General -- Automotive Products Division." The
Company believes that it can meet its expected working capital requirements for
the foreseeable future from existing cash on hand, cash flow from operations and
borrowings under its existing Credit Agreement. The Company had commitments to
acquire capital equipment at January 15, 1998 aggregating approximately
$5,300,000 related primarily to additional production equipment and other
support equipment required for the increased operations of the Automotive
Products Division.
In order to improve manufacturing efficiencies and to provide facilities
for growth, the Company purchased approximately 280 acres of land in the City of
Moorpark, located in Ventura County, north of Los Angeles, in October 1996, on
which the Company is building new facilities. Development of the land
infrastructure began in January 1997, and building construction began in
November 1997. Construction is expected to be completed by the Fall of 1998, and
the Company plans to move its entire California-based operations, including
Automotive Products, Aerospace and its administrative offices to these new
facilities shortly after completion of construction. Some operations of the
Company may remain at the present Newhall facility contingent upon demand for
certain products produced by the Company. Total net cost of the project is
estimated at approximately $21,000,000 of which approximately $9,440,000 had
been spent by October 31, 1997. The Company anticipates spending approximately
$12,000,000 in fiscal 1998, and approximately $3,000,000 in fiscal 1999 to
complete this project. The Company plans to sell two commercial lots being
developed as part of the Moorpark project, the proceeds of which are expected to
reduce the net project cost to
22
<PAGE> 24
approximately $21,000,000. The Company believes it will have adequate cash and
marketable securities available and on hand from 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.
The Company adopted Statement of Financial Accounting Standards No. 121
(SFAS No.121) "Impairment of Long-Lived Assets" during 1997. SFAS No. 121
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be held
and used and for long-lived assets and certain identifiable intangibles to be
disposed of. Adoption of the new pronouncement had no impact on the financial
statements.
New Pronouncements by Financial Accounting Standards Board
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128. Earnings Per Share. SFAS No.
128 specifies new standards designed to improve the earnings per share ("EPS")
information provided in financial statements by simplifying the existing
computational guidelines, revising the disclosure requirements and increasing
the comparability of EPS data on an international basis. Some of the changes
made to simplify the EPS computations include: (a) eliminating the presentation
of primary EPS and replacing it with basic EPS, with the principal differences
being that common stock equivalents are not considered in computing basic EPS,
(b) eliminating the modified treasury stock method and the three percent
materiality provision, and (c) revising the contingent share provisions and the
supplemental EPS data requirements. SFAS No. 128 also makes a number of changes
to existing disclosure requirements. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. The Company estimates that the implementation of SFAS No. 128 will not
have a material impact on the Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting
and display of comprehensive income and its components (revenues, expenses,
gains and loses) in a full set of general-purpose financial statements. SFAS No.
130 is effective for financial statements issued for periods beginning after
December 15, 1997. The Company has not determined the impact of SFAS No. 130 on
its consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. SFAS No.
131 establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. SFAS No. 131 is effective for
financial statements issued for periods beginning after December 15, 1997. The
Company has not determined the impact of SFAS No. 131 on its consolidated
financial statements.
The Company has initiated a program to prepare the Company's computer
systems and applications for the year 2000. The Company expects to incur
internal staff costs and may incur consulting and other fees related to computer
system enhancements necessary to prepare its systems for the year 2000. The
Company believes the total cost will not be significant to its operations, and
will most likely not be incremental, but will rather represent re-deployment of
existing information technology resources.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Financial Statements of the Company filed as part of this report on
Form 10-K are listed in Item 14(a).
23
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Special Devices, Incorporated:
We have audited the accompanying consolidated balance sheets of Special
Devices, Incorporated and subsidiary as of October 31, 1997 and 1996, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the years in the three-year period ended October 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Special
Devices, Incorporated and subsidiary as of October 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended October 31, 1997, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
December 22, 1997
24
<PAGE> 26
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1996 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash...................................................................... $ 2,592,578 $ 2,415,335
Marketable securities..................................................... 10,700,000 6,750,000
Accounts receivable, net of allowance of $155,959 in 1996 and $44,126 in
1997 for doubtful accounts (Note 2)..................................... 12,663,230 18,192,877
Inventories (Note 3)...................................................... 18,298,705 14,554,614
Prepaid expenses.......................................................... 401,645 503,430
Deferred income taxes (Note 6)............................................ 670,000 991,000
----------- -----------
Total current assets............................................... 45,326,158 43,407,256
----------- -----------
Property, plant and equipment, at cost:
Land...................................................................... 1,611,331 1,611,331
Building.................................................................. 7,562,979 7,963,637
Machinery and equipment................................................... 35,736,957 44,080,413
Furniture and fixtures.................................................... 2,221,376 2,844,116
Transportation equipment.................................................. 3,066,463 2,486,034
Leasehold improvements.................................................... 2,334,412 3,314,332
Construction in progress (includes land and related costs of $3,700,000 in
1996 and $9,440,000 in 1997)............................................ 5,695,185 17,942,985
----------- -----------
58,228,703 80,242,848
Less accumulated depreciation and amortization............................ 17,597,716 23,974,540
----------- -----------
40,630,987 56,268,308
----------- -----------
Other assets................................................................ 202,050 148,716
----------- -----------
$86,159,195 $99,824,280
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 4)................................ $ 1,296,973 $ 944,793
Trade accounts payable.................................................... 3,075,758 6,175,501
Accounts payable to related parties (Note 9).............................. 2,294,688 1,471,748
Accrued payroll and benefits.............................................. 1,104,613 1,929,420
Accrued expenses.......................................................... 605,881 1,491,360
Income taxes payable (Note 6)............................................. 1,991,290 1,257,872
----------- -----------
Total current liabilities.......................................... 10,369,203 13,270,694
Long-term debt, less current portion (Note 4)............................... 3,319,709 2,056,766
Deferred income taxes (Note 6).............................................. 2,769,000 3,140,000
----------- -----------
Total liabilities.................................................. 16,457,912 18,467,460
----------- -----------
Commitments and contingencies (Note 7)...................................... -- --
Stockholders' equity (Note 5):
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 7,675,535 shares in 1996 and 7,771,167 shares in 1997....... 76,756 77,712
Additional paid-in capital................................................ 49,911,050 50,887,737
Retained earnings......................................................... 19,713,477 30,391,371
----------- -----------
Total stockholders' equity......................................... 69,701,283 81,356,820
----------- -----------
$86,159,195 $99,824,280
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 27
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales............................................ $100,591,878 $104,482,025 $140,502,420
Cost of sales (Note 9)............................... 82,970,922 84,327,787 112,553,611
------------ ------------ ------------
Gross profit....................................... 17,620,956 20,154,238 27,948,809
------------ ------------ ------------
Operating expenses................................... 7,682,252 8,110,025 10,721,536
------------ ------------ ------------
Earnings from operations........................ 9,938,704 12,044,213 17,227,273
------------ ------------ ------------
Other (expense) income:
Interest expense................................... (964,099) (364,992) (258,678)
Interest income.................................... 296,733 484,710 353,435
Other, net......................................... 28,332 9,108 15,864
------------ ------------ ------------
Total other (expense) income.................... (639,034) 128,826 110,621
------------ ------------ ------------
Earnings before income taxes.................... 9,299,670 12,173,039 17,337,894
Income taxes (Note 6)................................ 3,720,000 4,725,000 6,660,000
------------ ------------ ------------
Net earnings....................................... $ 5,579,670 $ 7,448,039 $ 10,677,894
============ ============ ============
Net earnings per share............................... $ 0.82 $ 0.96 $ 1.37
============ ============ ============
Weighted average common shares and common equivalents
outstanding........................................ 6,831,590 7,762,529 7,821,600
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 28
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at October 31, 1994.......... 5,787,416 $57,874 $19,915,736 $ 6,685,768 $ 26,659,378
Issuance of common stock on exercise
of stock options................... 97,660 977 863,229 -- 864,206
Sale of 1,770,000 shares of common
stock, net of applicable costs..... 1,770,000 17,700 28,932,916 -- 28,950,616
Net earnings......................... -- -- -- 5,579,670 5,579,670
--------- ------- ----------- ----------- -----------
Balance at October 31, 1995.......... 7,655,076 76,551 49,711,881 12,265,438 62,053,870
Issuance of common stock on exercise
of stock options................... 20,459 205 199,169 -- 199,374
Net earnings......................... -- -- -- 7,448,039 7,448,039
--------- ------- ----------- ----------- -----------
Balance at October 31, 1996.......... 7,675,535 76,756 49,911,050 19,713,477 69,701,283
Issuance of common stock on exercise
of stock options................... 95,632 956 976,687 -- 977,643
Net earnings......................... -- -- -- 10,677,894 10,677,894
--------- ------- ----------- ----------- -----------
Balance at October 31, 1997.......... 7,771,167 $77,712 $50,887,737 $30,391,371 $ 81,356,820
========= ======= =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 29
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings....................................... $ 5,579,670 $ 7,448,039 $ 10,677,894
Adjustments to reconcile net earnings to net
Cash provided by operating activities:
Depreciation and amortization................... 4,430,382 5,402,314 6,376,824
Deferred income tax provision................... 398,000 300,000 50,000
Changes in assets and liabilities:
(Increase) in accounts receivable............... (3,991,946) (101,148) (5,529,647)
(Increase) decrease in inventories.............. (1,911,395) (1,059,097) 3,744,091
Decrease (increase) in prepaid expenses......... 27,087 (102,139) (101,785)
Decrease in other assets........................ 180,000 183,000 53,334
(Decrease) increase in accounts payable,
accounts payable to related parties and other
accrued expenses.............................. (1,201,710) (1,077,681) 3,987,089
Increase (decrease) in income taxes payable..... 117,372 1,864,189 (733,418)
------------ ------------ ------------
Net cash provided by operating activities.......... 3,627,460 12,857,477 18,524,382
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property, plant and equipment......... (13,375,729) (11,117,856) (22,544,145)
(Purchases) sales of marketable securities......... (8,700,000) (2,000,000) 3,950,000
------------ ------------ ------------
Net cash (used in) investing activities............ (22,075,729) (13,117,856) (18,594,145)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock............. 29,814,823 199,374 977,643
Proceeds from issuance of long term debt........... 2,769,000 -- --
Net (payments) borrowings under revolving line of
credit.......................................... (9,410,000) -- 750,000
Repayment of long term debt........................ (1,278,504) (1,274,602) (1,835,123)
------------ ------------ ------------
Net cash provided by (used in) financing
activities...................................... 21,895,319 (1,075,228) (107,480)
------------ ------------ ------------
Net increase (decrease) in cash.................... 3,447,050 (1,335,607) (177,243)
Cash at beginning of year............................ 481,135 3,928,185 2,592,578
------------ ------------ ------------
Cash at end of year.................................. $ 3,928,185 $ 2,592,578 $ 2,415,335
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest (net of amounts capitalized)........... $ 1,008,983 $ 354,938 $ 269,004
Income taxes.................................... 2,960,500 2,437,500 7,200,418
Non-cash financing activities:
Assignment of note payable...................... -- -- 530,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 30
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of Special
Devices, Incorporated, a Delaware corporation, and its wholly owned subsidiary
together collectively described as "the Company". All material intercompany
accounts and transactions have been eliminated.
Revenue Recognition
The Company has two operating divisions. The Automotive Products Division,
organized in 1989, manufactures products, to customer specifications, under
standard purchase orders. Sales are recognized when products are shipped. The
Aerospace Division manufactures products under fixed price, long-term contracts
directly for the Department of Defense, their prime contractors and commercial
companies. The contracts vary in length, but are generally completed within 12
to 24 months. Sales under long-term production contracts are recognized as units
are shipped or, in some cases, when accepted by the customer; sales under
significant engineering contracts are recognized under the percentage completion
method.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities and the reported amounts of
income and expenses for the periods presented. Actual results could differ from
those estimates.
Fair Value of Financial Instruments
The carrying amounts of the Company's cash, trade accounts receivable and
all current liabilities approximate the fair values due to the relatively short
maturities of these instruments.
Marketable securities consist of a tax-exempt mutual fund which is stated
at fair value based on market quotes. Accordingly, the cost basis of the
securities approximates the fair value.
The carrying amounts of the Company's long-term debt approximate the fair
value due to variable interest rates which approximate market rates associated
with the notes.
Inventories
Inventories, other than inventoried costs relating to long-term contracts,
are stated at the lower of cost (principally first-in, first-out) or market.
Inventoried costs relating to long-term contracts and programs are stated at the
actual production cost, including overhead incurred to date reduced by amounts
identified with revenue recognized on units delivered. Inventoried costs
relating to long-term contracts are further reduced by any amounts in excess of
estimated realizable value. The costs attributed to units delivered under
long-term contracts are based on the estimated average cost of all units
expected to be produced under existing contracts.
In accordance with industry practice, inventories are classified as current
assets although inventories may include amounts relating to contracts and
programs having production cycles longer than one year.
29
<PAGE> 31
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Property and Equipment
Property and equipment are recorded at cost. The cost of maintenance and
repairs is charged against results of operations as incurred. Depreciation is
charged against results of operations using the straight-line method over the
estimated service lives of the related assets. The principal lives used in
determining depreciation rates of various assets are as follows:
<TABLE>
<S> <C>
Building.......................................... 25 years
Machinery and equipment........................... 7.5 years
Furniture and fixtures............................ 5 years
Transportation equipment.......................... 4 years
</TABLE>
Leasehold improvements are amortized over the lesser of 10 years or the
remaining life of the lease. Upon sale or retirement of the depreciable
property, the related cost and accumulated depreciation are eliminated from the
accounts and gains or losses are reflected in earnings.
Interest costs incurred during the period of construction of plant and
equipment are capitalized. The interest costs capitalized in fiscal 1997 were
$101,000, and no amounts of interest were capitalized in fiscal 1996.
Net Earnings Per Share
Net earnings per share is computed by dividing net earnings by the weighted
average number of common stock and dilutive common stock equivalents outstanding
during the period.
Income Taxes
The Company accounts for income taxes under the asset and liability method
of accounting for income taxes whereby deferred income taxes are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date.
Impairment of Long-Lived Assets
The Company adopted Statement of Financial Accounting Standards No. 121
(SFAS No. 121) "Accounting for the Impairment of Long-Lived Assets" during 1997.
SFAS No. 121 establishes accounting standards for the impairment of longlived
assets, certain identifiable intangibles and goodwill related to those assets to
be held and used and for longlived assets and certain identifiable intangibles
to be disposed of. Adoption of the new pronouncement had no impact on the
financial statements.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require, companies to record
compensation costs for stock-based employee compensation plans at fair value.
The Company has chosen to continue to account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock.
30
<PAGE> 32
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACCOUNTS RECEIVABLE
Accounts receivable are as follows:
<TABLE>
<CAPTION>
OCTOBER 31
---------------------------
1996 1997
----------- -----------
<S> <C> <C>
Commercial customers...................... $ 6,388,176 $11,897,328
U.S. Government........................... 2,299,218 1,295,349
U.S. Government contractors............... 4,131,795 5,044,326
----------- -----------
12,819,189 18,237,003
Less allowance for doubtful accounts.... 155,959 44,126
----------- -----------
$12,663,230 $18,192,877
=========== ===========
</TABLE>
The activity relating to the allowance for doubtful accounts was as
follows:
<TABLE>
<S> <C>
Balance at October 31, 1994.............................. $ 299,004
Adjustments to reserve................................... (82,400)
Write-offs............................................... --
---------
Balance at October 31, 1995.............................. 216,604
Additions charged to expense............................. 81,000
Write-offs and other..................................... (141,645)
---------
Balance at October 31, 1996.............................. 155,959
Additions charged at expense............................. 208,000
Write-offs............................................... (319,833)
---------
Balance at October 31, 1997.............................. $ 44,126
=========
</TABLE>
3. INVENTORIES
Inventories and inventoried costs relating to long-term contracts are
classified as follows:
<TABLE>
<CAPTION>
OCTOBER 31
---------------------------
1996 1997
----------- -----------
<S> <C> <C>
Raw materials and component parts......... $ 6,167,337 $ 4,840,722
Work in process........................... 7,278,149 6,234,248
Finished goods............................ 1,020,337 920,809
Inventoried costs relating to long term
contracts, net of amounts attributed to
revenues recognized to date............. 3,835,468 2,558,835
----------- -----------
18,301,291 14,554,614
Less progress payments related to
long-term contracts..................... 2,586 --
----------- -----------
$18,298,705 $14,554,614
=========== ===========
</TABLE>
Inventoried costs relate to costs of products 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.
31
<PAGE> 33
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------------
1996 1997
---------- ----------
<S> <C> <C>
Bank term notes............................. $2,164,886 $ 530,530
Bank revolver............................... -- 750,000
Finance company............................. 2,392,295 1,713,641
Other notes................................. 59,501 7,388
---------- ----------
4,616,682 3,001,559
Less current portion................... 1,296,973 944,793
---------- ----------
$3,319,709 $2,056,766
========== ==========
</TABLE>
During the fiscal year ended October 31, 1996, the Company maintained a
credit agreement (the "Old Credit Agreement") with a bank under which the
Company had in place a revolving credit facility and a $5,000,000, five-year
term loan. In December 1996, the Company signed a new credit agreement (the
"Credit Agreement") with a different bank. The outstanding balances under the
Old Credit Agreement were paid at that time. The Credit Agreement expires May 1,
1998, and any borrowings under the Credit Agreement bear interest at the bank's
Reference Rate less .25 percentage point, or at the Company's option, at LIBOR
plus .75 percentage point. 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 $500,000 and for
standby letters of credit not-to-exceed $6,000,000, which reduce the amount
available under the agreement. 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 the bank's long-term interest rate in
effect at the time of such conversion.
Substantially all of the Company's assets were pledged as collateral under
the former Credit Agreement, and are also pledged as collateral under the New
Agreement, except as noted below. In addition, the New Agreement contains
covenants that include requirements to meet certain financial tests and ratios
(including minimum current ratio, debt service ratio, minimum tangible net
worth, maximum debt ratio and maintenance of profitable annual operations) and
restrictions and limitations on the sale of assets, new borrowings, mergers and
purchases of stock. The Company was in compliance with these provisions at
October 31, 1997.
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 October 31,
1997, was $530,500. The loan is being amortized with monthly payments of
approximately $7,800, including interest, adjusted monthly, at 1.9% over the
bank's LIBOR rate (5.7% at October 31, 1997). Any unpaid principal is due on
August 1, 2001.
A finance company financed the purchase of an aircraft in November 1994.
The note is being amortized over 12 years, with interest at 5.9% through
November, 1996, and with interest at prime (8.5% at October 31, 1997) plus
one-half percent through November, 2006, when the note will be fully amortized.
Monthly payments were approximately $20,300 through November, 1996, and are
currently approximately $23,100. The unpaid balance at October 31, 1997 was
$1,713,641. The Company purchased a second airplane in December 1994, which was
also financed by a note secured by the airplane. In May 1997, the Company
entered into an agreement with its chairman whereby the chairman assumed
responsibility for the note, and agreed to buy the airplane at its then fair
market value. The Company is liable to Beechcraft Acceptance
32
<PAGE> 34
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
under the note in the event the chairman defaults. The book value of the
aircraft ($523,000) and the note ($530,000) were removed from the Company's
books in May 1997 to reflect this sale and transfer of liability. The note bears
interest at prime plus one-half percent through December 2004, at which time the
note will be fully amortized. Monthly payments are approximately $7,100, and the
unpaid balance at October 31, 1997 was $501,000.
The scheduled principal payments of long-term debt outstanding at October
31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING OCTOBER 31
-------------------------------------------------
<S> <C>
1998...................................... 944,793
1999...................................... 210,000
2000...................................... 238,900
2001...................................... 253,500
2002...................................... 264,100
Thereafter................................ $1,090,300
==========
</TABLE>
5. STOCKHOLDERS' EQUITY
Preferred Stock
The Company is authorized to issue 2,000,000 shares of Preferred Stock,
$.01 par value. Shares of Preferred Stock may be issued from time to time in one
or more series and the Board of Directors, without further stockholder approval,
is authorized to fix the rights and terms, including dividends and liquidation
preferences and any other rights to each such series of Preferred Stock. At
October 31, 1996 and 1997, no shares of Preferred Stock were issued or
outstanding.
Stock Options and Grants
During 1991, the Company adopted its Stock Incentive Plan (the Plan). The
Plan is administered by a committee of the Board of Directors which determines
the amount, type, vesting period, terms and conditions of the awards. The Plan
provides for the issuance of restricted stock, grants of incentive and
non-qualified stock options, stock appreciation rights and performance share
awards at amounts which approximate current market value on the date of grant.
The Company has reserved 560,000 shares of common stock 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.
Prior to fiscal year ended October 31, 1996, all options granted under the
Plan vest ratably over a 3-year period. Options granted under the Plan during
fiscal years ended October 31, 1996 and 1997 vest ratably over 5 years from the
grant date.
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, 130,000 shares were
granted which vest ratably over 5 years from the grant date, and 312,000 shares
vest ratably over 8 years from the grant date. The 8 year 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 earning
levels. The options were granted at the fair market value of the stock on the
grant date, which was $17.00 per share.
33
<PAGE> 35
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
These grants were approved by the stockholders at the Company's Annual Meeting
in March 1997. At October 31, 1997, 58,000 shares were vested under this special
grant.
The Company adopted the requirements of Statements of Financial Accounting
Standards No. 123 (SFAS No. 123), "Accounting for Stock Based Compensation" in
1997. As permitted by SFAS No. 123, the Company has elected to account for
compensation expense pursuant to the provisions of Accounting Principles Board
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." In
accordance with APB 25, no compensation expense has been charged to earnings in
any of the three years ended October 31, 1997.
Had compensation cost for the Company's stock-based compensation plan been
determined consistent with SFAS No. 123, the Company's net income and per share
would have been reduced to the proforma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997
---------- -----------
<S> <C> <C> <C>
Net Income................ As Reported $7,448,039 $10,677,894
Pro forma 6,188,397 9,682,306
Earning per share......... As Reported $ 0.96 $ 1.37
Pro forma $ 0.80 $ 1.24
</TABLE>
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1996 and 1997, respectively: risk-free interest rates of 5.70%
and 6.12%; dividend yields of 0% and 0%; volatility factors of the expected
market price of the Company's common stock of 47.33% and 47.29% and a
weighted-average expected life of the option of 6 years.
34
<PAGE> 36
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock option activity for the three years ended October 31, 1997 was as
follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
1991 STOCK AVERAGE AVERAGE
OPTION PLAN EXERCISE PRICE SPECIAL GRANT EXERCISE PRICE
----------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Shares authorized......................... 560,000 442,000
======= =======
Shares under option:
Outstanding at October 31, 1994........... 323,334 --
Granted................................. 25,500 $14.93 -- $ --
Exercised............................... 97,660 $ 9.55 -- $ --
Forfeited............................... 3,667 $ 9.27 -- $ --
Shares under option:
Outstanding at October 31, 1995........... 247,507 --
Granted................................. 117,000 $17.63 -- $ --
Exercised............................... 20,460 $ 9.75 -- $ --
Forfeited............................... 24,337 $11.54 -- $ --
Shares under option:
Outstanding at October 31, 1996........... 319,710 --
Granted................................. 33,000 $17.07 442,000 $17.00
Exercised............................... 95,632 $10.85 -- $ --
Forfeited............................... 10,672 $12.54 -- $ --
Outstanding at October 31, 1997........... 246,406 442,000
Weighted average fair value of options
granted during the year:
1996.................................... $ 9.38 $ --
1997.................................... $ 9.19 $ 9.16
Options exercisable:
At October 31, 1995..................... 112,652 --
At October 31, 1996..................... 149,200 --
At October 31, 1997..................... 129,209 58,000
</TABLE>
The following table summarizes information about stock options outstanding
at October 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED AVERAGE -------------------------------------
NUMBER ---------------------- NUMBER WEIGHTED AVERAGE
OUTSTANDING AT REMAINING EXERCISE EXERCISABLE AT EXERCISE
RANGE OF EXERCISE PRICE OCTOBER 31, 1997 LIFE PRICE OCTOBER 31, 1997 PRICE
- ------------------------- ---------------- --------- -------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 6.50 - 9.50 50,800 4.88 $ 9.20 50,800 $ 9.20
$10.00 - 16.75 55,906 6.93 $10.21 53,239 $10.00
$17.00 - 18.00 581,700 8.87 $17.14 83,170 $17.20
------- -------
688,406 8.42 $16.00 187,209 $12.98
======= =======
</TABLE>
35
<PAGE> 37
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
The provisions for income taxes consist of the following for each
respective fiscal year ended October 31:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal.............................. $2,570,000 $3,558,000 $5,343,000
State................................ 752,000 867,000 1,267,000
---------- ---------- ----------
$3,322,000 $4,425,000 $6,610,000
========== ========== ==========
Deferred:
Federal.............................. $ 404,000 $ 279,000 $ 77,000
State................................ (6,000) 21,000 (27,000)
---------- ---------- ----------
$ 398,000 $ 300,000 $ 50,000
========== ========== ==========
Total
Federal.............................. $2,974,000 $3,837,000 $5,420,000
State................................ 746,000 888,000 1,240,000
---------- ---------- ----------
$3,720,000 $4,725,000 $6,660,000
========== ========== ==========
</TABLE>
Temporary differences which give rise to deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
OCTOBER 31, 1996 OCTOBER 31, 1997
---------------- ----------------
<S> <C> <C>
Deferred tax liabilities-non-current:
Depreciation........................ $2,769,000 $3,140,000
---------- ----------
Deferred tax assets-current:
Allowance for doubtful accounts..... 60,000 22,000
Inventory........................... 264,000 506,000
Vacation............................ 153,000 445,000
State taxes......................... 193,000 18,000
---------- ----------
670,000 991,000
---------- ----------
Net deferred tax liability............ $2,099,000 $2,149,000
========== ==========
</TABLE>
Management believes that it is more likely, than not, that future
operations will generate sufficient taxable income to realize the deferred tax
assets.
The provisions for income taxes for the years ended October 31, 1995, 1996
and 1997 differ from the provisions that would have resulted by applying the
Federal statutory rates during such periods to the earnings before income taxes.
The reasons for these differences are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Income taxes at Federal rate... $3,162,000 $4,139,000 $5,522,000
State income taxes............. 492,000 675,000 806,000
Other.......................... 66,000 (89,000) 332,000
---------- ---------- ----------
$3,720,000 $4,725,000 $6,660,000
========== ========== ==========
</TABLE>
36
<PAGE> 38
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
LEASES
Land and Buildings
The Company is obligated under a month-to-month operating lease for the
property on which the Company's Newhall facility is located. This lease is with
a partnership which is composed of certain stockholders of the Company, one of
which is an officer of the company. Monthly rental expense as of October 31,
1997 was $43,700 per month with annual increases equal to any changes in the
Consumer Price Index.
In May 1997, the Company signed a 7-year lease for an approximate 25,000
square foot building in Moorpark, California, for its glass-sealing division.
Monthly rental expense as of October 31, 1997 was $11,600 per month with annual
increases equal to the change in the Consumer Price Index.
Other Operating Leases
The Company also has several non-cancelable operating leases, primarily for
transportation equipment and temporary office units, that expire through August,
1998. Rental expenses for these operating leases for each of the fiscal years
ended October 31, 1995, 1996, and 1997 were $99,100, $114,900, and $286,000
respectively.
Future minimum lease payments under non-cancelable operating leases are as
follows:
<TABLE>
<S> <C>
Year ending October 31:
1998........................................ $65,400
1999........................................ 31,000
-------
Total minimum lease payments........... $96,400
=======
</TABLE>
OTHER
The Company had commitments at October 31, 1997, to acquire capital
equipment, at cost aggregating approximately $4,500,000, 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 $21,000,000 of
which $9,440,000 had been spent at October 31, 1997 and is included in
construction in progress in the accompanying consolidated balance sheet. The
Company anticipates spending approximately $12,000,000 in fiscal year 1998 and
approximately $3,000,000 in fiscal year 1999 to complete this project. The
Company plans to sell two commercial lots being developed as part of this
project, the proceed of which are expected to reduce the net project cost to
approximately $21,000,000. The Company has committed to complete the building
construction, the total cost of which is estimated to be approximately
$12,000,000.
Litigation
The Company is a defendant in pending claims and lawsuits arising in the
normal course of business. In the opinion of the Company's management, after
consultation with counsel, these matters are not expected to have a material
adverse effect upon the financial statements taken as a whole.
37
<PAGE> 39
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE BENEFIT PLANS
The Company supports a 401(k) plan that provides eligible employees the
opportunity to make tax deferred contributions to a retirement trust account in
amounts up to 15% of their gross wages. The Company can elect to make matching
contributions in amounts that can change from year to year. During the last
three fiscal years the Company matched 30% of the employees deferral up to the
first 5% of each participating employee's deferral. Employees vest immediately
in the Company's matching contributions. The Company's matching contributions
aggregated $135,900, $221,400 and $242,300 in 1995, 1996, and 1997,
respectively.
9. RELATED PARTY TRANSACTIONS
The Company purchased materials from two corporations owned by one of its
principal stockholders. During the years ended October 31, 1995, 1996 and 1997,
$1,247,400, $2,361,500, and $3,460,100 respectively, of materials were purchased
from such stockholder's corporations. At October 31, 1996 and 1997, $229,400 and
$381,200 respectively, were owed to the corporations owned by this principal
stockholder.
During 1990, the same principal stockholder of the Company acquired a
significant stockholding in the parent company of a corporation that supplies
materials to the Company. During the years ended October 31, 1995, 1996 and
1997, $12,791,600, $12,768,500, and $11,464,400 respectively, of materials were
purchased from such corporation. At October 31, 1996 and 1997, $2,065,700, and
$1,090,500 respectively, was due to this corporation. In January 1997, the
principal stockholder sold his interest in this corporation.
10. MAJOR CUSTOMERS
Sales to customers, in excess of 10% of net sales during any of the past
three years, as a percentage of net sales, were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Automotive:
TRW, Incorporated.................................... 59.9% 59.7% 49.1%
Autoliv.............................................. -- -- 20.6%
</TABLE>
38
<PAGE> 40
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for 1996 and 1997 (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------
APRIL
JANUARY 28 28 JULY 28 OCTOBER 31 FULL YEAR
------------ ------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
1996
Net sales........... $ 22,541 $24,222 $ 25,631 $32,088 $ 104,482
Gross profit........ 3,958 4,504 5,238 6,454 20,154
Earnings from
operations........ 2,213 2,418 3,491 3,922 12,044
Net earnings........ 1,360 1,526 2,148 2,414 7,448
Net earnings per
share............. .18 .20 .28 .31 .96
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------
FEBRUARY 2 MAY 4 AUGUST 3 OCTOBER 31 FULL YEAR
------------ ------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
1997
Net sales........... $ 27,537 $32,792 $ 36,970 $43,203 $ 140,502
Gross profit........ 5,297 6,391 7,094 9,167 27,949
Earnings from opera-
tions............. 3,071 3,932 4,543 5,681 17,227
Net earnings........ 1,914 2,462 2,795 3,507 10,678
Net earnings per
share............. .25 .32 .36 .44 1.37
</TABLE>
12. INDUSTRY SEGMENT INFORMATION
The Company operates primarily in two industry segments -- aerospace and
automotive. In the aerospace industry, the Company produces pyrotechnic devices
under long-term contracts for the Department of Defense and their prime
contractors. In the automotive industry, the Company produces air bag initiators
under trade terms for commercial companies. The Company has a multi-year
agreement to supply its largest customer that expires in 2000 and a multi-year
agreement to supply its second largest customer that expires in 1999.
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 operating
division. In fiscal years 1995 and 1996 the allocation was made approximately
equally to each division. In fiscal year 1997, the allocation was made at 35% to
the Aerospace Division and 65% to the Automotive Products Division. If the
allocation had been made equally, Aerospace Division operating income would have
been reduced by $581,000, and Automotive Products Division operating income
would have increased by $581,000. Administrative operating expenses amounted to
$2,550,000, $2,704,000 and $3,874,000 in fiscal years 1995, 1996 and 1997,
respectively.
The Company operates entirely within the United States and has no
intersegment sales. Corporate assets are primarily cash, prepaids and other
assets.
39
<PAGE> 41
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Financial information for these segments is summarized in the table below:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales:
Automotive Products.................... $ 71,252,937 $ 80,235,225 $111,930,660
Aerospace.............................. 29,338,941 24,246,800 28,571,760
------------ ------------ ------------
Total net sales................ $100,591,878 $104,482,025 $140,502,420
============ ============ ============
Earnings from operations:
Automotive Products.................... $ 4,600,013 $ 8,244,332 $ 13,648,127
Aerospace.............................. 5,338,691 3,799,881 3,579,146
------------ ------------ ------------
Total earnings from
operations................... $ 9,938,704 $ 12,044,213 $ 17,227,273
============ ============ ============
Depreciation and amortization:
Automotive Products.................... $ 3,560,159 $ 4,623,005 $ 5,593,108
Aerospace.............................. 400,504 429,809 518,188
Corporate.............................. 469,719 349,500 265,528
------------ ------------ ------------
Total depreciation and
amortization................. $ 4,430,382 $ 5,402,314 $ 6,376,824
============ ============ ============
Capital expenditures:
Automotive Products.................... $ 10,234,185 $ 10,511,449 $ 10,911,242
Aerospace.............................. 183,375 346,367 680,962
Corporate.............................. 2,958,169 260,040 10,421,941
------------ ------------ ------------
Total capital expenditures..... $ 13,375,729 $ 11,117,856 $ 22,014,145
============ ============ ============
Identifiable assets:
Automotive Products.................... $ 48,213,492 $ 54,658,384 $ 53,996,681
Aerospace.............................. 13,691,696 14,445,201 18,422,308
Corporate.............................. 16,715,668 17,055,610 27,405,291
------------ ------------ ------------
Total identifiable assets...... $ 78,620,856 $ 86,159,195 $ 99,824,280
============ ============ ============
</TABLE>
40
<PAGE> 42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be contained in the Company's
proxy statement to be filed within 120 days after the end of the Company's most
recent fiscal year and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be contained in the Company's
proxy statement to be filed within 120 days after the fiscal year end and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in the Company's
proxy statement to be filed within 120 days after the fiscal year end and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in the Company's
proxy statement to be filed within 120 days after the fiscal year end and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
<TABLE>
<CAPTION>
PAGE REFERENCE
FORM 10-K
--------------
<S> <C> <C>
(a)(1) FINANCIAL STATEMENTS
Independent Auditors' Report........................................ 24
Consolidated Balance Sheets at October 31, 1996 and 1997............ 25
Consolidated Statements of Earnings for each of the three years
ended October 31, 1997............................................ 26
Consolidated Statements of Stockholders' Equity for each of the
three years ended October 31, 1997................................ 27
Consolidated Statements of Cash Flows for each of the three years
ended October 31, 1997............................................ 28
Notes to Consolidated Financial Statements.......................... 29
</TABLE>
41
<PAGE> 43
<TABLE>
<S> <C>
(a)(2) FINANCIAL STATEMENT SCHEDULES
All schedules for which provision is made in the applicable accounting
regulations of Securities and Exchange Commission are not required under the
applicable instructions or required information is included in the Consolidated
Financial Statements and Notes thereto they are inapplicable and are therefore
omitted.
(a)(3) EXHIBITS
(1) 3.1 Certificate of Incorporation of the Registrant.
(1) 3.2 Agreement of Merger.
(1) 3.3 Bylaws of the Registrant.
(2) 3.4 Certificate of Amendment dated May 6, 1992 to the Certificate of
Incorporation of the Registrant.
(1) 4.1 Specimen Common Stock Certificate.
(1)10.1 Lease dated May 1, 1991 between the Registrant and Placerita Land and
Farming Company.
(1)10.2 Letter Agreement dated June 8, 1990 between the Registrant and Hermetic
Seal Corporation.
(1)10.3 Master Purchase Agreement, dated May 15, 1990, between the Registrant
and TRW Inc. (confidential treatment granted as to part).
(1)10.4 Technology License Agreement dated November 7, 1990 between the
Registrant and Davey Bickford Smith.
(3)10.5 Amended and Restated 1991 Stock Incentive Plan
(1)10.6 Special Devices, Inc. 401(k) Plan.
(3)10.7 Third Amendment to Credit Agreement dated September 7, 1994 between
Registrant and Bank of California.
(3)10.8 Fourth Amendment to Credit Agreement dated October 5, 1994 between
Registrant and Bank of California.
(3)10.9 Fifth Amendment to Credit Agreement dated January 20, 1995 between
Registrant and Bank of California.
(3)10.11 First Amendment to Master Purchase Agreement, dated February 25, 1993
between the Registrant and TRW, Inc. (confidential treatment granted as
to part).
(4)10.12 Letter Agreement, dated November 30, 1994 between the Registrant and
Hermetic Seal Corporation (confidential treatment granted as to part).
(4)10.13 Employment Agreement dated September 7, 1994, between the Registrant,
Scot, Inc. and Samuel Levin.
(3)10.14 Promissory Note dated November 30, 1994 in favor of Beechcraft
Acceptance Corporation Inc.
(3)10.15 Security Agreement dated November 30, 1994 in favor of Beechcraft
Acceptance Corporation, Inc.
(3)10.16 Airplane Purchase Order dated December 1, 1994 with United Beechcraft,
Inc.
(5)10.17 Second Amendment to Master Purchase Agreement, dated March 8, 1995,
between the Registrant and TRW, Inc. (confidential treatment granted as
to part).
(6)10.18 Sixth Amendment to Credit Agreement dated October 31, 1995 between the
Registrant and Bank of California.
(6)10.19 Supply Agreement dated as of November 14, 1995 between the Registrant
and Autoliv International, Inc. (confidential treatment requested as to
part).
</TABLE>
42
<PAGE> 44
<TABLE>
<S> <C>
(7)10.20 Credit Agreement, dated December 12, 1996, between Registrant and Bank
of America.
(7)10.21 Development Agreement, dated August 28, 1996, between Registrant and
the City of Moorpark.
10.22 Purchase Agreement, dated September 30, 1997, between the Registrant
and Hermetic Seal Corporation (confidential treatment requested as to
part).
11.1 Statement Re: Computation of per share earnings.
(3)21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG Peat Marwick LLP
</TABLE>
- ---------------
(1) Previously filed as an exhibit to Registration Statement on Form S-1 (File
No. 33-40903) and incorporated herein by reference.
(2) Previously filed as an exhibit to Annual Report on Form 10-K for the fiscal
year ended October 31, 1992 and incorporated herein by reference.
(3) Previously filed as an exhibit to Annual Report on Form 10-K for the fiscal
year ended October 31, 1994 and incorporated herein by reference.
(4) Previously filed as an exhibit to Amendment No. 1 on Form 10-K/A for the
fiscal year ended October 31, 1994 and incorporated herein by reference.
(5) Previously filed as an exhibit to Registration Statement on Form S-1 (File
No. 33-89902) and incorporated herein by reference.
(6) Previously filed as an exhibit to Annual Report on Form 10-K for the fiscal
year ended October 31, 1995 and incorporated herein by reference.
(7) Previously filed as an exhibit to Annual Report on Form 10-K for the fiscal
year ended October 31, 1996 and incorporated herein by reference.
(b) REPORTS ON FORM 8-K
None.
43
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Newhall, State of California, on January 28, 1998.
SPECIAL DEVICES, INCORPORATED
By: /s/ THOMAS F. TREINEN
------------------------------------
Its: Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------ -----------------
<C> <S> <C>
/s/ THOMAS F. TREINEN Director, Chairman and January 28, 1998
- --------------------------------------------- President (Principal
Thomas F. Treinen Executive Officer)
/s/ DONALD A. BENDIX Director January 28, 1998
- ---------------------------------------------
Donald A. Bendix
/s/ JOHN M. CUTHBERT Director and President, January 28, 1998
- --------------------------------------------- Automotive Products Division
John M. Cuthbert
/s/ NELSON HOFFMAN Director January 28, 1998
- ---------------------------------------------
Nelson Hoffman
/s/ SAMUEL LEVIN Director and President, January 28, 1998
- --------------------------------------------- Scot, Inc.
Samuel Levin
/s/ ROBERT S. RITCHIE Director and Vice President, January 28, 1998
- --------------------------------------------- Aerospace Division
Robert S. Ritchie
/s/ JACK B. WATSON Director and Vice President, January 28, 1998
- --------------------------------------------- Automotive Products Division
Jack B. Watson
/s/ JOHN T. VINKE Vice President -- Finance January 28, 1998
- --------------------------------------------- and Chief Financial Officer
John T. Vinke (Principal Financial and
Accounting Officer)
</TABLE>
44
<PAGE> 1
EXHIBIT 10.22
ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE
BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
BY SPECIAL DEVICES, INCORPORATED, AS PART OF A REQUEST FOR CONFIDENTIAL
TREATMENT.
This Purchase Agreement ("Agreement") is entered into on this 30th day of
September, 1997 by and between SPECIAL DEVICES, INCORPORATED Automotive
Products Division ("SDI") ("Buyer") and HERMETIC SEAL CORPORATION ("HSC")
(Seller) for the purpose of establishing the terms and conditions on which
Buyer will purchase from Seller header sub-assemblies for automotive airbag
initiators. This Agreement applies to only the following SDI part numbers and
any revisions on these headers:
105308- Header Sub-assembly, unplated (CC)
105363- Header Sub-assembly, plated (CC)
150900- Glass Header Sub-assembly, unplated (AGH)
150901- Glass Header Sub-assembly, plated (AGH)
SK4289- Glass Header Sub-assembly, plated (AGI)
A. Provisions related to CC and AGH products:
1. During the term of this agreement, and subject to the cumulative
total of customer orders, Buyer agrees to purchase from Seller all CC
and all AGH Headers, under the following provisions:
a) Buyer will purchase a minimum of ** units per week, or in the
event that Buyer's total manufacturing requirements are less
than ** units per week, then Buyer will purchase from Seller all
CC and all AGH Headers, to support customer orders.
b) If cumulative manufacturing requirements of Buyer exceed **
units per week, Buyer may purchase externally or internally
manufactured headers, up to but not to exceed a maximum of **
units per week.
c) The allocation of units between Seller and other sources will be
measured on a monthly basis. Buyer agrees to allow Seller to
review the allocation upon reasonable notice and in sufficient
detail to verify compliance with this agreement.
d) The above purchase commitments are contingent on Seller
maintaining adequate quality levels and reasonable delivery
requirements. If Seller is unable to meet Buyer's adequate
quality or reasonable delivery requirements Buyer may purchase
more headers from sources other than Seller. Delivery of parts
shall be made only as authorized by Buyer in individual purchase
orders under this Agreement.
<PAGE> 2
ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE
BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
BY SPECIAL DEVICES, INCORPORATED, AS PART OF A REQUEST FOR CONFIDENTIAL
TREATMENT.
2. Price schedule is as follows:
<TABLE>
<S> <C>
10/01/97 to 12/31/98 $** each
01/01/99 to 12/31/99 $** each
01/01/00 to 12/31/00 $** each
Gold plating at 100 microinches is additional $** each.
</TABLE>
3. The above pricing is subject adjustment as follows:
a) If Buyer should receive a "Qualified Competing Bid," as defined below,
that is greater than 10% less than Seller's then applicable pricing,
Buyer shall promptly notify Seller of the existence of a Qualified
Competing Bid and make information available to Seller for review at
Buyer's facility. Seller shall then have 10 business days (20 business
days in the event that SDI is the source of the Qualified Competing
Bid) to review the bid. During this period, Buyer will provide to
Seller such supporting information as may be reasonably requested by
Seller to assist in review of the Qualified Competing Bid. Upon
completion of Seller's review, Seller will be allowed to submit
revised pricing equal to 105% of the Qualified Competing Bid, which is
hereby agreed as acceptable pricing. If Seller submits such revised
pricing then all terms of this agreement shall remain in full force
and effect. If Seller should decline to submit such revised pricing
then this agreement is terminated.
b) For purposes of determining a Qualified Competing Bid from SDI,
itself, as an internal source of the CC or AGH products, a Qualified
Competing Bid is calculated as the total, actual SDI cost (including
all applicable overhead expenses, selling, general and administrative
expenses and an appropriate allocation of corporate expenses) divided
by the actual units produced by SDI to derive a unit cost. This unit
cost is then multiplied by 118% to determine a Qualified Competing
Bid. Buyer hereby agrees to allow Seller to review it's calculation of
a Qualified Competing Bid and to provide supporting detail analysis of
it's cost calculations. If a dispute should arise with respect to the
calculation, Buyer agrees to utilize a mutually agreed upon
independent nationally recognized accounting firm to resolve such
dispute.
<PAGE> 3
ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE
BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
BY SPECIAL DEVICES, INCORPORATED, AS PART OF A REQUEST FOR CONFIDENTIAL
TREATMENT.
c) A "Qualified Competing Bid" is defined as a quotation or proposal
received from 1) an external source 2) SDI, itself, as an
internal source. For an external source to be considered to have
submitted a valid "Qualified Competing Bid" the potential
external source must have prior experience in high-volume
production and have a Quality management system acceptable to
Buyer, and to Buyer's then existing Quality requirements.
d) A Qualified Competing Bid may only be submitted by Buyer to
Seller once within any twelve month period, and in no event
before October 1, 1998.
B. Provisions related to AGI products:
During the term of this Agreement, Buyer and its affiliates agree to
purchase from Seller a minimum of ** % of Buyer's domestic AGI headers. The
allocation of units between Seller and other sources will be determined on
a monthly basis. The above purchase commitments are contingent on Seller
maintaining adequate quality levels and reasonable delivery schedules. If
Seller is unable to meet Buyer's adequate quality or reasonable delivery
requirements Buyer may purchase more headers from sources other than
Seller. Delivery of parts shall be made only as authorized by Buyer in
individual purchase orders under this Agreement.
1. Price schedule is as follows:
10/01/97 to 12/31/98 $** each
01/01/99 to 12/31/99 $** each
01/01/00 to 12/31/00 $** each
2. The AGI product is not subject to the Qualified Competing bid
procedures as outlined in paragraph A.3 above.
C. Provisions relating to CC and AGH bodies:
1. Sellers agrees to sell to Buyer machined bodies in accordance with
Seller's specification (and as may be altered from time to time) at
a price of $** each.
2. Seller agrees to timely (at least 30 days notice) notify Buyer of
impending changes to the specification.
3. Buyer agrees to provide at least 12 weeks notice of shipping
requirements to Seller.
4. Buyer agrees that these bodies are for Buyer's internal used only and
may not be sold or transferred to any third party.
<PAGE> 4
5. Buyer acknowledges that Seller's specification and manufacturing
processes related to the header bodies is proprietary to Seller and
may not be disclosed to any third party. Buyer agrees to maintain such
information obtained by it as confidential and to take reasonable
efforts to assure that its employees maintain such confidentiality.
6. Buyer reserves the option to purchase Buyer designed machined bodies
from other qualified sources.
D. General provisions:
1. The term of this agreement is October 1, 1997 through December 31,
2000.
2. Buyer and Seller agree to quarterly meeting with top management of
each company to discuss market, production, quality and/or cost
issues related to these products.
3. Buyer and Seller agree to quarterly meetings with top technical
personnel of each company to discuss production and technical issues
related to these products.
4. All prices are F.O.B. Seller's plant in Rosemead, CA.
5. Terms of payment shall be Net 30 days. It is mutually agreed between
Buyer and Seller that shipments received prior to delivery schedule
designated on Buyer's purchase order release shall not be payable
until such time as items were originally scheduled for receipt to
Buyer's plant. It is also agreed that early payment will be made on
those items received at Buyer's plant prior to delivery schedule, as
designated on Buyer's purchase order, if Seller has received prior
authorization for early shipment from Buyer.
6. Buyer shall call for delivery of items specified within this
Agreement on Buyer's standard purchase order form. Purchase orders
placed under this Agreement shall reflect the following statement:
"This purchase order is subject to terms and conditions of Purchasing
Agreement dated September 30, 1997".
7. If HSC experiences material cost increases during the term of this
Agreement, SDI and HSC will negotiate in good faith changes to the
above prices in this Agreement. Any increases are subject to
competition clauses 3 (a).
8. Buyer and Seller agree to work cooperatively but not exclusively, in
developing new glass to metal sealed headers for automotive
applications.
<PAGE> 5
9. Buyer agrees that in the event of a need to cancel an outstanding
purchase order or to cease production on any configuration of
header, that Buyer will be responsible for raw material,
component stocks and work in process inventories for then
outstanding purchase orders plus twelve (12) weeks of production
at the average weekly rate for the quarter just prior to the
cancellation. At the option of Buyer, such inventories will be
built into completed units, shipped "as is" to Buyer or scrapped
and discarded.
10. This Agreement shall be interpreted in accordance with the laws
of the State of California.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representative.
SPECIAL DEVICES, INCORPORATED
By: /s/ THOMAS J. TREINEN
---------------------------------
Thomas J. Treinen
Vice President
Automotive Product Division
Date: 11/24/97
-------------------------------
HERMETIC SEAL CORPORATION
By: /s/ CHRISTOPHER BATEMAN
---------------------------------
Christopher Bateman
Vice President
Date: 12/10/97
-------------------------------
<PAGE> 1
EXHIBIT 11.1
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
-----------------------------------------
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
Primary Earnings per Common and Common Equivalent
Share:
Average Market Price................................ $ 18.82 $ 17.04 $ 19.02
Weighted average common shares outstanding
during period.................................... 6,722,354 7,655,075 7,697,522
Common Stock Equivalents:
Common Stock Options............................. 109,236 107,454 124,078
---------- ---------- ----------
Weighted average common and common
equivalent shares................................ 6,831,590 7,762,529 7,821,600
========== ========== ==========
Net earnings for period............................. $5,579,670 $7,448,039 $10,677,894
========== ========== ==========
Primary earnings per share.......................... $ .82 $ .96 $ 1.37
========== ========== ==========
</TABLE>
<PAGE> 1
EXHIBIT 23.1
[KPMG PEAT MARWICK LLP LETTERHEAD]
ACCOUNTANTS' CONSENT
The Board of Directors
Special Devices, Incorporated:
We consent to incorporation by reference in the registration statement
(No. 33-64536) on Form S-8 of Special Devices, Incorporated of our report
dated December 22, 1997, relating to the consolidated balance sheets of
Special Devices, Incorporated and subsidiaries as of October 31, 1997 and
1996, and related consolidated statements of earnings, retained earnings, and
cash flows for each of the years in the three-year period ended October 31,
1997, which report appears in the October 31, 1997 annual report on
Form 10-K of Special Devices, Incorporated.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Los Angeles, California
January 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT OCTOBER 31, 1997, AND THE CONSOLIDATED STATEMENT
OF EARNINGS FOR THE YEAR ENDED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<CASH> $2,415,335
<SECURITIES> 6,750,000
<RECEIVABLES> 18,192,877
<ALLOWANCES> (44,126)
<INVENTORY> 14,554,614
<CURRENT-ASSETS> 43,407,256
<PP&E> 80,242,848
<DEPRECIATION> 23,974,540
<TOTAL-ASSETS> 99,824,280
<CURRENT-LIABILITIES> 13,270,694
<BONDS> 0
0
0
<COMMON> 77,712
<OTHER-SE> 81,279,108
<TOTAL-LIABILITY-AND-EQUITY> 99,824,280
<SALES> 140,502,420
<TOTAL-REVENUES> 140,502,420
<CGS> 112,553,611
<TOTAL-COSTS> 123,275,147
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 208,000
<INTEREST-EXPENSE> 258,678
<INCOME-PRETAX> 17,337,894
<INCOME-TAX> 6,660,000
<INCOME-CONTINUING> 10,677,894
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,677,894
<EPS-PRIMARY> $1.37
<EPS-DILUTED> $1.37
</TABLE>
