<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended: AUGUST 1, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to________
Commission file number: 0-19330
SPECIAL DEVICES, INCORPORATED
(Exact name of Registrant as specified in its charter)
DELAWARE 95-3008754
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14370 WHITE SAGE ROAD, CALIFORNIA 93021
----------------------------------------
(Address of principal executive offices)
(805) 553-1200
----------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] YES [ ] NO
At August 31, 1999, the total number of outstanding shares of the registrant's
common stock was 3,706,889.
1
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS:
<TABLE>
<CAPTION>
October 31, August 1,
1998 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 1,248,130 $ 68,976
Accounts receivable, net of allowance for doubtful
accounts of $385,109 and $261,734 at October 31, 1998
and August 1, 1999, respectively 19,410,344 22,574,692
Inventories 16,609,014 20,946,211
Prepaid expenses 545,834 3,132,221
Deferred income taxes 1,366,000 1,366,000
------------ ------------
Total current assets 39,179,322 48,088,100
------------ ------------
Property, plant and equipment, at cost:
Land 1,611,331 4,219,491
Buildings 9,332,173 35,966,175
Machinery and equipment 59,482,401 81,015,255
Furniture and fixtures 3,337,788 5,684,737
Transportation equipment 331,069 497,022
Leasehold improvements 3,928,569 4,757,929
Construction in progress (includes land and related
costs of $25,562,000 at October 31, 1998 and
$3,296,689 at August 1, 1999) 38,236,428 3,296,689
------------ ------------
116,259,759 135,437,298
Less accumulated depreciation 31,488,641 42,012,077
------------ ------------
84,771,118 93,425,221
------------ ------------
Deferred financing costs, net of accumulated amortization
of $514,204 at August 1, 1999 -- 8,300,709
Other assets 668,678 565,950
------------ ------------
Total assets $124,619,118 $150,379,980
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 3
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
<TABLE>
<CAPTION>
October 31, August 1,
1998 1999
------------- -------------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 2,109,562 $ 758,334
Trade accounts payable 9,361,350 13,331,510
Accounts payable to related parties 269,727 485,338
Accrued payroll and benefits 2,161,240 2,208,750
Accrued expenses 5,015,987 3,324,107
Income taxes 4,590,183 --
------------- -------------
Total current liabilities 23,508,049 20,108,039
Long-term debt, less current portion 416,125 175,375,000
Deferred income taxes 3,415,000 3,415,000
------------- -------------
Total liabilities 27,339,174 198,898,039
------------- -------------
Commitments and contingencies
Redeemable common stock -- 26,874,997
Stockholders' equity (deficit):
Preferred stock, $.01 par value; 2,000,000 shares
authorized; no shares issued or outstanding -- --
Common stock, $.01 par value; 20,000,000 shares
authorized; 7,809,801 and 3,706,889 shares
issued and outstanding at October 31, 1998
and August 1, 1999, respectively 78,098 29,716
Additional paid-in capital 51,363,891 78,354,865
Retained earnings (accumulated deficit) 45,837,955 (153,777,637)
------------- -------------
Total stockholders' equity (deficit) 97,279,944 (75,393,056)
------------- -------------
Total liabilities and stockholders'
equity (deficit) $ 124,619,118 $ 150,379,980
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
----------------------------- ----------------------------
August 2, August 1, August 2, August 1,
1998 1999 1998 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 43,399,898 $ 42,774,997 $ 129,246,332 $ 122,933,229
Cost of sales 32,896,662 32,963,816 100,388,645 98,912,761
------------- ------------- ------------- -------------
Gross profit 10,503,236 9,811,181 28,857,687 24,020,468
------------- ------------- ------------- -------------
Operating expenses 3,197,772 3,598,148 9,075,560 9,794,779
Recapitalization costs -- -- -- 16,076,204
------------- ------------- ------------- -------------
Total operating expenses 3,197,772 3,598,148 9,075,560 25,870,983
------------- ------------- ------------- -------------
Income (loss) from operations 7,305,464 6,213,033 19,782,127 (1,850,515)
------------- ------------- ------------- -------------
Other income (expense):
Interest (expense) (46,439) (4,710,831) (146,389) (11,636,989)
Interest income 9,950 475 104,939 2,498
Other income (expense), net -- (178,931) 13,150 (530,493)
------------- ------------- ------------- -------------
Other income (expense), net (36,489) (4,889,287) (28,300) (12,164,984)
------------- ------------- ------------- -------------
Income (loss) before income taxes 7,268,975 1,323,746 19,753,827 (14,015,499)
Income tax provision (benefit) 2,875,000 181,000 7,925,000 (3,119,000)
------------- ------------- ------------- -------------
Net income (loss) $ 4,393,975 $ 1,142,746 $ 11,828,827 $ (10,896,499)
============= ============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings Total
----------------------------- Paid-In (Accumulated Stockholders'
Shares Amount Capital Deficit) Equity (Deficit)
------------- ------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at October 31, 1998 7,809,801 $ 78,098 $ 51,363,891 $ 45,837,955 $ 97,279,944
Record acquisition transaction (3,367,618) (41,029) 22,561,923 (163,726,450) (141,205,556)
Record redeemable common stock (735,294) (7,353) -- (24,992,643) (24,999,996)
Contributed assets -- -- 6,304,051 -- 6,304,051
Accreted put premium on
redeemable common stock -- -- (1,875,000) -- (1,875,000)
Net loss -- -- -- (10,896,499) (10,896,499)
------------- ------------- ------------- ------------- -------------
Balance at August 1, 1999 3,706,889 $ 29,716 $ 78,354,865 $(153,777,637) $ (75,393,056)
============= ============= ============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
-------------------------------
August 2, August 1,
1998 1999
------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 11,828,827 $ (10,896,499)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 6,039,569 10,523,436
Amortization of deferred financing fees -- 514,204
(Increase) in deferred income taxes (100,000) --
Changes in assets and liabilities:
(Increase) in accounts receivable (2,741,812) (3,164,348)
(Increase) in inventories (5,496,379) (4,337,197)
(Increase) in prepaid expenses (519,847) (2,586,387)
Decrease in other assets 40,000 102,728
Increase in accounts payable,
accounts payable to related parties and
other accrued expenses 3,984,279 2,541,402
Increase (decrease) in income taxes payable 2,218,999 (4,590,183)
------------- -------------
Net cash provided by (used in) operating activities 15,253,636 (11,892,844)
------------- -------------
Cash flows from investing activities:
Purchases of property, plant and equipment (25,382,422) (11,724,167)
Transfers of internally built equipment -- (1,149,321)
Sales of marketable securities 6,750,000 --
------------- -------------
Net cash used in investing activities (18,632,422) (12,873,488)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock 475,165 --
Proceeds from issuance of long term debt -- 176,600,000
Repurchase of common stock -- (41,029)
Recapitalization costs -- (141,164,527)
Payment of deferred financing fees -- (8,814,913)
Repayment of long-term debt (101,158) (2,992,353)
Net borrowings under revolving line of credit 781,000 --
Net repayment of notes payable to bank (41,008) --
------------- -------------
Net cash provided by financing activities 1,113,999 23,587,178
------------- -------------
Net decrease in cash (2,264,787) (1,179,154)
Cash at beginning of period 2,415,335 1,248,130
------------- -------------
Cash at end of period $ 150,548 $ 68,976
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
-------------------------------
August 2, August 1,
1998 1999
------------- --------------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 146,760 $ 9,510,575
Income taxes $ 5,806,000 $ 3,079,851
Non cash disclosures:
Investing activities:
Contributed assets from majority shareholder $ 6,304,051
Financing activities:
Issuance of redeemable common stock $ 24,999,996
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(1) COMPANY OPERATIONS
Special Devices, Incorporated, a Delaware corporation (the "Company"),
designs and manufactures highly reliable precision engineered pyrotechnic
devices. These devices are used predominantly in vehicle airbag and other
automotive safety systems as well as in various aerospace applications.
On December 15, 1998, the Company consummated a recapitalization (the
"Recapitalization") in which all shares of the Company's common stock, other
than those retained by certain members of management and certain other
shareholders (the "Continuing Shareholders"), were converted into the right to
receive $34 per share in cash. The Continuing Shareholders retained
approximately 41.3% of the common equity of the Company while new investors
acquired the balance of the equity interest in the Company.
(2) INTERIM FINANCIAL STATEMENTS
The accompanying unaudited consolidated condensed financial statements of
the Company include all adjustments (consisting of normal recurring entries)
which management believes are necessary for a fair statement of the financial
position and results of operations for the periods presented. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. It is recommended that the accompanying consolidated
condensed financial statements be read in conjunction with the Company's audited
financial statements and footnotes as of and for the year ended October 31,
1998. Operating results for the nine month period ended August 1, 1999 are not
necessarily indicative of the operating results for the full fiscal year.
(3) ACCOUNTS RECEIVABLE
The following are accounts receivable from long-term contracts:
<TABLE>
<CAPTION>
October 31, August 1,
1998 1999
----------- -----------
<S> <C> <C>
Commercial customers $13,591,228 $13,054,867
U.S. Government 2,273,366 1,787,367
U.S. Government contractors 3,930,859 7,994,192
----------- -----------
19,795,453 22,836,426
Less allowance for doubtful accounts 385,109 261,734
----------- -----------
Total $19,410,344 $22,574,692
=========== ===========
</TABLE>
8
<PAGE> 9
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(4) INVENTORIES
Inventories and inventoried costs relating to long-term contracts are
classified as follows:
<TABLE>
<CAPTION>
October 31, August 1,
1998 1999
------------- -------------
<S> <C> <C>
Raw materials and components $ 6,294,434 $ 4,877,473
Work in process 3,677,720 3,418,947
Finished goods 1,650,654 2,110,711
Inventoried costs relating to
long term contracts, net of
amounts attributed to revenues
recognized to date 6,810,037 10,539,080
------------- -------------
18,432,845 20,946,211
Less progress payments related
to long-term contracts 1,823,831 --
------------- -------------
Total inventories $ 16,609,014 $ 20,946,211
============= =============
</TABLE>
(5) NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following components:
<TABLE>
<CAPTION>
October 31, August 1,
1998 1999
------------- -------------
<S> <C> <C>
Bank borrowings $ 2,050,000 $ 6,600,000
Senior Term Loan -- 69,533,334
Other bank borrowings 475,687 --
Senior Subordinated Notes -- 100,000,000
------------- -------------
2,525,687 176,133,334
Less current portion 2,109,562 758,334
------------- -------------
Total long-term debt $ 416,125 $ 175,375,000
============= =============
</TABLE>
At October 31, 1998, $2,050,000 was outstanding under a credit agreement,
which was paid in full on December 15, 1998, in connection with the
Recapitalization. This credit agreement was then terminated. In addition, at
October 31, 1998, the Company had outstanding approximately $3,518,000 of
performance bonds collateralized by standby letters of credit.
The Company's wholly-owned subsidiary, Scot, Inc. ("Scot") had a term loan
with a bank, collateralized by certain real property of Scot. The principal
amount outstanding at October 31, 1998 was $475,687. The loan was repaid in full
on December 15, 1998.
9
<PAGE> 10
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
As part of the Recapitalization, the Company entered into a new credit
facility (the "New Credit Facility") with a syndicate of banks, which consists
of a $25,000,000 Revolving Credit Facility ("Revolver") and a $70,000,000 Senior
Term Loan.
The Revolver bears interest at the bank's Base Rate plus an applicable
margin (an effective rate of 9.75% at August 1, 1999). The Company has the
option of converting all or a portion of the balance outstanding under the
Revolver to a Eurodollar Loan, for one, two, three or six month periods, to bear
interest at the Eurodollar Rate plus an applicable margin (an effective rate of
7.94% at August 1, 1999). As of August 1, 1999, $6,600,000 was outstanding under
the Revolver of which $4,500,000 was outstanding as Eurodollar Loans. In
addition, the Company had approximately $2,500,000 of letters of credit
outstanding under the Revolver, which reduces the amount of additional borrowing
available. The total amount available under the Revolver at August 1, 1999 was
$15,900,000.
The Senior Term Loan is a seven year loan which bears interest at the
Eurodollar Rate plus an applicable margin (an effective rate of 8.56% at August
1, 1999). The New Credit Facility contains several financial and operating
covenants which the Company must meet on a quarterly basis. As of August 1,
1999, the Company was in compliance with all such covenants. As a result of
events discussed under "Legal Proceedings" in Part II, Item 1 below, the Company
has notified the lenders under the New Credit Facility of the investigation. On
September 14, 1999 the Company obtained a waiver from the lenders for the
Company's failure to be in compliance with covenants due solely to the alleged
environmental violations which are the subject of the investigation. At the same
time, the Company and the lenders agreed to reduce maximum borrowings under the
Revolver from $25 million to $20 million until such time as the lenders agree to
remove such restriction.
Substantially all of the Company's assets are pledged as collateral under
the New Credit Facility. As required under the terms of the New Credit Facility,
effective March 16, 1999, the Company entered into an interest rate protection
agreement. The terms of the agreement relate to the notional amount of
$35,000,000 of the total $70,000,000 original principal amount. This agreement
set the rate at 5.42% plus 175 basis points, requiring quarterly interest
payments starting June 17, 1999 through March 17, 2001. Remaining principal
payments under the Senior Term Loan are required as follows for the fiscal years
ending October 31:
<TABLE>
<S> <C>
1999 $ 233,334
2000 700,000
2001 700,000
2002 10,000,000
2003 16,700,000
Thereafter 41,200,000
-----------
$69,533,334
===========
</TABLE>
In addition, as part of the Recapitalization, the Company sold $100,000,000
of Senior Subordinated Notes. The Notes are due in December 2008, and bear
interest at 11 3/8%. Interest is payable semi-annually in June and December.
10
<PAGE> 11
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(6) INCOME TAXES
The Company's income tax provision (benefit) differs from the provision
(benefit) that would have resulted from applying the Federal statutory rates to
the income (loss) before income taxes as outlined below:
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------
August 2, August 1,
1998 1999
----------- -----------
<S> <C> <C>
Income taxes at Federal statutory rates $ 6,162,000 $(4,765,000)
State income taxes 1,629,000 (394,000)
Estimated recapitalization costs not
deductible for tax purposes -- 2,040,000
Other 134,000 --
----------- -----------
$ 7,925,000 $(3,119,000)
=========== ===========
</TABLE>
Of the total recapitalization costs of $16,076,204, approximately $6,000,000
consists of certain fees related to the Recapitalization that may not be
deductible for income tax purposes.
(7) OTHER
In July 1999, the Company entered into non-compete agreements with three
former owners of Scot totaling $1,825,000. The non-compete agreements expire on
November 30, 2001.
(8) COMMITMENTS AND CONTINGENCIES
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 has built new facilities. The total cost of the project was estimated at
approximately $32,500,000, substantially all of which has been spent at August
1, 1999. In April 1999, the Company sold two commercial lots developed as part
of this project, the proceeds of which have reduced the net project cost to
approximately $30,000,000.
Certain of the outstanding shares of common stock held by the Continuing
Shareholders (additional rollover shares) are subject to the right, under
certain conditions, to require the Company to purchase all or a portion of the
additional rollover shares at a price per share based on a formula. Accordingly,
the additional rollover shares have been recorded as redeemable common stock.
The Company is a defendant in various pending claims and lawsuits. In the
opinion of the Company's management, after consultation with counsel,
disposition of such matters is not expected to have a material adverse effect
upon the results of operations or the financial position of the Company except
as discussed below.
11
<PAGE> 12
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
On February 18, 1999, an accidental explosion occurred at the Company's
Newhall facility, resulting in the death of one employee. The Company suspended
all production at Newhall for four days to conduct a thorough investigation of
the accident along with California OSHA, and suspended the blending of
pyrotechnic powders for approximately two weeks. Concurrently, the Company
implemented contingency manufacturing plans to meet customer demand for existing
inventory and production from its Mesa facility. No building or equipment, other
than one transport vehicle, were damaged in the accident. The Company resumed
full production at Newhall on March 4, 1999 although the facility was abandoned
upon completion of the move to the new Moorpark facility in July 1999.
California OSHA's investigation of the accident was concluded during the third
quarter, resulting in the issuance on August 16, 1999 of citations for alleged
safety violations aggregating approximately $20,000, which the Company has
appealed.
On July 16, 1999 the Company entered into a Contribution, License and Lease
Agreement with McCormick Selph, Inc., an affiliate of the Company's majority
stockholder ("MSI"), pursuant to which the Company received all of MSI's assets
comprising the micro gas generator ("MGG") automotive product line, other than
the intellectual property relating to the product line, and the Company assumed
all of MSI's obligations with respect to the contributed assets. (MSI acquired
the MGG assets, along with certain other assets, from Teledyne Industries, Inc.
on the same date.) MGG units are used by the automotive industry in seat belt
pretentioner applications. Under the terms of the agreement, MSI licensed to the
Company on a perpetual, non-exclusive basis, the intellectual property rights to
produce MGG units, and leased to the Company the portion of the premises in
Hollister, California where the tangible MGG assets are located. The lease is
expected to terminate no later than September 30, 2000, or sooner if the Company
completes the move of the MGG product line to one of its facilities prior to
that date. The Company is obligated to pay MSI $14,000 per month for the leased
premises. As consideration for the licensed intellectual property, the Company
is obligated to pay a royalty of $0.25 per MGG unit produced and sold by the
Company which is based on the licensed intellectual property (or such lesser
amount, determined on a pro rata basis, if an MGG unit is only partly based on
the licensed intellectual property). The Company's obligation to pay the royalty
will arise once it has commenced production of MGG units at one of its
facilities (which is expected to occur by September 30, 2000) and will terminate
no later than July 16, 2003. Finally, during the term of the lease, MSI has
agreed to provide the Company with certain materials and manpower resources to
enable the Company to produce MGG units at the Hollister facility. In exchange
for such materials and services, the Company has agreed to pay MSI an aggregate
of $36,000 per month.
In August 1999 the Company learned that state and federal authorities were
investigating whether operations at certain of the Company's facilities have
been conducted in compliance with environmental laws and regulations. These
investigations are ongoing. See "Legal Proceedings" in Part II, Item 1.
12
<PAGE> 13
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(9) SEGMENT INFORMATION
<TABLE>
<CAPTION>
Three months ended Nine months ended
---------------------------- -----------------------------
August 2, August 1, August 2, August 1,
1998 1999 1998 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales:
Automotive Products $ 33,152,655 $ 29,383,605 $ 104,995,194 $ 91,802,658
Aerospace Products 10,247,243 13,391,392 24,251,138 31,130,571
------------- ------------- ------------- -------------
Total net sales $ 43,399,898 $ 42,774,997 $ 129,246,332 $ 122,933,229
============= ============= ============= =============
Earnings (loss) from operations:
Automotive Products $ 4,023,220 $ 1,394,444 $ 14,091,906 $ 5,963,542
Aerospace Products 3,021,390 4,822,825 5,830,722 8,268,555
Corporate and unallocated 260,854 (4,236) (140,501) (16,082,612)
------------- ------------- ------------- -------------
Total earnings (loss) from
operations $ 7,305,464 $ 6,213,033 $ 19,782,127 $ (1,850,515)
============= ============= ============= =============
</TABLE>
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Results for the first nine months of Fiscal 1999 were lower than results the
Company achieved in the first nine months of Fiscal 1998 due primarily to costs
relating to the Company's relocation to the Moorpark facility, including the
operation of duplicative facilities during the period and the manufacturing
inefficiencies inherent with the commencement of new manufacturing operations.
The Company received its final customer approvals on June 1, 1999, and the
Company completed the move to Moorpark in July 1999. The Company expects to have
all production lines operating at Moorpark at their historical rates by the end
of the fourth quarter. In addition, unit price concessions the Company made to
automotive initiator customers in exchange for anticipated volume increases
expected in the second half of Fiscal 1999 contributed to a decline in results
in the first half of Fiscal 1999. Finally, the slowdown in production at Newhall
as a result of the February 1999 accidental explosion and resulting
investigation impacted second and third quarter results. The Company maintains
insurance coverage including a business interruption policy under which it
expects to recover much of the costs related to the accidental explosion and
resulting delays. Final estimates of the recovery under the policy have not yet
been made.
The majority of air-bag initiators sold by the Company are sold to TRW and
Autoliv ASP Incorporated (formerly Morton International). The initiators sold to
TRW are more complex, and contain a higher material content, than the initiators
sold to Autoliv, and consequently are sold for a higher average unit price than
the initiators sold to Autoliv.
COMPARISON OF THE THREE MONTHS ENDED AUGUST 1, 1999 TO THE THREE MONTHS ENDED
AUGUST 2, 1998
Net Sales
Net sales for the Automotive Products Division decreased by $3,769,000, or
11.4%, to $29,384,000 for the quarter ended August 1, 1999 compared to sales of
$33,153,000 for the same quarter of the previous year. The decrease was a result
of contractual price decreases in the current period, offset partially by an
approximate 6% increase in units shipped in the third quarter of 1999 versus the
same period in 1998 despite the disruptions of moving to Moorpark.
Sales to TRW as a percent of the Automotive Products Division's total sales
were 48.6% for the third quarter of the current fiscal year as compared to 46.3%
for the same period last year, and were 33.4% of total Company sales this year
compared to 37.4% for the same period last year. Sales to Autoliv were 32.3% of
Automotive Products Division sales in the third quarter of the current fiscal
year as compared to 31.5% for the same period last year, and were 22.2% of total
Company sales for the three months ended August 1, 1999, compared to 23.8% of
total Company sales for the same period last year. MGG sales were negligible as
the Company received the MGG assets in the middle of the final month of the
quarter.
Net sales for the Aerospace Division increased by $3,144,000, or 30.7%, to
$13,391,000 for the quarter ended August 1, 1999 compared to sales of
$10,247,000 for the quarter ended August 2, 1998. The increase in sales in the
third quarter of 1999 was due to increased shipments of products used on several
missile programs and deliveries related to the bomb ejector program.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS CONTINUED
Cost of Sales
Cost of sales for the Automotive Products Division decreased $1,452,000, or
5.3%, to $25,716,000 for the quarter ended August 1, 1999, compared to cost of
sales of $27,168,000 for the same quarter last year. The Automotive Products
Division's gross profit margin was 12.5% for the third quarter of 1999, compared
to 18.1% for the same quarter last year. The decrease in the gross profit margin
reflects unit price concessions made to the Company's leading automotive
initiator customers in exchange for anticipated volume increases expected in the
second half of fiscal 1999 and increased costs and certain inefficiencies
related to a delay in the completion of the Company's move to the new facility
in Moorpark. Although the costs of operating both facilities continued during
the third quarter of Fiscal 1999, the completion of the Company's move allowed
it to begin to eliminate redundant staffing and commence other cost containment
efforts, including a reduction in its workforce of approximately 280 people (or
approximately 21% of the workforce) in May 1999. Increased efficiencies
throughout the quarter contributed to Automotive gross profit margin
improvements in Moorpark from (0.6)% in May, to 4.3% in June, to 12.4% in July.
Cost of sales for the Aerospace Division increased $1,269,000, or 21.2%, to
$7,248,000 for the quarter ended August 1, 1999, compared to cost of sales of
$5,979,000 for the comparable quarter last year. The gross profit as a percent
of sales was 45.9% for the third quarter of 1999 compared to 41.7% for the same
quarter last year. The increase in gross profit margin was primarily
attributable to the mix of products shipped in the third quarter of Fiscal 1999
and increased volumes.
Operating Expenses
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 expenses incurred by the Company (which are not attributable to a
particular division) on an equitable basis to reflect fairly the benefit
received by each operating division.
Operating expenses for the Automotive Products Division increased by
$311,000, or 15.9%, to $2,273,000 in the third quarter of 1999, compared to
operating expenses of $1,962,000 for the same period last year. As a percentage
of sales, operating expenses were 7.7% compared to 5.9% for the same period last
year as a result of increased operating costs associated with the Company's move
to the Moorpark facility.
Operating expenses for the Aerospace Division increased by $74,000, or 5.9%,
to $1,321,000 for the quarter ended August 1, 1999, compared to operating
expenses of $1,247,000 for the same period last year. As a percentage of sales,
operating expenses were 9.9% for the quarter ended August 1, 1999, compared to
12.2% for the same period last year. The increase in operating expenses in the
current year is due primarily to the increase in the incentive program tied to
increased sales, operating income and profitability in the Aerospace Division.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS CONTINUED
Recapitalization Costs
The Company incurred approximately $16,100,000 in one-time pre-tax charges
in connection with the Recapitalization (representing approximately $5,600,000
in professional advisory fees and approximately $10,500,000 of compensation
expenses relating to stock option exercises). As a result of these charges, the
Company incurred a net loss in the nine months ended August 1, 1999. Because
this loss resulted directly from the one-time charges incurred in connection
with the Recapitalization, the Company believes this loss will have no material
impact on its ongoing operations or liquidity.
Other Income and Expense
Other income (expense) consists primarily of interest income and interest
expense. Interest expense was $4,711,000 in the third quarter of Fiscal 1999
compared to interest expense of $46,000 for the third quarter last year. The
increase of $4,665,000 was the result of increased debt outstanding in the third
quarter of 1999, compared to the same period of 1998, resulting from the
Company's Recapitalization in December 1998. Interest income was $475 in the
third quarter of Fiscal 1999, compared to interest income of $10,000 for the
same period last year. The decrease was the result of lower average amounts
invested in interest-bearing securities during the third quarter of Fiscal 1999.
COMPARISON OF THE NINE MONTHS ENDED AUGUST 1, 1999 TO THE NINE MONTHS ENDED
AUGUST 2, 1998
Net Sales
Sales for the Automotive Products Division were $91,803,000 for the nine
months ended August 1, 1999 compared to sales of $104,995,000 for the comparable
period of the preceding year. The decrease in sales is primarily the result of
price concessions made to customers, partially offset by a 3.4% increase in the
number of initiators sold compared to the same period last year. Sales to TRW as
a percent of the Division's total sales were 51.5% for the first nine months of
the current fiscal year compared to 52.8% for the same period last year, and
were 38.4% of total Company sales this year compared to 41.1% for the same
period last year. Sales to Autoliv were 31.3% of the Automotive Products
Division sales in the first nine months of Fiscal 1999 as compared to 30.9% for
the same period last year, and were 23.4% of total Company sales for the nine
months ended August 1, 1999, compared to 24.0% of total Company sales for the
same period last year.
Sales for the Aerospace Division increased by $6,880,000, or 28.4%, to
$31,131,000 for the first nine months of the current year, compared to sales of
$24,251,000 for the same period last year. The increase in sales was the result
of increased shipments of products used on several missile programs and
increased shipments of the bomb ejector program in the current year.
Cost of Sales
Cost of sales for the Automotive Products Division was $79,934,000 for the
first nine months of the current fiscal year, compared to cost of sales of
$85,289,000 for the same period last year. The decrease of $5,355,000, or 6.3%,
was the result of decreased costs associated with decreased sales during the
same period. Gross profit as a percent of sales was 12.9% for the current nine
month period compared to 18.8% for the same period last year. The reduction in
gross profit percent was due to the reasons discussed under Cost of Sales for
the comparison of the three months ended August 1, 1999 to August 2, 1998.
Cost of sales for the Aerospace Division increased $3,718,000, or 24.6%, to
$18,818,000 for the first nine months of the current year, compared to cost of
sales of $15,100,000 for the same period last year. Gross profit
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
as a percent of sales was 39.6% in the current period, compared to 37.7% last
year, due to the mix of products shipped in the current year.
Operating Expenses
Operating expenses for the Automotive Products Division were $5,905,000 for
the first nine months of the current fiscal year, an increase of $290,000, or
5.2%, compared to operating expenses of $5,615,000 for the same period last
year. As a percentage of sales, operating expenses were 6.4% compared to 5.3%
for the same period last year. The increase in expenses is related to the
Company's move to the Moorpark facility.
Operating expenses for the Aerospace Division were $4,044,000 for the first
nine months of the current fiscal year, an increase of $723,000, or 21.8%,
compared to operating expenses of $3,321,000 last year. As a percentage of
sales, operating expenses were 13.0% compared to 13.7% for the same period last
year. The increase in operating expenses is due primarily to the increase in
incentive program costs related to increased operating income in the Aerospace
Division.
Other Income (Expense)
Other income (expense) consists primarily of interest income and interest
expense. Interest income was $2,500 in the first nine months of 1999 compared to
interest income of $105,000 for the same period last year. The reduction in
interest income was due to lower average cash balances invested in
interest-bearing securities in the current year period. Interest expense was
$11,637,000 in the first nine months of 1999, compared to interest expense of
$146,000 for the same period last year. The increase is the result of interest
incurred on new long-term debt associated with the Recapitalization.
Liquidity and Capital Resources
The Recapitalization had a substantial impact on the Company's capital
structure. The recapitalized Company is significantly more highly leveraged and
accordingly, the Recapitalization resulted in substantial changes to the
Company's debt-to-equity ratio and its debt service requirements.
The Company's principal sources of liquidity are cash flow from operations
and borrowings under the New Credit Facility. The Company's principal uses of
cash are debt service requirements, capital expenditures, research and
development and working capital.
As part of the Recapitalization, the Company entered into the New Credit
Facility which consists of a $25,000,000 Revolving Credit Facility and a
$70,000,000 Senior Term Loan. As of August 1, 1999, the Company had $6,600,000
outstanding on the Revolving Credit Facility. In addition, the Company had
approximately $2,500,000 in letters of credit outstanding. The Senior Term Loan
was fully drawn at the closing date of the Recapitalization. In addition, as
part of the Recapitalization, the Company sold $100,000,000 of Senior
Subordinated Notes.
Working capital requirements have increased in fiscal 1999 compared to
fiscal 1998 to service the Company's new long-term debt incurred in connection
with the Recapitalization, to support the investment in accounts receivable
related to the anticipated increased demand for initiators manufactured by the
Company and to support the investment in inventory related to the Company's
strong backlog in aerospace products. The Company believes that it can meet its
expected working capital requirements for the foreseeable future from cash from
operations and borrowings under its New Credit Facility.
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This Statement is effective for all fiscal years beginning after
December 15, 1999. Management believes that the adoption of SFAS No. 133 will
not have a material impact on the Company's financial reporting.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Cost of Startup
Activities." This SOP requires that costs incurred during start-up activities,
including organization costs, be expensed as incurred. SOP 98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998. Initial
application of the SOP should be as of the beginning of the fiscal year in which
the SOP is first adopted and should be reported as a cumulative effect of a
change in accounting principle. The Company will adopt SOP 98-5 in the first
quarter of Fiscal 2000 and is currently evaluating the impact of the standard on
its financial statements.
Year 2000
The Company has conducted a review of its computer systems and has
identified the systems that could be affected by the Year 2000 issue. The Year
2000 issue relates to the inability of information systems to recognize and
process date-sensitive information beyond December 31, 1999. In addition, many
systems and equipment that are not typically thought of as "computer-related"
contain imbedded hardware and software that may be date-sensitive and can be
impacted by the year 2000 issue. If the Company's computer systems cannot
recognize a date using "00" as the Year 2000, it could result in miscalculations
causing disruptions of operations including, among other things, a temporary
inability to manufacture products or engage in other normal business activities.
During Fiscal 1997, the Company commenced a program to address the Year 2000
issue and to pursue compliance with vendors. The scope of the project includes
inventorying and evaluating all hardware and operating systems and addressing
the compliance of third party vendors. The Company estimates the total cost of
this compliance program to be approximately $150,000, including internal staff
costs and the cost to write off any unamortized existing hardware and software
that may need to be replaced. The Company has incurred approximately $125,000 in
costs through the third quarter of Fiscal 1999, with the remaining $25,000 in
projected expenditures expected to be incurred by the end of calendar 1999. At
August 1, 1999, approximately 98% of the Company's program has been completed,
and all mission critical systems have been identified and upgraded. The Company
expects to complete its Year 2000 program by December 31, 1999.
Although management anticipates that its systems and applications will be
Year 2000 compliant on a timely basis, there can be no assurance that the
systems of other companies with which the Company does business will be Year
2000 compliant on a timely basis. The risks involved with not solving the Year
2000 issue include, but are not limited to, the following: loss of local or
regional electric power, loss of telecommunication services, and delays or
cancellations of shipping or transportation.
The Company has prepared contingency plans relating to identified Year 2000
risks. Key elements of the contingency plans include stockpiling raw materials,
adopting workaround procedures, and other measures designed to avoid or address
potential business interruptions.
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
Forward-Looking Information
This report on Form 10-Q contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. When used in this
report, the words "believe," "estimate," "expect," "anticipate," "plans," and
similar expressions are intended to identify forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Such statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those expected. Although the Company believes that
comments reflected in such forward-looking statements are reasonable, they are
based on information existing at the time made. Important factors that could
cause actual results to differ materially from expectations include, but are not
limited to, the Company's ability to have all lines at its Moorpark facility
operating at their rated capacity, the competitive marketplace, and the risk
factors described in the Company's prospectus as filed with the Securities and
Exchange Commission on June 2, 1999.
19
<PAGE> 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company has only limited involvement in derivative financial instruments
and does not hold or issue them for trading purposes. Certain amounts borrowed
under the Company's Credit Facility are at variable rates and the Company is
thus subject to market risk resulting from interest rate fluctuations. The
Company has entered into an interest rate swap arrangement to alter interest
rate exposure, as described below. This arrangement allows the Company to raise
long-term borrowings at floating rates and effectively swap them into fixed
rates that are lower than those available to the Company if fixed rate
borrowings were made directly. Under interest rate swaps, the Company agrees
with another party to exchange, at specified intervals, the difference between
fixed-rate and floating-rate amounts calculated by reference to an agreed
notional principal amount.
In March 1999, as required under the New Credit Facility, the Company
entered into an interest rate swap agreement with the agent under the New Credit
Facility. Under the swap agreement, which is in the notional principal amount of
$35 million, the Company is required to pay a fixed rate of 5.42% to the agent
on each March 17, June 17, September 17 and December 17, commencing on June 17,
1999. On those same dates, the Company will receive a floating-rate payment from
the agent based on the three-month LIBOR rate. The swap agreement terminates on
March 7, 2001.
The Company also is exposed to market risks related to fluctuations in
interest rates on the Senior Notes it issued in December 1998. For fixed rate
debt such as the Senior Notes, changes in interest rates generally affect the
fair value of the debt instrument. The Company does not have an obligation to
repay the Senior Notes prior to maturity in December 2008 and, as a result,
interest-rate risk and changes in fair value should not have a significant
impact on the Company.
20
<PAGE> 21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 16, 1999, representatives of the California Environmental
Protection Agency conducted an inspection of the Company's Newhall facility.
Following the inspection, the department issued a notice of violations
indicating that there had been unauthorized burning and treatment of hazardous
waste at the facility. Management immediately directed that an environmental
audit of all of the Company's facilities be undertaken. On September 3, 1999, a
federal grand jury issued a subpoena requesting copies of documents relating to
the generation, storage, and transportation of hazardous materials at the
Company's Newhall, Moorpark, and Mesa facilities.
The Company is cooperating fully with federal and state authorities in
connection with these matters. In light of their preliminary nature, however,
and the fact that the Company's environmental audit is ongoing, the Company is
unable to predict their outcome. They could, however, result in civil and/or
criminal liabilities and penalties, including fines and remediation costs, and
disrupt the conduct of the Company's business. Accordingly, there can be no
assurance that they will not have a material adverse effect upon the Company,
its operations, or its financial condition.
ITEMS 2 THROUGH 5. Omitted as not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
On September 2, 1999, the Company filed a report on Form 8-K
regarding a change in its independent accountants.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPECIAL DEVICES, INCORPORATED
DATED: September 15, 1999
/s/ GEORGE A. SAWYER
------------------------------------
GEORGE A. SAWYER
Chief Executive Officer
Director
DATED: September 15, 1999
/s/ JOSEPH A. STROUD
------------------------------------
JOSEPH A. STROUD
Executive Vice President Finance and
Chief Financial Officer
Director
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET, STATEMENT OF EARNINGS STATEMENT OF STOCKHOLDERS' EQUITY, STATEMENT OF
CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR
THE QUARTERLY PERIOD ENDED AUGUST 1, 1999.
</LEGEND>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> MAY-03-1999
<PERIOD-END> AUG-01-1999
<CASH> 68,976
<SECURITIES> 0
<RECEIVABLES> 22,959,801
<ALLOWANCES> 385,109
<INVENTORY> 20,946,211
<CURRENT-ASSETS> 48,088,100
<PP&E> 136,554,167
<DEPRECIATION> 43,128,946
<TOTAL-ASSETS> 150,379,980
<CURRENT-LIABILITIES> 20,108,039
<BONDS> 176,133,334
0
0
<COMMON> 29,716
<OTHER-SE> (75,422,772)
<TOTAL-LIABILITY-AND-EQUITY> 150,379,980
<SALES> 122,933,229
<TOTAL-REVENUES> 122,935,727
<CGS> 98,912,761
<TOTAL-COSTS> 108,707,540
<OTHER-EXPENSES> 16,606,697
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,636,989
<INCOME-PRETAX> (14,015,499)
<INCOME-TAX> (3,119,000)
<INCOME-CONTINUING> (10,896,499)
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