<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED: JULY 30, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 0-19330
------------------------
SPECIAL DEVICES, INCORPORATED
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 95-3008754
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
14370 WHITE SAGE ROAD, MOORPARK, 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. Yes /X/ No / /
At August 31, 2000 the total number of outstanding shares of the
registrant's common stock was 3,712,764.
--------------------------------------------------------------------------------
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<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
OCTOBER 31, JULY 30,
1999 2000
----------- --------
<S> <C> <C>
Current assets:
Cash...................................................... $ 448 $ 1,529
Accounts receivable, net of allowance for doubtful
accounts of $352 at October 31, 1999 and $340 at July
30, 2000................................................ 26,675 27,483
Inventories............................................... 17,833 21,933
Deferred tax assets....................................... 4,883 3,458
Prepaid expenses and other current assets................. 1,171 3,078
Income tax receivable..................................... 4,264 1,170
-------- --------
Total current assets.................................... 55,274 58,651
-------- --------
Property, plant and equipment, at cost:
Land...................................................... 4,227 4,227
Buildings and improvements................................ 36,923 37,038
Furniture, fixtures and computer equipment................ 5,815 5,964
Machinery and equipment................................... 79,209 78,915
Transportation equipment.................................. 484 486
Leasehold improvements.................................... 237 237
Construction in progress (includes land and related costs
of $468 at October 31, 1999 and $0 at July 30, 2000).... 4,203 13,037
-------- --------
Gross property, plant, and equipment...................... 131,098 139,904
Less accumulated depreciation and amortization............ (41,016) (50,869)
-------- --------
Net property, plant and equipment......................... 90,082 89,035
Other assets, net of accumulated amortization of $927 at
October 31, 1999 and $2,231 at July 30, 2000.............. 10,296 9,404
-------- --------
Total assets................................................ $155,652 $157,090
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
OCTOBER 31, JULY 30,
1999 2000
----------- ---------
<S> <C> <C>
Current liabilities:
Accounts payable.......................................... $ 16,574 $ 22,532
Accrued liabilities....................................... 12,281 7,375
Accrued environmental and other investigation costs....... 9,617 4,026
Current portion of long-term debt......................... 6,600 16,600
--------- ---------
Total current liabilities............................... 45,072 50,533
Deferred income taxes..................................... 2,331 2,881
Long-term debt, net of current portion.................... 168,600 168,250
Other long-term liability................................. 555 553
--------- ---------
Total liabilities....................................... 216,558 222,217
--------- ---------
Redeemable common stock..................................... 27,625 29,875
Stockholders' equity (deficit):
Preferred stock, $.01 par value; 2,000,000 shares
authorized; no shares issued and outstanding............ -- --
Common stock, $.01 par value; 20,000,000 shares
authorized; 3,706,889 and 3,712,764 shares issued and
outstanding at October 31, 1999 and July 30, 2000,
respectively............................................ 30 30
Additional paid-in capital................................ 74,587 70,852
Deficit................................................... (163,148) (165,884)
--------- ---------
Total stockholders' equity (deficit)...................... (88,531) (95,002)
--------- ---------
Total liabilities and stockholders' equity (deficit).... $ 155,652 $ 157,090
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------- --------------------
AUGUST 1, JULY 30, AUGUST 1, JULY 30,
1999 2000 1999 2000
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net sales.............................................. $42,775 $42,584 $122,933 $129,003
Cost of sales.......................................... 32,618 34,548 97,781 104,853
------- ------- -------- --------
Gross profit......................................... 10,157 8,036 25,152 24,150
Operating expenses..................................... 3,944 4,353 10,926 12,696
------- ------- -------- --------
Earnings from operations............................. 6,213 3,683 14,226 11,454
------- ------- -------- --------
Other (expense) income:
Interest expense..................................... (4,711) (5,139) (11,637) (15,339)
Other expense, net................................... (178) (367) (528) (835)
Recapitalization costs............................... -- -- (16,076) --
------- ------- -------- --------
Total other (expense) income......................... (4,889) (5,506) (28,241) (16,174)
------- ------- -------- --------
Income (loss) before income taxes.................... 1,324 (1,823) (14,015) (4,720)
Income tax provision (benefit)......................... 181 (742) (3,119) (1,905)
------- ------- -------- --------
Net income (loss).................................... $ 1,143 $(1,081) $(10,896) $ (2,815)
======= ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
-------------------- PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY (DEFICIT)
--------- -------- ---------- --------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at October 31, 1999................... 3,706,889 $30 $74,587 $(163,148) $(88,531)
Adjustment to acquisition costs............... -- -- (1,694) 79 (1,615)
Accreted put premium on redeemable common
stock....................................... -- -- (2,250) -- (2,250)
Purchase of common stock...................... 5,875 -- 209 -- 209
Net loss...................................... -- -- -- (2,815) (2,815)
--------- --- ------- --------- --------
Balance at July 30, 2000...................... 3,712,764 $30 $70,852 $(165,884) $(95,002)
========= === ======= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------
AUGUST 1, JULY 30,
1999 2000
--------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss.................................................. $(10,896) $ (2,815)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 11,037 10,847
Changes in operating assets and liabilities:
Accounts receivable..................................... (3,164) (808)
Inventories............................................. (4,337) (4,100)
Prepaid expenses and other current assets............... (2,587) 2,611
Other assets............................................ 103 (103)
Accounts payable, accounts payable to related parties
and accrued liabilities............................... 2,541 (4,537)
Other long-term liability............................... -- 548
Income taxes payable.................................... (4,590) --
-------- --------
Net cash provided by (used in) operating activities..... (11,893) 1,643
-------- --------
Cash Flows From Investing Activities:
Purchases of property, plant and equipment................ (12,873) (10,500)
-------- --------
Net cash used in investing activities..................... (12,873) (10,500)
-------- --------
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt.................. 176,600 --
Proceeds from common stock purchase....................... -- 209
Repurchase of common stock................................ (41) --
Recapitalization costs.................................... (141,165) 79
Payment of deferred financing fees........................ (8,815) --
Net borrowings under revolving line of credit............. -- 10,000
Repayment of long-term debt............................... (2,992) (350)
-------- --------
Net cash provided by financing activities................. 23,587 9,938
-------- --------
Net change in cash.......................................... (1,179) 1,081
Cash at beginning of period............................... 1,248 448
-------- --------
Cash at end of period..................................... $ 69 $ 1,529
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest................................................ $ 9,511 $ 9,950
Income taxes............................................ $ 3,080 $ --
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) COMPANY OPERATIONS
Special Devices, Incorporated, together with its wholly owned subsidiary
Scot, Incorporated (collectively, the "Company"), is a leading designer and
manufacturer of 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. Our primary products are
initiators, which function like an "electrical match" to ignite the gas
generating charge in an automotive airbag system or to provide precision
ignitions in aerospace-related products. In manufacturing our products, which
utilize pyrotechnic materials, we ensure safe handling and processing by
following strict safety procedures that we have developed for nearly 40 years.
We have two divisions: an Automotive Products Division and an Aerospace
Division.
- We believe that our Automotive Products Division is the world's largest
supplier of initiators sold to leading domestic and foreign automotive
airbag system manufacturers. Those manufacturers use our product in the
assembly of integrated airbag safety systems, which they then sell to
automobile original equipment manufacturers ("OEM's").
- Our Aerospace Division supplies initiators and other advanced pyrotechnic
products to aerospace companies. Those companies, in turn, use our
products in a variety of applications including tactical missile systems,
spacecraft launch vehicles, and military aircraft crew safety systems.
Our principal executive offices are located at 14370 White Sage Road,
Moorpark, California 93021 and our phone number is (805) 553-1200.
On December 15, 1998, the Company consummated a series of transactions
accounted for as a recapitalization (the "Recapitalization") whereby affiliates
of J.F. Lehman and Company ("J.F. Lehman") obtained a controlling interest in
the Company. As a result of the Recapitalization the Company delisted its common
stock from the Nasdaq Stock Market, and accordingly filed for deregistration
with the Securities and Exchange Commission.
In connection with the Recapitalization, 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 interests in the Company.
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.
(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
7
<PAGE>
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(2) INTERIM FINANCIAL STATEMENTS (CONTINUED)
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, 1999. Operating results for the nine-month
period ended July 30, 2000, are not necessarily indicative of the operating
results for the full fiscal year.
(3) NEW ACCOUNTING PRONOUNCEMENT
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 has adopted SOP 98-5 in the first
quarter of Fiscal 2000 and has determined the impact on its financial statements
is immaterial.
(4) ACCOUNTS RECEIVABLE
Accounts receivable consists of the following components:
<TABLE>
<CAPTION>
OCTOBER 31, JULY 30,
1999 2000
----------- --------
(IN THOUSANDS)
<S> <C> <C>
Commercial customers.................................... $17,872 $23,101
U.S. Government......................................... 3,018 845
U.S. Government contractors............................. 6,137 3,877
------- -------
27,027 27,823
Less allowance for doubtful accounts.................... (352) (340)
------- -------
Total................................................... $26,675 $27,483
======= =======
</TABLE>
(5) INVENTORIES
Inventories and inventoried costs consist of the following components:
<TABLE>
<CAPTION>
OCTOBER 31, JULY 30,
1999 2000
----------- --------
(IN THOUSANDS)
<S> <C> <C>
Raw materials and components............................ $ 6,695 $ 9,816
Work in process......................................... 4,126 4,846
Finished goods.......................................... 916 1,412
Inventoried costs relating to long-term contracts, net
of amounts attributed to revenues recognized to
date.................................................. 6,598 5,859
------- -------
18,335 21,933
Less progress payments related to long-term contracts... (502) --
------- -------
Total inventories..................................... $17,833 $21,933
======= =======
</TABLE>
8
<PAGE>
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(6) NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following components:
<TABLE>
<CAPTION>
OCTOBER 31, JULY 30,
1999 2000
----------- --------
(IN THOUSANDS)
<S> <C> <C>
Senior Term Loan....................................... $ 69,300 $ 68,950
Bank Revolver.......................................... 5,900 15,900
Senior Subordinated Notes.............................. 100,000 100,000
-------- --------
175,200 184,850
Less current portion................................... (6,600) (16,600)
-------- --------
Total long-term debt................................... $168,600 $168,250
======== ========
</TABLE>
As part of the Recapitalization, the Company issued $100.0 million 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.
The Notes are noncollateralized obligations of the Company and are
subordinate to its obligations under the New Credit Facility. The Notes are
fully and unconditionally guaranteed, jointly and severally, on a
noncollateralized, senior subordinated basis by Scot, Incorporated.
As part of the Recapitalization, the Company entered into a new credit
facility (the "New Credit Facility") with a syndicate of banks (the "Banks"),
which consists of a $25.0 million Revolving Credit Facility (the "Revolver") and
a $70.0 million Senior Term Loan.
The Revolver bears interest at the Bank's Base Rate plus an applicable
margin (an effective rate of 11.5% at July 30, 2000). 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 9.9% at
July 30, 2000). As of July 30, 2000, $15.9 million was outstanding under the
Revolver and this amount has been classified as current. The total amount
available under the Revolver at July 30, 2000 was $4.1 million subject to
compliance with certain financial covenants. The Senior Term Loan is a
seven-year loan which bears interest at the Eurodollar Rate plus an applicable
margin (an effective rate of 10.4% at July 30, 2000). The New Credit Facility
contains several financial and operating covenants which the Company must meet
on a quarterly basis.
On July 14, 1999, the Company and the Banks entered into the First Amendment
to the New Credit Facility pursuant to which the Company increased the Maximum
Swingline Amount (as defined) to $3,000,000 from $1,000,000 while not increasing
the total amount of borrowings available under the Revolver.
On August 20, 1999, the Company notified the Banks of the Company's
potential noncompliance with certain environmental covenants in connection with
an investigation by the California Environmental Protection Agency (the
"Environmental Noncompliance"). On September 14, 1999, the Company and the Banks
entered into a Waiver and Modification to the New Credit Facility pursuant to
which the Banks waived any Default or Event of Default (as defined) arising from
such Environmental Noncompliance until such time as the Banks or the Company
determine that the Environmental
9
<PAGE>
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(6) NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
Noncompliance has had, or could reasonably be expected to have, a materially
adverse effect on the Company. The Waiver and Modification to the New Credit
Facility also temporarily limited the maximum borrowings under the Revolver to
$20.0 million.
On January 26, 2000, the Company entered into a Second Amendment and Waiver
to the New Credit Facility pursuant to which, among other things, certain
financial covenants were amended, and the Company received a waiver for past
noncompliance with its financial covenants. In connection with amending the New
Credit Facility on January 26, 2000, the Company and its controlling stockholder
entered into a capital call agreement (the "Capital Call Agreement") with the
Banks. The Capital Call Agreement requires the controlling stockholder to make a
capital contribution to the Company upon the occurrence of certain events,
including the failure to comply with certain financial covenants contained in
the New Credit Facility. Upon receipt of any such contribution, the Company is
obligated to repay outstanding term loans under the New Credit Facility.
On June 13, 2000, the Company entered into a Third Amendment and Waiver to
the New Credit Facility pursuant to which certain financial covenants were
amended, and the Company received a waiver for non-compliance with certain
covenants as of April 30, 2000.
As of July 30, 2000, the Company was not in compliance with certain
financial covenants contained in the New Credit Facility. On September 18, 2000,
the Company entered into a Fourth Amendment and Waiver to the New Credit
Facility pursuant to which, among other things, certain financial covenants were
amended, the Company received a waiver for past non-compliance with its
financial covenants and the Capital Call Agreement was terminated. In connection
with amending the New Credit Facility on September 18, 2000, the Company and its
controlling stockholder entered into a new capital call agreement (the "New
Capital Call Agreement") with the Banks. The New Capital Call Agreement requires
the controlling stockholder to make a capital contribution to the Company upon
the occurrence of certain events. Upon receipt of any such contributions, the
Company is obligated to repay outstanding term loans under the New Credit
Facility and, in certain circumstances, satisfy its federal and state income tax
obligations for fiscal year ending October 31, 2000.
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
$35.0 million of the total $70.0 million 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.
10
<PAGE>
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(6) NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
The following are the remaining principal payments under the Senior Term
Loan:
<TABLE>
<CAPTION>
FOR THE YEARS ENDING OCTOBER 31 AMOUNT
------------------------------- --------------
(IN THOUSANDS)
<S> <C>
2000........................................................ $ 350
2001........................................................ 700
2002........................................................ 10,000
2003........................................................ 16,700
2004........................................................ 18,000
Thereafter.................................................. 23,200
-------
$68,950
=======
</TABLE>
(7) INCOME TAXES
The following are the reasons the income tax benefit differs from the amount
that would have resulted by applying the Federal statutory rates during such
periods to the loss before income taxes:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------
AUGUST 1, JULY 30,
1999 2000
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Federal statutory rate.................................... 35% 34%
Income taxes at Federal statutory rates................... $(4,765) $(1,605)
State income tax benefit, net of federal tax benefit...... (394) (300)
Recapitalization costs not deductible for tax purposes.... 2,040 --
------- -------
$(3,119) $(1,905)
======= =======
</TABLE>
(8) COMMITMENTS AND CONTINGENCIES
In 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 safety and environmental laws and regulations.
These investigations are ongoing. See "Legal Proceedings" in Part II, Item 1.
The Company is cooperating fully with federal and state authorities in
connection with these matters but is unable to predict their outcome. These
matters have disrupted the Company's business and could result in civil and/or
criminal liabilities and penalties, including fines and remediation costs, or
suspension or debarment from military or government sales. Accordingly, there
can be no assurance that these matters will not have a material adverse effect
upon either the Company's financial condition or results of operations.
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
11
<PAGE>
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(8) COMMITMENTS AND CONTINGENCIES (CONTINUED)
have a material adverse effect upon either the results of operations or the
financial position of the Company.
(9) SUBSEQUENT EVENTS
On September 1, 2000, an accidental explosion occurred at the Company's
Moorpark facility. Two employees were injured. The State of California,
Department of Industrial Relations, Division of Occupational Safety and Health
("Cal-OSHA") is conducting a process safety management inspection. The Company
does not expect to have the results of the inspection for several months. At
this stage, it is not possible to predict or assess the likelihood of an
unfavorable outcome or predict the amount of potential liabilities associated
with this incident.
On August 21, 2000, the Company announced that it had reached a definitive
agreement to sell its wholly-owned subsidiary, Scot, Incorporated, to an
investor group. Net proceeds from the sale will be used to reduce borrowings
under the New Credit Facility. The transaction is expected to close during the
Company's fiscal fourth quarter ending October 31, 2000.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal periods indicated, the
percentage of net sales represented by certain items in the Company's Condensed
Consolidated Statements of Operations.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NINE MONTHS ENDED
-------------------- --------------------
AUGUST 1, JULY 30 AUGUST 1, JULY 30,
1999 2000 1999 2000
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Automotive Products Division:
Net sales................................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................ 86.7 88.4 86.4 86.6
----- ----- ----- -----
Gross profit............................................. 13.3 11.6 13.6 13.4
Operating expenses....................................... 8.5 9.5 7.1 8.8
----- ----- ----- -----
Earnings from operations................................. 4.8% 2.1% 6.5% 4.6%
===== ===== ===== =====
Aerospace Division:
Net sales................................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................ 53.3 58.1 59.3 63.6
----- ----- ----- -----
Gross profit............................................. 46.7 41.9 40.7 36.4
Operating expenses....................................... 10.7 12.5 14.2 13.4
----- ----- ----- -----
Earnings from operations................................. 36.0% 29.4% 26.5% 23.0%
===== ===== ===== =====
</TABLE>
COMPARISON OF THE THREE MONTHS ENDED JULY 30, 2000 TO THE THREE MONTHS ENDED
AUGUST 1, 1999
NET SALES
Consolidated net sales for the third quarter of fiscal 2000 were $42.6
million, compared to net sales of $42.8 million for the third quarter of fiscal
1999. Net sales for the Automotive Products Division in the third quarter of
fiscal 2000 increased 10.1% to $32.4 million from $29.4 million in the third
quarter of fiscal 1999 primarily due to increased initiator unit shipments
partially offset by lower contractual prices. Net sales for the Aerospace
Division in the third quarter of fiscal 2000 decreased 23.6% to $10.2 million
from $13.4 million in the third quarter of fiscal 1999 primarily due to lower
shipments of bomb racks and products used on several tactical missile programs.
GROSS PROFIT
Consolidated gross profit for the third quarter of fiscal 2000 was $8.0
million, compared to gross profit of $10.2 million for the third quarter of
fiscal 1999. Gross profit for the Automotive Products Division in the third
quarter of fiscal 2000 was $3.8 million, or 11.6% of division net sales,
compared with gross profit for the third quarter of fiscal 1999 of $3.9 million,
or 13.3% of division net sales. The decrease is primarily due to the April
initiation incident at Hollister (see Legal Proceedings) and the manufacturing
inefficiencies associated with the unanticipated accelerated micro gas generator
("MGG") automotive product line transfer to our Mesa facility with little
disruptions to our customers. Gross profit for the Aerospace Division in the
third quarter of fiscal 2000 was $4.3 million, or 41.9% of division net sales,
compared with gross profit for the third quarter of fiscal 1999 of
$6.3 million, or 46.7% of division net sales. The decrease is primarily due to
product mix.
13
<PAGE>
OPERATING EXPENSES
Consolidated operating expenses for the third quarter of fiscal 2000 were
$4.4 million, compared with operating expenses of $3.9 million for the third
quarter of fiscal 1999. Operating expenses for the Automotive Products Division
for the third quarter of fiscal 2000 were $3.1 million, or 9.5% of division net
sales, compared with operating expenses of $2.5 million, or 8.5% of division net
sales, for the third quarter of fiscal 1999. The increase is primarily
attributed to increased marketing and general and administrative costs related
to staffing additions. Operating expenses for the Aerospace Division for the
third quarter of fiscal 2000 were $1.3 million, or 12.5% of division net sales,
compared with operating expenses of $1.4 million, or 10.7% of division net
sales, for the third quarter of fiscal 1999. The increase as a percent of net
sales was due to stable expenses on lower revenues.
OTHER INCOME AND EXPENSE
Interest expense was $5.1 million in the third quarter of fiscal 2000
compared to interest expense of $4.7 million for the third quarter of fiscal
1999. The increase of $0.4 million was due to increased borrowings on the
Revolver and higher interest rates.
COMPARISON OF THE NINE MONTHS ENDED JULY 30, 2000 TO THE NINE MONTHS ENDED
AUGUST 1, 1999
NET SALES
Consolidated net sales for the nine months ended July 30, 2000 were $129.0
million, compared to net sales of $122.9 million during the same period in
fiscal 1999. Net sales for the Automotive Products Division for the first nine
months of fiscal 2000 increased 8.2% to $99.3 million from $91.8 million during
the comparable period in fiscal 1999 primarily due to increased initiator unit
shipments partially offset by lower contractual prices. Net sales for the
Aerospace Division for the first nine months of fiscal 2000 decreased 4.5% to
$29.7 million from $31.1 million during the comparable period of fiscal 1999
primarily due to completion of a significant contract for bomb racks in 1999,
offset in part by an increase in shipments of products used on several tactical
missile programs.
GROSS PROFIT
Consolidated gross profit for the nine months ended July 30, 2000 was
$24.2 million, compared to gross profit of $25.2 million for the same period of
fiscal 1999. Gross profit for the Automotive Products Division for the first
nine months of fiscal 2000 was $13.3 million, or 13.4% of division net sales,
compared with gross profit for the comparable period of fiscal 1999 of
$12.5 million, or 13.6% of division net sales. The decrease as a percent of net
sales was due primarily to the impact of the accelerated MGG integration at
Mesa, which offset improved gross margins at Moorpark. Gross profit for the
Aerospace Division for the first nine months of fiscal 2000 was $10.9 million,
or 36.4% of division net sales, compared with gross profit for the comparable
period in fiscal 1999 of $12.7 million, or 40.7% of division net sales. The
decrease is primarily due to product mix and lower volume.
OPERATING EXPENSES
Consolidated operating expenses for the nine months ended July 30, 2000 were
$12.7 million, compared with operating expenses of $10.9 million for the
comparable period of fiscal 1999. Operating expenses for the Automotive Products
Division for the first nine months of fiscal 2000 were $8.7 million, or 8.8% of
division net sales, compared with operating expenses of $6.5 million, or 7.1% of
division net sales, for the comparable period of fiscal 1999. The increase is
primarily attributable to increased marketing and general and administrative
costs related to staffing additions. Operating expenses for the Aerospace
Division for the first nine months of fiscal 2000 were $4.0 million, or 13.4% of
division net sales, compared with operating expenses of $4.4 million, or 14.2%
of division net sales, for the comparable period of fiscal 1999. The decrease is
primarily attributed to a decrease in general and administrative expenses.
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OTHER INCOME AND EXPENSE
Interest expense was $15.3 million for the first nine months of fiscal 2000
compared to interest expense of $11.6 million for the comparable period of
fiscal 1999. The increase of $3.7 million was the result of increased debt
outstanding resulting from the Company's Recapitalization in December 1998,
higher average balances on the Revolver, and higher interest rates.
LIQUIDITY AND CAPITAL RESOURCES
The Recapitalization had a substantial impact on the Company's capital
structure. The recapitalized Company is significantly more leveraged and,
accordingly, the Recapitalization resulted in substantial changes to the
Company's debt-to-equity ratio and its debt service requirements.
As part of the Recapitalization, the Company entered into a credit facility
(the "New Credit Facility") with a syndicate of banks (the "Banks") which
consists of a $25.0 million revolving credit facility (the "Revolving Credit
Facility") and a $70.0 million Senior Term Loan (the "Senior Term Loan"). The
Senior Term Loan was fully drawn at the closing date of the Recapitalization. In
addition, as part of the Recapitalization, the Company issued $100.0 million of
11 3/8% Senior Subordinated Notes due 2008 (the "Notes").
The Revolving Credit Facility bears interest at the Banks Base Rate plus an
applicable margin (an effective rate of 11.5% at July 30, 2000). The Company has
the option of converting all or a portion of the balance outstanding under the
Revolving Credit Facility 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 9.9% at July 30, 2000). The Senior Term Loan is a seven-year
loan which bears interest at the Eurodollar Rate plus an applicable margin (an
effective rate of 10.4% at July 30, 2000).
The Company's principal sources of liquidity are cash flow from operations
and borrowings under the Revolving Credit Facility. The Company's principal uses
of cash are debt service requirements, capital expenditures, research and
development and working capital.
Working capital requirements have increased to service the Company's new
long-term debt incurred in connection with the Recapitalization, to support
increases in inventories, to pay fees and other costs in connection with various
legal matters (see Part II, Item I, Legal Proceedings), and to finance the
investment in new production equipment installed in fiscal 2000. As of July 30,
2000, the Company had $15.9 million outstanding under the Revolving Credit
Facility. The total amount available under the Revolver at July 30, 2000 was
$4.1 million subject to compliance with certain financial covenants. As of
July 30, 2000, the Company was not in compliance with certain financial
covenants contained in the New Credit Facility. On September 18, 2000, the
Company entered into a Fourth Amendment and Waiver to the New Credit Facility
pursuant to which, among other things, certain financial covenants were amended,
the Company received a waiver for past non-compliance with its financial
covenants and the Capital Call Agreement was terminated. In connection with
amending the New Credit Facility on September 18, 2000, the Company and its
controlling stockholder entered into a new capital call agreement (the "New
Capital Call Agreement") with the Banks. The New Capital Call Agreement requires
the controlling stockholder to make a capital contribution to the Company upon
the occurrence of certain events. Upon receipt of any such contributions, the
Company is obligated to repay outstanding term loans under the New Credit
Facility and, in certain circumstances, satisfy its federal and state income tax
obligations for fiscal year ending October 31, 2000.
The Company believes that it can meet its expected working capital
requirements for the foreseeable future from cash from operations and borrowings
under the Revolving Credit Facility. Our ability to make scheduled principal
payments of, or to pay the interest on, or to refinance our debt, or to fund
planned capital expenditures and research and development expense, will depend
on our future performance which, to a certain extent, is subject to general
economic, financial, competitive, legislative, regulatory and other factors that
are beyond our control. While management believes that
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we will be able to meet our liquidity needs, there can be no assurance that our
business will generate sufficient cash flow from operations or that future
borrowings will be available under the Revolving Credit Facility in an amount
sufficient to enable us to service our debt or to fund our other liquidity
needs.
NEW ACCOUNTING PRONOUNCEMENT
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 has adopted SOP 98-5 in the first
quarter of Fiscal 2000 and has determined the impact on its financial statements
is immaterial.
FORWARD-LOOKING INFORMATION
This report on Form 10-Q contains certain forward-looking statements and
information relating to our business that are based on the beliefs of management
as well as assumptions made by and information currently available to
management. The words "anticipates," "believes," "estimates," "expects,"
"plans," "intends," and similar expressions, as they relate to our operations,
are intended to identify forward-looking statements. Such statements reflect our
current views with respect to future events and are subject to certain risks,
uncertainties and assumptions that could cause actual results to differ
materially from those expressed in any forward-looking statement. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated or expected. We do not
intend to update these forward-looking statements.
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% plus 175 basis
points 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.
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PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
OSHA MATTERS. On September 1, 2000, an accidental explosion occurred at the
Company's Moorpark facility. Two employees were injured. The State of
California, Department of Industrial Relations, Division of Occupational Safety
and Health ("Cal-OSHA") is conducting a post-incident and process safety
management inspection. We do not expect to have the results of the inspection
for several months. At this stage, it is not possible to predict or assess the
likelihood of an unfavorable outcome.
On April 24, 2000, an accidental initiation incident occurred at the
premises leased by the Company from McCormick Selph, Inc. ("MSI") in Hollister,
California for the Company's microgas generator ("MGG") production line, which
it acquired from MSI in July 1999. The incident resulted in the death of one
Company employee. Cal-OSHA is conducting a post-incident and process safety
management inspection. We do not expect to have the results of that inspection
until later this year. The Bureau of Alcohol, Tobacco and Firearms also
conducted a post-incident inspection, which it concluded on or about April 26,
2000. Prior to the April 24th incident, the Company had intended to move its
operation in Hollister to its Mesa, Arizona facility. Following the incident,
the Company moved its MGG production to Mesa and ceased operations at the
Hollister facility.
At this stage, it is not possible to predict the amount of potential
liabilities associated with these matters, which could result in civil and/or
criminal liabilities and penalties, and could cause our defense operations to be
suspended or debarred from military or government sales.
On February 18, 1999, an accidental explosion occurred at the Company's
former Newhall facility, resulting in the death of one Company employee. The
Company and Cal-OSHA conducted an investigation and the cause of the accident
was not determined. Production was suspended for several weeks. Operations at
the Newhall facility ceased upon completion of the move to the Company's new
Moorpark facility in July 1999. Cal-OSHA's investigation of the accident was
concluded during the third fiscal quarter of 1999, resulting in the issuance on
August 16, 1999, of citations for alleged safety violations and fines
aggregating over $20,000. The Company appealed the citations and the case was
settled for $12,655. The District Attorney's Office for Los Angeles County filed
a misdemeanor complaint on February 17, 2000 alleging six violations of the
California Labor Code. On September 1, 2000, the Company entered into a plea and
sentencing agreement pursuant to which the pending case was resolved, the
Company entered a nolo contendre plea to one misdemeanor violation, and paid a
fine and made a charitable contribution in an aggregate amount of less than
$30,000.
OTHER LEGAL PROCEEDINGS. For information concerning other legal
proceedings, including state and federal investigations of compliance with
environmental and safety laws and regulations, a Department of Defense
investigation of the Aerospace Division, and stockholder litigation, see the
Company's annual report on Form 10-K405 for the fiscal year ended October 31,
1999. At this stage, it is not possible to predict or assess the likelihood of
an unfavorable outcome or predict the amount of potential liabilities associated
with these matters, which could result in civil and/or criminal liabilities and
penalties, including fines and remediation costs, and could cause our defense
operations to be suspended or debarred from military or government sales.
ITEMS 2 THROUGH 5. OMITTED AS NOT APPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27--Financial Data Schedule
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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.
<TABLE>
<S> <C>
SPECIAL DEVICES, INCORPORATED
Dated: September 18, 2000 /s/ THOMAS W. CRESANTE
------------------------------------------------
Thomas W. Cresante
PRESIDENT AND CHIEF EXECUTIVE OFFICER, DIRECTOR
Dated: September 18, 2000 /s/ JOSEPH A. STROUD
------------------------------------------------
Joseph A. Stroud
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER, ASSISTANT SECRETARY, DIRECTOR
</TABLE>
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