<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED: JANUARY 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
incorporation or organization) Identification No.)
</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 March 10, 2000 the total number of outstanding shares of the registrant's
common stock was 3,706,889.
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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, JANUARY 30,
1999 2000
------------ ------------
<S> <C> <C>
Current assets:
Cash...................................................... $ 448 $ 11
Accounts receivable, net of allowance for doubtful
accounts of $352 at October 31, 1999 and $442 at
January 30, 2000........................................ 26,675 23,615
Inventories............................................... 17,833 20,562
Deferred tax assets....................................... 4,883 5,929
Prepaid expenses and other current assets................. 1,171 2,140
Other current assets...................................... 4,264 4,288
-------- --------
Total current assets.................................... 55,274 56,545
-------- --------
Property, plant and equipment, at cost:
Land...................................................... 4,227 4,227
Building and improvements................................. 36,923 36,933
Furniture, fixtures and computer equipment................ 5,815 6,023
Machinery and equipment................................... 79,209 81,018
Transportation equipment.................................. 484 488
Leasehold improvements.................................... 237 237
Construction in progress (includes land and related costs
of $468 at October 31, 1999 and $0 at January 30,
2000)................................................... 4,203 6,537
-------- --------
Gross property, plant, and equipment...................... 131,098 135,463
Less accumulated depreciation and amortization............ (41,016) (44,518)
-------- --------
Net property, plant and equipment......................... 90,082 90,945
Other assets, net of accumulated amortization of $927 at
October 31, 1999 and $1,344 at January 30, 2000........... 10,296 10,111
-------- --------
Total assets................................................ $155,652 $157,601
======== ========
</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, JANUARY 30,
1999 2000
------------ ------------
<S> <C> <C>
Current liabilities:
Accounts payable.......................................... $ 16,574 $ 22,991
Accrued liabilities....................................... 12,281 6,891
Accrued environmental and other investigation costs....... 9,617 6,284
Current portion of long-term debt......................... 6,600 10,600
--------- ---------
Total current liabilities............................... 45,072 46,766
Deferred income taxes..................................... 2,331 2,331
Long-term debt, net of current portion.................... 168,600 168,600
Other long-term liability................................. 555 2,301
--------- ---------
Total liabilities....................................... 216,558 219,998
--------- ---------
Redeemable common stock..................................... 27,625 28,375
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 shares
issued and outstanding at October 31, 1999
and January 30, 2000, respectively...................... 30 30
Additional paid-in capital................................ 74,587 73,837
Deficit................................................... (163,148) (164,639)
--------- ---------
Total stockholders' equity (deficit)...................... (88,531) (90,772)
--------- ---------
Total liabilities and stockholders' equity
(deficit)........................................... $ 155,652 $ 157,601
========= =========
</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
---------------------------
JANUARY 31, JANUARY 30,
1999 2000
------------ ------------
<S> <C> <C>
Net sales................................................... $ 37,716 $38,831
Cost of sales............................................... 30,724 31,817
-------- -------
Gross profit.............................................. 6,992 7,014
Operating expenses.......................................... 2,576 4,364
-------- -------
Earnings from operations.................................. 4,416 2,650
-------- -------
Other (expense) income:
Interest expense.......................................... (2,342) (5,047)
Other expense, net........................................ (115) (218)
Recapitalization costs.................................... (15,637) --
-------- -------
Total other (expense) income.............................. (18,094) (5,265)
-------- -------
Loss before income taxes.................................. (13,678) (2,615)
Income tax benefit.......................................... (3,300) (1,046)
-------- -------
Net loss.................................................. $(10,378) $(1,569)
======== =======
</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......... -- -- -- 78 78
Accreted put premium on redeemable
common stock.......................... -- -- (750) -- (750)
Net loss................................ -- -- -- (1,569) (1,569)
--------- --- ------- --------- --------
Balance at January 30, 2000............. 3,706,889 $30 $73,837 $(164,639) ($90,772)
========= === ======= ========= ========
</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>
THREE MONTHS ENDED
---------------------------
JANUARY 31, JANUARY 30,
1999 2000
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss.................................................. $(10,378) $(1,569)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization........................... 2,981 3,696
Changes in assets and liabilities:
Accounts receivable..................................... 3,236 3,060
Inventories............................................. (2,365) (2,728)
Prepaid expenses and other current assets............... (2,224) (2,040)
Other assets............................................ 586 (9)
Accounts payable, accounts payable to related parties
and
accrued liabilities................................... 179 (2,228)
Other long-term liability............................... -- 1,746
Income taxes payable.................................... (4,590) --
-------- -------
Net cash used in operating activities................... (12,575) (72)
-------- -------
Cash Flows From Investing Activities:
Purchases of property, plant and equipment.............. (6,925) (4,365)
-------- -------
Net cash used in investing activities................... (6,925) (4,365)
-------- -------
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt................ 170,000 --
Repurchase of common stock.............................. (41) --
Recapitalization costs.................................. (141,102) --
Payment of deferred financing fees...................... (8,741) --
Net borrowings under revolving line of credit........... 750 4,000
Repayment of long-term debt............................. (2,526) --
-------- -------
Net cash provided by financing activities............... 18,340 4,000
-------- -------
Net decrease in cash...................................... (1,160) (437)
Cash at beginning of period............................... 1,248 448
-------- -------
Cash at end of period..................................... $ 88 $ 11
======== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest................................................ $ 78 $ 7,578
Income taxes............................................ $ 3,055 $ --
</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 the accompanying consolidated
condensed financial statements be read in conjunction with the
7
<PAGE>
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(UNAUDITED) (CONTINUED)
(2) INTERIM FINANCIAL STATEMENTS (CONTINUED)
Company's audited financial statements and footnotes as of and for the year
ended October 31, 1999. Operating results for the three-month period ended
January 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, JANUARY 30,
1999 2000
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Commercial customers................................... $17,872 $19,701
U.S. Government........................................ 3,018 1,097
U.S. Government contractors............................ 6,137 3,259
------- -------
27,027 24,057
Less allowance for doubtful accounts................... 352 442
------- -------
Total................................................ $26,675 $23,615
======= =======
</TABLE>
(5) INVENTORIES
Inventories and inventoried costs consist of the following components:
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 30,
1999 2000
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials and components........................... $ 6,695 $ 4,011
Work in process........................................ 4,126 7,807
Finished goods......................................... 916 1,292
Inventoried costs relating to long-term contracts, net
of amounts attributed to revenues recognized to
date................................................. 6,598 9,095
------- -------
18,335 22,205
Less progress payments related to long-term
contracts............................................ 502 1,643
------- -------
Total inventories.................................... $17,833 $20,562
======= =======
</TABLE>
8
<PAGE>
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(UNAUDITED)
(6) NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following components:
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 30,
1999 2000
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Senior Term Loan....................................... $ 69,300 $ 69,300
Bank Revolver.......................................... 5,900 9,900
Senior Subordinated Notes.............................. 100,000 100,000
-------- --------
175,200 179,200
Less current portion................................... 6,600 10,600
-------- --------
Total long-term debt................................... $168,600 $168,600
======== ========
</TABLE>
As part of the Recapitalization, the Company issued $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.
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 $25,000,000 Revolving Credit Facility (the "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 10.5% at January 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
9.1% at January 30, 2000). As of January 30, 2000, $9,900,000 was outstanding
under the Revolver and this amount has been classified as current. Also, the
Company had $2,321,000 of letters of credit outstanding under the Revolver,
which reduces the amount of additional borrowing available. The total amount
available under the Revolver at January 30, 2000 was $7,800,000. The Senior Term
Loan is a seven-year loan which bears interest at the Eurodollar Rate plus an
applicable margin (an effective rate of 9.6% at January 30, 2000). The New
Credit Facility contains several financial and operating covenants which the
Company must meet on a quarterly basis. As of January 30, 2000 the Company was
in compliance with all such covenants.
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 Noncompliance has had, or could reasonably be
expected to have, a materially adverse effect on the
9
<PAGE>
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(UNAUDITED) (CONTINUED)
(6) NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
Company. The Waiver and Modification to the New Credit Facility also temporarily
limited the maximum borrowings under the Revolver to $20,000,000.
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.
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.
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........................................... $ 700
2001........................................... 700
2002........................................... 10,000
2003........................................... 16,700
2004........................................... 18,000
Thereafter..................................... 23,200
-------
$69,300
=======
</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>
THREE MONTHS ENDED
---------------------------
JANUARY 31, JANUARY 30,
1999 2000
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Federal statutory rate...................................... 35% 34%
Income taxes at Federal statutory rates..................... $(4,787) $ (889)
State income taxes, net of federal tax benefit.............. (390) (157)
Recapitalization costs not deductible for tax purposes...... 1,945 --
Other....................................................... (68) --
------- -------
$(3,300) $(1,046)
======= =======
</TABLE>
10
<PAGE>
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(UNAUDITED) (CONTINUED)
(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. 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. These matters have disrupted the conduct of the
Company's business and could result in civil and/or criminal liabilities and
penalties, including fines and remediation costs. 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 have a material adverse effect
upon either the results of operations or the financial position of the Company.
(9) SEGMENT INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------
JANUARY 31, JANUARY 30,
1999 2000
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Net sales:
Automotive Products....................................... $30,443 $32,200
Aerospace Products........................................ 7,273 6,631
------- -------
Total net sales....................................... $37,716 $38,831
======= =======
Earnings from operations:
Automotive Products....................................... $ 2,923 $ 1,767
Aerospace Products........................................ 1,498 883
------- -------
Total earnings from operations........................ $ 4,421 $ 2,650
======= =======
</TABLE>
11
<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
---------------------------
JANUARY 31, JANUARY 30,
1999 2000
------------ ------------
<S> <C> <C>
Automotive Products Division:
Net sales............................................ 100.0 % 100.0 %
Cost of sales........................................ 84.8 84.9
----- -----
Gross profit......................................... 15.2 15.1
Operating expenses................................... 5.6 9.6
----- -----
Earnings from operations............................. 9.6 % 5.5 %
===== =====
Aerospace Division:
Net sales............................................ 100.0 % 100.0 %
Cost of sales........................................ 67.5 66.2
----- -----
Gross profit......................................... 32.5 33.8
Operating expenses................................... 11.9 20.5
----- -----
Earnings from operations............................. 20.6 % 13.3 %
===== =====
</TABLE>
COMPARISON OF THE THREE MONTHS ENDED JANUARY 30, 2000 TO THE THREE MONTHS ENDED
JANUARY 31, 1999
NET SALES
Consolidated net sales for the first quarter of fiscal 2000 were
$38.8 million, compared to net sales of $37.7 million for the first quarter of
fiscal 1999. Net sales for the Automotive Products Division in the first quarter
of fiscal 2000 increased 5.8% to $32.2 million from $30.4 million in the first
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 first quarter of fiscal 2000 decreased 8.8% to $6.6 million from
$7.3 million in the first quarter of fiscal 1999 primarily due to the
significant shipments of bomb racks in the first quarter of fiscal 1999
partially offset by increased initiator shipments in the first quarter of 2000.
GROSS PROFIT
Consolidated gross profit for the first quarter of fiscal 2000 was
$7.0 million, compared to gross profit of $7.0 million for the first quarter of
fiscal 1999. Gross profit for the Automotive Products Division in the first
quarter of fiscal 2000 was $4.9 million, or 15.1% of division net sales,
compared with gross profit for the first quarter of fiscal 1999 of
$4.7 million, or 15.5% of division net sales. The increase is primarily due to
increased unit production partially offset by unit price concessions, the
disruptions associated with the EPA investigation and associated compliance
audits, and temporary quality issues at our Mesa, Arizona and Hollister,
California plants. Gross profit for the Aerospace Division in the first quarter
of fiscal 2000 was $2.2 million, or 33.8% of division net sales, compared with
gross profit for the first quarter of fiscal 1999 of $2.4 million, or 33.6% of
division net sales. The decrease is primarily due to lower revenues.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
OPERATING EXPENSES
Consolidated operating expenses for the first quarter of fiscal 2000 were
$4.4 million, compared with operating expenses of $2.6 million for the first
quarter of fiscal 1999, an increase of $1.8 million or 69.2%. Operating expenses
for the Automotive Products Division for the first quarter of fiscal 2000 were
$3.1 million, or 9.6% of division net sales, compared with operating expenses of
$1.7 million, or 5.6% of division net sales, for the first 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 first quarter of fiscal 2000 were $1.4 million,
or 20.5% of division net sales, compared with operating expenses of
$0.9 million, or 11.9% of division net sales, for the first quarter of fiscal
1999. The increase is primarily attributed to an increase in general and
administrative expenses on lower sales.
OTHER INCOME AND EXPENSE
Interest expense was $5.0 million in the first quarter of fiscal 2000
compared to interest expense of $2.3 million for the first quarter of fiscal
1999. The increase of $2.7 million was the result of increased debt outstanding
resulting from the Company's Recapitalization in December 1998.
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.
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 10.5% at January 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 9.1% at January 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 9.6% at January 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, and to finance the investment in new production
equipment which is expected to be installed in fiscal 2000. As of January 30,
2000, the Company had $9.9 million outstanding under the Revolving Credit
Facility together with $2.3 million in outstanding letters of credit;
accordingly $7.8 million was available under the Revolving Credit Facility at
January 30, 2000, subject to compliance with certain financial covenants. As of
January 30, 2000, the Company was in compliance with all such covenants. The
13
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 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
14
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS (CONTINUED)
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.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
OSHA MATTERS. In February 1999, an accidental explosion occurred at the
Company's former Newhall facility, resulting in the death of one employee. A
transport vehicle was heavily damaged by the explosion, while nearby buildings
sustained only minor damage that was quickly repaired. The Company suspended all
production at Newhall for four days to conduct a thorough investigation of the
accident along with the Occupational Safety and Health Administration of the
State of California ("OSHA"). The Company also suspended the blending of
pyrotechnic powders for approximately two weeks. The Company resumed full
production at Newhall on March 4, 1999. The Newhall facility was vacated upon
completion of the move to the new Moorpark facility in July 1999. 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 approximately $20,000. The Company
appealed the citations as lacking in factual basis. The appeal is pending.
Because the accident resulted in a fatality, OSHA's Bureau of Investigation was
required to conduct its own investigation to determine whether to refer the
matter to the District Attorney's Office for Los Angeles County. As a result of
this investigation, on February 17, 2000, OSHA issued a misdemeanor complaint in
the Municipal Court of Newhall Judicial District, County of Los Angeles,
alleging six counts of violation of the Labor Code of California. The Company
intends to vigorously defend the complaint. At this point, given the limited
information available regarding the Bureau of Investigation's inquiry, it is
impossible to predict or assess the likelihood of an unfavorable outcome or
predict the amount of potential liabilities.
OTHER LEGAL PROCEEDINGS. For other legal proceedings, including the state
and federal investigations of compliance with environmental laws and regulations
referred to in Note 8 to the Consolidated Financial Statements (unaudited)
(Part I, Item 1), see the Company's annual report on Form 10-K405 for the fiscal
year ended October 31, 1999.
ITEMS 2 THROUGH 5. Omitted as not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27--Financial Data Schedule
15
<PAGE>
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: March 14, 2000 /S/ THOMAS W. CRESANTE
----------------------------------------------------
Thomas W. Cresante
President and Chief Executive Officer, Director
Dated: March 14, 2000 /S/ JOSEPH A. STROUD
----------------------------------------------------
Joseph A. Stroud
Executive Vice President and Chief Financial Officer, Assistant
Secretary, Director
</TABLE>
16
<TABLE> <S> <C>
<PAGE>
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<FISCAL-YEAR-END> OCT-31-2000
<PERIOD-START> NOV-01-1999
<PERIOD-END> JAN-30-2000
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0
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