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UNITED STATES
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: APRIL 30, 2000
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
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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, 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 June 1, 2000 the total number of outstanding shares of the registrant's
common stock was 3,712,764.
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PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(Unaudited)
ASSETS
OCTOBER 31, APRIL 30,
1999 2000
--------- ---------
Current assets:
Cash .............................................................................. $ 448 $ 740
Accounts receivable, net of allowance for doubtful
accounts of $352 at October 31, 1999 and $250 at
April 30, 2000 .................................................................. 26,675 26,021
Inventories ....................................................................... 17,833 19,298
Deferred tax assets ............................................................... 4,883 3,458
Prepaid expenses and other current assets ......................................... 1,171 2,420
Income tax receivable ............................................................. 4,264 7,426
--------- ---------
Total current assets ............................................................ 55,274 59,363
--------- ---------
Property, plant and equipment, at cost:
Land .............................................................................. 4,227 4,227
Building and improvements ......................................................... 36,923 37,155
Furniture, fixtures and computer equipment ........................................ 5,815 6,096
Machinery and equipment ........................................................... 79,209 83,855
Transportation equipment .......................................................... 484 494
Leasehold improvements ............................................................ 237 237
Construction in progress (includes land and related costs of $468 at
October 31, 1999 and $0 at April 30, 2000) ...................................... 4,203 8,812
--------- ---------
Gross property, plant, and equipment .............................................. 131,098 140,876
Less accumulated depreciation and amortization .................................... (41,016) (47,885)
--------- ---------
Net property, plant and equipment ................................................. 90,082 92,991
Other assets, net of accumulated amortization of $927 at
October 31, 1999 and $1,792 at April 30, 2000 ..................................... 10,296 9,675
--------- ---------
Total assets ........................................................................ $ 155,652 $ 162,029
========= =========
See accompanying notes to consolidated financial statements.
2
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
OCTOBER 31, APRIL 30,
1999 2000
--------- ---------
Current liabilities:
Accounts payable .......................................... $ 16,574 $ 23,582
Accrued liabilities ....................................... 12,281 8,771
Accrued environmental and other investigation costs ....... 9,617 5,402
Current portion of long-term debt ......................... 6,600 14,600
--------- ---------
Total current liabilities ............................... 45,072 52,355
Deferred income taxes ..................................... 2,331 2,881
Long-term debt, net of current portion .................... 168,600 168,250
Other long-term liability ................................. 555 906
--------- ---------
Total liabilities ....................................... 216,558 224,392
--------- ---------
Redeemable common stock ..................................... 27,625 29,125
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 April 30, 2000, respectively ....... 30 30
Additional paid-in capital ................................ 74,587 73,286
Deficit ................................................... (163,148) (164,804)
--------- ---------
Total stockholders' equity (deficit) ...................... (88,531) (91,488)
--------- ---------
Total liabilities and stockholders' equity
(deficit) ........................................... $ 155,652 $ 162,029
========= =========
See accompanying notes to consolidated financial statements.
3
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- ------------------
MAY 2, APRIL 30, MAY 2, APRIL 30,
1999 2000 1999 2000
------------ ----------- -------- --------
Net sales.................................................. $ 42,443 $47,588 $80,158 $86,419
Cost of sales.............................................. 34,740 38,489 65,163 70,305
-------- ------- -------- -------
Gross profit............................................. 7,703 9,099 14,995 16,114
Operating expenses......................................... 4,106 3,978 6,982 8,343
-------- ------- ------- -------
Earnings from operations................................. 3,597 5,121 8,013 7,771
-------- ------- ------- -------
Other (expense) income:
Interest expense......................................... (4,585) (5,153) (6,926) (10,200)
Other expense, net....................................... (234) (251) (350) (468)
Recapitalization costs................................... (439) -- (16,076) --
-------- ------- -------- ------
Total other (expense) income............................. (5,258) (5,404) (23,352) (10,668)
-------- ------- -------- --------
Loss before income taxes................................. (1,661) (283) (15,339) (2,897)
Income tax benefit......................................... -- (117) (3,300) (1,163)
-------- ------- -------- -------
Net loss................................................. $(1,661) $(166) $(12,039) $(1,734)
======== ======= ======== =======
See accompanying notes to consolidated financial statements.
4
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
(Unaudited)
COMMON STOCK ADDITIONAL RETAINED TOTAL
-------------------- PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY (DEFICIT)
--------- -------- ---------- --------- -----------------
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 ........................ -- -- (1,500) -- (1,500)
Purchase of common stock .............. 5,875 -- 199 -- 199
Net loss............................... -- -- -- (1,734) (1,734)
--------- --- ------- --------- --------
Balance at April 30, 2000 ............. 3,712,764 $30 $73,286 $(164,804) $(91,488)
========= === ======= ========= ========
See accompanying notes to consolidated financial statements.
5
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(Unaudited)
SIX MONTHS ENDED
----------------------
MAY 2, APRIL 30,
1999 2000
-------- -------
Cash Flows From Operating Activities:
Net loss.................................................. $(12,039) $(1,734)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization........................... 7,087 7,498
Changes in operating assets and liabilities:
Accounts receivable..................................... (2,567) 654
Inventories............................................. (4,087) (1,466)
Prepaid expenses and other current assets............... (2,102) (1,265)
Other assets............................................ 296 (1,730)
Accounts payable, accounts payable to related parties
and accrued liabilities............................... 4,084 (716)
Other long-term liability............................... -- 901
Income taxes payable.................................... (4,590) --
-------- -------
Net cash provided by (used in) operating activities..... (13,919) 2,142
-------- -------
Cash Flows From Investing Activities:
Purchases of property, plant and equipment.............. (9,967) (9,778)
-------- -------
Net cash used in investing activities................... (9,967) (9,778)
-------- -------
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt................ 170,000 --
Proceeds from common stock purchase..................... -- 199
Repurchase of common stock.............................. (41) --
Recapitalization costs.................................. (141,102) 79
Payment of deferred financing fees...................... (8,815) --
Net borrowings under revolving line of credit........... 5,450 8,000
Repayment of long-term debt............................. (2,759) (350)
-------- -------
Net cash provided by financing activities............... 22,733 7,928
-------- -------
Net change in cash........................................ (1,153) 292
Cash at beginning of period............................... 1,248 448
-------- -------
Cash at end of period..................................... $ 95 $ 740
======== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest................................................ $ 1,598 $ 9,509
Income taxes............................................ $ 3,055 $ --
See accompanying notes to consolidated financial statements.
6
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
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 six-month period ended April
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:
OCTOBER 31, APRIL 30,
1999 2000
----------- ---------
(IN THOUSANDS)
Commercial customers................................. $17,872 $20,088
U.S. Government...................................... 3,018 2,033
U.S. Government contractors.......................... 6,137 4,150
------- -------
27,027 26,271
Less allowance for doubtful accounts................. (352) (250)
------- -------
Total.............................................. $26,675 $26,021
======= =======
(5) INVENTORIES
Inventories and inventoried costs consist of the following components:
OCTOBER 31, APRIL 30,
1999 2000
----------- ---------
(IN THOUSANDS)
Raw materials and components........................... $ 6,695 $ 6,370
Work in process........................................ 4,126 5,588
Finished goods......................................... 916 1,498
Inventoried costs relating to long-term contracts,
net of amounts attributed to revenues recognized
to date.............................................. 6,598 5,842
------- -------
18,335 19,298
Less progress payments related to long-term
contracts............................................ (502) --
------- -------
Total inventories.................................... $17,833 $19,298
======= =======
8
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(UNAUDITED)(CONTINUED)
(6) NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following components:
OCTOBER 31, APRIL 30,
1999 2000
----------- ---------
(IN THOUSANDS)
Senior Term Loan....................................... $ 69,300 $ 68,950
Bank Revolver.......................................... 5,900 13,900
Senior Subordinated Notes.............................. 100,000 100,000
-------- --------
175,200 182,850
Less current portion................................... (6,600) (14,600)
-------- --------
Total long-term debt................................... $168,600 $168,250
======== ========
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 11.0% at April 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 April 30, 2000). As of April 30, 2000, $13,900,000 was
outstanding under the Revolver and this amount has been classified as
current. The total amount available under the Revolver at April 30, 2000, was
$6,100,000. 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
April 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 Noncompliance has had, or could reasonably be
expected to have, a materially adverse effect on the
9
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.
As of April 30, 2000, the Company was not in compliance with certain
financial covenants contained in the New Credit Facility. Although the
Company was in compliance with minimum EBITDA and Consolidated Interest
Coverage Ratio requirements, the Company was not able to satisfy the Leverage
Ratio test due to a delay in the processing of a substantial income tax
refund outside of the Company's control; therefore, a planned $6 million
payment of the Revolver could not be made until May 3, 2000, three business
days after triggering the non-compliance. Since that date, the Company has
been in compliance with all financial covenants. 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 of the Leverage Ratio for the
aforementioned period.
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:
FOR THE YEARS ENDING OCTOBER 31 AMOUNT
------------------------------- --------------
(IN THOUSANDS)
2000........................................... $ 350
2001........................................... 700
2002........................................... 10,000
2003........................................... 16,700
2004........................................... 18,000
Thereafter..................................... 23,200
-------
$68,950
=======
(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:
SIX MONTHS ENDED
---------------------------
MAY 2, APRIL 30,
1999 2000
------------ ------------
(IN THOUSANDS)
Federal statutory rate...................................... 35% 34%
Income taxes at Federal statutory rates..................... $(5,117) $(985)
State income tax benefit, net of federal tax benefit........ (1,316) (178)
Recapitalization costs not deductible for tax purposes...... 3,133 --
------- -------
$(3,300) $(1,163)
======= =======
10
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.
11
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.
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- ---------------------
MAY 2, APRIL 30 MAY 2, APRIL 30,
1999 2000 1999 2000
----------- ----------- -------- ----------
Automotive Products Division:
Net sales..................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales................................. 88.2 86.4 86.3 85.7
----- ----- ----- -------
Gross profit.................................. 11.8 13.6 13.7 14.3
Operating expenses............................ 7.1 7.3 6.4 8.4
----- ----- ----- -------
Earnings from operations...................... 4.7% 6.3% 7.3% 5.9%
===== ===== ===== =======
Aerospace Division:
Net sales..................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales................................. 62.3 66.7 63.8 66.5
----- ----- ----- -------
Gross profit.................................. 37.7 33.3 36.2 33.5
Operating expenses............................ 17.6 10.4 16.8 13.9
----- ----- ----- -------
Earnings from operations...................... 20.1% 22.9% 19.4% 19.6%
===== ===== ===== =====
COMPARISON OF THE THREE MONTHS ENDED APRIL 30, 2000 TO THE THREE MONTHS ENDED
MAY 2, 1999
NET SALES
Consolidated net sales for the second quarter of fiscal 2000 were $47.6
million, compared to net sales of $42.4 million for the second quarter of
fiscal 1999. Net sales for the Automotive Products Division in the second
quarter of fiscal 2000 increased 8.4% to $34.7 million from $32.0 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 second quarter of fiscal 2000 increased 22.9% to
$12.9 million from $10.5 million in the second quarter of fiscal 1999
primarily due to significant shipments of products used on several tactical
missile programs.
GROSS PROFIT
Consolidated gross profit for the second quarter of fiscal 2000 was $9.0
million, compared to gross profit of $7.7 million for the second quarter of
fiscal 1999. Gross profit for the Automotive Products Division in the second
quarter of fiscal 2000 was $4.7 million, or 13.6% of division net sales,
compared with gross profit for the second quarter of fiscal 1999 of $3.8
million, or 11.8% of division net sales. The increase is primarily due to
increased unit production and the fact that prior year results were impacted
by the Company's move to the Moorpark facility. Gross profit for the
Aerospace Division in the second quarter of fiscal 2000 was $4.3 million, or
33.3% of division net sales, compared with gross profit for the second
quarter of fiscal 1999 of $3.9 million, or 37.7% of division net sales. The
decrease as a percent of sales is primarily due to product mix.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
OPERATING EXPENSES
Consolidated operating expenses for the second quarter of fiscal 2000
were $3.9 million, compared with operating expenses of $4.1 million for the
second quarter of fiscal 1999. Operating expenses for the Automotive Products
Division for the second quarter of fiscal 2000 were $2.6 million, or 7.3% of
division net sales, compared with operating expenses of $2.3 million, or 7.1%
of division net sales, for the second 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 second quarter of fiscal 2000 were $1.3 million, or 10.4% of
division net sales, compared with operating expenses of $1.8 million, or
17.6% of division net sales, for the second quarter of fiscal 1999. The
decrease is primarily attributed to a decrease in general and administrative
expenses combined with an increase in revenues.
OTHER INCOME AND EXPENSE
Interest expense was $5.2 million in the second quarter of fiscal 2000
compared to interest expense of $4.6 million for the second quarter of fiscal
1999. The increase of $0.6 million was due to increased borrowings on the
Revolver and higher interest rates.
COMPARISON OF THE SIX MONTHS ENDED APRIL 30, 2000 TO THE SIX MONTHS ENDED
MAY 2, 1999
NET SALES
Consolidated net sales for the six months ended April 30, 2000 were $86.4
million, compared to net sales of $80.2 million during the same period in
fiscal 1999. Net sales for the Automotive Products Division for the first six
months of fiscal 2000 increased 7.2% to $66.9 million from $62.4 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 six months of fiscal 2000
increased 10.2% to $19.5 million from $17.7 million during the comparable
period of fiscal 1999 primarily due to significant shipments of products used
on several tactical missile programs.
GROSS PROFIT
Consolidated gross profit for the six months ended April 30, 2000 was
$16.1 million, compared to gross profit of $15.0 million for the same period
of fiscal 1999. Gross profit for the Automotive Products Division for the
first six months of fiscal 2000 was $9.6 million, or 14.3% of division net
sales, compared with gross profit for the comparable period of fiscal 1999 of
$8.6 million, or 13.7% of division net sales. The increase is primarily due
to increased unit production. Gross profit for the Aerospace Division for the
first six months of fiscal 2000 was $6.5 million, or 33.5% of division net
sales, compared with gross profit for the comparable period in fiscal 1999 of
$6.4 million, or 36.2% of division net sales. The decrease as a percent of
sales is primarily due to product mix.
OPERATING EXPENSES
Consolidated operating expenses for the six months ended April 30, 2000
were $8.3 million, compared with operating expenses of $7.0 million for the
comparable period of fiscal 1999. Operating expenses for the Automotive
Products Division for the first six months of fiscal 2000 were $5.7 million,
or 8.4% of division net sales, compared with operating expenses of $4.0
million, or 6.4% of division net sales, for the comparable period 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 six months of fiscal 2000 were $2.7
million, or 13.9% of division net sales, compared with operating expenses of
$3.0 million, or 16.8% of division net sales, for the comparable period of
fiscal 1999. The decrease is primarily attributed to a decrease in general
and administrative expenses combined with an increase in revenues.
OTHER INCOME AND EXPENSE
Interest expense was $10.2 million for the first six months of fiscal
2000 compared to interest expense of $6.9 million for the comparable period
of fiscal 1999. The increase of $3.3 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 11.0% at April 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 April 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 April 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 April 30,
2000, the Company had $13.9 million outstanding under the Revolving Credit
Facility. The total amount available under the Revolver at April 30, 2000 was
$6.1 million subject to compliance with certain financial covenants. As of
April 30, 2000, the Company was not in compliance with certain financial
covenants contained in the New Credit Facility. Although the Company was in
compliance with minimum EBITDA and Consolidated Interest Coverage Ratio
requirements, the Company was not able to satisfy the Leverage Ratio test due
to a delay in the processing of a substantial income tax refund outside of
the Company's control; therefore, a planned $6 million payment of the
Revolving Credit Facility could not be made until May 3, 2000, three business
days after triggering the non-compliance. Since that date, the Company has
been in compliance with all financial covenants. 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 of the Leverage Ratio for the
aforementioned period.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 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
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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. 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. 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 that inspection for several months. 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 intends to terminate its lease of the Hollister
premises. 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 the April 24th incident.
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. The Company intends to defend itself vigorously
against these charges. At this stage, it is not possible to predict or assess
the likelihood of an unfavorable outcome or to predict the amount of
potential liabilities associated with the misdemeanor charges.
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
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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.
SPECIAL DEVICES, INCORPORATED
Dated: June 14, 2000 /s/ THOMAS W. CRESANTE
-----------------------------------------------
Thomas W. Cresante
President and Chief Executive Officer, Director
Dated: June 14, 2000 /s/ JOSEPH A. STROUD
-----------------------------------------------
Joseph A. Stroud
Executive Vice President and Chief Financial
Officer, Assistant Secretary, Director
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