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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K405
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: OCTOBER 31, 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 incorporation or (I.R.S. Employer Identification No.)
organization)
14370 WHITE SAGE ROAD, MOORPARK, CALIFORNIA 93021
(Address of principal executive offices) (Zip Code)
(805) 553-1200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
11 3/8% SENIOR SUBORDINATED NOTES DUE 2008
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Indicate by check mark whether the Registrant: (l) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
As of January 26, 2001, the number of outstanding shares of the Registrant's
common stock was 3,712,764.
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SPECIAL DEVICES, INCORPORATED
INDEX TO ANNUAL REPORT ON FORM 10-K
PAGE
--------
PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 13
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 14
Item 6. Selected Consolidated Financial Data........................ 14
Item 7. Management's Discussion and Analysis of Financial Condition 15
and Results of Operations...................................
Item 7A. Quantitative and Qualitative Disclosures about Market
Risks....................................................... 21
Item 8. Financial Statements and Supplementary Data................. 21
Item 9. Changes in and Disagreements with Accountants on Accounting 21
and Financial Disclosure....................................
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 22
Item 11. Executive Compensation...................................... 27
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 30
Item 13. Certain Relationships and Related Transactions.............. 32
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.................................................... 34
NOTE CONCERNING FORWARD-LOOKING INFORMATION
This report 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.
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PART I
ITEM 1. BUSINESS
In this report, the "Company," "we," "us" and "our" refer to Special
Devices, Incorporated and its wholly owned subsidiary Scot, Incorporated (Scot)
through September 21, 2000 (the date we completed the divestiture of Scot),
unless the context requires otherwise. The Company's fiscal year is November 1
through October 31. Unless otherwise noted, all references to years, such as
"during 2000", means the Company's fiscal year.
OVERVIEW
We are 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.
We have two divisions: an Automotive Products Division and an Aerospace
Division. We believe that our Automotive Products Division is the world's
largest independent 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 ("OEMs"). 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 missiles, weapons and launch vehicles.
Our principal executive offices are located at 14370 White Sage Road,
Moorpark, California 93021 and our phone number is (805) 553-1200.
HISTORY
Special Devices, Incorporated was founded in the late 1950s in Pacoima,
California to manufacture pyrotechnics for motion picture special effects
applications. In 1960, we constructed a new facility in Newhall, California for
the production of military pyrotechnic devices.
During the 1980s, increased defense spending and a broadening of our product
lines allowed us to become a leading manufacturer of high-reliability initiators
for weapons systems and safe-and-arm and arm-fire devices. By the end of the
1980s, the decline of the Cold War and rising budget deficits were placing
downward pressure on defense spending. At the same time Congress passed
legislation mandating the increased use of airbags in passenger cars and
automotive OEMs were beginning to market the superior safety of cars equipped
with airbags. As a result, we decided to maintain our aerospace business and
aggressively penetrate the automotive market. In 1989, we signed a five-year
contract to supply initiators to TRW, Inc., one of the leading manufacturers of
automotive airbags. Through the 1990s, we gained additional airbag customers and
established our position as a leading supplier of initiators and pyrotechnic
devices to the world automotive and aerospace markets.
To accommodate our growth, we constructed during 1998 and 1999 a new,
state-of-the-art facility in Moorpark, California. We vacated our Newhall
facility and relocated to Moorpark in 1999.
In December 1998, we consummated a recapitalization (the "Recapitalization")
in which all shares of our Common Stock, other than those retained by certain
members of management and certain other stockholders (the "Continuing
Stockholders"), were converted into the right to receive $34 per share in cash.
In connection with the Recapitalization, we delisted our Common Stock from the
NASDAQ Stock Market, and accordingly filed for deregistration with the
Securities and Exchange Commission ("SEC").
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In July 1999, we entered into a Contribution, License and Lease Agreement
with McCormick Selph, Inc. ("MSI"), an affiliate of our controlling stockholder,
pursuant to which the Company received certain assets and licensed the
intellectual property comprising the micro gas generator ("MGG") automotive
product line. MGG units are used by the automotive industry in seat belt
pretensioner applications. The Contribution, License and Lease Agreement was
amended and restated in September 2000 to convey all of MSI's rights to the
intellectual property to the Company. The MGG product line was moved to our
Mesa, Arizona facility during the second half of 2000.
We completed the divestiture of Scot to an investor group on September 21,
2000 (the "Scot Divestiture"). Scot, located in Downers Grove, Illinois,
manufactures mission critical and other pyrotechnic devices for the aerospace
and defense industries.
AUTOMOTIVE PRODUCTS DIVISION
GENERAL
Our Automotive Products Division was created in 1989 after the United States
government adopted regulations requiring the installation of airbags and other
crash protection systems in all new passenger automobiles. Since that time,
demand for our initiators has grown rapidly. We attribute this growth in large
part to the continuing evolution of automotive safety standards and increased
customer preferences for airbag-related safety options. We expect continued
growth in the demand for our products as the number of airbag-equipped vehicles
increases, the number of airbags per vehicle grows, and our customers implement
new technologies. These new technologies include seat belt pretensioners and
"smart" airbag systems, both of which we expect will require new types of
initiators and sometimes more than one initiator per product.
The Automotive Products division accounted for 78%, 75% and 79% of our net
sales during fiscal years 2000, 1999 and 1998, respectively.
INDUSTRY OVERVIEW
One of the major reasons for the establishment of the Automotive Products
Division was the adoption by the National Highway Traffic Safety Administration
of regulations that initially required all passenger automobiles manufactured on
or after 1989 for sale in the United States to have automatic frontal crash
protection systems for the driver and front passenger. Beginning in 1994 similar
requirements for light trucks and vans went into effect. Airbags and automatic
seat belts were the two initial means of compliance with these regulations.
In 1994, these regulations were amended to require that airbags be the
automatic frontal crash protection system used for both the driver and front
passenger in at least 95% of passenger automobiles manufactured from September
1996 to August 1997 for sale in the United States, and in 100% of passenger
automobiles manufactured on or after September 1997 for sale in the United
States. For light trucks and vans, the amended regulations require that airbags
be the automatic frontal crash protection system used for at least the driver in
no less than 80% of light trucks and vans manufactured from September 1997 to
August 1998 for sale in the United States, and for both the driver and front
passenger in 100% of light trucks and vans manufactured on or after September
1998 for sale in the United States. In addition to these requirements,
automobile OEM's have recently introduced other safety restraint devices,
including side airbags, head protection airbags and seat belt pretensioners.
In response to concerns over injuries caused by airbag deployment for
out-of-position occupants (primarily children and infants), research is ongoing
to develop "smart" airbag systems. The first generation of these systems, which
deploys an airbag at lower forces, has been introduced. The next generation
systems will have the ability to detect weight and position of the occupant.
Most of these
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new systems have "dual chambers," each of which requires an initiator. Research
and development is currently in process for rear seat airbag systems.
Automotive airbag systems consist of six basic components: sensors, a
diagnostic and firing module, an initiator (the product we manufacture), a
combustion chamber, a gas generator and a specially treated fabric bag. Once the
sensors detect an impact of sufficient severity, the diagnostic and firing
module transmits an electrical charge to the initiator. The initiator then
fires, igniting the gas generator in the combustion chamber that burns very
rapidly, producing a gas that inflates the bag. The entire process takes
approximately 40 milliseconds. The diagnostic module also tests the initiator
each time the automobile is started.
PRODUCTS
We believe we are the world's largest independent supplier of airbag
initiators and micro gas generators. Initiators and micro gas generators are
devices that receive a low-energy electrical signal from an electronic firing
module and convert that signal to a high-energy output by a thermal reaction of
compacted pyrotechnic materials. In the event of an automobile accident, airbag
initiators activate inflators, which in turn inflate an airbag. Micro gas
generators are initiators used in seat belt pretensioning devices, which take
dangerous slack out of seat belts in the event of an accident.
The Automotive Products Division currently produces over 125 different
airbag initiators for foreign and domestic manufacturers of inflators. We also
began manufacturing micro gas generators in 1999 and have a variety of other
initiator products that are currently at various stages of the qualification
process. In order to maintain our leadership position in the industry, we are in
the process of developing "smart" initiator technologies that will be used in
new, integrated occupant protection systems.
CUSTOMERS
Currently, the major domestic manufacturers of airbag inflators are Autoliv
ASP Incorporated, TRW, BAICO (owned by Atlantic Research Corporation) and
Inflation Systems Incorporated (owned by Takata), each of whom incorporates our
initiators in certain of its airbag systems or sub-systems. Other companies have
indicated that they may enter the domestic automotive airbag market and
reportedly are working on the development of airbag systems. None of the current
manufacturers produces all of the components of an airbag system although
Autoliv has pursued a vertical integration strategy. Most components of the
system are purchased from suppliers like us, and the manufacturers concentrate
on the design, assembly, testing and qualification of the airbag systems.
The major non-U.S. manufacturers of inflators which we sell our products to
are TRW (Europe), Autoliv (Europe), Takata-Petal (Europe), Daicel Chemical
Industries (Japan), Autoliv Nichiyu (Japan) and Takata (Japan).
Customers providing more than 10% of our net sales for the year ended
October 31, 2000 include TRW (32.8%), Autoliv (24.8%) and ARC (10.5%). The loss
of any of these three customers would have a material adverse effect on the
automotive segment of our business.
BACKLOG
The majority of sales for the Automotive Products Division are achieved
under long-term agreements specifying minimum customer requirements to be
supplied by us during the term of the agreements. Purchase order releases are
updated weekly by each customer and include "firm" shipping requirements for the
next 8 to 16 weeks. The Automotive Products Division does not reflect an order
in backlog until it has received a purchase order from a customer that specifies
the quantity ordered and the delivery dates required. Since these orders are
generally shipped within 12 to 16 weeks of
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receipt of the order, the amount of "firm" backlog for the Automotive Products
Division at any given time is not indicative of sales levels expected to be
achieved over the next 12-month period.
COMPETITORS
There are two major suppliers of airbag initiators in the United States, the
Company and OEA, Inc. (purchased by Autoliv in 2000). We believe we hold the
largest share of the domestic airbag initiator market. In addition, we have
identified four major suppliers of airbag initiators in Europe and one major
supplier of initiators in Japan.
Other companies may choose to enter the automotive initiator market in the
future. However, a new entrant would need to achieve high sales volumes of
relatively low-priced units in order to recover significant startup costs,
including those relating to equipment outlays. In addition, each automotive
initiator platform must pass numerous tests established by automobile OEM's and
airbag system manufacturers. These testing phases typically take approximately
12 to 18 months to complete and are very expensive. We believe a new entrant
would require many years and significant up-front expenditures to replicate the
qualification and testing required to successfully market the mix of products
that we offer.
SALES AND MARKETING
The Automotive Products Division's management, engineers and personnel
maintain close contact with each customer and monitor developments in the
automotive industry and safety restraint markets. Recent efforts have focused on
the status of products such as side and rear seat airbag systems, seat belt
pretensioners and "smart" airbag systems.
For new programs, the Automotive Products Division generally receives a
request for quote from its customers. Program management handles high volume
production quotes. Contract management handles spot buys and prototype
production quotes. We respond to customer inquiries with price quotes,
configuration confirmation and prospective shipping dates. Lot acceptance
testing results are available upon request for confirmed orders. When supplied
with specific performance parameters, performance data is also supplied to
customers.
AEROSPACE DIVISION
GENERAL
Our Aerospace Division has been designing and manufacturing products for the
aerospace industry for nearly 40 years. Its customers are primarily the U.S.
Department of Defense and its prime contractors and subcontractors. The
Aerospace Division's products include initiators and devices that incorporate
these initiators such as explosive bolts, cutters, actuators, valves, pin
pullers and safe-and-arm and arm-fire devices. Our wholly owned subsidiary,
Scot, which was sold in September 2000, designed and manufactured devices for
launch vehicles and aircraft egress applications as well as sophisticated test
products such as parachute release and oxygen mask testers.
The Aerospace Division accounted for 22%, 25% and 21% of our consolidated
net sales during the years ended October 31, 2000, 1999 and 1998, respectively.
Excluding the sales of Scot, the Aerospace Division, accounted for 15%, 13% and
12% of our consolidated net sales during the years ended October 31, 2000, 1999
and 1998, respectively.
INDUSTRY OVERVIEW
The aerospace market is comprised of a large number of companies that
manufacture a wide variety of products and provide a diverse group of services.
The Aerospace Division has focused its
6
efforts primarily on the design, development and manufacture of highly reliable
ordnance and pyrotechnic products incorporated in tactical missiles, weapons and
launch vehicles.
PRODUCTS
The Aerospace Division has manufactured and qualified over 450 different
devices for use on various tactical missile and launch vehicle platforms over
the last forty years. These devices are critical components on the platforms
they serve. While the Company's products represent a small fraction of the cost
of the assets they support, the cost of failure is typically high, which drives
customers to high-quality, high-reliability suppliers, such as us. The Company's
products generally fall into one of three categories: safe-and-arm and arm-fire
devices, initiators and other pyrotechnic devices. In its simplest form, a
safe-and-arm device prevents a rocket motor from being fired accidentally and,
when commanded to do so, ignites the rocket motor in a very reliable manner.
Initiators and the devices that incorporate them are used to ignite larger
pyrotechnic systems, including rocket motors, and to activate mechanical
devices, such as valves and directional fins. In addition to safe-and-arm
devices, arm-fire devices and initiators, we sell a variety of other pyrotechnic
components and subassemblies. Among these products are items such as explosive
bolts, separation nuts and bolt cutters.
Each of the devices manufactured by the Aerospace Division is a component in
a larger product of its customer. As a result, we and our competitors must
respond to specification requirements by devoting significant engineering,
development and testing resources.
Although we have few patents, there are practical barriers to entry for
potential new competitors. Each of our products is made to precise technical
specifications and must be thoroughly tested before being used in a customer's
products. Testing and approval is a costly and time-consuming process.
CUSTOMERS
The end user of the Aerospace Division's products is generally the U.S.
Department of Defense. In most cases, we are a subcontractor to the prime
contractor or other subcontractor.
The current trend of the Aerospace Division's customers is to reduce their
supplier base to a few proven, reliable sources. During the past several years,
such determinations have been made based on historical performance, audits and
an analysis of the future viability of the supplier. We expect to continue as a
supplier to our current customers.
No program of the Aerospace Division accounted for more than 10% of our
consolidated net sales during any of the three years ended October 31, 2000.
BACKLOG
The Aerospace Division's backlog was $25.1 million at October 31, 2000,
compared to $30.3 million (excluding $13.4 million attributable to Scot) at
October 31, 1999. Backlog includes the remaining contract amount for units yet
to be shipped for signed contracts (excluding renewals or extensions that are at
the discretion of the customer) or contract award notifications with firm
delivery dates and prices. Backlog is calculated without regard to possible
adjustments for scope change or potential cancellations until such changes or
cancellations occur. Of the total Aerospace Division backlog at October 31,
2000, we expect that approximately $10.6 million will be delivered beyond fiscal
2001.
COMPETITORS
During the bid process for the initial contract for a program, the Aerospace
Division competes with several firms, some with greater financial resources than
we have. Once the initial contract is
7
awarded, contracts for additional quantities are generally entered into on a
negotiated price basis and are not competitively bid.
In recent years, the number of our competitors has decreased through both
attrition and acquisitions by the remaining companies. We have identified five
competitors in the aerospace pyrotechnic market, and we do not believe that any
one company dominates the market.
SALES AND MARKETING
Marketing efforts for the Aerospace Division are focused on identifying
emerging new programs, that have long-term production potential and the prime
contractors or subcontractors who are likely to receive contracts for such
programs. We have a marketing team whose duties include identifying and pursuing
new program opportunities, customers, potential teaming arrangements and new
business development strategies.
For new programs, the Aerospace Division generally receives a request for
quotation from its customer. We respond to customer inquiries with quotations
and extensive cost, technical and management proposals. In some cases, we will
provide prototype hardware for the customer's evaluation prior to source
selection. We believe that customers award contracts based upon the technical
proposals submitted, which include design innovation, analysis and compliance
with specifications, in addition to pricing.
Many contracts with respect to the U.S. Department of Defense programs
involving amounts in excess of $500,000 are subject to audit by the United
States government. Most of our contracts with respect to the U.S. Department of
Defense programs are subject to termination at the government's convenience.
GENERAL BUSINESS MATTERS
MANUFACTURING
GENERAL. Our production process consists of fabricating and assembling
hardware components and separately preparing the pyrotechnic charge. Production
of the electro-mechanical assemblies involves the purchase of machined
components, seals and other materials, the mechanical assembly of the components
and the testing of the completed units. Throughout the entire process, strict
quality assurance controls are maintained in order to obtain the lowest possible
theoretical failure rates. After assembly, the products are functionally tested
on a sample basis as required by each customer or the applicable contract.
We manufacture the pyrotechnic charge from raw generic chemicals. These
chemicals are readily available from a variety of suppliers, and we have handled
and processed these fuels and oxidizers for nearly 40 years. Some of the
pyrotechnic fuels are delivered to us in bulk in a wet and non-volatile form. We
dry the pyrotechnic fuels before use. These fuels are then mixed with oxidizers
and pressed in small quantities into the metal housings of the specific product
being made. Handling and processing pyrotechnic materials requires extensive
experience and expertise as well as the proper equipment and facilities.
While both the Automotive Products Division and the Aerospace Division
manufacture similar pyrotechnic products, each division's manufacturing process
is unique. Because the Automotive Products Division must produce large
quantities of highly reliable products at high speeds, automation and process
engineering are as important to us as product design. We have a staff of highly
trained automation engineers, technicians and operators whose goal is to
maximize yield and product quality. In contrast, the Aerospace Division
manufactures primarily engineered-to-order products pursuant to custom
specifications. Lead times typically range between six to nine months in order
to satisfy the highly technical nature and intense product testing required
prior to product shipment. As a result, the
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Aerospace Division produces a wider variety of products at significantly lower
volumes than the Automotive Products Division. However, these products typically
generate higher gross margins.
QUALITY CONTROL. Each type of initiator manufactured by the Automotive
Products Division must qualify for use by passing numerous tests established by
the automobile and airbag system manufacturers. The initial test phase is design
validation, which is intended to demonstrate that the design of the initiator is
capable of performing the required function within the stated specifications.
The second test phase is product validation, which is intended to demonstrate
that we have the management, personnel, equipment and facilities to manufacture
the initiator in production quantities to design specifications. The design
validation and product validation qualification phases must be repeated for each
new initiator design. The product validation qualification phase must also be
repeated for each facility at which initiators are produced. These initial
qualification procedures are very costly and time consuming. The product
validation qualification phase, for example, requires a supplier to have in
place its management, personnel, equipment and facilities prior to the time they
would otherwise be required for production.
Products manufactured by the Aerospace Division also must meet rigorous
standards and specifications for workmanship, process, raw materials, procedures
and testing. Customers, and in some cases the U.S. Department of Defense as the
end user, perform periodic quality audits of the manufacturing process. Certain
customers and the U.S. Department of Defense maintain representatives at our
facilities to monitor quality assurance.
RISK MANAGEMENT AND INSURANCE
The drying, sifting, mixing and processing of pyrotechnic materials involves
certain risks and potential liabilities. Our safety and health programs provide
specialized training to employees working with pyrotechnic materials.
Pyrotechnic chemicals generally are delivered to us and are stored in a
non-volatile form. The pyrotechnic materials are then dried, sifted and blended
in a separate building specially designed for these operations. Workstations are
designed to shield employees from any accidental initiation incidents.
Furthermore, our machines are designed so that an accidental initiation incident
will be contained in a protective enclosure to minimize damage. For a discussion
of accidental initiation incidents that occurred at the Company's former
Hollister, California facility and its Moorpark facility on April 24, and
September 1, 2000, respectively, see "Legal Proceedings." The Company has
notified its insurance carriers that it intends to file a claim for damages
resulting from the accidents.
Transportation of pyrotechnic materials also involves certain risks and
potential liabilities. For a discussion of an accidental initiation incident
which occurred in February 1999 in connection with the transportation of
pyrotechnic materials at our former Newhall facility, see "Legal Proceedings."
The Company has filed a claim with its insurance carriers for damage to personal
property, buildings, and business interruption resulting from the accident.
We maintain a liability insurance program covering a number of risks. Our
insurance program includes comprehensive general liability and products
liability coverage in the amount of $100 million for the Aerospace Division and
$102 million for the Automotive Products Division. We also have casualty and
fire insurance with various coverage limits for damage to personal property and
buildings, business interruption, earthquakes, boilers and machinery and
automobile liability. Pollution liability is excluded from our comprehensive
general liability insurance policy.
We are engaged in a business that could expose us to possible claims for
injury resulting from the failure of products sold by us, notably initiators for
airbag systems. We received one product liability claim in 1999, but have been
indemnified by Daimler Chrysler, who also is named in the complaint. Daimler
Chrysler is vigorously defending the claim and is paying all costs associated
with the defense. We maintain product liability insurance coverage as described
above. However, there can be no
9
assurance that other claims will not arise in the future and that the proceeds
of our insurance policies will be sufficient to pay future claims or that we
will be able to maintain the same level of insurance.
GOVERNMENT REGULATION
As a contractor and subcontractor of the U.S. Department of Defense, we are
subject to various laws and regulations more restrictive than those applicable
to non-government contractors. We are subject to periodic audits to confirm
compliance with these laws. Violations can result in civil and/or criminal
liability as well as suspension or debarment from eligibility for awards of new
government contracts or contract renewals. As of the date hereof, we know of one
pending preliminary inquiry regarding compliance with government policies by the
Aerospace Division. See "Legal Proceedings."
ENVIRONMENTAL REGULATION
We use various hazardous materials in our manufacturing processes, including
organic solvents and pyrotechnic materials. Our operations are subject to
numerous federal, state and local laws, regulations and permit requirements
relating to the handling, storage and disposal of those substances, including
the Clean Water Act, the Clean Air Act, the Resource Conservation and Recovery
Act, the Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA), and the Occupational Safety and Health Act. We believe that we are in
substantial compliance with applicable laws and regulations and that we have
obtained or are in the process of obtaining necessary permits. While compliance
with such laws and regulations has the effect of increasing costs of operations,
these costs must also be incurred by our competitors and, therefore, they do not
materially adversely affect our competitive position. Under certain
environmental laws, a current or previous owner of real property, and parties
that generate or transport hazardous substances that are disposed of at real
property, may be liable for the costs of investigating and remediating such
substances on or under the property. CERCLA and similar state laws impose
liability on a joint and several basis, regardless of whether the owner,
operator, or other responsible party was at fault for the presence of such
hazardous substances.
In connection with our relocation of operations from Newhall to Moorpark, we
may be required to conduct environmental investigations at the Newhall site. Due
to the site's history of industrial use by multiple parties, it is possible that
such investigations will reveal the presence of hazardous substances in soil
and/or groundwater, which could require remediation. We cannot determine whether
the remedial costs we may be required to incur at Newhall, if any, will be
material. Such costs that may be incurred in connection with the Newhall cleanup
may be shared with other responsible parties, although this cannot be
guaranteed.
To date, our efforts to ensure compliance with applicable environmental laws
have not had a material adverse effect on our financial condition, results of
operations or competitive position. For a discussion of certain aspects of past
compliance see "Legal Proceedings." Furthermore, although no assurances can be
given, we do not believe that future compliance with existing environmental laws
will have such a material adverse effect or require material expenditures in the
future.
EMPLOYEES
At October 31, 2000, we had approximately 720 full-time employees in
Moorpark, California and approximately 523 full-time employees in Mesa, Arizona.
None of our employees is represented by a collective bargaining unit. We
consider our relationship with our employees to be good.
10
INTELLECTUAL PROPERTY
In November 1990, we entered into the DBS License Agreement pursuant to
which we granted Davey Bickford Smith ("DBS") a license to:
- use all patented and non-patented technical information, know-how, data,
systems, programs and specifications (collectively, "Technology") used in
the manufacture of initiators or incorporated in initiators (whether such
Technology is owned by us or developed by us subsequently) and
- distribute initiators using the Technology worldwide, provided that DBS
may not sell such initiators to TRW or its affiliates in the U.S.
Until December 31, 1998, DBS was required to pay royalties to us under the
agreement. From and after January 1, 1999, DBS is no longer obligated to pay
royalties to us, and DBS is entitled to continue using the Technology
perpetually on a royalty-free basis. As DBS failed to meet certain distribution
requirements by December 31, 1998, we have the right to license the Technology
to third parties. To date, DBS has not manufactured or distributed any products
under the DBS License Agreement. Significant competition from DBS in Europe or
the U.S. could have a material adverse effect on us.
ITEM 2. PROPERTIES
Our corporate headquarters are located in the City of Moorpark, in Ventura
County, north of Los Angeles. The Moorpark facility, which was completed during
1999 and is owned by us, consists of six buildings that cover approximately
170,000 square feet. This facility is located on 280 acres of land and is used
by both the Automotive Products Division and the Aerospace Division.
We have an additional facility in Mesa, Arizona on approximately 21 acres of
land used for our Automotive Products Division. The Mesa facility is owned by us
and consists of several buildings aggregating approximately 60,000 square feet,
including a second blending facility and an approximately 12,000-square-foot
warehouse.
Our former subsidiary, Scot, had manufacturing facilities and principal
offices located in Downers Grove, Illinois that consisted of approximately
47,000 square feet of office and manufacturing facilities located on three and
one-half acres that are owned by Scot. Scot also owned 29 acres of land in
Ogden, Utah, on which Scot tests various products. We sold Scot in September
2000.
We leased a portion of premises in Hollister, California from MSI for our
MGG automotive product line. We relocated the MGG product line to our Mesa,
Arizona facility during the second half of 2000 and terminated the lease in
September 2000.
In May 1997, we signed a seven-year lease for an approximate 25,000 square
foot building in Moorpark, California, for the glass seal operation of the
Automotive Products Division. Monthly rental expense as of October 31, 2000 was
approximately $14,000. We discontinued glass seal operations in June 2000 and
terminated this lease in November 2000 with no further obligation to the
Company.
ITEM 3. LEGAL PROCEEDINGS
OSHA INVESTIGATIONS. In February 1999, a Company employee was killed when
an accidental initiation incident occurred at the Company's former Newhall
facility. The State of California, Department of Industrial Relations, Division
of Occupational Safety and Health ("Cal-OSHA") initiated an investigation of the
accident, which concluded in August 1999. The investigation resulted in the
issuance of citations for alleged safety violations and fines aggregating
approximately $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
11
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 approximately $30,000.
Two other Cal-OSHA investigations are pending. On April 24, 2000, an
accidental initiation incident occurred at the premises leased by the Company
from MSI in Hollister, California for the Company's MGG production line, which
it acquired from MSI in July 1999. The incident resulted in the death of one
Company employee. Prior to the April 24, 2000 incident, the Company had intended
to move its MGG operations 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. Cal-OSHA conducted a post-incident and process safety
management inspection, which resulted in the issuance on October 20, 2000 of
citations for alleged safety violations and proposed fines aggregating over
$250,000. The Company has appealed the citations. The appeal is pending. Because
the accident resulted in a fatality, Cal-OSHA's Bureau of Investigation is
required to conduct its own investigation to determine whether to refer the
matter to the District Attorney's Office. 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. On
September 1, 2000, an accidental initiation incident occurred at the Company's
Moorpark facility. Two employees were injured. Cal-OSHA is conducting a
post-incident and process safety management inspection. We do not expect to have
the results of the inspection until February 2001, and, thus, at this stage, it
is not possible to predict or assess the likelihood of an unfavorable outcome.
At this stage, it is not possible to predict the amount of potential liabilities
associated with these pending Cal-OSHA matters, which could result in civil
and/or criminal liabilities and penalties, and could cause the Company's defense
operations to be suspended or debarred from military or government sales, which
would materially and adversely affect our financial condition, results of
operations and liquidity.
ENVIRONMENTAL INVESTIGATION. In August 1999, representatives of the
California Environmental Protection Agency ("Cal EPA") conducted an inspection
of the Company's former Newhall facility. Following the inspection, Cal EPA
issued a notice of violations indicating that there had been unauthorized
burning and treatment of hazardous waste at the facility. In September 1999, a
federal grand jury issued subpoenas requesting copies of documents relating to
the handling of hazardous waste and hazardous materials at the Company's
Newhall, Moorpark, and Mesa facilities, as well as copies of documents related
to other health and safety issues. These state and federal investigations were
concluded in early January 2001 when (1) the Company pled guilty to three counts
of violation of Title 42, United States Code, Section 6928(d)(2)(A) for treating
hazardous wastes without a permit and was sentenced to pay fines, community
service amounts, and other assessments in an aggregate amount of approximately
$1.5 million and to a term of probation of three years; and (2) agreed to pay
civil penalties and related costs and expenses in an aggregate amount of
approximately $0.6 million. These fines and penalties were accrued in the 2000
financial statements.
STOCKHOLDER LITIGATION. Four purported stockholder class action lawsuits
were filed in 1998 in the Delaware Court of Chancery challenging the
Recapitalization. All four lawsuits were dismissed in 2000.
DEFENSE CRIMINAL INVESTIGATIVE SERVICE INVESTIGATION. The Company's
Aerospace Division is under investigation by the Defense Criminal Investigative
Service ("DCIS") of the Office of the Inspector General, Department of Defense.
The DCIS instituted an investigation into allegations that the Company deviated
from contractual requirements relating to the use of organic sealants. The
Company disputes the government's interpretation of the contracts as precluding
the use of such sealants in the manner in which they were used. This matter has
been pending for approximately three years with no change in status over the
past year. If the matter is referred to the U.S. Attorney's Office for possible
prosecution, the U.S. Attorney has informed the Company that prior to taking any
action, the Company will be given the opportunity to rebut the prospective
charges and present its own evidence.
12
One potential consequence of criminal charges, if filed, is the possibility that
the Company would be suspended from future military and federal government
sales, and if convicted, debarred from such sales for a period of time, which
would materially and adversely affect the Company's financial condition, results
of operations and liquidity. At this point, given the limited attention the
matter has received over the past year, it is not possible to predict or assess
the likelihood of an unfavorable outcome or predict the amount of potential
liabilities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As a result of the Recapitalization, our common equity is no longer traded
publicly on the NASDAQ. See public filing form 15-12G dated January 19, 1999.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial data of the Company as of
and for each of the five years in the period ended October 31, 2000. The
financial data for each of the two years in the period ended October 31, 2000 is
derived from the consolidated financial statements of the Company, which
consolidated financial statements have been audited by PricewaterhouseCoopers
LLP, independent accountants. The financial data for each of the three years in
the period ended October 31, 1998 is also derived from the consolidated
financial statements of the Company, which consolidated financial statements
have been audited by KPMG LLP, independent accountants. The data set forth below
should be read in conjunction with the Consolidated Financial Statements and
related Notes thereto appearing elsewhere herein and Item 7--Management's
Discussion and Analysis of Financial Condition and Results of Operations.
FOR THE YEARS ENDED OCTOBER 31
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS)
Statement of operations data:
Net sales:
Automotive........................................ $131,970 $124,552 $135,235 $111,930 $80,235
Aerospace......................................... 36,274 41,947 35,303 28,572 24,247
-------- -------- -------- -------- -------
Total........................................... 168,244 166,499 170,538 140,502 104,482
Cost of sales:
Automotive........................................ 114,303 110,555 110,284 93,159 68,513
Aerospace......................................... 23,510 25,169 21,326 19,394 15,815
-------- -------- -------- -------- -------
Total........................................... 137,813 135,724 131,610 112,553 84,328
Gross profit:
Automotive........................................ 17,667 13,997 24,951 18,771 11,722
Aerospace......................................... 12,764 16,778 13,977 9,178 8,432
-------- -------- -------- -------- -------
Total........................................... 30,431 30,775 38,928 27,949 20,154
Operating expenses:
Automotive........................................ 12,230 9,970 6,459 5,123 3,477
Aerospace......................................... 5,177 6,992 6,564 5,599 4,633
Environmental and other investigation costs....... 2,067 11,117 -- -- --
-------- -------- -------- -------- -------
Total........................................... 19,474 28,079 13,023 10,722 8,110
Earnings (loss) from operations:
Automotive........................................ 5,437 4,027 18,492 13,648 8,245
Aerospace......................................... 7,587 9,786 7,413 3,579 3,799
Corporate......................................... (2,067) (11,117) -- -- --
-------- -------- -------- -------- -------
Total........................................... 10,957 2,696 25,905 17,227 12,044
Other income (expense):
Gain on sale of subsidiary........................ 42,676 -- -- -- --
Other (expense) income, net....................... (21,233) (33,570) (48) 111 129
-------- -------- -------- -------- -------
Total........................................... 21,443 (33,570) (48) 111 129
Earnings (loss) before income taxes................. 32,400 (30,874) 25,857 17,338 12,173
Income tax provision (benefit)...................... 13,981 (10,608) 10,410 6,660 4,725
-------- -------- -------- -------- -------
Net earnings (loss)................................. $ 18,419 $(20,266) $ 15,447 $ 10,678 $ 7,448
======== ======== ======== ======== =======
EBITDA(1)........................................... $ 26,220 $ 16,370 $ 34,400 $ 23,600 $17,400
- --------------------------
(1) EBITDA is the sum of earnings before income taxes, interest, depreciation
and amortization expense, gains on sales of assets, and fines relating to
the Cal EPA investigation (See "Legal Proceedings"). EBITDA is presented
because the Company believes that it is a widely accepted financial
indicator of a company's ability to service indebtedness.
14
OCTOBER 31
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Balance Sheet Data:
Current assets............................................ $ 49,063 $54,772 $ 39,179
Total assets.............................................. $139,837 $155,150 $124,619
Current liabilities....................................... $ 52,876 $44,570 $ 23,508
Long-term debt, less current portion...................... $125,618 $168,600 $ 416
Stockholders' equity (deficit)............................ $(74,514) $(88,531) $ 97,280
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and our Consolidated Financial Statements
and the Notes thereto included elsewhere in this report.
RESULTS OF OPERATIONS
The following table is derived from the Company's statement of operations
data and sets forth, for the periods indicated, certain statement of operations
data as a percentage of net sales.
FOR THE YEARS ENDED
OCTOBER 31
------------------------------
2000 1999 1998
-------- -------- --------
Automotive Products Division
Net sales................................................. 100.0% 100.0% 100.0%
Cost of sales............................................. 86.6 88.8 81.5
----- ----- -----
Gross profit.............................................. 13.4 11.2 18.5
Operating expenses........................................ 9.3 8.0 4.8
----- ----- -----
Earnings from operations.................................. 4.1% 3.2% 13.7%
===== ===== =====
Aerospace Division
Net sales................................................. 100.0% 100.0% 100.0%
Cost of sales............................................. 64.8 60.0 60.4
----- ----- -----
Gross profit.............................................. 35.2 40.0 39.6
Operating expenses........................................ 14.3 16.7 18.6
----- ----- -----
Earnings from operations.................................. 20.9% 23.3% 21.0%
===== ===== =====
2000 COMPARED TO 1999
NET SALES
Consolidated net sales for 2000 were $168.2 million, compared to
consolidated net sales of $166.5 million for 1999. Net sales for the Automotive
Products Division in 2000 increased 6.0% to $132.0 million from $124.6 million
in 1999 primarily due to increased initiator unit shipments partially offset by
lower prices. Net sales for the Aerospace Division in 2000 decreased 13.5% to
$36.3 million from $41.9 million in 1999 primarily due to completion of a
significant contract for bomb racks in 1999 and the sale of Scot in September
2000, offset in part by an increase in shipments of products used on several
tactical missile programs. Net sales for the Aerospace Division (excluding sales
of Scot in both years), increased by $5.3 million or 29.1% to $23.5 million in
2000 from $18.2 million in 1999.
15
GROSS PROFIT
Consolidated gross profit for 2000 was $30.4 million, compared with
consolidated gross profit for 1999 of $30.8 million. Gross profit for the
Automotive Products Division for 2000 was $17.7 million, or 13.4% of division
net sales, compared with gross profit for 1999 of $14.0 million, or 11.2% of
division net sales. The increase in gross profit for the Automotive Products
Division was due to increased unit shipments and successful cost reduction
efforts in Moorpark, partially offset by the manufacturing inefficiencies
associated with the accelerated transfer of the MGG product line to our Mesa,
Arizona facility as a result of the April 24, 2000 accidental initiation
incident at the facility we leased in Hollister, California. See "Legal
Proceedings".
Gross profit for the Aerospace Division for 2000 was $12.8 million, or 35.2%
of division net sales, compared with gross profit for 1999 of $16.8 million, or
40.0% of division net sales. The decrease in gross profit of $4.0 million was
due to product mix (higher percentage of sales of products with lower gross
margins than in 1999), lower volume and the sale of Scot in September 2000.
Gross profit for the Aerospace Division (excluding the gross profit on Scot in
both years), increased $1.6 million or 32.7% to $6.5 million in 2000 from
$4.9 million in 1999.
OPERATING EXPENSES
Consolidated operating expense for 2000 was $17.4 million, compared with
consolidated operating expense for 1999 of $17.0 million (excluding expenses
related to environmental and other investigations in both years), an increase of
$0.4 million or 2.6%. Operating expenses for the Automotive Products Division
for 2000 were $12.2 million, or 9.3% of division net sales, compared with
operating expenses for 1999 of $10.0 million, or 8.0% of division net sales. The
increase is primarily attributable to increased marketing and general and
administrative costs related to staffing additions.
Operating expenses for the Aerospace Division for 2000 were $5.2 million, or
14.3% of division net sales, compared with operating expenses for 1999 of
$7.0 million, or 16.7% of division net sales. The decrease in operating expenses
of $1.8 million was due primarily to a decrease in general and administrative
expenses including performance bonuses and the sale of Scot in September 2000.
Operating expenses for the Aerospace Division (excluding operating expenses for
Scot in both years), decreased $0.1 million or 4.5% to $2.1 million in 2000 from
$2.2 million in 1999.
EXPENSES RELATED TO GOVERNMENT INVESTIGATIONS
There were $2.1 million in expenses related to the settlement of the Cal EPA
investigation in 2000 compared with $11.1 million of legal, consulting and other
costs incurred during 1999. See "Legal Proceedings."
OTHER INCOME AND EXPENSE
Net interest expense for 2000 was $20.3 million, compared with 1999 net
interest expense of $16.6 million. The increase of $3.7 million or 22.1% was the
result of an increase in average debt outstanding as well as higher interest
rates during 2000. The Company recorded a gain on the divestiture of its wholly
owned subsidiary, Scot, of $42.7 million in September 2000. There were no such
gains in 1999. Other expenses were $1.0 million in 2000 compared with
$17.0 million in 1999. Most of the expense in both years was due to certain
costs and management fees incurred in connection with the Recapitalization.
16
1999 COMPARED TO 1998
NET SALES
Consolidated net sales for 1999 were $166.5 million, compared to
consolidated net sales of $170.5 million for 1998. Net sales for the Automotive
Products Division in 1999 decreased 7.9% to $124.6 million from $135.2 million
in 1998 primarily due to lost volume resulting from the February 1999 accidental
initiation incident in Newhall, contractual price decreases, and the inability
to offset these price decreases with increased initiator unit production due to
the disruptions caused by the accident and loss of approvals by our customers to
move certain manufacturing operations from Newhall to Moorpark. Net sales for
the Aerospace Division in 1999 increased 18.8% to $41.9 million from
$35.3 million in 1998 primarily due to increased shipments of products used on
several missile programs and deliveries related to bomb ejector programs.
GROSS PROFIT
Consolidated gross profit for 1999 was $30.8 million, compared with
consolidated gross profit for 1998 of $38.9 million, a decrease of $8.1 million
or 20.9%. Gross profit for the Automotive Products Division for 1999 was
$14.0 million, or 11.2% of division net sales, compared with gross profit for
1998 of $25.0 million, or 18.5% of division net sales. The decrease in gross
profit for the Automotive Products Division was due to unit price concessions
made to the Company's leading automotive customers, the inefficiencies inherent
during the six months required to move certain manufacturing operations from
Newhall to Moorpark, approximately $2.3 million in adjustments to inventory and
certain receivables, and the disruptions associated with the internal
investigation and compliance audit in connection with the Cal EPA and other
investigations in the fourth quarter of 1999. See "Legal Proceedings."
Gross profit for the Aerospace Division for 1999 was $16.8 million, or 40.0%
of division net sales, compared with gross profit for 1998 of $14.0 million, or
39.6% of division net sales. The increase in gross profit of $2.8 million was
due to increased net sales during 1999, while the increase in gross profit as a
percentage of division sales was due to changes in product mix.
OPERATING EXPENSES
Consolidated operating expense for 1999 (excluding expenses related to
environmental and other investigations) was $17.0 million, compared with
consolidated operating expense for 1998 of $13.0 million, an increase of
$4.0 million or 30.2%. Operating expenses for the Automotive Products Division
for 1999 were $10.0 million, or 8.0% of division net sales, compared with
operating expenses for 1998 of $6.5 million, or 4.8% of division net sales. The
increase in operating expenses for the Automotive Products Division on both an
absolute and percentage basis was due to redundant costs incurred during the
Moorpark move as well as increased marketing and general and administrative
costs related to staffing additions.
Operating expenses for the Aerospace Division for 1999 were $7.0 million, or
16.7% of division net sales, compared with operating expenses for 1998 of
$6.6 million, or 18.6% of division net sales. The increase in operating expenses
of $0.4 million was due primarily to increases in performance bonuses, although
operating expenses as a percentage of division net sales decreased due to the
absorption of relatively stable general and administrative expenses over greater
net sales.
EXPENSES RELATED TO GOVERNMENT INVESTIGATIONS
Expenses related to the Cal EPA and other investigations were $11.1 million
in 1999, while no such expenses were incurred in 1998. The $11.1 million
represents legal, consulting and other related costs
17
incurred during the fourth quarter of 1999 as well as an allowance for estimated
costs in connection with this matter. See "Legal Proceedings."
OTHER INCOME AND EXPENSE
Interest expense for 1999 was $16.6 million, compared with 1998 interest
expense of $0.2 million. The increase was the result of increased debt
outstanding resulting from the Recapitalization. Other expenses of
$17.0 million in 1999 were due to certain costs and management fees incurred in
connection with the Recapitalization.
LIQUIDITY AND CAPITAL RESOURCES
The Recapitalization in 1999 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 "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 "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 Revolver bears interest at the Banks Base Rate plus an applicable margin
(an effective rate of 11.5% at October 31, 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 9.7% at
October 31, 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
10.2% at October 31, 2000).
The Company's principal sources of liquidity are cash flow from operations
and borrowings under the Revolver, and, in fiscal 2000, proceeds from the
divestiture by the Company of its wholly owned subsidiary, Scot. The Company's
principal uses of cash are debt service requirements, capital expenditures and
working capital.
Working capital requirements have increased in 2000 compared to 1999 to
service the Company's long-term debt, to support increases in inventories, to
pay fees and other costs in connection with various legal matters (see "Legal
Proceedings"), and to pay income taxes related to the gain on the divestiture of
Scot in September 2000. As of October 31, 2000, the Company had $4.4 million
outstanding under the Revolver. The total amount available under the Revolver at
October 31, 2000 was $4.1 million (in addition to $11.5 million reserved to
satisfy income taxes payable for the year ended October 31, 2000).
The agreement governing the Credit Facility contains customary covenants,
including restrictions on the incurrence of debt, the sale of assets, mergers,
acquisitions and other business combinations, voluntary prepayment of other debt
of the Company, transactions with affiliates, repurchase or redemption of stock
from stockholders, and various financial covenants, including covenants
requiring the maintenance of minimum interest coverage, maximum debt to earnings
before interest, taxes, depreciation and amortization (EBITDA) ratios, and
minimum consolidated EBITDA.
As of April 30, 2000, the Company was not in compliance with the Leverage
Ratio covenant. On June 13, 2000, the Company entered into a Third Amendment and
Waiver to the 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 period.
18
As of July 30, 2000, the Company was not in compliance with certain
financial covenants contained in the Credit Facility. On September 18, 2000, the
Company entered into a Fourth Amendment and Waiver to the Credit Facility
pursuant to which, among other things, the divestiture of Scot was approved,
certain financial covenants were amended and the Company received a waiver for
past non-compliance with its financial covenants. The Company repaid borrowings
of $38.0 million under the Senior Term Loan and $11.5 million under the Revolver
from the proceeds of the Scot divestiture.
On December 14, 2000, the Company notified the Banks that it had reached
settlement with federal and state authorities in connection with the Cal EPA
investigation. See "Legal Proceedings". On January 12, 2001, the Company entered
into a Fifth Amendment and Waiver to the Credit Facility pursuant to which an
additional $2.5 million in availability under the Revolver was provided by the
Banks to pay criminal and civil fines and other fees and expenses related to
these matters, and certain financial covenants were amended.
Substantially all of the Company's assets are pledged as collateral under
the Credit Facility. As required under the terms of the 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.
Our ability to make scheduled payments of principal on, or to pay the
interest on, or to refinance, our debt, or to fund planned capital expenditures,
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 Revolver in an amount sufficient to enable us to
service our debt, or to fund our other liquidity needs.
CAPITAL CALL AGREEMENT
In connection with a previous amendment to the 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.
On September 18, 2000, in connection with the Fourth Amendment and Waiver,
the Capital Call Agreement was terminated, and 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 Credit Facility
and, in certain circumstances, satisfy its federal and state income tax
obligations for the year ended October 31, 2000.
EQUITY OFFERING
In addition to the commitments contained in the New Capital Call Agreement,
the Company has reached an agreement with its controlling stockholder to provide
a minimum of $2.5 million of equity capital to the Company, subject to the
subscription rights of certain other stockholders of the Company to participate
in the offering. Closing is anticipated on or before February 28, 2001. Proceeds
are expected to be used for general corporate purposes.
19
SEASONALITY
The airbag manufacturers' requirements for the Company's initiators are
dependent on the requirements of automobile manufacturers. The Company believes
that the airbag initiator market in the United States has become, and will for
the foreseeable future remain, closely tied with the seasonal fluctuations of
the automotive market. This trend may be offset partially as new applications
for airbags and initiators, such as airbags for side-impact protection and seat
belt pretensioners, are installed by automobile manufacturers.
The Aerospace Division recognizes sales upon the shipment of units or
completion of a task. While there is no identifiable seasonality to the
aerospace business, there can be quarter-to-quarter changes in shipment volume
that result from customer requirements or other factors beyond the Company's
control.
ACCOUNTING DEVELOPMENTS
COMPREHENSIVE INCOME
On November 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," issued by the
Financial Accounting Standards Board (the "FASB"). SFAS No. 130 establishes
standards for reporting and presentation of comprehensive income and its
components in a full set of financial statements. The statement requires only
additional disclosures in the financial statements; it does not affect the
Company's financial position or results of operations. There is no difference
between the net earnings (loss) and comprehensive income (loss) for the Company
for the years ended October 31, 2000 and 1999.
STARTUP ACTIVITIES
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 adopted SOP 98-5 in the first
quarter of 2000 and determined that the impact on its financial statements was
immaterial.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The FASB subsequently issued SFAS No. 137 in June 1999 which
deferred the effective date of SFAS No. 133 until the first quarter of fiscal
years beginning after June 15, 2000. Management believes that the adoption of
SFAS No. 133 and SFAS No. 137 will not have a material impact on the Company's
financial reporting.
REVENUE RECOGNITION
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements," which provides guidance on
the recognition, presentation, and disclosure of revenue in the financial
statements filed with the SEC. The Company will adopt SAB 101 in the fourth
quarter of 2001 and does not expect such adoption to have a material impact on
the financial position or results of operations of the Company.
20
ITEM 7A: 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 Credit Facility, the Company entered
into an interest rate swap agreement with the agent under the Credit Facility.
Under the swap agreement, which is in the notional principal amount of
$35 million, the Company is required to pay a fixed rate of 5.42% to the agent
on each March 17, June 17, September 17 and December 17, commencing on June 17,
1999. On those same dates, the Company will receive a floating-rate payment from
the agent based on the three-month LIBOR rate. The swap agreement terminates on
March 7, 2001.
The Company also is exposed to market risks related to fluctuations in
interest rates on the Notes issued in December 1998. For fixed rate debt such as
the Notes, changes in interest rates generally affect the fair value of the debt
instrument. The Company does not have an obligation to repay the 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements required in response to this Item are
listed under Item 14(a) of Part IV of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As reported in a Form 8-K filed on September 3, 1999, upon recommendation of
the Audit Committee, the Board of Directors engaged PricewaterhouseCoopers LLP
as independent accountants in place of KPMG LLP.
KPMG LLP's reports on the financial statements for the two most recent
fiscal years ended October 31, 1998 and 1997 did not contain an adverse opinion,
disclaimer of opinion, or qualification or modification as to audit scope or
accounting principles. Furthermore, during the two most recent fiscal years and
through August 27, 1999 (the date of dismissal), there have been no
disagreements with KPMG LLP on any matter of accounting principles or practices,
financial statement disclosure or auditing scope and procedures, which
disagreements, if not resolved to the satisfaction of KPMG LLP, would have
caused that firm to make reference to the subject matter of such disagreements
in connection with their reports.
21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and position of each of our
directors and executive officers. All of our officers are elected annually and
serve at the discretion of the Board of Directors.
NAME AGE POSITIONS
- ---- -------- ------------------------------------------------------------
Dr. John F. Lehman............. 58 Chairman of the Board of Directors
Thomas W. Cresante............. 53 Director, President and Chief Executive Officer
George A. Sawyer............... 69 Director, Secretary
Joseph A. Stroud............... 45 Director, Executive Vice President, Assistant Secretary
M. Steven Alexander............ 44 Director
Oliver C. Boileau, Jr.......... 73 Director
Randy H. Brinkley.............. 56 Director
Donald Glickman................ 67 Director
William Paul................... 64 Director
Thomas G. Pownall.............. 79 Director
Donald C. Campion.............. 52 Executive Vice President and Chief Financial Officer
John J. Walsh.................. 42 Executive Vice President and Chief Operating Officer
Andrew G. Bonas................ 40 Vice President--Aerospace Division
Nicholas J. Bruge.............. 37 Vice President--General Manager, Mesa
Patrick J. Carroll............. 57 Vice President--Advanced Product Development
Thomas R. Cessario............. 46 Vice President--Environmental, Health and Safety
Herbert G. Chick............... 57 Vice President--Finance
Alan S. Fabian................. 50 Vice President--Cont. Improvement and Cost Reduction
Programs
Robert Sepulveda............... 47 Vice President--General Manager, Moorpark Automotive
DR. JOHN F. LEHMAN, who became a director of the Company upon consummation
of the Recapitalization and Chairman of the Company in June 1999, is a Managing
General Partner of J.F. Lehman and Company. Prior to founding J.F. Lehman &
Company, Dr. Lehman was an investment banker with PaineWebber Incorporated and
served as a Managing Director in Corporate Finance. Dr. Lehman served for six
years as Secretary of the Navy, was a member of the National Security Council
Staff, served as a delegate to the Mutual Balanced Force Reductions negotiations
and was the Deputy Director of the Arms Control and Disarmament Agency.
Dr. Lehman served as Chairman of the Board of Directors of Sperry Marine, Inc.,
and is a member of the Board of Directors of Elgar Holdings, Inc., Ball
Corporation, ISO Inc. and Burke Industries, Inc. and is Chairman of the Princess
Grace Foundation, a director of OpSail Foundation and a Trustee of LaSalle
College High School.
THOMAS W. CRESANTE became a director, President and Chief Executive Officer
of the Company in October 1999. Prior to joining the Company, Mr. Cresante was
general manager with ITT Hancock Hardware Division from 1984 through 1987, at
which time he was named Vice President of Manufacturing for its Hardware and
Seating Division. Mr. Cresante joined TRW Inflatable Restraints Division in 1990
as the Vice President of Operations. During his tenure with TRW, two of his
startup facilities were named as "10 Best Plants in the U.S." by Industry Week
Magazine. In early 1996, Mr. Cresante joined Allied Signal Aerospace as the Vice
President of Operations and later that year was named President of Allied Signal
Safety Restraints Systems. Mr. Cresante returned to Arizona in 1997 as the
Executive Vice President and Chief Operating Officer for Safety Components
International, Inc.
GEORGE A. SAWYER is currently a director and Secretary of the Company and
also served as Chairman of the Board from December 1998 to May 1999 and interim
Chief Executive Officer from May 1999 to October 1999. Mr. Sawyer is also a
co-founder and Managing General Partner of J.F. Lehman & Company. From 1993 to
1995, Mr. Sawyer served as the President and Chief Executive Officer of Sperry
Marine Inc. Prior thereto, Mr. Sawyer held a number of prominent positions in
22
private industry and in the United States government, including serving as the
President of John J. McMullen Associates, the President and Chief Operating
Officer of TRE Corporation, Executive Vice President and Director of General
Dynamics Corporation, the Vice President of International Operations for Bechtel
Corporation and the Assistant Secretary of the Navy for Shipbuilding and
Logistics under Dr. Lehman. Mr. Sawyer is currently Chairman of Burke
Industries, Inc. and a director of Elgar Holdings, Inc. He also serves on the
Board of Trustees of Webb Institute and is on the Board of Managers of the
American Bureau of Shipping.
JOSEPH A. STROUD, is currently a director and Executive Vice President of
the Company and also served as interim Chief Financial Officer from June 1999 to
October 2000. Mr. Stroud is a General Partner of J.F. Lehman & Company.
Mr. Stroud has been affiliated with J.F. Lehman & Company since 1992 and
formally joined the firm in 1996. Prior to joining J.F. Lehman & Company,
Mr. Stroud was the Chief Financial Officer of Sperry Marine Inc. from 1993 until
Litton Industries, Inc. purchased the company in 1996. From 1989 to 1993,
Mr. Stroud was Chief Financial Officer of the Accudyne and Kilgore Corporations.
Mr. Stroud is currently a director of Elgar Holdings, Inc. and Burke
Industries, Inc.
M. STEVEN ALEXANDER became a director of the Company in April 2000.
Currently, Mr. Alexander is President of Paribas Principal Incorporated (a
licensed small business investment company for U.S. investments owned by BNP
Paribas) and the co-head of the Merchant Banking Group and the head of Equity
Co-investments for North America for BNP Paribas. Prior to his current position
at BNP Paribas, Mr. Alexander was head of the national Merchant Banking Group at
Paribas for the last five years. Mr. Alexander currently serves on the Board of
Directors of U.S. Healthworks, Inc. and Atlantic Coast Fire Protection, Inc.
OLIVER C. BOILEAU, JR. became a director of the Company upon consummation
of the Recapitalization. He joined The Boeing Company in 1953 as a research
engineer and progressed through several technical and management positions and
was named Vice President in 1968 and then President of Boeing Aerospace in 1973.
In 1980, he joined General Dynamics Corporation as President and a member of the
Board of Directors. In January 1988, Mr. Boileau was promoted to Vice-Chairman.
He retired from General Dynamics in May 1988. Mr. Boileau joined Northrop
Grumman Corporation in December 1989 as President and General Manager of the B-2
Division. He also served as President and Chief Operating Officer of the Grumman
Corporation, a subsidiary of Northrop Grumman, and as a member of the Board of
Directors of Northrop Grumman. Mr. Boileau retired from Northrop Grumman in
1995. He is an Honorary Fellow of the American Institute of Aeronautics and
Astronautics, a member of the National Academy of Engineering, the Board of
Trustees of St. Louis University and the Massachusetts Institute of Technology;
and the National Security Advisory Panel of Sandia National Laboratories.
Mr. Boileau is also director of Burke Industries, Inc., Elgar Holdings, Inc.,
United States Marine Repair and Forever Enterprises.
RANDY H. BRINKLEY became a director of the Company in September 1999.
Currently, Mr. Brinkley serves as a Senior Vice President of Programs for Boeing
Satellite Systems Inc., the world's largest manufacturer of commercial
communication satellites. Before joining Hughes Space and Communications Company
(acquired by Boeing in October 2000) in 1999, Mr. Brinkley spent seven years as
a senior executive at the National Aeronautics and Space Administration,
including positions as Program Manager for the International Space Station and
Mission Director of the Hubble Space Telescope repair mission. From 1990 to
1992, Mr. Brinkley managed research and development activities for advanced
aircraft systems and technologies at the McDonnell Douglas Corporation. Prior
thereto, Mr. Brinkley served in the U.S. Marine Corps for 25 years before
retiring as a Colonel.
DONALD GLICKMAN, who became a director of the Company upon consummation of
the Recapitalization, is a Managing General Partner of J.F. Lehman & Company.
Prior to joining J.F. Lehman & Company, Mr. Glickman was a principal of the
Peter J. Solomon Company, a Managing Director of Shearson Lehman Brothers
Merchant Banking Group and Senior Vice President and Regional Head of The First
National Bank of Chicago. Mr. Glickman served as an armored calvary
23
officer in the Seventh U.S. Army. Mr. Glickman is currently Chairman of Elgar
Holdings, Inc. and a director of the MacNeal-Schwendler Corporation, General
Aluminum Corporation, Monroe Muffler Brake, Inc. and Burke Industries, Inc. He
is also a trustee of MassMutual Corporate Investors, MassMutual Participation
Investors and Wolf Trap Foundation for the Performing Arts.
WILLIAM PAUL became a director of the Company upon consummation of the
Recapitalization. Mr. Paul began his career with United Technologies Corporation
("UTC") at its Sikorsky Aircraft division in 1955. Mr. Paul progressed through a
succession of several technical and managerial positions while at Sikorsky
Aircraft, including Vice President of Engineering and Programs and Executive
Vice President and Chief Operating Officer, and in 1983 was named President and
Chief Executive Officer of Sikorsky Aircraft. In 1994, Mr. Paul was appointed
the Executive Vice President of UTC, Chairman of UTC's international operations
and became a member of UTC's Management Executive Committee. Mr. Paul retired
from these positions in 1997. Mr. Paul is also a director of Elgar
Holdings, Inc.
THOMAS G. POWNALL, who became a director of the Company upon consummation of
the Recapitalization, is a member of the investment advisory board of J.F.
Lehman & Company. Mr. Pownall was Chairman of the Board of Directors from 1983
until 1992 and Chief Executive Officer of Martin Marietta Corporation ("Martin
Marietta") from 1982 until 1988. Mr. Pownall joined Martin Marietta in 1963 as
Vice President of its Aerospace Advanced Planning Unit, became President of
Aerospace Operations and, in succession, Vice President, then President and
Chief Operating Officer of Martin Marietta. Mr. Pownall is also a director of
The Titan Corporation, Burke Industries, Inc., Elgar Holdings, Inc., Director
Emeritus of Sundstrand Corporation and serves on the advisory board of Ferris,
Baker Watts Incorporated. He is also a director of the U.S. Naval Academy
Foundation and the Naval Academy Endowment Trust and a trustee of Salem-Teikyo
University.
DONALD C. CAMPION, Executive Vice President and Chief Financial Officer, is
responsible for all matters relating to the Finance, Human Resources, Management
Information Systems and Purchasing functions. Mr. Campion joined the Company in
October 2000 in his current position. Prior to joining the Company, Mr. Campion
was the Chief Financial Officer of two privately held tier one automotive
suppliers: Oxford Automotive from 1997 to 1999 and Cambridge Industries from
1999 to 2000. Mr. Campion worked for General Motors from 1970 to 1997 including
assignments as Chief Financial Officer of their Service Parts Operations from
1993 to 1996 and Senior Vice President and Chief Financial Officer of Delco
Electronics from 1996 to 1997. Mr. Campion has a degree in Applied Mathematics
and a Master of Business Administration from the University of Michigan.
JOHN J. WALSH, Executive Vice President and Chief Operating Officer, is
responsible for developing and implementing the Company's business strategy and
is the corporate champion for the Company's lean manufacturing and Six Sigma
programs. Mr. Walsh joined the Company in May 1999 as Vice President of
Strategic Marketing and Programs and was promoted to his current position in May
2000. Prior to joining the Company, Mr. Walsh was the Director of Sales and
Marketing, Aerospace from 1996 to 1999 and the Director of Aerospace, Defense
and Specialty Products from 1994 to 1996 for The Ensign-Bickford Company.
Mr. Walsh worked as a Product Section Manager and a Business Development Manager
from 1986 to 1993 for Thiokol Corporation. From 1977 to 1986, Mr. Walsh worked
in various engineering roles for two different aerospace manufacturing firms.
Mr. Walsh has a degree in Aeronautical and Astronautical Engineering from Purdue
University and a Master of Business Administration from St. Joseph's University.
ANDREW G. BONAS, Vice President--Aerospace Division, is responsible for
managing the day-to-day operations of the Company's Aerospace Division.
Mr. Bonas joined the Company in April 1999 in his current position. Prior to
joining the Company, Mr. Bonas worked in product design for TRW's Vehicle Safety
Systems. Starting with TRW in 1988, Mr. Bonas worked as a New Product Team
Leader, a Product Design and Development Engineering Manager and a Senior
Engineer. From 1983 to 1988, Mr. Bonas worked in various engineering roles with
two different manufacturing companies producing pyrotechnic devices. Mr. Bonas
holds a degree in Mechanical Engineering from Pennsylvania State University and
a Master of Business Administration from the University of Phoenix.
24
NICHOLAS J. BRUGE, Vice President--General Manager, Mesa, is responsible for
the day-to-day facility operations and general management of the Company's Mesa,
Arizona facility. Mr. Bruge joined the Company in October 2000 in his current
position. Mr. Bruge has fifteen years of automotive airbag and manufacturing
start-ups and turnaround experience, including eight years with TRW Vehicle
Safety Systems in various capacities. Mr. Bruge also has international
experience including three years as Vice President of Operations, Satellite
Facility for RSI Home Products. Mr. Bruge has a degree in Industrial Technology
specializing in Automotive Technology from Arizona State University.
PATRICK J. CARROLL, Vice President--Mr. Carroll joined the Company in 1999
as Vice President-General Manager, Hollister when the Company acquired the Micro
Gas Generator product line. Prior to the acquisition, Mr. Carroll was a
Corporate Vice President for Teledyne, and in 1998 concurrently served as the
General Manager of Commercial Operations for McCormick Selph Ordnance Products,
a business unit of Teledyne Ryan Aeronautical. Prior thereto, Mr. Carroll worked
for FMC Corporation from 1967 to 1995, most recently as General Manager of the
corporate lab. Mr. Carroll has a degree in Mechanical Engineering and Master of
Mechanical Engineering from Pennsylvania State University and an Executive
Master of Business Administration from Stanford University.
THOMAS R. CESSARIO, Vice President--Environment, Health and Safety, is
responsible for all matters regarding environmental, health and safety issues at
the Company. Mr. Cessario joined the Company in November 1999 in his current
position. Prior to joining the Company, Mr. Cessario was the Corporate Director
of Safety, Health and Environment from 1997 to 1999 for Irex Construction
Engineering Corporation. From 1992 to 1997, Mr. Cessario worked in a similar
position with Rollins Environmental, Inc. Mr. Cessario worked as a Division
Manager of Safety, Health and Environment from 1983 to 1992 for Thiokol
Corporation. Mr. Cessario has Bachelor of Science from West Virginia University
as well as a Master of Safety and Industrial Hygiene and a Master of Operations
from Wilmington College.
HERBERT G. CHICK, Vice President--Finance, is responsible for managing the
day-to-day financial operations of the Company. Mr. Chick joined the Company in
August 1999 in his current position. Prior to joining the Company, Mr. Chick was
the Senior Vice President and Chief Financial Officer for the Passenger Systems
division of Rockwell International Corporation from 1996 to 1999. Prior thereto,
Mr. Chick worked as a self-employed consultant from 1993 to 1996. From 1986 to
1993, Mr. Chick held a variety of positions, including Chief Financial Officer,
at a number of manufacturing firms. Mr. Chick has a degree in Aerospace
Engineering from the Georgia Institute of Technology and a Master of Business
Administration from University of California, Los Angeles.
ALAN S. FABIAN, Vice President--Continuous Improvement and Cost Reduction
Programs is responsible for all process improvement and cost reduction programs
at the Company. Mr. Fabian joined the Company as a plant manager in 1995.
Mr. Fabian was appointed General Manager of the Company's Mesa, Arizona facility
in 1997, Vice President in 1999 and to his current position in October 2000.
Prior to joining the Company, Mr. Fabian was the Vice President of Operations
from 1990 to 1995 for Power Convertibles Corporation. Mr. Fabian has a degree in
Engineering from Oakland University and a Master of Industrial Engineering from
Wayne State University.
ROBERT SEPULVEDA, Vice President--General Manager, Moorpark Automotive, is
responsible for the day-to-day facility operations and general management of the
Company's Moorpark, California facility. Mr. Sepulveda joined the Company in May
2000 in his current position. Prior to joining the Company, Mr. Sepulveda worked
as a self-employed manufacturing representative and consultant in the automotive
and aerospace industries from 1998 to 2000. From 1989 to 1998, Mr. Sepulveda
worked for TRW's Driverside Module Facility starting in materials management and
ultimately serving as plant manager. Mr. Sepulveda worked as Materials Manager
for Morton International, an airbag manufacturer, from 1987 to 1989 and as a
Materials Supervisor for Williams International, an aerospace manufacturer from
1980 to 1987. Mr. Sepulveda has a degree in Business Management from Weber State
University.
25
COMMITTEES OF THE BOARD OF DIRECTORS
EXECUTIVE COMMITTEE. The Executive Committee of the Board of Directors is
comprised of Messrs. Lehman, Sawyer, Glickman, Paul and Cresante. The Executive
Committee's main function is to expedite the decision-making process on certain
matters.
AUDIT COMMITTEE. The Audit Committee of the Board of Directors is comprised
of Messrs. Paul, Glickman, Alexander and Boileau. The Audit Committee makes
recommendations concerning the engagement of independent public accountants,
reviews with the independent public accountants the scope and results of the
audit engagement, approves professional services provided by the independent
public accountants, reviews the independence of the independent public
accountants, considers the range of audit and non-audit fees and reviews the
adequacy of the Company's internal accounting controls.
COMPENSATION COMMITTEE. The Compensation Committee of the Board of
Directors is comprised of Messrs. Lehman, Sawyer, Glickman, Stroud, Pownall and
Cresante. The Compensation Committee makes recommendations concerning the
salaries and incentive compensation of employees and consultants to the Company,
and oversees and administers certain of the Company's stock option plans.
STOCK OPTION COMMITTEE. The Stock Option Committee of the Board of
Directors is comprised of Messrs. Lehman, Sawyer, Glickman, Stroud, and Pownall.
The Stock Option Committee is responsible for the administration of the
Company's 1991 and 1999 Stock Option Plans.
26
ITEM 11. EXECUTIVE COMPENSATION
Compensation. Set forth below is information concerning the annual and
long-term compensation for services in all capacities to the Company for 2000,
1999 and 1998, of those persons (collectively, the "Named Executive Officers")
who were, during 2000, (i) the Chief Executive Officer and (ii) the other most
highly compensated executive officers receiving compensation of $100,000 or more
from the Company or one of its subsidiaries.
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION ------------
------------------- SECURITIES ALL OTHER
SALARY BONUS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) OPTIONS ($)
- --------------------------- -------- -------- -------- ------------ ------------
Thomas W. Cresante........................ 2000 335,927 -- -- 750(2)
President and Chief Executive 1999 32,934 -- 111,200(1) --
Officer (October 1999 to date) 1998 -- -- -- --
John J. Walsh............................. 2000 183,750 -- -- 1,938(2)
Executive Vice President and Chief 1999 84,140 -- 25,000(3) --
Operating Officer (May 2000 to date) 1998 -- -- -- --
Andrew G. Bonas........................... 2000 152,774 -- -- 1,945(2)
Vice President--Aerospace Division 1999 77,890 -- 18,000(3) --
(April 1999 to date) 1998 -- -- -- --
Patrick J. Carroll........................ 2000 150,093 -- -- 1,890(2)
Vice President--Advanced Product 1999 40,987 -- 20,000(1) --
Development (September 2000 to date) 1998 -- -- -- --
Thomas R. Cessario........................ 2000 147,561 15,000 8,000(4) --
Vice President--Environment, Health & 1999 -- -- -- --
Safety (November 1999 to date) 1998 -- -- -- --
Joseph A. Stroud.......................... 2000 245,200 -- -- --
Chief Financial Officer 1999 127,504 -- -- --
(June 1999 to October 2000) 1998 -- -- -- --
Samuel Levin (6).......................... 2000 128,071 -- -- 668,396(2)(6)
President--Scot, Incorporated 1999 215,208 167,820 -- 205,160(2)(5)
(1992--December 1999) 1998 206,766 437,901 -- 4,000(2)
- ------------------------
(1) Options granted pursuant to the 1999 Stock Option Plan adopted by the Board
of Directors on June 3, 1999, as authorized by the Stock Option Committee of
the Board of Directors on October 12, 1999.
(2) Consists of matching contributions by the Company under its 401(k) plan,
which was adopted in Fiscal 1994, and certain life insurance premiums.
(3) Options granted pursuant to the 1999 Stock Option Plan adopted by the Board
of Directors on June 3, 1999, as authorized by the Stock Option Committee of
the Board of Directors on June 23, 1999.
(4) Options granted pursuant to the 1999 Stock Option Plan adopted by the Board
of Directors on June 3, 1999, as authorized by the Stock Option Committee of
the Board of Directors on January 11, 2000.
(5) Includes the compensation component of the consideration paid for certain
stock options in connection with the Recapitalization.
27
(6) Mr. Levin retired from his position in December 1999 and is now a consultant
to the Company. "All Other Compensation" includes consulting fees and
payments under a non-compete agreement. (See "Employment and Consulting
Agreements.")
OPTIONS GRANTED IN 2000
The following table summarizes options granted in 2000 to the Named
Executive Officers:
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION
NAME GRANTED 2000 SHARE DATE
---- ---------- ------------ --------- ----------
Thomas R. Cessario................................. 8,000 28.6% $50.00 1/11/10
AGGREGATE OPTION PURCHASES IN 2000 AND 2000 YEAR END OPTION VALUES
The following table summarizes information with respect to all options held
by the Named Executive Officers exercisable within 60 days of October 31, 2000:
NUMBER OF
SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY
SHARES AT YEAR END OPTIONS AT YEAR END
ACQUIRED ON EXERCISABLE/ EXERCISABLE/
NAME EXERCISE VALUE REALIZED UNEXERCISABLE UNEXERCISABLE(1)
- ---- ----------- --------------- ------------------- --------------------
Thomas W. Cresante........... 0 $0 27,800/83,400 $0/$0
John J. Walsh................ 0 0 6,250/18,750 0/0
Andrew G. Bonas.............. 0 0 4,500/13,500 0/0
Patrick J. Carroll........... 0 0 5,000/15,000 0/0
Thomas R. Cessario........... 0 0 2,000/6,000 0/0
Joseph A. Stroud............. 0 0 0/0 0/0
Samuel Levin................. 0 0 3,750/0 0/0
- ------------------------
(1) There is no public market for our Common Stock. The Company estimates the
market value for its Common Stock is approximately $5.00 per share.
BONUS AND INCENTIVE PLANS
Since March 1998, the Company has maintained two short-term incentive plans
for the benefit of all regular, full time employees of the Automotive Products
Division and the Aerospace Division, respectively (collectively, the "Bonus
Plans"), and a Management Incentive Plan for certain members of management from
both divisions (the "Management Plan"). The Bonus Plans permit the Company to
pay employees quarterly bonuses based on employment level, the attainment of
certain pre-established financial performance criteria, and the attainment of
certain pre-established individual goals. The Management Plan bonuses are paid
annually, based upon the attainment of certain pre-established Company and
division financial performance criteria. The Bonus Plans and the Management Plan
are administered by a committee of the Board of Directors, which has full power
and authority to determine the terms and conditions of awards under the Bonus
Plans and the Management Plan.
BENEFIT PLANS
The Company also maintains various qualified and non-qualified benefit plans
for its employees, including a 401(k) profit sharing plan. An insured deferred
compensation plan for certain highly compensated employees, which was adopted in
1995, was terminated and all assets were distributed to
28
participants in November 2000. The Company reserves the right to add, amend,
change, tie off and/or terminate any or all qualified or nonqualified benefit
plans at any time and to alter, amend, add to and/or restrict employee
participation to the extent permitted by applicable federal or state law or
regulation.
COMPENSATION OF DIRECTORS
None of the directors of the Company who are employees of the Company
receive any compensation directly for their service on the Board of Directors.
All other directors receive $2,000 per meeting and $20,000 per annum for their
services.
EMPLOYMENT AND CONSULTING AGREEMENTS
THOMAS W. CRESANTE. On October 1, 1999, the Company entered into an
employment agreement with Mr. Cresante. The employment agreement has an initial
term of two years and provides for an automatic one-year renewal at the end of
the initial term and each renewal term until terminated upon written notice. The
Company will pay Mr. Cresante a base salary of $342,500 per year, subject to
annual review by the Company's Board of Directors. In addition, Mr. Cresante is
eligible to receive at least 60% of his annual base salary in bonus compensation
based upon set performance standards. Pursuant to the employment agreement,
Mr. Cresante is eligible to receive options to purchase up to 3% of the
Company's Common Stock at an exercise price of $50.00 per share. Mr. Cresante
was also required by the employment agreement to and did purchase 5,875 shares
of the Company's Common Stock at a price of $34.00 per share on January 31,
2000. The employment agreement provides that the Company may terminate
Mr. Cresante's employment for cause (as defined in the employment agreement). If
the Company terminates Mr. Cresante's employment other than for cause or
disability, Mr. Cresante will be entitled to receive an amount equal to the
balance payable under the employment agreement or twelve months salary,
depending on when the agreement is terminated.
SAMUEL LEVIN. Mr. Levin's employment agreement, pursuant to which he
retired as President of Scot, our former subsidiary, on December 31, 1999,
provides for a consulting term beginning on January 1, 2000 and ending on
December 31, 2000. Mr. Levin received approximately $93,000 under this agreement
in 2000. During 1999, Scot entered into a Noncompetition Agreement with
Mr. Levin, pursuant to which Mr. Levin has agreed not to compete with Scot or
the Company until November 30, 2001. In consideration of Mr. Levin's agreement
not to compete with Scot or the Company, Scot paid $570,000 to Mr. Levin on
November 30, 1999. Both of these agreements were terminated by the Company in
connection with the divestiture of Scot in September 2000.
29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of October 31, 2000, ownership of the
Company's Common Stock by (i) the stockholders known to us to be the beneficial
owners of more than five percent of the outstanding shares of Common Stock,
(ii) each director, (iii) each named executive officer and (iv) all directors
and executive officers as a group:
NUMBER OF SHARES
BENEFICIALLY PERCENT OF CLASS
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(2) OUTSTANDING(3)
- --------------------------------------- ---------------- ----------------
JFL Co-Invest Partners I, LP................................ 1,173,499(4) 31.6%
2001 Jefferson Davis Highway, Suite 607
Arlington, Virginia 22202
J.F. Lehman & Company....................................... 735,294(4)(5) 19.8%
450 Park Avenue
New York, New York 10022
J.F. Lehman Equity Investors I, LP.......................... 679,442(4) 18.3%
2001 Jefferson Davis Highway, Suite 607
Arlington, Virginia 22202
Neubauer Family Trust....................................... 1,096,522(6) 29.5%
Ordnance Products, Inc.
16207 Carmenita Rd.
Cerritos, CA 90703
Paribas Principal Incorporated.............................. 323,529 8.7%
787 Seventh Avenue
New York, New York 10019
Treinen Family Trust........................................ 433,897(7) 11.7%
10457 Laramie Ave.
Chatsworth, CA 91311
Oliver C. Boileau, Jr....................................... --(8) --
M. Steven Alexander......................................... 323,529(9) 8.7%
John F. Lehman.............................................. 2,588,235(4)(10) 69.7%
Donald Glickman............................................. 2,588,235(4)(10) 69.7%
George A. Sawyer............................................ 2,588,235(4)(10) 69.7%
Joseph A. Stroud............................................ 2,588,235(4)(10) 69.7%
William Paul................................................ --(11) --
Thomas G. Pownall........................................... --(12) --
Thomas W. Cresante.......................................... 33,675(13) *
John J. Walsh............................................... 6,250(13) *
Andrew G. Bonas............................................. 4,500(13) *
Patrick J. Carroll.......................................... 5,000(13) *
Thomas R. Cessario.......................................... 2,000(13) *
Samuel Levin................................................ 3,750(13) *
Directors and Executive Officers as a Group................. 2,970,689 78.9%
- ------------------------
* Indicates ownership of less than one percent of outstanding shares.
(1) Unless indicated otherwise, the address of the beneficial owner listed
above is c/o Special Devices, Incorporated, 14370 White Sage Road,
Moorpark, California 93021.
30
(2) As used in this table, beneficial ownership means the sole or shared power
to vote, or to direct the voting of a security, or the sole or shared power
to dispose, or direct the disposition of, a security. However, under
California law, personal property owned by a married person may be
community property that either spouse may manage and control. The Company
has no information as to whether any shares shown in this table are subject
to California community property law.
(3) Computed based upon the total number of shares of Common Stock outstanding
and the number of shares of Common Stock underlying options or warrants
held by that person exercisable within 60 days of October 31, 2000. In
accordance with Rule 13(d)-3 of the Exchange Act, any Common Stock that
will not be outstanding within 60 days of October 31, 2000 that is subject
to options or warrants exercisable within 60 days of October 31, 2000 is
deemed to be outstanding for the purpose of computing the percentage of
outstanding shares of the Common Stock owned by the person holding such
options or warrants, but is not deemed to be outstanding for the purpose of
computing the percentage of outstanding shares of the Common Stock owned by
any other person.
(4) JFL Co-Invest Partners I, LP is a Delaware limited liability company that
is an affiliate of J.F. Lehman Equity Investors I, LP and J.F. Lehman &
Company. Each of Messrs. Lehman, Glickman, Sawyer and Stroud, either
directly (whether through ownership interest or position) or through one or
more intermediaries, may be deemed to control JFL Co-Invest Partners I, LP,
J.F. Lehman Equity Investors I, LP and J.F. Lehman & Company. J.F. Lehman
Investors I, LP and J.F. Lehman & Company may be deemed to control the
voting and disposition of the shares of the Common Stock owned by JFL
Co-Invest Partners I, LP. Accordingly, for certain purposes,
Messrs. Lehman, Glickman, Sawyer and Stroud may be deemed to be beneficial
owners of the shares of Common Stock owned by JFL Co-Invest Partners I, LP.
(5) Represents 735,294 shares owned by the Neubauer and Treinen Family Trusts
that J.F. Lehman & Company has the right to vote under an irrevocable
voting power and has the right to acquire at any time prior to
December 15, 2002.
(6) Includes 367,647 shares as to which Mr. Neubauer has granted J.F. Lehman &
Company an irrevocable voting proxy and which J.F. Lehman & Company has the
right to acquire at any time prior to December 15, 2002.
(7) All of such shares are owned by the Treinen Family Trust dated December 2,
1981, as restated on November 3, 1986, under which Mr. Treinen is the sole
trustee and has sole voting and investment power. Includes 367,647 shares
as to which Mr. Treinen has granted J.F. Lehman & Company an irrevocable
voting proxy and which J.F. Lehman & Company has the right to acquire at
any time prior to December 15, 2002.
(8) Mr. Boileau is a member of a limited partnership of J.F. Lehman Equity
Investors I, LP. The address for Mr. Boileau is 202 North Brentwood
Boulevard, Apt. 3A, St. Louis, Missouri 63105.
(9) As an affiliate of Paribas, Mr. Alexander may be deemed to control the
shares of Common Stock owned by Paribas Principal Incorporated.
Accordingly, Mr. Alexander may be deemed to be beneficial owner of the
shares of Common Stock owned by Paribas Principal, Inc. reflected above.
The address for Mr. Alexander is c/o Paribas Principal, Inc., 787 Seventh
Avenue, New York, New York 10019.
(10) The address of Messrs. Lehman, Glickman, Sawyer and Stroud is 2001
Jefferson Davis Highway, Suite 607, Arlington, Virginia 22202.
(11) Mr. Paul is a member of a limited partnership of J.F. Lehman Equity
Investors I, LP. The address for Mr. Paul is 21 Springwood Drive,
Trumbull, Connecticut 06611.
31
(12) Mr. Pownall is a member of a limited partnership of J.F. Lehman Equity
Investors I, LP and is on the investment advisory board of J.F. Lehman &
Company. The address for Mr. Pownall is 1800 K Street, NW, Suite 724,
Washington, D.C. 20006.
(13) Includes options exercisable within 60 days of October 31, 2000 for
27,800, 6,250, 4,500, 5,000, 2,000 and 3,750 shares for Messrs. Cresante,
Walsh, Bonas, Carroll, Cessario and Levin, respectively.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCKHOLDERS AGREEMENT
Upon consummation of the Recapitalization, the Company entered into a
Stockholders Agreement with JFL Equity Investors I, LP, JFL Co-Invest Partners
I, LP, Paribas Principal Incorporated, the Treinen Family Trust and the Neubauer
Family Trust (collectively, the "Stockholders") and J.F. Lehman & Company. Among
other things, the Stockholders Agreement provides that each Stockholder will
vote all of its Common Stock to elect as directors the 11 persons designated as
directors by JFL Equity Investors I, LP and the one person designated as a
director by Paribas Principal Incorporated. The Stockholders Agreement contains
customary restrictions on transfer, rights of first offer, preemptive rights,
tag-along and drag-along rights. The Stockholders Agreement will terminate upon
the earlier of:
- the tenth anniversary of the Stockholders Agreement,
- the date when all Stockholders and their transferees cease to hold any
Securities (as defined under the Stockholders Agreement),
- the date when all Securities have been sold in a registered public
offering or distributed to the public pursuant to Rule 144 under the
Securities Act, or
- the date when Securities at an aggregate offering price of at least
$20,000,000 are sold in a registered public offering.
The Stockholders Agreement will terminate with respect to any Stockholder
once that Stockholder ceases to hold any Securities. The Stockholders Agreement
will terminate with respect to any Securities once those Securities have been
sold in a registered public offering or distributed to the public pursuant to
Rule 144 under the Securities Act.
ROLLOVER STOCKHOLDERS AGREEMENT
Upon consummation of the Recapitalization, the Company entered into a
Rollover Stockholders Agreement with J.F. Lehman & Company, and the Treinen and
Neubauer family trusts. The Rollover Stockholders Agreement provides that the
Neubauer and Treinen family trusts and their respective transferees will have
the right under certain circumstances to require the Company to purchase all or
any portion of the Additional Rollover Shares (as defined in the Rollover
Stockholders Agreement) at the Call Price (as defined in the Rollover
Stockholders Agreement). The Rollover Stockholders Agreement also provides that
J.F. Lehman & Company will have the right for a specified period to purchase any
or all of the Additional Rollover Shares held by the Neubauer and Treinen family
trusts at the Call Price. J.F. Lehman & Company has an irrevocable proxy to vote
all of the Additional Rollover Shares it has a right to acquire.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Registration Rights Agreement entered into upon consummation
of the Recapitalization, J.F. Lehman Equity Investors I, LP, JFL Co-Invest
Partners I, LP, Paribas Principal Incorporated, the Treinen Family Trust and the
Neubauer Family Trust and any of their direct
32
or indirect transferees have certain demand and piggyback registration rights,
on customary terms, with respect to the Common Stock held by such entities and
persons.
MGG CONTRIBUTION, LICENSE AND LEASE
In July 1999, the Company entered into a Contribution, License and Lease
Agreement with MSI, an affiliate of our controlling stockholder, pursuant to
which the Company received certain assets and licensed the intellectual property
comprising the MGG automotive product line. MGG units are used by the automotive
industry in seat belt pretensioner applications. Under the terms of the
agreement, MSI licensed to the Company on a perpetual, non-exclusive basis, the
intellectual property rights to produce MGG units, and leased to the Company the
portion of the premises in Hollister, California where the tangible MGG assets
were located. The Contribution, License and Lease Agreement was amended and
restated in September 2000 to terminate the lease and convey all of MSI's rights
to the intellectual property to the Company for consideration of $75,000. The
MGG product line was moved to our Mesa, Arizona facility during the second half
of 2000.
33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
PAGE
--------
(a)(1) FINANCIAL STATEMENTS
Report of Independent Accountants........................... F-1
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets at October 31, 2000 and 1999.... F-3
Consolidated Statements of Operations for each of the three
years ended October 31, 2000.............................. F-4
Consolidated Statements of Stockholders' Equity for each of
the three years ended October 31, 2000.................... F-5
Consolidated Statements of Cash Flows for each of the three
years ended October 31, 2000.............................. F-6
Notes to Consolidated Financial Statements.................. F-7
(a)(2) FINANCIAL STATEMENT SCHEDULES
All other financial statement schedules have been omitted as
they are not applicable, not material or the required
information is included in the Consolidated Financial
Statement or Notes thereto.
(a)(3) EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
1.1(k) Purchase Agreement, dated as of December 11, 1998, among SDI
Acquisition Corp. and BT Alex. Brown Incorporated and
Paribas Corporation.
2.1(a) Amended and Restated Agreement and Plan of Merger, dated as
of June 19, 1998, between the Company and SDI Acquisition
Corp.
2.2(b) Amendment No. 1, dated as of October 27, 1998, to the
Amended and Restated Agreement and Plan of Merger between
the Company and SDI Acquisition Corp.
2.3(c) Guaranty Agreement, dated as of June 19, 1998, between J.F.
Lehman Equity Investors I, LP and the Company
3.1(k) Certificate of Incorporation of the Company
3.2(k) Bylaws of the Company
3.3(k) Certificate of Incorporation of Scot, Incorporated
3.4(k) By laws of Scot, Incorporated
4.1(k) Indenture, dated as of December 15, 1998, among SDI
Acquisition Corp., the Guarantors named therein and United
States Trust Company of New York, as Trustee.
4.2(k) First Supplemental Indenture, dated as of December 15, 1998,
among the Company, the Guarantors named therein and the
United States Trust Company of New York, as Trustee.
4.3(k) Form of 11 3/8% Senior Subordinated Note due 2008, Series A
(see Exhibit A of the First Supplemental Indenture in
Exhibit 4.2).
4.4(k) Form of 11 3/8% Senior Subordinated Note due 2008, Series B
(see Exhibit B of the First Supplemental Indenture in
Exhibit 4.2).
4.5(k) Registration Rights Agreement, dated as of December 15,
1998, among SDI Acquisition Corp., as Issuer and BT Alex.
Brown Incorporated and Paribas Corporation as Initial
Purchasers.
34
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.1(k) Assumption Agreement, dated as of December 15, 1998, by the
Company and Scot, Incorporated, assuming, among other
things, the obligations of SDI Acquisition Corp. under the
Purchase Agreement and the Registration Rights Agreement
10.2(k) Credit Agreement, dated as of December 15, 1998, among the
Company, various banks and Bankers Trust Company, as Lead
Arranger and Administrative Agent.
10.3(k) Security Agreement, dated as of December 15, 1998, by the
Company and Scot, Incorporated in favor of Bankers Trust
Company.
10.4(k) Pledge Agreement, dated as of December 15, 1998, by the
Company and Scot, Incorporated in favor of Bankers Trust
Company.
10.5(k) Subsidiaries Guarantee, dated as of December 15, 1998, by
Scot, Incorporated in favor of Bankers Trust Company.
10.6(k) Management Agreement, dated as of December 15, 1998, between
the Company and J.F. Lehman & Company
10.7(k) Management Services Agreement, dated as of December 15,
1998, between the Company and J.F. Lehman & Company
10.8(k) Subscription Agreement, dated as of September 7, 1998, among
the Company, Paribas Principal Inc., J.F. Lehman Equity
Investors I, LP and JFL Co-Invest Partners I, LP
10.9(k) Amendment No. 1 to Subscription Agreement, dated as of
December 3, 1998, among the Company, Paribas Principal Inc.,
J.F. Lehman Equity Investors I, LP and JFL Co-Invest
Partners I, LP
10.10(k) Amendment No. 2 to Subscription Agreement, dated as of
December 15, 1998, among the Company, Paribas Principal
Inc., J.F. Lehman Equity Investors I, LP and JFL Co-Invest
Partners I, LP
10.11(k) Stockholders Agreement, dated as of December 15, 1998, among
the Company, J.F. Lehman & Co., J.F. Lehman Equity Investors
I, LP, JFL Co-Invest Partners I, LP, the Neubauer Family
Trust, by Walter Neubauer trustee, and the Treinen Family
Trust, by Thomas F. Treinen trustee.
10.12(k) Pledge Agreement, dated as of December 15, 1998, between the
Neubauer Family Trust, by Walter Neubauer, trustee and J.F.
Lehman & Company.
10.13(k) Rollover Stockholders Agreement, dated as of December 15,
1998, among the Company, J.F. Lehman & Co., the Neubauer
Family Trust, by Walter Neubauer trustee, and the Treinen
Family Trust, by Thomas F. Treinen trustee.
10.14(k) Pledge Agreement, dated as of December 15, 1998, between
Thomas Treinen Family Trust, by Thomas F. Treinen, trustee
and J.F. Lehman & Company.
10.15(k) Registration Rights Agreement, dated as of December 15,
1998, among the Company, J.F. Lehman Equity Investors I, LP,
JFL Co-Invest Partners I, LP, Paribas Principal Inc., the
Neubauer Family Trust, by Walter Neubauer trustee, and the
Treinen Family Trust, by Thomas F. Treinen trustee.
10.16(d) Lease dated May 1, 1991 between the Company and Placerita
Land and Farming Company.
10.17(d) Letter Agreement dated June 8, 1990 between the Company and
Hermetic Seal Corporation.
10.18(d) Master Purchase Agreement, dated May 15, 1990, between the
Company and TRW Inc. (confidential treatment granted as to
part).
10.19(d) Technology License Agreement dated November 7, 1990 between
the Company and Davey Bickford Smith.
10.20(e) Amended and Restated 1991 Stock Incentive Plan of the
Company
10.21(d) Special Devices, Incorporated 401(k) Plan.
10.22(e) First Amendment to Master Purchase Agreement, dated
February 25, 1993, between the Company and TRW, Inc.
(confidential treatment granted as to part).
35
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.23(f) Letter Agreement, dated November 30, 1994 between the
Company and Hermetic Seal Corporation (confidential
treatment granted as to part).
10.24(f) Employment Agreement dated September 7, 1994, between the
Company, Scot, Incorporated and Samuel Levin.
10.25(g) Second Amendment to Master Purchase Agreement, dated
March 8, 1995, between the Company and TRW, Inc.
(confidential treatment granted as to part).
10.26(h) Supply Agreement dated as of November 14, 1995 between the
Company and Autoliv International, Inc. (confidential
treatment requested as to part).
10.27(i) Development Agreement, dated August 28, 1996, between
Company and the City of Moorpark.
10.28(j) Purchase Agreement, dated September 30, 1997, between the
Company and Hermetic Seal Corporation (confidential
treatment requested as to part).
10.29(l) Employment Agreement dated October 1, 1999 between the
Company and Thomas W. Cresante.
10.30(l) Non-competition Agreement, dated July 29, 1999, between
Scot, Incorporated and Samuel Levin.
10.31(l) 1999 Stock Option Plan dated June 23, 1999.
10.32(l) Contribution, License, and Lease Agreement between McCormick
Selph, Inc. and the Company dated May 17, 1999.
10.33(l) Capital Call Agreement dated January 26, 2000 among the
Company, various banks, and Bankers Trust Company as
Administrative Agent.
10.34(l) Second Amendment to Credit Agreement, dated January 26, 2000
among the Company, various banks, and Bankers Trust Company,
as Lead Arranger or Administrative Agent.
10.35 Third Amendment to Credit Agreement, dated June 7, 2000
among the Company, various banks, and Bankers Trust Company,
as Lead Arranger or Administrative Agent.
10.36 Fourth Amendment to Credit Agreement, dated September 18,
2000 among the Company, various banks, and Bankers Trust
Company, as Lead Arranger or Administrative Agent.
10.37 Fifth Amendment to Credit Agreement, dated January 12, 2001
among the Company, various banks, and Bankers Trust Company,
as Lead Arranger or Administrative Agent.
10.38 Capital Call Agreement dated September 18, 2000 among the
Company, various banks, and Bankers Trust Company as
Administrative Agent.
12.1(k) Statement of Computation of Ratios of Earnings to Fixed
Charges
21.1(k) Subsidiaries of the Company
25.1(k) Form T-1 Statement of Eligibility of United States Trust
Company of New York to act as trustee under the Indenture
99.1(m) Special Devices, Incorporated Press Release dated
September 22, 2000.
99.2(m) Agreement and Plan of Merger between the Company and Wind
Point Partners IV, LP
- ------------------------
(a) Previously filed as Appendix A to the Company's Proxy Statement on
Schedule 14A filed with the Commission on August 18, 1998 and
incorporated by reference herein.
(b) Previously filed as Appendix B to the Company's Proxy Statement on
Schedule 14A filed with the Commission on December 10, 1998 and
incorporated by reference herein.
(c) Previously filed as Exhibit 2.3 to the Company's Current Report on
Form 8-K filed with the Commission on July 10, 1998 and incorporated by
reference herein.
(d) Previously filed as an exhibit to Registration Statement on Form S-1
(File No. 33-40903) and incorporated herein by reference.
36
(e) Previously filed as an exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended October 31, 1994 and incorporated
herein by reference.
(f) Previously filed as an exhibit to Amendment No. 1 on Form 10-K/A for the
fiscal year ended October 31, 1994 and incorporated herein by reference.
(g) Previously filed as an exhibit to Registration Statement on Form S-1
(File No. 33-89902) and incorporated herein by reference.
(h) Previously filed as an exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended October 31, 1995 and incorporated
herein by reference.
(i) Previously filed as an exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended October 31, 1996 and incorporated
herein by reference.
(j) Previously filed as an exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended October 31, 1997 and incorporated
herein by reference.
(k) Previously filed as an exhibit to Registration Statement on Form S-4
(File No. 333-75869) and incorporated herein by reference.
(l) Previously filed as an exhibit to the Company's Annual Report on Form
10-K405 for the fiscal year ended October 31, 1999 and incorporated
herein by reference.
(m) Previously filed as an exhibit to the Company's Current Report on Form
8-K filed with the Commission on October 6, 2000 and incorporated herein
by reference.
(B) REPORTS ON FORM 8-K
We completed the divestiture of our wholly-owned subsidiary, Scot,
Incorporated, to an investor group on September 21, 2000. Scot, located in
Downers Grove, Illinois, manufactured mission critical and other pyrotechnic
devices for the aerospace and defense industries. See Form 8-K filed October 6,
2000.
37
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Special Devices, Incorporated:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows present fairly, in all material respects, the financial position of
Special Devices, Incorporated and its subsidiary at October 31, 2000 and 1999,
and the results of their operations and their cash flows for each of the two
years in the period ended October 31, 2000 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Los Angeles, California
January 23, 2001
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Special Devices, Incorporated:
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Special Devices, Incorporated and
subsidiary for the year ended October 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Special Devices, Incorporated and subsidiary for the year ended
October 31, 1998, in conformity with accounting principles generally accepted in
the United States of America.
KPMG LLP
Los Angeles, California
December 9, 1998
F-2
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
OCTOBER 31
-------------------
2000 1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 596 $ 448
Accounts receivable, net of allowance for doubtful
accounts of $423 and $352 in 2000 and 1999,
respectively............................................ 21,689 26,675
Inventories............................................... 20,477 17,331
Deferred tax assets....................................... 2,411 4,883
Prepaid expenses and other current assets................. 3,890 1,171
Income taxes receivable................................... -- 4,264
-------- --------
Total current assets.................................. 49,063 54,772
-------- --------
Property, plant and equipment, at cost:
Land...................................................... 3,723 4,227
Buildings and improvements................................ 36,546 36,923
Furniture, fixtures and computer equipment................ 5,985 5,815
Machinery and equipment................................... 81,220 79,209
Transportation equipment.................................. 494 484
Leasehold improvements.................................... 237 237
Construction in progress (includes land and related costs
of $468 in 1999)........................................ 6,862 4,203
-------- --------
Gross property, plant, and equipment.................. 135,067 131,098
Less accumulated depreciation and amortization........ (52,435) (41,016)
-------- --------
Net property, plant and equipment..................... 82,632 90,082
Other assets, net of accumulated amortization............... 8,142 10,296
-------- --------
$139,837 $155,150
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 18,292 $ 16,574
Accrued liabilities....................................... 9,957 11,779
Accrued environmental and other investigation costs....... 3,636 9,617
Income taxes payable...................................... 11,434 --
Current portion of long-term debt......................... 9,557 6,600
-------- --------
Total current liabilities............................. 52,876 44,570
Deferred income taxes....................................... 5,232 2,331
Long-term debt, net of current portion...................... 125,618 168,600
Other long-term liability................................... -- 555
-------- --------
Total liabilities..................................... 183,726 216,056
-------- --------
Redeemable common stock..................................... 30,625 27,625
Stockholders' equity (deficit):
Preferred stock $.01 par value, 2,000,000 shares
authorized; no shares issued and outstanding in 2000 and
1999.................................................... -- --
Common stock, $.01 par value, 20,000,000 shares
authorized; 3,712,764 and 3,706,889 shares issued and
outstanding in 2000 and 1999, respectively.............. 30 30
Additional paid-in capital................................ 70,102 74,587
Retained earnings (deficit)............................... (144,646) (163,148)
-------- --------
Total stockholders' equity (deficit).................. (74,514) (88,531)
-------- --------
$139,837 $155,150
======== ========
See accompanying notes to consolidated financial statements.
F-3
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED OCTOBER 31
---------------------------------
2000 1999 1998
--------- --------- ---------
Net sales................................................... $168,244 $166,499 $170,538
Cost of sales............................................... 137,813 135,724 131,610
-------- -------- --------
Gross profit............................................ 30,431 30,775 38,928
-------- -------- --------
Operating expenses.......................................... 17,407 16,962 13,023
Environmental and other investigation costs................. 2,067 11,117 --
-------- -------- --------
Total operating expenses.................................... 19,474 28,079 13,023
-------- -------- --------
Earnings from operations................................ 10,957 2,696 25,905
-------- -------- --------
Other income (expense):
Interest expense, net..................................... (20,268) (16,602) (48)
Gain on sale of subsidiary................................ 42,676 -- --
Management fees........................................... (900) (788) --
Recapitalization costs.................................... (65) (16,180) --
-------- -------- --------
Total other income (expense)............................ 21,443 (33,570) (48)
-------- -------- --------
Earnings (loss) before income taxes..................... 32,400 (30,874) 25,857
Income tax provision (benefit).............................. 13,981 (10,608) 10,410
-------- -------- --------
Net earnings (loss)....................................... $ 18,419 $(20,266) $ 15,447
======== ======== ========
See accompanying notes to consolidated financial statements.
F-4
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
COMMON STOCK ADDITIONAL RETAINED TOTAL
--------------------- PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY (DEFICIT)
---------- -------- ---------- --------- ----------------
Balance, October 31, 1997.............. 7,771,167 $ 78 $ 50,888 $ 30,391 $ 81,357
Issuance of common stock on exercise of
stock options........................ 38,634 -- 476 -- 476
Net earnings........................... -- -- -- 15,447 15,447
---------- ---- -------- --------- ---------
Balance, October 31, 1998.............. 7,809,801 78 51,364 45,838 97,280
Record acquisition transaction......... (3,367,618) (41) 22,562 (163,727) (141,206)
Record redeemable common stock......... (735,294) (7) -- (24,993) (25,000)
Contributed assets..................... -- -- 3,286 -- 3,286
Accreted put premium on redeemable
common stock......................... -- -- (2,625) -- (2,625)
Net loss............................... -- -- -- (20,266) (20,266)
---------- ---- -------- --------- ---------
Balance, October 31, 1999.............. 3,706,889 30 74,587 (163,148) (88,531)
Record adjustment to contributed
assets............................... -- -- (1,694) 83 (1,611)
Purchase of common stock............... 5,875 -- 199 -- 199
Accreted put premium on redeemable
common stock......................... -- -- (3,000) -- (3,000)
Issuance of warrants................... -- -- 10 -- 10
Net earnings........................... -- -- -- 18,419 18,419
---------- ---- -------- --------- ---------
Balance, October 31, 2000.............. 3,712,764 $ 30 $ 70,102 $(144,646) $ (74,514)
========== ==== ======== ========= =========
See accompanying notes to consolidated financial statements.
F-5
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED OCTOBER 31
---------------------------------
2000 1999 1998
--------- --------- ---------
Cash Flows From Operating Activities:
Net earnings (loss)....................................... $18,419 $(20,266) $15,447
Adjustments to reconcile net earnings (loss) to net cash
(used in) provided by operating activities:
Gain on sale of subsidiary.............................. (42,676) -- --
Depreciation and amortization........................... 14,319 15,110 8,520
Deferred income taxes................................... 5,373 (4,601) (100)
Increase (decrease) in inventory reserve................ (1,488) (379) 865
Changes in assets and liabilities:
Accounts receivable..................................... 1,570 (7,324) (1,218)
Inventories............................................. (5,215) (1,199) (2,919)
Prepaid expenses and other current assets and income
taxes receivable...................................... 1,541 (4,889) (42)
Other assets............................................ 202 (1,548) (520)
Accounts payable, accounts payable to related parties
and accrued liabilities............................... (4,342) 21,664 5,740
Other long-term liability............................... (305) 555 --
Income taxes payable.................................... 11,434 (4,590) 3,332
------- -------- -------
Net cash (used in) provided by operating activities..... (1,168) (7,467) 29,105
------- -------- -------
Cash Flows From Investing Activities:
Purchases of property, plant and equipment.............. (10,321) (16,046) (38,523)
Proceeds from sale of subsidiary........................ 51,370 -- --
Sales of marketable securities.......................... -- -- 6,750
------- -------- -------
Net cash provided by (used in) investing activities..... 41,049 (16,046) (31,773)
------- -------- -------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock.................. 199 -- 476
Proceeds from issuance of warrants...................... 10 -- --
Proceeds from issuance of long-term debt................ -- 170,000 --
Repurchase of common stock.............................. -- (41) --
Recapitalization costs.................................. -- (141,165) --
Payment of deferred financing fees...................... -- (8,815) --
Net borrowings under revolving line of credit........... -- 5,900 1,300
Net repayments under revolving line of credit........... (1,500) -- --
Repayment of long-term debt............................. (38,525) (3,166) (275)
Other................................................... 83 -- --
------- -------- -------
Net cash (used in) provided by financing activities..... (39,733) 22,713 1,501
------- -------- -------
Net increase (decrease) in cash............................. 148 (800) (1,167)
Cash at beginning of year................................... 448 1,248 2,415
------- -------- -------
Cash at end of year......................................... $ 596 $ 448 $ 1,248
======= ======== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest (net of amounts capitalized in 1998)........... $18,639 $ 11,181 $ 156
Income taxes............................................ 2 5,349 7,178
Non-cash financing activities:
Long-term debt assumed by buyer on sale of aircraft..... -- -- $ 1,500
Issuance of redeemable common stock..................... -- $ 27,625 --
See accompanying notes to consolidated financial statements.
F-6
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY OPERATIONS
Special Devices, Incorporated, a Delaware corporation, and its wholly owned
subsidiary, Scot, Incorporated ("Scot"), which was sold in September 2000,
collectively referred to as "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. The Company's 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.
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 (the "SEC"). The Company continues
to file reports with the SEC because it has agreed to so long as the Senior
Subordinated Notes remain outstanding.
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 stockholders (the "Continuing Stockholders"), were converted into the
right to receive $34 per share in cash. The Continuing Stockholders retained
approximately 41.3% of the common equity of the Company while new investors
acquired the balance of the equity interests in the Company.
The Company has the right with respect to certain of the outstanding shares
of Common Stock held by the Continuing Stockholders (additional rollover shares)
to acquire all or any portion of such shares prior to December 31, 2002. The
owners of the additional rollover shares under certain conditions have the right
to require the Company to purchase all or a portion of the additional rollover
shares at a price per share equal to the call price. Accordingly, the additional
rollover shares have been recorded as redeemable common stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, Scot, through the date of sale in September
2000. All material intercompany accounts and transactions have been eliminated.
REVENUE RECOGNITION
The Company has two operating divisions. The Automotive Products Division,
organized in 1989, manufactures products, to customer specifications, under
standard purchase orders. Sales are primarily recognized when products are
shipped. The Aerospace Division manufactures products under fixed price,
long-term contracts directly for the U.S. Department of Defense, its prime
contractors and subcontractors; and commercial companies. The contracts vary in
length, but generally are completed within 12 to 24 months. Sales under
production contracts are generally recognized as units are shipped or, in some
cases, when accepted by the customer; sales under significant engineering
contracts or long-term production contracts are recognized under the percentage
of completion method.
F-7
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's cash, trade accounts receivable and
all current liabilities (excluding short-term borrowings) approximate the fair
values due to the relatively short maturities of these instruments.
The fair value and carrying amount of long-term debt, including short-term
borrowings, was as follows:
OCTOBER 31
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
Fair value.............................................. $ 55,175 $145,200
Carrying amount......................................... 135,175 175,200
The Company's borrowings under the Senior Term Loan and the Bank Revolver
have variable rates that reflect currently available terms and conditions for
similar debt. The carrying amount of this debt is a reasonable estimate of its
fair value. The Senior Subordinated Notes are traded occasionally in public
markets.
INVENTORIES
Inventories, other than inventoried costs relating to long-term contracts,
are stated at the lower of cost (principally first-in, first-out) or market.
Inventoried costs relating to long-term contracts and programs are stated at the
actual production cost, including overhead incurred to date reduced by amounts
identified with revenue recognized on units delivered. Inventoried costs
relating to long-term contracts are further reduced by any amounts in excess of
estimated net realizable value. The costs attributed to units delivered under
long-term contracts are based on the estimated average cost of all units
expected to be produced under existing contracts.
In accordance with industry practice, inventories are classified as current
assets although inventories may include amounts relating to contracts and
programs having production cycles longer than one year.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. The cost of maintenance and
repairs is charged against results of operations as incurred. Depreciation is
charged against results of operations using the straight-line method over the
estimated service lives of the related assets. The following are the lives used
in determining depreciation rates of various assets:
Buildings and improvements.................................. 25-39 years
Machinery and equipment..................................... 8 years
Furniture, fixtures and computer equipment.................. 3-5 years
Transportation equipment.................................... 4 years
F-8
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Leasehold improvements are amortized over the lesser of 10 years or the
remaining life of the lease. Upon sale or retirement of the depreciable
property, the related cost and accumulated depreciation are eliminated from the
accounts and gains or losses are reflected in the statement of operations.
Interest costs incurred during the period of construction of plant and
equipment are capitalized. There were no interest costs capitalized in 2000 and
1999, respectively. Interest costs of $0.1 million were capitalized in 1998.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method
of accounting for income taxes whereby deferred income taxes are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date.
IMPAIRMENT OF LONG-LIVED ASSETS
On November 1, 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held and
used and for long-lived assets and certain identifiable intangibles to be
disposed of. SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of SFAS No. 121 did not have a material impact on the Company's
financial position, results of operations, or liquidity.
COMPREHENSIVE INCOME
On November 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. The statement requires only additional disclosures in the
financial statements; it does not affect the Company's financial position or
results of operations. There is no difference between the net earnings (loss)
and comprehensive income (loss) for the Company for the years ended October 31,
2000 and 1999.
STOCK-BASED COMPENSATION
On November 1, 1997, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which encourages, but does not require, companies to
record as compensation expense over the vesting period the fair value of all
stock-based awards on the date of grant. The Company has
F-9
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
chosen to continue to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation expense for stock options is measured as the excess,
if any, of the estimate of the market value of the Company's stock at the date
of the grant over the amount an employee must pay to acquire the stock.
RECENT ACCOUNTING PRONOUNCEMENTS
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 adopted SOP 98-5 in the first
quarter of 2000 and determined that the impact on its financial statements was
immaterial.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The FASB subsequently
issued SFAS No. 137 in July 1999 which deferred the effective date of SFAS
No. 133 until the first quarter of fiscal years beginning after June 15, 2000.
Management believes that the adoption of SFAS No. 133 and SFAS No. 137 will not
have a material impact on the Company's financial reporting.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101
("SAB 101"), "Revenue Recognition in Financial Statements," which provides
guidance on the recognition, presentation, and disclosure of revenue in the
financial statements filed with the SEC. The Company will adopt SAB 101 in the
fourth quarter of 2001 and does not expect such adoption to have a material
impact on the financial position or results of operations of the Company.
3. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following components:
OCTOBER 31
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
Commercial customers...................................... $18,453 $17,872
U.S. Department of Defense................................ 2 3,018
U.S. Department of Defense subcontractors................. 3,657 6,137
------- -------
22,112 27,027
Less allowance for doubtful accounts...................... 423 352
------- -------
$21,689 $26,675
======= =======
F-10
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACCOUNTS RECEIVABLE (CONTINUED)
The following is activity relating to the allowance for doubtful accounts
(in thousands):
Balance at October 31, 1997................................. $ 44
Additions charged to expense................................ 510
Write-offs.................................................. (169)
-----
Balance at October 31, 1998................................. 385
Additions charged to expense................................ 360
Write-offs.................................................. (393)
-----
Balance at October 31, 1999................................. 352
Additions charged to expense................................ 361
Write-offs.................................................. (290)
-----
Balance at October 31, 2000................................. $ 423
=====
4. INVENTORIES
Inventories and inventoried costs relating to long-term contracts consist of
the following components:
OCTOBER 31
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
Raw materials and component parts......................... $ 7,241 $ 3,555
Work in process........................................... 1,121 948
Finished goods............................................ 3,368 1,801
Inventoried costs relating to long-term contracts, net of
amounts attributed to revenues recognized to date....... 9,361 11,529
------- -------
21,091 17,833
Less progress payments related to long-term contracts..... 614 502
------- -------
$20,477 $17,331
======= =======
Inventoried costs relate to costs of products currently in progress. There
are no significant inventoried costs relating to the production costs of
delivered units over the estimated average cost of all units expected to be
produced. Raw materials and component parts relating to long-term contracts at
October 31, 1999 have been reclassified as "Inventoried costs relating to
long-term contracts" to conform to the 2000 presentation.
F-11
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT
Long-term debt consists of the following components:
OCTOBER 31
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
Senior term loan........................................ $ 30,775 $ 69,300
Bank revolver........................................... 4,400 5,900
Senior subordinated notes............................... 100,000 100,000
-------- --------
135,175 175,200
Less current portion.................................... 9,557 6,600
-------- --------
Long-term debt.......................................... $125,618 $168,600
======== ========
As part of the Recapitalization, the Company issued $100 million of Senior
Subordinated Notes. The Notes are due in December 2008, and bear interest at
11.4%. 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 Credit Facility.
As part of the Recapitalization, the Company entered into a credit facility
(the "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 Banks Base Rate plus an applicable margin
(an effective rate of 11.5% at October 31, 2000). At October 31, 2000,
$4.4 million was outstanding under the Revolver and this amount has been
classified as current. 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 9.7% at October 31, 2000). Letters of
credit outstanding under the Revolver reduce the amount of additional borrowings
available. The Company had no letters of credit outstanding at October 31, 2000.
The total amount available under the Revolver at October 31, 2000 was
$4.1 million (in addition to $11.5 million reserved to satisfy income taxes
payable for the year ended October 31, 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 10.2% at October 31, 2000). The Credit Facility
contains several financial and operating covenants which the Company must meet
on a quarterly basis.
On January 26, 2000, the Company entered into a Second Amendment and Waiver
to the 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 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.
As of April 30, 2000, the Company was not in compliance with the Leverage
Ratio covenant. On June 13, 2000, the Company entered into a Third Amendment and
Waiver to the Credit Facility pursuant to which certain financial covenants were
amended and the Company received a waiver for non-compliance with the Leverage
Ratio covenant for the period.
As of July 30, 2000, the Company was not in compliance with certain
financial covenants contained in the Credit Facility. On September 18, 2000, the
Company entered into a Fourth Amendment and Waiver to the Credit Facility
pursuant to which, among other things, the divestiture of Scot was
F-12
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT (CONTINUED)
approved, certain financial covenants were amended and the Company received a
waiver for past non-compliance with its financial covenants. The Company repaid
borrowings of $38.0 million under the Senior Term Loan and $11.5 million under
the Revolver from the proceeds of the Scot divestiture and the maximum
borrowings under the Revolver were temporarily limited to $8.5 million. In
connection with the Fourth Amendment and Waiver, the Capital Call Agreement was
terminated, and 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 Credit Facility and, in certain circumstances, satisfy its
federal and state income tax obligations for the year ended October 31, 2000.
On December 14, 2000, the Company notified the Banks that it had reached
settlement with federal and state authorities in connection with the Cal EPA
investigation. On January 12, 2001, the Company entered into a Fifth Amendment
and Waiver to the Credit Facility pursuant to which an additional $2.5 million
in availability under the Revolver was provided by the Banks to pay criminal and
civil fines and other fees and expenses related to these matters (See Note 14,
"Commitments and Contingencies"), and certain financial covenants were amended.
Substantially all of the Company's assets are pledged as collateral under
the Credit Facility. As required under the terms of the 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.
The following are the remaining principal payments under the Senior Term
Loan:
FOR THE YEARS ENDING OCTOBER 31 AMOUNT
- ------------------------------- --------------
(IN THOUSANDS)
2001........................................................ $ 5,157
2002........................................................ 4,475
2003........................................................ 7,473
2004........................................................ 8,054
2005........................................................ 5,616
Thereafter.................................................. --
-------
$30,775
=======
F-13
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
The income tax provision (benefit) consists of the following components:
FOR THE YEARS ENDED OCTOBER 31
---------------------------------
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS)
Current:
Federal................................................... $ 8,046 $ (6,007) $ 8,492
State..................................................... 562 -- 2,018
------- -------- -------
$ 8,608 $ (6,007) $10,510
------- -------- -------
Deferred:
Federal................................................... $ 3,779 $ (3,446) $ (96)
State..................................................... 1,594 (1,155) (4)
------- -------- -------
$ 5,373 $ (4,601) $ (100)
------- -------- -------
Total:
Federal................................................... $11,825 $ (9,453) $ 8,396
State..................................................... 2,156 (1,155) 2,014
------- -------- -------
$13,981 $(10,608) $10,410
======= ======== =======
The following are temporary differences which give rise to deferred tax
assets and liabilities:
OCTOBER 31
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
Noncurrent deferred tax assets (liabilities):
Depreciation............................................ $(3,732) $(3,309)
State net operating losses.............................. -- 666
Advance recovery of estimated net operating losses...... (1,500) --
Alternative minimum tax credit.......................... -- 312
------- -------
(5,232) (2,331)
------- -------
Current deferred tax assets:
Allowance for doubtful accounts......................... 166 156
Inventories............................................. 122 508
Vacation................................................ 403 527
Other accruals.......................................... 1,720 3,692
------- -------
2,411 4,883
------- -------
Net deferred tax asset (liability)........................ $(2,821) $ 2,552
======= =======
Management believes that it is more likely than not that the reversal of
taxable temporary differences will be sufficient to realize the net deferred tax
assets.
F-14
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
The following are the reasons the income tax provision (benefit) differs
from the amount that would have resulted by applying the Federal statutory rates
during such periods to the earnings (loss) before income taxes:
FOR THE YEARS ENDED OCTOBER 31
---------------------------------
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS)
Income tax provision (benefit) at Federal
statutory rates............................... $11,340 $(10,497) $ 9,050
State income taxes.............................. 1,965 (1,155) 1,312
Recapitalization costs not deductible for tax
purposes...................................... -- 2,075
Non-deductible penalties........................ 723 -- --
Decrease in tax reserves........................ -- (1,000) --
Other........................................... (47) (31) 48
------- -------- -------
$13,981 $(10,608) $10,410
======= ======== =======
Of the total recapitalization costs of $16.2 million recorded in 1999,
approximately $3.9 million consists of certain fees related to the
Recapitalization that were not deductible for income tax purposes.
7. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company is authorized to issue 2,000,000 shares of Preferred Stock, $.01
par value. Shares of Preferred Stock may be issued from time to time in one or
more series and the Board of Directors, without further stockholder approval, is
authorized to fix the rights and terms, including dividends and liquidation
preferences and any other rights to each such series of Preferred Stock. At
October 31, 2000 and 1999, no shares of Preferred Stock were issued or
outstanding.
WARRANTS
The Company issued a warrant certificate in April 2000 for 10,000 warrants
for a total consideration of $10,000. The warrant certificate expires
April 2010 and entitles the holder to purchase one share of Common Stock, par
value of $.01, for each warrant at an exercise price of $50.00 per share.
STOCK OPTIONS AND GRANTS
The Company's Amended and Restated 1991 Stock Incentive Plan (the "1991
Plan") is administered by a committee of the Board of Directors which determines
the amount, type, terms and conditions of the awards made pursuant to the
1991 Plan. The 1991 Plan provides for issuance of restricted stock, grants of
incentive and non-qualified stock options, stock appreciation rights and
performance share awards. There are 560,000 shares of Common Stock reserved for
issuance under the 1991 Plan.
F-15
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
Pursuant to the 1991 Plan, no option may be granted that is exercisable in
less than six months or more than ten years from the grant date. Certain events,
including a change in control of the Company, may accelerate exercise dates,
cause forfeiture of all shares of any restricted stock and terminate all
conditions relating to the realization of any performance awards.
In December 1996, the Company's Stock Option Committee authorized stock
option grants to certain employees via a special grant that is not part of the
1991 Stock Option Plan. Under terms of this authorization, options to purchase
130,000 shares were granted which vest ratably over 5 years from the grant date,
and options to purchase 312,000 shares vest ratably over a period ranging from 5
to 8 years from the grant date. The grants for the latter options contain
vesting acceleration clauses during the first 36 months of the option; the
acceleration clauses are contingent upon the price of the Company's Common Stock
attaining a certain level, and upon the Company attaining certain earnings
levels. The options were granted at the fair market value of the stock on the
grant date, which was $17.00 per share.
In June 1999, the Company adopted the 1999 Stock Option Plan (the "Plan"),
which provides for the issuance of up to 370,000 shares of Common Stock pursuant
to awards granted under the Plan. All options have been granted at an exercise
price of $50.00 per share. Options vest ratably over four years and expire on
the tenth anniversary of the date of grant.
In accordance with APB Opinion No. 25, no compensation expense has been
charged to earnings in any of the three years in the period ended October 31,
2000. Had compensation expense for the Company's stock-based compensation plans
been determined consistent with SFAS No. 123, the Company's net earnings (loss)
would have been adjusted to the pro forma amounts indicated below:
FOR THE YEARS ENDED OCTOBER 31
---------------------------------
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS)
Net earnings (loss)............... As reported $18,419 $(20,266) $ 15,447
Pro forma 17,925 (21,976) 14,548
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 2000, 1999 and 1998, respectively: risk-free interest rates of
5.84%, 6.02% and 5.68%; dividend yields of 0% for all three years; and a
weighted-average expected life of the option of 9.2 years for all three years.
F-16
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes stock option activity for the three years
ended October 31, 2000:
WEIGHTED WEIGHTED WEIGHTED
1991 STOCK AVERAGE 1996 AVERAGE 1999 STOCK AVERAGE
OPTION PLAN EXERCISE PRICE SPECIAL GRANT EXERCISE PRICE OPTION PLAN EXERCISE PRICE
----------- -------------- ------------- -------------- ----------- --------------
Shares authorized......... 560,000 442,000 370,000
======= ======= =======
Shares under option:
Outstanding at
October 31, 1997........ 246,406 442,000 --
Granted................. 25,500 $23.80 -- -- -- --
Exercised............... 38,634 $12.30 -- -- -- --
Forfeited............... 1,200 $17.75 -- -- -- --
------- ------- -------
Shares under option:
Outstanding at
October 31, 1998........ 232,072 442,000 --
Granted................. -- -- -- -- 363,200 $50.00
Exercised............... 224,322 $17.75 348,250 $17.00 -- --
Forfeited............... -- -- -- -- 7,000 $50.00
------- ------- -------
Shares under option:
Outstanding at
October 31, 1999........ 7,750 93,750 356,200
Granted................. -- -- -- -- 28,000 $50.00
Exercised............... -- -- -- -- --
Forfeited............... -- -- -- -- 42,000 $50.00
------- ------- -------
Shares under option:
Outstanding at
October 31, 2000........ 7,750 93,750 342,200
======= ======= =======
Weighted average fair
value of options granted
during the year:
1998.................... $12.32 -- --
1999.................... -- -- $ 4.80
2000.................... -- -- $ 4.67
Options exercisable:
At October 31, 1998..... 119,212 338,000 --
At October 31, 1999..... 5,500 72,000 --
At October 31, 2000..... 7,750 79,250 78,550
The following table summarizes information about stock options outstanding
at October 31, 2000:
OPTIONS OUTSTANDING
------------------------------------------
WEIGHTED AVERAGE OPTIONS EXERCISABLE
---------------------- ------------------------------------
AVERAGE EXERCISABLE NUMBER REMAINING NUMBER WEIGHTED
AT RANGE OF OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE AT AVERAGE EXERCISE
EXERCISE PRICE OCTOBER 31, 2000 LIFE PRICE OCTOBER 31, 2000 PRICE
- ------------------- ----------------- ----------- -------- ----------------- ----------------
$17.00-$17.75...... 101,500 6.2 $17.03 87,000 $17.03
$50.00............. 342,200 9.1 50.00 78,550 50.00
------- ------ ------- ------
443,700 8.4 $42.46 165,550 $32.68
======= ====== ======= ======
F-17
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Registration Rights Agreement entered into upon consummation
of the Recapitalization, J.F. Lehman Equity Investors I, L.P., JFL Co-Invest
Partners I, L.P., Paribas Principal Incorporated, the Treinen Family Trust and
the Neubauer Family Trust and any of their direct or indirect transferees have
certain demand and piggyback registration rights, on customary terms, with
respect to the Common Stock held by such entities and persons.
8. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan that provides eligible employees the
opportunity to make tax deferred contributions to a retirement trust account in
amounts up to 20% of their gross wages, subject to statutory limitations. The
Company can elect to make matching contributions in amounts that can change from
year to year. During the last three fiscal years the Company matched 30% of an
employee's deferral up to the first 5% of each participating employee's salary.
Employees vest ratably over three years in the Company's matching contributions.
The Company's matching expense was approximately $0.4, $0.3 and $0.2 million for
the years ended October 31, 2000, 1999 and 1998, respectively.
9. RELATED PARTY TRANSACTIONS
MANAGEMENT AGREEMENTS WITH J.F. LEHMAN
Pursuant to the terms of a ten-year Management Agreement and a ten-year
Management Services Agreement (together, the "Management Agreements") the
Company entered into with J.F. Lehman upon consummation of the Recapitalization,
the Company paid J.F. Lehman a transaction fee of $3.0 million for its efforts
in connection with the Recapitalization in 1999. In addition, the Company agreed
to pay J.F. Lehman an annual management fee equal to $0.9 million, payable in
advance on a quarterly basis. The Company paid $0.9 million in management fees
to J.F. Lehman in 2000. They also received a transaction fee of $0.9 million and
expense reimbursements of $0.2 million on the divestiture of Scot, the Company's
former wholly owned subsidiary.
COMPONENT PURCHASES
The Company purchased materials from one corporation in 2000 and from two
corporations in 1999 and 1998 owned by one of its stockholders. During the years
ended October 31, 2000, 1999 and 1998, approximately $3.1, $4.5 and
$0.7 million, respectively, of materials were purchased from this stockholder's
corporations. At October 31, 2000 and 1999, approximately $0.2 million was owed
to the corporations owned by this stockholder.
MGG CONTRIBUTION, LICENSE AND LEASE AGREEMENT
In July 1999, the Company entered into a Contribution, License and Lease
Agreement with McCormick Selph, Inc. ("MSI"), an affiliate of the Company's
controlling stockholder, pursuant to which the Company received certain assets
and licensed the intellectual property comprising the micro gas generator
("MGG") automotive product line. MGG units are used by the automotive industry
in seat belt pretensioner applications. Under the terms of the agreement, MSI
licensed to the Company on a perpetual, non-exclusive basis, the intellectual
property rights to produce MGG units, and leased
F-18
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTY TRANSACTIONS (CONTINUED)
to the Company the portion of the premises in Hollister, California where the
tangible MGG assets are located. The Company was obligated to pay MSI $14,000
per month for the leased premises. As consideration for the licensed
intellectual property, the Company was obligated to pay a royalty of $0.25 per
MGG unit produced and sold by the Company. Finally, during the term of the
lease, MSI agreed to provide the Company with certain materials and manpower
resources to enable the Company to produce MGG units at the Hollister facility.
In exchange for such materials and services, the Company agreed to pay MSI
$36,000 per month. After the April 24, 2000 accidental initiation incident that
occurred at Hollister (see Note 14, "Commitments and Contingencies"), the MGG
product line was moved to our Mesa, Arizona facility. The Contribution, License
and Lease Agreement was amended and restated in September 2000 to terminate the
lease and convey all of MSI's rights to the intellectual property to the Company
for consideration of $75,000.
10. MAJOR CUSTOMERS
The following are accounts receivable from, and sales to, customers that
exceeded 10% of total accounts receivable and net sales:
OCTOBER 31
-----------------------------------------
2000 1999
------------------- -------------------
$ % $ %
-------- -------- -------- --------
($ IN THOUSANDS)
Accounts Receivable:
TRW, Incorporated............................. $6,091 27.5% $5,529 20.5%
Autoliv....................................... 6,846 31.0% 8,796 32.5%
Atlantic Research Corporation................. 3,010 13.6% 2,311 8.6%
FOR THE YEARS ENDED OCTOBER 31
---------------------------------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
$ % $ % $ %
-------- -------- -------- -------- -------- --------
($ IN THOUSANDS)
Sales:
TRW, Incorporated............ $55,183 32.8% $60,606 36.4% $67,704 39.7%
Autoliv...................... 41,728 24.8% 40,459 24.3% 42,464 24.9%
Atlantic Research
Corporation................ 17,631 10.5% 15,605 9.4% 19,271 11.3%
F-19
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for 2000 and 1999:
2000 QUARTER ENDED
------------------------------------------------------------
JANUARY 30 APRIL 30 JULY 30 OCTOBER 31 FULL YEAR
----------- --------- -------- ----------- ---------
(IN THOUSANDS)
Net sales................................... $38,831 $47,588 $42,584 $39,241 $168,244
Gross profit................................ 7,014 9,099 8,036 6,282 30,431
Earnings (loss) from operations............. 2,650 5,121 3,683 (497) 10,957
Net earnings (loss)......................... (1,569) (166) (1,081) 21,235 18,419
1999 QUARTER ENDED
------------------------------------------------------------
JANUARY 31 MAY 2 AUGUST 1 OCTOBER 31 FULL YEAR
----------- -------- --------- ----------- ---------
(IN THOUSANDS)
Net sales................................... $ 37,716 $42,442 $42,775 $ 43,566 $166,499
Gross profit................................ 6,992 7,217 9,811 6,755 30,775
Earnings (loss) from operations............. 4,416 2,958 6,213 (10,891) 2,696
Net earnings (loss)......................... (10,379) (1,861) 1,143 (9,169) (20,266)
12. INDUSTRY SEGMENT INFORMATION
The Company operates primarily in two industry segments: aerospace and
automotive. In the aerospace industry, the Company produces pyrotechnic devices
under long-term contracts for the U.S. Department of Defense and their prime
contractors. In the automotive industry, the Company produces airbag initiators
under trade terms for commercial companies.
Each division is allocated administrative operating expenses incurred by the
Company (which are not attributable to a particular division) on an equitable
basis (e.g., sales, headcount and square footage) to fairly reflect the benefit
received by each operating division. In 2000 the allocation was made at 14% to
the Aerospace Division and 86% to the Automotive Division. In 1999 the
allocation was made at 21% to the Aerospace Division and 79% to the Automotive
Products Division. In 1998 the allocation was made at 40% to the Aerospace
Division and 60% to the Automotive Products Division. Administrative operating
expenses amounted to approximately $15.6, $6.9 and $3.9 million for the years
ended October 31, 2000, 1999 and 1998, respectively. Certain expenses in 2000
which in prior years had been charged directly to the divisions were instead
charged to the corporate segment and allocated back to the divisions. It was not
practical to reclassify prior years' expense for purposes of this note.
The Company operates entirely within the United States and has no
intersegment sales. Corporate assets are primarily cash, prepaid expenses and
other assets.
F-20
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INDUSTRY SEGMENT INFORMATION (CONTINUED)
Financial information for these segments is summarized in the table below:
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Net sales:
Automotive Products....................................... $131,970 $124,552 $135,235
Aerospace................................................. 36,274 41,947 35,303
-------- -------- --------
Total net sales......................................... $168,244 $166,499 $170,538
======== ======== ========
Earnings (losses) from operations:
Automotive Products....................................... $ 5,437 $ 4,028 $ 18,492
Aerospace................................................. 7,587 9,785 7,413
Corporate................................................. (2,067) (11,117) --
-------- -------- --------
Total earnings (losses) from operations................. $ 10,957 $ 2,696 $ 25,905
======== ======== ========
Depreciation and amortization:
Automotive Products....................................... $ 10,631 $ 12,626 $ 7,601
Aerospace................................................. 1,521 1,393 592
Corporate................................................. 2,167 1,091 327
-------- -------- --------
Total depreciation and amortization..................... $ 14,319 $ 15,110 $ 8,520
======== ======== ========
Capital expenditures:
Automotive Products....................................... $ 10,118 $ 12,969 $ 21,204
Aerospace................................................. 103 320 1,270
Corporate................................................. 100 2,757 16,049
-------- -------- --------
Total capital expenditures.............................. $ 10,321 $ 16,046 $ 38,523
======== ======== ========
Identifiable assets:
Automotive Products....................................... $ 82,438 $ 78,674 $ 69,295
Aerospace................................................. 14,628 27,165 21,737
Corporate................................................. 42,771 49,311 33,587
-------- -------- --------
Total identifiable assets............................... $139,837 $155,150 $124,619
======== ======== ========
13. SCOT, INCORPORATED
In September 2000, the Company divested itself of its wholly owned
subsidiary, Scot. The sale resulted in a $24.4 million gain net of income taxes
of 18.3 million. The Company repaid borrowings of $38.0 million under the Senior
Term Loan and $11.5 million under the Revolver from the net sales proceeds.
F-21
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENCIES
LEASES
LAND AND BUILDINGS
In 1997, the Company signed a 7-year lease for an approximate 25,000 square
foot building in Moorpark, California, for its glass-sealing division. Monthly
rental expense as of October 31, 2000 was approximately $14,000 per month. This
lease was terminated in November 2000.
OTHER OPERATING LEASES
Rental expense for non-cancelable operating leases for each of the years
ended October 31, 2000, 1999 and 1998 was approximately $0.3, $0.3 and
$0.2 million, respectively.
The following are future minimum lease payments under non-cancelable
operating leases:
AMOUNT
--------------
(IN THOUSANDS)
For The Years Ending October 31
2001...................................................... $191
2002...................................................... 77
2003...................................................... 16
2004...................................................... 4
2005...................................................... 3
----
Total minimum lease payments.............................. $291
====
OTHER MATTERS
ENVIRONMENTAL INVESTIGATION. In August 1999, representatives of the
California Environmental Protection Agency ("Cal EPA") conducted an inspection
of the Company's former Newhall facility. Following the inspection, Cal EPA
issued a notice of violations indicating that there had been unauthorized
burning and treatment of hazardous waste at the facility. In September 1999, a
federal grand jury issued subpoenas requesting copies of documents relating to
the handling of hazardous waste and hazardous materials at the Company's
Newhall, Moorpark, and Mesa facilities, as well as copies of documents related
to other health and safety issues. These state and federal investigations were
concluded in early January 2001 when (1) the Company pled guilty to three counts
of violation of Title 42, United States Code, Section 6928(d)(2)(A) for treating
hazardous wastes without a permit and was sentenced to pay fines, community
service amounts, and other assessments in an aggregate amount of approximately
$1.5 million and to a term of probation of three years; and (2) agreed to pay
civil penalties and related costs and expenses in an aggregate amount of
approximately $0.6 million. These fines and penalties were accrued during the
year ended October 31, 2000.
OSHA INVESTIGATIONS. In February 1999, a Company employee was killed when
an accidental initiation incident occurred at the Company's former Newhall
facility. The State of California, Department of Industrial Relations, Division
of Occupational Safety and Health ("Cal-OSHA") initiated an investigation of the
accident, which concluded in August 1999. The investigation resulted in the
issuance of citations for alleged safety violations and fines aggregating
approximately $20,000. The Company appealed the citations and the case was
settled for $12,655. The District Attorney's Office for
F-22
SPECIAL DEVICES, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 approximately $30,000.
Two other Cal-OSHA investigations are pending. On April 24, 2000, an
accidental initiation incident occurred at the premises leased by the Company
from MSI in Hollister, California for the Company's MGG production line, which
it acquired from MSI in July 1999. The incident resulted in the death of one
Company employee. Prior to the April 24, 2000 incident, the Company had intended
to move its MGG operations 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. Cal-OSHA conducted a post-incident and process safety
management inspection, which resulted in the issuance on October 20, 2000 of
citations for alleged safety violations and proposed fines aggregating over
$250,000. The Company has appealed the citations. The appeal is pending. Because
the accident resulted in a fatality, Cal-OSHA's Bureau of Investigation is
required to conduct its own investigation to determine whether to refer the
matter to the District Attorney's Office. 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. On
September 1, 2000, an accidental initiation incident occurred at the Company's
Moorpark facility. Two employees were injured. Cal-OSHA is conducting a
post-incident and process safety management inspection. We do not expect to have
the results of the inspection until February 2001, and, thus, at this stage, it
is not possible to predict or assess the likelihood of an unfavorable outcome.
At this stage, it is not possible to predict the amount of potential liabilities
associated with these pending Cal-OSHA matters, which could result in civil
and/or criminal liabilities and penalties, and could cause the Company's defense
operations to be suspended or debarred from military or government sales which
could materially and adversely affect our financial condition, results of
operations and liquidity.
F-23
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Moorpark, State of California, on the 26th day of January 2001.
SPECIAL DEVICES, INCORPORATED
By: /s/ THOMAS W. CRESANTE
-----------------------------------------
Thomas W. Cresante
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SIGNATURE TITLE DATE
--------- ----- ----
/s/ THOMAS W. CRESANTE
--------------------------------- Director, President and Chief Executive January 26, 2001
Thomas W. Cresante Officer (Principal Executive Officer)
/s/ DONALD C. CAMPION Executive Vice President and Chief
--------------------------------- Financial Officer (Principal January 26, 2001
Donald C. Campion Financial and Accounting Officer)
/s/ DR. JOHN F. LEHMAN
--------------------------------- Chairman of the Board of Directors January 26, 2001
Dr. John F. Lehman
/s/ GEORGE A. SAWYER
--------------------------------- Director and Secretary January 26, 2001
George A. Sawyer
/s/ JOSEPH A. STROUD
--------------------------------- Director, Executive Vice President and January 26, 2001
Joseph A. Stroud Assistant Secretary
/s/ M. STEVEN ALEXANDER
--------------------------------- Director January 26, 2001
M. Steven Alexander
--------------------------------- Director
Oliver C. Boileau, Jr.
/s/ RANDY H. BRINKLEY
--------------------------------- Director January 26, 2001
Randy H. Brinkley
/s/ DONALD GLICKMAN
--------------------------------- Director January 26, 2001
Donald Glickman
/s/ WILLIAM PAUL
--------------------------------- Director January 26, 2001
William Paul
--------------------------------- Director
Thomas G. Pownall