1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended: FEBRUARY 2, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number: 0-19330
SPECIAL DEVICES, INCORPORATED
(Exact name of Registrant as specified in its charter)
DELAWARE 95-3008754
----------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16830 W. PLACERITA CANYON ROAD, NEWHALL, CALIFORNIA 91321
---------------------------------------------------------
(Address of principal executive offices)
(805) 259-0753
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X YES NO
---- ----
At March 12, 1997, the total number of outstanding shares of registrant's common
stock was 7,685,696.
2
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
ASSETS
October 31, February 2,
1996 1997
----------- -----------
Current assets:
Cash $ 2,592,578 $ 894,105
Marketable securities 10,700,000 10,700,000
Accounts receivable, net of allowance
of $155,959 at October 31, 1996 and $179,959
at February 2, 1997 for doubtful accounts 12,663,230 11,321,768
Inventories 18,298,705 19,111,551
Prepaid expenses 401,645 832,984
Deferred income taxes 670,000 667,000
----------- -----------
Total current assets 45,326,158 43,527,408
----------- -----------
Property, plant and equipment, at cost:
Land 1,611,331 1,611,331
Buildings 7,562,979 7,566,265
Machinery and equipment 35,736,957 36,568,222
Furniture and fixtures 2,221,376 2,320,515
Transportation equipment 3,066,463 3,068,463
Leasehold improvements 2,334,412 2,423,213
Construction in progress
(includes land and related costs of $3,700,000
at October 31, 1996, and $3,900,000 at
February 2, 1997) 5,695,185 7,869,604
----------- -----------
58,228,703 61,427,613
Less accumulated depreciation 17,597,716 19,153,246
----------- -----------
40,630,987 42,274,367
----------- -----------
Other assets 202,050 188,717
----------- -----------
$86,159,195 $85,990,492
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY - UNAUDITED
October 31, February 2,
1996 1997
-------------- --------------
Current liabilities:
Current portion of long-term debt $ 1,296,973 $ 1,738,367
Trade accounts payable 3,075,758 2,605,873
Accounts payable to related parties 2,294,688 818,656
Accrued payroll, benefits & other 1,710,494 2,107,091
Income taxes 1,991,290 1,642,290
-------------- --------------
Total current liabilities 10,369,203 8,912,277
Long-term debt, less current portion 3,319,709 2,671,189
Deferred income taxes 2,769,000 2,695,000
-------------- --------------
Total liabilities 16,457,912 14,278,466
-------------- --------------
Stockholders' equity:
Preferred stock, $.01 par value. Authorized
2,000,000 shares; no shares issued or outstanding -- --
Common stock, $.01 par value. Authorized
20,000,000 shares; issued and outstanding
7,675,535 shares at October 31, 1996, and
7,685,363 shares at February 2, 1997 76,756 76,854
Additional paid-in capital 49,911,050 50,007,566
Retained earnings 19,713,477 21,627,606
-------------- --------------
Total stockholders' equity 69,701,283 71,712,026
-------------- --------------
$ 86,159,195 $ 85,990,492
============== ==============
See accompanying notes to condensed consolidated financial statements.
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SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS - UNAUDITED
Three Months ended
--------------------------------
January 28, February 2,
1996 1997
------------ ------------
Net sales $ 22,541,443 $ 27,537,394
Cost of sales 18,583,770 22,240,535
------------ ------------
Gross profit 3,957,673 5,296,859
------------ ------------
Operating expenses 1,744,183 2,225,865
------------ ------------
Earnings from operations 2,213,490 3,070,994
------------ ------------
Other income (expense):
Interest income 119,271 117,991
Interest (expense) (115,526) (78,178)
Other 7,701 (1,678)
------------ ------------
Net other income 11,446 38,135
------------ ------------
Earnings before income taxes 2,224,936 3,109,129
Income taxes 865,000 1,195,000
------------ ------------
Net earnings $ 1,359,936 $ 1,914,129
============ ============
Net earnings per share $ 0.18 $ 0.25
============ ============
Weighted average common shares
and common stock
equivalents outstanding 7,741,238 7,753,052
============ ============
See accompanying notes to condensed consolidated financial statements.
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SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED FEBRUARY 2, 1997
Additional Total
Common Stock paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
------------- ------------- ------------- ------------- -------------
Balance at October 31, 1996 7,675,535 $ 76,756 $ 49,911,050 $ 19,713,477 $ 69,701,283
Issuance of common stock on
exercise of stock options 9,828 98 96,516 -- 96,614
Net income (unaudited) -- -- -- 1,914,129 1,914,129
------------- ------------- ------------- ------------- -------------
Balance at February 2, 1997 7,685,363 $ 76,854 $ 50,007,566 $ 21,627,606 $ 71,712,026
============= ============= ============= ============= =============
See accompanying notes to condensed consolidated financial statements.
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SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended
---------------------------------
January 28, February 2,
1996 1997
-------------- --------------
Cash flows from operating activities:
Net earnings $ 1,359,936 $ 1,914,129
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation 1,307,753 1,555,531
Changes in assets and liabilities:
Decrease in accounts receivable 216,001 1,341,462
(Increase) in inventories (857,127) (822,495)
Decrease (increase) in prepaid expenses 35,030 (431,338)
Decrease in other assets -- 13,333
(Decrease) in accounts payable,
accounts payable to related parties and other
accrued expenses (1,278,558) (1,539,673)
Increase (decrease) in income taxes payable 207,470 (349,000)
Increase (decrease) in net deferred taxes 62,000 (71,000)
-------------- --------------
Net cash provided by operating activities 1,052,505 1,610,949
-------------- --------------
Cash flows from investing activities:
Purchase of property, plant and equipment (2,290,890) (3,198,910)
-------------- --------------
Net cash (used in) investing activities (2,290,890) (3,198,910)
-------------- --------------
Cash flows from financing activities:
Proceeds from issuance of common stock 44,423 96,614
Repayments of long-term debt (302,580) (207,126)
-------------- --------------
Net cash (used in) financing activities (258,157) (110,512)
-------------- --------------
Net (decrease) in cash (1,496,542) (1,698,473)
Cash at beginning of period 3,928,185 2,592,578
-------------- --------------
Cash at end of period $ 2,431,643 $ 894,105
============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 93,615 $ 82,119
Income taxes 625,000 1,872,000
============== ==============
See accompanying notes to condensed consolidated financial statements.
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SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 2, 1997
(Unaudited)
(1) INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements of
Special Devices, Incorporated, a Delaware corporation, include all adjustments
(consisting of normal recurring entries) which management believes are necessary
for a fair presentation of the financial position and results of operations for
the periods presented. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that the
accompanying financial statements be read in conjunction with the Company's
audited financial statements and footnotes as of and for the year ended October
31, 1996. Operating results for the three month period ended February 2, 1997
are not necessarily indicative of the operating results which may be expected
for the full fiscal year.
(2) ACCOUNTS RECEIVABLE
Accounts receivable from long-term contracts are as follows:
October 31, February 2,
1996 1997
----------- -----------
Commercial Customers $ 6,388,176 $ 7,790,467
U.S. Government 2,299,218 1,202,900
U.S. Government Subcontractors 4,131,795 2,508,360
----------- -----------
12,819,189 11,501,727
Less allowance for doubtful accounts 155,959 179,959
----------- -----------
Total $12,663,230 $11,321,768
=========== ===========
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8
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 2, 1997
(Unaudited)
(3) INVENTORIES
Inventories and inventoried costs relating to long-term contracts are
classified as follows:
October 31, February 2,
1996 1997
-------------- --------------
Raw materials and components $ 6,167,337 $ 5,656,094
Work in process 7,278,149 7,496,458
Finished goods 1,020,337 1,157,295
Inventoried costs relating to
long term contracts, net of
amounts attributed to revenues
recognized to date 5,835,468 4,801,704
-------------- --------------
18,301,291 19,111,551
Less progress payments related
to long-term contracts 2,586 --
-------------- --------------
$ 18,298,705 $ 19,111,551
============== ==============
Inventoried costs relate to costs of goods currently in progress on long-term
contracts. 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.
(4) LONG-TERM DEBT
Long-term debt consists of the following:
October 31, February 2,
1996 1997
-------------- --------------
Bank term notes $ 2,164,886 $ 569,004
Bank credit agreement -- 1,449,953
Finance company 2,392,295 2,347,449
Other notes 59,501 43,150
-------------- --------------
4,616,682 4,409,556
Less current portion 1,296,973 1,738,367
-------------- --------------
$ 3,319,709 $ 2,671,189
============== ==============
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9
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 2, 1997
(Unaudited)
In December 1996, the Company signed a new credit agreement (the "Credit
Agreement") with a new bank and replaced its prior credit facility. Under the
prior credit facility, the Company had a term note outstanding which bore
interest at 7.3 percent, the unpaid balance of which was $1,583,000 at October
31, 1996. The balance of the Term Loan and any other borrowings outstanding with
the former bank were paid at that time. The new Credit Agreement expires May 1,
1998, and any borrowings under the new Credit Agreement bear interest at the
bank's Reference Rate less .25 percentage point, or at the Company's option, at
LIBOR plus .75 percentage point. The new Credit Agreement contains two revolving
credit facilities. The Company may borrow up to $10,000,000 under Facility No.
1, and may borrow up to $12,000,000 under Facility No. 2. Facility No. 1 may be
used for commercial letters of credit not to exceed $500,000 and for standby
letters of credit not to exceed $6,000,000, which reduce the amount available
under the agreement. In addition, the Company has the option of converting
outstanding borrowings, in increments of not less than $1,000,000, under
Facility No. 2 to a 5-year term loan. Any amounts converted to term debt under
Facility No. 2 will bear interest at the bank's long-term interest rate in
effect at the time of such conversion. As of February 2, 1997, $1,450,000 was
outstanding under Facility No. 2, and no amounts were outstanding under Facility
No. 1. In addition, the Company had outstanding approximately $5,500,000 of
performance bonds secured by standby letters of credit related to development of
new facilities (see Footnote 8).
The Company's wholly-owned subsidiary, Scot, Inc. has a term loan with a
bank, secured by certain real property of Scot. The principal balance
outstanding at October 31, 1996, was $582,000, and at February 2, 1997 was
$569,000. The loan is being amortized with monthly payments of approximately
$13,000, including interest of 10.0%, through August 2001, at which time the
remaining balance is due.
The finance company notes are secured by related equipment. The first note
is being amortized over 12 years, with interest at 5.9% through November 1996,
and with interest at prime plus one-half percent through November 2006, when the
note will be fully amortized. Monthly payments are approximately $22,800. The
unpaid balance at February 2, 1997, was $1,802,200. The second note is being
amortized over 10 years, with interest of 4.9% through December 1996, and with
interest at prime plus one-half percent through December 2004, when the note
will be fully amortized. Monthly payments are approximately $7,100. The unpaid
balance at February 2, 1997 was $545,200.
(5) STOCK INCENTIVE PLAN
The Company's amended and restated 1991 Stock Incentive Plan (the"Plan") is
administered by a committee of the Board of Directors which determines the
amount, type, terms and condition of the awards made pursuant to the Plan. The
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
Plan.
Pursuant to the Plan, no option may be granted that is exercisable in less
than six months nor 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.
During the quarter ended February 2, 1997, 33,000 options were granted at
prices ranging from $17.00 to $17.75 per share under the Plan and 9,828 options
were exercised at prices ranging from $9.50 to $10.00 per share. At February 2,
1997, there were outstanding options to purchase 338,880 shares, which options
were
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SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 2, 1997
(Unaudited)
exercisable with respect to 138,675 shares.
In January 1997, the Company's Stock Option Committee authorized stock
option grants to certain employees via a special grant which 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 from 5 to 8 years from
the grant date. The grants for the later 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 earning levels. The options were
granted at the fair market value of the stock on the grant date, which was
$17.00 per share. These grants are subject to stockholder approval.
(6) NET INCOME PER SHARE
Net income per share is computed by dividing net income by the weighted
average number of common stock and dilutive common stock equivalents outstanding
during the period. Fully diluted earnings per share are presented when dilutive.
(7) INCOME TAXES
The provisions for income taxes consist of the following for each respective
quarter ended:
January 28, February 2,
1996 1997
--------- -----------
Current:
Federal $ 622,000 $ 965,000
State 208,000 244,000
------- ----------
$ 830,000 $ 1,209,000
======= =========
Deferred:
Federal $ 27,000 $ 16,000
State 8,000 (30,000)
------- ----------
$ 35,000 $ (14,000)
======= ==========
Total
Federal $ 649,000 $ 981,000
State 216,000 214,000
------- -------
$ 865,000 $ 1,195,000
======= =========
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11
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 2, 1997
(Unaudited)
Temporary differences which give rise to deferred tax assets and liabilities
are as follows:
October 31, February 2,
1996 1997
----------- -----------
Deferred tax liabilities:
Depreciation $(2,769,000) $(2,695,000)
=========== ===========
Deferred tax assets:
Allowance for doubtful accounts 60,000 69,000
Inventory 264,000 304,000
Vacation 153,000 194,000
State taxes 193,000 100,000
----------- -----------
670,000 667,000
----------- -----------
Net deferred tax liability $(2,099,000) $(2,028,000)
=========== ===========
Management believes that it is more likely than not that future operations
will generate sufficient taxable income to realize the deferred tax assets.
The provisions for income tax expense for the three months ended 1996 and
1997 differ from the provisions that would have resulted from applying the
Federal statutory rates during such periods to the income before income taxes.
The reasons for these differences are as follows:
January 28, February 2,
1996 1997
-------------- --------------
Income taxes at Federal rate $ 622,000 $ 790,000
State income taxes 208,000 289,000
Other 35,000 116,000
-------------- --------------
$ 865,000 $ 1,195,000
============== ==============
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12
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 2, 1997
(Unaudited)
(8) COMMITMENTS AND CONTINGENCIES
The Company is a defendant in various pending claims and lawsuits. In the
opinion of the Company's management, after consultation with counsel,
disposition of such matters is not expected to have a material adverse effect
upon the results of operations or the financial position of the Company.
The Company had commitments at February 2, 1997 to acquire capital
equipment, at cost aggregating approximately $4,000,000, primarily for
production and other support equipment required for the increased operations of
the Automotive Products Division. In addition, in order to improve manufacturing
efficiencies and to provide facilities for growth, the Company purchased in
October 1996, approximately 280 acres of land in the City of Moorpark, located
in Ventura County, north of Los Angeles, where the Company plans to build new
facilities. Development of the land infrastructure, including grading, began in
January 1997, and is expected to be completed in late Spring 1997, at which time
construction of the buildings is expected to begin. The construction is expected
to be completed by the end of 1997, and the Company expects to move its entire
California-based operations, including Automotive Products, Aerospace and the
administrative offices in early 1998 to these new facilities. Total cost of the
project is estimated at $18,000,000 of which $3,900,000 had been spent at
February 2, 1997 and is included in construction in progress in the accompanying
consolidated balance sheet. The Company anticipates spending approximately
$10,000,000 in fiscal year 1997, and approximately $4,100,000 in fiscal year
1998 to complete this project. The Company has committed to complete the land
infra-structure, the total cost of which is estimated to be approximately
$8,000,000.
The statements above regarding the land purchased by the Company in
Moorpark and the construction of facilities on that land by the Company are
forward-looking statements. Actual results and the timing of those results may
vary depending on various factors including, for example, the ability of the
Company to obtain permits and approvals that do not contain conditions or
restrictions that are unduly restrictive or otherwise unacceptable to the
Company, the Company's not encountering any unforeseen conditions relating to
the property that make completion of the land infrastructure work or
construction more expensive, difficult or time intensive than is currently
expected, the ability of the contractors and subcontractors retained by the
Company to complete the work on the schedule and for the costs described above,
and other factors which may develop during the course of this project.
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13
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 2, 1997
(Unaudited)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED FEBRUARY 2, 1997 TO THREE MONTHS ENDED
JANUARY 28, 1996
Net Sales
Net sales for the Automotive Products Division increased $5,722,000, or
32.0%, to $23,576,000 for the three months ended February 2, 1997 compared to
net sales of $17,854,000 for the same period last year. The increase was due to
increased shipments of initiators (used to ignite airbag systems) to TRW, Inc.
and Morton International, Inc., under terms of long-term supplier agreements.
The increase in demand for initiators is in response to federal regulations that
require automatic frontal crash protection systems to be installed for the
driver and front passenger in all passenger automobiles manufactured for sale in
the United States on or after September 1, 1989. The use of airbags as the
primary means of compliance with the regulations is the principal reason for the
significant increase in the Automotive Products Division's net sales. Sales to
TRW as a percentage of total Automotive Products Division sales were 69.6% for
the three months ended February 2, 1996 compared to 84.3% for the same period
last year. As a percentage of total company sales, sales to TRW were 63.4% for
the three months ended February 2, 1997, compared to 66.8% for the same period
last year. The Company began shipping at an increased rate to Morton
International in August 1996, under terms of a long-term agreement with Morton
that became effective in August 1996. Sales to Morton as a percentage of total
Automotive Products Division sales were 19.5% for the three months ended
February 2, 1997, and were 17.8% of total Company sales for the same period.
Sales to Morton in the prior year comparable quarter were not significant.
Net sales for the Aerospace Division decreased by $726,000, or 15.5%, to
$3,961,000 for the three months ended February 2, 1997 compared to net sales of
$4,687,000 for the same period last year. The decrease in sales in the first
quarter of 1997 was the result of a low level of backlog entering the quarter as
compared to the backlog entering the first quarter last year. The low level of
backlog was the result of a delay in booking certain programs in the prior
fiscal year.
Cost of Sales
Cost of sales for the Automotive Products Division increased $3,963,000, or
25.4% to $19,556,000 for the quarter ended February 2, 1997, compared to cost of
sales of $15,593,000 for same quarter last year. The increase in cost of sales
reflects the cost of increased shipments during the 1997 quarter. The Division's
gross profit margin was 17.1% for the 1997 quarter, compared to 12.7% for the
same quarter last year. The increase in margin reflects the effects of increased
yields from automated equipment and reduced scrap rates during the 1997 quarter
compared to the 1996 quarter, partially offset by a lower average unit sales
price in the 1997 quarter compared to the 1996 quarter. The Automotive Products
Division is continuing its efforts to reduce average unit production costs by,
among other things: a) redesigning certain parts of an initiator; b) reducing
costs of material through vertical integration; c) improving yields from
existing automated equipment; and d) reducing scrap.
Cost of sales for the Aerospace Division decreased $306,000, or 10.2%, to
$2,684,000 compared to cost of sales of $2,990,000 for the comparable quarter
last year. The decrease is the result of reduced costs associated with reduced
sales during the first quarter of the 1997 fiscal year. Gross profit as a
percent of sales was 32.2% for the first quarter of 1997 compared to 36.2% for
the same quarter last year. The decline in gross profit as a percent of sales in
the 1997 first quarter was the result of the mix of products shipped in the 1997
first quarter and
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14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
because of start-up costs incurred on several new programs in the 1997 first
quarter which were not incurred in the 1996 first quarter.
Operating Expenses
Operating expenses for each division (Automotive Products and Aerospace)
are comprised of two components. First, each division is charged those operating
expenses directly incurred by that division. Second, each division is allocated
administrative expenses incurred by the Company (which are not attributable to a
particular division) on an equitable basis to reflect fairly the benefit
received by each operating division. For the past two fiscal years these
expenses have been allocated equally to each division. Administrative expenses
incurred by the Company and allocated to each division increased in the first
quarter of 1997 compared to the same quarter last year. The primary areas of
increase were in salaries, salary related expenses and other corporate support
charges.
Operating expenses for the Automotive Products Division increased $298,000,
or 36.9%, to $1,106,000 in the first quarter of 1997, compared to operating
expenses of $808,000 for the same period last year. As a percentage of sales,
operating expenses were 4.7% compared to 4.5% for the same period last year. The
increase in operating expenses occurred primarily in salary and salary related
expenses, and in administrative expenses allocated to each division.
Operating expenses for the Aerospace Division increased by $183,000, or
19.5%, to $1,120,000 for the quarter ended February 2, 1997, compared to
operating expenses of $937,000 for the same period last year. As a percentage of
sales, operating expenses were 28.3% for the quarter ended February 2, 1997,
compared to 20.0% for the same quarter last year. The increase in operating
expenses (as a percentage of sales) is due to sales volume decreasing at a
faster rate than operating expenses decreased. Operating expenses are incurred
to support a broad range of sales and therefore do not increase or decrease at
the same rate sales may increase or decrease. The increase in actual operating
expenses occurred primarily in the increase in administrative expenses allocated
to each division.
Other Income and Expense
Other income (expense) consists primarily of interest income and interest
expense. Net other income was $38,100 in the first quarter of 1997, compared to
net other income of $11,000 for the same period last year. Interest income was
$118,000 in the first quarter of 1997 compared to interest income of $119,300
for the first quarter last year. Average interest rates and amounts invested
were comparable for the quarters. Interest expense was $78,200 in the first
quarter of 1997, compared to interest expense of $115,500 for the same period
last year. The decrease of $37,300 was the result of lower average debt
outstanding in the first quarter of 1997 due to scheduled monthly payments of
existing debt.
Liquidity and Capital Resources
The Company's primary sources of capital since its initial public offering
in 1991 have been cash from operations and bank borrowings and, in fiscal year
1995, an additional public offering of its common stock. In December 1996, the
Company signed a credit agreement (the "Credit Agreement") with a bank. The
Credit Agreement expires May 1, 1998, and any borrowings under the Credit
Agreement bear interest at the bank's Reference Rate (8.25% at February 2, 1997)
less .25 percentage point, or at the Company's option, at LIBOR (5.69% at
February 2, 1997) plus .75 percentage point. The Credit Agreement contains two
revolving credit facilities. The Company may borrow up to $10,000,000 under
Facility No. 1, and may borrow up to $12,000,000 under Facility No. 2.
Borrowings under both facilities may be used for general and other corporate
purposes. In
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15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
addition, the Company has the option of converting outstanding borrowings in
increments of not less than $1,000,000, under Facility No. 2 to 5-year term
loan. Any amounts converted to term debt under Facility No. 2 will bear interest
at the bank's long-term rate in effect at the time of such conversion.
Substantially all of the Company's assets are pledged as collateral under
the Credit Agreement. In addition, the Credit Agreement contains covenants that
include requirements to meet certain financial tests and ratios (including
minimum current ratio, debt service ratio, minimum tangible net worth, maximum
debt ratio and maintenance of profitable annual operations) and restrictions and
limitations on the sale of assets, new borrowings, mergers and purchases of
stock. The Company was in compliance with these provisions as of February 2,
1997. As of February 2, 1997, $1,450,000 was outstanding under Facility No. 2,
and no amounts were outstanding under Facility No. 1.
The Company's wholly owned subsidiary, Scot, Inc. has a term loan with a
bank, which was renewed in August 1996, secured by certain real property of
Scot. The principal balance outstanding under the renewed loan at February 2,
1997, was $569,000. The loan is being amortized with monthly payments of
approximately $7,800, including interest, adjusted monthly, at 1.9% over the
bank's LIBOR rate (5.5% at February 2, 1997). Any unpaid principal is due on
August 1, 2001.
In November 1994, the Company purchased a new airplane from United
Beechcraft, Inc. for $2,210,000. The Company made an initial payment of $110,500
for the plane and delivered a promissory note with Beech Acceptance Corporation,
Inc. to finance the remaining balance of $2,099,500 over a 12-year period with
interest at prime plus one-half percent. The unpaid balance of this note at
February 2, 1997 was $1,802,200. In December 1994, the Company purchased a
second airplane from United Beechcraft, Inc. for $669,419. The Company entered
into a promissory note with Beech Acceptance, Inc. to finance the purchase over
a 10-year period with interest at prime plus one-half percent. The unpaid
balance of this note at February 2, 1997 was $545,200. The planes are being used
primarily to transport Company officials between its Newhall, California and
Mesa, Arizona facilities. In addition, the Company leases the first airplane for
use by third parties when not in use by the Company in order to defray a portion
of the costs.
During the first quarter ended February 2, 1997, the Company generated cash
flow from operations of $1,611,000. Capital expenditures, primarily for payments
related to automated manufacturing equipment and new production facilities,
amounted to $3,199,000. Principal payments of long-term bank debt aggregated
$207,100. These net cash outflows were funded by cash flow from operations and
the use of existing cash on hand. At February 2, 1997, the Company had cash and
marketable securities on hand of $11,594,000 and additional borrowing capacity
available under its Credit Agreement of $15,050,000.
At February 2, 1997, the Company had working capital of $34,615,000 as
compared to working capital of $34,957,000 at October 31, 1996. The decrease of
$342,000 is due primarily to a decrease in cash of $1,699,000, a decrease in
accounts receivable of $1,341,000, an increase in the current portion of
long-term debt of $441,000, and an increase in accrued expenses of $397,000,
partially offset by an increase in inventory of $813,000, an increase in prepaid
expenses of $431,000, a decrease in accounts payable of $1,946,000, and a
decrease in income taxes payable of $349,000. The increase in inventories was
due primarily to higher levels of raw materials purchases and work-in-process
required to support the increasing production and shipping volume of the
Automotive Products Division. The decrease in accounts receivable occurred as
the Company collected funds
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
for shipments at a faster rate in the first quarter of 1997. The decrease in
cash occurred as the Company reduced the balance in accounts payable.
In order to improve manufacturing efficiencies and to provide facilities
for growth, the Company purchased approximately 280 acres of land in the City of
Moorpark, located in Ventura County, north of Los Angeles, in October 1996, on
which the Company plans to build new facilities. Development of the land
infrastructure, including grading, began in January 1997, and is expected to be
completed in late Spring 1997, at which time construction of the buildings is
expected to begin. The building construction is expected to be completed by the
end of 1997, and the Company expects to move its entire California-based
operations, including Automotive Products, Aerospace and the administrative
offices in early 1998 to these new facilities. Total cost of the project is
estimated at $18,000,000 of which approximately $3,900,000 had been spent by
February 2, 1997. The Company anticipates spending approximately $10,000,000 in
fiscal 1997, and approximately $4,100,000 in fiscal 1998 to complete this
project. The Company believes it has available adequate cash and marketable
securities, cash flow from operations, and borrowing capacity to adequately
finance this project. The Company believes additional term financing is
available for this project to the extent required, however there can be no
assurance that such financing will be available when required.
The Company anticipates that working capital requirements will increase in
1997 as compared to 1996 to support the investment in inventories and accounts
receivable related to the anticipated increased demand for initiators
manufactured by the Company. The Company believes that it can meet its expected
working capital requirements for the foreseeable future from existing cash and
marketable securities on hand, cash flow from operations and borrowings under
its Credit Agreement. The Company had commitments to acquire capital equipment
at February 2, 1997 aggregating approximately $4,000,000 related primarily to
additional production equipment, and other support equipment required for the
increased operations of the Automotive Products Division. In addition, the
Company has committed to complete the land infra-structure related to its
Moorpark facility, the remaining cost of which, at February 2, 1997, is
approximately $7,000,000.
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PART II - OTHER INFORMATION
Items 1 through 5 are omitted as they are not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Statement RE: Computation of Per Share Earnings
(b) Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPECIAL DEVICES, INCORPORATED
DATED: March 17, 1997
---------------------- -----------------------------------
Chairman of the Board and
President
DATED: March 17, 1997
---------------------- -----------------------------------
Vice President Finance and
Chief Financial Officer
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