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 1, 1998
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 16, 1998, the total number of outstanding shares of registrant's common
stock was 7,793,267.
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PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
October 31, February 1,
1997 1998
------------ ------------
(Unaudited)
Current assets:
Cash $ 2,415,335 $ 479,748
Marketable securities 6,750,000 4,750,000
Accounts receivable, net of allowance
of $44,126 at October 31, 1997 and $30,037
at February 1, 1998 for doubtful accounts 18,192,877 19,706,049
Inventories 14,554,614 15,372,270
Prepaid expenses 503,430 1,096,999
Deferred income taxes 991,000 941,000
------------ ------------
Total current assets 43,407,256 42,346,066
------------ ------------
Property, plant and equipment, at cost:
Land 1,611,331 1,611,331
Buildings 7,963,637 7,979,805
Machinery and equipment 44,080,413 46,365,799
Furniture and fixtures 2,844,116 2,947,589
Transportation equipment 2,486,034 2,506,198
Leasehold improvements 3,314,332 3,373,187
Construction in progress
(includes land and related costs of $9,440,000
at October 31, 1997, and $11,500,000 at
February 1, 1998) 17,942,985 23,381,209
------------ ------------
80,242,848 88,165,118
Less accumulated depreciation 23,974,540 25,862,832
------------ ------------
56,268,308 62,302,286
------------ ------------
Other assets 148,716 135,383
------------ ------------
$ 99,824,280 $104,783,735
============ ============
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
October 31, February 1,
1997 1998
------------ ------------
(unaudited)
Current liabilities:
Current portion of long-term debt $ 944,793 $ 688,603
Trade accounts payable 6,175,501 7,542,134
Accounts payable to related parties 1,471,748 1,188,636
Accrued payroll, benefits & other 3,420,780 3,101,413
Income taxes 1,257,872 2,108,872
------------ ------------
Total current liabilities 13,270,694 14,629,658
Long-term debt, less current portion 2,056,766 2,011,380
Deferred income taxes 3,140,000 3,215,000
------------ ------------
Total liabilities 18,467,460 19,856,038
------------ ------------
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
7,771,167 shares at October 31, 1997, and
7,788,667 shares at February 1, 1998 77,712 77,887
Additional paid-in capital 50,887,737 51,071,461
Retained earnings 30,391,371 33,778,349
------------ ------------
Total stockholders' equity 81,356,820 84,927,697
------------ ------------
$ 99,824,280 $104,783,735
============ ============
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
--------------------------------
February 2, February 1,
1997 1998
------------ ------------
Net sales $ 27,537,394 $ 40,732,373
Cost of sales 22,240,535 32,523,427
------------ ------------
Gross profit 5,296,859 8,208,946
------------ ------------
Operating expenses 2,225,865 2,656,944
------------ ------------
Earnings from operations 3,070,994 5,552,002
------------ ------------
Other income (expense):
Interest income 117,991 66,309
Interest expense (78,178) (50,487)
Other (1,678) (5,846)
------------ ------------
Net other income 38,135 9,976
------------ ------------
Earnings before income taxes 3,109,129 5,561,978
Income taxes 1,195,000 2,175,000
------------ ------------
Net earnings $ 1,914,129 $ 3,386,978
============ ============
Basic net earnings per share $ .25 $ .43
============ ============
Weighted average shares outstanding 7,676,610 7,794,013
============ ============
Diluted net earnings per share $ .25 $ .42
============ ============
Weighted average shares outstanding 7,753,052 8,041,127
============ ============
See accompanying notes to condensed consolidated financial statements.
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SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - UNAUDITED
FOR THE THREE MONTHS ENDED FEBRUARY 1, 1998
Common Stock Additional Total
--------------------------- paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
--------- ----------- ----------- ----------- -----------
Balance at October 31, 1997 7,771,167 $ 77,712 $50,887,737 $30,391,371 $81,356,820
Issuance of common stock on
exercise of stock options 17,500 175 183,724 -- 183,899
Net income (unaudited) -- -- -- 3,386,978 3,386,978
--------- ----------- ----------- ----------- -----------
Balance at February 1, 1998 7,788,667 $ 77,887 $51,071,461 $33,778,349 $84,927,697
=========== =========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
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SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
Three months ended
------------------------------
February 2, February 1,
1997 1998
----------- -----------
Cash flows from operating activities:
Net earnings $ 1,914,129 $ 3,386,978
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation 1,555,531 1,888,292
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 1,341,462 (1,513,172)
(Increase) in inventories (822,495) (817,656)
(Increase) in prepaid expenses (431,338) (593,569)
Decrease in other assets 13,333 13,333
(Decrease) increase in accounts payable,
accounts payable to related parties and other
accrued expenses (1,539,673) 764,154
(Decrease) increase in income taxes payable (349,000) 851,000
(Decrease) increase in net deferred taxes (71,000) 125,000
----------- -----------
Net cash provided by operating activities 1,610,949 4,104,360
----------- -----------
Cash flows from investing activities:
(Purchase) of property, plant and equipment (3,198,910) (7,922,270)
Sale of marketable securities -- 2,000,000
----------- -----------
Net cash (used in) investing activities (3,198,910) (5,922,270)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 96,614 183,899
(Repayments) of long-term debt (207,126) (301,576)
----------- -----------
Net cash (used in) financing activities (110,512) (117,677)
----------- -----------
Net (decrease) in cash (1,698,473) (1,935,587)
Cash at beginning of period 2,592,578 2,415,335
----------- -----------
Cash at end of period $ 894,105 $ 479,748
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 82,119 $ 50,683
Income taxes 1,872,000 1,199,000
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 1, 1998
(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, 1997. Operating results for the three month period ended February 1, 1998
are not necessarily indicative of the operating results which may be expected
for the full fiscal year.
(2) ACCOUNTS RECEIVABLE
Accounts receivable are as follows:
October 31, February 1,
1997 1998
----------- -----------
Commercial customers $11,897,328 $16,319,165
U.S. Government 1,295,349 829,827
U.S. Government subcontractors 5,044,326 2,587,094
----------- -----------
18,237,003 19,736,086
Less allowance for doubtful accounts 44,126 30,037
----------- -----------
Total $18,192,877 $19,706,049
=========== ===========
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SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 1, 1998
(Unaudited)
(3) INVENTORIES
Inventories and inventoried costs relating to long-term contracts are
classified as follows:
October 31, February 1,
1997 1998
----------- -----------
Raw materials and components $ 4,840,722 $ 4,750,446
Work in process 6,234,248 7,156,063
Finished goods 920,809 521,324
Inventoried costs relating to
long term contracts, net of
amounts attributed to revenues
recognized to date 2,558,835 3,170,204
----------- -----------
14,554,614 15,598,037
Less progress payments related
to long-term contracts -- 225,767
----------- -----------
$14,554,614 $15,372,270
=========== ===========
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 1,
1997 1998
---------- ----------
Bank revolver $ 750,000 $ 500,000
Bank term note 530,530 517,194
Finance company 1,713,641 1,682,789
Other notes 7,388 --
---------- ----------
3,001,559 2,699,983
Less current portion 944,793 688,603
---------- ----------
$2,056,766 $2,011,380
========== ==========
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SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 1, 1998
(Unaudited)
The Company has a Credit Agreement with a bank which expires May 1, 1998.
Borrowings under the 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 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.
At October 31, 1997, and February 1, 1998, $750,000 and $500,000, respectively,
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
the development of new facilities (see Footnote 8). The Company is currently in
negotiations with its bank to extend the term of its Credit Agreement.
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, 1997, was $530,500, and at February 1, 1998 was
$517,200. 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 note is secured by related equipment. The note is being
amortized over 12 years with interest at prime plus one-half percent through
November 2006, when the note will be fully amortized. Monthly payments are
approximately $23,100. The unpaid balance at October 31, 1997 was $1,713,600,
and at February 1, 1998 was $1,682,800.
(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.
Options to acquire 24,000 shares at prices ranging from $22.00 to $24.75 per
share was granted during the quarter ended February 1, 1998, under the Plan.
During the quarter, 17,500 options were exercised at prices ranging from $9.50
to $17.75 per share. At February 1, 1998, there were outstanding options to
purchase 252,906 shares, which options were exercisable with respect to 112,109
shares.
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SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 1, 1998
(Unaudited)
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. Options to
purchase 58,000 were vested under these acceleration clauses at February 1,
1998. The options were granted at the fair market value of the stock on the
grant date, which was $17.00 per share.
(6) NET EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share." Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to fully diluted earnings per share. Earnings
per share amounts for the prior period have been restated to conform to
Statement 128 requirements.
Basic net earnings per share is computed by dividing net earnings by the
weighted average number of common stock outstanding during the period. Diluted
net earnings per share is computed by dividing net earnings by the weighted
average number of common stock and dilutive stock equivalents outstanding during
the period.
(7) INCOME TAXES
The provisions for income taxes consist of the following for each respective
quarter ended:
February 2, February 1,
1997 1998
----------- -----------
Current:
Federal $ 965,000 $ 1,662,000
State 244,000 388,000
----------- -----------
$ 1,209,000 $ 2,050,000
=========== ===========
Deferred:
Federal $ 16,000 $ 86,000
State (30,000) 39,000
----------- -----------
$ (14,000) $ 125,000
=========== ===========
Total
Federal $ 981,000 $ 1,748,000
State 214,000 427,000
----------- -----------
$ 1,195,000 $ 2,175,000
=========== ===========
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SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 1, 1998
(Unaudited)
Temporary differences which give rise to deferred tax assets and liabilities
are as follows:
October 31, February 1,
1997 1998
---------- ----------
Deferred tax liabilities - non-current:
Depreciation $3,140,000 $3,215,000
========== ==========
Deferred tax assets - current:
Allowance for doubtful accounts 22,000 11,000
Inventory 506,000 448,000
Vacation 445,000 445,000
State taxes 18,000 37,000
---------- ----------
991,000 941,000
---------- ----------
Net deferred tax liability $2,149,000 $2,274,000
========== ==========
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 1997 and
1998 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:
February 2, February 1,
1997 1998
---------- ----------
Income taxes at Federal rate $ 790,000 $1,613,000
State income taxes 289,000 517,000
Other 116,000 45,000
---------- ----------
$1,195,000 $2,175,000
========== ==========
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SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 1, 1998
(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 1, 1998 to acquire capital
equipment, at cost aggregating approximately $6,600,000, 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 is currently building
new facilities. Total net cost of the project is estimated at $22,000,000 of
which $11,500,000 had been spent at February 1, 1998 and is included in
construction in progress in the accompanying condensed consolidated balance
sheet. The Company anticipates spending approximately $12,000,000 in fiscal year
1998 and approximately $3,000,000 in fiscal year 1999 to complete this project.
The Company plans to sell two commercial lots being developed as part of this
project, the proceeds of which are expect to reduce the net project cost to
approximately $22,000,000. The Company has committed to complete the building
construction, the total cost of which is estimated to be approximately
$12,000,000.
The statements above regarding the land purchased by the Company in
Moorpark, the construction of facilities on that land by the Company, and the
amount and timing of expenditures 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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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED FEBRUARY 1, 1998 TO THREE MONTHS ENDED FEBRUARY
2, 1997
Net Sales
Net sales for the Automotive Products Division increased $12,171,000, or
51.6%, to $35,747,000 for the three months ended February 1, 1998 compared to
net sales of $23,576,000 for the same period last year. The increase was due to
increased shipments of initiators (used to ignite airbag systems) to TRW, Inc.
("TRW") and Autoliv ASP Incorporated (formerly Morton International - "Autoliv")
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 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 50.5% for the quarter ended February 1,
1998, and were 44.3% of total Company sales for the 1998 first quarter, compared
to 59.6% of Automotive Products Division , and 69.7% of total Company sales for
the same period last year. Sales to Autoliv as a percentage of total Automotive
Product Division sales were 32.0% for the quarter ended February 1, 1998, and
were 28.1% of total Company sales for the 1998 first quarter, compared to 19.6%
of Automotive Products Division, and 16.7% of total Company sales for the same
period last year.
Net sales for the Aerospace Division increased by $1,024,000, or 25.9%, to
$4,985,000 for the three months ended February 1, 1998 compared to net sales of
$3,961,000 for the same period last year. The increase in sales in the first
quarter of 1998 was due to increased shipments of products used on several
missile programs and the commencement of production of bomb ejectors in fiscal
1998.
Cost of Sales
Cost of sales for the Automotive Products Division increased $9,492,000, or
48.5% to $29,048,000 for the quarter ended February 1, 1998, compared to cost of
sales of $19,556,000 for same quarter last year. The increase in cost of sales
reflects the cost of increased shipments during the 1998 quarter. The Division's
gross profit margin was 18.7% for the 1998 quarter, compared to 17.1% for the
same quarter last year. The increase in margin reflects the effects of increased
yields from automated equipment and increased absorption of overhead expenses
during the 1998 quarter compared to the 1997 quarter, partially offset by a
lower average unit sales price in the 1998 quarter compared to the 1997 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 increased $791,000, or 29.5%, to
$3,475,000 for the quarter ended February 1, 1998, compared to cost of sales of
$2,684,000 for the comparable quarter last year. The increase was the result of
increased costs associated with the increase in sales during the first quarter
of 1998. Gross profit as a percent of sales was 30.3% for the first quarter of
1998 compared to 32.2% for the same quarter last year. The decline in gross
profit as a percent of sales in the 1998 first quarter was the result of the mix
of products shipped in the 1998 first quarter.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
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. Administrative expenses incurred by the
Company for allocation to each division were approximately the same amount for
the first quarter of 1998 compared to the same period last year.
Operating expenses for the Automotive Products Division increased $649,000,
or 58.7%, to $1,755,000 in the first quarter of 1998, compared to operating
expenses of $1,106,000 for the same period last year. As a percentage of sales,
operating expenses were 4.9% compared to 4.7% for the same period last year. The
increase in operating expenses occurred due to a write-off of an uncollectible
account related to initiator sales, and to a lesser extent, increases in salary
expense.
Operating expenses for the Aerospace Division decreased by $218,000, or
19.5%, to $902,000 for the quarter ended February 1, 1998, compared to operating
expenses of $1,120,000 for the same period last year. As a percentage of sales,
operating expenses were 18.1% for the quarter ended February 1, 1998, compared
to 28.3% for the same quarter last year. The decrease in operating expenses in
the current year first quarter is due to a reduction in the amount of
administrative expenses allocated to the Aerospace Division compared to the same
period last year.
Other Income and Expense
Other income (expense) consists primarily of interest income and interest
expense. Net other income was $10,000 in the first quarter of 1998, compared to
net other income of $38,100 for the same period last year. Interest income was
$66,300 in the first quarter of 1998 compared to interest income of $118,000 for
the first quarter last year. The decrease of $51,700 was the result of lower
average amounts invested in interest-bearing securities during the 1998 first
quarter. Interest expense was $50,500 in the first quarter of 1998, compared to
interest expense of $78,200 for the same period last year. The decrease of
$27,700 was the result of lower average debt outstanding in the first quarter of
1998 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 (8.50% at February 1, 1998)
less .25 percentage point, or at the Company's option, at LIBOR (5.59% at
February 1, 1998) 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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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 a 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. The
Company is currently in negotiations with its bank to extend the term of its
Credit Agreement.
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 1,
1998. As of February 1, 1998, $500,000 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 1,
1998, was $517,200. 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 (5.69 at February 1, 1998). 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 1, 1998 was $1,682,800. The plane is being used primarily to transport
Company officials between its Newhall, California and Mesa, Arizona facilities
In addition, the Company leases the 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 1, 1998, the Company generated cash
flow from operations of $4,104,000. Capital expenditures, primarily for payments
related to automated manufacturing equipment and new production facilities,
amounted to $7,922,000. Principal payments of long-term bank debt aggregated
$301,600. These net cash outflows were funded by cash flow from operations and
the use of existing cash on hand. At February 1, 1998, the Company had cash and
marketable securities on hand of $5,230,000 and additional borrowing capacity
available under its Credit Agreement of $16,000,000.
At February 1, 1998, the Company had working capital of $27,716,000 as
compared to working capital of $30,137,000 at October 31, 1997. The decrease of
$2,421,000 was due primarily to a decrease in cash and marketable securities of
$3,936,000, an increase in accounts payable of $1,084,000, and an increase in
income taxes payable of $851,000, offset partially by an increase in accounts
receivable of $1,513,000, an increase in inventories of $818,000, an increase in
prepaid expenses of $594,000, a decrease in accrued liabilities of $319,000, and
a decrease in the current portion of long-term debt of $256,000. The increase in
accounts receivable and inventories was the result of increased sales in the
1998 first quarter. The increase in accounts payable was the result of the
increase in inventories noted above. The decrease in cash occurred to fund the
purchase of additional production equipment, and to fund the on-going
construction of the Moorpark facilities.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
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 is currently building new facilities. Total net cost of the project
is estimated at $22,000,000, of which $11,500,000 had been spent at February 1,
1998 and is included in construction in progress in the accompanying condensed
consolidated balance sheet. The Company anticipates spending approximately
$12,000,000 in fiscal year 1998 and approximately $3,000,000 in fiscal year 1999
to complete this project. The Company plans to sell two commercial lots being
developed as part of this project, the proceeds of which are expected to reduce
the net project cost to approximately $22,000,000. The Company has committed to
complete the building construction, the total cost of which is estimated to be
approximately $12,000,000. 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
1998 as compared to 1997 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 1, 1998 aggregating approximately $6,600,000 related primarily to
additional production equipment, and other support equipment required for the
increased operations of the Automotive Products Division.
The statements above regarding the land purchased by the Company in
Moorpark, the construction of facilities on that land by the Company, and the
amount and timing of expenditures 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
that 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.
The statements above regarding the anticipated increased demand for
initiators, the anticipated increase in working capital requirements and the
Company's expectations regarding its ability to meet such requirements are
forward-looking statements. Actual results may vary depending on various factors
including, for example, the development and acceptance of technologies different
from those employed by the Company for the initiation of airbag systems,
competition from new or existing companies for the Company's existing or future
customers, a slow-down in the world-wide rate of airbag implementation, the
inability of the Company to negotiate an extension of its existing credit
agreement or a replacement facility, anticipated expenditures exceeding amounts
currently budgeted by the Company, and the occurrence of unanticipated expenses.
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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 16, 1998 /s/ THOMAS F. TREINAN
----------------- -------------------------------
Thomas F. Treinan
Chairman of the Board and
President
DATED: March 16, 1998 /s/ JOHN T. VINKE
----------------- -------------------------------
John T. Vinke
Vice President Finance and
Chief Financial Officer
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