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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the quarterly period ended: September 30,December 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Commission File No. 1-11474
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BREED TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
Delaware 22-2767118
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
5300 Old Tampa Highway
Lakeland, Florida 33811
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(941) 668-6000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
--------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO __.
As of November 12, 1998,36,849,438February 15, 1999, 36,849,160 shares of the registrant's common
stock, par value $.01 per share, were outstanding.
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INDEX
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets - September 30,December 31, 1998
(Unaudited)and June 30, 1998 ........................... 1
Consolidated Condensed Statements of Operations (Unaudited)
Three and six months ended September 30,December 31, 1998 and 1997..........1997... 3
Consolidated Condensed Statements of Cash Flows (Unaudited)
ThreeSix months ended September 30,December 31, 1998 and 1997 .........1997............. 4
Notes to Consolidated Condensed Financial Statements
(Unaudited) ............................................ 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ...................... 16....................... 19
PART II. OTHER INFORMATION
ITEM 3. Legal Proceedings.............................................. 20
ITEM 4. Submission of Matters to a Vote of Security Holders............ 2029
ITEM 6. Exhibits and Reports on Form 8-K .............................. 2029
SIGNATURES ............................................................ 2130
i
PART I - FINANCIAL INFORMATION6INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BREED TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
IN MILLIONS, EXCEPT FOR SHARE DATA
September 30,December 31, June 30,
1998 1998
------------ --------------------------- --------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $21.4 $44.4$ 33.0 $ 44.4
Accounts receivable, principally trade 283.4284.8 275.3
Inventories:
Raw materials 56.864.1 75.0
Work in process 31.226.3 18.2
Finished goods 29.326.9 15.9
-------- -------------------- ------------
Total Inventories 117.3 109.1
-------- -------------------- ------------
Income tax receivable 2.23.3 64.6
Prepaid expenses and other current assets 31.635.3 27.7
-------- -------------------- ------------
Total Current Assets 455.9473.7 521.1
Property, plant and equipment, net 373.3369.6 365.2
Intangibles, net 696.4687.0 692.1
Net assets held for sale 38.260.1 29.0
Other assets 49.448.9 42.5
-------- -------------------- ------------
Total Assets $1,613.2 $1,649.9
======== ========$ 1,639.3 $ 1,649.9
============ ============
See Notes to Consolidated Condensed Financial Statements.
1
BREED TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
IN MILLIONS, EXCEPT FOR SHARE DATA
September 30,December 31, June 30,
1998 1998
------------ --------------------------- ---------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Notes payable and current portion of long-term
debt (Note 3) $42.2 $46.9$ 555.0 $ 46.9
Accounts payable 272.7297.2 254.9
Accrued expenses 207.7221.5 233.2
-------- -------------------- ------------
Total Current Liabilities 522.61,073.7 535.0
-------- --------
Long-term debt (Note 3) 834.7352.2 851.1
Other long-term liabilities 25.725.0 25.6
-------- -------------------- ------------
Total Liabilities 1,383.01,450.9 1,411.7
-------- -------------------- ------------
Company obligated mandatorily redeemable convertible
preferred securities 250.0 250.0
Stockholders' Deficit:
Common stock, par value $0.01, authorized 75,000,000 shares,
issued and outstanding 36,849,43836,848,993 and 36,850,261 shares at
September 30,December 31, 1998 and June 30, 1998, respectively 0.4 0.4
Series A Preference Stock par value $0.01, authorized
5,000,000 shares,5,000,000shares, issued and outstanding 1 share at
September 30,December 31, 1998 and June 30, 1998 -- --
Additional paid-in capital 197.6 197.6
Warrants 1.9 1.9
Retained deficit (212.5)(246.9) (184.0)
Accumulated other comprehensive incomeloss (Notes 4 and 5) (7.0)(14.5) (27.4)
Unearned compensation (0.2)(0.1) (0.3)
-------- -------------------- ------------
Total Stockholders' Deficit (19.8)(61.6) (11.8)
-------- -------------------- ------------
Total Liabilities and Stockholders' Deficit $1,613.2 $1,649.9
======== ========$ 1,639.3 $ 1,649.9
============ ============
See Notes to Consolidated Condensed Financial Statements.
2
BREED TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
IN MILLIONS, EXCEPT PER SHARE DATA
Three Months Ended September 30,
------------------Six Months Ended
December 31, December 31,
----------------------- ------------------------
1998 1997 1998 1997
Net sales $339.1 $195.2$ 396.2 $ 340.7 $ 735.2 $ 535.9
Cost of sales 291.7 166.9
------ ------349.1 312.5 640.8 479.4
---------- ---------- ---------- -----------
Gross profit 47.4 28.3
------ ------47.1 28.2 94.4 56.5
---------- ---------- ---------- -----------
Operating expenses:
Selling, general and administrative expenses 20.9 16.223.3 21.3 44.2 37.5
Research, development and engineering expenses 23.7 8.925.7 18.6 49.4 27.5
Repositioning and impairment charges 259.5 259.5
In-process research and development expenses 77.5 77.5
Amortization of intangibles 5.8 2.0
------ ------6.0 3.9 11.8 5.9
---------- ---------- ---------- -----------
Total operating expenses 50.4 27.1
------ ------55.0 380.8 105.4 407.9
---------- ---------- ---------- -----------
Operating income (loss) (3.0) 1.2loss (7.9) (352.6) (11.0) (351.4)
Interest expense 22.1 8.420.6 27.1 42.7 35.4
Other income (expense), net 1.0 (0.4)
------ ------
Earnings (loss)0.4 0.4 1.3 (0.1)
---------- ---------- ---------- -----------
Loss before income taxes, and distributions
on Company obligated mandatorily redeemable
convertible preferred securities (24.1) (7.6)(28.1) (379.3) (52.4) (386.9)
Income taxes (benefit) (Note 6) -- (3.4)1.8 (46.5) 1.8 (49.9)
Distributions on Company obligated mandatorily
redeemable convertible preferred securities 4.44.5 1.4 8.7 1.4
---------- ---------- ---------- -----------
Loss before extraordinary item (34.4) (334.2) (62.9) (338.4)
Extraordinary loss net of tax benefit of $1.4 million -- ------ ------0.7 -- 0.7
---------- ---------- ---------- -----------
Net (loss) $(28.5) $(4.2)
====== ======
Earnings (loss)loss $ (34.4) $ (334.9) $ (62.9) $ (339.1)
========== ========== ========== ===========
Loss per share (Note 7):
Basic earnings (loss) $(0.77) $(0.13)
====== ======loss per share
Loss before extraordinary item $ (0.93) $ (10.54) $ (1.71) $ (10.68)
Extraordinary item -- (0.02) -- (0.02)
---------- ---------- ---------- -----------
Net loss $ (0.93) $ (10.56) $ (1.71) $ (10.70)
========== ========== ========== ===========
Diluted earnings (loss) $(0.77) $(0.13)
====== ======loss per share
Loss before extraordinary item $ (0.93) $ (10.54) $ (1.71) $ (10.68)
Extraordinary item -- (0.02) -- (0.02)
---------- ---------- ---------- -----------
Net loss $ (0.93) $ (10.56) $ (1.71) $ (10.70)
========== ========== ========== ===========
Shares used for computation:
Basic 36.850 31.68236.849 31.705 36.849 31.694
Diluted 36.850 31.68236.849 31.705 36.849 31.694
See Notes to Consolidated Condensed Financial Statements.
3
BREED TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
IN MILLIONS
ThreeSix Months Ended September 30,
-------------------------December 31,
-----------------------------------
1998 1997
--------- -------------------- ------------
Cash Flows from Operating Activities:
Net (loss) $(28.5) $(4.2)loss $ (62.9) $ (339.1)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 18.6 12.737.4 26.6
Changes in working capital items and other 33.6 (16.5)
--------- --------32.8 291.5
------------ ------------
Net cash provided by (used in)operating activities 23.7 (8.0)
--------- --------7.3 (21.0)
------------ ------------
Cash Flows from Investing Activities:
CapitalCost of acquisitions and capital expenditures (18.5) (6.9)(32.8) (733.4)
Proceeds from sale of assets 0.1 0.4
--------- --------3.0 2.6
------------ ------------
Net cash used in investing activities (18.4) (6.5)
--------- --------(29.8) (730.8)
------------ ------------
Cash Flows from Financing Activities:
Proceeds from (repayment of) debt net (21.1) 13.1265.5 860.8
Proceeds from Preference Stock issuances 554.0
Repayment of debt (256.3) (433.3)
Redemption of Preference Stock (210.0)
Cash dividends paid -- (2.2)
Proceeds from common stock issued -- 0.2
--------- --------0.7
------------ ------------
Net cash provided by (used in)financing activities (21.1) 11.1
--------- --------9.2 770.0
------------ ------------
Effect of exchange rate changes on cash (7.2) (3.2)
--------- --------1.9 (4.6)
------------ ------------
Net decrease(decrease) increase in cash and cash equivalents (23.0) (6.6)(11.4) 13.6
Cash and cash equivalents at beginning of period 44.4 18.7
--------- -------------------- ------------
Cash and cash equivalents at end of period $21.4 $12.1
========= ========$ 33.0 $ 32.3
============ ============
See Notes to Consolidated Condensed Financial Statements.
4
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
GENERAL - The accompanying unaudited consolidated condensed financial statements
of Breed Technologies, Inc. (the "Company" or "Breed") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and notes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six months ended September 30,December 31, 1998 are not
necessarily indicative of the results that may be expected for the year ending June
30, 1999. The consolidated financial statements include the accounts of Breed
and all majority owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. For further information, refer to the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K/A for the year ended June 30, 1998.
POST RETIREMENT HEALTH CARE BENEFITS-REVENUE RECOGNITION AND SALES COMMITMENTS- The Company's accumulated post retirement
benefitCompany recognizes revenue when
title and risk of loss transfers to its customers, which is generally upon
shipment of products to customers. The company generally enters into agreements
with its customers at the beginning of a given vehicle's life to produce
products. Once such agreements are entered into by the Company, fulfillment of
the customers' purchasing requirements is generally the obligation of $3.5 million asthe
Company for the entire production life of June 30, 1998the vehicle (which averages five
years). In certain instances, the Company may be committed under existing
agreements to supply products to its customers at selling prices that are not
sufficient to cover the direct cost to produce such products. In such
situations, the Company records a liability for the estimated future amount of
such losses under such agreements to the earliest date on which the Company can
terminate such agreements. Such losses are recognized at the time that the loss
is unfunded.probable and reasonably estimable. Losses are estimated based upon
information available at the time of the estimate, including future production
volume estimates, length of the program and selling price and production cost
information.
NOTE 2 - REPOSITIONING AND IMPAIRMENT CHARGES
During the quarter ended December 31, 1997, the Company formulated a
repositioning program which is intended to (i) enhance the Company's
competitiveness and productivity, (ii) reduce costs and increase asset control
and (iii) improve processes and systems (the "Repositioning Program"). The
Company expects that the Repositioning Program will be substantially completed
by March 31, 1999.
During the threesix months ended September 30,December 31, 1998, the repositioning and impairment
accrual was reduced by $5.7 million as a result of cash charges. The following
table sets forth the details and the cumulative activity relating to the
repositioning and impairment charge as of September 30,December 31, 1998:
Accrual Accrual
Balance at Balance at
June 30, Cash Non-Cash SeptemberDecember
IN MILLIONS June 30, 1998 Reductions Reductions 30,31, 1998
- -------------------------- ------------- ---------- ----------- --------------------------------------------------- -------------- -------------- -------------- ----------------
Headcount reductions $15.9 $3.2 $-- $12.7$ 15.9 $ 2.3 $ -- $ 13.6
Facility consolidations 18.9 2.53.4 -- 16.415.5
- -------------------------- ------------- ---------- ----------- --------------------------------------------------- -------------- -------------- -------------- ----------------
Total $34.8 $5.7 $-- $29.1
========================== ============= ========== =========== ============$ 34.8 $ 5.7 $ -- $ 29.1
======================================= ============== ============== ============== ================
5
NOTE 3 - LONG-TERM DEBT
A summary of long-term debt follows:
Three months ended,
-------------------------
September 30,December 31, June 30,
1998 1998
------------ ---------------------------- -----------------
Term Loan A, interest at 7.815%7.375% and 7.825% at September 30,December 31, 1998, and
June 30, 1998, respectively, installments due 1999 through 2004 $297.6 $309.2$ 297.6 $ 309.2
Term Loan B, interest at 8.065% 7.625%and 8.075% at September 30,December 31, 1998, and
June 30, 1998, respectively, installments due 20042005 through 2006 190.4 197.8
Revolver, interest at 7.555% at December 31, 1998 40.0
Senior Subordinated Notes, interest at 9.50% and 9.25%, at December 31,
1998 and June 30, 1998 respectively, due April 15, 2008 330.0 330.0
Foreign short-term lines of credit, weighted average
interest rate of 6.8%5.67%, installments due various 29.420.9 30.4
Mortgages and equipment financing loans 29.528.3 30.6
------------ ---------------------------- -----------------
Total debt 876.9907.2 898.0
------------ ---------------------------- -----------------
Less current maturities 42.2 40.9
------------ -----------555.0 46.9
----------------- -----------------
Total long-term debt $834.7 $851.1
============ ===========$ 352.2 $ 851.1
================= =================
On April 28, 1998, the Company entered into a new $675.0 million credit
facility. At September 30,December 31, 1998, the Company had an aggregate of $488.0$528.0 million
of borrowings outstanding under the credit facility, which bore interest at a
weighted average rate of 7.48% per annum at such date, and had aggregate
borrowing availability thereunder of $137.3$54.4 million. DuringBecause the three months ended
SeptemberCompany would
have been in violation of the net worth covenant in the loan agreement relating
to the credit facility as of December 30, 1998, the Company decreased its outstanding indebtedness by $21.0
million. The decrease resultedobtained a waiver of
this covenant from a $19.0 million voluntary prepayment toward
outstanding term loan balancesthe lenders that was effective from December 30, 1998 through
February 12, 1999 (the "First Waiver"). Pursuant to the First Waiver, the
maximum borrowing availability under the company's revolving line of credit facility andwas
decreased from $150.0 million (including letters of credit) to $110.0 million
(including letters of credit).
On February 11, 1999, the repaymentCompany obtained a new waiver (the "Second Waiver") of
$2.0such net worth covenant as well as an event of default that existed due to the
Company's failure to register certain securities as required under certain
agreements to which it is a party. The Second Waiver is effective from February
13, 1999 through March 30, 1999. In connection with the Second Waiver, the
maximum borrowing availability under the revolving line of credit was increased
to $125.0 million (including letters of credit). As of February 15, 1999, the
Company had an aggregate of $570.9 million of borrowings outstanding under short-term linesthe
credit facility (including $82.9 million of revolver borrowings). Additionally,
$15.6 million of letters of credit were outstanding under the revolving line of
credit leaving an aggregate borrowing availability thereunder of $26.5 million.
The Company paid the lenders fees aggregating $1.3 million in connection with
the Second Waiver. The Company is not currently in violation of any covenants
contained in the loan agreement.
The Company is in the process of negotiating an amendment to the loan agreement
relating to the net worth covenant and the existing event of default as well as
certain other financial covenants. The Company is not currently in violation of
these other financial covenants but anticipates that, to the extent such
covenants are not amended, it will be in violation on March 31, 1999 of the two
covenants presently waived and it anticipates violation of certain other
financial covenants by June 30, 1999. The Company anticipates that
6
in connection with any such amendment, borrowing availability under the
revolving line of credit will be restored to $150.0 million. Although the
Company believes that it will be able to negotiate the necessary amendments with
its lenders, there can be no assurance that it will be able to do so. Any
amendment to the loan agreement must be approved by the lenders holding more
than 50% of the commitments and borrowings outstanding under the credit
facility. In the absence of a further waiver or an amendment to the loan
agreement, after March 30, 1999, the lenders would be entitled to exercise all
of their rights under the loan agreement including, without limitation,
declaring all amounts outstanding under the credit facility immediately due and
payable and/or exercising their rights with respect to the collateral securing
the credit facility which consists of, among other things, substantially all of
the real and personal property of the Company and its subsidiaries.
If the Company is unable to obtain a further waiver or amendment to the loan
agreement, the Company may not have sufficient cash to meet its working capital,
debt service and capital expenditure needs beyond March 30, 1999, in which case,
the Company may be required to obtain financing from other sources. There can be
no assurance that such financing will be available or, if available, that it
will be on terms satisfactory to the Company. Consequently, the inability to
obtain any such waiver, amendment or alternative financing would have a material
adverse effect on the Company's foreign subsidiaries.financial condition and results of operations.
Until such time as the credit facility is amended as discussed above or all
amounts outstanding under the credit facility are repaid in full, borrowings
outstanding under the credit facility will be classified as a current liability
on the Company's consolidated balance sheet.
On April 28, 1998, the Company issued and sold an aggregate of $330 million of
its 9.25% Senior Subordinated Notes due 2008 (the "Notes") in a private
transaction under Rule 144A under the Securities Act of 1933, as amended (the
"Securities Act") (the "Notes Offering"). In connection with the Notes Offering,
the Company entered into a registration rights agreement (the "Notes Agreement")
pursuant to which it agreed to offer to exchange the Notes for substantially
identical 9.25% Senior Subordinated Notes due 2008 registered under the
Securities Act (the "Exchange Offer"). Pursuant to the Notes Agreement, the
Company was required to complete the Exchange Offer by the date 180 days after
April 28, 1998 (the "Closing Date"). The Company filed the registration
statement relating to the Exchange Offer on June 24, 1998. Because the Exchange
Offer had not been consummated on or prior to the date 180 days after the
Closing Date as required under the Notes Agreement, the interest rate borne by
the Notes increased pursuant to the Notes Agreement by 0.25% on the 181st day
after the Closing Date. The interest rate has and will continue to increase by
0.25% on the 1st day of each subsequent 90-day period; provided, however, that
in no event will the interest rate borne by the Notes be increased by more than
1.5%. The Notes currently bear interest at a rate of 9.75% per annum.
On November 25, 1997, the Company sold $257.7 million of its 6.50% Convertible
Subordinated Debentures due 2027 (the "Convertible Debentures") to BTI Capital
Trust, which, concurrently therewith, sold $250.0 million aggregate liquidation
amount of its 6.50% Convertible Trust Preferred Securities (the "Preferred
Securities") (which are fully and unconditionally guaranteed by the Company) in
a private transaction under Rule 144A under the Securities Act (the "Preferred
Securities Offering"). In connection with the Preferred Securities Offering, the
Company entered into a registration rights agreement (the "Preferred Securities
Agreement") pursuant to which it agreed to register (and cause BTI Capital Trust
to register), among other things, the Convertible Debentures and Preferred
Securities. Pursuant to the Preferred Securities Agreement, the Shelf
Registration Statement (as defined therein) was required to be effective on or
prior to June 17, 1998. The Company filed the Shelf Registration Statement on
March 18, 1998. Because the Shelf Registration Statement was not declared
effective by June 17, 1998, the interest rate on the Convertible Debentures and
the distribution rate applicable to the Preferred Securities increased by 0.25%,
payable in arrears, with the first quarterly payment due on the first interest
or distribution date following June 17, 1998.
The Shelf Registration Statement was not declared effective and the Exchange
7
Offer was not completed on or prior to the required dates because the Securities
and Exchange Commission was reviewing certain periodic reports previously filed
by the Company. The commission has now completed its review and the interest
rate borne by the Notes and the Convertible Debentures and the distribution rate
in respect of the Preferred Securities will be reduced to the original amounts
on the date the Shelf Registration Statement is declared effective and the
Exchange Offer is completed, as the case may be, which the Company currently
expects will be prior to April 15, 1999.
NOTE 4 -COMPREHENSIVE INCOME
Effective July 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No.
130 establishes new rules for the reporting and display of comprehensive incomeloss
and its components. The adoption of this Statement requires that foreign
currency translation adjustments be included in other comprehensive income,loss, which
prior to adoption were reported separately in stockholders' equity. There is no
tax effect because the Company intends to reinvest foreign earnings in foreign
business operations. Prior year financial statements have been reclassified to
conform to the requirements of SFAS No. 130.
ThreeSix months ended September 30,
---------------------------December 31,
--------------------------------------
1998 1997
---------- ----------------------- --------------
Net (loss) $(28.5) $(4.2)loss $ (62.9) $ (339.1)
Foreign currency transistiontranslation adjustment 20.4 (3.2)
---------- ---------12.9 (5.4)
-------------- --------------
Comprehensive income (loss) $(8.1) $(7.4)
========== =========loss $ (50.0) $ (344.5)
============== ==============
6
NOTE 5 - FOREIGN CURRENCY TRANSLATIONS
The Company translates foreign currencies into U.S. dollars using year-endquarter-end
exchange rates for foreign assets and liabilities and weighted average rates for
foreign income and expenses. Translation gains and losses arising from the
conversion of the foreign balance sheets and income statements into U.S. dollars
are reflected as a separate component of comprehensive incomeloss and included in
other comprehensive incomeloss in accumulated stockholders' deficit. With respect to
operations in Mexico, the functional currency is the U.S. dollar, and any gains
or losses from translations are included directly in income. During the threesix
months ended September 30,December 31, 1998 major European currencies strengthened relative
to the U.S. dollar. As a result, the conversion of foreign balance sheets into
U.S. dollars improved the foreign currency translation adjustment reported for
such threesix month period and increased the related assets and liabilities as
measured in U.S. dollars. The change in the U.S. dollar during the quartersix months
ended September 30,December 31, 1998 did not have a material impact on the resultresults of
operations.
NOTE 6 -INCOME TAXES
During the threesix months ended September 30,December 31, 1998, the Company recorded a
domestic benefitforeign tax
expense of $0.5$2.3 million which was fullypartially offset by a $0.5 million foreign expense.domestic
benefit for a tax credit. No other tax benefit was recognized for either
domestic or foreign purposes due to the provisions of Statementstatement of Financial Accountingfinancial
accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). SFAS
No. 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
need for a valuation allowance was addressed separately for domestic and foreign
purposes. For domestic purposes, the Company is in a cumulative loss position
and pursuant to SFAS No. 109, a valuation allowance was recorded by the Company
to offset the portion of the domestic deferred tax asset which, upon reversal,
could not be carried back against prior yearsyear's taxable income. A valuation
allowance has been recognized to reduce to zero, foreign deferred tax assets,
primarily related to net operating loss carryforwardscarry-forwards in Finland, Spain and
8
the U.K. and restructuring charges in Italy. A portion of incomeIncome taxes will be paid in
some
foreign jurisdictions becausein which there is no ability to offset income earned could not be offsetin
such jurisdictions against net
operating losses.
7
tax loss carry-forwards.
NOTE 7 - EARNINGS (LOSS)LOSS PER SHARE
The following table sets forth the computation of the numerator and denominator
of the basic and diluted earnings (loss)loss per share calculations:
Three Months Ended September 30,
------------------------------Six Months Ended
December 31, December 31,
---------------------------- ---------------------------
1998 1997 1998 1997
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
BASIC EARNINGS PER SHARE
Net (loss)LOSS
Loss before extraordinary item $ (34.4) $ (334.2) $ (62.9) $ (338.4)
Extraordinary item, net -- (0.7) -- (0.7)
------------- ------------ ----------- -------------
Loss applicable to common stock $(28.5) $(4.2)$ (34.4) $ (334.9) $ (62.9) $ (339.1)
============= ============ =========== =============
Weighted average common shares outstanding 36.850 31.68236.849 31.705 36.849 31.694
============= ============ =========== =============
BASIC LOSS
Loss before extraordinary item $ (0.93) $ (10.54) $ (1.71) $ (10.68)
Extraordinary item -- (0.02) -- (0.02)
------------- ------------ ----------- -----------
Basic earnings (loss) per share $(0.77) $(0.13)-------------
Net loss $ (0.93) $ (10.56) $ (1.71) $ (10.70)
============= ============ =========== ========================
DILUTED EARNINGSLOSS PER SHARE
Net (loss)Loss before extraordinary item $ (34.4) $ (334.2) $ (62.9) $ (338.4)
Extraordinary item, net -- (0.7) -- (0.7)
------------- ------------ ----------- -------------
Loss applicable to common stock $(28.5) $(4.2)$ (34.4) $ (334.9) $ (62.9) $ (339.1)
============= ============ =========== =============
Share computation:
Weighted average common shares outstanding 36.850 31.68236.849 31.705 36.849 31.694
Effect of diluted securities:
Assumed exercise of stock options and warrants * * * *
Series A Preference Stock * --* * *
Company obligated mandatorily redeemable
convertible preferred securities * --* * *
------------- ------------ ----------- ------------------------
Weighted average common shares outstanding
as adjusted 36.850 31.68236.849 31.705 36.849 31.694
------------- ------------ ----------- -------------
DILUTED LOSS PER SHARE
Loss before extraordinary item $ (0.93) $ (10.54) $ (1.71) $ (10.68)
Extraordinary item -- (0.02) -- (0.02)
------------- ------------ ----------- Diluted earnings (loss) per share $(0.77) $(0.13)-------------
Net loss $ (0.93) $ (10.56) $ (1.71) $ (10.70)
============= ============ =========== ========================
* ITEMS NOT ASSUMED IN THE COMPUTATION BECAUSE THEIR EFFECT IS ANTI-DILUTIVE
Each Company Obligated Mandatory Redeemable Convertible Preferred Securityobligated mandatorily redeemable convertible preferred security is
convertible, at the option of the holder, into shares of the Company's common
stock, at a conversion rate of 2.1973 shares of common stock for each Preferred
Security, subject to adjustment in certain circumstances.
9
Options to purchase 2,423,3452,453,770 shares of common stock at prices between $6.875
and $32.25 per share were outstanding as of September 30,December 31, 1998 but were not
included in the computation of diluted earnings per share because the effect
would be anti-dilutive.
As part of the acquisition of VTI in June 1995, the Company issued to certain of
the former stockholders of VTI warrants to purchase up to 100,000 shares of
common stock between July 1, 1998 and June 30, 2000, at an exercise price of
$25.75 per share. The 100,000 shares subject to the VTI warrants have not been
included in the computation of diluted earnings per share for the three and six
months ended September 30,December 31, 1998 because the effect would be anti-dilutive.
In connection with the bridge loan credit facility entered into in connection
with the acquisition of the safety restraints systems business ("SRS") of
AlliedSignal, the Company issued to NationsBank, N.A., a warrant to purchase
250,000 shares of common stock of the Company at an exercise price of $23.125
per share. The 250,000 shares subject to the NationsBank warrant have not been
included in the computation of diluted earnings per share for the three and six
months ended September 30,December 31, 1998 because the effect would be anti-dilutive.
8
NOTE 8 - BSRS JOINT VENTURE
The Company and Siemens Aktiengesallschaft ("Siemens") completed formation of a
joint venture, known as BSRS Restraint Systems International G.m.b.H.GmbH & Co. KG
("BSRS"), in June 1998. Pursuant to the joint venture agreement between the
Company and Siemens, on July 1,June 30, 1998, the Company transferred various assets
relating to the development, research and testing of integrated occupant
protection systems having an aggregate value of $5.6 million (net book value
approximates fair value) to BSRS and Siemens contributed its shares in PARS
Ruckhaltesysteme G.m.b.H.,GmbH, which operates crash test facilities and develops
occupant safety systems.
NOTE 9 - FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES
The Company conducts a significant portion of its business through subsidiaries.
On April 28, 1998, the Company issued and sold an aggregate of $330 million of
9.25% Senior Subordinated Notes due 2008 ("the Notes"). The Notes of the Company
are guaranteed, jointly and severally on a senior subordinated basis, by the
domestic subsidiaries of the Company (the "Subsidiary Guarantors") other than
BTI Capital Trust and certain domestic subsidiaries owned by a foreign
subsidiary of the Company (the "Non-Guarantor Subsidiaries"). The Notes are
effectively subordinated in right of payment to all indebtedness and other
liabilities (including trade payables) of the Non-Guarantor Subsidiaries.
Presented below are the condensed consolidating balance sheets as of September
30,December
31, 1998 and June 30, 1998, the condensed consolidating statementstatements of operations
for the three and six months ended September 30,December 31, 1998 and 1997 and the condensed
consolidating statement of cash flows for the threesix months ended September 30,December 31, 1998
and 1997, for the Subsidiary Guarantors, the Non-Guarantor Subsidiaries, Parent
only and the Company consolidated.
910
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30,DECEMBER 31, 1998
(Unaudited)
IN MILLIONS
NON-
SUBSIDIARY GUARANTOR PARENT
GUARANTORS SUBSIDIARIES ONLY ELIMINATIONS CONSOLIDATED
---------- ---------- ------- -------------------------- --------------- ----------- ---------------- --------------
ASSETS
Cash and cash equivalents $(7.0) $17.5 $10.9 $-- $21.4$ 4.4 $ 21.9 $ 6.7 $ -- $ 33.0
Accounts receivable, principally trade 130.9 149.2 3.3 283.4647.2 167.6 0.7 (530.7) 284.8
Inventories 56.3 61.058.9 58.4 -- -- 117.3
Other current assets 679.6 93.8 8.7 (748.3) 33.8
---------- ---------- -------6.4 20.0 12.2 -- 38.6
-------------- ---------------- ------------ --------------------------- -------------
Total current assets 859.8 321.5 22.9 (748.3) 455.9716.9 267.9 19.6 (530.7) 473.7
Property, plant and equipment, net 173.9 163.9 35.5 373.3172.7 167.9 34.6 (5.6) 369.6
Intangibles, net 518.6 171.0 6.8 696.4510.3 176.7 -- -- 687.0
Net assets held for sale -- 38.258.3 -- 38.21.8 60.1
Other assets 35.1 5.6 1,034.5 (1,025.8) 49.426.2 3.3 1,031.6 (1,012.2) 48.9
Total assets $1,587.4 $700.2 $1,099.7 $(1,774.1) $1,613.2
========== ========== =======$ 1,426.1 $ 674.1 $1,085.8 $ (1,546.7) $ 1,639.3
============== ================ ============ ============================= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Notes payable and current portion of
long termlong-term debt $-- $34.0 $8.2 $-- $42.2$ -- $ 27.0 $ 528.0 $ -- $ 555.0
Accounts payable 87.2 179.0 6.5 272.7220.3 336.2 260.6 (519.9) 297.2
Accrued expenses 431.4 168.3 331.4 (723.4) 207.7
---------- ---------- -------138.1 38.6 53.2 (8.4) 221.5
-------------- ---------------- ------------ --------------------------- ------------
Total current liabilities 518.6 381.3 346.1 (723.4) 522.6358.4 401.8 841.8 (528.3) 1,073.7
Long-term debt -- 24.9 809.822.2 330.0 -- 834.7352.2
Other long-term liabilities 13.9 13.6 (1.8)12.4 12.6 -- 25.7
---------- ---------- --------- 25.0
-------------- ---------------- ------------ --------------------------- ------------
Total liabilities 532.5 419.8 1,154.1 (723.4) 1,383.0370.8 436.6 1,171.8 (528.3) 1,450.9
Company obligated mandatorily redeemable convertible
preferred securities -- -- 250.0 -- 250.0
Stockholders' equity (deficit) 1,054.9 280.4 (304.4) (1,050.7) (19.8)
---------- ---------- -------1,055.3 237.5 (336.0) (1,018.4) (61.6)
-------------- ---------------- ------------ --------------------------- ------------
Total liabilities and stockholders'
equity (deficit) $1,587.4 $700.2 $1,099.7 $(1,774.1) $1,613.2
========== ========== =======$ 1,426.1 $ 674.1 $1,085.8 $ (1,546.7) $ 1,639.3
============== ================ ============ =========================== ============
1011
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 1998
(Unaudited)
IN MILLIONS
NON-
SUBSIDIARY GUARANTOR PARENT
GUARANTORS SUBSIDIARIES ONLY ELIMINATIONS CONSOLIDATED
---------- ---------- --------------------- ---------------- ------------ ---------------------------- ---------------
ASSETS
Cash and cash equivalents $(22.9) $19.0 $48.3 $-- $44.4$ (22.9) $ 19.0 $ 48.3 $ -- $ 44.4
Accounts receivable, principally trade 138.8 135.9 0.6 -- 275.3
Inventories 57.3 51.8 -- -- 109.1
Other current assets 527.5 72.1 67.4 (574.7) 92.3
---------- ---------- ------- -------------------------- ---------------- ----------- ------------------ --------------
Total current assets 700.7 278.8 116.3 (574.7) 521.1
Property, plant and equipment, net 203.1 129.5 32.6 -- 365.2
Intangibles, net 431.1 257.8 3.2 -- 692.1
Net assets held for sale -- 29.0 -- -- 29.0
Other assets 25.0 44.4 1,015.4 (1,042.3) 42.5
Total assets $1,359.9 $739.5 $1,167.5 $(1,617.0) $1,649.9
========== ========== =======$ 1,359.9 $ 739.5 $ 1,167.5 $ (1,617.0) $ 1,649.9
============== ================ ============ ============================= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Notes payable and current portion of
long termlong-term debt $-- $35.2 $11.7 $-- $46.9$ -- $ 35.2 $ 11.7 $ -- $ 46.9
Accounts payable 84.9 158.9 11.1 -- 254.9
Accrued expenses 229.0 235.4 346.6 (577.8) 233.2
---------- ---------- --------------------- ---------------- ------------ ----------------------------- --------------
Total current liabilities 313.9 429.5 369.4 (577.8) 535.0
Long-term debt -- 25.8 825.3 -- 851.1
Other long-term liabilities 10.5 16.1 (1.0) -- 25.6
---------- ---------- --------------------- ---------------- ------------ ----------------------------- --------------
Total liabilities 324.4 471.4 1,193.7 (577.8) 1,411.7
Company obligated mandatorily redeemable convertible
preferred securities -- -- 250.0 -- 250.0
Stockholders' equity (deficit) 1,035.5 268.1 (276.2) (1,039.2) (11.8)
---------- ---------- --------------------- ---------------- ------------ ----------------------------- --------------
Total liabilities and stockholders'
equity (deficit) $1,359.9 $739.5 $1,167.5 $(1,617.0) $1,649.9
========== ========== =======$ 1,359.9 $ 739.5 $ 1,167.5 $ (1,617.0) $ 1,649.9
============== ================ ============ ===========
11
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATION
THREE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
IN MILLIONS
NON-
SUBSIDIARY GUARANTOR PARENT
GUARANTORS SUBSIDIARIES ONLY ELIMINATIONS CONSOLIDATED
---------- ----------- ------- ----------- ----------
Net Sales $185.2 $187.7 $-- $(33.8) $339.1
Cost of sales 160.2 162.7 2.6 (33.8) 291.7
---------- ----------- ----------- ----------
Gross profit 25.0 25.0 (2.6) -- 47.4
---------- ----------- ------- ----------- ----------
Selling, general and administrative
expenses 5.8 8.3 6.8 20.9
Research, development, and engineering
expenses 15.4 7.1 1.2 23.7
Amortization of intangibles 4.9 0.8 0.1 5.8
---------- ----------- ------- ----------- ----------
Operating income (loss) (1.1) 8.8 (10.7) -- (3.0)
Interest expense -- 2.9 19.2 22.1
Other income (expense), net 1.2 0.5 (0.7) 1.0
---------- ----------- ------- ----------- ----------
Earnings (loss) before income taxes,
and distributions on Company obligated
mandatorily redeemable convertible
preferred securities 0.1 6.4 (30.6) -- (24.1)
Income taxes (benefit) -- 0.5 (0.5) --
Distributions on Company obligated
mandatorily redeemable convertible
preferred securities -- -- 4.4 4.4
---------- ----------- ----------- ----------
Net earnings (loss) $0.1 $5.9 $(34.5) $-- $(28.5)
========== =========== ======= =========== ============================ ==============
12
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATION
THREE MONTHS ENDED SEPTEMBER 30, 1997DECEMBER 31, 1998
(Unaudited)
IN MILLIONS
NON-
SUBSIDIARY GUARANTOR PARENT
GUARANTORS SUBSIDIARIES ONLY ELIMINATIONS CONSOLIDATED
---------- ----------- ------- ----------- ------------------------ --------------- ------------ --------------- ---------------
Net Sales $96.3 $118.5 $-- $(19.6) $195.2$ 218.1 $ 218.0 $ -- $ (39.9) $ 396.2
Cost of sales 78.4 104.8 3.3 (19.6) 166.9
---------- ----------- ----------- ----------193.7 193.5 1.8 (39.9) 349.1
-------------- --------------- ------------ --------------- ---------------
Gross profit 17.9 13.7 (3.3)24.4 24.5 (1.8) -- 28.3
---------- ----------- ------- ----------- ----------47.1
-------------- --------------- ------------ --------------- ---------------
Selling, general and administrative expenses 1.7 8.0 6.5 16.23.2 9.5 10.6 -- 23.3
Research, development, and engineering expenses 1.2 1.5 6.2 8.914.8 8.4 2.5 -- 25.7
Amortization of intangibles 0.8 1.0 0.2 2.0
---------- ----------- ------- ----------- ----------5.7 1.3 (1.0) -- 6.0
-------------- --------------- ------------ --------------- ---------------
Operating income (loss) 14.2 3.2 (16.2)0.7 5.3 (13.9) -- 1.2(7.9)
Interest expense -- 1.7 6.7 8.41.9 18.7 -- 20.6
Other income (expense), net 3.2 (1.6) (2.0) (0.4)
---------- ----------- ------- ----------- ----------(0.9) 4.4 (2.6) (0.5) 0.4
-------------- --------------- ------------ --------------- ---------------
Earnings (loss) before income taxes, and distributions
on Company obligated mandatorily redeemable
convertible preferred securities 17.4 (0.1) (24.9) -- (7.6)(0.2) 7.8 (35.2) (0.5) (28.1)
Income taxes (benefit) 6.6 0.2 (10.2) (3.4)(6.8) 1.8 6.8 -- 1.8
Distributions on Company obligated mandatorily
redeemable convertible preferred securities -- -- 4.5 -- --
---------- ----------- ----------- ----------4.5
-------------- --------------- ------------ --------------- ---------------
Net earnings (loss) $10.8 $(0.3) $(14.7) $-- $(4.2)
========== =========== ======= =========== ==========$ 6.6 $ 6.0 $ (46.5) $ (0.5) $ (34.4)
============== =============== ============ =============== ===============
13
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
THREEOPERATION
SIX MONTHS ENDED SEPTEMBER 30,DECEMBER 31, 1998
(Unaudited)
IN MILLIONS
NON-
SUBSIDIARY GUARANTOR PARENT
GUARANTORS SUBSIDIARIES ONLY ELIMINATIONS CONSOLIDATED
---------- ----------- ------- ----------- ------------------------ --------------- ------------ --------------- ----------------
Net Sales $ 403.3 $ 405.6 $ -- $ (73.7) $ 735.2
Cost of sales 353.9 356.1 4.5 (73.7) 640.8
-------------- --------------- ------------ --------------- ----------------
Gross profit 49.4 49.5 (4.5) -- 94.4
-------------- --------------- ------------ --------------- ----------------
Selling, general and administrative expenses 9.0 17.9 17.3 -- 44.2
Research, development, and engineering expenses 30.2 15.5 3.7 -- 49.4
Amortization of intangibles 10.6 2.1 (0.9) -- 11.8
-------------- --------------- ------------ --------------- ----------------
Operating income (loss) (0.4) 14.0 (24.6) -- (11.0)
Interest expense -- 4.8 37.9 -- 42.7
Other income (expense), net 0.3 4.9 (3.4) (0.5) 1.3
-------------- --------------- ------------ --------------- ----------------
Earnings (loss) before income taxes, and distributions
on Company obligated mandatorily redeemable
convertible preferred securities (0.1) 14.1 (65.9) (0.5) (52.4)
Income taxes (benefit) (6.8) 2.4 6.2 -- 1.8
Distributions on Company obligated mandatorily
redeemable convertible preferred securities -- -- 8.7 -- 8.7
-------------- --------------- ------------ --------------- ----------------
Net earnings (loss) $ 6.7 $ 11.7 $ (80.8) $ (0.5) $ (62.9)
============== =============== ============ =============== ================
14
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATION
THREE MONTHS ENDED DECEMBER 31, 1997
(Unaudited)
IN MILLIONS
NON-
SUBSIDIARY GUARANTOR PARENT
GUARANTORS SUBSIDIARIES ONLY ELIMINATIONS CONSOLIDATED
-------------- --------------- ------------ --------------- ----------------
Net Sales $ 202.1 $ 191.0 $ -- $ (52.4) $ 340.7
Cost of sales 167.6 172.6 14.6 (42.3) 312.5
-------------- --------------- ------------ --------------- ----------------
Gross profit 34.5 18.4 (14.6) (10.1) 28.2
-------------- --------------- ------------ --------------- ----------------
Selling, general and administrative expenses 4.9 11.9 4.5 -- 21.3
Research, development, and engineering expenses 8.0 5.8 4.8 -- 18.6
Repositioning and impairment charges 80.2 0.7 188.6 (10.0) 259.5
In-process research and development expenses -- -- 77.5 -- 77.5
Amortization of intangibles 3.6 1.1 (0.8) -- 3.9
-------------- --------------- ------------ --------------- ----------------
Operating loss (62.2) (1.1) (289.2) (0.1) (352.6)
Interest expense -- 1.5 32.2 (6.6) 27.1
Other income (expense), net (2.0) 0.4 9.3 (7.3) 0.4
-------------- --------------- ------------ --------------- ----------------
Loss before income taxes, and distributions
on Company obligated mandatorily redeemable
convertible preferred securities (64.2) (2.2) (312.1) (0.8) (379.3)
Income taxes (benefit) (2.0) 1.5 (49.6) 3.6 (46.5)
Distributions on Company obligated mandatorily
redeemable convertible preferred securities -- -- 1.4 -- 1.4
-------------- --------------- ------------ --------------- ----------------
Loss before extraordinary loss (62.2) (3.7) (263.9) (4.4) (334.2)
Extraordinary loss, net of tax benefit of $1.4 million -- -- (0.7) -- (0.7)
-------------- --------------- ------------ --------------- ----------------
Net loss $ (62.2) $ (3.7) $ (264.6) $ (4.4) $ (334.9)
============== =============== ============ =============== ================
15
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATION
SIX MONTHS ENDED DECEMBER 31, 1997
(Unaudited)
IN MILLIONS
NON-
SUBSIDIARY GUARANTOR PARENT
GUARANTORS SUBSIDIARIES ONLY ELIMINATIONS CONSOLIDATED
-------------- --------------- ------------ --------------- ----------------
Net Sales $ 298.4 $ 309.5 $ -- $ (72.0) $ 535.9
Cost of sales 246.1 277.4 17.9 (62.0) 479.4
-------------- --------------- ------------ --------------- ----------------
Gross profit 52.3 32.1 (17.9) (10.0) 56.5
-------------- --------------- ------------ --------------- ----------------
Selling, general and administrative expenses 5.1 19.2 13.2 -- 37.5
Research, development, and engineering expenses 8.4 6.7 12.4 -- 27.5
Repositioning and impairment charges 80.3 0.7 188.5 (10.0) 259.5
In-process research and development charges -- -- 77.5 -- 77.5
Amortization of intangibles 4.4 2.1 (0.6) -- 5.9
-------------- --------------- ------------ --------------- ----------------
Operating income (loss) (45.9) 3.4 (308.9) -- (351.4)
Interest expense -- 3.2 32.2 -- 35.4
Other income (expense), net 1.0 (1.2) 0.4 (0.3) (0.1)
-------------- --------------- ------------ --------------- ----------------
Earnings (loss) before income taxes, and distributions
on Company obligated mandatorily redeemable
convertible preferred securities (44.9) (1.0) (340.7) (0.3) (386.9)
Income taxes (benefit) 3.4 1.7 (55.0) -- (49.9)
Distributions on Company obligated mandatorily
redeemable convertible preferred securities -- -- 1.4 -- 1.4
-------------- --------------- ------------ --------------- ---------------
Earnings (loss) before extraordinary loss (48.3) (2.7) (287.1) (0.3) (338.4)
Extraordinary loss, net of tax benefit of $0.4 million -- -- 0.7 -- 0.7
-------------- --------------- ------------ --------------- ----------------
Net earnings (loss) $ (48.3) $ (2.7) $ (287.8) $ (0.3) $ (339.1)
============== =============== ============ =============== ================
16
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
SIX MONTHS ENDED DECEMBER 31, 1998
(Unaudited)
IN MILLIONS
NON-
SUBSIDIARY GUARANTOR PARENT
GUARANTORS SUBSIDIARIES ONLY ELIMINATIONS CONSOLIDATED
-------------- --------------- ------------ --------------- ----------------
Cash flows from operating activities:
Net earnings(loss) $0.1 $5.9 $(34.5) $-- $(28.5)$ 6.7 $ 11.7 $ (80.8) $ (0.5) $ (62.9)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 10.9 7.3 0.4 18.623.5 12.9 1.0 -- 37.4
Changes in working capital items and other 11.5 0.7 21.4 33.6
---------- ----------- ------- ----------- ----------16.0 (8.3) 24.6 0.5 32.8
-------------- --------------- ------------ --------------- ----------------
Net cash provided by (used in) operating activities 22.5 13.9 (12.7)46.2 16.3 (55.2) -- 23.7
---------- ----------- ------- ----------- ----------7.3
-------------- --------------- ------------ --------------- ----------------
Cash flows from investing activities:
Capital expenditures (6.6) (6.2) (5.7) (18.5)(13.8) (11.6) (7.4) -- (32.8)
Proceeds from sale of assets -- 0.10.7 2.3 -- -- 0.1
---------- ----------- ------- ----------- ----------3.0
-------------- --------------- ------------ --------------- ----------------
Net cash (used in) investing activities (6.6) (6.1) (5.7) (18.4)
---------- ----------- ------- ----------- ----------(13.1) (9.3) (7.4) -- (29.8)
-------------- --------------- ------------ --------------- ----------------
Cash flows from financing activities:
Proceeds from (repayment of) debt net -- (2.1) (19.0) (21.1)
---------- ----------- ------- ----------- ----------5.6 259.9 -- 265.5
Repayment of debt (5.8) (11.6) (238.9) -- (256.3)
-------------- --------------- ------------ --------------- ----------------
Net cash provided by (used in) financing activities (5.8) (6.0) 21.0 -- (2.1) (19.0) (21.1)
---------- ----------- ------- ----------- ----------9.2
-------------- --------------- ------------ --------------- ----------------
Effect of exchange rate changes on cash -- (7.2)1.9 -- -- (7.2)
---------- ----------- ------- ----------- ----------1.9
-------------- --------------- ------------ --------------- ----------------
Increase (decrease) in cash and cash equivalents 15.9 (1.5) (37.4)27.3 2.9 (41.6) -- (23.0)(11.4)
Cash and cash equivalents at beginning of period (22.9) 19.0 48.3 -- 44.4
---------- ----------- ------- ----------- ------------------------ --------------- ------------ --------------- ----------------
Cash and cash equivalents at end of period $(7.0) $17.5 $10.9 $-- $21.4
========== =========== ======= =========== ==========$ 4.4 $ 21.9 $ 6.7 $ -- $ 33.0
============== =============== ============ =============== ================
1417
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
THREESIX MONTHS ENDED SEPTEMBER 30,DECEMBER 31, 1997
(Unaudited)
IN MILLIONS
NON-
SUBSIDIARY GUARANTOR PARENT
GUARANTORS SUBSIDIARIES ONLY ELIMINATIONS CONSOLIDATED
---------- ----------- ------- ----------- ------------------------ --------------- ------------ --------------- ---------------
Cash flows from operating activities:
Net earnings(loss) $10.8 $(0.3) $(14.7) $-- $(4.2)$ (48.0) $ (2.7) $ (288.1) $ (0.3) $ (339.1)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 6.0 5.1 1.6 12.714.8 9.6 2.2 -- 26.6
Changes in working capital items and other (9.7) (7.2) 0.4 (16.5)
---------- ----------- ------- ----------- ----------50.5 (2.7) 243.4 0.3 291.5
-------------- --------------- ------------ --------------- ---------------
Net cash provided by (used in) operating activities 7.1 (2.4) (12.7) (8.0)
---------- ----------- ------- ----------- ----------17.3 4.2 (42.5) -- (21.0)
-------------- --------------- ------------ --------------- ---------------
Cash flows from investing activities:
Cost of acquisitions and Capital expenditures (3.5) (2.3) (1.1) (6.9)(9.3) (17.9) (706.2) -- (733.4)
Proceeds from sale of assets 0.41.2 1.3 0.1 -- -- 0.4
---------- ----------- ------- ----------- ----------2.6
-------------- --------------- ------------ --------------- ---------------
Net cash (used in) investing activities (3.1) (2.3) (1.1) (6.5)
---------- ----------- ------- ----------- ----------(8.1) (16.6) (706.1) -- (730.8)
-------------- --------------- ------------ --------------- ---------------
Cash flows from financing activities:
Proceeds from (repayment of) debt net -- 1.7 11.4 13.1
---------- ----------- ------- ----------- ----------
Net change in equity -- -- (2.0) (2.0)
---------- ----------- ------- ----------- ----------860.8 -- 860.8
Proceeds from Preference Stock Issuances -- -- 554.0 -- 554.0
Repayment of debt -- (14.5) (418.8) -- (433.3)
Redemption of Preference Stock -- -- (210.0) -- (210.0)
Cash dividends paid -- -- (2.2) -- (2.2)
Proceeds from common stock issued -- -- 0.7 -- 0.7
-------------- --------------- ------------ --------------- ---------------
Net cash provided by financing activities -- 1.7 9.4 11.1
---------- ----------- ------- ----------- ----------(14.5) 784.5 -- 770.0
-------------- --------------- ------------ --------------- ---------------
Effect of exchange rate changes on cash -- (3.2)(4.6) -- -- (3.2)
---------- ----------- ------- ----------- ----------(4.6)
-------------- --------------- ------------ --------------- ---------------
Increase (decrease) in cash and cash equivalents 4.0 (6.2) (4.4)9.2 (31.5) 35.9 -- (6.6)13.6
Cash and cash equivalents at beginning of period -- 20.0 (1.3) -- 18.7
---------- ----------- ------- ----------- ------------------------ --------------- ------------ --------------- ---------------
Cash and cash equivalents at end of period $4.0 $13.8 $(5.7) $-- $12.1
========== =========== ======= =========== ==========9.2 (11.5) 34.6 -- 32.3
============== =============== ============ =============== ===============
1518
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
IMPLEMENTATION OF REPOSITIONING PROGRAM
The Company began implementingformulated the Repositioning Program during the quarter ended
December 31, 1997. As of September 30,December 31, 1998, the Company had reduced its global
work force by approximately 1,8274,300 employees (compared to a net reduction of
2,700approximately 1,800 employees at Juneas of September 30, 1998) and closed and/or sold
24approximately 40 manufacturing facilities. During the six months ended December
31, 1998, the Company incurred disruption costs of approximately $5.0 million
associated with closing and relocating manufacturing facilities in connection
with the Repositioning Program. These costs were included in cost of sales. The
increaseCompany expects the Repositioning Program to be substantially completed by March
31, 1999.
As of December 31, 1998, actions taken by the Company in connection with the
Repositioning Program have resulted in approximately $90.0 million in annual
cost savings to the Company. The benefit of cost savings realized to date has
been substantially offset by costs associated with an unusually high number of
product launches commenced during the three months ended September 30, 1998. In
addition, the Company believes that the benefit of anticipated cost savings
during fiscal 1999 attributable to the Repositioning Program will be further
offset in part due to the deteriorating business conditions at USS and Custom
Trim.
PRODUCT LAUNCHES
The Company's global workforce was necessary
primarily to supportresults of operations for the restartsix months ended December 31, 1998
were adversely impacted by a number of production under the Company's General
Motors programs following conclusion of the General Motors strike as well as thefactors including higher costs associated
with an unusually high number of product launches commenced during the three
months ended September 30, 1998. During the three months ended September 30,
1998, the Company incurred disruption costs of approximately $2.8 million associated with
closing and relocating manufacturing facilities in connection with the
Repositioning Program. These costs were included in cost of sales.
As of September 30, 1998, actions taken by the Company in connection with the
Repositioning Program have resulted in approximately $67.2 million in annual
cost savings to the Company (compared to $70 million in annual cost savings at
June 30, 1998). During the three months ended September 30, 1998, previously
realized cost savings were offset by higher labor costs relating to the global
work force additions discussed above. Moreover, the benefit of cost savings
realized to date was significantly offset by costs associated with an unusually
high number of product launches. In addition, the Company believes that the
benefit of anticipated cost savings during fiscal 1999 attributable to the
Repositioning Program will be offset in part due to the deteriorating business
conditions at USS and Custom Trim.
FIRST QUARTER PRODUCT LAUNCHES
The Company's results of operations for the three months ended September 30,
1998 were adversely impacted by a number of factors including higher costs
associated with an unusually high number of product launches during such period.
During the three months ended September 30, 1998, the Company launched 44 products compared to10to 10 products launched during
the three months ended September 30, 1997 and an average of 15 products launched
during the second, third and fourth quarters of fiscal 1998 (which includes
product launches attributable to SRS, which was acquired on October 30, 1998)1997). A
"launch" means the start of production of a product and the related activities
including, among other things, manufacturing, engineering, quality, sales and
administrative support necessary to bring a product into production. A "launch"
continues until such time as the Company is able to meet the customer's quality
and volume requirements for the product on a consistent basis with normal
production resources and is typically a resource intensive and complex process.
As a result of the higher than normal number of launches commenced during the
threesix months ended September 30,December 31, 1998, the Company was required to allocate
resources during such period to such launches that would have otherwise been
directed towards implementing the Repositioning Program. For example, the
Company could not implement scheduled personnel reductions during such period
pursuant to the Repositioning Program and, in some instances, additional
personnel were hired to support these launches. ManagementIn addition, the Company
incurred significant costs associated with (i) premium freight (both in
receiving supplies from vendors and shipping products to customers) as a result
of these product launches and (ii) generally higher material content
requirements in connection with launches relating to seatbelt and airbag
programs. To address the increased costs relating to higher material content
requirements, the Company is seeking customer approval of certain engineering
changes with respect to certain programs that the Company believes thatwill lower
material costs for such programs, has sought price reductions from certain
vendors and, in some cases, has increased prices for subject products. As a
result of the reallocation of resources and these significant costs, these
launches together with new launches
anticipated during the three months ending December 31, 1998 may continue to
adversely impactimpacted the Company's results of operations for such period and/or its
ability to realizethe three
and six months ended December 31, 1998 and reduced the benefit from anticipatedof cost savings
realized under the Repositioning Program to date. The Company does not believe
that the product launches commenced during such period.
16the three months ended September 30,
1998 will adversely impact its results of operations during the three months
ending March 31, 1999.
19
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30,DECEMBER 31, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30,DECEMBER 31,
1997
Net sales increased 74%16% to $339.1$396.2 million for the three months ended September
30,December
31, 1998 from $195.2$340.7 million for the three months ended September 30,December 31, 1997. The
increase in net sales was primarily due to the acquisition of SRS on October 30,
1997, which accounted for approximately $175.6$87.0 million of increasedthe increase in net
sales for the three months ended September 30,December 31, 1998. That increase in net sales
was partially offset significantly by reduced sales volume due to the General Motors strike, the
usual shutdown of the European automotive business during August 1998, a reduction in net sales attributable to USS and Custom
Trim due to previously announced deteriorating business conditions,decrease in sales and a decrease in sales of
EMS sensors. The strike at General Motors, which began in June 1998 and ended July
1998, reduced net sales by $13.7 million ($5.9 million of which was attributable
to BREED and $7.8 million of which was attributable to SRS) while deterioratingDeteriorating business conditions at USS and Custom Trim reduced
net sales by approximately $10.1$8.5 million. The Company expects that net sales
attributable to USS and Custom Trim will continue to decline significantly
during the balance of fiscal 1999 due to the loss of business (and the failure
to replace such business on a timely basis with new business) and industry-wide
pricing pressures.
The usual
shutdown of the European automotive business had a disproportionate impact on
net sales during the three months ended September 30, 1998 because of the higher
volume of business in Europe during such period due to the acquisition of SRS on
October 30, 1998.
EMS sensors sales decreased 42%52% to $16.6$13.4 million for the three months ended
September 30,December 31, 1998 from $28.6$28.1 million for the three months ended September 30,December 31,
1997. This decrease was primarily due to lower demand as major customers
continued to shift from EMS sensors to electronic sensors that are sourced
internally. The Company believes that sales of EMS sensors will continue to
decline in the foreseeable future.
Cost of sales increased 75%12% to $291.7$349.1 million for the three months ended
September 30,December 31, 1998 from $166.9$312.5 million for the three months ended September 30,December 31,
1997. The increase reflects thereflected additional production costs of $155.5 million for the three months
ended September 30,December 31, 1998, resulting from the acquisition of SRS in fiscal 1998
and the unusually high number of product launches commenced during the three
months ended September 30, 1998. See discussion above under "Product Launches".
This increase in production costs was partially offset by lower cost of sales
associated with the loss of sales volume as discussed above and a reduction in
production costs caused by the closingas a result of manufacturing facilities
and labor savings associated withactions taken under the Repositioning Program.
In addition, the Company incurred approximately $2.8$2.1 million during the three
months ended September 30,December 31, 1998 related to disruption costs associated with the
closing of manufacturing facilities in connection with the Repositioning
Program.Program, as well as $1.3 million charge relating to settlement of a warranty
claim.
Gross profit increased 68%67% to $47.4$47.1 million for the three months ended September
30,December
31, 1998 from $28.3$28.2 million for the three months ended September 30,December 31, 1997. Gross
profit as a percentage of net sales was 14%12% for the three months ended September
30,December
31, 1998 compared to 15%8% for the three months ended September 30,December 31, 1997. TheGross
profit for the three months ended December 31, 1997 reflected a $21.7 million
charge against cost of sales relating to expected losses under contracts
acquired in connection with the SRS acquisition. Excluding this charge, gross
profit as a percentage of net sales for the three months ended December 31, 1997
would have been 17% compared to 12% for the three months ended December 31,
1998. Excluding this charge, this decrease in gross marginprofit as a percentage of
sales during the three months ended December 31, 1998 was primarily attributabledue to (i) a shift in
product mix from high margin EMS sensors to lower margin products, primarily
steering
wheels, plastics and seatbelts,seat belts acquired in recent acquisitions,the SRS acquisition, (ii) the
General Motors strike and (iii) disruption costs incurred
during the three months ended September 30, 1998. Excluding disruptionDecember 31, 1998, (iii) higher production costs
grossassociated with multiple product launches and (iv) a shift in product mix to a
higher proportion of products with lower average margins than the average margin
would
have been 15% forattributable to products sold by the Company during the three months ended
September 30, 1998.December 31, 1997.
Selling, general and administrative expenses increased 29%9% to $20.9$23.3 million for
the three months ended September 30,December 31, 1998 from $16.2$21.3 million for the three months
ended September 30,December 31, 1997. The increase was primarily attributable expenses
aggregating $1.1 million incurred to settle a claim relating to the Lemelson bar
coding patent, costs of $3.7 million associated with SRS, which was acquired onin October 30,
1997.1997,
and bad debt expenses aggregating $0.6 million. This increase in selling,
general and administrative expenses was partially offset by cost savings
associated with the Repositioning Program.
20
Research, development and engineering expenses increased 166%38% to $23.7$25.7 million
for the three months ended September 30,December 31, 1998 from $8.9$18.6 million for the three
months ended September 30,December 31, 1997. This increase reflectsreflected increased costs
aggregating $16.0 million
associated with the ongoing activities of SRS, which was
17
acquired in October
1997, and HS Technik and Design, which was acquired in May 1998, and an increase
in spending for new product development and additional application engineering
costs associated with new product launches. This increase was partially offset
by cost savings relating to reduced headcount and related expenses as a result
of the Company's Repositioning Program.
Amortization of intangibles increased by $3.8$2.1 million during the three months
ended September 30,December 31, 1998. The increase in amortization expense was primarily the
result of the goodwill and other intangibles associated with the acquisition of
SRS.
Operating income (loss)loss for the three months ended September 30,December 31, 1998 was $(3.0)$7.9 million
compared to $1.2$352.6 million for the three months ended September 30,December 31, 1997.
Operating income (loss)loss as a percentage of net sales was (1)(2)% for the three months ended
September 30,December 31, 1998 compared to 1%(103)% for the three months ended September 30,December 31,
1997. The operating loss for the three months ended December 31, 1997 included
$365.4 million in one-time charges: (i) $259.5 million of repositioning and
impairment charges, (ii) a $77.5 million charge relating to the write-off of
certain in-process research and development, and (iii) a $28.4 million charge
against cost of sales for inventory and long-term contracts relating to
manufacturing processes that will be exited. Excluding these $365.4 million of
charges, the decrease in operating income was primarily due to the shift in
product mix, the General Motors strikeproduct launches, and disruption costs discussed above.
ExclusiveInterest expense for the three months ended December 31, 1998 decreased 24% to
$20.6 million. This decrease was primarily due to lower domestic and
international interest rates, this year versus last year.
During the three months ended December 31, 1998, the Company recorded a foreign
tax expense in the amount of $1.8 million. No tax benefit was recognized for
either domestic or foreign purposes due to the provisions of SFAS No. 109. SFAS
No. 109 states that a valuation allowance is recognized if, it is more likely
than not, some portion or all of the effectsdeferred tax asset will not be realized.
For both domestic and foreign jurisdictions, a valuation allowance for the
deferred income tax benefit related to the current loss incurred has been
recorded.
21
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1998 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1997
Net sales increased 37% to $735.2 million for the six months ended December 31,
1998 from $535.9 million for the six months ended December 31, 1997. The
increase in net sales was primarily due to the acquisition of SRS on October 30,
1997, which accounted for approximately $273.5 million of the General Motors strike and disruption
costs, operating income would have been $7.6 million or 2% ofincrease in net
sales for the six months ended December 31, 1998. That increase in net sales was
offset significantly by a reduction in net sales attributable to USS and Custom
Trim due to previously announced decrease in sales and a decrease in sales of
EMS sensors. Deteriorating business conditions at USS and Custom Trim reduced
net sales by approximately $21.5 million. The Company expects that net sales
attributable to USS and Custom Trim will continue to decline significantly
during the balance of fiscal 1999 due to the loss of business (and the failure
to replace such business on a timely basis with new business) and industry-wide
pricing pressures.
EMS sensors sales decreased 47% to $29.2 million for the six months ended
December 31, 1998 from $54.7 million for the six months ended December 31, 1997.
This decrease was primarily due to lower demand as major customers continued to
shift from EMS sensors to electronic sensors that are sourced internally. The
Company believes that sales of EMS sensors will continue to decline in the
foreseeable future.
Cost of sales increased 34% to $640.8 million for the six months ended December
31, 1998 from $479.4 million for the six months ended December 31, 1997. The
increase reflected additional production costs for the six months ended December
31, 1998, resulting from the acquisition of SRS in fiscal 1998 and the unusually
high number of product launches commenced during the three months ended
September 30, 1998. Interest expenseSee discussion above under "Product Launches". This increase
in production costs was partially offset by lower cost of sales associated with
the loss of sales volume as discussed above and a reduction in production costs
as a result of actions taken under the Repositioning Program. In addition, the
Company incurred approximately $5.0 million during the six months ended December
31, 1998 related to disruption costs associated with the closing of
manufacturing facilities in connection with the Repositioning Program, as well
as $1.3 million charge relating to settlement of a warranty claim.
Gross profit increased 67% to $94.4 million for the six months ended December
31, 1998 from $56.5 million for the six months ended December 31, 1997. Gross
profit as a percentage of net sales was 13% for the six months ended December
31, 1998 compared to 11% for the six months ended December 31, 1997. Gross
profit for the six months ended December 31, 1997 reflected a $21.7 million
charge against cost of sales relating to expected losses under contracts
acquired in connection with the SRS acquisition. Excluding this charge, gross
profit as a percentage of net sales for the six months ended December 31, 1997
would have been 17% compared to 12% for the six months ended December 31, 1998.
Excluding this charge, this decrease in gross profit as a percentage of sales
was due to (i) a shift in product mix from high margin EMS sensors to lower
margin products, primarily seat belts acquired in the SRS acquisition, (ii)
disruption costs incurred during the six months ended December 31, 1998, (iii)
higher production costs associated with the unusually high number of product
launches commenced during the three months ended September 30, 1998, and (iv) a
shift in product mix due to a higher proportion of products with lower average
margins than the average margin attributable to products sold by the Company
during the six months ended December 31, 1997.
Selling, general and administrative expenses increased 163%18% to $22.1$44.2 million for
the threesix months ended September 30,December 31, 1998 from $37.5 million for the six months
ended December 31, 1997. The increase was primarily attributable expenses
aggregating $1.1 million incurred to settle a claim relating to the Lemelson bar
coding patent, costs associated with SRS, which was acquired in October 1997,
and bad debt expenses aggregating $0.6 million. This increase in selling,
general and administrative expenses was partially offset by cost savings
associated with the Repositioning Program.
22
Research, development and engineering expenses increased 80% to $49.4 million
for the six months ended December 31, 1998 from $27.5 million for the six months
ended December 31, 1997. This increase reflected increased costs associated with
the ongoing activities of SRS, which was acquired in October 1997, and HS
Technik and Design, which was acquired in May 1998, and an increase in spending
for new product development and additional application engineering costs
associated with new product launches. This increase was partially offset by cost
savings relating to reduced headcount and related expenses as a result of the
Repositioning Program.
Amortization of intangibles increased by $5.9 million during the six months
ended December 31, 1998. The increase in amortization expense was primarily the
result of the goodwill and other intangibles associated with the acquisition of
SRS.
Operating loss for the six months ended December 31, 1998 was $11.0 million
compared to $351.4 million for the six months ended December 31, 1997. Operating
loss as a percentage of net sales was (2)% for the six months ended December 31,
1998 compared to (66)% for the six months ended December 31, 1997. The operating
loss for the six months ended December 31, 1997 includes $365.4 million in
one-time charges: (i) $259.5 million of repositioning and impairment charges,
(ii) a $77.5 million chargerelating to the write-off of certain in-process
research and development, and (iii) a $28.4 million charge against cost of sales
for inventory and long-term contracts relating to manufacturing processes that
will be exited. Excluding these $365.4 million of charges, the decrease in
operating income was primarily due to the shift in product mix, product launches
and disruption costs discussed above.
Interest expense for the six months ended December 31, 1998 increased 21% to
$42.7 million as compared to the six months ended December 31, 1997. This
increase in interest expense was primarily due to the increase in average
borrowings outstanding as a result of the acquisition of SRS in fiscal 1998.October 1997.
This increase was offset partially by interest savings resulting from voluntary
debt reductions.
During the threesix months ended September 30,December 31, 1998 the Company recorded a domestic
benefitforeign tax
expense of $0.5$2.3 million which was fullypartially offset by a $0.5 million foreign
expense.domestic
benefit for a tax credit. No other tax benefit was recognized for either
domestic or foreign purposes due to the provisions of SFAS No. 109. SFAS No. 109
states that a valuation allowance is recognized if, it is more likely than not,
some portion or all of the deferred tax asset will not be realized. For both
domestic and foreign jurisdictions, a valuation allowance for the deferred
income tax benefit related to the current loss incurred has been recorded.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are for working capital, servicing the
Company's indebtedness and capital expenditures and acquisitions.expenditures. The Company believes thatintends to fund
these cash generatedneeds with cash from operations together with borrowings available
under its credit facility. On April 28, 1998, the Company entered into a new
$675.0 million credit facility. At December 31, 1998, the Company had an
aggregate of $528.0 million of borrowings outstanding under the credit facility,
which bore interest at a weighted average rate of 7.48% per annum at such date,
and had aggregate borrowing availability thereunder of $54.4 million. Because
the Company would have been in violation of the net worth covenant in the loan
agreement relating to the credit facility as of December 31, 1998, the Company
obtained a waiver of this covenant from the lenders that was effective from
December 30, 1998 through February 12, 1999 (the "First Waiver"). Pursuant to
the First Waiver, the maximum borrowing availability under the company's
revolving line of credit was decreased from $150.0 million (including letters of
credit) to $110.0 million (including letters of credit).
On February 11, 1999, the Company obtained a new waiver (the "Second Waiver") of
such net worth covenant as well as an event of default that existed due to the
Company's failure to register certain securities as required under certain
agreements to which it is a party. The Second Waiver is effective from February
13, 1999 through March 30, 1999. In connection with the Second Waiver, the
maximum borrowing
23
availability under the revolving line of credit was increased to $125.0 million
(including letters of credit). As of February 15, 1999, the Company had an
aggregate of $570.9 million of borrowings outstanding under the credit facility
(including $82.9 million of revolver borrowings). Additionally, $15.6 million of
letters of credit were outstanding under the revolving line of credit leaving an
aggregate borrowing availability thereunder of $26.5 million. The Company paid
the lenders fees aggregating $1.3 million in connection with the Second Waiver.
The Company is not currently in violation of any covenants contained in the loan
agreement.
The Company is in the process of negotiating an amendment to the loan agreement
relating to the net worth covenant and the existing event of default as well as
certain other financial covenants. The Company is not currently in violation of
these other financial covenants but anticipates that, to the extent such
covenants are not amended, it will be in violation on March 31, 1999 of the two
covenants presently waived and it anticipates violation of certain other
financial covenants by June 30, 1999. The Company anticipates that in connection
with any such amendment, borrowing availability under the revolving line of
credit will be restored to $150.0 million. Although the Company believes that it
will be able to negotiate the necessary amendments with its lenders, there can
be no assurance that it will be able to do so. Any amendment to the loan
agreement must be approved by the lenders holding more that 50% of the
commitments and borrowings outstanding under the credit facility. In the absence
of a further waiver or an amendment to the loan agreement, after March 30, 1999,
the lenders would be entitled to exercise all of their rights under the loan
agreement including, without limitation, declaring all amounts outstanding under
the credit facility immediately due and payable and/or exercising their rights
with respect to the collateral securing the credit facility which consists of,
among other things, substantially all of the real and personal property of the
Company and its subsidiaries.
If the Company is unable to obtain a further waiver or amendment to the loan
agreement, the Company may not have sufficient cash to meet the Company'sits working capital,
debt service and capital expenditure needs as well as required
investments in BSRS for the foreseeable future. However, if unexpected cash
needs arise, there can be no assurance that cash generated from operations
together with borrowings available under the Company's credit facility will be
sufficient to meet such needs,beyond March 30, 1999, in which case,
the Company willmay be required to obtain financing from other sources. There can be
no assurance that such financing will be available or, if available, that it
will be on terms satisfactory to the Company. TheConsequently, the inability to
obtain any such waiver, amendment or alternative financing would have a material
adverse effect on the Company's ability to invest in BSRSfinancial condition and results of operations.
Until such time as the credit facility is limitedamended as discussed above or all
amounts outstanding under the Company's credit facility are repaid in full, borrowings
outstanding under the credit facility will be classified as a current liability
on the Company's consolidated balance sheet.
On April 28, 1998, the Company issued and sold an aggregate of $330 million of
its Notes in a private transaction under Rule 144A under the Securities Act. In
connection with the Notes Offering, the Company entered into the Notes Agreement
pursuant to which it agreed to offer to exchange the Notes for substantially
identical 9.25% Senior Subordinated Notes due 2008 registered under the
Securities Act. Pursuant to the Note Agreement, the Company was required to
complete the Exchange Offer by the date 180 days after the Closing Date. The
Company filed the registration statement relating to the Exchange Offer on June
24, 1998. Because the Exchange Offer had not been consummated on or prior to the
date 180 days after the Closing Date as required under the Note Agreement, the
interest rate borne by the Notes increased pursuant to the Note Agreement by
0.25% on the 181st day after the Closing Date. The interest rate has and will
continue to increase by 0.25% on the 1st day of each subsequent 90-day period;
provided, however, that in no event will the interest rate borne by the Notes be
increased by more than 1.5%. The Notes currently bear interest at a rate of
9.75% per annum.
On November 25, 1998, the Company sold $257.7 million of its Convertible
Debentures to BTI Capital Trust, which, concurrently therewith, sold $250.0
million aggregate liquidation amount of its Preferred Securities (which are
fully and unconditionally guaranteed by the Company) in a private transaction
under Rule 144A under the Securities Act (the "Preferred Securities Offering").
In connection with the Preferred Securities Offering, the Company entered into a
registration rights agreement (the "Preferred Securities
24
Agreement") pursuant to which it agreed to register (and cause BTI Capital Trust
to register), among other things, the Convertible Debentures and Preferred
Securities. Pursuant to the Preferred Securities Agreement, the Shelf
Registration Statement (as defined therein) was required to be effective on or
prior to June 17, 1998. The Company filed the Shelf Registration Statement on
March 18, 1998. Because the Shelf Registration Statement was not declared
effective by June 17, 1998, the interest rate on the Convertible Debentures and
the Notes.
Cash flow from operating activities fordistribution rate applicable to the three months ended September 30,
1998Preferred Securities increased by 0.25%,
payable in arrears, with the first quarterly payment due on the first interest
or distribution date following June 17, 1998.
The Shelf Registration Statement was a surplusnot declared effective and the Exchange
Offer was not completed on or prior to the required dates because the Commission
was reviewing certain periodic reports previously filed by the Company. The
commission has now completed its review and the interest rate borne by the Notes
and the Convertible Debentures and the distribution rate in respect of $23.7 million compared with a deficit of $8.0 million for
the
three months ended September 30, 1997.Preferred Securities will be reduced to the original amounts on the date the
Shelf Registration Statement is declared effective and the Exchange Offer is
completed, as the case may be, which the Company currently expects will be prior
to April 15, 1999.
The increase in cash flow from operations for the six months ended December 31, 1997 was
primarilyadversely affected by the receipt of an income tax refund of $62.6$365.4 million on
September 25, 1998, less the increasein one-time charges recorded in the
net loss of $24.3 million.quarter ended December 31, 1997, partially offset by changes in working capital
items.
Capital expenditures aggregated $18.5$32.3 million for the threesix months ended September 30,December
31, 1998. Investments continue to be made to support productivity improvements,
cost reduction programs, finance new program launches, capital needs to improve
manufacturing efficiency and added capability for existing and new products and
reconfigurations of manufacturing facilities relating to the Repositioning
Program. The Company estimates that capital expenditures will aggregate
approximately $56.5$38.0 million during the
18
remainder of fiscal 1999. On April 28, 1998,Cash
investments in BSRS during the Company entered into a new $675.0 million credit
facility. At September 30, 1998, the Company had an aggregate of $488.0 million
of borrowings outstandingperiod were not material. The Company's ability
to invest in BSRS is limited under the credit facility, which bore interest at a
weighted average rate of 8.8% per annum at such date, and had aggregate
borrowing availability thereunder of $137.3 million. During the three months
ended September 30, 1998, the Company decreased its outstanding indebtedness by
$21.0 million. The decrease resulted from a $19.0 million voluntary prepayment
toward outstanding term loan balances under theCompany's credit facility and the repaymentSenior
Subordinated Notes due 2008.
The Company has market risk exposure from the impact of $2.0 millioninterest rate changes.
The Company has elected to manage this risk through the maturity structure of
its borrowings outstanding under short-term linesand through the use of creditinterest rate swap and cap instruments.
Currently, interest rates affecting approximately 35% of the Company's foreign subsidiaries.debt will
vary directly with market rates due to the short-term nature of its maturity and
the absence of interest rate management instruments associated with this debt.
Given the Company's present exposure to rate movements, each 0.5% change in
rates will impact interest approximately $1.6 million. This analysis considers
only the impact of the hypothetical interest rate changes and not the overall
economic activity impacting the Company.
YEAR 2000
The debt reduction resultingYear 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculation causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company is a member of the Automotive Industry Action Group (AIAG), an
automotive trade association whose members are the North American vehicle
manufacturers and many large suppliers. These member organizations assemble as
the AIAG to tackle industry issues in supply, manufacturing, engineering,
quality and finance. The AIAG investigates the benefits of commonization in new
areas, examines established processes with an eye toward improvements and
compares procedures to determine best practices. The result of this work is the
development of new technologies and the standards that govern their usage. One
of the issues the AIAG has been charged with confronting is Year 2000 compliance
among automotive suppliers.
25
As a member of the AIAG and in conjunction with our major customers, the Company
has used the AIAG guidelines for Y2K compliance. The phases prescribed by AIAG
are:
AWARENESS Within the Company the level of awareness of the significance of the
Y2K issue has been elevated through meetings and notifications throughout the
organization. This phase of the project is an ongoing effort.
INVENTORY The Company conducted a worldwide inventory of all computer hardware
and software (including business and operational applications, operating systems
and third party products) and other equipment that may be at risk, and
identified key third party businesses whose Y2K failure might most significantly
impact the Company. This phase has been completed.
RISK EVALUATION After the identification of each at-risk system, the Company
assessed how critical the system was to the business operation and the potential
impact of failure. Resources for remediation were allocated based on the level
of risk assigned. This phase has been completed.
REMEDIATION The Company has targeted a completion date of March 1999 for
remediation of its critical systems and will continue to address remediation of
other systems on a prioritized basis thereafter.
TESTING After remediation, all implemented solutions will be tested in isolation
and with their interface with all other systems. This phase is closely related
to the remediation phase and is scheduled for completion by June 30, 1999.
ACCEPTANCE AND IMPLEMENTATION This phase involves having functional experts
review test results and pre-established criteria to ensure compliance. This
phase assures that business processes or groups of components will function
correctly regardless of dates used. The Company expects all critical systems to
be accepted and implemented by August 31, 1999.
The Company has determined that it will be required to modify or replace
portions of its software and hardware so its computer systems will properly
utilize dates beyond December 31, 1999. These assessments indicated that some of
the Company's significant information technology systems and operating
equipment, (i.e., production and manufacturing systems) could be affected.
Affected operating equipment includes automated assembly lines and related
technologies used in various aspects of the manufacturing process. However,
based on a review of its product lines, the Company has determined that the
products it has sold and will continue to sell do not require remediation to be
Year 2000 compliant. Accordingly, the Company does not believe the Year 2000
presents a material exposure as it relates to the Company's products. In
addition, the Company has gathered information about the Year 2000 compliance
status of its significant suppliers and subcontractors and continues to monitor
their compliance.
For its information technology exposures, the Company expects to complete
software reprogramming no later than March 31, 1999. Once software is
reprogrammed and replaced for a system, the Company begins testing and
implementation. These phases run concurrently for different systems. Completion
of the testing phase for all significant systems is expected by March 31, 1999,
with all remediated systems fully tested and implemented by August 31, 1999.
The remediation of operating equipment is significantly more difficult than the
remediation of the information technology systems because some of the
manufacturers of that equipment are no longer in business. Testing of this
equipment is also more difficult than the testing of the information technology
systems. Once testing is complete, the operating equipment is ready for
immediate use. The Company expects to complete its remediation efforts by March
31, 1999. Testing and implementation of all critical equipment is expected to be
completed by June 30, 1999.
26
The Company is in the process of working with suppliers and customers to ensure
that the Company's systems that interface directly with third parties are Year
2000 compliant by December 31, 1999. The Company has completed its assessment
efforts. Testing of all material systems is expected no later than March 31,
1999. Implementation is expected to be completed by June 30, 1999. Each vendor
queried believed its order entry and inventory management systems would be Year
2000 compliant by the end of 1999.
The Company has queried its important suppliers and customers that do not share
information systems with the Company. To date, the Company is not aware of any
suppliers or customers Year 2000 issue that would materially impact the
Company's results of operations or financial condition. However, the Company has
no means of ensuring that suppliers and customers will be Year 2000 ready. The
inability of its external agents to complete their Year 2000 resolution process
in a timely fashion could materially impact the Company. The effect of
noncompliance by its suppliers and customers is not determinable.
The Company will utilize both internal and external resources to reprogram or
replace, test and implement the software and operating equipment for Year 2000
modifications. The total cost of the Year 2000 project is estimated at $7
million and is being funded with cash from operations. To date, the prepayment substantially satisfiesCompany has
incurred approximately $2.5 million ($2.5 million expensed) relating for all
phases of the mandatory prepaymentYear 2000 project. Of the total remaining project costs, the
remaining $4.5 million relates to repair of amortization
through June 1999hardware and June 2004software and will be
expensed as incurred.
The Company plans to complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources, and
other factors. Estimates on the status of completion and the expected completion
dates are based on costs incurred to date compared to total expected costs.
However, there can be no guarantee these estimates will be achieved and actual
results could differ materially from those plans. Specific factors that might
cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
There can be no assurance that the Company will be completely successful in its
efforts to address Year 2000 issues. The Company could suffer lost sales or
other negative consequences, including, but not limited to, diversion of
resources, damage to the Company's reputation, increased service and warranty
costs and litigation, any of which could materially adversely affect the
Company's business operations or financial statements.
The Company is also dependent on third parties such as its customers, suppliers,
service providers and other business partners. If these or other third parties
fail to adequately address Year 2000 issues, the Company could experience a
negative impact on its business operations or financial statements. For example,
the failure of certain of the Company's principal suppliers to have Year 2000
compliant internal systems could impact the Company's ability to manufacture
and/or ship its products or to maintain adequate inventory levels for
Term Loans Aproduction.
Although the Company has not yet developed a comprehensive contingency plan to
address situations that may result if the Company or the third parties upon
which the Company is dependent are unable to achieve Year 2000 readiness the
Company's Year 2000 compliance program is ongoing and B, respectively, underits ultimate scope, as
well as the credit facility.consideration of contingency plans, will continue to be evaluated as
new information becomes available.
27
FORWARD LOOKING STATEMENTS
Statements herein regarding estimated cost savings and the Company's anticipated
performance in future periods constitute forward-looking statements within the
meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934.
Such statements are subject to certain risks and uncertainties that could cause
actual amounts to differ materially from those projected. With respect to
estimated cost savings, management has made assumptions regarding, among other
things, the timing of plant closures, the amount and timing of expected
short-term operating losses and reductions in fixed labor costs. The realization
of cost savings is subject to certain risks, including, among other things, the
risks that expected operating losses have been underestimated, expected cost
reductions have been overestimated, unexpected costs and expenses will be
incurred and anticipated operating efficiencies will not be achieved. Further,
statements herein regarding the Company's performance in future periods are
subject to risks relating to, among other things, possible higher costs
associated with product launches, difficulties in integrating acquired
businesses, deterioration of relationships with material customers, possible
significant product liability claims, decreases in demand for the Company's
products and adverse changes in general market and industry conditions.
Management believes these forward-looking statements are reasonable; however,
undue reliance should not be placed on such forward-looking statements, which
are based on current expectations.
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PART II - OTHER INFORMATION
ITEM 3. LEGAL PROCEEDINGS
On October 22, 1998, AlliedSignal, Inc. tendered the defense of an action
entitled Garcia, et. al. v. General Motors Corporation and AlliedSignal, Inc.,
Cause No. 98-093642-E in the Cameron County, Texas, District Court, under the
indemnification provisions of the Asset Purchase Agreement ("APA") between the
Company and AlliedSignal pursuant to which the Company purchased SRS. The suit
seeks class action status and alleges that a seat belt buckle previously
manufactured by AlliedSignal and now manufactured by the Company is defective in
design. The Company has notified AlliedSignal (i) that a portion of the
liability was excluded under the APA and is AlliedSignal's responsibility, (ii)
the remedy sought is a shared liability under the APA, (iii) the claims in the
complaint, if proven, constitute a breach of a representation by AlliedSignal
under the APA and thus any related liability would be AlliedSignal's liability.
The Company has agreed to defend the matter under a reservation of rights
against AlliedSignal. AlliedSignal had denied liability under the APA but has
acknowledged the Company's reservation of rights. The Company is investigating
the allegations and does not yet have sufficient information upon which to form
a belief as to the outcome of such litigation or likelihood or extent of any
loss.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NoneThe annual meeting of shareholders was held on Thursday, November 19, 1998 at
which the following matters was submitted to a vote of the shareholders:
Votes cast for or withheld regarding the seven individuals elected as directors
of the Company for a term expiring at the next annual meeting of shareholders
were as follows:
Name # of Shares Voted For # of Shares Withheld
- ---- --------------------- --------------------
Allen K. Breed 34,747,811 181,307
Johnnie C. Breed 34,757,774 171,344
Larry W. McCurdy 34,774,495 154,623
Charles J. Speranzella 34,770,978 158,140
Robert W. Shower 34,770,178 159,940
Alberto Negro 34,769,678 159,840
Dr. -Ing. Franz Wressnigg 34,768,678 160,440
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K -
The following reports have been filed on Form 8-K with the Securities and
Exchange Commission during the first quarter of fiscal 1999: (a) the Company's
Current Report on Form 8-K filed on August 31, 1998 announcing a delay in the
release of the Company's earnings for the quarter and year ended June 30, 1998,
(b) the Company's Current Report of Form 8-K on September 4, 1998 announcing
certain information regarding previously recorded repositioning and other
special charges and other business developments, (c) the Company's Current
Report on Form 8-K on September 18, 1998 announcing the resolution of certain
outstanding items with the Securities and Exchange Commission, (d) the Company's
Current Report of Form 8-K on September 21, 1998 announcing the Company will
restate its financial statements for the second quarter ended December 31, 1997
and the third quarter ended March 31, 1998 to take into account changes in the
repositioning and other special charges.
20None
29
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.
Breed Technologies, Inc.
(REGISTRANT)
NovemberFebruary 16, 19981999
By: /s/ Frank J. Gnisci
Frank J. Gnisci
Executive Vice President and
ChiefJ.F. Gallagher
Cheif Financial Officer
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