================================================================================- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________--------------------
FORM 10-Q/A10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the quarterly period ended: MarchDecember 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Commission File No. 1-11474
____________________- --------------------------------------------------------------------------------
--------------------
BREED TECHNOLOGIES, INC.
(Exact name of registrant as specified in charter)(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
Delaware 22-2767118
(State of Incorporation)(STATE OF INCORPORATION) (I.R.S. Employer Identification No.EMPLOYER IDENTIFICATION NO.)
5300 Old Tampa Highway
Lakeland, Florida 33811
(Address of principal executive offices) (Zip Code)(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(941) 668-6000
(Registrant's telephone number, including area code)
____________________(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 May 12, 1998, 36,658,707February 15, 1999, 36,849,160 shares of the registrant's common
stock, par value $.01 per share, were outstanding.
================================================================================- --------------------------------------------------------------------------------
-------------------------------------------------------------------------------
INDEX
-----
The undersigned registrant hereby amends the following itemPART I. FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets - December 31, 1998
(Unaudited)and June 30, 1998 ........................... 1
Consolidated Condensed Statements of its
Quarterly ReportOperations (Unaudited)
Three and six months ended December 31, 1998 and 1997... 3
Consolidated Condensed Statements of Cash Flows (Unaudited)
Six months ended December 31, 1998 and 1997............. 4
Notes to Consolidated Condensed Financial Statements
(Unaudited) ............................................ 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ....................... 19
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders............ 29
ITEM 6. Exhibits and Reports on Form 10-Q for the quarter ended March 31, 1998 as set forth
in the pages attached hereto:
PAGE
----
8-K .............................. 29
SIGNATURES ............................................................ 30
i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets -
March 31, 1998 (Unaudited) and June 30, 1997.................................................... 1
Consolidated Condensed Statements of Operations (Unaudited)
Three and nine months ended March 31, 1998 and 1997 ............................................ 3
Consolidated Condensed Statements of Cash Flows (Unaudited)
Nine months ended March 31, 1998 and 1997....................................................... 4
Consolidated Statement of Stockholders' Equity (Unaudited) ...................................... 5
Notes to Consolidated Condensed Financial Statements (Unaudited)................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ......................................................................... 22
i
ITEM 1. FINANCIAL STATEMENTS
BREED TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
In Millions, except per share data MARCHIN MILLIONS, EXCEPT FOR SHARE DATA
December 31, JUNEJune 30,
1998 1997
-------- -------1998
----------------- --------------
(Unaudited)
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 24.133.0 $ 18.744.4
Accounts receivable, principally trade 320.1 208.0284.8 275.3
Inventories:
Raw materials 38.3 24.864.1 75.0
Work in process 22.6 23.426.3 18.2
Finished goods 46.2 27.1
--------- --------26.9 15.9
------------ ------------
Total Inventories 107.1 75.3
--------- --------117.3 109.1
------------ ------------
Income tax receivable 3.3 64.6
Prepaid expenses and other current assets 82.0 13.5
--------- --------35.3 27.7
------------ ------------
Total Current Assets 533.3 315.5473.7 521.1
Property, plant and equipment, net 327.9 276.5369.6 365.2
Intangibles, net 726.3 221.0687.0 692.1
Net assets held for sale 28.4 52.660.1 29.0
Other assets 41.6 11.6
--------- --------48.9 42.5
------------ ------------
Total Assets $1,657.5 $877.2
========= ========
$ 1,639.3 $ 1,649.9
============ ============
See Notes to Consolidated Condensed Financial Statements.
1
BREED TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
In Millions, except per share data
BREED TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
IN MILLIONS, EXCEPT FOR SHARE DATA
MARCHDecember 31, JUNEJune 30,
1998 1997
---------- ----------1998
----------------- ---------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITYDEFICIT
Current Liabilities:
Notes payable and current portion of long-term
debt (Note 3) $ 72.2 $191.7555.0 $ 46.9
Accounts payable 270.8 121.5297.2 254.9
Accrued expenses 215.0 49.5
--------- ---------221.5 233.2
------------ ------------
Total Current Liabilities 558.0 362.7
--------- ---------1,073.7 535.0
Long-term debt (Note 3) 810.9 231.7352.2 851.1
Other long-term liabilities 29.5 16.3
--------- ---------25.0 25.6
------------ ------------
Total Liabilities 1,398.4 610.7
-------- ---------1,450.9 1,411.7
------------ ------------
Company obligated mandatorily redeemable convertible
250.0 ---
preferred securities (Note 5)
Stockholder's Equity:250.0 250.0
Stockholders' Deficit:
Common stock, par value $0.01, authorized 50,000,000 0.4 0.375,000,000 shares,
issued and outstanding 36,656,24136,848,993 and 31,679,44236,850,261 shares at
MarchDecember 31, 1998 and June 30, 1997,1998, respectively 0.4 0.4
Series A Preference Stock par value $0.001,$0.01, authorized
5,000,000 shares,5,000,000shares, issued and outstanding 1 share at
MarchDecember 31, 1998 (Note 4) --- ---and June 30, 1998 -- --
Additional paid-in capital 193.8 77.5197.6 197.6
Warrants (Note 8) 1.9 ---1.9
Retained earnings (156.0) 208.0
Foreign currency translation adjustments (30.7) (18.8)deficit (246.9) (184.0)
Accumulated other comprehensive loss (Notes 4 and 5) (14.5) (27.4)
Unearned compensation (0.1) (0.3)
(0.5)
--------- --------------------- ------------
Total Stockholders' Equity 9.1 266.5
--------- ---------Deficit (61.6) (11.8)
------------ ------------
Total Liabilities and Stockholders' Equity $1,657.5 $877.2
========= =========
Deficit $ 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 earnings per share
BREED TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
IN MILLIONS, EXCEPT PER SHARE DATA
THREE MONTHS ENDED NINE MONTHS ENDED
MARCHThree Months Ended Six Months Ended
December 31, MARCHDecember 31,
------------------ ------------------------------------------ ------------------------
1998 1997 1998 1997
------- -------- ------- ------
Net sales $431.7 $209.4 $ 967.6 $550.6396.2 $ 340.7 $ 735.2 $ 535.9
Cost of sales (Note 6) 356.8 171.4 836.2 433.9
------- ------- ------- ------349.1 312.5 640.8 479.4
---------- ---------- ---------- -----------
Gross profit 74.9 38.0 131.5 116.7
------- ------- ------- ------47.1 28.2 94.4 56.5
---------- ---------- ---------- -----------
Operating expenses:
Selling, general and administrative expenses 22.1 19.1 59.7 51.323.3 21.3 44.2 37.5
Research, development and engineering expenses 22.4 9.5 49.9 27.325.7 18.6 49.4 27.5
Repositioning and impairment charges (Note 6) --- --- 259.5 ---259.5
In-process research and development expenses (Note 6) --- --- 77.5 ---77.5
Amortization of intangibles 6.8 2.2 12.7 4.3
------- ------- ------- ------6.0 3.9 11.8 5.9
---------- ---------- ---------- -----------
Total operating expense 51.3 30.8 459.2 82.9
------- ------- ------- ------expenses 55.0 380.8 105.4 407.9
---------- ---------- ---------- -----------
Operating income (loss) 23.6 7.2 (327.8) 33.8loss (7.9) (352.6) (11.0) (351.4)
Interest expense 28.2 6.7 63.7 17.820.6 27.1 42.7 35.4
Other income (expense), net 2.8 2.0 2.8 4.6
------- ------- ------- ------
Earnings (loss)0.4 0.4 1.3 (0.1)
---------- ---------- ---------- -----------
Loss before income taxes, and distributions
on Company obligated mandatorily redeemable
convertible preferred securities and extraordinary
item (1.8) 2.5 (388.7) 20.6(28.1) (379.3) (52.4) (386.9)
Income taxes (benefit) (Note 7) (4.4) 1.0 (54.3) 8.16) 1.8 (46.5) 1.8 (49.9)
Distributions on Company obligated mandatorily
4.3 --- 5.7 ---
------- ------- ------- ------
redeemable convertible preferred securities Earnings (loss)4.5 1.4 8.7 1.4
---------- ---------- ---------- -----------
Loss before extraordinary loss (1.7) 1.5 (340.1) 12.5
------- ------- ------- ------item (34.4) (334.2) (62.9) (338.4)
Extraordinary loss net of tax benefit of $0.4$1.4 million --- --- (0.7) ---
------- ------- ------- -------- 0.7 -- 0.7
---------- ---------- ---------- -----------
Net earnings (loss)loss $ (1.7)(34.4) $ 1.5 $(340.8)(334.9) $ 12.5
======= ======= ======= ======
Basic earning (loss)(62.9) $ (339.1)
========== ========== ========== ===========
Loss per common share (Note 8)7):
Earnings (loss)Basic loss per share
Loss before extraordinary item $ (0.93) $ (10.54) $ (1.71) $ (10.68)
Extraordinary item -- (0.02) -- (0.02)
---------- ---------- ---------- -----------
Net loss $(0.05) $ 0.05 $(10.33)(0.93) $ 0.39
Extraordinary(10.56) $ (1.71) $ (10.70)
========== ========== ========== ===========
Diluted loss --- --- (0.02) ---
------- ------- ------- ------
Net earnings (loss) $(0.05) $ 0.05 $(10.35) $ 0.39
======= ======= ======= ======
Diluted earnings (loss) per common share:
Earnings (loss)share
Loss before extraordinary item $ (0.93) $ (10.54) $ (1.71) $ (10.68)
Extraordinary item -- (0.02) -- (0.02)
---------- ---------- ---------- -----------
Net loss $(0.05) $ 0.05 $(10.33)(0.93) $ 0.39
Extraordinary loss --- --- (0.02) ---
------- ------- ------- ------
Net earnings (loss) - assuming dilution $(0.05)(10.56) $ 0.05 $(10.35)(1.71) $ 0.39
======= ======= ======= ======
(10.70)
========== ========== ========== ===========
Shares used for computation:
Basic 36.849 31.705 36.849 31.694
Diluted 36.849 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
BREED TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
IN MILLIONS
NINE MONTHS ENDED MARCHSix Months Ended December 31,
-----------------------------------
1998 1997
--------- --------------------- ------------
Cash Flows from Operating Activities:
Net earnings (loss) $(340.8)loss $ 12.5(62.9) $ (339.1)
Adjustments to reconcile net earningsloss to net cash provided by
(used in) operating activities:
Depreciation and amortization 43.4 34.1
Non-cash items included in repositioning, impairment and other special 211.4 ---
charges
Accrual for repositioning, impairment and other special charges 76.5 ---37.4 26.6
Changes in working capital items and other (20.4) 1.2
--------- ---------32.8 291.5
------------ ------------
Net cash provided by (used in) operating activities (29.9) 47.87.3 (21.0)
------------ ------------
Cash Flows from Investing Activities:
Cost of acquisition, net of cash acquired (Note 2) (710.0) (267.0)
Capitalacquisitions and capital expenditures (50.1) (61.4)(32.8) (733.4)
Proceeds from sale of assets 4.2 0.1
--------- ---------3.0 2.6
------------ ------------
Net cash used in investing activities (755.9) (328.3)
--------- ---------(29.8) (730.8)
------------ ------------
Cash Flows from Financing Activities:
Proceeds from (repayment of) debt net 459.7 215.9265.5 860.8
Proceeds from Series A Preference Stock issuance 115.0 ---
Proceeds from Series Bissuances 554.0
Repayment of debt (256.3) (433.3)
Redemption of Preference Stock issuance 200.0 ---
Fees associated with Series B Preference Stock issuance (10.0) ---
Redemption of Series B Preference Stock issuance (200.0) ---
Proceeds from Company obligated mandatorily redeemable 239.0 ---
convertible preferred securities, less related fees(210.0)
Cash dividends paid (2.2) (6.6)
Proceeds from common stock issued 1.6 0.5
--------- ---------0.7
------------ ------------
Net cash provided by financing activities 803.1 209.8
--------- ---------9.2 770.0
------------ ------------
Effect of exchange rate changes on cash (11.9) (7.0)
--------- ---------1.9 (4.6)
------------ ------------
Net (decrease) increase (decrease) in cash and cash equivalents 5.4 (77.7)(11.4) 13.6
Cash and cash equivalents at beginning of period 44.4 18.7
95.8
--------- --------------------- ------------
Cash and cash equivalents at end of period $ 24.133.0 $ 18.1
========= =========
Cost of Acquisitions:
Working capital, net of cash acquired $ 39.5 $ (40.7)
Property, plant and equipment (140.3) (162.9)
Cost in excess of net assets acquired (683.3) (121.1)
Intangibles-write-off of in-process research and development costs 77.5 ---
Investments and other assets (11.8) (19.1)
Long-term debt -- 33.9
Other long-term liabilities 8.4 42.9
--------- ---------
Net cost of acquisitions $(710.0) $(267.0)
========= =========
32.3
============ ============
See Notes to Consolidated Condensed Financial Statements.
4
BREED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
In Millions, except per share data
COMMON STOCK SERIES A SERIES B ADDITIONAL FOREIGN
---------------------
SHARES AMOUNT PREFERENCE PREFERENCE PAID-IN RETAINED CURRENCY
STOCK STOCK CAPITAL WARRANTS EARNINGS TRANSLATION
ADJUSTMENTS
----------------------------------------------------------------------------------------------------
Balance at June 30, 1997 31,679,442 $ 0.3 -- -- $ 77.5 -- $ 208.0 $(18.8)
Net loss (340.8)
Translation adjustments (11.9)
Issue Series A Preference
Stock 115.0
Issue Series B Preference
Stock, (including fees) 200.0 (10.0)
Redemption of Series B
Preference Stock (200.0)
Fees associated with
Company obligated
mandatorily redeemable
convertible preferred
securities (11.0)
Warrants issued with
Credit Facility 1.9
Shares issued under Stock
Option Plans 101,793 1.6
Shares terminated under
Stock Incentive Plan, net
of granted Shares (8,220) (0.2)
Cash dividends (2.2)
Conversion of Series A
Preference Stock 4,883,226 0.1 (115.0) 114.9
---------------------------------------------------------------------------------------------------
Balance at March 31, 1998 36,656,241 $0.4 $ -- -- $193.8 $1.9 $(156.0) $(30.7)
===================================================================================================
===================================================================================================
UNEARNED
COMPENSATION TOTAL
--------------------------
Balance at June 30, 1997 $ (0.5) $ 266.5
Net loss (340.8)
Translation adjustments (11.9)
Issue Series A Preference
Stock 115.0
Issue Series B Preference
Stock, (including fees) 190.0
Redemption of Series B
Preference Stock (200.0)
Fees associated with
Company obligated (11.0)
mandatorily redeemable
convertible preferred
securities
Warrants issued with
Credit Facility 1.9
Shares issued under Stock
Option Plans 1.6
Shares terminated under
Stock Incentive Plan, net
of granted Shares 0.2 ---
Cash dividends (2.2)
Conversion of Series A
Preference Stock
--------------------------
Balance at March 31, 1998 $ (0.3) $ 9.1
==========================
54
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 ninesix months ended MarchDecember 31, 1998 are not
necessarily indicative of the results that may be expected for the year ending June
30, 1998.1999. 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-K10-K/A for the year ended June 30, 1997.
Revenue Recognition -1998.
REVENUE RECOGNITION AND SALES COMMITMENTS- The Company recognizes revenue when
title and risk of loss transfers to its customers, which is generally upon
shipment of products to customers. The Companycompany 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 the
Company for the entire production life of the 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.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 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.
Cash and Cash Equivalents - Cash and cash equivalents include short-term
interest bearing securities with maturities of three months or less when
purchased.
Grant - The Company earned and recorded as income in 1997 a grant from the
Italian Ministry of Labor and Social Security of $1.0 million for locating a
plant in southern Italy in 1994.
NOTE 2 - ACQUISITIONS
On October 30,REPOSITIONING AND IMPAIRMENT CHARGES
During the quarter ended December 31, 1997, the Company completedformulated a
repositioning program which is intended to (i) enhance the acquisition of certain assetsCompany's
competitiveness and the assumption of certain liabilities of the "Safety Restraints Systems"
business unit of AlliedSignal, Inc.productivity, (ii) reduce costs and 100% of the outstanding shares of
capital stock of ICSRD Rucckhaltesysteme Fahrzeugsicherheit GmbH, a German
company, BSRD Limited, an English company, AlliedSignal India, Inc., a Delaware
company, Sistemas AlliedSignal de Seguridad, S.A. de C.V., a Mexican company,increase asset control
and AlliedSignal Cinturones de Seguridad, S.A. de C.V., a Mexican company
(collectively, "SRS"(iii) improve processes and systems (the "Repositioning Program"). The
acquisitionCompany expects that the Repositioning Program will be substantially completed
by March 31, 1999.
During the six months ended December 31, 1998, the repositioning and impairment
accrual was made pursuant to the Asset Purchase
Agreement ("Agreement") dated August 27, 1997 among AlliedSignal, Inc. (and
certain subsidiaries identified in the Agreement) and Breed (and certain
subsidiaries identified in the Agreement).
6
SRS produces seatbelts and airbags with principal locations in Knoxville,
Tennessee; Maryville, Tennessee; Greenville, Alabama; St. Clair Shores,
Michigan; Sterling Heights, Michigan; Douglas, Arizona; Brownsville, Texas; El
Paso, Texas; Aqua Prieta, Mexico; Juarez, Mexico; Valle Hermoso, Mexico;
Carlisle, England; Colleferro, Italy; Turin, Italy; Siena, Italy; Arzano, Italy;
and Barcelona, Spain.
The purchase price for the SRS acquisition was $710.0reduced by $5.7 million which was
financed with borrowings under a revolving and term credit facility, the net
proceeds from the issuance and sale of Series B Preference Securities, and the
net proceeds from the issuance and sale of Series A Preference Shares to Siemens
AG.
With the acquisition of SRS, the Company conducted an evaluation and review
of the assets acquired. The allocation of the purchase price is preliminary and
subject to change. Asas a result of such review,cash charges. The following
table sets forth the Company recorded a charge
relateddetails and the cumulative activity relating to the
write-off of in-process researchrepositioning and development for acquired
technology that has not been established as technologically feasible. In
addition, the purchase price is subject to post-closing adjustments based on the
net book value of the acquired business, retained cash balances, if any, and any
amounts paid with respect to certain intercompany obligations. The initial
purchase price shall be increased or decreased by the amount by which the net
book value of SRSimpairment charge as of the closing date is greater than or less than,
respectively, $175.3 million. The Company has submitted to AlliedSignal, Inc. a
post closing purchase price adjustment in accordance with the terms of the
agreement. The final adjustment will be determined in accordance with the terms
of the Agreement.
As a part of the purchase price allocation, the Company evaluated the value
of the identifiable intangible assets, including in-process research and
development (In-Process R&D). Under generally accepted accounting principles,
if the technological feasibility of the acquired technology has not been
established and the technology has no future alternative uses, such in- process
research and development must be written off ($77.5 million).
The Company identified approximately 40 In-Process R&D projects at SRS that
do not have future alternative uses, but which have a high likelihood of
obtaining technological feasibility at various times over a six month to five
year period, with a midpoint development date of approximately two years. That
In-Process R&D ($158.1 million) was recorded at fair value based on the present
cash value to the going concern as if SRS were sold to an unrelated
party having similar application purposes.
The estimated goodwill and preliminary allocation of purchase price to
identifiable intangible assets acquired in the SRS acquisition are summarized as
follows:December 31, 1998:
Accrual Accrual
Balance at Balance at
June 30, Cash Non-Cash December
IN MILLIONS 1998 Reductions Reductions 31, 1998
- --------------------------------------- -------------- -------------- -------------- ----------------
Cash purchase price $ 710.0
Less:
Estimated fair value of SRS net assets acquired less assumed liabilities $ 122.8
Adjustment for planned closings of facilities (45.0) (77.8)
-------- --------
632.2
Adjustment for estimated costs of planned employee termination 16.7
Estimated costs related to the SRS acquisition 15.0
Other 19.4
--------
Cost in excess of net assets acquired 683.3
Less estimated in-process research and development (77.5)
--------
Excess of purchase price over fair value of net assets acquired $ 605.8
========
7
Amortization
Value Period in
Allocated Years
--------- ------------
Trained workforceHeadcount reductions $ 10.3 10
Developed technology 158.1 22
Goodwill 437.4 40
---------15.9 $ 605.8
=========2.3 $ -- $ 13.6
Facility consolidations 18.9 3.4 -- 15.5
- --------------------------------------- -------------- -------------- -------------- ----------------
Total $ 34.8 $ 5.7 $ -- $ 29.1
======================================= ============== ============== ============== ================
The pro-forma unaudited results of operations for the nine months ended
March 31, 1998 and 1997, assuming the acquisition of SRS had been consummated on
the first day of the respective periods are as follows:
In millions, except per share data NINE MONTHS ENDED MARCH 31,
1998 1997
------------- -------------
Net sales $ 1,245.1 $ 1,292.2
Net income (loss) $ (364.2) $ 6.6
Net income (loss) per share - basic and diluted $ (11.06) $ 0.21
Net Income (loss) per share - diluted $ (11.06) $ 0.18
85
NOTE 3 - BORROWINGSDEBT
A summary of debt follows:
December 31, June 30,
1998 1998
----------------- -----------------
Term Loan A, interest at 7.375% and 7.825% at December 31, 1998, and
June 30, 1998, respectively, installments due 1999 through 2004 $ 297.6 $ 309.2
Term Loan B, interest at 7.625%and 8.075% at December 31, 1998, and
June 30, 1998, respectively, installments due 2005 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 5.67%, installments due various 20.9 30.4
Mortgages and equipment financing loans 28.3 30.6
----------------- -----------------
Total debt 907.2 898.0
----------------- -----------------
Less current maturities 555.0 46.9
----------------- -----------------
Total long-term debt $ 352.2 $ 851.1
================= =================
On October 30, 1997, in connection withApril 28, 1998, the acquisition of SRS, the Company
and NationsBank entered into a new revolving and term$675.0 million credit
facility ("Credit
Facility") pursuant to which the Company has $900 million of aggregate borrowing
availability.facility. At December 31, 1997 and March 31, 1998, the Company had an aggregate of $810$528.0 million
of borrowings outstanding under the Credit Facilitycredit 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 30, 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 approximately $10.0letters 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 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) andcredit were outstanding under the weighted
average interest rate on such borrowings was approximately 8.76% per annum.
The Credit Facility consists of a $600 million term loan and a $300 million
revolver (with $75 million multicurrency and $25 million letterrevolving line of
credit sublimits). Both credit facilities have a 366 day term which expire on October
31, 1998. Borrowings underleaving an aggregate borrowing availability thereunder of $26.5 million.
The Company paid the Credit Facility bear interest at a per annum
rate equal to, atlenders fees aggregating $1.3 million in connection with
the election of the Company, either (i) the higher of the
Federal Funds Rate plus 0.5% or the NationsBank prime rate plus, in either case,
an additional margin ranging from 2.0% to 5.0% based on the length of time the
Credit Facility is in existence, or (ii) a rate based on the prevailing
interbank offered rate plus an additional margin ranging from 3.0% to 6.0% based
on the length of time the Credit Facility is in existence. The letter of credit
fee ranges from 3.0% to 6.0% and, when there is more than one Lender, an
additional 0.125% for the issuing bank.Second Waiver. The Company is also requirednot currently in violation of any covenants
contained in the loan agreement.
The Company is in the process of negotiating an amendment to pay a
quarterly unused facility fee. In addition,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 paid a commitment fee,
uponbelieves that it will be able to negotiate the executionnecessary 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 Credit Facility, equal to 3% of the aggregate
availablecommitments and borrowings outstanding under the Credit Facility ($27 million). The Credit
Facility hascredit
facility. In the absence of a 1.5% take-out fee ($13.5 million), subjectfurther waiver or an amendment to certain conditions,
which is payable upon repayment in fullthe 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.
The Credit Facility is secured by (i) a security interest incredit 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 and assets (including inventory, accounts receivable,
intellectual property, mortgages on all real property owned by the Company and
the assets acquired pursuant to the SRS acquisition) of the Company and certain
subsidiaries, (ii) a stock pledge byits subsidiaries.
If the Company and certain subsidiaries of
their stock in certain domestic subsidiaries and at least 65% ofis unable to obtain a further waiver or amendment to the voting
stock and 100% of the non- voting stock of foreign subsidiaries, (iii) a pledge
of the common stock owned by A. Breed, L.P., a Texas limited partnership and J.
Breed, L.P., a Texas limited partnership, (iv) an assignment of certain leases
for facilities ofloan
agreement, the Company may not have sufficient cash to meet its working capital,
debt service and certain subsidiaries, (v)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 pledge and
subordination of intercompany notes, (vi) an assignment of certain partnership
interests, and (vii) an assignment of a trademark licensing agreement. The
Credit Facility is guaranteed by certain ofmaterial
adverse effect on the Company's subsidiaries.
The Credit Facility requires compliance with certain covenants byfinancial condition and results of operations.
Until such time as the Company and its subsidiaries, including, among other things: (i) maintenance of
certain financial ratios and compliance with certain financial tests and
limitations; (ii) limitationscredit 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 payment of dividends, incurrence of
additional indebtedness and granting of certain liens; and (iii) restrictions on
mergers, acquisitions, and investments. At December 31, 1997 and March 31,Company's consolidated balance sheet.
On April 28, 1998, the Company was in compliance with all covenants.
In connection with the Credit Facility, the Company also entered into a
warrant agreement with NationsBank providing for the issuance by the Company of
a warrant to purchase common stock. The warrant is exercisable for 250,000
common shares at an exercise price of $23.125 per share. The warrants were
valued at $1.9 million using the Black- Sholes model as recommended by Financial
Accounting Standards Statement No. 123. The number of shares for which the
warrant is exercisable may be increased to a maximum of 3,000,000 shares if the
Company fails to fulfill certain obligations prior to July 26, 1998. The
exercise price for such additional shares shall be the market price of the
common stock on the day such
9
warrant shares become exercisable. The warrant agreementissued and the warrant expire
on October 30, 2000. NationsBank may elect that the warrant shares be included
in certain registration statements filed by the Company under the Securities Act
for the sale of common stock of the Company and, until October 30, 2002, may
demand that the Company register the warrant shares on Form S-3 (see Note 9).
NOTE 4 - SIEMENS INVESTMENT AND JOINT VENTURE AGREEMENT
Joint Venture Agreement
On December 24, 1997, the Company and Siemens Aktiengesellschaft (A.G.),
Automotive Systems Group ("Siemens") signed an agreement forming a joint venture
for the worldwide research, development, engineering, assembly and marketing of
motor vehicle occupant safety restraint systems. The joint venture will be
owned effectively 50% by both the Company and Siemens. Siemens will contribute
to the joint venture its shares in the existing Passive Restraint Systems
("PARS") GmbH. PARS operates crash test facilities and develops occupant safety
systems. It will serve as a center for the design, engineering, simulation,
testing and sales of integrated occupant safety systems in Europe. The Company
will form a company with its headquarters and facilities located in Michigan and
will contribute various assets which are comparable to those existing at PARS.
This new entity will act in the same capacity as PARS in North America. The
Company will then contribute its ownership interest in the new company to the
joint venture.
The joint venture will be governed by a partners' committee consisting of
three representatives from each of the Company and Siemens. The joint venture
will operate pursuant to an operating budget approved by the partners' committee
and subject to annual review. No expenditures in excess of budgeted amounts may
be made without consent of the partners' committee. The parties will provide
funding to the joint venture to the extent revenues and external funding sources
are inadequate to cover budgeted operating expenses and capital expenditures.
Neither party can be compelled to provide funding for operating expenses and
capital expenditures above budgeted amounts.
Any technology generated by the joint venture (either by itself or with one
of the parties) will belong jointly to Siemens and the Company. Each party will
be responsible for warranties and liabilities, including recall actions, arising
from its components marketed by the joint venture to customers.
The term of the joint venture is not fixed. However, it is subject to the
right of either party to terminate the joint venture with six month prior
written notice, or sooner upon mutual agreement, after the sixth anniversary
date of the formation of the joint venture.
Stock Purchase Agreement and the Preference Shares. Pursuant to the Stock
Purchase Agreement, on October 30, 1997, Siemens acquired 4,883,227 Series A
Preference Shares forsold an aggregate purchase price of $115 million. Pursuant to
the Stock Purchase Agreement, the Company agreed to indemnify Siemens for
breaches of representations, warranties, and covenants for a period of up to 18
months. The indemnification obligations of the Company are subject to a $1.5$330 million deductible and a cap of $30 million.
Each Series A Preference Share represents one one-thousandth (1/1000th) of
a share of 1997 Series A Convertible Non-Voting Preferred Stock of the Company
and, subject to adjustment, each Series A Preference Share is convertible into
one share of common stock. Except for voting rights required by law,
10
and except for the right to elect as a class one director of the Company during
the period that begins on the date when any Series A Preference Shares are
converted into Common Stock and ends on the date of the termination of the
stockholders agreement, the holders of shares of Series A Preference Shares do
not have voting rights. All other rights of the holders of Series A Preference
Shares are equal to the right of the holders of common stock and are shared
ratably on an as-converted basis.
On January 20, 1998, Siemens converted 4,883,226 of
its Series A Preference
Shares into 4,883,226 shares of common stock.
The Make-Whole Agreement. In connection with the Siemens Investment, the
Company entered into9.25% Senior Subordinated Notes due 2008 (the "Notes") in a Make-Whole Agreement (the "Make-Whole Agreement") with
Siemens. Under the Make-Whole Agreement, within 30 days after a "Triggering
Event," Siemens will have the right to require the Company, at the Company's
election to either (i) repurchase the Series A Preference Shares purchased
pursuant to the Stock Purchase Agreement (and any shares issuable with respect
to such shares) for a purchase price equal to $115 million plus $15,753 per day
for each day between December 15, 1997 and the exercise of the right (the "Make-
Whole Price"), or (ii) if the net proceeds from the bona fide sale of such
shares by Siemens to a third party financial institution does not equal the
Make-Whole Price, to issue to Siemens such number of shares (subject to certain
limits) the net proceeds from the sale of which would equal the amount of the
deficit. Under the Make-Whole Agreement, a "Triggering Event" includes (a) the
parties shall have been unable, after diligent and good faith efforts, to obtain
the governmental approvals required with respect to the formation of the Siemens
Joint Venture; or (b) the formation of the Siemens Joint Venture shall not have
been completed by June 30, 1998. The Make-Whole Agreement terminates if (1)
prior to Siemens' delivery of a notice that it has entered into an agreement to
sell its shares to a third party financial institution as described above,
Siemens sells or otherwise transfers any of the securities subject to the Make-
Whole Agreement to any person other than a direct or indirect subsidiary of
Siemens or (2) Siemens has not delivered such a notice by the later to occur of
(x) July 31, 1998, or (y) 45 days after a Triggering Event.
Registration Rights Agreement. In connection with the Siemens Investment,
the Company entered into a Registration Rights Agreement (the "Registration
Rights Agreement") with Siemens. Pursuant to the Registration Rights Agreement
with Siemens, Siemens shall have the right, after June 1, 1998 and before the
tenth anniversary of the date of the Registration Rights Agreement with Siemens,
to require the Company to file up to three registration statementsprivate
transaction under the
Securities Act to register any shares of common stock owned by Siemens for sale
to the public, subject to certain limitations. The Company is required to pay
all expenses (other than discounts and commissions) in connection with such
demand registrations. In addition, if the Company elects to register securitiesRule 144A under the Securities Act of 1933, for its account or for the account of other
stockholders, Siemens shall have the right to register its shares under any such
registration statement, subject to certain limitations.
NOTE 5 - CONVERTIBLE TRUST PREFERRED SECURITIESas amended (the
"Securities Act") (the "Notes Offering"). In connection with the SRS acquisition, on October 30, 1997,Notes Offering,
the Company issued and soldentered into a registration rights agreement (the "Notes Agreement")
pursuant to Prudentialwhich it agreed to offer to exchange the Notes for substantially
identical 9.25% Senior Subordinated Notes due 2008 registered under the
Securities Credit Corp. ("PSCC"Act (the "Exchange Offer") $200 million of
Series B Convertible Preference Stock of. Pursuant to the Notes Agreement, the
Company was required to complete the Exchange Offer by the date 180 days after
April 28, 1998 (the "Series B Preference
Securities""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 issued and sold $250.0$257.7 million of its 6.50% Convertible
Subordinated Debentures due 2027 (the "Convertible Debentures") of the Company to BTI Capital
Trust, (the "Trust") which, concurrently therewith, issued and sold $257.7$250.0 million aggregate liquidation
amount of its 6.50% Company Obligated Mandatorily Redeemable
11
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 of 1933. The Company used the net
proceeds from the issuance and sale of the Convertible Debentures to the Trust
to redeem all of the outstanding Series B Preference(the "Preferred
Securities in accordance
with the terms thereof and for general corporate purposes.
The Preferred Securities represent preferred undivided beneficial interests
in the assets of the Trust, which consist solely of the Convertible Debentures.
The Company owns all the common securities (the "Common Securities" and,
togetherOffering"). In connection with the Preferred Securities Offering, the
"Trust Securities"Company entered into a registration rights agreement (the "Preferred Securities
Agreement") representing
individual undivided beneficial interestspursuant 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 assets offirst quarterly payment due on the Trust,first interest
or distribution date following June 17, 1998.
The Shelf Registration Statement was not declared effective and consequently, the Trust is a wholly owned subsidiary ofExchange
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. HoldersThe 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 are entitledwill be reduced to receive cumulative cash
distributions at an annual rate of 6.5% of the liquidation amount of $50 per
Preferred Security, accruing from,original amounts
on the date the Shelf Registration Statement is declared effective and including, November 25, 1997 and payable
quarterly in arrears on February 15, May 15, August 15 and November 15 of each
year, commencing February 15, 1998 (the "Distributions"). Each Preferred
Securitythe
Exchange Offer is convertible, atcompleted, as the option of the holder into shares of Common
Stock, at the rate of 2.1973 shares of Common Stock for each Preferred Security,
subject to adjustment in certain circumstances.
Each Convertible Debenture bears interest at the rate of 6.50% per annum
from November 25, 1997, payable quarterly in arrears on February 15, May 15,
August 15 and November 15, commencing February 15, 1998. The Convertible
Debentures are redeemable bycase may be, which the Company in whole or in part, from timecurrently
expects will be prior to time, on or after November 25, 2000, or at any time, in whole or in part, in
certain circumstances upon the occurrence of certain specified tax events. IfApril 15, 1999.
NOTE 4 -COMPREHENSIVE INCOME
Effective July 1, 1998, the Company redeems any Convertible Debentures, the proceeds from such
redemption will be applied to redeem a like amount of Trust Securities. The
Preferred Securities will be redeemed upon maturity of the Convertible
Debentures on November 15, 2027. Upon the repayment of the Convertible
Debentures, the proceeds from such repayment will be applied to redeem a like
amount of Trust Securities.
The payment of Distributions out of moneys held by the Trust and payments
on liquidation of the Trust or the redemption of Preferred Securities are fully
and unconditionally guaranteed by the Company (the "Preferred Securities
Guarantee"). The Preferred Securities Guarantee covers payments of Distributions
and other payments on the Preferred Securities only if and to the extent that
the Company has made a payment of principal or other payments on the Convertible
Debentures held by the Trust as its sole assets.
The Company has the right to defer payments of interest on the Convertible
Debentures by extending the interest payment period on the Convertible
Debentures at any time (so long as no event of default has occurred and is
continuing under the indenture applicable to the Convertible Debentures) for up
to 20 consecutive quarters (each, an "Extension Period"); provided that no such
Extension Period may extend beyond the maturity date of the Convertible
Debentures. If interest payments are so deferred, Distributions on the Preferred
Securities will also be deferred. During any Extension Period, Distributions on
the Preferred Securities will continue to accrue with interest thereon (to the
extent permitted by applicable law) at an annual rate of 6.50% per annum,
compounded quarterly.
NOTE 6 - REPOSITIONING, IMPAIRMENT AND OTHER SPECIAL CHARGES
12
General. The rapid growth experienced by the Company and the demand of
integrating acquired businesses has out paced the development of the Company's
corporate infrastructure and systems. In addition, the Company believes that
its cost structures and working capital requirements have increased to
unacceptable levels. Consequently, during the first quarter of the fiscal year,
management initiated a review of its global operations, cost structure and
balance sheet directed at reducing its operating expenses, manufacturing costs
and increasing productivity. This review focused on operational systems,
organizational structures, facility utilization, product offerings, inventory
valuation and other matters, including, without limitation, the deterioration of
business conditions at certain acquired businesses. As a result of this review,
during the second quarter ended December 31, 1997, the Company formulated a
repositioning plan 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 Company recorded $365.4 million
before taxes ($333.9 after taxes) of repositioning, impairment and other special
charges (a portion of which was required due to deteriorating business
conditions at an acquired business) during the second quarter ended December 31,
1997. It is anticipated that approximately $73.4 million of these costs will
result in cash outlays.
Repositioning Charge. The repositioning charge aggregated $177.0 million
and included (i) $30.8 million relating to an approximately 25% reduction of the
Company's global work force (or 4,900 employees) by eliminating redundant and
overlapping positions resulting from recent acquisitions as well as reducing
personnel required at USS and Custom Trim (both as defined herein) due to
deteriorating business conditions at such businesses; (ii) $31.4 million
relating to the consolidation of the Company's manufacturing, sales and
engineering facilities in North America and Europe through the elimination of
approximately 50% (or 32) and 33% (or 10) of such facilities, respectively
(which includes certain facilities being consolidated due to deteriorating
business conditions at USS and Custom Trim); (iii) $10.6 million relating to the
write-down of goodwill associated with the disposal of long-lived assets; (iv)
$41.3 million relating to the write-down to net realizable value of certain
long-lived assets relating to business being divested; and (v) $62.9 million
relating to the write-down of impaired production and other equipment and the
write-off of assets used to manufacture products being replaced by new
technologies.
The Impairment Charge - The impairment charge aggregated $82.5 million and
related to the write-down of goodwill and other long-lived assets at USS (in
accordance withadopted Statement of Financial Accounting
Standard 121--AccountingStandards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No.
130 establishes new rules for the Impairmentreporting and display of Long-Lived Assetscomprehensive loss
and for Long-Lived Assetsits components. The adoption of this Statement requires that foreign
currency translation adjustments be included in other comprehensive loss, which
prior to be Disposed Of
("FAS 121") due to deteriorating business conditions, reflecting the Company's
determination during the quarter ended December 31, 1997 that a material
diminutionadoption were reported separately in the value of USS had occurred. Whenstockholders' equity. There is no
tax effect because the Company acquired USSintends to reinvest foreign earnings in October 1996, it was aware that USS's largest original equipment manufacturer
("OEM") customer (which accounted for approximately 50% of USS's revenues) had
awarded a significant portion of itsforeign
business (which relatedoperations. Prior year financial statements have been reclassified to
one platform) to
a competitor of USS, signaling the OEM's intention to source steering wheels and
airbag modules from one supplier as a unit, instead of as separate components
from two suppliers, provided the supplier had an approved airbag module.
However, the Company believed it could recover this business by negotiating to
supply the steering wheel componentconform to the competitor because the competitor,
although it had an approved airbag module, did not manufacture steering wheels.
At the same time, therequirements of SFAS No. 130.
Six months ended December 31,
--------------------------------------
1998 1997
-------------- --------------
Net loss $ (62.9) $ (339.1)
Foreign currency translation adjustment 12.9 (5.4)
-------------- --------------
Comprehensive loss $ (50.0) $ (344.5)
============== ==============
NOTE 5 - FOREIGN CURRENCY TRANSLATIONS
The Company worked to have its airbag module approved by the
OEM to position it to compete with respect to other platforms manufactured by
that OEM, which would put the Company in the position to source USS steering
wheelstranslates foreign currencies into U.S. dollars using quarter-end
exchange rates for those platforms.
13
The negotiations between the Companyforeign assets and USS's competitor ceased in April
1997. Thereafter, the Company continued to seek the OEM's approval of its airbag
module in an effort to bidliabilities and weighted average rates for
other businessforeign income and expenses. Translation gains and losses arising from the
OEM despite the
designation of twoconversion of the Company's competitors by the OEM as preferred vendors
for airbag modules. The Company obtained the approval of a newly developed
inflator (a major component of the Company's airbag module) from the OEM on July
28, 1997,foreign balance sheets and the Company thus continued to believe that obtaining approval of
its airbag module was feasible. During the quarter ended December 31, 1997, the
Company determined that its efforts to be named as a preferred vendor of
integrated steering wheels would not be successful or would be materially
delayed. The Company concluded that, consequently, USS would likely experience a
material and continuing decline in the revenue from USS's existing contracts as
these contracts were completed and not replaced on a timely basis with new
business. In addition, the Company was informed by the OEM during such quarter
that sales volume on the existing platform would decrease by approximately 30%
from the sales volume projected with respect to such platform at the time the
Company acquired USS, and that the Company's revenue attributable to all
platforms for such OEM would be impacted by a 2 1/2% price decrease starting
January 1, 1998 as well as a yet to be determined price decrease starting
January 1, 1999.
Other Special Charges. With the acquisition of SRS (Note 2), the Company
conducted an evaluation and review of the assets acquired. As a result of such
review, the Company recorded a $77.5 million charge related to the write-off of
in-process research and development for acquired technology that has not been
established as technologically feasible. The Company also reviewed its
inventories for slow-moving and excess items in light of the SRS acquisition and
planned realignment of its manufacturing operations. The Company also
reevaluated its customer contracts relating to products lines that will be
discontinued. As a result, the Company recorded a $28.4 million charge for
inventory and long-term contracts relating to manufacturing processes that will
be exited (which isincome statements into U.S. dollars
are reflected as a charge to costseparate component of sales). The $28.4 million
chargecomprehensive loss and included $15.5 million of expected losses under a contract entered into
in February 1996 (under which production began in August 1997) with a European
OEM to supply side impact airbags, which had not been previously manufactured by
the Company. This amount represented estimated losses expected to be incurred
over the five-year expected life of the platform to which the contract related.
These losses resulted from substantial cost overruns due to significant
additional testing requirements, design engineering costs and production
problems experienced in connection with that contract.
Implementation of the Repositioning Plan - During the three months ended
December 31, 1997, the Company began implementing its repositioning plan. The
Company has continued to reduce its work force, closed seven manufacturing
facilities and announced plans to close an additional facility and relocated a
major portion of a Canadian facility to a Mexican facility. These actions are
expected to result in $60 million of annual ongoing cost savings to the Company
under the repositioning plan.
As discussed above, the Company has closed or plans to close manufacturing
plants and sales and engineering facilities. During the three months ended
December 31, 1997 the property, plant and equipment at those plants and
facilities was written down from the aggregate carrying value of approximately
$139 million to $29.9 million. At March 31, 1998 the Company had closed seven of
those facilities and expects to close the remaining facilities by the end of the
third quarter of fiscal 1999. The Company has not yet reclassified the value of
property, plant and equipment closed as a part of the repositioning plan to
assets held for sale because the amounts are not material. The Company has
ceased recording depreciation for any plants and facilities that have been
identified for disposal
14
During the nine months ended March 31, 1998, the repositioning reserve was
reduced by $172.0 million as a result of cash and non-cash charges. The
following table sets forth the details and the cumulative activity of the
repositioning and impairment charges as of March 31, 1998:
CHARGE RESERVE
TAKEN BALANCE AT
AT DECEMBER CASH NON-CASH MARCH 31,
31, 1997 REDUCTIONS REDUCTIONS 1998
----------- ----------- ----------- -----------
Headcount reductions $ 30.8 $2.9 $ -- $27.9
Facility consolidations 31.4 14.5 16.9
Goodwill write-down 10.6 81.9 ---
Impairment charge 82.5
Gallino write-down 41.3 41.3 ---
Impaired assets and equipment write-down 62.9 2.9 32.8 27.2
------ ---- ------ -----
Total $259.5 $5.8 $170.5 $83.2
====== ==== ====== =====
The repositioning plan is expected to be substantially complete at the end
of the third quarter of fiscal year 1999 (March 31, 1999) and the Company
believes the provisions recorded are adequate to cover the costs associated with
this plan.
NOTE 7 - INCOME TAXES
Foreign income tax expense for fiscal 1997 was greater than the amount of
foreign income generated due to the inability to offset certain foreign losses
against foreign income. Within certain jurisdictions, such as Italy and the
United Kingdom, consolidation of certain legal entities or group relief within a
controlled group is not permitted and, thus, operating losses in one entity will
not be available to offset operating income of another commonly controlled
entity. In this case, operating losses incurred by certain of the Company's
legal entities within one taxing jurisdiction could not be used to offset
operating income of entities in
other taxing jurisdictions owned bycomprehensive loss in accumulated stockholders' deficit. With respect to
operations in Mexico, the Company.
Losses for fiscal 1997 of approximately $4 millionfunctional currency is the U.S. dollar, and $2 million were incurred
by subsidiaries locatedany gains
or losses from translations are included directly in the United Kingdom and Finland, respectively. Both
of these subsidiaries are in a cumulative loss position and no significant
positive evidence exists to support realization of the deferred tax benefit.
Accordingly, a valuation allowance was recorded. As a result of the inability to
record a tax benefit on the aforementioned losses, foreign income tax expense is
greater than the amount of foreign net income generated. Accordingly the
effective tax rate for fiscal 1997 was approximately 50%.
The Company revised its estimated effective tax rate from a 45% benefit in
the first quarter of fiscal 1998 to approximately 12% inincome. During the six
months ended December 31, 1997. This1998 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 six month period and increased the related assets and liabilities as
measured in U.S. dollars. The change is primarilyin the result of: (i)U.S. dollar during the six months
ended December 31, 1998 did not have a material impact on the results of
certain repositioning, impairment and other special charges (see Note 3) taken
in jurisdictions whereoperations.
NOTE 6 -INCOME TAXES
During the six months ended December 31, 1998, the Company may not be able to recognize the full incomerecorded foreign tax
expense of $2.3 million which was partially offset by a $0.5 million domestic
benefit for a tax credit. No other tax benefit and (ii) no tax benefit on write-downwas recognized for either
domestic or foreign purposes due to the provisions of goodwill included in the
repositioning and impairment charge. Financial Accountingstatement of financial
accounting Standards Statement No. 109, states that"Accounting for Income Taxes" (SFAS No. 109). SFAS
No. 109 requires a valuation allowance is recognizedto 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 assetassets will not be realized. Because of
15
limitations on the utilization of net operating losses from foreign
jurisdictions,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 income tax benefitasset which, upon reversal,
could not be carried back against prior year's taxable income. A valuation
allowance has been recognized to reduce to zero, foreign deferred tax assets,
primarily related to net operating loss carry-forwards in Finland, Spain and
8
the repositioning, impairmentU.K. and the other specialrestructuring charges has been recorded.
16
in Italy. Income taxes will be paid in
foreign jurisdictions in which there is no ability to offset income earned in
such jurisdictions against tax loss carry-forwards.
NOTE 87 - EARNINGLOSS PER SHARE
The following table sets forth the computation of the numerator and denominator
of the basic and diluted loss per share calculations:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCHThree Months Ended Six Months Ended
December 31, MARCHDecember 31,
----------------------- ------------------------------------------------------ ---------------------------
1998 1997 1998 1997
--------- ---------- ------------ -----------(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
Numerator:
Net earnings (loss)
BASIC LOSS
Loss before extraordinary item $ (1.7)(34.4) $ 1.5(334.2) $ (340.8)(62.9) $ 12.5(338.4)
Extraordinary item, net -- (0.7) -- (0.7)
------------- ------------ ----------- ----------- ----------- -----------
Numerator for basic earnings per
share-income available-------------
Loss applicable to common stockholders (1.7) 1.5 (340.8) 12.5stock $ (34.4) $ (334.9) $ (62.9) $ (339.1)
============= ============ =========== =============
Weighted average common shares outstanding 36.849 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)
------------- ------------ ----------- -------------
Net loss $ (0.93) $ (10.56) $ (1.71) $ (10.70)
============= ============ =========== =============
DILUTED LOSS PER SHARE
Loss before extraordinary item $ (34.4) $ (334.2) $ (62.9) $ (338.4)
Extraordinary item, net -- (0.7) -- (0.7)
------------- ------------ ----------- ----------- ------------------------
Loss applicable to common stock $ (34.4) $ (334.9) $ (62.9) $ (339.1)
============= ============ =========== =============
Share computation:
Weighted average common shares outstanding 36.849 31.705 36.849 31.694
Effect of dilutivediluted securities:
Company obligated mandatorily
redeemable convertible preferred
securities, netAssumed exercise of tax benefit * --- * ---
----------- ----------- ----------- -----------
Numerator for diluted earnings
per share-income available to
common stockholders after
assumed conversions $ (1.7) $ 1.5 $ (340.8) $ 12.5
----------- ----------- ----------- -----------
Denominator:
Denominator for basic earnings per
share-weighted-average shares 35,380,458 31,661,377 32,922,510 31,643,055
----------- ----------- ----------- -----------
Effect of dilutive securities:
Employee stock options and warrants * 230,509 * 269,276* *
Series A Preference Stock * --- * ---* *
Company obligated mandatorily redeemable
convertible preferred securities * --- * ---* *
------------- ------------ ----------- ----------- ----------- -----------
Dilutive potential-------------
Weighted average common shares --- 230,509 --- 269,276outstanding
as adjusted 36.849 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)
------------- ------------ ----------- ----------- -----------
Denominator for diluted earnings
per share-adjusted weighted-
average shares and assumed
conversions 35,380,458 31,891,886 32,922,510 31,912,331
----------- ----------- ----------- ------------------------
Net loss $ (0.93) $ (10.56) $ (1.71) $ (10.70)
============= ============ =========== =============
* ITEMS NOT ASSUMED IN THE COMPUTATION BECAUSE THEIR EFFECT IS ANTI-DILUTIVE
* 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 1,232,0312,453,770 shares of common stock at prices between $20.375$6.875
and $32.25 per share were outstanding as of MarchDecember 31, 1998 but were not
included in the computation of diluted earnings per share because the exercise
prices were greater than the average market price of the common shares and,
therefore, the effect
would be anti- dilutive.
17
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 ninesix
months ended MarchDecember 31, 1998 because the effect would be anti dilutive.anti-dilutive.
In connection with its Credit Facilitythe bridge loan credit facility entered into in connection
with the acquisition of SRS,the safety restraints systems business ("SRS") of
AlliedSignal, the Company issued to NationsBank, National Association
("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 warrantsshares subject to the NationsBank warrant have not been
included in the computation of diluted earnings per share for the three and ninesix
months ended MarchDecember 31, 1998 because the effect would be anti-dilutive.
NOTE 8 - BSRS JOINT VENTURE
The Company and Siemens Aktiengesallschaft ("Siemens") completed formation of a
joint venture, known as BSRS Restraint Systems International GmbH & Co. KG
("BSRS"), in June 1998. Pursuant to the joint venture agreement between the
Company and Siemens, on 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 GmbH, which operates crash test facilities and develops
occupant safety systems.
NOTE 9 - SUBSEQUENT EVENTSFINANCIAL 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 completed the refinancing of its Credit
Facility with a $675 million long-term senior credit facility ("New Credit
Facility"),issued and completedsold an offeringaggregate of $330 million of
its 9.25% Senior Subordinated Notes due 2008 ("Notes"). Borrowings under the New Credit Facility together
with the net proceeds of the Notes offering were used to repay all borrowings
outstanding under the bridge loan credit facility the Company obtained to
finance in part the SRS acquisition.
New Credit Facility - The New Credit Facility entered into with
NationsBank, as Agent and as Lender, consists of (1) a revolving credit facility
of up to $150.0 million (the "Revolving Credit Facility") (which was not drawn
at closing, except for approximately $10.0 million of Letters of Credit), (2) a
term loan in the amount of $325.0 million ("Term Loan A") and (3) a term loan in
the amount of $200.0 million ("Term Loan B", and together with Term Loan A, the
"Term Loans"Notes"). The Revolving Credit Facility includes (a) a $25.0 million
sublimit for the issuance of standby letters of credit, (b) a $75.0 million
sublimit for foreign currency denominated borrowings and (c) a $20.0 million
sublimit for swing line loans to be provided by NationsBank ("Swing Line
Loans"). All amounts outstanding under the Revolving Credit Facility are
payable on the sixth anniversary of the closing of the New Credit Facility.
Term Loan A is payable in quarterly installments, subject to annual
amortization, based on a principal amount equal to $325.0 million, ranging from
$27.5 million for the fiscal year 1999 to $97.5 million for the fiscal year
2004. Term Loan B is payable in annual installments, subject to annual
amortization, based on a principal amount to $200.0 million, ranging from $1.3
million for the fiscal year 1999 to $96.3 million for the fiscal year 2006.
Interest accrues on the loans made under the Revolving Credit Facility
(other than Swing Line Loans) and on Term Loan A at either LIBOR plus a
specified margin ranging from 1.125% to 2.125%, or the base rate, which is the
higher of NationsBank's prime rate and the federal funds rate plus 0.50% (the
"Base Rate"), plus a specified margin ranging from 0.125% to 1.125%, at the
Company's option. Interest accrues on Term Loan B at either LIBOR plus a
specified margin ranging from 1.75% to 2.375%, or the Base Rate plus a specified
margin ranging from 0.75% to 1.375%, at the Company's option. Swing Line Loans
will bear interest at the Base Rate plus a specified margin ranging from 0.125%
to 2.125%. The applicable margins will be determined by reference to a leverage
ratioNotes of the Company
and its subsidiaries.
The aggregate amount outstanding under the New Credit Facility will be
prepaid by amounts equal to the net proceeds, or a specified portion thereof,
from certain indebtedness and equity issuances and specified asset sales by the
Company and its subsidiaries, and by a specified percentage of cash flow in
18
excess of certain expenditures, costs and payments. The Company may at its
option reduce the amount available under the New Credit Facility to the extent
such amounts are unused or prepaid in certain minimum amounts, provided that any
holder of Term Loan B shall have, under certain circumstances, the right to
refuse to permit the Company to optionally prepay all or any portion of Term
Loan B.
The New Credit Facility is secured by a security interest in substantially
all of the real and personal property, tangible and intangible, of the Company
and its domestic subsidiaries as well as a pledge of all of the stock of such
domestic subsidiaries, a pledge of not less than 65% of the voting stock and all
of the non-voting common stock of each direct foreign subsidiary of the Company
and each direct foreign subsidiary of each domestic subsidiary of the Company,
and a pledge of all of the capital stock of any subsidiary of a subsidiary of
the Company that is a borrower under the New Credit Facility. The security
interest, other than the pledge of stock, will be released if the unsecured
long-term indebtedness of the Company has received a certain minimum rating or
the leverage ratio of the Company and its subsidiaries has decreased below a
certain threshold. The New Credit Facility is guaranteed by all of the domestic
subsidiaries of the Company.
The New Credit Facility contains a number of significant covenants that,
among other things, restrict the ability of the Company to dispose of assets,
incur additional indebtedness, prepay other indebtedness, pay dividends,
repurchase or redeem capital stock, enter into certain investments or create new
subsidiaries, enter into sale and lease-back transactions, make certain
acquisitions, engage in mergers or consolidations, create liens, make capital
expenditures, or engage in certain transactions with affiliates, and that
otherwise restrict corporate and business activities. In addition, under the
New Credit Facility, the Company is required to comply with specified financial
ratios and tests, including a minimum net worth test, a fixed charge coverage
ratio, an interest coverage ratio and a leverage ratio.
Senior Subordinated Notes - The Notes bear interest at 9.25% and mature on
April 15, 2008, unless previously redeemed. Interest on the Notes is payable
semiannually on April 15 and October 15 of each year, commencing October 15,
1998. The Notes are redeemable, in whole or in part, at the option of the
Company at any time on or after April 15, 2003, at certain redemption prices,
plus accrued and unpaid interest to the date of redemption. In addition, at any
time on or prior to April 15, 2001, the Company may redeem Notes with the net
proceeds of one or more equity offerings at a redemption price equal to 109.25%
of the principal amount thereof, plus accrued and unpaid interest to the date of
redemption, provided that at least 65% of the aggregate principal amount of
Notes issued remains outstanding after each such redemption. Upon a change of
control, the Company will be required to make an offer to repurchase all
outstanding Notes at a price equal to 101% of the principal amount thereof, plus
accrued and unpaid interest to the date of repurchase.
The Notes are general unsecured obligations of the Company, subordinated in
right of payment to all existing and future senior indebtedness (as defined in
the related Indenture) of the Company, including indebtedness incurred pursuant
to the New Credit Facility. The Notes rank pari passu in right of payment with
all future senior subordinated indebtedness of the Company, if any, and rank
senior in right of payment to all future subordinated indebtedness of the
Company, if any. The Notes are guaranteed, jointly and severally on a senior subordinated basis, by the active
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 Notes are effectively subordinated in
right of payment to all indebtedness and other liabilities (including trade
payables) of the Company's subsidiaries that are not Subsidiary Guarantors.
19
If the refinancing had occurred on the later of the first day of the
respective periods, or on the date the Credit Facility was entered into, the pro
forma net earnings (loss) for the third quarter and nine months ended March 31,
1998 would have been $2.4 million, $0.07 a share, and $(330.3) million, $(10.03)
a share, respectively, as compared to actual net earnings (loss) of $(1.7)
million, $(0.05) a share and $(340.8) million, $(10.35) a share. The following
is the unaudited pro forma condensed consolidated statement of operations:
20
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
PRO-FORMA
In millions, except earnings per share THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
--------------------------------- ------------------------------------
ACTUAL ADJUSTMENTS PROFORMA ACTUAL ADJUSTMENTS PROFORMA
------- ------------ ---------- ------- ------------ ----------
1998 1998 1998 1998
Net Sales $431.7 $431.7 $ 967.6 $ 967.6
Cost of Sales 356.8 356.8 836.1 836.1
------- ------------ --------- -------- ------------ --------
Gross profit 74.9 --- 74.9 131.5 --- 131.5
Total operating expenses 51.3 --- 51.3 459.3 --- 459.3
------- ------------ --------- -------- ------------ --------
Operating income (loss) 23.6 23.6 (327.8) (327.8)
Interest expense 28.2 (6.4) 21.8 63.7 (16.4) 47.3
Other income (expense), net 2.8 2.8 2.8 2.8
------- ------------ --------- -------- ------------ --------
Earnings (loss) before income
taxes, distributions on Company
obligated mandatorily redeemable
convertible preferred securities
and extraordinary loss (1.8) 6.4 4.6 (388.7) 16.4 (372.3)
Income taxes (benefit) (4.4) 2.3 (2.1) (54.3) 5.9 (48.4)
Distributions on Company obligated
mandatorily redeemable convertible
preferred securities 4.3 4.3 5.7 5.7
------- ------------ --------- -------- ------------ --------
Earnings (loss) before
extraordinary loss (1.7) 4.1 2.4 (340.1) 10.5 (329.6)
Extraordinary loss, net of tax benefit
of $0.4 million --- (0.7) (0.7)
------- ------------ --------- -------- ------------ --------
Net earnings (loss) $ (1.7) $ 4.1 $ 2.4 $(340.8) $ 10.5 $(330.3)
======= ============ ========= ======== ============ ========
Earnings (loss) per common share:
Earnings (loss) before
extraordinary loss $(0.05) $ 0.07 $(10.33) $(10.01)
Extraordinary loss --- --- (0.02) (0.02)
------- ------------ --------- -------- ------------ --------
Net earnings (loss) per
common share $(0.05) $ 0.07 $(10.35) $(10.03)
======= ============ ========= ======== ============ ========
The pro-forma adjustment is attributable to lower interest costs and bank
fees associated with the new capital structure put in place on April 28, 1998.
21
NOTE 10 - FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES
The Company conducts a significant portion of its business through
subsidiaries. The Notes of the Company are guaranteed, jointly and severally on
a senior subordinated basis, by the active domestic subsidiaries of the Company
other than BTI Capital Trust and certain domestic subsidiaries owned by a
foreign subsidiary of the Company. BTI Capital Trust, such domestic subsidiaries
owned by a foreign subsidiary and the foreign subsidiaries of the Company have
not guaranteed the Notes (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 athe condensed consolidating balance sheetsheets as of MarchDecember
31, 1998 aand June 30, 1998, the condensed consolidating statementstatements of operations
for the ninethree and six months ended MarchDecember 31, 1998 and a1997 and the condensed
consolidating statement of cash flows for the ninesix months ended MarchDecember 31, 1998
and 1997, for the Subsidiary Guarantors, the Non-
GuarantorNon-Guarantor Subsidiaries, Parent
only and the Company consolidated.
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 1998
(UNAUDITED)10
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1998
(Unaudited)
IN MILLIONS
In millionsNON-
SUBSIDIARY NON-GUARANTORGUARANTOR PARENT
GUARANTORS SUBSIDIARIES ONLY ELIMINATIONS CONSOLIDATED
-------------- --------------- ----------- ---------------- --------------
------------- ------------
ASSETS
Cash and cash equivalents $ 5.64.4 $ 18.521.9 $ ---6.7 $ 24.1-- $ 33.0
Accounts receivable, net 466.8 215.8 (362.5) 320.1principally trade 647.2 167.6 0.7 (530.7) 284.8
Inventories 61.2 45.9 --- 107.158.9 58.4 -- -- 117.3
Other current assets 56.8 25.2 --- 82.0
-----------6.4 20.0 12.2 -- 38.6
-------------- ---------------- ------------ ---------------- ------------- ------------
Total current assets 590.4 305.4 (362.5) 533.3716.9 267.9 19.6 (530.7) 473.7
Property, plant and equipment, net 201.7 126.2 --- 327.9172.7 167.9 34.6 (5.6) 369.6
Intangibles, net 561.5 164.8 --- 726.3510.3 176.7 -- -- 687.0
Net assets held for sale --- 28.4 --- 28.4-- 58.3 -- 1.8 60.1
Other assets 1038.1 2.6 (999.1) 41.6
----------- -------------- ------------- ------------26.2 3.3 1,031.6 (1,012.2) 48.9
Total assets $2,391.7 $627.4 $(1,361.6) $1,657.5
===========$ 1,426.1 $ 674.1 $1,085.8 $ (1,546.7) $ 1,639.3
============== ============================= ============ ================== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Notes Payablepayable and current portion of
long-term debt $ 20.4-- $ 51.827.0 $ ---528.0 $ 72.2-- $ 555.0
Accounts payable 105.4 165.4 --- 270.8220.3 336.2 260.6 (519.9) 297.2
Accrued expenses 325.1 214.2 (324.3) 215.0
-----------138.1 38.6 53.2 (8.4) 221.5
-------------- ----------------------------- ------------ ---------------- ------------
Total current liabilities 450.9 431.4 (324.3) 558.0358.4 401.8 841.8 (528.3) 1,073.7
Long-term debt 781.7 29.2 --- 810.9-- 22.2 330.0 -- 352.2
Other long-term liabilities 13.6 15.9 --- 29.5
-----------12.4 12.6 -- -- 25.0
-------------- ----------------------------- ------------ ---------------- ------------
Total liabilities $1,246.2 $476.5 $ (324.3) $1,398.4370.8 436.6 1,171.8 (528.3) 1,450.9
Company obligated mandatorily redeemable convertible
preferred securities -- -- 250.0 --- ----- 250.0
Stockholders' equity 895.5 150.9 (1,037.3) 9.1
-----------(deficit) 1,055.3 237.5 (336.0) (1,018.4) (61.6)
-------------- ----------------------------- ------------ ---------------- ------------
Total liabilities and stockholders'
equity $2,391.7 $627.4 $(1,361.6) $1,657.5
===========(deficit) $ 1,426.1 $ 674.1 $1,085.8 $ (1,546.7) $ 1,639.3
============== ============================= ============ ================ ============
2211
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 1998
(Unaudited)
IN MILLIONS
In millionsNON-
SUBSIDIARY NON-GUARANTORGUARANTOR PARENT
GUARANTORS SUBSIDIARIES ONLY ELIMINATIONS CONSOLIDATED
---------- -------------- ---------------- ------------ ----------------- ---------------
ASSETS
Cash and cash equivalents $ (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
============== ================ ============ ================== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Notes payable and current portion of
long-term debt $ -- $ 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
============== ================ ============ ================== ==============
12
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATION
THREE MONTHS ENDED DECEMBER 31, 1998
(Unaudited)
IN MILLIONS
NON-
SUBSIDIARY GUARANTOR PARENT
GUARANTORS SUBSIDIARIES ONLY ELIMINATIONS CONSOLIDATED
-------------- --------------- ------------ --------------- ---------------
Net Sales $ 567.8218.1 $ 488.1 $(88.3)218.0 $ 967.6-- $ (39.9) $ 396.2
Cost of sales 493.3 431.1 (88.3) 836.1
-------- -------- -------- --------193.7 193.5 1.8 (39.9) 349.1
-------------- --------------- ------------ --------------- ---------------
Gross profit 74.4 57.0 --- 131.5
-------- -------- -------- --------24.4 24.5 (1.8) -- 47.1
-------------- --------------- ------------ --------------- ---------------
Selling, general and administrative expenses 29.8 29.8 --- 59.93.2 9.5 10.6 -- 23.3
Research, development, and engineering expenses 37.3 12.6 --- 49.9
Repositioning and impairment charges 143.2 116.3 --- 259.5
In process research and development expenses 77.5 --- --- 77.514.8 8.4 2.5 -- 25.7
Amortization of intangibles 9.7 3.0 --- 12.7
-------- -------- -------- --------5.7 1.3 (1.0) -- 6.0
-------------- --------------- ------------ --------------- ---------------
Operating income (loss) (223.1) (104.7) --- (327.8)0.7 5.3 (13.9) -- (7.9)
Interest expense 58.0 5.7 --- 63.7-- 1.9 18.7 -- 20.6
Other income (expense), net 2.8 0.2 (0.2) 2.8
-------- -------- -------- --------(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 and extraordinary item (278.3) (110.2) (0.2) (388.7)7.8 (35.2) (0.5) (28.1)
Income tax (benefits) (49.8) (4.5) --- (54.3)taxes (benefit) (6.8) 1.8 6.8 -- 1.8
Distributions on Company obligated mandatorily
redeemable convertible preferred securities 5.7 --- --- 5.7
-------- -------- -------- ---------- -- 4.5 -- 4.5
-------------- --------------- ------------ --------------- ---------------
Net earnings (loss) $ 6.6 $ 6.0 $ (46.5) $ (0.5) $ (34.4)
============== =============== ============ =============== ===============
13
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATION
SIX MONTHS ENDED 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 (234.2) (105.7) (0.2) (340.1)
-------- -------- -------- --------(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) $(234.9) $(105.7) $ (0.2) $(340.8)
======== ======== ======== ========(48.3) $ (2.7) $ (287.8) $ (0.3) $ (339.1)
============== =============== ============ =============== ================
2316
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
SIX MONTHS ENDED DECEMBER 31, 1998
(Unaudited)
IN MILLIONS
In millionsNON-
SUBSIDIARY NON-GUARANTORGUARANTOR PARENT
GUARANTORS SUBSIDIARIES ONLY ELIMINATIONS CONSOLIDATED
-------------- --------------- ------------ --------------- -------------- ------------------------------
Cash flows from operating activities:
Net earnings (loss)earnings(loss) $ (234.9)6.7 $ (105.7)11.7 $ (0.2)(80.8) $ (340.8)(0.5) $ (62.9)
Adjustments to reconcile net earnings (loss) to net
cash used inprovided by (used in) operating activities:
Depreciation and amortization 24.2 19.2 --- 43.4
Non-cash items included in and accrual for
repositioning, impairment and other
special charges 202.5 85.4 --- 287.923.5 12.9 1.0 -- 37.4
Changes in working capital items and other (124.1) 103.5 0.2 (20.4)
----------- -------------16.0 (8.3) 24.6 0.5 32.8
-------------- --------------- ------------ --------------------------- ----------------
Net cash provided by (used in) operating activities (132.3) 102.4 --- (29.9)
----------- -------------46.2 16.3 (55.2) -- 7.3
-------------- --------------- ------------ --------------------------- ----------------
Cash flows from investing activities:
Cost of acquisitions, net of cash acquired (638.8) (71.2) --- (710.0)
Capital expenditures (13.8) (11.6) (38.5) --- (50.1)(7.4) -- (32.8)
Proceeds from sale of assets and equipment 1.90.7 2.3 --- 4.2
----------- --------------- -- 3.0
-------------- --------------- ------------ --------------------------- ----------------
Net cash (used in) investing activities (648.5) (107.4) --- (755.9)
----------- -------------(13.1) (9.3) (7.4) -- (29.8)
-------------- --------------- ------------ --------------------------- ----------------
Cash flows from financing activities:
Net change inProceeds from debt 444.3 15.4 --- 459.7
Net change in equity 343.4 --- --- 343.4
----------- --------------- 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 787.7 15.4 --- 803.1
----------- -------------(5.8) (6.0) 21.0 -- 9.2
-------------- --------------- ------------ --------------------------- ----------------
Effect of exchange rate changes on cash --- (11.9) --- (11.9)
----------- --------------- 1.9 -- -- 1.9
-------------- --------------- ------------ --------------------------- ----------------
Increase (decrease) in cash and cash equivalents 6.9 (1.5) --- 5.427.3 2.9 (41.6) -- (11.4)
Cash and cash equivalents at beginning of period (1.3) 20.0 --- 18.7
----------- -------------(22.9) 19.0 48.3 -- 44.4
-------------- --------------- ------------ --------------------------- ----------------
Cash and cash equivalents at end of period $ 5.64.4 $ 18.5 ---21.9 $ 24.1
=========== =============6.7 $ -- $ 33.0
============== =============== ============ =========================== ================
2417
NOTE 11 - FOREIGN OPERATIONS
The following financial information relates to operations in different
geographic areas:
NINEBREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
SIX MONTHS ENDED MARCHDECEMBER 31, In millions 1998 1997
1996 1995
- --------------------------------------------------------------------------------------------------(Unaudited)
IN MILLIONS
NON-
SUBSIDIARY GUARANTOR PARENT
GUARANTORS SUBSIDIARIES ONLY ELIMINATIONS CONSOLIDATED
-------------- --------------- ------------ --------------- ---------------
Net sales to unaffiliated customers:
North America $ 594.6 $379.3 $324.6 $345.6
Europe 373.0 415.6 107.1 55.4
- --------------------------------------------------------------------------------------------------
Total net sales $ 967.6 $794.9 $431.7 $401.0
- --------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes, distributions on
Company-obligated mandatorily redeemable
preferred securities and extraordinary item
Operating income (loss):
North America $ (216.4) $ 46.6 $ 88.4 $100.5
Europe (111.4) 4.0 2.4 4.0
Other income (expense), net (60.9) (21.0) 7.5 5.6
- --------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes $ (388.7) $ 29.6 $ 98.3 $110.1
- --------------------------------------------------------------------------------------------------
Identifiable assets:
North America $1,196.0 $466.6 $284.5 $240.3
Europe 461.5 410.6 219.3 38.4
- --------------------------------------------------------------------------------------------------
Total assets $1,657.5 $877.2 $503.8 $278.7
==================================================================================================
Fiscal year 1996 includes only three months of operations of MOMO, S.p.A.
which was acquired in April 1996. Fiscal year 1997 includes the acquisition of
Gallino in July 1996, United Steering Systems in October 1996 and Custom Trim in
February 1997. The nine months ended March 31, 1998 include the acquisition of
SRS in October 1997.
NOTE 12 - DIVIDENDS
On October 17, 1997 the Board of Directors decided to suspend future
dividend payments in view of the acquisition of SRS and the related financing
transactions.
Under terms of the New Credit Facility entered into on April 28, 1998, the
Company is obligated not to make restricted payments (as defined in the credit
agreement) including dividends, until the consolidated leverage ratio is equal
to or less than 3.50 to 1.00 as at the end of the four-quarter period most
recently then ended. The Company does not presently meet this standard and it
is unclear when it will be met.
NOTE 13 - STOCK OPTIONS
The Company adopted Statement of Financial Accounting Standards No. 123
(SFAS 123) "Accounting for Stock-Based Compensation", in fiscal 1997, but
elected to continue to measure compensation cost using the intrinsic value
method, in accordance with APB Option No. 25, "Accounting for Stock issued to
Employees". Accordingly no compensation cost for stock options has been
recognized in fiscal year 1996 or 1997. If the Company had accounted for its
options under the fair value method of SFAS 123 in fiscal year 1997 and 1996,
net income would have been reduced by $0.6 million and $0.3
25
million for the years ended June 30, 1997 and 1996, respectively, to the pro-
forma amounts indicated below:
YEAR ENDED JUNE 30,
--------------------------
1997 1996
------------ ------------
Cash flows from operating activities:
Net earnings(loss) $ (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 14.8 9.6 2.2 -- 26.6
Changes in millions $ 14.3 $ 62.7
Earnings per common share $ 0.45 $ 1.99
NOTE 14 - LEASES
The Company owns most of its major facilities, but does lease certain
office, factory and warehouse space and data processing and other equipment
under principally noncancelable operating leases. The minimum rental
commitments under these noncancelable operating leases is immaterial.
NOTE 15 - REVENUE BY CLASS OF SIMILAR PRODUCT
The following is a summary of revenue by class of similar product for the
last three fiscal years and for the nine months ended March 31, 1998:
NINE MONTHS ENDED
MARCH 31, 1998 1997 1996 1995
----------------- ---- ---- ----
Electronicsworking capital items and sensors 16% 34% 70% 85%
Airbag systems 22 9 23 14
Steering wheels 28 33 5other 50.5 (2.7) 243.4 0.3 291.5
-------------- --------------- ------------ --------------- ---------------
Net cash provided by (used in) operating activities 17.3 4.2 (42.5) -- Interior(21.0)
-------------- --------------- ------------ --------------- ---------------
Cash flows from investing activities:
Cost of acquisitions and plastics 13 23Capital expenditures (9.3) (17.9) (706.2) -- (733.4)
Proceeds from sale of assets 1.2 1.3 0.1 -- 2.6
-------------- --------------- ------------ --------------- ---------------
Net cash (used in) investing activities (8.1) (16.6) (706.1) -- (730.8)
-------------- --------------- ------------ --------------- ---------------
Cash flows from financing activities:
Proceeds from debt -- -- Seatbelts 20860.8 -- 860.8
Proceeds from Preference Stock Issuances -- -- 554.0 -- Other 1 1 2 1554.0
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 -- (14.5) 784.5 -- 770.0
-------------- --------------- ------------ --------------- ---------------
Effect of exchange rate changes on cash -- (4.6) -- -- (4.6)
-------------- --------------- ------------ --------------- ---------------
Increase (decrease) in cash and cash equivalents 9.2 (31.5) 35.9 -- 13.6
Cash and cash equivalents at beginning of period -- 20.0 (1.3) -- 18.7
-------------- --------------- ------------ --------------- ---------------
Cash and cash equivalents at end of period 9.2 (11.5) 34.6 -- 32.3
============== =============== ============ =============== ===============
2618
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTSOVERVIEW
IMPLEMENTATION OF OPERATIONS
OVERVIEW
General -REPOSITIONING PROGRAM
The Company formulated the Repositioning Program during the quarter ended
December 31, 1997. As of December 31, 1998, the Company had reduced its global
work force by approximately 4,300 employees (compared to a net reduction of
approximately 1,800 employees as of September 30, 1998) and closed and/or sold
approximately 40 manufacturing facilities. During the past several years, automobile manufacturers ("OEMs")
have begun consolidating their supplier base and increasing their use of full-
service suppliers that are able to provide a broad range of products and
services. In response to this trend,six months ended December
31, 1998, the Company has pursued strategic
acquisitionsincurred disruption costs of approximately $5.0 million
associated with closing and joint ventures and internal product development programs that
have enabled Breedrelocating manufacturing facilities in connection
with the Repositioning Program. These costs were included in cost of sales. The
Company expects the Repositioning Program to evolve from predominantly the producerbe substantially completed by March
31, 1999.
As of a single product
- -- electromechanical sensors ("EMS sensors") -- to a leading manufacturer of all
of the components required for complete, integrated occupant protection systems.
Recent strategic acquisitions have included, among others, the acquisition in
October 1997 of SRS, which is a leading supplier of seatbelts and airbag systems
to OEMs worldwide, the acquisition in October 1996 of the steering wheel
operations ("USS") of United Technologies, and the acquisition in February 1997
of the Custom Trim group of companies ("Custom Trim"), which leather wraps
steering wheels and produces other automotive leather wrapped products. As a
result of these acquisitions, the Company expanded its capabilities to include
the manufacture of steering wheels and accessories, seatbelt systems and
complementary airbag technology.
The rapid growth experiencedDecember 31, 1998, actions taken by the Company andin connection with the
demandRepositioning Program have resulted in approximately $90.0 million in annual
cost savings to the Company. The benefit of integrating
acquired businessescost savings realized to date has
out pacedbeen substantially offset by costs associated with an unusually high number of
product launches commenced during the development of the Company's corporate
infrastructure and systems.three months ended September 30, 1998. In
addition, the Company believes that its cost
structures and working capital requirements have increased to unacceptable
levels. Consequently, during the first quarter of the fiscal year, management
initiated a review of its global operations, cost structure and balance sheet
directed at reducing its operating expenses, manufacturing costs and increasing
productivity. This review focused on operational systems, organizational
structures, facility utilization, product offerings, inventory valuation and
other matters, including, without limitation, the deterioration of business
conditions at certain acquired businesses. As a result of this review, during
the second quarter ended December 31, 1997, the Company formulated a
repositioning plan 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 Company recorded $365.4 million
before taxes ($333.9 after taxes) of repositioning, impairment and other special
charges (a portion of which was required due to deteriorating business
conditions at an acquired business) during the second quarter ended December 31,
1997. It is anticipated that approximately $73.4 million of these costs will
result in cash outlays.
The repositioning plan is expected to be substantially completed within 15
months, and the Company believes the provisions recorded are adequate to cover
the costs associated with the plan. The Company expects the repositioning plan
to generate approximately $855 million of total cost savings, which will be
phased in through fiscal 2002. Of the $855 million in cost savings, $780
million will be cash savings primarily related to salary and benefit expense
that will not be incurred in future years due to the anticipated reduction in
the Company's global workforce and the consolidation of manufacturing, sales and
engineering facilities. The Company believes that the benefit of theanticipated cost savings
during fiscal 1999 attributable to the repositioning planRepositioning Program will be further
offset in part due to the deteriorating business conditions at USS and Custom
Trim.
27
Repositioning Charge -PRODUCT LAUNCHES
The repositioning charge aggregated $177.0 million
and included (i) $30.8 million relating to an approximately 25% reductionCompany's results of operations for the Company's global work force (or 4,900 employees) by eliminating redundant and
overlapping positions resulting from recent acquisitions as well as reducing
personnel required at USS and Custom Trim due to deteriorating business
conditions at such businesses; (ii) $31.4 million relating to the consolidation
of the Company's manufacturing, sales and engineering facilities in North
America and Europe through the elimination of approximately 50% (or 32) and 33%
(or 10) of such facilities, respectively (which includes certain facilities
being consolidated due to deteriorating business conditions at USS and Custom
Trim); (iii) $10.6 million relating to the write-down of goodwill associated
with the disposal of long-lived assets; (iv) $41.3 million relating to the
write-down to net realizable value of certain long-lived assets relating to
businesses being divested; and (v) $62.9 million relating to the write-down of
impaired production and other equipment and the write-off of assets used to
manufacture products being replaced by new technologies.
The Impairment Charge - The impairment charge aggregated $82.5 million and
related to the write-down of goodwill and other long-lived assets at USS (in
accordance with FAS 121) due to deteriorating business conditions, reflecting
the Company's determination during the quartersix months ended December 31, 1997 that1998
were adversely impacted by a material diminution innumber of factors including higher costs associated
with an unusually high number of product launches commenced during the value of USS had occurred. Whenthree
months ended September 30, 1998. During the three months ended September 30,
1998, the Company launched 44 products compared to 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 USS inon October 1996, it was aware that USS's largest original equipment
manufacturer ("OEM") customer (which accounted for approximately 50%30, 1997). A
"launch" means the start of USS's
revenues) had awardedproduction of a significant portion of its business (whichproduct and the related activities
including, among other things, manufacturing, engineering, quality, sales and
administrative support necessary to one platform) tobring a competitor of USS, signaling the OEM's intention to source
steering wheels and airbag modules from one supplierproduct into production. A "launch"
continues until such time as a unit, instead of as
separate components from two suppliers, provided the supplier had an approved
airbag module. However, the Company believed it could recover this business by
negotiatingis able to supplymeet the steering wheel component tocustomer's quality
and volume requirements for the competitor because the
competitor, although it had an approved airbag module, did not manufacture
steering wheels. At the same time, the Company worked to have its airbag module
approved by the OEM to position it to competeproduct on a consistent basis with respect to other platforms
manufactured by that OEM, which would put the Company in the position to source
USS steering wheels for those platforms.
The negotiations between the Companynormal
production resources and USS's competitor ceased in April
1997. Thereafter, the Company continued to seek the OEM's approval of its airbag
module in an effort to bid for other business from the OEM despite the
designation of twois typically a resource intensive and complex process.
As a result of the Company's competitors byhigher than normal number of launches commenced during the
OEM as preferred vendors
for airbag modules. The Company obtained the approval of a newly developed
inflator (a major component of the Company's airbag module) from the OEM on July
28, 1997, and the Company thus continued to believe that obtaining approval of
its airbag module was feasible. During the quartersix months ended December 31, 1997,1998, the Company determinedwas required to allocate
resources during such period to such launches that its effortswould have otherwise been
directed towards implementing the Repositioning Program. For example, the
Company could not implement scheduled personnel reductions during such period
pursuant to be named as a preferred vendor of
integrated steering wheels would not be successful or would be materially
delayed. The Company concluded that, consequently, USS would likely experience a
materialthe Repositioning Program and, continuing decline in the revenue from USS's existing contracts assome instances, additional
personnel were hired to support these contracts were completed and not replaced on a timely basis with new
business.launches. In addition, the Company
was informed byincurred 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 OEM during such quarter
that sales volume onincreased costs relating to higher material content
requirements, the existing platform would decrease by approximately 30%
from the sales volume projectedCompany is seeking customer approval of certain engineering
changes with respect to such platform at the timecertain programs that the Company acquired USS, and that the Company's revenue attributable to all
platformsbelieves will lower
material costs for such OEM would be impacted by a 2 1/2%programs, has sought price decrease starting
January 1, 1998 as well as a yet to be determined price decrease starting
January 1, 1999.
Other Special Charges - With the acquisition of SRS, the Company conducted
an evaluationreductions from certain
vendors and, review of the assets acquired.in some cases, has increased prices for subject products. As a
result of such review,
the Company recorded a $77.5 million charge related toreallocation of resources and these significant costs, these
launches adversely impacted the write-offCompany's results of in-
process research and development for acquired technology that has not been
28
established as technologically feasible. The Company also reviewed its
inventories for slow-moving and excess items in light of the SRS acquisition and
planned realignment of its manufacturing operations. The Company also
reevaluated its customer contracts relating to products lines that will be
discontinued. As a result, the Company recorded a $28.4 million charge for
inventory and long-term contracts relating to manufacturing processes that will
be exited (which is reflected as a charge to cost of sales). The $28.4 million
charge included $15.5 million of expected losses under a contract entered into
in February 1996 (under which production began in August 1997) with a European
OEM to supply side impact airbags, which had not been previously manufactured by
the Company. This amount represented estimated losses expected to be incurred
over the five-year expected life of the platform to which the contract related.
These losses resulted from substantial cost overruns due to significant
additional testing requirements, design engineering costs and production
problems experienced in connection with that contract. The contract has been
terminated effective January 1999.
Custom Trim - During the quarter ended December 31, 1997, it became
apparent that a number of significant customers of Custom Trim intended to shift
suppliers or to internalize their leather wrapping functions. Consequently, the
Company concluded that it could expect a material decline in revenues from lost
business and price reductions aimed at retaining business attributable to Custom
Trim's historical business. The Company also concluded that it would not be
able to replace these customers with new customers in the foreseeable future.
THREE AND NINE MONTHS ENDED MARCH 31, 1998 (FY98) COMPARED TO THREE AND NINE
MONTHS ENDED MARCH 31, 1997 (FY97)
Net salesoperations for the three
and ninesix months ended December 31, 1998 and reduced the benefit of cost savings
realized under the Repositioning Program to date. The Company does not believe
that the product launches commenced during the 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 DECEMBER 31, 1998 were $431.7COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1997
Net sales increased 16% to $396.2 million and $967.6for the three months ended December
31, 1998 from $340.7 million respectively, an increase of $222.3 million or 106%,
and $417.0 million or 76%, respectively, fromfor the comparable periods of the
prior year.three months ended December 31, 1997. The
increase in net sales was primarily due to growth from the acquisition of
USS on October 25, 1996, Custom Trim on February 25, 1997 and SRS on October 30,
1997. These acquisitions1997, which accounted for approximately $242.0 million and $421.8$87.0 million of the increase in net
sales for the three and nine months ended MarchDecember 31, 1998, respectively. The increases were1998. That increase in net sales
was partially offset by decreaseda reduction in net sales attributable to USS and Custom
Trim due to deterioratingpreviously announced decrease in sales and a decrease in sales of
EMS sensors. Deteriorating business conditions at USS and Custom Trim and a decline inreduced
net sales of EMS sensors and inflator and airbag modules.by approximately $8.5 million. The Company expects that net sales
attributable to USS and Custom Trim will continue to decline significantly
forduring the foreseeable future.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 sensorsensors sales decreased 52% to $13.4 million for the three and nine months ended
MarchDecember 31, 1998 were
$26.6from $28.1 million and $85.6 million, afor the three months ended December 31,
1997. This decrease of 32% and 33%, respectively, from
the comparable prior year periods. These decreases arewas primarily due to lower demand as major customers
continued to shift from EMS sensors to electronic sensors that are sourced
internally. Inflator and airbag moduleThe Company believes that sales (excluding SRS) decreased 6% and 24%of EMS sensors will continue to
$22.6decline in the foreseeable future.
Cost of sales increased 12% to $349.1 million and $63.0 million, respectively, for the three and nine months
ended March 31, 1998 as compared to the comparable prior year periods. The
decrease was primarily due to the planned phase-out of all mechanical airbag
systems at Chrysler and Fiat, and the reduction of shipments into Asia of all
inflators and airbags due to the economic situation in Asia.
The Company's mix of sales by class of similar product has experienced
certain changes as described above. The other principal changes are due to the
acquisition of SRS in October 1997 which had sales by class of similar product
weighted differently from that of the Company. Note 15 to the
29
Consolidated Condensed Financial Statements discloses revenue by class of
similar product for fiscal 1997, 1996 and 1995 and for the nine months ended
March 31, 1998.
As disclosed in Note 11 to the Consolidated Condensed Financial Statements,
the Company earned the majority of its revenues in fiscal 1997 in Europe,
whereas in earlier years the Company earned the majority of its revenues in
North America. This change occurred due to the acquisition of MOMO, S.p.A. in
April 1996 and Gallino in July 1996, both of which are based in Europe and earn
all of their revenues in Europe. In October 1997 the Company acquired SRS which
earns approximately 30% of its revenues in Europe and the remainder in North
America, resulting in the Company's revenues for the nine months ended March 31,
1998 to be earned primarily in North America.
Net sales for the third quarter ended March 31, 1998 increased 27% to
$431.7 million from $340.7 million in the second quarter ended
December 31, 1998. The quarter-over-quarter increase was primarily attributable to the
Company's acquisition of SRS on October 30, 1997. Excluding the SRS acquisition,
net sales for the third quarter of fiscal 1998 were comparable with sales for
the second quarter.
Cost of salesfrom $312.5 million for the three and nine months ended March 31, 1998 were
$356.8 and $836.2, respectively, as compared to $171.4 million and $433.9
million, respectively, for the quarter and nine months ended MarchDecember 31,
1997. The increase primarily reflected the additional production costs of $208.1
million and $375.9 million for the quarter and ninethree months
ended MarchDecember 31, 1998, resulting from the acquisition of Custom Trim during fiscal 1997 and 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 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 $4.5 million and $9.0$2.1 million during the quarter and ninethree
months ended MarchDecember 31, 1998 related to disruption costs associated with the
closing of seven manufacturing facilities andin connection with the ongoing relocation of a facility in North
America to Mexico,Repositioning
Program, as well as a $28.4$1.3 million charge inrelating to settlement of a warranty
claim.
Gross profit increased 67% to $47.1 million for the second quarterthree months ended December
31, 1997, related to other special charges, (see "Repositioning
and Other Special Charges" in Note 6 above).1998 from $28.2 million for the three months ended December 31, 1997. Gross
profit as a percentage of net sales was 17% and 14%12% for the three and
nine months ended MarchDecember
31, 1998 respectively, compared to 18% and 21%,
respectively,8% for the comparable periodsthree months ended December 31, 1997. Gross
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 prior year. TheSRS 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 those of lower margin products, primarily
seat belts acquired in recent
acquisitions andthe SRS acquisition, (ii) disruption costs. Also,costs incurred
during the ninethree months ended MarchDecember 31, 1998, (iii) higher production costs
associated 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
attributable to products sold by the Company incurred $28.4 million of other special charges and $9.0
million of disruption costs. Excluding these special charges and disruption
costs, gross profit as a percentage of net sales would have been 18% and 17% forduring the three and nine months ended
MarchDecember 31, 1998, respectively.1997.
Selling, general and administrative expenses increased 9% to $23.3 million for
the three and nine months ended MarchDecember 31, 1998 were $22.1from $21.3 million and $59.7 million (5% and 6% of net
sales), respectively, compared to $19.1 million and $51.3 million (in each case
9% of net sales) for the comparable periods ofthree months
ended December 31, 1997. The increase was primarily attributable expenses
aggregating $1.1 million incurred to settle a claim relating to the prior year. Selling,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 as a percentage of net sales decreased primarily as
a result ofwas partially offset by cost improvementssavings
associated with the reduction of headcount and
reduced spending.Repositioning Program.
20
Research, development and engineering expenses for the three and nine
months ended March 31, 1998 were $22.4increased 38% to $25.7 million and $49.9 million, respectively,
as compared to $9.5 million and $27.3 million for the comparable periods in the
prior year. These increases primarily reflect costs associated with acquired
businesses of $14.7 million and $23.8 million for the three and nine months
ended March 31, 1998, respectively. As discussed in Note 6 to Consolidated
Condensed Financial Statements, the Company
30
incurred a $77.5 million charge in the second quarter of fiscal 1998 relating to
the write-off of in- process research and development for technology acquired
with SRS that has not yet been established as technologically feasible. The
Company expects to benefit from this technology as the products are launched
over the next five years.
Operating income
for the three months ended MarchDecember 31, 1998 from $18.6 million for the three
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 $2.1 million during the three 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 three months ended December 31, 1998 was $23.6$7.9 million or 5% of net sales
compared to $7.2$352.6 million or 3% of net sales for the prior year period. The increase in operating incomethree months ended December 31, 1997.
Operating loss as a percentage of net sales was primarily due to cost reductions from the repositioning plan. Savings
associated with the repositioning plan were approximately $15 million during the
third quarter of fiscal year 1998. Also, included in cost of sales during(2)% for the three months ended
MarchDecember 31, 1998 were disruption costs of $4.5 million.
Exclusive of the effects of disruption costs, operating income would have been
$28.1 million or 7% of net sales ofcompared to (103)% for the three months ended MarchDecember 31,
1998.
Operating income (loss)1997. The operating loss for the ninethree months ended MarchDecember 31, 1998 decreased
significantly from last year's comparable period1997 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 repositioning, impairment and other special charges aggregating $365.4 million
includedshift in
cost of sales and operating expenses. Also, included in cost of
sales during the three months ended March 31, 1998 were disruption costs of $9.0
million. Exclusive of the effects of the repositioning, impairment and other
special chargesproduct mix, product launches, and disruption costs operating income would have been $46.6
million or 5% of net sales for the nine months ended March 31, 1998, compared to
$33.8 million or 6% of net sales for the nine months ended March 31, 1997.
Operating income for the third quarter of fiscal year 1998 increased 86%
from the second quarter of fiscal year 1998. Operating income was $23.6
million, or 5% of net sales, versus $12.3 million, or 4% of net sales, in the
second quarter of fiscal year 1998, before repositioning, impairment and other
special charges. This quarter-over-quarter increase was largely attributable to
cost reductions from the repositioning plan and the contribution of SRS business
for a full three months. The operating income gains were partially offset by
declining sales volumes for the electromechanical sensor business and lower
product pricing.discussed above.
Interest expense for the three and nine months ended MarchDecember 31, 1998 was
$28.2 million and $63.6 million, respectively, an increase of $21.5 million and
$45.9 million, respectively, from the comparative prior year periods. The
increase in interest expensedecreased 24% to
$20.6 million. This decrease was primarily due to lower domestic and
international interest rates, this year versus last year.
During the increase in average
outstanding borrowings as a result of the acquisitions of USS and Custom Trim in
fiscal 1997 and SRS in fiscalthree months ended December 31, 1998, and the fees associated with the short-term
bridge loan facility.
The estimated fiscal 1998 annual effective tax rate has been revised to a
12% benefit to reflect the impact of certain repositioning, impairment and other
special charges (i) taken in jurisdictions where the Company may not be able to
recognizerecorded a foreign
tax expense in the full incomeamount of $1.8 million. No tax benefit was recognized for
either domestic or foreign purposes due to limitations imposed by Financial
Accounting Standards Statementthe provisions of SFAS No. 109 (SFAS 109) and (ii) no tax benefit on
write-down of goodwill included in the repositioning and impairment charge.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.
Because of limitations on the utilization of net operating losses fromFor both domestic and foreign jurisdictions, a valuation allowance for a portion of the
deferred income tax benefit related to the repositioning, impairment and the other special chargescurrent loss incurred has been
recorded.
See Note 721
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 Financial Statements.acquisition of SRS on October 30,
1997, which accounted for approximately $273.5 million of the increase 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 extraordinaryCompany 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 recordedof 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
nineforeseeable future.
Cost of sales increased 34% to $640.8 million for the six months ended MarchDecember
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. 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
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 write-offclosing of
unamortized debt costsmanufacturing facilities in connection with the Repositioning Program, as well
as $1.3 million charge relating to settlement of the previous bank credit
facility.
31
The Company's net loss of $(1.7)a warranty claim.
Gross profit increased 67% to $94.4 million for the third quartersix months ended MarchDecember
31, 1998 includes $3.3from $56.5 million (after tax) of excess bank fees related to the
Credit Facility that was refinanced on April 28, 1998. Excluding the excess bank
fees on the Credit Facility, net income for the third quarter was $0.9 million,
or $0.03 per share. This compares to a net loss (before repositioning,
impairment and other special charges and extraordinary items) of $(0.8) million,
or $(0.03) per share, in the second quartersix months ended December 31, 1997. Excess bank
fees representsGross
profit as a percentage of net sales was 13% for the amountsix 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 feesales 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 18% to $44.2 million for
the six months ended 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 October 1997.
This increase was offset partially by interest savings resulting from voluntary
debt reductions.
During the six months ended December 31, 1998 the Company recorded a foreign tax
expense of $2.3 million which was partially offset by a $0.5 million 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 Credit Facility in
excess of the amortization of the fees related to the new long-term capital
structure.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 interest payments on outstanding indebtedness.expenditures. The Company believes thatintends to fund
these cash generatedneeds with cash from operations together with borrowings available
under its New Credit Facility will be sufficientcredit 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 meetthe 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 working capital,
capital expenditures and debt service needs forfailure 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 foreseeable future.
Cash flows from operating activities forSecond Waiver, the
nine months ended March 31,
1998maximum borrowing
23
availability under the revolving line of credit was a deficitincreased to $125.0 million
(including letters of $29.9credit). As of February 15, 1999, the Company had an
aggregate of $570.9 million comparedof 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 a $47.8 million surplus for
the nine months ended March 31, 1997.Second Waiver.
The decreaseCompany is not currently in cash flows was primarily
attributedviolation 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 lossworth covenant and the existing event of $340.8 million, netdefault 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 noncash itemstwo
covenants presently waived and accruals includedit 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 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 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 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 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
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 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.
The cash flow from operations for the six months ended December 31, 1997 was
adversely affected by the $365.4 million in one-time charges recorded in the
repositioning and other special charges.quarter ended December 31, 1997, partially offset by changes in working capital
items.
Capital expenditures aggregated $50.1$32.3 million for the ninesix months ended MarchDecember
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.
Duringproducts and
reconfigurations of manufacturing facilities relating to the nine months ended March 31, 1998,Repositioning
Program. The Company estimates that capital expenditures will aggregate
approximately $38.0 million during the remainder of fiscal 1999. Cash
investments in BSRS during the period were not material. The Company's ability
to invest in BSRS is limited under the Company's credit facility and the Senior
Subordinated Notes due 2008.
The Company increased its
outstanding indebtedness by $459.7 million which resulted primarilyhas market risk exposure from the acquisitionimpact of SRSinterest rate changes.
The Company has elected to manage this risk through the maturity structure of
its borrowings and through the use of interest rate swap and cap instruments.
Currently, interest rates affecting approximately 35% of the Company's debt will
vary directly with market rates due to the short-term nature of its maturity and
the financingabsence of capital expenditures.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 Year 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 had
unused availability under its New Credit Facilityis 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 March 31, 1998commonization in new
areas, examines established processes with an eye toward improvements and
compares procedures to determine best practices. The result of approximately $90 million.
On April 28, 1998,this work is the
Company replaced its Credit Facilitydevelopment 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 New
Credit Facility, under whichAIAG and in conjunction with our major customers, the Company
has $675 million of aggregate borrowing
availability.used the AIAG guidelines for Y2K compliance. The New Credit Facility consists of two term loans totaling $525
million and a $150 million revolving credit facility (which was largely undrawn
at closing). At April 28, 1998phases prescribed by AIAG
are:
AWARENESS Within the Company had an aggregatethe level of $525 million of
borrowings outstanding under the New Credit Facility, which bore interest at a
weighted average rate of 8% per annum at such date. Under the termsawareness of the New
Credit Facility,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
is prohibited from making certain restricted
payments (as defined inassessed how critical the Credit Agreement) including dividends, untilsystem was to the consolidated leverage ratio is equal to or less than 3.50 to 1.00 as atbusiness operation and the endpotential
impact of failure. Resources for remediation were allocated based on the four-quarter period most recently then ended.level
of risk assigned. This phase has been completed.
REMEDIATION The Company does not
presently meet this standardhas targeted a completion date of March 1999 for
remediation of its critical systems and it is unclear when itwill continue to address remediation of
other systems on a prioritized basis thereafter.
TESTING After remediation, all implemented solutions will be met. Also,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 issuedexpects all critical systems to
be accepted and sold $330 million of the Notes in a private transaction under
Rule 144A under the Securities Act of 1933.implemented by August 31, 1999.
The interest rate on the Notes is
9.25%.
Based on a recent assessment, the Company has determined that it will be required to modify or replace
portions of its software and hardware so that its computer systems will function properly
with respectutilize 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 dates insell do not require remediation to be
Year 2000 compliant. Accordingly, the year 2000 and
thereafter. The Company presently believes that with modifications to existing
software and conversions to new software,does not believe the Year 2000
issue will not pose
significant operational problems for its computer systems. Thepresents a material exposure as it relates to the Company's products. In
addition, the Company cannot
currently quantify the costs of these modifications and
32
conversions. However, if such modifications and conversions are not made, or are
not timely completed,has gathered information about the Year 2000 Issuecompliance
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 havematerially 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 Company has
incurred approximately $2.5 million ($2.5 million expensed) relating for all
phases of the Year 2000 project. Of the total remaining project costs, the
remaining $4.5 million relates to repair of hardware and software 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
materialnegative impact on its business operations or financial statements. For example,
the operationsfailure of certain of the Company.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
production.
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 its ultimate scope, as
well as the 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.
3328
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 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 -
None
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendmentreport to be signed on its behalf by the
undersigned thereunto duly authorized.
BREED TECHNOLOGIES, INC.
September 28, 1998Breed Technologies, Inc.
(REGISTRANT)
February 16, 1999
By: /s/ Frank J. Gnisci
----------------------------------
Frank J. Gnisci
Executive Vice President and
ChiefJ.F. Gallagher
Cheif Financial Officer
3430