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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the quarterly period ended: September 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Commission File No. 1-11474
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BREED TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
Delaware 22-2767118
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
5300 Old Tampa Highway
Lakeland, Florida 33811
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(941) 668-6000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
--------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO __.
As of November 12, 1998,36,849,438 shares of the registrant's common
stock, par value $.01 per share, were outstanding.
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INDEX
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets - September 30, 1998
(Unaudited)and June 30, 1998 ........................... 1
Consolidated Condensed Statements of Operations (Unaudited)
Three months ended September 30, 1998 and 1997.......... 3
Consolidated Condensed Statements of Cash Flows (Unaudited)
Three months ended September 30, 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 ...................... 16
PART II. OTHER INFORMATION
ITEM 3. Legal Proceedings.............................................. 20
ITEM 4. Submission of Matters to a Vote of Security Holders............ 20
ITEM 6. Exhibits and Reports on Form 8-K .............................. 20
SIGNATURES ............................................................ 21
i
PART I - FINANCIAL INFORMATION6
ITEM 1. FINANCIAL STATEMENTS
BREED TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
IN MILLIONS, EXCEPT FOR SHARE DATA
September 30, June 30,
1998 1998
------------ ----------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $21.4 $44.4
Accounts receivable, principally trade 283.4 275.3
Inventories:
Raw materials 56.8 75.0
Work in process 31.2 18.2
Finished goods 29.3 15.9
-------- --------
Total Inventories 117.3 109.1
-------- --------
Income tax receivable 2.2 64.6
Prepaid expenses and other current assets 31.6 27.7
-------- --------
Total Current Assets 455.9 521.1
Property, plant and equipment, net 373.3 365.2
Intangibles, net 696.4 692.1
Net assets held for sale 38.2 29.0
Other assets 49.4 42.5
-------- --------
Total Assets $1,613.2 $1,649.9
======== ========
See Notes to Consolidated Condensed Financial Statements.
1
BREED TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
IN MILLIONS, EXCEPT FOR SHARE DATA
September 30, June 30,
1998 1998
------------ ----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Notes payable and current portion of
long-term debt (Note 3) $42.2 $46.9
Accounts payable 272.7 254.9
Accrued expenses 207.7 233.2
-------- --------
Total Current Liabilities 522.6 535.0
-------- --------
Long-term debt (Note 3) 834.7 851.1
Other long-term liabilities 25.7 25.6
-------- --------
Total Liabilities 1,383.0 1,411.7
-------- --------
Company obligated mandatorily redeemable
convertible preferred securities 250.0 250.0
Stockholders' Deficit:
Common stock, par value $0.01, authorized
75,000,000 shares, issued and outstanding
36,849,438 and 36,850,261 shares at
September 30, 1998 and June 30, 1998,
respectively 0.4 0.4
Series A Preference Stock par value $0.01,
authorized 5,000,000 shares, issued and
outstanding 1 share at September 30, 1998
and June 30, 1998 -- --
Additional paid-in capital 197.6 197.6
Warrants 1.9 1.9
Retained deficit (212.5) (184.0)
Accumulated other comprehensive
income (Notes 4 and 5) (7.0) (27.4)
Unearned compensation (0.2) (0.3)
-------- --------
Total Stockholders' Deficit (19.8) (11.8)
-------- --------
Total Liabilities and Stockholders'
Deficit $1,613.2 $1,649.9
======== ========
See Notes to Consolidated Condensed Financial Statements.
2
BREED TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
IN MILLIONS, EXCEPT PER SHARE DATA
Three Months Ended
September 30,
------------------
1998 1997
Net sales $339.1 $195.2
Cost of sales 291.7 166.9
------ ------
Gross profit 47.4 28.3
------ ------
Operating expenses:
Selling, general and administrative expenses 20.9 16.2
Research, development and engineering expenses 23.7 8.9
Amortization of intangibles 5.8 2.0
------ ------
Total operating expenses 50.4 27.1
------ ------
Operating income (loss) (3.0) 1.2
Interest expense 22.1 8.4
Other income (expense), net 1.0 (0.4)
------ ------
Earnings (loss) before income taxes, and
distributions on Company obligated
mandatorily redeemable convertible
preferred securities (24.1) (7.6)
Income taxes (benefit) (Note 6) -- (3.4)
Distributions on Company obligated mandatorily
redeemable convertible preferred securities 4.4 --
------ ------
Net (loss) $(28.5) $(4.2)
====== ======
Earnings (loss) per share (Note 7):
Basic earnings (loss) $(0.77) $(0.13)
====== ======
Diluted earnings (loss) $(0.77) $(0.13)
====== ======
Shares used for computation:
Basic 36.850 31.682
Diluted 36.850 31.682
See Notes to Consolidated Condensed Financial Statements.
3
BREED TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
IN MILLIONS
Three Months Ended September 30,
-------------------------
1998 1997
--------- --------
Cash Flows from Operating Activities:
Net (loss) $(28.5) $(4.2)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 18.6 12.7
Changes in working capital items and other 33.6 (16.5)
--------- --------
Net cash provided by (used in)operating
activities 23.7 (8.0)
--------- --------
Cash Flows from Investing Activities:
Capital expenditures (18.5) (6.9)
Proceeds from sale of assets 0.1 0.4
--------- --------
Net cash used in investing activities (18.4) (6.5)
--------- --------
Cash Flows from Financing Activities:
Proceeds from (repayment of) debt, net (21.1) 13.1
Cash dividends paid -- (2.2)
Proceeds from common stock issued -- 0.2
--------- --------
Net cash provided by (used in)financing
activities (21.1) 11.1
--------- --------
Effect of exchange rate changes on cash (7.2) (3.2)
--------- --------
Net decrease in cash and cash equivalents (23.0) (6.6)
Cash and cash equivalents at beginning of period 44.4 18.7
--------- --------
Cash and cash equivalents at end of period $21.4 $12.1
========= ========
See Notes to Consolidated Condensed Financial Statements.
4
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
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 months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
June 30, 1999. The consolidated financial statements include the accounts of
Breed and all majority owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated. For further information, refer to the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K/A for the year ended June 30, 1998.
POST RETIREMENT HEALTH CARE BENEFITS- The Company's accumulated post retirement
benefit obligation of $3.5 million as of June 30, 1998 is unfunded.
NOTE 2 - REPOSITIONING AND IMPAIRMENT CHARGES
During the quarter ended December 31, 1997, the Company formulated a
repositioning program which is intended to (i) enhance the Company's
competitiveness and productivity, (ii) reduce costs and increase asset control
and (iii) improve processes and systems (the "Repositioning Program"). The
Company expects that the Repositioning Program will be substantially completed
by March 31, 1999.
During the three months ended September 30, 1998, the repositioning and
impairment accrual was reduced by $5.7 million as a result of cash charges. The
following table sets forth the details and the cumulative activity relating to
the repositioning and impairment charge as of September 30, 1998:
Accrual
Accrual Balance at
Balance at Cash Non-Cash September
IN MILLIONS June 30, 1998 Reductions Reductions 30, 1998
- -------------------------- ------------- ---------- ----------- ------------
Headcount reductions $15.9 $3.2 $-- $12.7
Facility consolidations 18.9 2.5 -- 16.4
- -------------------------- ------------- ---------- ----------- ------------
Total $34.8 $5.7 $-- $29.1
========================== ============= ========== =========== ============
5
NOTE 3 - LONG-TERM DEBT
A summary of long-term debt follows:
Three months ended,
-------------------------
September 30, June 30,
1998 1998
------------ -----------
Term Loan A, interest at 7.815% and 7.825% at
September 30, 1998, and June 30, 1998, respectively,
installments due 1999 through 2004 $297.6 $309.2
Term Loan B, interest at 8.065% and 8.075% at
September 30, 1998, and June 30, 1998, respectively,
installments due 2004 through 2006 190.4 197.8
Senior Subordinated Notes, interest at
9.25%, due April 15, 2008 330.0 330.0
Foreign short-term lines of credit, weighted average
interest rate of 6.8%, installments due various 29.4 30.4
Mortgages and equipment financing loans 29.5 30.6
------------ -----------
Total debt 876.9 898.0
------------ -----------
Less current maturities 42.2 40.9
------------ -----------
Total long-term debt $834.7 $851.1
============ ===========
At September 30, 1998, the Company had an aggregate of $488.0 million of
borrowings outstanding under the credit facility and had aggregate borrowing
availability thereunder of $137.3 million. During the three months ended
September 30, 1998, the Company decreased its outstanding indebtedness by $21.0
million. The decrease resulted from a $19.0 million voluntary prepayment toward
outstanding term loan balances under the credit facility and the repayment of
$2.0 million of borrowings outstanding under short-term lines of credit of the
Company's foreign subsidiaries.
NOTE 4 -COMPREHENSIVE INCOME
Effective July 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No.
130 establishes new rules for the reporting and display of comprehensive income
and its components. The adoption of this Statement requires that foreign
currency translation adjustments be included in other comprehensive income,
which prior to adoption were reported separately in stockholders' equity. There
is no tax effect because the Company intends to reinvest earnings in foreign
business operations. Prior year financial statements have been reclassified to
conform to the requirements of SFAS No. 130.
Three months ended September 30,
---------------------------
1998 1997
---------- ---------
Net (loss) $(28.5) $(4.2)
Foreign currency transistion adjustment 20.4 (3.2)
---------- ---------
Comprehensive income (loss) $(8.1) $(7.4)
========== =========
6
NOTE 5 - FOREIGN CURRENCY TRANSLATIONS
The Company translates foreign currencies into U.S. dollars using year-end
exchange rates for foreign assets and liabilities and weighted average rates for
foreign income and expenses. Translation gains and losses arising from the
conversion of the foreign balance sheets and income statements into U.S. dollars
are reflected as a separate component of comprehensive income and included in
other comprehensive income in accumulated stockholders' deficit. With respect to
operations in Mexico, the functional currency is the U.S. dollar, and any gains
or losses from translations are included directly in income. During the three
months ended September 30, 1998 major European currencies strengthened relative
to the U.S. dollar. As a result, the conversion of foreign balance sheets into
U.S. dollars improved the foreign currency translation adjustment reported for
such three month period and increased the related assets and liabilities as
measured in U.S. dollars. The change in the U.S. dollar during the quarter ended
September 30, 1998 did not have a material impact on the result of operations.
NOTE 6 -INCOME TAXES
During the three months ended September 30, 1998, the Company recorded a
domestic benefit of $0.5 million, which was fully offset by a $0.5 million
foreign expense. No other tax benefit was recognized for either domestic or
foreign purposes due to the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). SFAS No. 109
requires a valuation allowance to reduce the deferred tax assets reported if,
based on the weight of the evidence, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The need for a
valuation allowance was addressed separately for domestic and foreign purposes.
For domestic purposes, the Company is in a cumulative loss position and pursuant
to SFAS No. 109, a valuation allowance was recorded by the Company to offset the
portion of the domestic deferred tax asset which, upon reversal, could not be
carried back against prior years taxable income. A valuation allowance has been
recognized to reduce to zero, foreign deferred tax assets, primarily related to
net operating loss carryforwards in Finland, Spain and the U.K. and
restructuring charges in Italy. A portion of income taxes will be paid in some
foreign jurisdictions because income earned could not be offset against net
operating losses.
7
NOTE 7 - EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of the numerator and denominator
of the basic and diluted earnings (loss) per share calculations:
Three Months Ended
September 30,
------------------------------
1998 1997
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
BASIC EARNINGS PER SHARE
Net (loss) applicable to common stock $(28.5) $(4.2)
Weighted average common shares outstanding 36.850 31.682
----------- -----------
Basic earnings (loss) per share $(0.77) $(0.13)
=========== ===========
DILUTED EARNINGS PER SHARE
Net (loss) applicable to common stock $(28.5) $(4.2)
Share computation:
Weighted average common shares outstanding 36.850 31.682
Effect of diluted securities:
Assumed exercise of stock options and warrants * *
Series A Preference Stock * --
Company obligated mandatorily redeemable
convertible preferred securities * --
----------- -----------
Weighted average common shares outstanding
as adjusted 36.850 31.682
----------- -----------
Diluted earnings (loss) per share $(0.77) $(0.13)
=========== ===========
* ITEMS NOT ASSUMED IN THE COMPUTATION BECAUSE THEIR EFFECT IS ANTI-DILUTIVE
Each Company Obligated Mandatory 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.
Options to purchase 2,423,345 shares of common stock at prices between $6.875
and $32.25 per share were outstanding as of September 30, 1998 but were not
included in the computation of diluted earnings per share because the effect
would be anti-dilutive.
As part of the acquisition of VTI in June 1995, the Company issued to certain of
the former stockholders of VTI warrants to purchase up to 100,000 shares of
common stock between July 1, 1998 and June 30, 2000, at an exercise price of
$25.75 per share. The 100,000 warrants have not been included in the computation
of diluted earnings per share for the three months ended September 30, 1998
because the effect would be anti-dilutive.
In connection with the bridge loan credit facility entered into in connection
with the acquisition of the safety restraints systems business ("SRS") of
AlliedSignal, the Company issued to NationsBank, N.A., a warrant to purchase
250,000 shares of common stock of the Company at an exercise price of $23.125
per share. The 250,000 shares have not been included in the computation of
diluted earnings per share for the three months ended September 30, 1998 because
the effect would be anti-dilutive.
8
NOTE 8 - BSRS JOINT VENTURE
The Company and Siemens Aktiengesallschaft ("Siemens") completed formation of a
joint venture, known as BSRS Restraint Systems International G.m.b.H. & Co. KG
("BSRS"), in June 1998. Pursuant to the joint venture agreement between the
Company and Siemens, on July 1, 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 to BSRS and Siemens
contributed its shares in PARS Ruckhaltesysteme G.m.b.H., which operates crash
test facilities and develops occupant safety systems.
NOTE 9 - FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES
The Company conducts a significant portion of its business through subsidiaries.
On April 28, 1998, the Company issued and sold an aggregate of $330 million of
9.25% Senior Subordinated Notes ("the Notes"). The Notes of the Company are
guaranteed, jointly and severally on a senior subordinated basis, by the
domestic subsidiaries of the Company (the "Subsidiary Guarantors") other than
BTI Capital Trust and certain domestic subsidiaries owned by a foreign
subsidiary of the Company (the "Non-Guarantor Subsidiaries"). The Notes are
effectively subordinated in right of payment to all indebtedness and other
liabilities (including trade payables) of the Non-Guarantor Subsidiaries.
Presented below are the condensed consolidating balance sheets as of September
30, 1998 and June 30, 1998, the condensed consolidating statement of operations
for the three months ended September 30, 1998 and 1997 and the condensed
consolidating statement of cash flows for the three months ended September 30,
1998 and 1997, for the Subsidiary Guarantors, the Non-Guarantor Subsidiaries,
Parent only and the Company consolidated.
9
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 1998
(Unaudited)
IN MILLIONS
NON-
SUBSIDIARY GUARANTOR PARENT
GUARANTORS SUBSIDIARIES ONLY ELIMINATIONS CONSOLIDATED
---------- ---------- ------- ------------ -----------
ASSETS
Cash and cash equivalents $(7.0) $17.5 $10.9 $-- $21.4
Accounts receivable, principally trade 130.9 149.2 3.3 283.4
Inventories 56.3 61.0 -- -- 117.3
Other current assets 679.6 93.8 8.7 (748.3) 33.8
---------- ---------- ------- ------------ -----------
Total current assets 859.8 321.5 22.9 (748.3) 455.9
Property, plant and equipment, net 173.9 163.9 35.5 373.3
Intangibles, net 518.6 171.0 6.8 696.4
Net assets held for sale -- 38.2 -- 38.2
Other assets 35.1 5.6 1,034.5 (1,025.8) 49.4
Total assets $1,587.4 $700.2 $1,099.7 $(1,774.1) $1,613.2
========== ========== ======= ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Notes payable and current portion of
long term debt $-- $34.0 $8.2 $-- $42.2
Accounts payable 87.2 179.0 6.5 272.7
Accrued expenses 431.4 168.3 331.4 (723.4) 207.7
---------- ---------- ------- ------------ -----------
Total current liabilities 518.6 381.3 346.1 (723.4) 522.6
Long-term debt -- 24.9 809.8 -- 834.7
Other long-term liabilities 13.9 13.6 (1.8) -- 25.7
---------- ---------- ------- ------------ -----------
Total liabilities 532.5 419.8 1,154.1 (723.4) 1,383.0
Company obligated mandatorily redeemable
convertible preferred securities -- 250.0 -- 250.0
Stockholders' equity (deficit) 1,054.9 280.4 (304.4) (1,050.7) (19.8)
---------- ---------- ------- ------------ -----------
Total liabilities and
stockholders' equity (deficit) $1,587.4 $700.2 $1,099.7 $(1,774.1) $1,613.2
========== ========== ======= ============ ===========
10
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 1998
(Unaudited)
IN MILLIONS
NON-
SUBSIDIARY GUARANTOR PARENT
GUARANTORS SUBSIDIARIES ONLY ELIMINATIONS CONSOLIDATED
---------- ---------- ------- ------------ -----------
ASSETS
Cash and cash equivalents $(22.9) $19.0 $48.3 $-- $44.4
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
========== ========== ======= ============ ===========
11
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATION
THREE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
IN MILLIONS
NON-
SUBSIDIARY GUARANTOR PARENT
GUARANTORS SUBSIDIARIES ONLY ELIMINATIONS CONSOLIDATED
---------- ----------- ------- ----------- ----------
Net Sales $185.2 $187.7 $-- $(33.8) $339.1
Cost of sales 160.2 162.7 2.6 (33.8) 291.7
---------- ----------- ----------- ----------
Gross profit 25.0 25.0 (2.6) -- 47.4
---------- ----------- ------- ----------- ----------
Selling, general and administrative
expenses 5.8 8.3 6.8 20.9
Research, development, and engineering
expenses 15.4 7.1 1.2 23.7
Amortization of intangibles 4.9 0.8 0.1 5.8
---------- ----------- ------- ----------- ----------
Operating income (loss) (1.1) 8.8 (10.7) -- (3.0)
Interest expense -- 2.9 19.2 22.1
Other income (expense), net 1.2 0.5 (0.7) 1.0
---------- ----------- ------- ----------- ----------
Earnings (loss) before income taxes,
and distributions on Company obligated
mandatorily redeemable convertible
preferred securities 0.1 6.4 (30.6) -- (24.1)
Income taxes (benefit) -- 0.5 (0.5) --
Distributions on Company obligated
mandatorily redeemable convertible
preferred securities -- -- 4.4 4.4
---------- ----------- ----------- ----------
Net earnings (loss) $0.1 $5.9 $(34.5) $-- $(28.5)
========== =========== ======= =========== ==========
12
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATION
THREE MONTHS ENDED SEPTEMBER 30, 1997
(Unaudited)
IN MILLIONS
NON-
SUBSIDIARY GUARANTOR PARENT
GUARANTORS SUBSIDIARIES ONLY ELIMINATIONS CONSOLIDATED
---------- ----------- ------- ----------- ----------
Net Sales $96.3 $118.5 $-- $(19.6) $195.2
Cost of sales 78.4 104.8 3.3 (19.6) 166.9
---------- ----------- ----------- ----------
Gross profit 17.9 13.7 (3.3) -- 28.3
---------- ----------- ------- ----------- ----------
Selling, general and administrative
expenses 1.7 8.0 6.5 16.2
Research, development, and engineering
expenses 1.2 1.5 6.2 8.9
Amortization of intangibles 0.8 1.0 0.2 2.0
---------- ----------- ------- ----------- ----------
Operating income (loss) 14.2 3.2 (16.2) -- 1.2
Interest expense -- 1.7 6.7 8.4
Other income (expense), net 3.2 (1.6) (2.0) (0.4)
---------- ----------- ------- ----------- ----------
Earnings (loss) before income taxes,
and distributions on Company obligated
mandatorily redeemable convertible
preferred securities 17.4 (0.1) (24.9) -- (7.6)
Income taxes (benefit) 6.6 0.2 (10.2) (3.4)
Distributions on Company obligated
mandatorily redeemable convertible
preferred securities -- -- -- --
---------- ----------- ----------- ----------
Net earnings (loss) $10.8 $(0.3) $(14.7) $-- $(4.2)
========== =========== ======= =========== ==========
13
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
THREE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
IN MILLIONS
NON-
SUBSIDIARY GUARANTOR PARENT
GUARANTORS SUBSIDIARIES ONLY ELIMINATIONS CONSOLIDATED
---------- ----------- ------- ----------- ----------
Cash flows from operating activities:
Net earnings(loss) $0.1 $5.9 $(34.5) $-- $(28.5)
Adjustments to reconcile net earnings
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 10.9 7.3 0.4 18.6
Changes in working capital items
and other 11.5 0.7 21.4 33.6
---------- ----------- ------- ----------- ----------
Net cash provided by (used in)
operating activities 22.5 13.9 (12.7) -- 23.7
---------- ----------- ------- ----------- ----------
Cash flows from investing activities:
Capital expenditures (6.6) (6.2) (5.7) (18.5)
Proceeds from sale of assets -- 0.1 -- -- 0.1
---------- ----------- ------- ----------- ----------
Net cash (used in) investing activities (6.6) (6.1) (5.7) (18.4)
---------- ----------- ------- ----------- ----------
Cash flows from financing activities:
Proceeds from (repayment of) debt, net -- (2.1) (19.0) (21.1)
---------- ----------- ------- ----------- ----------
Net cash (used in) financing activities -- (2.1) (19.0) (21.1)
---------- ----------- ------- ----------- ----------
Effect of exchange rate changes on cash -- (7.2) -- -- (7.2)
---------- ----------- ------- ----------- ----------
Increase (decrease) in cash and
cash equivalents 15.9 (1.5) (37.4) -- (23.0)
Cash and cash equivalents at beginning
of period (22.9) 19.0 48.3 -- 44.4
---------- ----------- ------- ----------- ----------
Cash and cash equivalents at end
of period $(7.0) $17.5 $10.9 $-- $21.4
========== =========== ======= =========== ==========
14
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
THREE MONTHS ENDED SEPTEMBER 30, 1997
(Unaudited)
IN MILLIONS
NON-
SUBSIDIARY GUARANTOR PARENT
GUARANTORS SUBSIDIARIES ONLY ELIMINATIONS CONSOLIDATED
---------- ----------- ------- ----------- ----------
Cash flows from operating activities:
Net earnings(loss) $10.8 $(0.3) $(14.7) $-- $(4.2)
Adjustments to reconcile net earnings
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 6.0 5.1 1.6 12.7
Changes in working capital items
and other (9.7) (7.2) 0.4 (16.5)
---------- ----------- ------- ----------- ----------
Net cash provided by (used in)
operating activities 7.1 (2.4) (12.7) (8.0)
---------- ----------- ------- ----------- ----------
Cash flows from investing activities:
Capital expenditures (3.5) (2.3) (1.1) (6.9)
Proceeds from sale of assets 0.4 -- -- 0.4
---------- ----------- ------- ----------- ----------
Net cash (used in) investing activities (3.1) (2.3) (1.1) (6.5)
---------- ----------- ------- ----------- ----------
Cash flows from financing activities:
Proceeds from (repayment of) debt, net -- 1.7 11.4 13.1
---------- ----------- ------- ----------- ----------
Net change in equity -- -- (2.0) (2.0)
---------- ----------- ------- ----------- ----------
Net cash provided by financing activities -- 1.7 9.4 11.1
---------- ----------- ------- ----------- ----------
Effect of exchange rate changes on cash -- (3.2) -- -- (3.2)
---------- ----------- ------- ----------- ----------
Increase (decrease) in cash and
cash equivalents 4.0 (6.2) (4.4) -- (6.6)
Cash and cash equivalents at beginning
of period -- 20.0 (1.3) -- 18.7
---------- ----------- ------- ----------- ----------
Cash and cash equivalents at end
of period $4.0 $13.8 $(5.7) $-- $12.1
========== =========== ======= =========== ==========
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
IMPLEMENTATION OF REPOSITIONING PROGRAM
The Company began implementing the Repositioning Program during the quarter
ended December 31, 1997. As of September 30, 1998, the Company had reduced its
global work force by approximately 1,827 employees (compared to a net reduction
of 2,700 employees at June 30, 1998) and closed and/or sold 24 manufacturing
facilities. The increase in the Company's global workforce was necessary
primarily to support the restart of production under the Company's General
Motors programs following conclusion of the General Motors strike as well as the
unusually high number of product launches commenced during the three months
ended September 30, 1998. During the three months ended September 30, 1998, the
Company incurred disruption costs of approximately $2.8 million associated with
closing and relocating manufacturing facilities in connection with the
Repositioning Program. These costs were included in cost of sales.
As of September 30, 1998, actions taken by the Company in connection with the
Repositioning Program have resulted in approximately $67.2 million in annual
cost savings to the Company (compared to $70 million in annual cost savings at
June 30, 1998). During the three months ended September 30, 1998, previously
realized cost savings were offset by higher labor costs relating to the global
work force additions discussed above. Moreover, the benefit of cost savings
realized to date was significantly offset by costs associated with an unusually
high number of product launches. In addition, the Company believes that the
benefit of anticipated cost savings during fiscal 1999 attributable to the
Repositioning Program will be offset in part due to the deteriorating business
conditions at USS and Custom Trim.
FIRST QUARTER PRODUCT LAUNCHES
The Company's results of operations for the three months ended September 30,
1998 were adversely impacted by a number of factors including higher costs
associated with an unusually high number of product launches during such period.
During the three months ended September 30, 1998, the Company launched 44
products compared to10 products launched during the three months ended September
30, 1997 and an average of 15 products launched during the second, third and
fourth quarters of fiscal 1998, (which includes product launches attributable to
SRS, which was acquired on October 30, 1998). A "launch" means the start of
production of a product and the related activities including, among other
things, manufacturing, engineering, quality, sales and administrative support
necessary to bring a product into production. A "launch" continues until such
time as the Company is able to meet the customer's quality and volume
requirements for the product on a consistent basis with normal production
resources and is typically a resource intensive and complex process.
As a result of the higher than normal number of launches commenced during the
three months ended September 30, 1998, the Company was required to allocate
resources to such launches that would have otherwise been directed towards
implementing the Repositioning Program. For example, the Company could not
implement scheduled personnel reductions pursuant to the Repositioning Program
and, in some instances, additional personnel were hired to support these
launches. Management believes that these launches together with new launches
anticipated during the three months ending December 31, 1998 may continue to
adversely impact the Company's results of operations for such period and/or its
ability to realize and benefit from anticipated cost savings under the
Repositioning Program during such period.
16
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Net sales increased 74% to $339.1 million for the three months ended September
30, 1998 from $195.2 million for the three months ended September 30, 1997. The
increase in net sales was due to the acquisition of SRS on October 30, 1997,
which accounted for approximately $175.6 million of increased net sales for the
three months ended September 30, 1998. That increase in net sales was offset
significantly by reduced sales volume due to the General Motors strike, the
usual shutdown of the European automotive business during August 1998, a
reduction in net sales attributable to USS and Custom Trim due to previously
announced deteriorating business conditions, and a decrease in sales of EMS
sensors. The strike at General Motors, which began in June 1998 and ended July
1998, reduced net sales by $13.7 million ($5.9 million of which was attributable
to BREED and $7.8 million of which was attributable to SRS) while deteriorating
business conditions at USS and Custom Trim reduced net sales by approximately
$10.1 million. The Company expects that net sales attributable to USS and Custom
Trim will continue to decline significantly during the balance of fiscal 1999
due to the loss of business (and the failure to replace such business on a
timely basis with new business) and industry-wide pricing pressures. The usual
shutdown of the European automotive business had a disproportionate impact on
net sales during the three months ended September 30, 1998 because of the higher
volume of business in Europe during such period due to the acquisition of SRS on
October 30, 1998.
EMS sensors sales decreased 42% to $16.6 million for the three months ended
September 30, 1998 from $28.6 million for the three months ended September 30,
1997. This decrease was primarily due to lower demand as major customers
continued to shift from EMS sensors to electronic sensors that are sourced
internally. The Company believes that sales of EMS sensors will continue to
decline in the foreseeable future.
Cost of sales increased 75% to $291.7 million for the three months ended
September 30, 1998 from $166.9 million for the three months ended September 30,
1997. The increase reflects the additional production costs of $155.5 million
for the three months ended September 30, 1998, resulting from the acquisition of
SRS in fiscal 1998. This increase in production costs was offset by lower cost
of sales associated with the loss of sales volume as discussed above and a
reduction in production costs caused by the closing of manufacturing facilities
and labor savings associated with the Repositioning Program. In addition, the
Company incurred approximately $2.8 million during the three months ended
September 30, 1998 related to disruption costs associated with the closing of
manufacturing facilities in connection with the Repositioning Program.
Gross profit increased 68% to $47.4 million for the three months ended September
30, 1998 from $28.3 million for the three months ended September 30, 1997. Gross
profit as a percentage of net sales was 14% for the three months ended September
30, 1998 compared to 15% for the three months ended September 30, 1997. The
decrease in gross margin was primarily attributable to (i) a shift in product
mix from high margin EMS sensors to lower margin products, primarily steering
wheels, plastics and seatbelts, acquired in recent acquisitions, (ii) the
General Motors strike and (iii) disruption costs incurred during the three
months ended September 30, 1998. Excluding disruption costs, gross margin would
have been 15% for three months ended September 30, 1998.
Selling, general and administrative expenses increased 29% to $20.9 million for
the three months ended September 30, 1998 from $16.2 million for the three
months ended September 30, 1997. The increase was primarily attributable to
costs of $3.7 million associated with SRS, which was acquired on October 30,
1997.
Research, development and engineering expenses increased 166% to $23.7 million
for the three months ended September 30, 1998 from $8.9 million for the three
months ended September 30, 1997. This increase reflects increased costs
aggregating $16.0 million associated with the ongoing activities of SRS, which
was
17
acquired in October 1997, and HS Technik and Design, which was acquired in May
1998, an increase in spending for new product development and additional
application engineering costs associated with new product launches. This
increase was offset by cost savings relating to reduced headcount and related
expenses as a result of the Company's Repositioning Program.
Amortization of intangibles increased by $3.8 million during the three months
ended September 30, 1998. The increase in amortization expense was primarily the
result of the goodwill and other intangibles associated with the acquisition of
SRS.
Operating income (loss) for the three months ended September 30, 1998 was $(3.0)
million compared to $1.2 million for the three months ended September 30, 1997.
Operating income (loss) as a percentage of net sales was (1)% for the three
months ended September 30, 1998 compared to 1% for the three months ended
September 30, 1997. The decrease in operating income was primarily due to the
shift in product mix, the General Motors strike and disruption costs discussed
above. Exclusive of the effects of the General Motors strike and disruption
costs, operating income would have been $7.6 million or 2% of net sales for the
three months ended September 30, 1998.
Interest expense for the three months ended September 30, 1998 increased 163% to
$22.1 million for the three months ended September 30, 1997. The increase in
interest expense was primarily due to the increase in average borrowings
outstanding as a result of the acquisition of SRS in fiscal 1998. This increase
was offset partially by interest savings resulting from voluntary debt
reductions.
During the three months ended September 30, 1998 the Company recorded a domestic
benefit of $0.5 million which was fully offset by a $0.5 million foreign
expense. No other tax benefit was recognized for either domestic or foreign
purposes due to the provisions of SFAS No. 109. SFAS No. 109 states that a
valuation allowance is recognized if, it is more likely than not, some portion
or all of the deferred tax asset will not be realized. For both domestic and
foreign jurisdictions, a valuation allowance for the deferred income tax benefit
related to the current loss incurred has been recorded.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are for working capital, servicing the
Company's indebtedness, capital expenditures and acquisitions. The Company
believes that cash generated from operations together with borrowings available
under its credit facility will be sufficient to meet the Company's working
capital, debt service and capital expenditure needs as well as required
investments in BSRS for the foreseeable future. However, if unexpected cash
needs arise, there can be no assurance that cash generated from operations
together with borrowings available under the Company's credit facility will be
sufficient to meet such needs, in which case the Company will 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. The Company's ability to invest in BSRS is limited
under the Company's credit facility and the Notes.
Cash flow from operating activities for the three months ended September 30,
1998 was a surplus of $23.7 million compared with a deficit of $8.0 million for
the three months ended September 30, 1997. The increase in cash flow from
operations was primarily the receipt of an income tax refund of $62.6 million on
September 25, 1998, less the increase in the net loss of $24.3 million.
Capital expenditures aggregated $18.5 million for the three months ended
September 30, 1998. Investments continue to be made to support productivity
improvements, cost reduction programs, finance new program launches, capital
needs to improve manufacturing efficiency and added capability for existing and
new products and reconfigurations of manufacturing facilities relating to the
Repositioning Program. The Company estimates that capital expenditures will
aggregate approximately $56.5 million during the
18
remainder of fiscal 1999.
On April 28, 1998, the Company entered into a new $675.0 million credit
facility. At September 30, 1998, the Company had an aggregate of $488.0 million
of borrowings outstanding under the credit facility, which bore interest at a
weighted average rate of 8.8% per annum at such date, and had aggregate
borrowing availability thereunder of $137.3 million. During the three months
ended September 30, 1998, the Company decreased its outstanding indebtedness by
$21.0 million. The decrease resulted from a $19.0 million voluntary prepayment
toward outstanding term loan balances under the credit facility and the
repayment of $2.0 million of borrowings outstanding under short-term lines of
credit of the Company's foreign subsidiaries. The debt reduction resulting from
the prepayment substantially satisfies the mandatory prepayment of amortization
through June 1999 and June 2004 for Term Loans A and B, respectively, under the
credit facility.
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.
19
PART II - OTHER INFORMATION
ITEM 3. LEGAL PROCEEDINGS
On October 22, 1998, AlliedSignal, Inc. tendered the defense of an action
entitled Garcia, et. al. v. General Motors Corporation and AlliedSignal, Inc.,
Cause No. 98-093642-E in the Cameron County, Texas, District Court, under the
indemnification provisions of the Asset Purchase Agreement ("APA") between the
Company and AlliedSignal pursuant to which the Company purchased SRS. The suit
seeks class action status and alleges that a seat belt buckle previously
manufactured by AlliedSignal and now manufactured by the Company is defective in
design. The Company has notified AlliedSignal (i) that a portion of the
liability was excluded under the APA and is AlliedSignal's responsibility, (ii)
the remedy sought is a shared liability under the APA, (iii) the claims in the
complaint, if proven, constitute a breach of a representation by AlliedSignal
under the APA and thus any related liability would be AlliedSignal's liability.
The Company has agreed to defend the matter under a reservation of rights
against AlliedSignal. AlliedSignal had denied liability under the APA but has
acknowledged the Company's reservation of rights. The Company is investigating
the allegations and does not yet have sufficient information upon which to form
a belief as to the outcome of such litigation or likelihood or extent of any
loss.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K -
The following reports have been filed on Form 8-K with the Securities and
Exchange Commission during the first quarter of fiscal 1999: (a) the Company's
Current Report on Form 8-K filed on August 31, 1998 announcing a delay in the
release of the Company's earnings for the quarter and year ended June 30, 1998,
(b) the Company's Current Report of Form 8-K on September 4, 1998 announcing
certain information regarding previously recorded repositioning and other
special charges and other business developments, (c) the Company's Current
Report on Form 8-K on September 18, 1998 announcing the resolution of certain
outstanding items with the Securities and Exchange Commission, (d) the Company's
Current Report of Form 8-K on September 21, 1998 announcing the Company will
restate its financial statements for the second quarter ended December 31, 1997
and the third quarter ended March 31, 1998 to take into account changes in the
repositioning and other special charges.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Breed Technologies, Inc.
(REGISTRANT)
November 16, 1998
By: /s/ Frank J. Gnisci
Frank J. Gnisci
Executive Vice President and
Chief Financial Officer
21