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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM 10-Q/A
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the quarterly period ended: March 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)
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 May 12, 1998, 36,658,707 shares of the registrant's common stock, par
value $.01 per share, were outstanding.
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INDEX
-----
The undersigned registrant hereby amends the following item of its
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 as set forth
in the pages attached hereto:
PAGE
----
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 MARCH 31, JUNE 30,
1998 1997
-------- -------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 24.1 $ 18.7
Accounts receivable, principally trade 320.1 208.0
Inventories:
Raw materials 38.3 24.8
Work in process 22.6 23.4
Finished goods 46.2 27.1
--------- --------
Total Inventories 107.1 75.3
--------- --------
Prepaid expenses and other current assets 82.0 13.5
--------- --------
Total Current Assets 533.3 315.5
Property, plant and equipment, net 327.9 276.5
Intangibles, net 726.3 221.0
Net assets held for sale 28.4 52.6
Other assets 41.6 11.6
--------- --------
Total Assets $1,657.5 $877.2
========= ========
See Notes to Consolidated Condensed Financial Statements.
1
BREED TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
In Millions, except per share data
MARCH 31, JUNE 30,
1998 1997
---------- ----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable and current portion of long-term debt $ 72.2 $191.7
Accounts payable 270.8 121.5
Accrued expenses 215.0 49.5
--------- ---------
Total Current Liabilities 558.0 362.7
--------- ---------
Long-term debt (Note 3) 810.9 231.7
Other long-term liabilities 29.5 16.3
--------- ---------
Total Liabilities 1,398.4 610.7
-------- ---------
Company obligated mandatorily redeemable convertible 250.0 ---
preferred securities (Note 5)
Stockholder's Equity:
Common stock, par value $0.01, authorized 50,000,000 0.4 0.3
shares, issued and outstanding 36,656,241 and
31,679,442 shares at March 31, 1998 and
June 30, 1997, respectively
Series A Preference Stock par value $0.001, authorized
5,000,000 shares, issued and outstanding 1 share
at March 31, 1998 (Note 4) --- ---
Additional paid-in capital 193.8 77.5
Warrants (Note 8) 1.9 ---
Retained earnings (156.0) 208.0
Foreign currency translation adjustments (30.7) (18.8)
Unearned compensation (0.3) (0.5)
--------- ---------
Total Stockholders' Equity 9.1 266.5
--------- ---------
Total Liabilities and Stockholders' Equity $1,657.5 $877.2
========= =========
See Notes to Consolidated Condensed Financial Statements.
2
BREED TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
In millions, except earnings per share
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------ -------------------
1998 1997 1998 1997
------- -------- ------- ------
Net sales $431.7 $209.4 $ 967.6 $550.6
Cost of sales (Note 6) 356.8 171.4 836.2 433.9
------- ------- ------- ------
Gross profit 74.9 38.0 131.5 116.7
------- ------- ------- ------
Operating expenses:
Selling, general and administrative expenses 22.1 19.1 59.7 51.3
Research, development and engineering expenses 22.4 9.5 49.9 27.3
Repositioning and impairment charges (Note 6) --- --- 259.5 ---
In-process research and development expenses (Note 6) --- --- 77.5 ---
Amortization of intangibles 6.8 2.2 12.7 4.3
------- ------- ------- ------
Total operating expense 51.3 30.8 459.2 82.9
------- ------- ------- ------
Operating income (loss) 23.6 7.2 (327.8) 33.8
Interest expense 28.2 6.7 63.7 17.8
Other income (expense), net 2.8 2.0 2.8 4.6
------- ------- ------- ------
Earnings (loss) before income taxes, distributions
on Company obligated mandatorily redeemable
convertible preferred securities and extraordinary
item (1.8) 2.5 (388.7) 20.6
Income taxes (benefit) (Note 7) (4.4) 1.0 (54.3) 8.1
Distributions on Company obligated mandatorily 4.3 --- 5.7 ---
------- ------- ------- ------
redeemable convertible preferred securities
Earnings (loss) before extraordinary loss (1.7) 1.5 (340.1) 12.5
------- ------- ------- ------
Extraordinary loss, net of tax benefit of $0.4 million --- --- (0.7) ---
------- ------- ------- ------
Net earnings (loss) $ (1.7) $ 1.5 $(340.8) $ 12.5
======= ======= ======= ======
Basic earning (loss) per common share (Note 8):
Earnings (loss) before extraordinary loss $(0.05) $ 0.05 $(10.33) $ 0.39
Extraordinary loss --- --- (0.02) ---
------- ------- ------- ------
Net earnings (loss) $(0.05) $ 0.05 $(10.35) $ 0.39
======= ======= ======= ======
Diluted earnings (loss) per common share:
Earnings (loss) before extraordinary loss $(0.05) $ 0.05 $(10.33) $ 0.39
Extraordinary loss --- --- (0.02) ---
------- ------- ------- ------
Net earnings (loss) - assuming dilution $(0.05) $ 0.05 $(10.35) $ 0.39
======= ======= ======= ======
See Notes to Consolidated Condensed Financial Statements.
3
BREED TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
In millions
NINE MONTHS ENDED MARCH 31,
1998 1997
--------- ---------
Cash Flows from Operating Activities:
Net earnings (loss) $(340.8) $ 12.5
Adjustments to reconcile net earnings 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 ---
Changes in working capital items and other (20.4) 1.2
--------- ---------
Net cash provided by (used in) operating activities (29.9) 47.8
Cash Flows from Investing Activities:
Cost of acquisition, net of cash acquired (Note 2) (710.0) (267.0)
Capital expenditures (50.1) (61.4)
Proceeds from sale of assets 4.2 0.1
--------- ---------
Net cash used in investing activities (755.9) (328.3)
--------- ---------
Cash Flows from Financing Activities:
Proceeds from (repayment of) debt, net 459.7 215.9
Proceeds from Series A Preference Stock issuance 115.0 ---
Proceeds from Series B 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
Cash dividends paid (2.2) (6.6)
Proceeds from common stock issued 1.6 0.5
--------- ---------
Net cash provided by financing activities 803.1 209.8
--------- ---------
Effect of exchange rate changes on cash (11.9) (7.0)
--------- ---------
Net increase (decrease) in cash and cash equivalents 5.4 (77.7)
Cash and cash equivalents at beginning of period 18.7 95.8
--------- ---------
Cash and cash equivalents at end of period $ 24.1 $ 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)
========= =========
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
==========================
5
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 and nine months ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year ending
June 30, 1998. 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 for the year ended June 30, 1997.
Revenue Recognition - The Company recognizes revenue when title and risk of
loss transfers to its customers, which is generally upon shipment of products to
customers. The Company generally enters into agreements with its customers at
the beginning of a given vehicle's life to produce products. Once such
agreements are entered into by the Company, fulfillment of the customers'
purchasing requirements is generally the obligation of 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. 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, 1997 the Company completed the acquisition of certain assets
and the assumption of certain liabilities of the "Safety Restraints Systems"
business unit of AlliedSignal, Inc. 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,
and AlliedSignal Cinturones de Seguridad, S.A. de C.V., a Mexican company
(collectively, "SRS"). The acquisition 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 $710.0 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. As a result of such review, the Company recorded a charge
related to the write-off of in-process research 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 SRS 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:
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 workforce $ 10.3 10
Developed technology 158.1 22
Goodwill 437.4 40
---------
$ 605.8
=========
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
8
NOTE 3 - BORROWINGS
On October 30, 1997, in connection with the acquisition of SRS, the Company
and NationsBank entered into a new revolving and term credit facility ("Credit
Facility") pursuant to which the Company has $900 million of aggregate borrowing
availability. At December 31, 1997 and March 31, 1998, the Company had an
aggregate of $810 million of borrowings outstanding under the Credit Facility
(including approximately $10.0 million of letters of credit) and 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 letter of credit
sublimits). Both credit facilities have a 366 day term which expire on October
31, 1998. Borrowings under the Credit Facility bear interest at a per annum
rate equal to, at 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. The Company is also required to pay a
quarterly unused facility fee. In addition, the Company paid a commitment fee,
upon the execution of the Credit Facility, equal to 3% of the aggregate
available borrowings under the Credit Facility ($27 million). The Credit
Facility has a 1.5% take-out fee ($13.5 million), subject to certain conditions,
which is payable upon repayment in full of all amounts outstanding under the
Credit Facility.
The Credit Facility is secured by (i) a security interest in all of the
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 by the Company and certain subsidiaries of
their stock in certain domestic subsidiaries and at least 65% of 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 of the Company and certain subsidiaries, (v) 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 of the Company's subsidiaries.
The Credit Facility requires compliance with certain covenants by the
Company and its subsidiaries, including, among other things: (i) maintenance of
certain financial ratios and compliance with certain financial tests and
limitations; (ii) limitations 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,
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 agreement 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 for 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
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 into 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 statements 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 securities
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 SECURITIES
In connection with the SRS acquisition, on October 30, 1997, the Company
issued and sold to Prudential Securities Credit Corp. ("PSCC") $200 million of
Series B Convertible Preference Stock of the Company (the "Series B Preference
Securities"). On November 25, 1997, the Company issued and sold $250.0 million
of 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 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 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,
together with the Preferred Securities, the "Trust Securities") representing
individual undivided beneficial interests in the assets of the Trust, and,
consequently, the Trust is a wholly owned subsidiary of the Company.
Holders of the Preferred Securities are entitled to receive cumulative cash
distributions at an annual rate of 6.5% of the liquidation amount of $50 per
Preferred Security, accruing from, 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
Security is convertible, at 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 by the Company, in whole or in part, from time 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. If
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 with Statement of Financial Accounting Standard 121--Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets 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
diminution in the value of USS had occurred. When the Company acquired USS 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 its business (which related 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 component to 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 compete 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.
13
The negotiations between the Company 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 two 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, 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 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.
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 by the Company.
Losses for fiscal 1997 of approximately $4 million and $2 million were incurred
by subsidiaries located 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% in the six months ended
December 31, 1997. This change is primarily the result of: (i) the impact of
certain repositioning, impairment and other special charges (see Note 3) taken
in jurisdictions where the Company may not be able to recognize the full income
tax benefit and (ii) no tax benefit on write-down of goodwill included in the
repositioning and impairment charge. Financial Accounting Standards Statement
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
15
limitations on the utilization of net operating losses from foreign
jurisdictions, a valuation allowance for a portion of the deferred income tax
benefit related to the repositioning, impairment and the other special charges
has been recorded.
16
NOTE 8 - EARNING PER SHARE
The following table sets forth the computation of the numerator and
denominator of the basic and diluted per share calculations:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------- --------------------------
1998 1997 1998 1997
--------- ---------- ------------ -----------
Numerator:
Net earnings (loss) $ (1.7) $ 1.5 $ (340.8) $ 12.5
----------- ----------- ----------- -----------
Numerator for basic earnings per
share-income available to
common stockholders (1.7) 1.5 (340.8) 12.5
----------- ----------- ----------- -----------
Effect of dilutive securities:
Company obligated mandatorily
redeemable convertible preferred
securities, net 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 * 230,509 * 269,276
Series A Preference Stock * --- * ---
Company obligated mandatorily
redeemable convertible preferred
securities * --- * ---
----------- ----------- ----------- -----------
Dilutive potential common shares --- 230,509 --- 269,276
----------- ----------- ----------- -----------
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
----------- ----------- ----------- -----------
* 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 1,232,031 shares of common stock at prices between
$20.375 and $32.25 per share were outstanding as of March 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
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 and nine months ended
March 31, 1998 because the effect would be anti dilutive.
In connection with its Credit Facility entered into in connection with the
acquisition of SRS, the Company issued to NationsBank, National Association
("NationsBank"), 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 warrants have not
been included in the computation of diluted earnings per share for the three and
nine months ended March 31, 1998 because the effect would be anti-dilutive.
NOTE 9 - SUBSEQUENT EVENTS
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"), and completed an offering of $330 million of its 9.25% Senior
Subordinated Notes ("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"). 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
ratio 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, 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 a condensed consolidating balance sheet as of March 31,
1998, a condensed consolidating statement of operations for the nine months
ended March 31, 1998 and a condensed consolidating statement of cash flows for
the nine months ended March 31, 1998, for the Subsidiary Guarantors, the Non-
Guarantor Subsidiaries and the Company consolidated.
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 1998
(UNAUDITED)
In millions SUBSIDIARY NON-GUARANTOR
GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- -------------- ------------- ------------
ASSETS
Cash and cash equivalents $ 5.6 $ 18.5 $ --- $ 24.1
Accounts receivable, net 466.8 215.8 (362.5) 320.1
Inventories 61.2 45.9 --- 107.1
Other current assets 56.8 25.2 --- 82.0
----------- -------------- ------------- ------------
Total current assets 590.4 305.4 (362.5) 533.3
Property, plant and equipment, net 201.7 126.2 --- 327.9
Intangibles, net 561.5 164.8 --- 726.3
Net assets held for sale --- 28.4 --- 28.4
Other assets 1038.1 2.6 (999.1) 41.6
----------- -------------- ------------- ------------
Total assets $2,391.7 $627.4 $(1,361.6) $1,657.5
=========== ============== ============= ============
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Notes Payable and current portion of
long-term debt $ 20.4 $ 51.8 $ --- $ 72.2
Accounts payable 105.4 165.4 --- 270.8
Accrued expenses 325.1 214.2 (324.3) 215.0
----------- -------------- ------------- ------------
Total current liabilities 450.9 431.4 (324.3) 558.0
Long-term debt 781.7 29.2 --- 810.9
Other long-term liabilities 13.6 15.9 --- 29.5
----------- -------------- ------------- ------------
Total liabilities $1,246.2 $476.5 $ (324.3) $1,398.4
Company obligated mandatorily redeemable
convertible preferred securities 250.0 --- --- 250.0
Stockholders' equity 895.5 150.9 (1,037.3) 9.1
----------- -------------- ------------- ------------
Total liabilities and stockholders'
equity $2,391.7 $627.4 $(1,361.6) $1,657.5
=========== ============== ============= ============
22
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
In millions SUBSIDIARY NON-GUARANTOR
GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- -------------- -------------- --------------
Net Sales $ 567.8 $ 488.1 $(88.3) $ 967.6
Cost of sales 493.3 431.1 (88.3) 836.1
-------- -------- -------- --------
Gross profit 74.4 57.0 --- 131.5
-------- -------- -------- --------
Selling, general and administrative expenses 29.8 29.8 --- 59.9
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 --- --- 77.5
Amortization of intangibles 9.7 3.0 --- 12.7
-------- -------- -------- --------
Operating (loss) (223.1) (104.7) --- (327.8)
Interest expense 58.0 5.7 --- 63.7
Other income (expense), net 2.8 0.2 (0.2) 2.8
-------- -------- -------- --------
Earnings (loss) before income taxes,
distributions on Company obligated
mandatorily redeemable convertible
preferred securities and extraordinary item (278.3) (110.2) (0.2) (388.7)
Income tax (benefits) (49.8) (4.5) --- (54.3)
Distributions on Company obligated mandatorily
redeemable convertible preferred securities 5.7 --- --- 5.7
-------- -------- -------- --------
Earnings (loss) before extraordinary loss (234.2) (105.7) (0.2) (340.1)
-------- -------- -------- --------
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)
======== ======== ======== ========
23
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
In millions SUBSIDIARY NON-GUARANTOR
GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ --------------- -------------- --------------
Cash flows from operating activities:
Net earnings (loss) $ (234.9) $ (105.7) $ (0.2) $ (340.8)
Adjustments to reconcile net cash 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 --- 287.9
Changes in working capital items and other (124.1) 103.5 0.2 (20.4)
----------- ------------- ------------ ------------
Net cash (used in) operating
activities (132.3) 102.4 --- (29.9)
----------- ------------- ------------ ------------
Cash flows from investing activities:
Cost of acquisitions, net of cash acquired (638.8) (71.2) --- (710.0)
Capital expenditures (11.6) (38.5) --- (50.1)
Proceeds from sale of assets and equipment 1.9 2.3 --- 4.2
----------- ------------- ------------ ------------
Net cash (used in) investing
activities (648.5) (107.4) --- (755.9)
----------- ------------- ------------ ------------
Cash flows from financing activities:
Net change in debt 444.3 15.4 --- 459.7
Net change in equity 343.4 --- --- 343.4
----------- ------------- ------------ ------------
Net cash provided by financing
activities 787.7 15.4 --- 803.1
----------- ------------- ------------ ------------
Effect of exchange rate changes on cash --- (11.9) --- (11.9)
----------- ------------- ------------ ------------
Increase (decrease) in cash and cash equivalents 6.9 (1.5) --- 5.4
Cash and cash equivalents at beginning of period (1.3) 20.0 --- 18.7
----------- ------------- ------------ ------------
Cash and cash equivalents at end of period $ 5.6 $ 18.5 --- $ 24.1
=========== ============= ============ ============
24
NOTE 11 - FOREIGN OPERATIONS
The following financial information relates to operations in different
geographic areas:
NINE MONTHS
ENDED MARCH 31,
In millions 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------
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
------------ ------------
Net earnings 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
----------------- ---- ---- ----
Electronics and sensors 16% 34% 70% 85%
Airbag systems 22 9 23 14
Steering wheels 28 33 5 --
Interior and plastics 13 23 -- --
Seatbelts 20 -- -- --
Other 1 1 2 1
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
General - 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, the Company has pursued strategic
acquisitions and joint ventures and internal product development programs that
have enabled Breed to evolve from predominantly the producer 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 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.
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 the cost
savings during fiscal 1999 attributable to the repositioning plan will be offset
in part due to deteriorating business conditions at USS and Custom Trim.
27
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 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 quarter ended December 31, 1997 that a
material diminution in the value of USS had occurred. When the Company acquired
USS 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 its business (which related 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 component to 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 compete 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 Company 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 two 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, 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, 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
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 sales for the three and nine months ended March 31, 1998 were $431.7
million and $967.6 million, respectively, an increase of $222.3 million or 106%,
and $417.0 million or 76%, respectively, from the comparable periods of the
prior year. The increase in net sales was 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 acquisitions accounted for approximately $242.0 million and $421.8
million of the increase in net sales for the three and nine months ended March
31, 1998, respectively. The increases were partially offset by decreased sales
due to deteriorating business conditions at USS and Custom Trim and a decline in
sales of EMS sensors and inflator and airbag modules. The Company expects that
net sales attributable to USS and Custom Trim will continue to decline
significantly for the foreseeable future.
EMS sensor sales for the three and nine months ended March 31, 1998 were
$26.6 million and $85.6 million, a decrease of 32% and 33%, respectively, from
the comparable prior year periods. These decreases are primarily due to lower
demand as major customers continued to shift from EMS to electronic sensors that
are sourced internally.
Inflator and airbag module sales (excluding SRS) decreased 6% and 24% to
$22.6 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 sales 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 March 31, 1997.
The increase primarily reflected the additional production costs of $208.1
million and $375.9 million for the quarter and nine months ended March 31, 1998,
resulting from the acquisition of Custom Trim during fiscal 1997 and the
acquisition of SRS in fiscal 1998. In addition, the Company incurred
approximately $4.5 million and $9.0 million during the quarter and nine months
ended March 31, 1998 related to disruption costs associated with the closing of
seven manufacturing facilities and the ongoing relocation of a facility in North
America to Mexico, as well as a $28.4 million charge, in the second quarter
ended December 31, 1997, related to other special charges, (see "Repositioning
and Other Special Charges" in Note 6 above).
Gross profit as a percentage of net sales was 17% and 14% for the three and
nine months ended March 31, 1998, respectively, compared to 18% and 21%,
respectively, for the comparable periods of the prior year. The decrease in
gross margin was primarily attributable to a shift in product mix from high
margin EMS sensors to those of lower margin products acquired in recent
acquisitions and disruption costs. Also, during the nine months ended March 31,
1998, 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% for
three and nine months ended March 31, 1998, respectively.
Selling, general and administrative expenses for the three and nine months
ended March 31, 1998 were $22.1 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 of the prior year. Selling, general
and administrative expenses as a percentage of net sales decreased primarily as
a result of cost improvements associated with the reduction of headcount and
reduced spending.
Research, development and engineering expenses for the three and nine
months ended March 31, 1998 were $22.4 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 March 31, 1998 was $23.6
million or 5% of net sales compared to $7.2 million or 3% of net sales for the
prior year period. The increase in operating income 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 the
three months ended March 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 of the three months ended March 31, 1998.
Operating income (loss) for the nine months ended March 31, 1998 decreased
significantly from last year's comparable period primarily due to the
repositioning, impairment and other special charges aggregating $365.4 million
included 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 charges 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.
Interest expense for the three and nine months ended March 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 expense was primarily due to the increase in average
outstanding borrowings as a result of the acquisitions of USS and Custom Trim in
fiscal 1997 and SRS in fiscal 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
recognize the full income tax benefit due to limitations imposed by Financial
Accounting Standards Statement No. 109 (SFAS 109) and (ii) no tax benefit on
write-down of goodwill included in the repositioning and impairment charge.
SFAS 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 from foreign
jurisdictions, a valuation allowance for a portion of the deferred income tax
benefit related to the repositioning, impairment and the other special charges
has been recorded. See Note 7 to the Financial Statements.
The extraordinary loss recorded in the nine months ended March 31, 1998
related to the write-off of unamortized debt costs of the previous bank credit
facility.
31
The Company's net loss of $(1.7) million for the third quarter ended March
31, 1998 includes $3.3 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 quarter ended December 31, 1997. Excess bank
fees represents the amount of fee amortization related to the Credit Facility in
excess of the amortization of the fees related to the new long-term capital
structure.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are for working capital, capital
expenditures and interest payments on outstanding indebtedness. The Company
believes that cash generated from operations together with borrowings under its
New Credit Facility will be sufficient to meet the Company's working capital,
capital expenditures and debt service needs for the foreseeable future.
Cash flows from operating activities for the nine months ended March 31,
1998 was a deficit of $29.9 million compared with a $47.8 million surplus for
the nine months ended March 31, 1997. The decrease in cash flows was primarily
attributed to the net loss of $340.8 million, net of the noncash items and
accruals included in the repositioning and other special charges.
Capital expenditures aggregated $50.1 million for the nine months ended
March 31, 1998. Investments continue to be made to support productivity
improvements, cost reduction programs, capital needs to improve manufacturing
efficiency and added capability for existing and new products.
During the nine months ended March 31, 1998, the Company increased its
outstanding indebtedness by $459.7 million which resulted primarily from the
acquisition of SRS and the financing of capital expenditures. The Company had
unused availability under its New Credit Facility as of March 31, 1998 of
approximately $90 million.
On April 28, 1998, the Company replaced its Credit Facility with the New
Credit Facility, under which the Company has $675 million of aggregate borrowing
availability. 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, 1998 the Company had an aggregate 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 terms of the New
Credit Facility, the Company is prohibited from making certain 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. Also, the
Company issued and sold $330 million of the Notes in a private transaction under
Rule 144A under the Securities Act of 1933. The interest rate on the Notes is
9.25%.
Based on a recent assessment, the Company determined that it will be
required to modify or replace portions of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. The Company presently believes that with modifications to existing
software and conversions to new software, the Year 2000 issue will not pose
significant operational problems for its computer systems. 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, the Year 2000 Issue could have a material impact on the
operations of the Company.
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, 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.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
BREED TECHNOLOGIES, INC.
September 28, 1998 By: /s/ Frank J. Gnisci
----------------------------------
Frank J. Gnisci
Executive Vice President and
Chief Financial Officer
34