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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: December 31, 1997
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 February 12, 1998, 31,712,608 shares of the registrant's common
stock, par value $.01 per share, were outstanding.
<PAGE>
INDEX
-----
The undersigned registrant hereby amends the following item of its
Quarterly Report on Form 10-Q for the quarter ended December 31, 1997 as set
forth in the pages attached hereto:
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<CAPTION>
PAGE
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets - December 31, 1997
(Unaudited) and June 30, 1997.................................. 1
Consolidated Condensed Statements of Operations (Unaudited)
Three and six months ended December 31, 1997 and 1996.......... 3
Consolidated Condensed Statements of Cash Flows (Unaudited)
Six months ended December 31, 1997 and 1996................... 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............................... 16
</TABLE>
i
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ITEM 1. FINANCIAL STATEMENTS
BREED TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
In Millions, except per share data
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1997
------------ ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 32.3 $ 18.7
Accounts receivable, principally trade 287.1 208.0
Inventories:
Raw materials 56.1 24.8
Work in process 30.3 23.4
Finished goods 34.9 27.1
-------- ------
Total Inventories 121.3 75.3
-------- ------
Prepaid expenses and other current assets 61.9 13.5
-------- ------
Total Current Assets 502.6 315.5
Property, plant and equipment, net 336.6 276.5
Intangibles, net 740.7 221.0
Net assets held for sale 22.2 52.6
Other assets 48.3 11.6
-------- ------
Total Assets $1,650.4 $877.2
======== ======
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
1
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BREED TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
In Millions, except per share data
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1997
------------ --------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable and current portion of long-term debt (Note 3) $ 819.0 $191.7
Accounts payable 262.4 121.5
Accrued expenses 240.9 49.5
-------- ------
Total Current Liabilities 1322.3 362.7
-------- ------
Long-term debt 31.9 231.7
Other long-term liabilities 29.8 16.3
-------- ------
Total Liabilities 1384.0 610.7
-------- ------
Company obligated mandatorily redeemable convertible preferred 250.0 ---
securities (Note 5)
Stockholders' Equity:
Common stock, par value $0.01, authorized 50,000,000 shares, 0.3 0.3
issued and outstanding 31,712,608 and 31,679,442 shares at
December 31, 1997 and June 30, 1997, respectively
Series A Preference Stock par value $0.001, authorized 5,000,000 115.0 ---
shares, issued and outstanding 4,883,227 shares at
December 31, 1997 (Note 4)
Additional paid-in capital 78.0 77.5
Warrants (Note 3) 1.9 ---
Retained earnings (154.3) 208.0
Foreign currency translation adjustments (24.2) (18.8)
Unearned compensation (0.3) (0.5)
-------- ------
Total Stockholders' Equity 16.4 266.5
-------- ------
Total Liabilities and Stockholders' Equity $ 1650.4 $877.2
======== ======
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
2
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BREED TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
In millions, except earnings per share
<TABLE>
<CAPTION>
THREE MONTHS END SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ ---------------------
1997 1996 1997 1996
------- ------ ---------- --------
<S> <C> <C> <C> <C>
Net sales $ 340.7 $182.6 $ 535.9 $341.2
Cost of sales (Note 6) 312.5 145.9 479.4 262.4
------- ------ ------- ------
Gross profit 28.2 36.7 56.5 78.8
------- ------ ------- ------
Operating expenses:
Selling, general and administrative expenses 21.3 16.7 37.5 32.2
Research, development and engineering expenses 18.6 9.9 27.5 17.8
Repositioning and impairment charges (Note 6) 259.5 --- 259.5 ---
In-process research and development expenses (Note 6) 77.5 --- 77.5 ---
Amortization of intangibles 3.9 0.8 5.9 2.1
------- ------ ------- ------
Total operating expenses 380.8 27.4 407.9 52.1
------- ------ ------- ------
Operating income (loss) (352.6) 9.3 (351.4) 26.7
Interest expense 27.1 6.7 35.4 11.1
Other income (expense), net 0.4 2.3 (0.1) 2.5
------- ------ ------- ------
Earnings (loss) before income taxes,
distributions on Company obligated
mandatorily redeemable convertible preferred
securities and extraordinary item (379.3) 4.9 (386.9) 18.1
Income taxes (benefit) (Note 7) (46.5) 1.8 (49.9) 7.1
Distributions on Company obligated mandatorily
redeemable convertible preferred securities (Note 5) 1.4 --- 1.4 ---
------- ------ ------- ------
Earnings (loss) before extraordinary loss (334.2) 3.1 (338.4) 11.0
Extraordinary loss, net of tax benefit of $0.4 million (0.7) --- (0.7) ---
------- ------ ------- ------
Net earnings (loss) $(334.9) $ 3.1 $(339.1) $ 11.0
======= ====== ======= ======
Basic earning (loss) per common share (Note 8):
Earnings (loss) before extraordinary loss $(10.54) $ 0.10 $(10.68) $ 0.35
Extraordinary loss (0.02) --- (0.02) ---
------- ------ ------- ------
Net earnings (loss) $(10.56) $ 0.10 $(10.70) $ 0.35
======= ====== ======= ======
Diluted earnings (loss) per common share:
Earnings (loss) before extraordinary loss $(10.54) $ 0.10 $(10.68) $ 0.34
------- ------ ------- ------
Extraordinary loss (0.02) --- (0.02) ---
------- ------ ------- ------
Net earnings (loss) - assuming dilution $(10.56) $ 0.10 $(10.70) $ 0.34
======= ====== ======= ======
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
3
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BREED TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
In millions
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31,
1997 1996
-------------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings (loss) $(339.1) $ 11.0
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Depreciation and amortization 26.6 21.5
Non-cash items included in repositioning, impairment and other
special charges 211.4 ---
Accrual for repositioning, impairment and other special charges 76.5 ---
Changes in working capital items and other 3.6 39.9
-------------- ---------
Net cash provided by (used in) operating activities (21.0) 72.4
-------------- ---------
Cash Flows from Investing Activities:
Cost of acquisitions, net of cash acquired (Note 2) (710.0) (211.0)
Capital expenditures (23.4) (41.7)
Proceeds from sale of assets 2.6 ---
-------------- ---------
Net cash used in investing activities (730.8) (252.7)
-------------- ---------
Cash Flows from Financing Activities:
Proceeds from (repayment of) debt, net 427.5 119.0
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
convertible preferred securities, less related fees 239.0 ---
Cash dividend paid (2.2) (4.4)
Proceeds from common stock issued 0.7 0.6
-------------- ---------
Net cash provided by financing activities 770.0 115.2
-------------- ---------
Effect of exchange rate changes on cash (4.6) (0.5)
-------------- ---------
Net increase (decrease) in cash and cash equivalents 13.6 (65.6)
Cash and cash equivalents at beginning of period 18.7 95.8
-------------- ---------
Cash and cash equivalents at end of period $ 32.3 $ 30.2
============== =========
Cost of Acquisitions:
Working capital, net of cash acquired $ 39.5 $ (44.2)
Property, plant and equipment (140.3) (151.2)
Cost in excess of net assets acquired (683.3) (72.9)
Intangibles-write-off of in-process research and development costs 77.5 ---
Investments and other assets (11.8) (19.0)
Long-term debt --- 33.9
Other long-term liabilities 8.4 42.4
-------------- ---------
Net cost of acquisitions $(710.0) $(211.0)
============== =========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
4
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BREED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (UNAUDITED)
In Millions, except per share data
<TABLE>
<CAPTION>
COMMON STOCK SERIES A SERIES B ADDITIONAL
----------------------------
PREFERENCE PREFERENCE PAID-IN
SHARES AMOUNT STOCK STOCK CAPITAL
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1997 31,679,442 $ 0.3 -- -- $ 77.5
Net loss
Translation adjustments
Issue Series A Preference
Stock, (Note 4) 115.0
Issue Series B Preference
Stock, (including fees),
(Note 5) 200.0
Redemption of Series B
Preference Stock, (Note 5) (200.0)
Fees associated with
Company obligated
mandatorily redeemable
convertible preferred
securities
Warrants issued with
Credit Facility, (Note 3)
Shares issued under Stock
Option Plans 39,692 0.7
Shares terminated under
Stock Incentive Plan, net
of granted Shares (6,526) (0.2)
Cash dividends
Balance at December 31, 1997 31,712,608 $ 0.3 $ 115.0 -- $ 78.0
==========================================================================================
<CAPTION>
FOREIGN
CURRENCY UNEARNED
RETAINED TRANSLATION COMPENSATIO
WARRANTS EARNINGS ADJUSTMENTS N TOTAL
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1997 -- $ 208.0 $ (18.8) $ (0.5) $ 266.5
Net loss (339.1) (339.1)
Translation adjustments (5.4) (5.4)
Issue Series A Preference
Stock, (Note 4) 115.0
Issue Series B Preference
Stock, (including fees),
(Note 5) (10.0) 190.0
Redemption of Series B
Preference Stock, (Note 5) (200.0)
Fees associated with
Company obligated
mandatorily redeemable
convertible preferred
securities (11.0) (11.0)
Warrants issued with
Credit Facility, (Note 3) 1.9 1.9
Shares issued under Stock
Option Plans 0.2 0.9
Shares terminated under
Stock Incentive Plan, net
of granted Shares (0.2)
Cash dividends (2.2) (2.2)
Balance at December 31, 1997 $ 1.9 $ (154.3) $ (24.2) $ (0.3) $ 16.4
=======================================================================================
</TABLE>
<PAGE>
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 six months ended December 31, 1997 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 the
Company 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 Rueckhaltesysteme 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 the Company (and certain
subsidiaries identified in the Agreement).
6
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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 (as
defined in Note 5) 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 required. 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.
The pro forma unaudited results of operations for the six months ended
December 31, 1997 and 1996, assuming the acquisition of SRS had been consummated
as of July 1, 1996, are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31,
In millions, except per share data 1997 1996
- ---------------------------------- ------------- ----------
<S> <C> <C>
Net sales $ 813.5 $852.3
Net loss $(404.9) $(13.5)
Net loss per share - basic and diluted $(12.78) $(0.43)
</TABLE>
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, 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.
7
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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, 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- Shoals 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 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.
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
8
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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, 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
9
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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 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.
10
<PAGE>
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
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
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<PAGE>
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 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.
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
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<PAGE>
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.
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 estimated fiscal 1998 annual effective tax rate has been revised from a
45% benefit estimated in the first quarter of fiscal 1998 to a 12% benefit. This
change is primarily the result of: (i) the impact of certain repositioning,
impairment and other special charges (see Note 6) 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, that 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.
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<PAGE>
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------- -----------
(in millions, except share amounts)
<S> <C> <C> <C> <C>
Numerator:
Net earnings (loss) $ (334.9) $ 3.1 $ (339.1) $ 11.0
------------ ------------ ------------- -----------
Numerator for basic earnings per
share-income available to common
stockholders (334.9) 3.1 (339.1) 11.0
------------ ------------ ------------- -----------
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 $ (334.9) $ 3.1 $ (339.1) $ 11.0
------------ ------------ ------------- -----------
Denominator:
Denominator for basic earnings per
share-weighted-average shares 31,705,492 31,640,199 31,693,537 31,633,894
------------ ------------ ------------- -----------
Effect of dilutive securities:
Employee stock options * 372,006 * 326,871
Series A Preference Stock * --- * ---
Company obligated mandatorily
redeemable convertible preferred
securities * --- * ---
------------ ------------ ------------- -----------
Dilutive potential common shares --- 372,006 --- 326,871
------------ ------------ ------------- -----------
Denominator for diluted earnings per
share-adjusted weighted- average
shares and assumed conversions 31,705,492 32,012,205 31,693,537 31,960,765
============ ============ ============= ===========
</TABLE>
* Items not assumed in the computation because their effect is antidilutive.
For additional disclosures regarding the outstanding Series A Preference
Stock see Note 4, and the Company obligated mandatorily redeemable convertible
preferred securities, see Note 5.
Options to purchase 1,755,489 shares of common stock at prices between
$20.375 and $32.25 per share were outstanding as of December 31, 1997 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.
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
14
<PAGE>
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 six month periods ended December 31, 1997 because the effect would be
anti dilutive.
In connection with its Credit Facility, the Company issued to 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 six months ended
December 31, 1997 because the effect would be anti-dilutive.
NOTE 9 - 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.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
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 the Company
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 18
months, and the Company believes the provisions recorded are adequate to cover
the costs associated with the plan. The Company expects the repositioning
program 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 program will be
offset in part due to deteriorating business conditions at USS and Custom Trim.
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
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<PAGE>
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.
Implementation of Repositioning Plan - During the quarter ended December 31,
1997, the Company started to implement its repositioning plan. Net headcount
was reduced by 725 people during the quarter ended December 31, 1997, primarily
in North America. The Company also closed three manufacturing facilities and
announced the closure of an additional facility and the relocation of a major
portion of a Canadian facility to Mexico.
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<PAGE>
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 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.
Disruption Costs - The repositioning, impairment and other special charges
recorded in the quarter ended December 31, 1997 do not include a provision for
disruption costs in accordance with Generally Accepted Accounting Principles
("GAAP"). Disruption costs are expenses incurred in connection with the
closing and consolidating of manufacturing, engineering and sales facilities.
Disruption costs include; (1) inefficiencies associated with consolidating
manufacturing, engineering and sales facilities; (2) unabsorbed fixed overhead;
(3) temporary increases in factory labor; (4) premium freight and (5) excessive
inventory scrap. GAAP requires that disruption costs be expensed as incurred
and included in cost of sales. The Company incurred disruption costs of
approximately $2.8 million and $4.5 million for the quarter and six months ended
December 31, 1997, respectively, associated with the closing of three
manufacturing facilities and the ongoing relocation of a North American facility
to Mexico.
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 SIX MONTHS ENDED DECEMBER 31, 1997 (FY98) COMPARED TO THREE AND SIX
MONTHS ENDED DECEMBER 31, 1996 (FY97)
Net sales for the quarter and six months ended December 31, 1997 were $340.7
million and $535.9 million, respectively, an increase of $158.1 million or 87%,
and $194.7 million or 57%, 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 three acquisitions accounted for approximately $177.0 million
and $235.2 million of the increase in net sales for the three and six months
ended December 31, 1997, 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 systems products.
The Company expects that net sales attributable to USS and Custom Trim will
continue to decline significantly for the foreseeable future.
18
<PAGE>
EMS sensor sales for the quarter and six months ended December 31, 1997 were
$28.1 million and $54.7 million, a decrease of 23% and 32%, respectively, from
the comparable prior year periods. These decreases are primarily due to lower
demand as major customers continue to shift from EMS to electronic sensors that
are sourced internally.
Inflator and airbag module sales decreased 18% and 37% to $18.7 million and
$35.3 million, respectively, for the quarter and six months ended December 31,
1997 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.
Net sales for the quarter ended December 31, 1997, increased 75% to $340.7
million from $195.2 million in the first quarter ended September 30, 1997. The
quarter over quarter increase in net sales was primarily attributable to the
acquisition of SRS on October 30, 1997. Excluding the acquisition of SRS, net
sales for the quarter ended December 31, 1997 would have increased 4% over the
quarter ended September 30, 1997.
Cost of sales for the quarter and six months ended December 31, 1997 were $312.5
million and $479.4 million, respectively, as compared to $145.9 million and
$262.4 million, respectively, for the quarter and six months ended December 31,
1996. The increase primarily reflected the additional production costs of
$151.0 million and $203.7 million for the quarter and six months ended December
31, 1997, resulting from the acquisitions of USS and Custom Trim during fiscal
1997 and the acquisition of SRS in fiscal 1998. In addition, the Company
incurred approximately $2.8 million and $4.5 million during the quarter and six
months ended December 31, 1997 related to disruption costs associated with the
closing of three manufacturing facilities and the ongoing relocation of a
facility in North America to Mexico, as well as a $28.4 million charge related
to other special charges.
Gross profit as a percentage of net sales was 8% and 11% for the three and six
months ended December 31, 1997, respectively, compared to 20% and 23%,
respectively, for the comparable periods of the prior year. The decrease in
gross margins 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 certain special charges aggregating $28.4 million. Excluding
these special charges, gross profit as a percentage of net sales would have been
17% and 16% for the three and six months ended December 31, 1997, respectively.
Selling, general and administrative expenses for the three and six months ended
December 31, 1997 were $21.3 million and $37.6 million (6% and 7% of net sales),
respectively, compared to $16.7 million and $32.2 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 quarter and six months
ended December 31, 1997 were $18.6 million and $27.5 million, respectively, as
compared to $9.9 million and $17.8 million for the comparable periods in the
prior year. These increases reflected costs associated with acquired businesses
of $9.3 million and $10.1 million for the three and six months ended December
31, 1997, respectively.
Operating income (loss) for the three and six months ended December 31, 1997
decreased significantly from last year's comparable periods primarily due to
items mentioned above and the repositioning, impairment and other special
charges aggregating $365.4 million included in cost of sales and operating
expenses. Exclusive of the effects of the repositioning, impairment and other
special charges, operating income would
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<PAGE>
have been $12.8 million and $14.0 million for the three and six months ended
December 31, 1997, respectively.
Operating income before repositioning, impairment and other special charges for
the three months ended December 31, 1997 reflected an improvement over the three
months ended September 30, 1997. Operating income was $12.8 million or 4% of
net sales in the three months ended December 31, 1997 compared to $1.2 million
or 1% of net sales in the three months ended September 30, 1997. The quarter
over quarter increase in operating income was primarily attributable to the SRS
acquisition, higher sales volumes, and personnel reductions. Excluding the SRS
acquisition, operating income would have been approximately $7.9 million or 4%
of net sales for the three months ended December 31, 1997. The operating margin
improvement from 1% of net sales in the three months ended September 30, 1997 to
4% of net sales for the three months ended December 31, 1997 was primarily
attributable to personnel reductions resulting from the repositioning program.
Interest expense for the three and six months ended December 31, 1997 was $27.1
million and $35.4 million, an increase of $20.4 million and $24.3 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. In addition the fees associated with the Credit Facility
(approximately $30.0 million) are being amortized over a six month period.
The estimated fiscal 1998 annual effective tax rate has been revised from a 45%
benefit estimated in the three months ended September 30, 1997 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, that 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.
The extraordinary loss recorded in the three months ended December 31, 1997
related to the write-off of unamortized debt costs of the previous bank credit
facility.
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, borrowings available under the
Credit Facility and net proceeds received in connection with the issuance of
debt and equity securities 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 six months ended December 31, 1997,
were a deficit of $21.0 million compared with a $72.4 million surplus for the
six months ended December 31, 1996. The decrease in cash flows was primarily
attributed to the net loss of $339.1 million and changes in working capital
items.
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Capital expenditures aggregated $23.4 million for the six months ended December
31, 1997. The Company continues to invest capital to expand capacity and tool
new products. Investments continue to be made to support productivity
improvements, cost reduction programs, and added capability for existing and new
products. Although the Credit Facility restricts the amount of capital
expenditures the Company can incur in any given quarter, the Company does not
believe that this covenant will adversely affect the Company's capital
expenditure plans .
On October 30, 1997, in connection with the acquisition of SRS, the Company and
NationsBank entered into the Credit Facility, pursuant to which the Company has
$900 million of aggregate borrowing availability. At December 31, 1997, 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 366-day revolving credit
facility providing up to $300 million of availability, including a $25 million
sublimit for the issuance of standby letters of credit and a $75 million
sublimit for multi-currency borrowings, and a 366-day $600 million term loan.
The Company is currently in negotiations with a number of financial
institutions, to replace the current credit facility with longer term credit
facilities. The Company expects to replace the existing credit facility during
its third quarter.
On October 14, 1997, the Company and Siemens entered into the Stock Purchase
Agreement pursuant to which, on October 30, 1997, the Company issued and sold
4,883,227 Series A Preference Shares to Siemens for an aggregate purchase price
of $115.0 million. The $115.0 million of proceeds was used to fund a portion of
the purchase price for the SRS acquisition. On January 20, 1998, Siemens
converted 4,883,226 of its Series A Preference Shares into 4,883,226 shares of
common stock.
In connection with the SRS acquisition, on October 30, 1997, the Company issued
and sold to PSCC $200 million of Series B Preference Securities. On November
25, 1997, the Company issued and sold $257.7 million of Convertible Debentures
to the Trust which, concurrently therewith, issued and sold $250.0 million
aggregate liquidation amount of 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.
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. 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
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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.
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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
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