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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K/A
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
COMMISSION FILE NUMBER 1-11474
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BREED TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-2767118
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
5300 OLD TAMPA HIGHWAY 33807
LAKELAND, FLORIDA (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (941) 668-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, par value $.01 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
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
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 21, 1998 (based on the last reported closing price
per share of Common Stock as reported on the New York Stock Exchange on such
date) was $130,343,185. As of such date, the registrant had 36,849,438 shares
of Common Stock outstanding.
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INDEX TO FORM 10-K
BREED TECHNOLOGIES, INC.
The undersigned registrant hereby amends and restates the following items
of its Annual Report on Form 10-K for the year ended June 30, 1997 as set forth
in the pages attached hereto:
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PAGE REFERENCE
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PART I
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Item 1. Business.................................................. 2
Item 2. Properties................................................ 10
Item 3. Legal Proceedings......................................... 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters..................................... 12
Item 6. Selected Financial Data................................... 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 15
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 29
Item 8. Financial Statements and Supplementary Data............... 30
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................. 78
PART III
Item 10. Directors and Executive Officers of the Registrant........ 78
Item 11. Executive Compensation.................................... 81
Item 12. Common Stock Ownership of Certain Beneficial
Owners and Management..................................... 85
Item 13. Certain Relationships and Related Transactions............ 87
PART IV
Item 14. Exhibits, Financial Statements Schedules
and Reports on Form 8-K................................. 88
</TABLE>
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PART I
Unless the context otherwise requires, (i) references herein to the "Company"
are to Breed Technologies, Inc. and its direct and indirect subsidiaries
(including SRS), (ii) references to "SRS" are to the safety restraint systems
business of AlliedSignal Inc. ("AlliedSignal") acquired by the Company on
October 30, 1997 (the "SRS Acquisition"), (iii) references to any "fiscal" year
of the Company refer to the Company's fiscal year ended or ending June 30 in
such year, and (iv) references to the "model year" of automobiles mean the
twelve-month period generally commencing on September 1 of the prior year,
although specific model years may vary by manufacturer and vehicle.
ITEM 1. BUSINESS
GENERAL
The Company is a worldwide leader in the design, development, manufacture and
sale of all of the components used in complete, integrated occupant protection
systems. Its principal products include sensors, electronics and related
software, airbag modules and inflators, seatbelt systems and steering wheels.
These products are used in over 400 vehicle models manufactured by over 45
automobile manufacturers ("OEMs"), including General Motors ("GM"), Fiat, Ford,
Chrysler, Suzuki and most of the other largest OEMs in the world. The Company
sells products to customers in over 14 countries worldwide and believes that it
is the largest independent supplier of steering wheels in the world and a
leading supplier of seatbelts.
The Company's goal is to become the leading worldwide supplier of complete,
integrated occupant protection systems, which consist of (i) sensors and
electronics (including crash and occupant protection sensors, electronics and
related software), (ii) airbag modules (consisting primarily of airbags and
inflators), (iii) seatbelt systems (including pretensioners and retractors) and
(iv) steering wheels. To accomplish this goal, the Company has significantly
expanded its business through the following eleven acquisitions since August
1994:
. May 1998--acquired HS Technik and Design, which develops advanced
technology for seatbelt systems, for $4.1 million in cash (which includes
$1.3 million subject to a hold-back agreement) and 129,144 shares of
Common Stock.
. October 1997--acquired SRS, the largest independent supplier of seatbelt
systems and the third largest independent supplier of airbag systems in
the United States, for $710.0 million in cash.
. February 1997--acquired Custom Trim, located in Canada and Mexico, which
produces leather wrapped steering wheels and other automotive leather
wrapped products, for approximately $70.0 million in cash.
. November 1996--acquired Artistic Analytical Methods, Inc., a designer of
advanced algorithm technology used in the interpretation of crash pulse
data, for $1.0 million in cash.
. October 1996--acquired the North American steering wheel operations
("USS") of Untied Technologies, which produces steering wheels, airbag
covers, horn pads and related molded products in the United States, Mexico
and England, for $154.0 million in cash.
. July 1996--acquired Gallino Plasturgia, S.r.l. ("Gallino"), a manufacturer
of steering wheels and plastic interior and exterior parts based in Italy,
for $74.0 million in cash and the assumption of $52.0 million of
liabilities.
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. May 1996--acquired Force Imaging Technologies, Inc. ("FIT"), a developer,
manufacturer and distributor of proprietary, high-profile, variable force
sensors, for $3.0 million in cash.
. April 1996--acquired MOMO S.p.A. and G. Holding, S.r.l. (collectively,
"MOMO"), an original equipment manufacturer and aftermarket supplier of
premium steering wheels and alloy road wheels, for $45.2 million in cash.
. April 1996--acquired Italtest, S.r.l. ("Italtest"), a European supplier of
printed circuit boards to automotive and commercial markets, for $1.8
million in cash.
. June 1995--acquired VTI Hamlin OY ("VTI"), a Finnish company that designs
and manufactures silicon capacitive micro-machined accelerometers and
angular rate and differential and absolute pressure sensors, for $1.7
million in cash and warrants to purchase 100,000 shares of Common Stock.
. August 1994--acquired Hamlin, Incorporated, a manufacturer of crash
sensors and reed switch products with operations in the United States,
Mexico and Europe, for 838,324 shares of Common Stock.
In addition, in December 1997 the Company and Siemens Aktiengesellschaft
("Siemens") agreed to form a joint venture, BSRS Restraint Systems International
G.m.b.H & Co. KG ("BSRS"), pursuant to a joint venture agreement. In connection
with BSRS, Siemens made a $115.0 million equity investment in the Company (the
"Siemens Investment"), the proceeds of which were used to finance a portion of
the purchase price of the SRS Acquisition. BSRS provides for the worldwide
research, development, engineering, assembly and marketing of integrated
occupant protection systems incorporating at least one component manufactured by
each of the Company and Siemens (a "JV System"). The Company expects that
components comprising JV Systems will continue to be produced separately by
Siemens and the Company but will be sold by BSRS under trade names owned by it.
The Company and Siemens completed formation of BSRS in June 1998.
INDUSTRY TRENDS
The Company's performance and growth have been, and are expected to continue
to be, directly related to certain trends within the automotive industry as well
as general economic conditions. As a result of increasing competition, OEMs
have sought to reduce costs, improve quality and reduce the time required to
develop new vehicle platforms. OEMs have reduced their supplier base by
awarding contracts to full-service suppliers that are able to supply complete
automotive systems and modules on a global basis. The Company believes the
following are the primary trends in the automotive component supply industry:
SUPPLIER CONSOLIDATION. During the past several years, OEMs have
significantly consolidated their supplier bases to lower costs, improve
quality and accelerate new platform development. OEMs evaluate suppliers on
the basis of product quality, cost control, reliability of delivery, product
design capability, financial strength, new technology implementation, quality
and condition of facilities and overall management. Suppliers that obtain
superior ratings are preferred for sourcing new business.
SYSTEM/SUBSYSTEM SOURCING. OEMs are increasingly seeking full-service
suppliers capable of providing complete systems or subsystems rather than
suppliers that produce only individual components of such systems or
subsystems. A system is a group of component parts that operate together to
provide a specific engineering driven functionality whereas a subsystem is a
group of component parts that are assembled and shipped to the OEM or to a
systems supplier for installation in a vehicle as a unit. By outsourcing
complete systems or subsystems, OEMs are able to reduce their
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costs associated with the design and integration of different components and
improve quality by requiring suppliers to assemble and test major portions of
the vehicle prior to beginning production.
GLOBAL SOURCING. OEMs are positioning themselves to reach emerging
markets in a cost-effective manner by seeking to design and produce "world
cars" which can be designed in one vehicle center to a single global standard
but produced and sold in different geographic markets, thereby allowing OEMs
to reduce design costs and take advantage of low-cost manufacturing
locations. Consequently OEMs are increasingly seeking suppliers that have the
capability to design and manufacture their products in multiple geographic
markets.
PRODUCTS
The following table sets forth the percentage of net sales attributable to
each product category of the Company for the periods indicated(1):
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FISCAL YEAR PRO FORMA
---------------------- FISCAL YEAR
1996 1997 1998 1998(2)
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<S> <C> <C> <C> <C>
Electronics and sensors..... 70.1% 33.6% 14.9% 12.2%
Airbags and inflators....... 22.9 9.4 24.1 27.1
Steering wheels............. 4.5 33.4 25.1 20.6
Seatbelt systems............ -- -- 23.1 29.5
Interiors and plastics...... -- 22.9 12.4 10.2
Other....................... 2.5 0.7 0.4 0.4
----- ----- ----- -----
Total....................... 100.0% 100.0% 100.0% 100.0%
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(1) For information regarding net sales, operating income and identifiable
assets attributable to the geographic regions in which the Company operates,
see Note 14 to Consolidated Financial Statements included elsewhere in this
Annual Report.
(2) Gives effect to the SRS Acquisition as if it occurred on July 1, 1997.
ELECTRONICS AND SENSOR PRODUCTS
The Company's principal electronics and sensor product lines consist of
proprietary electronic and electromechanical sensors ("EMS sensors"), as well as
relay and reed switch products. In response to OEMs' increased reliance upon
electronic sensing systems, the Company, in conjunction with Siemens, is
developing its own advanced electronic sensing devices. The most important of
these devices is the Restraints Control Module ("RCM")--the "brain" of the
intelligent occupant protection system being developed by the Company. The RCM
serves as both an electronic crash sensor (replacing multiple EMS sensors in
prior generation systems) and a diagnostic module. Future generations of RCMs
are also expected to interpret information received from occupant detection
sensors (which will identify occupant presence, size and location) and rollover
sensors, both of which are currently being developed by the Company, and in turn
initiate a tailored response utilizing variable output airbags and seatbelt
pretensioners.
The Company is also a leading producer of EMS sensors. These crash sensors
detect a change in velocity of the vehicle by, in the case of the Company's
patented "ball-in-tube" technology, the movement of a gold-plated ball through a
finely machined tube, which closes an electrical circuit causing the initiation
of the airbag. While the Company's production of EMS sensors has declined and is
expected to continue
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to decline due to the increased functionality of electronic sensors, the
research and modeling used to develop these devices is applicable to the newer
generation electronic sensing devices currently being developed by the Company.
In addition to crash and occupant detection, the Company's sensing devices can
be used in a number of other automotive and non-automotive products. Reed
switches are used to sense position or proximity in a wide range of commercial
equipment, such as photocopy machines, exercise equipment, security systems and
cellular phones. They also have potential applications as seat position sensors
and seatbelt engagement sensors. These applications are part of intelligent
occupant protection systems. The Company also has a full range of pressure
sensors and accelerometers which utilize its silicon micro machined sensor
technology. These products can be used to detect acceleration pressure or
angular rate changes and have a number of applications including rollover
sensing, electronically controlled suspension, anti-lock braking, fuel vapor
recovery, manifold absolute pressure products and monitoring refrigerant
pressure, combustion pressure, fuel levels and brake line and tire pressure.
The Company has recently developed the Tailorable Occupant Protection System
("TOPS"), which incorporates occupant-position sensors, weight sensors and seat-
buckle sensors. These sensing systems work together with the Company's passive
restraints, seatbelts, electronics and algorithms to determine the occupant's
size and position as well as the presence of a child safety seat. The Company
has also recently developed the dynamic occupant position test sled, which
utilizes sensors located in a vehicle instrument panel to determine if an
occupant will be placed out of position relative to the automobile's airbag,
during pre-impact braking conditions. The test sled will work in conjunction
with the Company's occupant sensing system to provide the maximum and
appropriate level of occupant protection during vehicular crashes.
AIRBAG AND INFLATOR PRODUCTS
The Company offers airbags and inflators for driver-side, passenger-side and
side-impact systems used by OEMs in North America, Asia and Europe. The Company
offers a variety of inflators and modules, including sodium azide-based
pyrotechnic inflators and all-solid propellant, non-azide Eco-Safe/TM/ inflators
for driver-side applications, and a hybrid (combination solid and gas generant)
side-impact inflator. All of the Company's inflators can be tailored to provide
a variety of inflation levels to satisfy applications from depowered systems (to
address concerns for the safety of children and adults of small stature) to full
output systems. The Company is vertically integrated and manufactures most of
the components used in airbag modules including airbag fabric, inflators and the
airbag module cover.
The Eco-Safe/TM/ inflator represents the Company's newest generation of
environmentally friendly, compact inflators. In addition to the Company's thorax
and head/thorax Twin-Bag/TM/ side-impact module designs, the Company has in
development a head curtain airbag system that features both inflated and non-
inflated surfaces working together to offer a wide side-protection area. For the
next generation intelligent occupant protection system, the Company is
developing variable mass flow deployment inflators. The Company has also been
addressing the need for improved side-impact protection and recently announced
the SoftPak/TM/ head/thorax module with a patented venting system and crescent
cushion fold. This technology is designed to improve the protection of occupants
who may not be in a standard seated position. The Company also offers a self-
contained all-mechanical driver-side airbag module and steering wheel. The
entire system can be used to replace an existing steering wheel with an airbag
equipped steering wheel system on a vehicle manufactured without a driver-side
airbag.
SEATBELT SYSTEMS
As a result of the SRS Acquisition, the Company designs, develops and
manufactures complete seatbelt systems. Seatbelt systems include retractors,
buckles, seat-integrated belts, electric and mechanical height adjusters and
pyrotechnic and mechanical pretensioners, which are devices that remove slack
from a
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seatbelt system within milliseconds of a collision. The Company is a vertically
integrated manufacturer of the webbing, metal and plastic components and
finishing of seatbelt systems.
The Company is a leader in the development of seatbelts that are integrated
into the seats of the vehicle, as opposed to being attached to the upper part of
the interior known as the "B-pillar." Seat-integrated belts offer comfort,
convenience and appearance benefits to drivers and passengers, while providing
styling and assembly benefits to OEMs.
STEERING WHEELS
The Company believes that it is the world's largest independent manufacturer
of steering wheels, supplying steering wheels to OEMs in North America, Europe
and Asia. The Company's steering wheel products range from high-end steering
wheels trimmed with higher quality wood and leather for luxury and high
performance automobiles to molded plastic steering wheels for lower-priced,
higher volume vehicles. The Company is vertically integrated and finishes the
steering wheels it produces with leather wrapping or wood finishing.
CUSTOMERS
The Company supplies its products primarily to automotive OEMs in North
America, Europe and Asia. The Company's products are included in over 400
vehicle models manufactured by more than 45 OEMs. In addition to its OEM
customers, the Company sells its reed switch and silicon sensor products to a
number of manufacturers of both automotive and non-automotive equipment. During
fiscal 1998, sales to Fiat, GM, Chrysler and Ford accounted for 20%, 19% 19%
and 16% of the Company's net sales, respectively. None of the Company's other
customers accounted for more than 10% of the Company's net sales in fiscal 1998.
The Company's OEM customers typically award contracts to supply products for a
particular car model for the life of the model (which averages five years) (a
"program"). Such contracts are awarded two or three years prior to the start of
production of such model and do not require the OEM to purchase any specified
quantities of products. The Company also competes for new business to supply
products for successor models and thus is subject to the risk that the OEM will
not select the Company to produce products for a successor model. Consequently,
the Company is required to bid for contracts on a continuous basis in order to
maintain stable revenues. Because the Company supplies products for a broad
cross-section of both new and mature models, the Company is not dependent on
sales attributable to a single program and thus generally the loss of any single
program should not have a material adverse effect on the Company's results of
operations. However, although the agreements with OEMs typically extend for
life of the model, such agreements may be terminable by the customer during the
term of the contract.
The Company warrants to its OEM customers that its products are free from
defects and that they meet certain OEM designated specifications. The OEMs in
turn offer product warranties to the purchasers of vehicles. In some instances
of common complaint, the automobile manufacturer will institute a vehicle recall
or will be required by a governmental agency to conduct a recall. As a result,
from time to time, the Company has received claims against it and requests for
payment from its OEM customers to remedy complaints made by the purchasers of
vehicles. There can be no assurance that the Company will not incur substantial
warranty or recall expense the future. Such complaints and the related expenses
could have a material adverse effect on the Company's relationship with its OEM
customers and on its financial condition and results of operations.
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SALES AND ENGINEERING SUPPORT
The Company generally competes for new business at the beginning of the
development process for new vehicle models. The Company also competes for new
business upon the redesign of existing models by its customers or, in the case
of inflators and modules, as a replacement supplier for existing models.
OEM customers typically require early involvement of their suppliers in the
design and engineering aspects of product development. Automobile manufacturers
seek the Company's assistance in sensor and system design and calibration so
that particular characteristics of each vehicle model are taken into account.
Through the lengthy vehicle design process, sensors and systems are repeatedly
evaluated by the Company in simulations and sled tests, culminating in the
testing of finished vehicles with installed prototype sensors and systems to
ensure compliance with standards and specifications of the federal government
and manufacturers' safety requirements. The Company has dedicated certain of its
engineering staff to the support of its major customers.
The Company also supports its customers with its proprietary computer modeling
programs that simulate sensor and system performance using vehicle data supplied
by the customer. Using this software, the Company assists its customers in
determining calibration and installation location and adapting the Company's
products for use in the customer's vehicles. The Company's programs can also
provide customers with computer modeling of occupant motion and injury during a
simulated crash, crash pulse and inflator optimization and finite element
analysis of vehicle and component structures.
In December 1997, the Company and Siemens agreed to form BSRS. When fully
operational over the next several years, BSRS is expected to assume the sales
and marketing functions for both the Company's and Siemens' integrated occupant
protection systems and components. It is anticipated that all sales and
marketing and program management personnel relating to JV Systems and components
will be employed by BSRS (although initially certain sales and marketing
personnel will be leased by the Company to BSRS) and that billing and collection
activities will be handled by BSRS on a pass-through basis. Accordingly, the
Company expects its sales and marketing staff and related expenses to decrease
as BSRS begins to conduct the sales and marketing functions. The Company expects
that the Company and Siemens will be required to fund such expenses incurred by
BSRS. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview--BSRS".
SUPPLIERS AND RAW MATERIALS
The Company purchases many of the components for its products (including
certain plastic parts, stampings, magnets, inflators, precision steel balls,
contacts, electronic assemblies, wire harnesses, airbag doors/covers, printed
wire boards, ignitor assemblies, labels, aluminum propellant cups,
rubber/silicon seals, aluminum, leather) and raw materials (including chemicals
for the production of inflator propellent, resin and hardener for potting
compound, impacted aluminum blanks, steel rod, raw stampings to be welded,
airbag fabric, and wire harness sub-components) from third parties pursuant to
supply agreements.
The Company has agreements to purchase most or all of its requirements for
certain components from single sources, typically when the tooling for such is
reimbursed by the OEM customer. Examples include certain plastic parts,
stampings, magnets, contacts, certain electronic assemblies, certain wire
harnesses, airbag doors/covers, inflators, ignitor assemblies, aluminum
propellent cups and resin and hardener for the potting compound. The Company
believes that alternative sources for these single source items are available at
competitive prices. The Company has not experienced any interruptions in supply
in recent years, and its relationships with its suppliers have generally been
good.
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PROPRIETARY RIGHTS
The Company currently owns 355 United States patents and 505 foreign patents.
The Company has also trademarked eight names in the United States and 176 names
in certain other countries. While the Company considers its patents and
trademarks to be valuable assets, it does not believe that its competitive
position is dependent on patent or trademark protection or that its operations
are dependent on any individual patent. There can be no assurance that the
protection offered by any patents will be adequate to protect the Company's
rights and interests in its technology.
RESEARCH AND DEVELOPMENT
The Company places significant emphasis on new product and technology
development and has increased its research and development activities in each of
the last three years. During fiscal 1996, 1997 and 1998, engineering, research
and development expenses were $23.6 million, $36.1 million and $73.2 million,
respectively. The Company's research and development activities are currently
focused primarily on the development of new intelligent occupant protection
systems, next-generation inflator technologies and enhancements or cost
improvements to existing products and applications engineering. When fully
operational over the next several years, BSRS is expected to assume the
research, development and engineering functions for both the Company's and
Siemens' integrated occupant protection systems. Accordingly, the Company
expects its research, development and engineering staff and expenses to decrease
as BSRS begins to conduct these research, development and engineering functions.
The Company expects that the Company and Siemens will be required to fund all
such expenses incurred by BSRS. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview--BSRS".
COMPETITION
The Company competes with independent suppliers and partially or fully
integrated manufacturers of occupant protection systems and other automotive
components. In addition, many of the Company's customers are integrated
manufacturers that produce or could produce a substantial portion of their own
requirements for certain components. Increased competition, pricing pressures
and the demands of OEMs have caused an industry-wide trend toward consolidation.
The Company competes primarily on the basis of its product quality, price,
reliability of delivery, product design capability and engineering support,
financial strength, new technology implementation, production capabilities and
geographic service area. In addition, the ability to introduce new products to
the market has become an increasingly important factor in maintaining a
competitive position in the market.
The Company's principal competitors in the integrated occupant protection
system market are TRW, Autoliv, Delphi and Takata. These competitors produce
most of the components comprising their integrated systems. Further, these
companies have significant financial and other resources and are able to compete
as global suppliers. The Company's principal competitors in the market for
electronics and sensors are TRW, Bosch, Autoliv, Temic, Delphi (through Delco)
and Nippondenso and Ford Visteon. The Company's principal competitors in the
market for inflators and airbags are Autoliv, Takata, TRW, OEA and Tally, which
offer inflator products on a worldwide basis, and Temic, which offers inflator
products in Europe. The Company competes for sales of steering wheels in North
America with TRW, Autoliv, Centoco, Toyoda Gosei and Neaton, and in Europe with
Autoliv, Dalphi Metal, Delphi and Petri. The Company's principal competitors for
sales of seatbelts are Autoliv, Takata and TRW.
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GOVERNMENT REGULATION
AUTOMOTIVE REGULATIONS
Airbag systems installed in automobiles sold in the United States must comply
with government regulations, including those which require the installation of
passive restraint devices in all new cars, light trucks and vans. In order to
comply with these regulations, airbag systems must meet specifications intended
to ensure that certain types of injuries occurring as a result of specified
crash conditions fall within established severity levels. The Company's
customers are required to self-certify that airbag systems installed in vehicles
sold in the United States satisfy these requirements.
ENVIRONMENTAL REGULATIONS
The Company uses various hazardous and toxic substances in its manufacturing
processes including certain solvents and lubricants, as well as sodium azide and
other pyrotechnic materials. The Company's operations are subject to numerous
federal, state and local laws, regulations and permit requirements relating to
the handling, storage, disposal and transportation of certain of these
substances. The Company's foreign operations are also subject to various
environmental and transportation-related statutes and regulations. Generally,
these foreign requirements tend to be no more restrictive than those in effect
in the U.S. The Company believes that it is in compliance in all material
respects with existing laws and regulations and has obtained or applied for all
material permits necessary to conduct its business. Although no assurance can be
given, the Company does not believe that compliance with existing environmental
or other governmental laws or regulations will have a material adverse effect on
its results of operations or financial condition.
PRODUCT LIABILITY
The sale of the Company's products entail an inherent risk of product
liability claims. Although the Company maintains product liability insurance
covering certain types of claims, the Company's policies are subject to
substantial deductibles and there can be no assurance that the coverage limits
of the Company's insurance policies will be adequate or that any particular loss
will be covered. Such insurance can be expensive and in the future may not be
available on acceptable terms, if at all. A successful claim brought against
the Company not covered by the Company's insurance or resulting in a recovery in
excess of its insurance coverage could have a material adverse effect on the
Company's financial condition and results of operations.
BACKLOG
The Company's automotive customers typically award contracts to supply
products for a particular car model for the life of the model (which averages
five years). Such contracts do not require the OEM to purchase any specified
quantities of products. With respect to these customers, the Company generally
does not manufacture or ship products until it has received a purchase order and
material release which specifies the quantity ordered and specific delivery
dates. Generally these orders are shipped within two weeks of receipt of the
final material release. With respect to the Company's non-automotive customers,
products are produced for stock based on sales forecasts and historical demand.
The backlog at June 30, 1998 was not material.
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EMPLOYEES
As of June 30, 1998, the Company had approximately 16,300 full-time employees
worldwide. Certain of the Company's North American employees and most of its
overseas employees are unionized. The Company has not experienced any
significant work stoppages during the past three years and considers its
relations with its employees to be good. During the three months ended December
31, 1997, the Company began implementing its Repositioning Program (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview -- Repositioning Program" under Item 7 in this Annual
Report) pursuant to which the Company plans to reduce its global workforce by
25% (or approximately 4,900 employees). The Company currently expects the
reduction in its global workforce to be substantially completed by March 31,
1999.
ITEM 2. PROPERTIES
As of June 30, 1998, the Company owns or leases manufacturing, sales and
engineering facilities located throughout the United States, Mexico, and Europe.
The Company's principal executive offices are located in Lakeland, Florida in
buildings owned by the Company. The Company believes that its existing
production capacity is adequate to service existing demand for the Company's
products. The Company considers its plants and equipment to be in good
condition. The Company believes that, if necessary, suitable additional or
alternative facilities would be available to accommodate the Company's needs on
commercially reasonable terms.
The following table provides, as of June 30, 1998, certain information
regarding the Company's significant facilities (in excess of 25,000 square
feet):
<TABLE>
<CAPTION>
Location Type of Interest Description of Use
- -------- ---------------- ------------------
<S> <C> <C>
Lakeland, FL............... Owned Corporate Headquarters;
Manufacturing and
Engineering
Brownsville, TX............ Owned Distribution and Administration
Farmington Hills, MI....... Leased Technical Center: Engineering,
Sales, Customer Support
and Research &
Development
Valle Hermosa, Mexico...... Owned Manufacturing
Matamoros, Mexico.......... Owned Manufacturing
Grabill, IN................ Owned Manufacturing
Birmingham, England........ Owned Manufacturing
Lake Mills, WI............. Leased Manufacturing, Sales and Engineering
Aqua Prieta, Mexico........ Owned Manufacturing
Diss, England.............. Owned Manufacturing
Torino, Italy.............. Leased Manufacturing
Tregnano, Italy............ Owned Manufacturing
Milan, Italy............... Leased Administrative, Sales and Design
Aszar, Hungary............. Owned Manufacturing
Juarez, Mexico............. Owned Manufacturing
Torino, Italy.............. Leased Manufacturing
</TABLE>
-10-
<PAGE>
<TABLE>
<CAPTION>
Location Type of Interest Description of Use
- -------- ---------------- ------------------
<S> <C> <C>
Aqua Prieta, Mexico........ Leased Manufacturing
Torino, Italy.............. Owned Manufacturing
Carlisle, England.......... Leased Manufacturing
Milan, Italy............... Leased Manufacturing
Maryville, TN.............. Owned Manufacturing
Milan, Italy............... Leased Manufacturing
Greenville, AL............. Owned Manufacturing
Torino, Italy.............. Owned Manufacturing
Knoxville, TN.............. Leased Manufacturing
Sterling Heights, MI....... Leased Administrative, Research & Development
Frosinone, Italy........... Owned Manufacturing
El Paso, TX................ Leased Manufacturing
Waterloo, Ontario, Canada.. Leased Manufacturing
Knoxville, TN.............. Leased Warehouse
Matamoros, Mexico.......... Owned Manufacturing
Tamaulipas, Mexico......... Leased Manufacturing
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
On April 16, 1998, the Company was served with a complaint in the matter of
Takata Corporation ("Takata") v. AlliedSignal, Inc. and Breed Technologies,
Inc., (United States District Court, District of Delaware, case no. 98-94). The
original complaint alleged patent infringement on the part of the Company
relating to the production of two seatbelt retractors formerly manufactured by
AlliedSignal and now manufactured by the Company. The suit seeks monetary
damages and injunctive relief. Under the Asset Purchase Agreement relating to
the SRS Acquisition (the "APA"), AlliedSignal is required to indemnify the
Company (on a net after tax basis) against any monetary damages incurred by the
Company in connection with this lawsuit, including any reasonable royalties that
might be paid in respect of sales made through February 2000. The complaint was
subsequently amended to include allegations of infringement relating to four
additional products. The Company has counterclaimed that Takata is infringing a
patent owned by the Company. Under the APA, any liability for the additional
claims of Takata is to be shared equally with AlliedSignal, including any
reasonable royalties that might be paid in respect of sales made through April
2000. Both the Company and AlliedSignal are vigorously defending this matter.
While the outcome of this lawsuit cannot be predicated with certainty, based
upon currently available information, the Company does not believe that this
lawsuit will have a material adverse effect on the Company's financial condition
or results of operations.
In addition, the Company is party to other litigation incidental to its
business from time to time. The Company is not currently a party to any
litigation that the Company believes, if determined adversely to the Company,
would have a material adverse effect on the Company's financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
-11-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON EQUITY
The Common Stock of the Company is traded on the New York Stock Exchange
under the symbol "BDT." The table below sets forth the high and low sales prices
of the Common Stock during the periods indicated. The Company paid cash
dividends aggregating approximately $8.9 million ($0.28 per share) and
approximately $2.4 million ($0.07 per share) in fiscal 1997 and 1998,
respectively.
<TABLE>
<CAPTION>
Price Range
----------------
High Low
------ --------
<S> <C> <C>
FISCAL 1997
First Quarter................. 27 7/8 18 1/2
Second Quarter................ 28 1/2 22 5/8
Third Quarter................. 27 1/4 19 1/4
Fourth Quarter................ 23 17 3/8
FISCAL 1998
First Quarter................. 24 1/2 18 1/4
Second Quarter................ 25 3/8 17 3/4
Third Quarter................. 24 1/4 17 3/16
Fourth Quarter................ 23 1/2 15
</TABLE>
- ------------
As of September 21, 1998, there were approximately 853 holders of
record of the Company's Common Stock.
Determinations to pay cash dividends are at the discretion of the
Board of Directors of the Company, and the actual payment of any such cash
dividends in the future will depend upon the Company's results of operations,
earnings, capital requirements, contractual restrictions, and other factors
deemed relevant by the Company's Board. Under the Company's New Credit Facility
and Indenture (both as hereinafter defined), the Company's ability to pay
dividends is restricted, and the Company does not anticipate paying cash
dividends on the Common Stock in the foreseeable future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below for, and as
of the end of, each of the years in the five-year period ended June 30, 1998 are
derived from the consolidated financial statements of the Company, of which (i)
the financial statements for fiscal 1994 and 1995 were audited by KPMG Peat
Marwick LLP and (ii) the financial statements for fiscal 1996, 1997 and 1998
were audited by Ernst & Young LLP. The following data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto of the
Company and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Annual Report.
-12-
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------------------------
1994 1995 1996 1997 1998
-------------------------------------------------
(DOLLARS IN MILLIONS, EXCEPT FOR SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Net sales.............................................. $324.7 $401.0 $431.7 $794.9 $1,385.3
Cost of sales(2)....................................... 206.8 244.6 277.1 631.3 1,201.4
------ ------ ------ ------ --------
Gross profit........................................... 117.9 156.4 154.6 163.6 183.9
Selling, general and administrative expenses........... 28.9 33.1 38.2 70.6 78.6
Engineering, research and development expenses......... 14.8 18.5 23.6 36.1 73.2
Repositioning Charge(3)................................ -- -- -- -- 177.0
Impairment Charge(4)................................... -- -- -- -- 82.5
R&D Write-Off(5)....................................... -- -- -- -- 77.5
Amortization of intangibles............................ -- 0.3 2.0 6.3 19.3
------ ------ ------ ------ --------
Operating income (loss)................................ 74.2 104.5 90.8 50.6 (324.2)
Interest income (expense), net......................... 0.5 0.7 (1.1) (24.5) (83.2)
Other income (expense), net............................ (1.7) 4.9 8.6 3.5 (1.4)
------ ------ ------ ------ --------
Earnings (loss) before income taxes, distributions
on Preferred Securities and extraordinary item....... 73.0 110.1 98.3 29.6 (408.8)
Income taxes (benefit)................................. 28.4 37.8 35.3 14.8 (60.2)
Distributions on Preferred Securities.................. -- -- -- -- 10.0
------ ------ ------ ------ --------
Earnings (loss) before extraordinary loss.............. 44.6 72.3 63.0 14.8 (358.6)
Extraordinary loss, net of tax benefit................. -- -- -- -- 10.0
------ ------ ------ ------ --------
Net earnings (loss).................................... $ 44.6 $ 72.3 $ 63.0 $ 14.8 $ (368.6)
====== ====== ====== ====== ========
PER SHARE DATA:
Basic earnings (loss) per common share:
Earnings (loss) before extraordinary loss............ $ 1.43 $ 2.30 $ 2.00 $ 0.47 $ (10.73)
Extraordinary loss................................... -- -- -- -- (0.30)
------ ------ ------ ------ --------
Net earnings (loss).................................. $ 1.43 $ 2.30 $ 2.00 $ 0.47 $ (11.03)
====== ====== ====== ====== ========
Diluted earnings (loss) per common share:
Earnings (loss) before extraordinary loss............ $ 1.43 $ 2.29 $ 1.99 $ 0.47 $ (10.73)
Extraordinary loss................................... -- -- -- -- (0.30)
------ ------ ------ ------ --------
Net earnings (loss).................................. $ 1.43 $ 2.29 $ 1.99 $ 0.47 $ (11.03)
====== ====== ====== ====== ========
OTHER DATA:
Capital expenditures................................. $ 23.6 $ 69.3 $ 45.4 $ 75.9 $ 67.8
Depreciation and amortization........................ 8.9 13.9 20.1 48.5 61.5
EBITDA(6)............................................ 83.1 118.4 110.9 99.1 124.4
Cash interest expense(7)............................. 1.1 0.8 2.7 26.8 68.9
Ratio of EBITDA to cash interest expense............. 75.5x 148.0x 41.1x 3.7x 1.8x
Ratio of earnings to fixed charges(8)................ 53.1x 92.7x 33.8x 2.0x --
</TABLE>
-13-
<PAGE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.............. $ 94.7 $ 75.5 $ 90.2 $(47.2) $ (13.9)
Total assets................. 206.3 278.7 503.8 877.2 1,649.9
Total debt................... 11.6 13.6 162.8 423.4 898.0
Preferred Securities......... -- -- -- -- 250.0
Total stockholders' equity
(deficit).................. 151.2 218.7 275.1 266.5 (11.8)
</TABLE>
- -------------
(1) The Company has completed eleven acquisitions since August 1994.
Consequently, the results of operations of the Company have been
significantly impacted by the results of operations and the integration and
acquisition costs relating to these acquisitions and, accordingly,
comparisons of results of operations for fiscal 1996, 1997 and 1998 and are
not as meaningful as comparisons of results in prior periods.
(2) Includes the December COS Charge and June COS Charge (both as defined
herein). For a description of The December COS Charge and June COS Charge,
see "Management's Discussion and Analysis of Financial Condition and Results
of Operations --Overview--Repositioning Program--Other Special Charges --
December 1997" and "--Special Charge --June 1998," respectively.
(3) For a discussion of the Repositioning Charge (as defined herein), see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview--Repositioning Program--Other Special Charges December
1997" and "--Special Charge--June 1998," respectively.
(4) For a discussion of the Impairment Charge, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview--
Impairment Program--Impairment Charge."
(5) For a discussion of the R&D Write-Off (as defined herein), see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview--Repositioning Program--Repositioning Charge."
(6) EBITDA represents operating income (loss) plus (i) depreciation and
amortization, (ii) the December 1997 Charges (as hereinafter defined) and
(iii) the June COS Charge (as hereinafter defined). EBITDA is presented
because it is a widely accepted financial indicator of a company's ability
to service debt. EBITDA should not be considered as an alternative measure
of operating results or cash flow from operations (as determined in
accordance with generally accepted accounting principles).
(7) Cash interest expense reflects, for the applicable period, aggregate
interest expense during such period minus non-cash interest expense during
such period attributable to the amortization of deferred financing costs.
Non-cash interest expense was $16.8 million for fiscal 1998.
(8) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of earnings before income taxes and extraordinary items plus fixed
charges. Fixed charges consist of interest expense, whether expensed or
capitalized, amortization of debt issuance costs and an estimated portion of
rental expense that is representative of the interest factor in such
rentals. Earnings were insufficient to cover fixed charges by $408.9 million
for fiscal 1998. The ratio of earnings to fixed charges for fiscal 1998
reflects the December 1997 Charges (as hereinafter defined).
-14-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes thereto of the Company included
elsewhere in this Annual Report.
OVERVIEW
During the past several years, OEMs have begun consolidating their supplier
base by awarding contracts to full-service suppliers that are able to supply
complete automotive systems and subsystems on a global basis. 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--EMS sensors--to a
leading manufacturer of all of the components required for complete, integrated
occupant protection systems. The Company believes that this capability
positions it to better respond to this trend.
The Company anticipates that the prices of automotive occupant protection
systems and components such as those sold by the Company will continue to
decline over the next several years as a result of competitive pressures and OEM
requirements. The Company's future profitability, therefore, will depend, among
other things, on its ability to continue to reduce its per-unit costs and
maintain a cost structure, internally and with its suppliers, that will enable
it to offer competitive prices. There can be no assurance that the Company will
be successful in doing so. Further, the automobile market is cyclical and
dependent on general economic conditions. Further, declines in car production
in the United States or in markets outside the Untied States could have a
material adverse effect on the Company's financial condition and results of
operations. In addition, most of the Company's customers are unionized and may,
from time to time, experience labor disruptions. Any disruption in production by
one or more of the Company's customers could have an adverse effect on the
Company's financial condition and results of operations.
The recent results of operations of the Company have been significantly
impacted by the results of operations and the integration and acquisition costs
relating to acquisitions and, accordingly, comparisons of results of operations
for fiscal 1998, 1997 and 1996 are not as meaningful as comparisons of results
in prior periods.
REPOSITIONING PROGRAM
Overview. 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 fiscal 1998,
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 quarter ended December 31, 1997, the Company formulated a
repositioning plan (the "Repositioning Program") which is intended to: (i)
enhance the Company's competitiveness and productivity, (ii) reduce costs and
increase asset control and (iii) improve processes and systems.
The Repositioning Program consists primarily of a 25% planned reduction in
the Company's global workforce (or approximately 4,900 employees) through the
elimination of 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, the consolidation of
the Company's
-15-
<PAGE>
manufacturing, sales and engineering facilities primarily in North America and
Europe through the closing of approximately 50% (or 32) of its manufacturing
facilities and 33% (or 10) of its sales and engineering facilities (which
includes certain facilities being consolidated due to deteriorating business
conditions at USS and Custom Trim), and the disposal of certain non-core assets.
The Company expects the Repositioning Program to generate approximately $855
million in aggregate cumulative cost savings (which includes approximately $780
million of cash savings), which will be realized over the five-year period
ending June 30, 2002. As of June 30, 1998, actions taken by the Company in
connection with the Repositioning Program have resulted in approximately $70
million in annual cost savings to the Company. 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. In connection with the Repositioning Program, the
Company recorded a $177.0 million charge during the three months ended December
31, 1997 (the "Repositioning Charge"), which included the following: (i) $30.8
million relating to planned work force reductions; (ii) $31.4 million relating
to proposed facility consolidations (not including any SRS facilities); (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 in connection with the Gallino
Disposition (as defined herein); and (v) $62.9 million relating to the write-
down of impaired production and other equipment and the related goodwill and the
write-off of assets used to manufacture products being replaced by new
technologies.
The Impairment Charge. During the quarter ended December 31, 1997, the
Company recorded a $82.5 million impairment charge (the "Impairment Charge")
relating to the write-down of goodwill and other long-lived assets at USS due to
deteriorating business conditions, reflecting the Company's determination 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 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.
-16-
<PAGE>
Implementation of Repositioning Program. The Company began implementing the
Repositioning Program during the quarter ended December 31, 1997. As of June
30, 1998, the Company had reduced its net global workforce by approximately
2,700 employees and closed and/or sold 24 manufacturing facilities. During
fiscal 1998, in connection with the proposed facility consolidations, the
Company identified assets to be disposed of including property, plant and
equipment at certain facilities worldwide. During fiscal 1998, the property,
plant and equipment at those facilities was determined to be impaired and was
written down from its aggregate carrying value of approximately $139.0 million
to its estimated fair market value of $34.8 million. The Company has not yet
reclassified the value of property, plant and equipment closed as a part of the
Repositioning Program to assets held for sale because the amounts are not
material. The Company has ceased recording depreciation for all facilities and
equipment that have been identified for disposal, including Gallino's non-
steering wheel business. The annual depreciation expense associated with these
assets is $13.6 million.
During fiscal 1998, the repositioning reserve was reduced by $224.7 million
as a result of cash and non-cash charges. The following table sets forth the
details and the cumulative activity relating to the Repositioning Charge and
Impairment Charge as of June 30, 1998:
<TABLE>
<CAPTION>
RESERVE
CHARGE TAKEN AT CASH NON-CASH BALANCE AT
DECEMBER 31, 1997 REDUCTIONS REDUCTIONS JUNE 30, 1998
----------------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Headcount reductions................. $ 30.8 $14.9 $ -- $15.9
Facility consolidations.............. 31.4 2.9 9.6 18.9
Goodwill write-down.................. 10.6 -- 10.6 --
Impairment Charge.................... 82.5 -- 82.5 --
Gallino write-down................... 41.3 -- 41.3 --
Impaired assets and equipment
write-down......................... 62.9 62.9
------ ----- ------ -----
Total.......................... $259.5 $17.8 $206.9 $34.8
====== ===== ====== =====
</TABLE>
The Repositioning Program is expected to be substantially completed by March
31, 1999.
Disruption Charges. The December 1997 Charges 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: (i) inefficiencies associated with consolidating manufacturing,
engineering and sales facilities; (ii) unabsorbed fixed overhead; (iii)
temporary increases in labor; (iv) premium freight and (v) 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 $14.0
million during fiscal 1998 associated with closing and relocating manufacturing
facilities in connection with the Repositioning Program. These costs were
included in cost of sales.
OTHER SPECIAL CHARGES - DECEMBER 1997
In addition, during the quarter ended December 31, 1997, (i) in connection
with the purchase price allocation for the SRS Acquisition, the Company incurred
a $77.5 million charge relating to the write-off of in-process research and
development for acquired technology that has not been established as
technologically feasible (the "R&D Write-Off"), and (ii) the Company incurred a
$28.4 million charge against cost of sales for inventory and long-term contracts
relating to manufacturing processes that will be exited (the "December COS
Charge"). 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
-17-
<PAGE>
European OEM to supply side impact airbag modules, 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 since been terminated effective January 1999. The Repositioning Charge, the
Impairment Charge, the R&D Write-Off and the December COS Charge are referred to
herein collectively as the "December 1997 Charges."
SPECIAL CHARGE - JUNE 1998
During the quarter ended June 30, 1998, the Company recorded a $21.7 million
special charge (the "June COS Charge") against cost of sales relating to
expected losses under 28 contracts (within nine different OEMs) acquired in
connection with the SRS Acquisition. The June COS Charge represented estimated
losses expected to be incurred over the expected life of the respective
platforms to which the contracts related. The Company recorded these losses
during the quarter ended June 30, 1998 because it determined that they were
probable and reasonably estimable.
SHIFT IN HISTORICAL PRODUCT MIX AND PRODUCT MARGINS
Historically, a large percentage of the Company's net sales and gross profit
has been attributable to sales of EMS sensors. EMS sensors generally have higher
gross margins than other products sold by the Company. Beginning in fiscal 1996,
sales of EMS sensors to OEMs began to decline, reflecting OEMs' increased
reliance on electronic sensors sourced internally. The Company's product mix has
also been affected by recent acquisitions, which expanded product offerings
having lower gross margins, particularly steering wheels and plastic trim
components. In addition, the markets for automotive occupant protection systems
and components are highly competitive and the Company is experiencing, and
expects to continue to experience, downward pricing pressure for its products
which will in turn put pressure on gross margins. The following table sets forth
the percentage of net sales attributable to each product category for the
periods indicated(1):
<TABLE>
<CAPTION>
FISCAL YEAR PRO FORMA
------------------------------- FISCAL YEAR
1996 1997 1998 1998(2)
------- ------- ------- -----------
<S> <C> <C> <C> <C>
Electronics and sensors.... 70.1% 33.6% 14.9% 12.2%
Airbags and inflators...... 22.9 9.4 24.1 27.1
Steering wheels............ 4.5 33.4 25.1 20.6
Seatbelt systems........... -- -- 23.1 29.5
Interiors and plastics..... -- 22.9 12.4 10.2
Other...................... 2.5 0.7 0.4 0.4
----- ----- ----- -----
Total...................... 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
- -------------
(1) Gives effect to the SRS Acquisition as if it occurred on July 1, 1997. For
information regarding net sales, operating income and identifiable assets
attributable to the geographic regions in which the Company operates, see
Note 14 to Consolidated Financial Statements included elsewhere in this
Annual Report.
(2) Gives effect to the SRS Acquisition as if it occurred on July 1, 1997.
-18-
<PAGE>
INTERNATIONAL OPERATIONS
The Company operates primarily in North America and Europe. Net sales in
North America accounted for 75%, 48% and 60% of the Company's net sales in
fiscal 1996, 1997 and 1998, respectively, and net sales in Europe accounted for
25%, 52% and 37% of the Company's net sales in fiscal 1996, 1997 and 1998,
respectively. The increase in net sales in Europe during fiscal 1997 was
primarily attributable to the acquisition of Gallino and MOMO. Operating income
attributable to North American operations was 97% and 92% in fiscal 1996 and
1997, respectively. Operating income attributable to European operations was 3%
and 8% in fiscal 1996 and 1997, respectively. Operating margin attributable to
both North American and European operations for fiscal 1998 was negative as a
result of the December 1997 Charges. In addition, operating margin attributable
to European operations is substantially lower than that generated by North
American operations primarily because European net sales consist of sales of a
higher proportion of low margin products, such as steering wheels, interiors and
plastics.
The Company expects that international sales will continue to account for a
significant portion of its business in the future. The Company's ability to
compete effectively outside the United States will depend on its ability to
develop the relationships and, if demand requires, additional facilities
necessary to service international customers. In addition, the Company's
financial results attributable to international sales may be affected by
fluctuations in currency exchange rates, increases in duty rates, difficulties
in obtaining export licenses, trade and tariff regulations, political
instability, difficulties or delays in collecting accounts receivable and
difficulties in staffing and managing international operations. Pro forma for
the SRS Acquisition, sales in Asia accounted for approximately 4.1% of the
Company's net sales for fiscal 1998. In recent months, certain Asian currencies
have been devalued significantly in relation to the U.S. dollar and financial
markets in Asia have experienced significant turmoil. There can be no assurance
that the Company's sales in Asia will not be materially adversely affected by
such developments
PRODUCT DEVELOPMENT
In response to OEMs' increased reliance upon electronic sensing systems, the
Company in conjunction with Siemens is developing its own advanced electronic
sensing systems. The Company's research and development activities are currently
focused primarily on the development of new intelligent occupant protection
systems, next generation inflator technologies and enhancements or cost
improvements for existing products. In addition, in December 1997 the Company
and Siemens agreed to form BSRS. When fully operational over the next several
years, BSRS is expected to assume the research, development and engineering
functions for both the Company's and Siemens' integrated occupant protection
systems as well as the sales and marketing activities with respect thereto.
BSRS
In December 1997, the Company and Siemens agreed to form BSRS, which provides
for the worldwide research, development, engineering, assembly and marketing of
integrated occupant protection systems. When fully operational over the next
several years, BSRS is expected to assume the sales and marketing, as well as
the research, development and engineering, functions for both the Company's and
Siemens' integrated occupant protection systems. The Company expects that
components comprising integrated occupant protection systems will continue to be
produced separately by Siemens and the Company but will be sold by BSRS under
trade names owned by it. Further it is anticipated that all sales and marketing
and program management personnel relating to integrated occupant protection
systems and components will be employed by BSRS (although initially certain
sales and marketing personnel will be leased by the Company to BSRS) and that
billing and collection activities will be handled by BSRS on a pass-through
basis. Accordingly, the Company expects its own sales and marketing expenses, as
well as its research, development and engineering expenses, to decrease as BSRS
begins to conduct these functions. However, the Company will recognize its
proportionate share of such expenses incurred by BSRS as the Company's interest
in BSRS will be accounted for by the Company under the equity method
-19-
<PAGE>
of accounting. The Company and Siemens will be required to fund any such
expenses incurred by BSRS to the extent revenues and external funding sources
(such as loans from the third parties) are insufficient to cover budgeted
operating expenses and capital expenditures. The Company does not anticipate
that BSRS will borrow amounts from unaffiliated third parties and, consequently,
the Company expects that the Company and Siemens will be required to fund all of
the operating expenses of BSRS. The Company and Siemens completed formation of
BSRS in June 1998.
In the event that the BSRS is terminated, there can be no assurance that the
Company will be able to rehire a sufficient number of such personnel and any
inability to do so could have a material adverse effect on the Company.
Further, all significant operating decisions regarding the joint venture must be
approved by Siemens and the Company. In the event of a deadlock regarding
material operating decisions, either party may sell their interest in the BSRS
to the other or the BSRS may be terminated. If the Company sells its interest
in the BSRS or the BSRS is otherwise terminated, the Company will likely no
longer have access to Siemens' expertise in sensors and electronics, which may
materially adversely affect the Company's ability to develop next generation,
intelligent, integrated occupant protection systems. Any failure to develop
such systems would adversely affect the Company's competitive position and could
have a material adverse effect on the Company's financial condition and results
of operations.
Pursuant to the joint venture agreement relating to BSRS, the Company and
Siemens are required to fund the operations of the BSRS pursuant to an operating
budget to be agreed upon by the parties. The New Credit Facility and the Notes
will restrict the amount that the Company can invest in the BSRS. The New
Credit Facility limits the Company's investments in the BSRS to $2.0 million in
fiscal 1998, $10.0 million in fiscal 1999 and 2000 and $15.0 million in each
year thereafter provided that the Company may make investments in the BSRS in
excess of the specified amounts beginning in fiscal 2000 and thereafter if,
after adding such specified amounts to consolidated fixed charges (as defined in
the New Credit Facility), the Company is in compliance with the covenants in the
New Credit Facility. Any inability to make sufficient investments in the BSRS
could have a material adverse effect on the operations of the BSRS.
OTHER DEVELOPMENTS
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.
Gallino Disposition. In July 1996, the Company acquired Gallino, a
manufacturer of steering wheels and plastic interior and exterior parts based in
Italy. During the quarter ended June 30, 1997, the Company committed to a plan
to dispose of the plastic interior and exterior parts business of Gallino (the
"Gallino Disposition"). The Company is currently in negotiations with two third
parties relating to the sale of substantially all of this business. Under both
proposals, the Company would retain at least a 10% interest in the business
subject to the Gallino Disposition.
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED TO FISCAL 1997
Net Sales. Net sales for fiscal 1998 increased 74% to $1,385.3 from $794.9
million for fiscal 1997. The increase in net sales was primarily due to the
acquisitions of USS in October, 1997, Custom Trim in February 1997 and SRS in
October 1997. These three acquisitions accounted for approximately $695.0
million of the increase in net sales. The increase in net sales in fiscal 1998
was partially offset by a $7.1
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million reduction in net sales attributable to the strike at General Motors
(which began June 1998), decreased sales due to deteriorating business
conditions at USS and Custom Trim and a decrease in sales of EMS sensors,
inflators and airbag modules and steering wheel products. The Company was
impacted by the strike across all product categories. The Company expects that
decreased sales due to the GM strike and the usual shutdown of the Company's
European plants during August 1998 will materially adversely impact net sales
for the first quarter of fiscal 1999. The Company expects that net sales
attributable to USS and Custom Trim will continue to decline significantly
during fiscal 1999 due to the loss of business (and the failure to replace such
business on a timely basis with new business) and industry-wide pricing
pressures.
EMS sensor sales decreased 33% to $111.4 million in fiscal 1998 from $165.1
million for fiscal 1997. These decreases are due to lower demand as major
customers continued to shift from EMS to Electronic sensors that are sourced
internally. The company believes that the reduction in revenues for EMS sensors
will continue to decline in the foreseeable future.
Inflator and airbag modules sales (excluding SRS) decreased 6% to $68.8
million for fiscal 1998 from $74.3 million in fiscal 1997. The decrease was
primarily due to the planned phase-out of all mechanical airbag systems at
Chrysler and Fiat and the reduction of shipments of inflators and airbags to
customers in Asia due to the economic situation in Asia.
Cost of Sales. Cost of sales increased 90% to $1,201.4 million in fiscal 1998
from $631.3 million for fiscal 1997. The increase primarily reflected the
additional production costs of $597.4 million resulting from the acquisition of
USS and Custom Trim in fiscal 1997 and the acquisition of SRS in fiscal 1998.
In addition, the Company incurred approximately $14.0 million of disruption
costs associated with the closing, sale and/or relocation of 15 manufacturing
facilities in connection with the Repositioning Program and the ongoing
relocations of manufacturing facilities, as well as the $28.4 million December
COS Charge and $21.7 million June COS Charge, in the quarter ended December 31,
1997.
Gross Profit. Gross profit increased 12% to $183.9 million in fiscal 1998
from $163.6 million for fiscal 1997. As a percentage of net sales, gross profit
for fiscal 1998 was 13% as compared to 21% for fiscal 1997. The decrease in
gross margin was primarily attributable to (i) a shift in product mix from high
margin EMS sensors to those of lower margin products, primarily steering wheels,
plastics and seatbelts acquired in recent acquisitions, (ii) disruption costs,
(iii) the December COS Charge and (iv) the June COS Charge. Excluding the
December COS Charge, the June COS Charge and disruption costs incurred during
fiscal 1998, gross profit would have been $248.0 million, or 18% of net sales,
for fiscal 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 11% to $78.6 million in fiscal 1998 from $70.6
million. Selling, general and administrative expenses as a percentage of net
sales decreased to 6% in fiscal 1998 from 9% in fiscal 1997. Selling, general
and administrative expenses as a percentage of net sales decreased primarily as
a result of the cost improvements associated with the reduction of headcount and
reduced spending associated with the Repositioning Program.
Research, Development and Engineering Expenses. Research, development and
engineering expenses increased 103% to $73.2 million for fiscal 1998 from $36.1
million for fiscal 1997. The increase was primarily due to costs associated
with acquired businesses in fiscal 1997 and 1998 of $40.0 million, an increase
in spending for new product development and additional application engineering
costs associated with new program launches.
Operating Income (Loss). Operating income (loss) for fiscal 1998 decreased
significantly from fiscal 1997 primarily due to the December 1997 Charges
aggregating $365.4 million included in cost of sales and operating expenses as
well as the $21.7 million June COS Charge and the impact of the General Motors
strike (which reduced operating income by $3.5 million). Cost of sales during
fiscal 1998 also reflected
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disruption costs of $14.0 million. Exclusive of the effects of the December 1997
Charges, the June COS Charge General Motors strike and disruption costs,
operating income would have been $80.4 million, or 6% of net sales, for fiscal
1998, compared to $50.6 or 6% of net sales, for fiscal 1997.
Interest Expense. Interest expense during fiscal 1998 increased to $85.7
million from $26.8 million for fiscal 1997. The increase in interest expense
was primarily due to a $474.6 million increase in average borrowings outstanding
during fiscal 1998 compared to fiscal 1997 as a result of the acquisitions of
USS and Custom Trim in fiscal 1997 and SRS in fiscal 1998.
Income Taxes. The fiscal 1998 annual effective tax rate benefit was 14%.
This benefit reflected the impact of the December 1997 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 or the write-down of goodwill
included in the December 1997 Charges. 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.
Extraordinary Loss. In October 1997, the Company recorded an extraordinary
loss of $0.7 million net of an income tax benefit of $0.4 million for the write-
off of debt issuance costs relating to the prepayment of the two multi-currency
credit agreements. In April 1998, the Company recorded an extraordinary loss of
$9.2 million net of an income tax benefit of $5.0 million for the write-off of
debt issuance costs relating to the New Credit Facility.
FISCAL 1997 COMPARED TO FISCAL 1996
Net Sales. Net sales increased 84.1% to $794.9 million in fiscal 1997 from
$431.7 million in fiscal 1996 primarily due to the acquisitions made in the
fourth quarter of fiscal 1996 and during fiscal 1997. These acquisitions
accounted for approximately $435.0 million of year-over-year sales growth,
including approximately $260.0 million attributable to sales of steering wheels.
The increase in net sales was partially offset by a decline in sales of the
Company's EMS sensors and all-mechanical airbag systems.
EMS sensor sales decreased 26.8% to $165.1 million in fiscal 1997 from $225.6
million in fiscal 1996 as major OEM customers continued the shift to electronic
sensors sourced internally. This decline was partially offset by an increase in
the sale of auxiliary and safing sensors, which are components in electronic
sensor systems.
Inflator and airbag systems sales decreased 16.4% to $74.3 million in fiscal
1997 from $88.9 million in fiscal 1996, primarily due to a phase-out of all-
mechanical airbag systems at Fiat and Chrysler, partially offset by new program
launches for inflator products sourced to Delphi, Mazda and Suzuki.
Cost of Sales. Cost of sales increased 127.9% to $631.3 million in fiscal
1997 from $277.0 million in fiscal 1996. The increase primarily reflected (i)
additional costs of sales attributable to the acquisitions made in the fourth
quarter of fiscal 1996 and during fiscal 1997, (ii) an increase in fixed
manufacturing costs, primarily depreciation, as a result of capacity expansion
for the Company's inflator products and (iii) charges of approximately $10.0
million related to the closing in fiscal 1997 of three plants acquired in
previous acquisitions.
Gross Profit. Gross profit as a percentage of net sales decreased to 20.6%
in fiscal 1997 from 35.8% in fiscal 1996, reflecting the declining sales of
high-margin EMS sensors and a higher percentage of net sales (more than 50%)
being generated by lower margin products, primarily steering wheels, acquired in
recent acquisitions.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 84.8% to $70.6 million in fiscal 1997 from
$38.2 million in fiscal 1996, primarily reflecting costs
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associated with the acquired businesses ($33.6 million), which was partially
offset by reductions in expenses associated with the existing business.
Research, Development and Engineering Expenses. Research, development and
engineering expenses increased 53.1% to $36.1 million in fiscal 1997 from $23.6
in fiscal 1996, reflecting costs associated with the acquired businesses ($8.0
million) and a significant increase in spending for new product development in
the existing business. New product development initiatives included non-azide
and reduced-sized inflators, hybrid side-impact inflators, and electronic
sensing, especially for intelligent systems.
Operating Income. Operating income was $50.6 million for fiscal 1997 compared
to $90.8 million for fiscal 1996. The decrease in operating income resulted
primarily from the declining sales of high margin EMS sensors being replaced
with lower margin products, primarily steering wheels, and an increase in
operating expenses associated with the recent acquisitions.
Interest Expense. Interest expense increased to $26.8 million in fiscal 1997
from $2.7 million in fiscal 1996. This increase reflected an increase in average
borrowings outstanding during fiscal 1997, which borrowings were used to finance
acquisitions and capital spending programs.
Income Taxes. The higher effective tax rate of 49.9% in fiscal 1997 compared
to 35.9% in fiscal 1996 was primarily due to the amortization of goodwill
without tax benefit and higher foreign tax rates. Fiscal 1996 also included a
benefit related to a reduction in taxes provided in prior years.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL AND CAPITAL EXPENDITURES
The Company's primary cash requirements are for working capital, servicing the
Company's indebtedness, capital expenditures and acquisitions. Management
believes that cash generated from operations together with borrowings available
under the New Credit Facility will be sufficient to meet the Company's working
capital, debt service and capital expenditure needs, as well as required
investments in BSRS, for at least the next twelve months. The Company's ability
to invest in BSRS is limited under the New Credit Facility and the Notes.
During fiscal 1998, cash flow from operating activities was a deficit of $10.3
million compared with $89.4 million for fiscal 1997. The decrease in fiscal
1998 was primarily attributable to the net loss of $368.6 million in fiscal 1998
and the timing of cash flow from current assets and liabilities, such as
accounts receivable, inventory, accounts payable, accrued liabilities and income
taxes. This decrease was offset by non-cash items and accruals included in the
December 1997 Charges.
The Company had a working capital deficit of $13.9 million at June 30, 1998
compared to a deficit of $47.2 million at June 30, 1997 and working capital of
$90.2 million at June 30, 1996. The lower working capital deficit at June 30,
1998 compared to June 30, 1997 was attributable to a reduction in the amount of
current portion of long-term debt outstanding at June 30, 1998 compared to June
30, 1997. The decrease in working capital to a deficit of $47.2 million at June
30, 1997 from $90.2 million of working capital at June 30, 1996 was attributable
to the use of available cash as well as borrowings to finance the acquisitions
of Gallino, USS and Custom Trim.
In fiscal 1997 and fiscal 1998, the Company made capital expenditures of $75.9
million and $67.8 million, respectively, to expand capacity and tool new
products. Investments continue to be made in new equipment throughout the
Company to support productivity improvements, cost reduction programs and to add
capacity for existing and new products. The Company estimates that capital
expenditures during fiscal 1999 will aggregate approximately $75.0 million and
will be used to support productivity
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improvements, cost reduction programs, reconfiguration of manufacturing
facilities relating to the Repositioning Program and to finance new program
launches.
Cash investments by the Company in BSRS during fiscal 1998 were not material.
The Company and Siemens are in the process of preparing a business plan and
budget for BSRS for fiscal 1998 and expect this process to be completed by
December 1998. Accordingly, the Company cannot currently estimate the amount of
cash investments that it will be required to make in BSRS during fiscal 1999.
ACQUISITIONS AND RELATED FINANCINGS
On October 30, 1997, the Company consummated its largest acquisition to date,
the SRS Acquisition, for an aggregate purchase price of $710.0 million in cash.
SRS is the largest independent supplier of seatbelt systems and the third
largest independent supplier of airbag systems in the United States and is a
leading supplier of seatbelts and airbag systems to OEMs worldwide.
The SRS Acquisition was financed with (i) borrowings under a $900.0 million
bridge credit facility (the "Bridge Credit Facility"), (ii) the proceeds
received in connection with the issuance and sale of 4,883,227 Series A
Preference Shares to Siemens for an aggregate purchase price of $115.0 million
(Siemens converted 4,883,226 of its Series A Preference Shares into an equal
number of shares of Common Stock on January 20, 1998) and (iii) the proceeds
received in connection with the issuance and sale to Prudential Securities
Credit Corp., of $200.0 million of Series B Convertible Preferred Stock of the
Company (the "Series B Preferred"). On November 25, 1997, the Company sold
$257.7 million of its 6.50% Convertible Subordinated Debentures due 2027 (the
"Convertible Debentures") to BIT Capital Trust which, concurrently therewith,
sold $250.0 million aggregate liquidation amount of its 6.50% Convertible Trust
Preferred Securities (the "Preferred Securities") (which are fully and
unconditionally guaranteed by the Company) in a private transaction under Rule
144A under the Securities Act of 1933 (the "Preferred Securities Offering").
The Company used the net proceeds received in connection with the Preferred
Securities Offering to redeem all of the outstanding Series B Preferred and for
general corporate purposes.
The Company used borrowings under the New Credit Facility, together with the
net proceeds received in connection with issuance and sale of the Notes, to
repay in full all amounts outstanding under the Bridge Credit Facility as of
April 28, 1998.
On May 1, 1998, the Company acquired HS Technik and Design, which develops
advanced technology for seatbelt systems, for $4.1 million in cash (which
includes $1.3 million subject to a hold-back agreement) and 129,144 shares of
Common Stock of the Company. The Company financed the cash portion of the
purchase price for the acquisition with available cash.
NEW CREDIT FACILITY
On April 28, 1998, the Company entered into a new $675.0 million credit
facility (the "New Credit Facility"), which replaced the Bridge Credit Facility.
The New Credit Facility consists of (i) a $150.0 million revolving credit
facility and (ii) $525 million of term loans. At June 30, 1998, the Company had
an aggregate of $507 million of borrowings outstanding under the New Credit
Facility, which bore interest at a weighted average rate of 7.9% per annum at
such date, and had aggregate borrowing availability thereunder of $137.6
million. 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 the
Company that is a borrower under the New Credit Facility. The New
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Credit Facility matures at various times between the sixth and eighth
anniversaries of the Closing Date. The New Credit Facility is guaranteed by all
of the domestic subsidiaries.
Under the New Credit Facility, the Company is subject to restrictive 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, make 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. Under the terms of the
New Credit Facility, the Company may not pay dividends or make other restricted
payments until the Company's consolidated leverage ratio is equal to or less
than 3.50 to 1.00 as of the end of the most recent four-quarter period. The
Company does not presently meet this standard and it is unclear when it will be
met. In addition, 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. At June 30, 1998, the
Company was in compliance with all covenants.
On June 26, 1998, the Company made a $18.0 million voluntary prepayment of its
outstanding term loan balances under the New Credit Facility. The debt
reduction resulting from the prepayment, fully satisfied the mandatory payment
of principal due in December 1998 and partially satisfied the payment due in
March 1999.
SENIOR SUBORDINATED NOTES
On April 28, 1998, the Company issued and sold $330 million of 9.25% Senior
Subordinated Notes (the "Notes") in a private transaction under Rule 144A under
the Securities Act of 1933. The Notes bear interest at 9.25% and mature on
April 15, 2008, unless previously redeemed. Interest on the Notes is payable
semi-annually 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 originally 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 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. The
Indenture relating to the Notes contains certain covenants that, among other
things, restrict the Company and its Restricted Subsidiaries (as defined in the
Indenture) with respect to: the incurrence of additional debt; restricted
payments; assets sales; transactions with affiliates; dividend and other
payment restrictions affecting restricted subsidiaries; certain liens; and
certain consolidations, mergers or sales of assets.
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SWAP AGREEMENTS AND OTHER HEDGING ARRANGEMENTS
The Company uses interest rate swap agreements to help minimize its interest
rate exposures. Amounts to be paid or received under swap agreements are
recognized over the terms of the agreements as adjustments to interest expense.
The Company had entered into variable to fixed interest rate swap agreements in
the notional amount of $35.0 million as of June 30, 1998. These agreements have
expiration dates between 1999 and 2005. Under these agreements, the Company
received an average variable rate of 5.7% and paid an average fixed rate of 6.3%
on June 30, 1998. The Company also has variable to variable interest rate swap
agreements outstanding at June 30, 1998 with notional amounts of $275.0 million,
which effectively convert interest from a LIBOR basis to a broader index and cap
the Company's exposure to upward movement in rates at 6.0% through May 28, 2001
and afterwards at 7.5% through May 28, 2005. These agreements expire in 2005.
Under these agreements, the Company received an average variable rate of 5.7%
and paid an average variable rate of 5.3% at June 30, 1998.
The Company also uses foreign currency derivative financial instruments to
offset the effects of exchange rate changes on firm purchase commitments and
certain intercompany loan transactions. At June 30, 1998 the Company had
outstanding foreign exchange contracts to buy $53.0 million Canadian dollars
maturing through October 1999 and a contract to sell $2.0 million British
pounds. See Note 6 to Consolidated Financial Statements included elsewhere in
this Annual Report.
SEASONALITY
The Company's quarterly operating results may vary significantly depending on
factors such as the timing of significant orders, the level of sales by
automobile manufacturers, disruptions caused by labor disputes and the seasonal
patterns of its customers, especially those located in Europe. A large portion
of the Company's expenses are fixed and cannot be adjusted in response to a
shortfall in quarterly revenues. There can be no assurance that the Company will
operate profitably in any quarter.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculation causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
Based on recent assessments, the Company has determined that it will be
required to modify or replace portions of its software and hardware so that its
computer systems will properly utilize dates beyond December 31, 1999. These
assessments indicated that some of the Company's significant information
technology systems and operating equipment (i.e. production and manufacturing
systems) could be affected.
Affected operating equipment includes automated assembly lines and related
technologies used in various aspects of the manufacturing process. However,
based on a review of its product lines, the Company has determined that the
products it has sold and will continue to sell do not require remediation to be
Year 2000 complaint. Accordingly, the Company does not believe that the Year
2000 presents a material exposure as it relates to the Company's products. In
addition, the Company has gathered information about the Year 2000 compliance
status of its significant suppliers and subcontractors and continues to monitor
their compliance.
For its information technology exposures, the Company expects to complete
software reprogramming no later than December 31, 1998. Once software is
reprogrammed and replaced for a system, the Company begins testing and
implementation. These phases run concurrently for different systems.
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Completion of the testing phase for all significant systems is expected by
March 31, 1999, with all remediated systems fully tested and implemented by June
30, 1999.
The remediation of operating equipment is significantly more difficult than
the remediation of the information technology systems because some of the
manufacturers of that equipment are no longer in business. Testing of this
equipment is also more difficult than the testing of the information technology
systems. Once testing is complete, the operating equipment is ready for
immediate use. The Company expects to complete its remediation efforts by March
31, 1999. Testing and implementation of affected equipment is expected to be
80% complete by June 30, 1999.
The Company is in the process of working with third party vendors to ensure
that the Company's systems that interface directly with third parties are Year
2000 compliant by December 31, 1999. The Company has completed its assessment
efforts. Testing of all material systems is expected no later than December 31,
1998. Implementation is expected to be completed by March 31, 1999. Each
vendor queried believed that its billing system would be Year 2000 compliant by
the end of 1999.
The Company has queried its important suppliers and customers that do not
share information systems with the Company. To date, the Company is not aware
of any suppliers and customers Year 2000 issue that would materially impact the
Company's results of operations of financial condition. However, the Company has
no means of ensuring that suppliers and customers will be Year 2000 ready. The
inability of its external agents to complete their Year 2000 resolution process
in a timely fashion could materially impact the Company. The effect of non-
compliance by its suppliers and customers is not determinable.
The Company will utilize both internal and external resources to reprogram,
or replace, test, and implement the software and operating equipment for Year
2000 modifications. The total cost of the Year 2000 project is estimated at $7
million and is being funded with cash from operations. To date, the Company has
incurred approximately $1 million ($1 million expensed) relating to all phases
of the Year 2000 project. Of the total remaining project costs, the remaining
$6 million relates to repair of hardware and software and will be expensed as
incurred.
The Company plans to complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources, and
other factors. Estimates on the status of completion and the expected
completion dates are based on costs incurred to date compared to total expected
costs. However, there can be no guarantee that these estimates will be achieved
and actual results could differ materially from those plans. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
FORWARD LOOKING STATEMENTS
Statements herein regarding estimated annual cost savings under the
Repositioning Program, anticipated capital expenditures, estimated investments
in BSRS 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 annual 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
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of relationships with, or the loss of, material customers, the failure to obtain
business related to new and redesigned model introductions, possible significant
product liability claims, decreases in demand for the Company's products, and
adverse changes in general market and industry conditions (including, without
limitation, continued downward pricing pressure and competitive pressures
associated with OEM's consolidation of their supplier base. 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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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONTENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants.......... 31
Consolidated Balance Sheets................................. 32
Consolidated Statements of Operations....................... 34
Consolidated Statements of Stockholders' Equity (Deficit)... 35
Consolidated Statements of Cash Flows....................... 37
Notes to Consolidated Financial Statements.................. 40
</TABLE>
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
BREED Technologies, Inc.
We have audited the accompanying consolidated balance sheets of BREED
Technologies, Inc. and subsidiaries as of June 30, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the three years in the period ended June 30, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit. We did not audit the 1997 financial statements of MOMO S.p.A, a
wholly owned consolidated subsidiary acquired April 15, 1996, which statements
reflect total assets of $106,398,000 as of June 30, 1997 and net sales of
$73,093,000 for the year then ended. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to data included for MOMO S.p.A., is based solely on the report of the
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of BREED Technologies,
Inc. and subsidiaries at June 30, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1998, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
September 23, 1998,
Tampa, Florida
-31-
<PAGE>
BREED TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
------------------
1998 1997
------------------
ASSETS (IN MILLIONS)
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 1) $ 44.4 $ 18.7
Accounts receivable, principally trade 275.3 208.0
Inventories (Note 1):
Raw materials 75.0 27.1
Work in progress 18.2 23.4
Finished goods 15.9 24.8
------------------
109.1 75.3
Income tax receivable 64.6 --
Deferred income taxes (Notes 1 and 4) 4.5 5.8
Prepaid expenses and other 23.2 7.7
------------------
Total current assets 521.1 315.5
Property, plant and equipment: (Note 1)
Land 17.4 15.2
Buildings 98.8 106.1
Machinery and equipment 320.1 212.6
Construction in progress 60.5 28.0
------------------
496.8 361.9
Less accumulated depreciation (131.6) (85.4)
------------------
365.2 276.5
------------------
Intangible assets, net (Note 1) 692.1 221.0
Net assets held-for-sale (Note 3) 29.0 52.6
Investments and other assets 42.5 11.6
------------------
Total assets $1,649.9 $877.2
==================
</TABLE>
-32-
<PAGE>
BREED TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30,
-----------------
1998 1997
------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) (IN MILLIONS)
<S> <C> <C>
Current liabilities:
Notes payable and current portion of
long-term debt (Note 5) $ 46.9 $191.7
Accounts payable 254.9 121.5
Accrued expenses (Note 18) 233.2 49.5
------------------
Total current liabilities 535.0 362.7
Long-Term Debt (Notes 5 and 6) 851.1 231.7
Other Long-Term Liabilities 25.6 16.3
------------------
Total Liabilities 1,411.7 610.7
------------------
Company Obligated Mandatorily Redeemable Convertible
Preferred Securities (Notes 6 and 11) 250.0 --
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, par value $0.01, authorized 75,000,000
shares issued and outstanding 36,850,261 and
31,679,442 at June 30, 1998 and 1997, respectively 0.4 0.3
Series A Preference Stock, par value $0.01, issued and
outstanding 1 share at June 30, 1998 (Note 13) -- --
Additional paid-in capital 197.6 77.5
Warrants (Note 13) 1.9 --
Retained earnings (184.0) 208.0
Foreign currency translation adjustments (Note 1) (27.4) (18.8)
Unearned compensation (0.3) (0.5)
------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (11.8) 266.5
------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $1,649.9 $877.2
==================
</TABLE>
See notes to Consolidated Financial Statements.
-33-
<PAGE>
BREED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------
1998 1997 1996
------------------------------------
(IN MILLIONS, EXCEPT FOR SHARE DATA)
<S> <C> <C> <C>
Net sales (Note 1) $1,385.3 $ 794.9 $ 431.7
Cost of sales (Note 15) 1,201.4 631.3 277.1
------------------------------------
Gross profit 183.9 163.6 154.6
------------------------------------
Selling, general and administrative expenses 78.6 70.6 38.2
Research, development and engineering expenses 73.2 36.1 23.6
Repositioning and impairment charges (Note 15) 259.5 -- --
In-process research and development expenses
(Notes 2 and 15) 77.5 -- --
Amortization of intangibles 19.3 6.3 2.0
------------------------------------
Operating income (loss) (324.2) 50.6 90.8
------------------------------------
Interest expense 85.7 26.8 2.7
Other income (expense), net (Note 18) 1.1 5.8 10.2
------------------------------------
Earnings (loss) before income taxes, distributions on
Company obligated mandatorily redeemable convertible
preferred securities and extraordinary loss (408.8) 29.6 98.3
Income taxes (benefit) (Note 4) (60.2) 14.8 35.3
Distributions on Company obligated mandatorily
redeemable convertible preferred securities 10.0 -- --
------------------------------------
Earnings (loss) before extraordinary loss (358.6) 14.8 63.0
Extraordinary loss, net of tax benefit
of $5.4 million (Note 16) 10.0 -- --
------------------------------------
NET EARNINGS (LOSS) $ (368.6) $ 14.8 $ 63.0
====================================
EARNINGS PER SHARE (NOTES 1 AND 12):
BASIC:
Income (loss) before extraordinary items $ (10.73) $ 0.47 $ 2.00
Extraordinary loss (0.30) -- --
------------------------------------
NET INCOME (LOSS) $ (11.03) $ 0.47 $ 2.00
====================================
DILUTED:
Income (loss) before extraordinary items $ (10.73) $ 0.46 $ 1.99
Extraordinary loss (0.30) -- --
------------------------------------
NET INCOME (LOSS) $ (11.03) $ 0.46 $ 1.99
====================================
Shares used for computation:
Basic 33,407 31,648 31,550
Diluted 33,407 31,867 31,644
Cash dividends per share $ 0.07 $ 0.28 $ 0.24
</TABLE>
See Notes to Consolidated Financial Statements.
-34-
<PAGE>
BREED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
FOREIGN
(IN MILLIONS, SERIES A SERIES B ADDITIONAL CURRENCY UNEARNED TOTAL
EXCEPT PER COMMON STOCK PREFERENCE PREFERENCE PAID-IN RETAINED TRANSLATION COMPEN- STOCKHOLDERS'
SHARE DATA) SHARES AMOUNT STOCK STOCK CAPITAL WARRANTS EARNINGS ADJUSTMENTS SATION EQUITY (DEFICIT)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June
30, 1995 31,515,390 0.3 -- -- 75.1 -- 146.5 (1.5) (1.6) 218.8
Shares issued
under Stock
Option Plans 67,561 0.8 -- -- -- 0.8
Shares sold
under Employee
Stock Purchase
Plan 60,906 -- 1.0 -- -- -- 1.0
Shares terminat-
ed under Stock
Incentive Plan,
net of granted
shares (17,200) -- (0.4) -- -- 0.5 0.1
Compensation
expense -- -- -- -- -- 0.2 0.2
Tax benefit from
exercise of
stock options -- -- 0.2 -- -- -- 0.2
Net earnings -- -- -- 63.1 -- -- 63.1
Translation
adjustments -- -- -- -- (1.4) -- (1.4)
Cash dividends--
$.24 per share -- -- -- (7.6) -- -- (7.6)
------------------------------------------------------------------------------------------------------------------
Balance at June
30, 1996 31,626,657 0.3 76.7 202.0 (2.9) (0.9) 275.2
Shares issued
under Stock
Option Plans 38,695 0.5 -- -- -- 0.5
Shares sold
under Employee
Stock Purchase
Plan 27,082 -- 0.5 -- -- -- 0.5
Shares terminat-
ed under Stock
Incentive Plan,
net of granted
shares (12,992) -- (0.3) -- -- 0.3 --
Compensation
expense -- -- -- -- -- 0.1 0.1
Tax benefit from
exercise of
stock options -- -- 0.1 -- -- -- 0.1
Net earnings -- -- -- 14.8 -- -- 14.8
Translation
adjustments -- -- -- -- (15.9) -- (15.9)
Cash dividends--
$.24 per share -- -- -- (8.8) -- -- (8.8)
------------------------------------------------------------------------------------------------------------------
Balance at June
30, 1997 31,679,442 $0.3 $77.5 $208.0 $(18.8) $(0.5) 266.5
</TABLE>
See Notes to Consolidated Financial Statements.
-35-
<PAGE>
BREED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
<TABLE>
<CAPTION>
FOREIGN
(IN MILLIONS, SERIES A SERIES B ADDITIONAL CURRENCY UNEARNED TOTAL
EXCEPT PER COMMON STOCK PREFERENCE PREFERENCE PAID-IN RETAINED TRANSLATION COMPEN- STOCKHOLDERS'
SHARE DATA) SHARES AMOUNT STOCK STOCK CAPITAL WARRANTS EARNINGS ADJUSTMENTS SATION EQUITY (DEFICIT)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June
30, 1997 31,679,442 $0.3 $ 77.5 $ 208.0 $(18.8) $(0.5) 266.5
Shares issued
under Stock
Option Plans 103,162 1.6 1.6
Shares terminat
ed under Stock
Incentive Plan,
net of granted
shares (7,212) (0.2) .2 --
Shares issued
for acquisition
of HS Technik
and Design 129,144 2.8 2.8
Shares issued
for acquisition
of minority
interest in
subsidiary 62,499 1.0 1.0
Net loss (368.6) (368.6)
Issue Series A
Preference
Stock 115.0 115.0
Issue Series B
Preference
Stock, (in-
cluding fees) 200.0 (10.0) 190.0
Redemption of
Series B
Preference
Stock (200.0) (200.0)
Fees associated
with Company
obligated
mandatorily
redeemable
convertible
preferred
securities (11.0) (11.0)
Warrants issued
with Credit
Facility 1.9 1.9
Conversion of
Series A
Preference
Stock 4,883,226 0.1 (115.0) 114.9 --
Translation
adjustments (8.6) (8.6)
Cash dividends
$.07 per share (2.4) (2.4)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at June
30, 1998 36,850,261 0.4 -- -- 197.6 1.9 (184.0) (27.4) (0.3) (11.8)
====================================================================================================================================
</TABLE>
Preferred stock: Authorized 5,000,000 shares, par value $.001 per
share. To date, none of these shares have been issued.
Common stock: Authorized 75,000,000 shares, par value $.01 per
share.
See Notes to Consolidated Financial Statements.
-36-
<PAGE>
BREED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------
1998 1997 1996
--------------------------------
(IN MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $(368.6) $ 14.8 $ 63.0
Adjustments:
Depreciation of plant and equipment 42.2 42.2 18.1
Amortization of intangible assets 19.3 6.3 2.0
Deferred income taxes 7.3 1.2 1.7
Loss (gain) from sale of assets 1.3 0.6 (1.5)
Compensation related to stock plan -- 0.1 0.2
Non-cash items included in repositioning,
impairment and other special charges 211.4 -- --
Accrual for repositioning, impairment and other
special charges 98.2 -- --
Changes in operating assets and liabilities, net of
effects from acquisitions:
Accounts receivable 31.8 (16.3) (30.7)
Inventories 2.4 2.2 (1.5)
Income tax receivable (64.6) -- --
Prepaid expenses and other (0.9) (0.7) (0.7)
Accounts payable 5.5 37.0 0.8
Accrued expenses (10.9) (7.6) (9.2)
Other assets and liabilities 7.4 9.6 (1.0)
--------------------------------
Net cash provided by (used in)operating activities (18.2) 89.4 41.2
--------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (67.8) (75.9) (45.4)
Sale of short-term investments, net -- -- 10.6
Cost of acquisitions, net of cash acquired (716.9) (291.9) (48.5)
Deposit on Gallino acquisition -- -- (10.3)
Investment in and advances to affiliates -- (0.9) --
Proceeds from sale of assets 11.5 1.4 2.7
--------------------------------
Net cash used in investing activities (773.2) (367.3) (90.9)
--------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
-37-
<PAGE>
BREED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
YEAR ENDED JUNE 30,
--------------------------------
1998 1997 1996
--------------------------------
(IN MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Bridge Loan Facility 800.0 -- --
Repayment of Bridge Loan Facility (800.0) -- --
Proceeds from New Credit Facility 525.0 -- --
Proceeds from Senior Subordinated Notes 330.0 -- --
Other borrowings (repayments), net (380.4) 210.3 125.6
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 (10.0) -- --
Redemption of Series B Preference Stock (200.0) -- --
Proceeds from Company Obligated Mandatorily
Redeemable Convertible Preferred Securities,
less related fees 239.0 -- --
Cash dividends paid (2.4) (8.9) (6.9)
Common stock issued--options and stock plans 1.6 1.2 2.1
--------------------------------
Net cash provided by financing activities 817.8 202.6 120.8
Effect of exchange rate changes on cash (0.7) (1.8) (1.6)
--------------------------------
Net increase (decrease) in cash and cash equivalents 25.7 (77.1) 69.5
Cash and cash equivalents at beginning of year 18.7 95.8 26.3
--------------------------------
Cash and cash equivalents at end of year $ 44.4 $ 18.7 $ 95.8
================================
</TABLE>
See Notes to Consolidated Financial Statements.
-38-
<PAGE>
BREED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------
1998 1997 1996
-----------------------------------
<S> <C> <C> <C>
(IN MILLIONS)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 78.2 $ 20.8 $ 2.3
Income taxes $ 21.5 $ 12.9 $ 32.2
Cost of acquisitions (Note 2):
Working capital (deficiency), net of cash acquired $ 62.6 $ (23.5) $ 0.1
Property, plant and equipment (139.5) (145.0) (18.0)
Identifiable intangible assets (263.9) (16.0) --
Cost in excess of net assets of businesses acquired (372.0) (158.1) (35.7)
Other assets (12.5) (2.2) (3.1)
Long-term debt and other long-term liabilities 8.4 52.9 8.2
-----------------------------------
Net cost of acquisitions $(716.9) $(291.9) $(48.5)
===================================
</TABLE>
See Notes to Consolidated Financial Statements.
-39-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of BREED
Technologies, Inc. (the Company) and its wholly and majority-owned subsidiaries.
All intercompany balances and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include short-term interest bearing securities with
maturities of three months or less when purchased.
REVENUE RECOGNITION AND SALES COMMITMENTS
The Company recognizes revenue when title and risk of loss transfers to its
customers, which is generally upon shipment of products to customers. The
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.
EARNINGS PER SHARE
In 1998, the Company adopted Statement of Financial Accounting Standard No. 128,
"Earnings per Share" (SFAS No. 128). SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options and convertible securities. Diluted earnings per
share is similar to the previously reported fully diluted earnings per share.
All earnings per share amounts for all periods presented have been restated to
conform to SFAS No. 128 requirements. This charge did not have a material
impact on the computation of the earnings per share data.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
primarily using the first-in, first-out method for inventories in North America
and primarily using the average cost method for inventories in Europe.
-40-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is computed
using the straight-line method applied to individual items based on estimated
useful lives of the assets which range from 5 to 40 years for buildings and
improvements, and 3 to 10 years for machinery, computer and office equipment.
Replacements and betterments that extend the lives of assets are capitalized,
while maintenance and repairs are expensed as incurred. Upon sale or retirement
of property and equipment, the related cost and accumulated depreciation are
removed and any gain or loss is recognized.
INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
----------------
1998 1997
----------------
<S> <C> <C>
(IN MILLIONS)
Cost in excess of net assets of businesses acquired $526.1 $207.0
Patents 12.5 21.5
Developed technology 170.0 ---
Work force 10.3 ---
----------------
718.9 228.5
Accumulated amortization 26.8 7.5
----------------
Net intangible assets $692.1 $221.0
================
</TABLE>
Cost in excess of net assets of businesses acquired (goodwill) is being
amortized on a straight-line basis over periods ranging from 3 to 40 years and
is stated net of accumulated amortization of $18.7 million and $6.2 million at
June 30, 1998 and 1997, respectively.
The Company assesses the recoverability of its intangible assets by determining
whether the net carrying value of the intangibles can be recovered through
undiscounted future cash flows. The amount of intangible impairment, if any, is
measured based on estimated discounted future cash flows. The assessment of the
recoverability of intangibles will be impacted if estimated future cash flows
are not achieved.
Patents, technology, and workforce are being amortized on a straight-line basis
over a period of 10 to 22 years and is stated at cost less accumulated
amortization of $8.1 million and $1.3 million at June 30, 1998 and 1997,
respectively. These items, which were acquired in connection with the
acquisition of VTI Hamlin OY ("VTI"), the North American steering wheel
operations ("USS") of United Technologies and the acquisition of SRS (as defined
in Note 2) are capitalized and amortized on a straight-line basis over the
average remaining life of the related patents and technology.
DEFERRED INCOME TAXES
Under the asset and liability method of Statement of Financial Accounting
Standard No. 109 "Accounting for Income Taxes" (SFAS No. 109), deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, operating loss
and tax credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Under Statement 109, the
-41-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
effect on deferred tax assets and liabilities due to a change in tax rates is
recognized in income in the period that includes the enactment date.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
(SFAS No. 123). SFAS No. 123 established financial accounting and reporting
standards for stock-based compensation plans and transactions in which an entity
issues its equity instruments to acquire goods and services from nonemployees.
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation cost has been recognized for the stock option
plans.
FOREIGN CURRENCY TRANSLATIONS
The Company translates foreign currencies into U.S. dollars using year-end
exchange rates for foreign assets and liabilities and weighted average rates for
foreign income and expenses. Translation gains and losses arising from the
conversion of the foreign balance sheets and income statements into U.S. dollars
are reflected as a separate component of stockholders' equity. With respect to
operations in Mexico, the functional currency is the U.S. dollar, and any gains
or losses from translations are included directly in income.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses interest rate swap agreements to help minimize its interest
rate exposure. Amounts to be paid or received under swap agreements are
recognized over the terms of the agreements as adjustments to interest expense.
Amounts receivable or payable under the agreements are included in receivables
or accrued expenses in the accompanying Consolidated Balance Sheets.
The Company also uses foreign currency derivative financial instruments to
offset the effects of exchange rate changes on firm purchase commitments and
certain intercompany loan transactions. Gains and losses on contracts
designated as hedges of intercompany transactions that are permanent in nature
are accrued as exchange rates change, and are recognized in stockholders' equity
as foreign currency translation adjustments. Gains and losses on contracts that
are not permanent in nature or are not designated as hedges are accrued as
exchange rates change and are recognized in income. Gains and losses on
contracts designated as hedges of identifiable foreign currency firm commitments
are deferred and included in the measurement of the related foreign currency
transaction.
LONG-LIVED ASSET IMPAIRMENT
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 121 "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of" (FAS No. 121) which
became effective for fiscal years beginning after December 15, 1995 (fiscal 1997
for the Company). Impairment of long-lived assets, including intangibles
related to such assets, is recognized whenever events or changes in
circumstances indicate that the carrying amount of the asset, or related groups
of assets, may not be fully recoverable from estimated future cash flows and the
fair value of the related assets is less than their carrying value.
-42-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts in prior years' consolidated financial statements and related
notes have been reclassified to conform to the current year's presentation.
IMPLEMENTATION OF NEW FINANCIAL ACCOUNTING STANDARDS
In June 1997, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income". The
statement must be adopted by the Company in the first quarter of fiscal 1999.
Under provisions of this statement, the Company will be required to include a
financial statement presentation of comprehensive income and its components to
conform to these new requirements. As a consequence of this change, certain
reclassifications will be necessary for previously reported amounts to achieve
the required presentation of comprehensive income. Required disclosures will
not affect the Company's financial position or results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131, "Disclosure about Segments of an
Enterprise and Related Information". The statement must be adopted by the
Company on June 30, 1999. Under provisions of this statement, the Company will
be required to modify or expand the financial statement disclosures for
operating segments, products and services, and geographic areas. Required
disclosures will not affect the Company's financial position or results of
operations.
In December 1997, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits" and is effective for the Company's 1999
fiscal year. The statement revises current disclosure requirements for
employers' pensions and other retiree benefits. Required disclosures will not
affect the Company's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," (SFAS No. 133)
which is required to be adopted in years beginning after June 15, 1999. The
SFAS No. 133 permits early adoption as of the beginning of any fiscal quarter
after its issuance. SFAS No. 133 will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company has not yet determined what the effect of
SFAS No. 133 will be on the earnings and financial position of the Company.
-43-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
The Company sells to customers throughout the United States and the world.
Credit evaluations of its customers' financial conditions are performed
periodically, and the Company generally does not require collateral from its
customers.
Sales to Fiat, Delphi-GM, Chrysler and Ford represented approximately 20%, 19%,
19%, 16%, respectively, of the Company's total net sales during fiscal 1998,
32%, 13%, 3% and 25%, respectively, of the Company's total net sales during
fiscal 1997, and 14%, 26%, 5% and 33%, respectively, of the Company's total net
sales during fiscal 1996.
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the strong financial condition of the Company's customer base.
At June 30, 1998, the Company's receivables from Fiat, Delphi-GM, Chrysler and
Ford amounted to 29%, 8%, 12% and 12% respectively, of total trade accounts
receivable balance.
2. ACQUISITIONS
During the three years ended June 30, 1998, the Company made the acquisitions
set forth below. All of the acquisitions were accounted for under the purchase
method of accounting. Accordingly, the purchased assets and liabilities have
been recorded at their estimated fair value at the date of acquisition, and the
Consolidated Financial Statements include the operating results of each business
from the date of acquisition.
FISCAL 1998
On October 30, 1997 the Company completed the acquisition of certain assets and
the assumption of certain liabilities of SRS 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"). 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
Hermosa, 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 the
Bridge Credit Facility (as defined in Note 5), the net proceeds from the
issuance and sale of Series B Preference Stock, and the net proceeds from the
issuance and sale of Series A Preference Shares to Siemens AG. The purchase
price exceed the fair value of the net assets acquired by approximately $372.0
million. The resulting goodwill is being amortized on a straight-line basis
over 40 years.
-44-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The SRS acquisition has been accounted for as a purchase for financial
accounting purposed in accordance with U.S. generally accepted accounting
principles. The purchase price for SRS was allocated to the assets acquired and
liabilities assumed based on the estimated fair values at the date of
acquisition as follows (in millions):
<TABLE>
<CAPTION>
<S> <C> <C>
Cash purchase price $710.0
Less:
Estimated fair value of SRS net assets acquired less
assumed liabilities $301.8
Adjustment for planned closings of 8 facilities (13.0) 288.8
-----------------
421.2
Involuntary employee termination costs for
approximately 2,187 employees 32.0
Acquisition costs 7.0
Other 10.2
-------
Excess of purchase price over fair value of net assets
acquired $372.0
=======
</TABLE>
The allocation of purchase price to goodwill and identifiable intangibles and
estimated lives are:
<TABLE>
<CAPTION>
VALUE AMORTIZATION
ALLOCATED PERIOD IN YEARS
-------------------------------
(IN MILLIONS)
<S> <C> <C>
Trained Workforce $ 10.3 10
Developed Technology 170.0 22
In-process research and
development 77.5 --
Goodwill 372.0 40
</TABLE>
Independent appraisals have been used in establishing the fair market values.
The preliminary allocation of the purchase price was adjusted during the fourth
quarter of fiscal 1998 to reflect revised estimates of pre-acquisition
contingencies, liabilities and restructuring. The plant closings and
involuntary employee terminations accrued above are part of restructuring this
business and is to be substantially completed by March 31, 1999.
On May 1, 1998, the Company completed the acquisition of all of the outstanding
capital stock of HS Technik and Design ("HSTD"). HSTD is in the business of
developing advance technology for vehicle safety belt systems among other
automotive products. The purchase price for the HSTD acquisition was $4.1
million (which includes $1.3 million subject to a hold-back agreement) and
129,144 shares of common stock (valued at $2.8 million as of the acquisition
date). The cash portion of the purchase price was financed with borrowings
under the Company's New Credit Facility (as defined in Note 5). The allocation
of the purchase price is preliminary and subject to change. The purchase price
exceeded the fair value of net assets acquired by approximately $6.1 million.
The resulting goodwill is being amortized over 13 years.
-45-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The pro forma unaudited results of operations for the years ended June 30, 1998
and 1997, assuming the acquisitions had been consummated as of July 1, 1997 and
1996, respectively, are as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Net sales $1,675.4 $1,765.4
Net earnings $ (391.8) $ 4.7
Net earnings per share - basic $ (11.73) $ 0.15
Net earnings per share - diluted $ (11.73) $ 0.13
</TABLE>
FISCAL 1997
GALLINO
On July 1, 1996, the Company completed the acquisition of Gallino Plasturgia,
S.r.l. and affiliates ("Gallino") from IAO Industrie Riunite S.p.A. Gallino
manufactures steering wheels, instrument panels, bumpers and other plastic trim
components used in automotive original equipment and aftermarket applications.
The aggregate purchase price for the Gallino acquisition was $126 million and
consisted of $74 million in cash and $52 million of assumed liabilities. The
acquisition was financed with borrowings under the Company's revolving credit
agreements. The purchase price exceeded the fair value of net assets acquired
by approximately $40 million. The resulting goodwill is being amortized on a
straight-line basis over 40 years.
UNITED STEERING SYSTEMS
On October 25, 1996, the Company completed the acquisition of certain assets and
the assumption of certain liabilities of USS and all of the shares of United
Technologies Automotive Clifford Limited. USS produces steering wheels, airbag
covers, horn pads and related molded products in the U.S., Mexico and England.
The purchase price was $154 million and was financed with borrowings under the
Company's revolving credit agreements. The purchase price exceeded the fair
value of net assets acquired by approximately $75 million. The resulting
goodwill was being amortized on the straight-line basis over 40 years. In
fiscal 1998, a portion of the goodwill was written-off as part of the impairment
charge (see Note 15).
CUSTOM TRIM
On February 25, 1997, the Company completed the acquisition of all of the
outstanding shares of capital stock of BTI Investments, Inc. ("BTI"), a holding
company that owned the Custom Trim group of companies. The purchase price for
the BTI acquisition was $70 million and was financed with borrowings under the
Company's revolving credit agreements. Additionally, up to $5 million may be
paid on September 1, 2002, contingent upon BTI attaining certain operating
profit targets for each of the years subsequent to the acquisition date. BTI
produces leather-wrapped steering wheels, shift knobs and shift boots, injection
molded levers and leather/vinyl cloth sewing of armrests, headrests and seating
in Canada and Mexico. The purchase price exceeded the fair market value of net
assets acquired by $48 million. The allocation of the purchase price is subject
to change pending completion of the Company's integration plans. The resulting
goodwill is being amortized on a straight-line basis over 40 years.
-46-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The pro forma unaudited results of operations for the years ended June 30, 1997
and 1996, assuming the purchase of the acquisitions had been consummated as of
July 1, 1996 and 1995, respectively, are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Net sales $901.1 $1,056.6
Net earnings $ 21.0 $ 45.9
Net earnings per share - basic $ 0. 66 $ 1.45
Net earnings per share - diluted $ 0. 66 $ 1.45
</TABLE>
FISCAL 1996
MOMO
On April 15, 1996, the Company acquired all of the outstanding shares of capital
stock of MOMO S.p.A. and G. Holding, S.r.l. (collectively, "MOMO"), an original
equipment manufacturer and aftermarket supplier of luxury steering wheels and
alloy wheels. The purchase price for the MOMO acquisition was for $45.2 million
in cash and was financed with borrowings under the Company's revolving credit
agreements. The purchase price exceeded the fair value of the net assets
acquired by $31.1 million. The resulting goodwill is being amortized over 40
years.
ITALTEST
On April 22, 1996, the Company acquired all of the outstanding shares of
Italtest S.r.l. ("Italtest"), an Italian manufacturer of printed circuit boards
for the automotive, computer and telecommunications markets. The purchase price
for the Italtest acquisition was $1.8 million in cash was financed with
borrowings under the Company's revolving credit agreements. The purchase price
exceeded the fair value of the net assets acquired by $1.8 million. The
resulting goodwill was being amortized over 10 years. In fiscal 1998, the
goodwill was written-off as part of the repositioning charge. (See Note 15)
FORCE IMAGING TECHNOLOGIES, INC.
On May 31, 1996, the Company acquired all of the outstanding shares of capital
stock of Force Imaging Technologies, Inc. ("FIT"), a manufacturer of thin-
profile variable force sensors for multifunction automotive capabilities. The
purchase price for the FIT acquisition was $3 million in cash and was financed
with borrowings under the Company's revolving credit agreements. The purchase
price exceeded the fair value of the net assets acquired by $2.8 million. The
resulting goodwill was being amortized over 5 years. In fiscal 1998, the
goodwill was written off as part of the repositioning charge. (See Note 15).
3. NET ASSETS HELD FOR SALE
The Company acquired Gallino in July 1996 primarily for the steering wheel
business. However, in order to acquire the steering wheel business it was
necessary to also acquire Gallino's instrument panel, bumper and other plastic
trim component business (nonsteering wheel business). In 1997, the Company
evaluated whether the nonsteering wheel business of Gallino could be integrated
into the core business of the Company.
-47-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the fourth quarter of fiscal 1997, the Company committed to a plan to
dispose of Gallino's instrument panel, bumper and other plastic trim component
business (nonsteering wheel business). The Company recorded the nonsteering
wheel business at its net realizable value based on amounts in a letter of
intent. In December 1997 when the transaction was not consummated the Company
wrote down the carrying value to the estimated net realizable value based on
then current negotiations. The Company is negotiating with prospective buyers
of Gallino's nonsteering wheel business for amounts in excess of net carrying
value. For financial reporting purposes, the assets and liabilities
attributable to all of Gallino's nonsteering wheel business have been classified
in the consolidated balance sheet as "Net assets held for sale" and consist of
the following as of June 30, 1998 (in millions):
<TABLE>
<CAPTION>
<S> <C>
Current assets $46.1
Property, plant and equipment, net 38.4
Other noncurrent assets 1.0
--------
Total assets 85.5
--------
Current liabilities 33.7
Other liabilities 22.8
--------
Total liabilities 56.5
--------
Net assets held for sale $29.0
========
</TABLE>
4. INCOME TAXES
For financial reporting purposes, earnings from continuing operations before
income taxes and distribution on the Preferred Securities (as defined in Note
11) includes the following components:
<TABLE>
<CAPTION>
IN MILLIONS 1998 1997 1996
- ------------------------------------------
<S> <C> <C> <C>
Domestic $(413.5) $23.7 $98.3
Italy 22.4 5.5 5.2
Other Foreign (17.7) 0.4 (5.2)
- ------------------------------------------
$(408.8) $29.6 $98.3
==========================================
</TABLE>
The components of income taxes (benefit) are as follows:
<TABLE>
<CAPTION>
IN MILLIONS 1998 1997 1996
- -------------------------------------------------
Current:
<S> <C> <C> <C>
Federal $(65.9) $ 6.4 $30.8
Italy 3.7 3.0 1.3
Other Foreign 2.1 3.4 0.7
State 0.3 0.8 0.8
- -------------------------------------------------
Total current (59.8) 13.6 33.6
Deferred:
Federal (4.3) 1.5 1.7
Italy (1.6) (0.3) --
Other Foreign 0.1 -- --
- -------------------------------------------------
Total deferred (5.8) 1.2 1.7
- -------------------------------------------------
Income taxes (benefit) $(65.6) $14.8 $35.3
=================================================
</TABLE>
-48-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Effective January 1, 1998, the corporate income tax rate in Italy decreased from
53% to 42%. The deferred income tax balances were adjusted to reflect this
revised rate. The current domestic benefit that has been recorded represents
the calculated Federal income tax refund the Company will receive as a result of
the carryback of the June 30, 1998 taxable loss to the tax years ending June 30,
1995 through June 30, 1997.
The income tax expense (benefit) is included in the financial statements as
follows:
<TABLE>
<CAPTION>
IN MILLIONS 1998 1997 1996
- -----------------------------------------------
<S> <C> <C> <C>
Income taxes (benefit) $(60.2) $14.8 $35.3
Extraordinary item (5.4) -- --
- -----------------------------------------------
Income taxes (benefit) $(65.6) $14.8 $35.3
===============================================
</TABLE>
-49-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The reconciliation of income tax from continuing operations (before
extraordinary item) computed at the US federal statutory tax rate to the
company's effective income tax provision is as follows:
<TABLE>
<CAPTION>
IN MILLIONS 1998 1997 1996
- ------------------------------------------------------------------
<S> <C> <C> <C>
Tax at U.S. statutory rate $(146.6) $10.3 $34.4
State taxes, net of Federal
tax benefit 0.2 0.5 0.5
Change in valuation allowance 105.4 1.8 2.2
Amortization of goodwill (1.8) 1.3 --
Foreign rate differential (4.2) 0.7 --
Reduction of taxes provided in
prior years (1.0) -- (1.2)
Gain on intercompany debt forgiveness (8.1)
Other (4.1) 0.2 (0.6)
- ------------------------------------------------------------------
$ (60.2) $14.8 $35.3
==================================================================
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income taxes. A provision for income taxes
has not been made for the undistributed earnings of foreign subsidiaries of
approximately $38.1 million at June 30, 1998 and $10 million at June 30, 1997,
which have been or are intended to be permanently reinvested in expanded foreign
business operations.
The temporary differences that give rise to significant portions of the deferred
tax assets and liabilities as of June 30, 1998, and 1997, respectively, are
presented below.
<TABLE>
<CAPTION>
IN MILLIONS 1998 1997
- ------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Accrued Expenses-U.S. $ 3.0 $ 5.1
Accrued Expenses-Canada 1.0
Net Operating losses-Foreign 13.5 4.0
Other 0.2 1.0
Accrued Repositioning Expenses-Italy 23.6 --
Accrued Repositioning Expenses-U.S. 58.6 --
Amortization of Intangibles 20.2 --
Tax credit carryforwards 3.0 --
Valuation allowance (109.4) (4.0)
- ------------------------------------------------------------------
$ 13.7 $ 6.1
- ------------------------------------------------------------------
Deferred tax liabilities:
Depreciation (7.5) (2.3)
Amortization of Intangibles -- (0.6)
Fixed Asset basis differences-Italy (0.3) (5.0)
Other-U.S. (0.3) --
Other-Foreign (0.1) --
- ------------------------------------------------------------------
(8.2) (7.9)
- ------------------------------------------------------------------
Net deferred tax asset (liability) $ 5.5 $(1.8)
==================================================================
</TABLE>
The net deferred income tax asset is reflected in the accompanying 1998 and 1997
consolidated balance sheets as a $4.5 million and $5.8 million current asset, a
$1.3 million and zero non-current asset (included
-50-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
in investments and other assets), and a $0.3 million and $7.6 million non-
current liability (included in other long-term liabilities), respectively.
SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. For
the fiscal year ended June 30, 1997, the Company determined that a valuation
allowance of $4 million was necessary to reduce the deferred tax asset related
to the foreign net operating loss carryforwards, incurred predominately in the
United Kingdom and Finland, to $0. For the fiscal year ended June 30, 1998, the
Company has determined that a valuation allowance of approximately $109 million
is necessary to reduce the deferred tax assets for approximately $72 million
attributable to the United States and approximately $37 million attributable to
foreign operations. The need for a valuation allowance was addressed separately
for domestic and foreign purposes. For domestic purposes, the Company is in a
cumulative loss position and pursuant to SFAS No. 109, a valuation allowance was
recorded by the Company to offset the portion of the domestic deferred tax asset
which, upon reversal, could not be carried back against prior year taxable
income. For foreign purposes, a valuation allowance of approximately $37 million
has been recognized to reduce foreign deferred tax assets primarily related to
net operating loss carryforwards in Finland, Spain and the U.K. and
restructuring charges in Italy to zero.
At June 30, 1998, the Company's Finnish subsidiary had an operating loss
carryforward of approximately $21 million, which expires through the year 2008.
In addition, the Company's Italian subsidiaries have an operating loss of $5.6
million, which expires through the year 2001. The Company's subsidiary in the
U.K. had an operating loss of $17 million which can be carried forward
indefinitely. U.S. Federal tax credit carryforwards at June 30, 1998 totaled
approximately $3.0 million, which carry forward indefinitely.
5. DEBT
<TABLE>
<CAPTION>
A summary of long-term debt follows: JUNE 30,
1998 1997
------------------
<S> <C> <C>
(IN MILLIONS)
Term Loan A, interest at 7.825%
installments due 1999 through 2004 $309.2 $ --
Term Loan B, interest at 8.075%
installments due 1999 through 2006 197.8 --
Senior Subordinated Notes, interest at
9.25%, due April 15, 2008 330.0 --
Multi-currency credit facility, weighted average
interest rate of 6.7%, installments due on April 29, 1998
and April 30, 2002 -- 358.0
Foreign short-term lines of credit, weighted average
interest rate of 6.8%, installments due various 30.4 27.3
Mortgages and equipment financing loans 30.6 38.1
------------------
Total debt 898.0 423.4
------------------
Less current maturities 46.9 191.7
------------------
Total long-term debt $851.1 $231.7
==================
</TABLE>
-51-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On April 28, 1998, the Company completed the refinancing of its Bridge Loan
Facility (as defined below) with borrowings under a $675 million long-term
senior credit facility ("New Credit Facility") and the net proceeds received in
connection with the issuance and sale of $330 million of 9.25% Senior
Subordinated Notes ("Notes").
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 must be paid 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 an assumed
outstanding principle amount equal to $325.0 million, ranging from $27.5
million for fiscal 1999 to $97.5 million for fiscal 2004. Term Loan B is
payable in annual installments, subject to annual amortization, based on an
assumed outstanding principle amount equal to $200.0 million, ranging from $1.3
million for the fiscal year 1999 to $96.3 million for fiscal 2006. On June 26,
1998, the Company prepaid $18.0 million of Term Loan.
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 1.125%.
The applicable margins will be determined by reference to a leverage ratio of
the Company and its subsidiaries.
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 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 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, make 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. Under the terms of the New Credit Facility, the Company
may not pay dividends or make other restricted payments until the Company's
consolidated leverage ratio is equal to or less than 3.50 to 1.00 as of the end
of the most recent four-quarter period. The Company does not
-52-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
presently meet this standard and it is unclear when it will be met. 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.
The aggregate maturities of the New Credit Facility subsequent to June 30, 1998
during the next five years are as follows, in millions: 1999, $10.8; 2000,
$33.8; 2001, $38.8; 2002, $41.3; 2003, $91.3; thereafter $291.0.
Issued letters of credit aggregated approximately $12.4 million at June 30,
1998.
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 originally 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.
Bridge Loan Facility
On October 30, 1997, the Company and NationsBank entered into a revolving and
term credit facility ("Bridge Loan Facility") pursuant to which the Company had
$900 million of aggregate borrowing availability. Borrowings under the Bridge
Loan Facility were used to repay in full borrowings outstanding under two
multicurrency credit agreements and to finance a portion of the purchase price
for the acquisition of SRS (see Note 2). The Bridge Loan Facility was replaced
by the New Credit Facility and Senior Subordinated Notes.
Old Loan Facility
During 1997, the Company entered into two multicurrency credit agreements
totaling $450 million that would have expired on April 29, 1998 ($250 million)
and April 30, 2002 ($200 million). This Old Loan Facility was replaced by the
Bridge Loan Facility.
-53-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Other Debt
The Company's subsidiaries outside of the United States have short-term lines of
credit aggregating approximately $100 million from various banks worldwide.
Most of these arrangements are reviewed periodically for renewal. Interest
rates are generally based on the prevailing bank prime rate in the various
countries in which the Company has operations. Additionally, the subsidiaries
have outstanding mortgage and equipment financing loans.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
Due to their short maturity or their insignificance, the carrying amounts of
cash and cash equivalents, accounts and notes receivable, accounts payable,
accrued liabilities and short-term borrowings approximated their fair values at
June 30, 1998. The approximate fair value of the Company's $330 million of
Notes determined through reference to market yields was $323.8 million at June
30, 1998. The fair value of the Company's $250 million of Convertible
Debentures (as defined in Note 11) approximated $205.0 million at June 30, 1998.
The Company had entered into variable to fixed interest rate swap agreements in
the notional amount of $35.0 million as of June 30, 1998. These agreements have
expiration dates between 1999 and 2005. Under these agreements, the Company
received an average variable rate of 5.7% and paid an average fixed rate of 6.3
% on June 30, 1998. The Company also has variable to variable interest rate
swap agreements outstanding at June 30, 1998 with notional amounts of $275.0
million, which effectively convert interest from a LIBOR basis to a broader
index and cap the Company's exposure to upward movement in rates at 6.0% through
May 28, 2001 and afterwards at 7.5% through May 28, 2005. These agreements
expire in 2005. Under these agreements, the Company received an average
variable rate of 5.7% and paid an average variable rate of 5.3% at June 30,
1998.
At June 30, 1998 the Company had outstanding foreign exchange contracts to buy
$53.0 million Canadian dollars maturing through October 1999 and a contract to
sell $2.0 million British pounds.
Exposure to market risk on interest rate and foreign currency financial
instruments result from fluctuations in interest and currency rates,
respectively, during the periods in which the contracts are outstanding. The
counterparties to the Company's interest rate swap agreements and currency
exchange contracts consist of a diversified group of major financial
institutions, each of which is rated investment grade or better. The Company is
exposed to credit risk to the extent of potential nonperformance by
counterparties on financial instruments. Any potential credit exposure does not
exceed the fair value as stated below; the Company believes the risk of
incurring losses due to credit risk is remote.
The cost to terminate the outstanding interest rate swaps as of June 30, 1998
was $7.8 million. Book value at June 30, 1998 was a $0.1 million receivable.
The cost to terminate outstanding foreign exchange contracts as of June 30, 1998
was approximately $2.4 million.
7. EMPLOYEE PENSION AND SAVINGS PLAN
The Company has a non-contributory defined benefit retirement plan (Plan) which
covers substantially all unionized employees in the United States who meet age
and service requirements. The Plan was primarily established for the pension
responsibilities assumed in the acquisition of SRS. The Plan provides defined
benefits that are based on years of credited service, average compensation and
the primary social security benefit.
-54-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The cost of pension benefits under the Plan is determined by an independent
actuarial firm using the "projected unit credit" actuarial cost method.
Currently payable contributions to the Plan are limited to amounts that are
currently deductible for income tax reporting purposes, and are included in
accrued expenses in the consolidated balance sheets. The assumptions used to
develop the projected benefit obligations and net periodic pension expense for
the Plan for 1998 were as follows:
<TABLE>
<S> <C>
Discount rate for obligations 7%
Future compensation increase rate 5%
Investment return assumptions 9%
</TABLE>
Net pension expense for the year ended June 30, 1998 included the following
components (in millions):
<TABLE>
<S> <C>
Service Costs - benefits earned during the year $ 1.1
Interest Costs on projected benefit obligations 0.6
Actual return on plan assets (0.3)
Net amortization and deferral (0.3)
-------
$ 1.1
=======
</TABLE>
The following table sets forth the Plan's funded status and amounts recognized
in the consolidated balance sheets at June 30, 1998 (in millions):
<TABLE>
<CAPTION>
<S> <C>
Actuarial present value of accumulated benefit
obligation, including vested benefits of $9.7
at June 30, 1998 $10.9
=======
Projected benefit obligation $14.7
Less fair value of plan assets, primarily bonds, stocks
and cash equivalents 11.7
-------
Projected benefit obligation in excess of plan assets 3.0
Unrecognized net gains/ (loss) (0.3)
-------
$ 2.7
=======
</TABLE>
The Company maintains a 401(k) retirement plan which covers substantially all
full-time U.S. employees. Under the plan, the Company will match employee
contributions at rates which are determined annually by management. Employer
contributions for the years ended June 30, 1998, 1997, and 1996 amount to $2.0
million, $0.8 million and $0.9 million, respectively.
8. POST RETIREMENT HEALTH CARE BENEFITS
The Company provides to certain unionized employees health care benefits when
they retire. The employee may become eligible for these benefits if they reach
normal retirement age while working for the Company. The post retirement health
care benefits plan was established for the responsibilities assumed in the
acquisition of SRS. Net periodic post retirement benefit cost was $0.3 million
in 1998.
-55-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth the funding status and amounts recognized in the
consolidated balance sheet at June 30, 1998 (in millions):
<TABLE>
<CAPTION>
<S> <C>
Accumulated post retirement benefit obligation (APBO):
Existing retirees $ --
Active employees 3.5
------
$ 3.5
======
</TABLE>
A weighted average discount rate of 7% and a medical trend rate of 6% was used
in determining the actuarial present value of APBO. A 1% increase or decrease
in the medical trend rate would increase or decrease the APBO by approximately
$0.1 million.
9. STOCK OPTION PLANS
The Company's Omnibus Stock Plan provides for the granting of 3.7 million shares
of common stock for awards of options under the Company's 1992 Stock Option
Plan, the 1992 Employee Stock Purchase Plan, and the 1994 Stock Incentive Plan.
Under the 1992 Stock Option Plan, options to purchase up to 1,500,000 shares of
common stock may be granted to officers, employees and consultants to the
Company. The Company may grant options that are either qualified (incentive
stock options) or nonqualified under the Internal Revenue Code of 1986, as
amended. Options under the Plan will generally vest over a three-year period
and the option term may not exceed ten years. Total options granted under this
plan amounted to 28,100 in 1998, 48,313 in 1997 and 45,000 in 1996.
The Company's 1992 Employee Stock Purchase Plan provides that eligible employees
may contribute up to 10% of their base earnings toward the semiannual purchase
of the Company's common stock, at a price equal to 85% of the lower of the
market value of the common stock on the first and last day of the applicable
period. There are limitations on the number of shares that can be purchased in
any period. As of November 1996, this plan has been discontinued. Total shares
issued under this plan were 27,082 in 1997 and 60,906 in 1996. Since the plan
is noncompensatory, no charges to operations have been recorded.
The 1994 Stock Incentive Plan permits the issuance of options of common stock in
the form of incentive stock options, nonstatutory stock options, stock
appreciation rights, performance shares, restricted stock or unrestricted stock
to selected employees of the Company. Options under the plan vest over a three-
year period. Stock appreciation rights entitle recipients to receive an amount
determined in whole or in part by appreciation in the fair market value of the
stock between the date of the award and the date of exercise. Performance share
awards entitle recipients to acquire shares of stock upon attainment of
specified performance goals. Restricted stock awards entitle recipients to
acquire shares of stock, subject to the right of the Company to repurchase under
certain circumstances all or part of the shares at their purchase price (or to
require forfeiture of such shares if purchased at no cost) from the recipient.
Restricted shares vest over a five-year period. Unearned compensation,
representing the fair market value of the shares at the date of issuance, is
charged to earnings over the vesting period. Total options granted under this
plan amounted to 1,399,468 in 1998, 63,744 in 1997 and 648,873 in 1996. No
stock appreciation rights or performance shares were granted in 1998, 1997 or
1996.
-56-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In addition to the above plans, the Company's 1992 Director Stock Option Plan
provides for the grant of nonqualified stock options to the Company's
nonemployee directors. The total number of shares to be issued under this plan
may not exceed 100,000 shares. Options granted under the 1992 Director Stock
Option Plan have an exercise price equal to the fair market value of the common
stock on the date of the grant and a term equal to ten years. Total options
granted under this plan amounted to 8,055 in 1998, 5,310 in 1997 and 14,600 in
1996.
Pursuant to Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" (SFAS No. 123), the Company has elected to account for
its stock option plan under the provisions of APB Opinion No. 25 "Accounting for
Stock Issued to Employees."
Accordingly, no compensation cost has been recognized for the stock option
plans. The Company has evaluated the pro forma effects of SFAS No. 123 and as
such, net earnings, basic earnings per common share and diluted earnings per
common share would have been as follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------
1998 1997
---------------------------------------
<S> <C> <C>
(IN MILLIONS, EXCEPT PER SHARE DATA)
Net earnings (loss)
As reported $ (368.6) $ 14.8
Pro forma (375.0) 14.2
Basic earnings (loss) per common share
As reported (11.03) 0.47
Pro forma (11.23) 0.45
Diluted earnings (loss) per common share
As reported (11.03) 0.47
Pro forma (11.23) 0.45
</TABLE>
-57-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Because SFAS No. 123 is applicable to options granted subsequent to December 31,
1994, and the options have a three to ten year vesting period, the pro forma
effect will not be fully reflected until fiscal 2006.
The fair value of each option was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
JUNE 30,
---------------
1998 1997
---------------
Risk-free interest rate 5.43% 6.17%
Dividend yield --- 1.31%
Expected volatility 46.8% 52.0%
Expected life in years 8 10
-58-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the status of the Company's stock option plans as of June 30, 1998,
1997 and 1996 and changes during the years ended on those dates.
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES WTD. SHARES SUBJECT WTD. AVG. SHARES WTD.
SUBJECT TO AVG. TO OPTIONS EXERCISE PRICE SUBJECT TO AVG.
(IN THOUSANDS EXCEPT EXERCISE, PRICE OPTIONS EXERCISE OPTIONS EXERCISE
AND WEIGHTED AVERAGE FAIR VALUE) PRICE PRICE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of 1,100,361 18.043 1,149,236 17.824 622,028 17.436
year
Additional options granted 1,435,623 21.527 117,367 22.162 708,473 18.166
Options exercised 116,098 14.252 38,695 13.882 67,561 11.677
Options terminated, cancelled or 424,532 20.930 127,547 19.225 113,704 21.037
expired
- ------------------------------------------------------------------------------------------------------------------------------------
Options outstanding at June 30 1,995,354 20.308 1,100,361 18.043 1,149,236 17.824
- -----------------------------------------------------------------------------------------------------------------------------------
Options exercisable at June 30 820,228 19.638 318,996 15.874 240,649 13.851
- -----------------------------------------------------------------------------------------------------------------------------------
Options price range at end of year 0 - 32.25 0 - 32.25 0 - 32.25
- -----------------------------------------------------------------------------------------------------------------------------------
Options price range for exercised 0 - 20.375 12 - 20.375 3.14 - 17.00
shares
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average fair value of options 12.32 13.30
granted during the year
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-59-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about stock options outstanding and
exercisable at June 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------------------------------
WTD. AVG. WTD.
NO. OF OPTIONS WTD. AVG. CONTRACTUAL NO. OF AVG.
EXERCISE PRICE RANGE: OUTSTANDING EXERCISE PRICE LIFE (IN YRS.) OPTIONS EXERCISE
PRICE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.0000 - $ 3.2250 19,016 $ 0.000 6.2 639 $ 0.000
$ 9.6751 - $12.9000 160,292 $ 12.00 4.2 160,292 $12.000
$12.9001 - $16.1250 3,000 $15.625 10.0 0 $ 0.000
$16.1251 - $19.3500 481,247 $17.306 7.9 173,523 $16.761
$19.3501 - $22.5750 1,058,330 $21.199 8.8 142,908 $20.796
$22.5751 - $25.8000 190,965 $23.890 4.6 274,101 $23.190
$25.8001 - $29.0250 77,854 $28.043 6.1 64,115 $28.041
$29.0281 - $32.2500 4,650 $32.250 6.4 4,650 $32.250
--------- ---------
1,995,354 820,228
========= =======
</TABLE>
-60-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS
The Company owns most of its major facilities, but does lease certain office,
and warehouse space, data processing equipment and other equipment under
principally noncancelable operating losses. The future minimum lease payments
over the next five years under noncancelable operating leases at June 30, 1998
are as follows (in millions):
1999 $7.0
2000 $5.7
2001 $5.2
2002 $3.1
2003 $2.3
Total rental expense under cancelable and noncancelable operating leases were as
follows:
Year ended June 30, 1998 $10.8
Year ended June 30, 1997 $ 5.5
Year ended June 30, 1996 $ 3.0
11. COMPANY OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES
In connection with the SRS acquisition, on October 30, 1997, the Company issued
and sold to Prudential Securities Credit Corp. ("PSCC") $200.0 million of Series
B Convertible Preference Stock of the Company (the "Series B Preference Stock").
On November 25, 1997, the Company issued and sold $250.0 million of 6.5%
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 Stock 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 6.5% 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
-61-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 continue to accrue with interest thereon (to the extent
permitted by applicable law) at an annual rate of 6.5% per annum, compounded
quarterly.
An event of default under the indenture relating to the Convertible Debentures
constitutes an event of default under the declaration relating to the Trust
Securities. Upon the occurrence of an event of default under the declaration,
until such event of default has been cured, waived or otherwise eliminated, the
institutional trustee will be deemed to be acting on behalf of the holders of
the Preferred Securities, and the holders of the Preferred Securities will have
the right to direct the institutional trustee with respect to certain matters
under the declaration and, therefore, the indenture. If the institutional
trustee fails to enforce its rights under the Convertible Debentures, any holder
of Preferred Securities may, to the fullest extent permitted by law, directly
institute a legal proceeding against the Company to enforce the institutional
trustee's rights under the Convertible Debentures without first instituting any
legal proceeding against the institutional trustee or any other person or
entity.
-62-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------
1998 1997 1996
-------------------------------------------
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Income (loss) before extraordinary items $ (358.6) $ 14.8 $ 63.0
Extraordinary loss, net (10.0) -- --
-------------------------------------------
Income (loss) applicable to common stock $ (368.6) $ 14.8 $ 63.0
===========================================
Weighted average common shares outstanding 33,407 31,648 31,550
===========================================
Basic earnings per share:
Income (loss) before extraordinary items $ (10.73) $ 0.47 $ 2.00
Extraordinary loss (0.30) -- --
-------------------------------------------
Net (loss) income $ (11.03) $ 0.47 $ 2.00
===========================================
DILUTED EARNINGS PER SHARE
Income (loss) before extraordinary items $ (358.6) $ 14.8 $ 63.0
Extraordinary loss, net (10.0) -- --
-------------------------------------------
Income applicable to common stock $ (368.6) $ 14.8 $ 63.0
===========================================
Share computation:
Weighted average common shares outstanding 33,407 31,648 31,550
Effect of diluted securities:
Assumed exercise of stock options and warrants * 219 94
Series A Preference Stock * -- --
Company obligated mandatorily redeemable
convertible preferred securities * -- --
-------------------------------------------
Weighted average common shares
outstanding as adjusted 33,407 31,867 31,644
===========================================
Diluted earnings per share:
Income before extraordinary items $ (10.73) $ 0.46 $ 1.99
Extraordinary items (0.30) -- --
-------------------------------------------
Net income $ (11.03) $ 0.46 $ 1.99
===========================================
</TABLE>
* Items not assumed in the computation because their effect is anti-dilutive
Each Company Obligated Mandatorily Redeemable Convertible Preferred Security is
convertible, at the option of the holder, into shares of the Company's common
stock, at a conversion rate of 2.1973 shares of common stock for each Preferred
Security, subject to adjustment in certain circumstances (see Note 11).
Options to purchase 1,098,416 shares of common stock at prices between $20.0625
and $32.25 per share were outstanding as of June 30, 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.
-63-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As part of the acquisition of VTI Hamlin OY ("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 year ended June 30,
1998 because the effect would be anti-dilutive.
In connection with the Bridge Loan 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 year ended June 30, 1998
because the effect would be anti-dilutive.
13. CAPITAL STOCK
SERIES A PREFERENCE STOCK
On October 30, 1997, pursuant to a Stock Purchase Agreement dated October 14,
1997 (the "Stock Purchase Agreement"), Siemens acquired 4,883,227 Series A
Preference Shares for an aggregate purchase price of $115.0 million. Pursuant
to the Stock Purchase Agreement, the Company made certain customary
representations and warranties concerning its business, agreed to certain post-
closing covenants, including an agreement to provide Siemens with substantially
equivalent rights to those granted in the future to any stockholder acquiring an
equal or smaller percentage of voting interest in the Company as Siemens, agreed
to indemnify Siemens for breaches of covenants and granted Siemens certain anti-
dilution rights. The indemnification obligations of the Company are subject to
a $1.5 million deductible and a cap of $30.0 million. On January 20, 1998,
Siemens converted 4,883,226 of its Series A Preference Shares into an equal
number of shares of Common Stock. The Company also granted Siemens certain
demand and piggy-back registration rights that require the Company from time to
time, subject to certain limitations, to register Siemens' shares of Common
Stock for public sale. As of June 30, 1998, Siemens is the record holder of one
Series A Preference Share.
SERIES B PREFERENCE STOCK
On October 30, 1997, in connection with the acquisition of SRS, the Company
issued and sold $200.0 million Series B Preference Stock to PSCC. November 25,
1997, the Company redeemed all of the outstanding Series B Preference Stock with
the net proceeds from the issuance and sale of the Convertible Debentures to the
Trust (see Note 11).
WARRANTS
In connection with the Bridge Credit Facility, pursuant to a Warrant Agreement
between NationsBank and the Company dated October 30, 1997, as amended March 2,
1998, the Company issued to NationsBank a warrant exercisable for 250,000 shares
of common stock of the Company at an exercise price of $23.125 per share (the
"NB Warrant"). The Warrant Agreement and the NB Warrant expire on October 30,
2000. NationsBank may elect to include the common stock subject to the Warrant
Agreement and NB Warrant in certain registration statements filed by the Company
under the Securities Act and also has certain demand registration rights until
October 30, 2002.
In connection with the Company's June 1995 acquisition of VTI, a Finnish company
that designs and manufactures silicon capacitive micro-machined accelerometers
and angular rate and differential and absolute pressure sensors, the Company
issued to the former stockholders of VTI warrants to purchase an aggregate of
100,000 shares of common stock for a purchase price of $25.75 per share. These
warrants
-64-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
are exercisable between July 1, 1998 and June 30, 2000. The Company
granted certain demand and incidental registration rights with respect to the
shares of common stock issuable upon the exercise of these warrants.
14. INFORMATION RELATING TO CUSTOMERS AND OPERATIONS IN DIFFERENT GEOGRAPHIC
AREAS
The Company operates in one principal industry segment: the design, manufacture,
and sale of components used in the manufacture of automotive occupant safety
systems--which represents more than 90% of consolidated net sales. The
following financial information relates to operations in different geographic
areas. Net sales to unaffiliated customers is based on the location of
Company's operating entity. Transfers between geographic areas are recorded at
amounts above cost and in accordance with the rules and regulations of the
respective governing tax authorities. Identifiable assets of geographic areas
are those assets used in the Company's operations in each area. Corporate
assets include cash and cash equivalents, intangibles, long-term investments,
and deferred income taxes.
<TABLE>
<CAPTION>
NET SALES OPERATING INCOME (LOSS)
------------------------------- -----------------------------------
YEAR ENDED JUNE 30, YEAR ENDED JUNE 30,
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
North America $710.2 $379.3 $324.6 $(157.7) $ 46.6 $ 88.4
Europe 675.1 415.6 107.1 (166.5) 4.0 2.4
------------------------------- -----------------------------------
Geographic totals $1,385.3 $794.9 $431.7 (324.2) 50.6 90.8
General corporate expenses
Interest expense 85.7 26.8 2.7
Other income (expense), net 1.1 5.8 10.2
-----------------------------------
Earnings (loss) before income taxes,
distributions on Company Obligated
Mandatorily Redeemable
Convertible Preferred Securities,
and extraordinary loss $(408.8) $ 29.6 $ 98.3
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ASSETS
--------------------------------------
AS OF JUNE 30, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
<S> <C> <C> <C>
North America $ 1,050.4 $447.1 $196.8
Europe 511.4 410.6 219.3
---------------------------------------
Geographic totals 1,561.8 857.7 416.1
General corporate assets 88.1 19.5 87.7
---------------------------------------
Total assets $ 1,649.9 $877.2 $503.8
- -----------------------------------------------------------------------------=======================================
</TABLE>
-65-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company also had foreign export sales from the United States amounting to
$162.6 million, $27.4 million and $24.5 million for the years ended June 30,
1998, 1997 and 1996, respectively.
The Company operates its Mexican manufacturing facilities under the
"Maquiladora" program. Pursuant to this program, materials and components owned
by the Company are transferred to the Mexican subsidiaries where they are used
to produce finished goods. The finished goods are returned to the United States
and the Company reimburses the Mexican subsidiaries for their manufacturing
costs without any intended significant profit or loss of consequence.
Accordingly, the Mexican sales, transfers, and income amounts are excluded from
the above geographic area information.
15. REPOSITIONING, IMPAIRMENT AND OTHER SPECIAL CHARGES
During the quarter ended December 31, 1997, the Company formulated a
repositioning program which is intended to: (i) enhance the Company's
competitiveness and productivity (ii) reduce costs and increase asset control
and (iii) improve processes and systems (the "Repositioning Program"). The
Repositioning Program consists primarily of a 25% planned reduction in the
Company's global workforce (or approximately 4,900 employees) through the
elimination of 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, the consolidation of
the Company's manufacturing, sales and engineering facilities primarily in North
America and Europe through the closing of approximately 50% (or 32) of its
manufacturing facilities and 33% (or 10) of its sales and engineering facilities
(which includes certain facilities being consolidated due to deteriorating
business conditions at USS and Custom Trim) and the disposal of certain non-core
assets.
As of June 30, 1998, the Company had reduced its net global workforce by
approximately 2,700 employees and closed and/or sold 24 manufacturing
facilities. The Company expects that the Repositioning Program will be
substantially completed by March 31, 1999.
Repositioning Charge
In connection with the Repositioning Program, the Company recorded a $177.0
million charge during the three months ended December 31, 1997 (the
"Repositioning Charge"), which included the following; (i) $30.8 million
relating to planned work force reductions; (ii) $31.4 million relating to
proposed facility consolidation (not including any SRS facilities); (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 in connection with the Gallino
Disposition (as defined in Note 3); 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.
USS Impairment
During the quarter ended December 31, 1997, the Company recorded a $82.5 million
charge relating to the write-down of goodwill and other long-lived assets at USS
due to deteriorating business conditions, reflecting the Company's determination
that a material diminution in the value of USS has occurred (USS Impairment).
When the Company acquired USS in October 1996, it was aware that USS's largest
OEM customer (which accounted for approximately 50% of USS 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
-66-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
competitor because the competitor, although it has 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.
During fiscal 1998, the repositioning and impairment accrual was reduced by
$224.7 million as a result of cash and non-cash charges. The following table
sets forth the details and the cumulative activity relating to the repositioning
and impairment charge as of June 30, 1998:
<TABLE>
<CAPTION>
CHARGE TAKEN AT CASH NON-CASH ACCRUAL BALANCE
IN MILLIONS DECEMBER 31, 1997 REDUCTIONS REDUCTIONS AT JUNE 30, 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Headcount reductions $30.8 $14.9 $-- $15.9
Facility consolidations 31.4 2.9 9.6 18.9
Goodwill write-down 10.6 -- 10.6 --
USS Impairment 82.5 -- 82.5 --
Gallino write-down 41.3 -- 41.3 --
Impaired assets and equipment write-
down 62.9 -- 62.9 --
- -------------------------------------------------------------------------------------------------------------
Total $259.5 $17.8 $206.9 $34.8
=============================================================================================================
</TABLE>
Other Special Charges
In addition, during the quarter ended December 31, 1997, (i) in connection with
the purchase price allocation for the SRS acquisition, the Company recorded a
$77.5 million charge relating to the write-off of in-process research and
development for acquired technology that has not been established as
technologically feasible, and (ii) the Company recorded a $28.4 million charge
against cost of sales for inventory and long-term contracts relating to
manufacturing processes that will be exited. 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 airbag modules, 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
-67-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
requirements, design engineering costs and production problems experienced in
connection with that contract. The contract has since been terminated effective
January 1999.
During the quarter ended June 30, 1998, the Company recorded a $21.7 million
special charge against cost of sales relating to expected losses under 28
contracts acquired in connection with the SRS Acquisition. These contracts are
with nine different OEMs. The charge represented estimated losses expected to
be incurred over the expected life of the respective platforms to which the
contracts related. The Company recorded these losses during the quarter ended
June 30, 1998 because it determined that they were probable and reasonably
estimable.
Gallino Disposition
In July 1996, the Company acquired Gallino, a manufacturer of steering wheels
and plastic interior and exterior parts based in Italy. During the quarter
ended June 30, 1997, the Company committed to a plan to dispose of the plastic
interior and exterior parts business acquired in connection with the acquisition
of Gallino (the "Gallino Disposition"). The Company is currently in
negotiations with two third parties relating to the sale of substantially all of
this business for amounts in excess of net carrying value. Under both of the
current proposals under consideration, the Company would retain at least a 10%
interest in the business subject to the Gallino Disposition.
16. EXTRAORDINARY LOSS
In October 1997, the Company had an extraordinary loss of $0.7 million net of an
income tax benefit of $0.4 million for the write-off of debt issuance costs
relating to the two multi-currency credit agreements. In April 1998, the Company
had an extraordinary loss of $9.3 million net of an income tax benefit of $5.0
million for the write-off of debt issuance costs relating to the Bridge Credit
Facility.
17. CONTINGENCIES
On April 16, 1998, the Company was served with a complaint in the matter of
Takata Corporation v. AlliedSignal, Inc. and BREED Technologies, Inc., (United
States District Court, District of Delaware, case no. 98-94). The original
complaint alleged patent infringement on the part of the Company relating to the
production of two seat belt retractors formerly manufactured by AlliedSignal and
now manufactured by the Company. The suit seeks monetary damages and injunctive
relief. Under the Asset Purchase Agreement relating to the SRS Acquisition (the
"Asset Purchase Agreement"), AlliedSignal is required to indemnify the Company
(on a net after tax basis) against any monetary damages incurred by the Company
in connection with this lawsuit, including any reasonable royalties that might
be paid in respect of sales made through February 2000. The complaint was
subsequently amended to include allegations of infringement relating to four
additional products. The Company has counterclaimed that Takata is infringing a
patent owned by the Company. Under the Asset Purchase Agreement, any liability
for the additional claims of Takata is to be shared equally with AlliedSignal,
including any reasonable royalties that might be paid in respect of sales made
through April 2000. Both the Company and AlliedSignal are vigorously defending
the matter. While the outcome of this lawsuit cannot be predicated with
certainty, based upon currently available information, the Company does not
believe that this lawsuit will have a material adverse effect on the Company's
financial condition or results of operations.
In addition, the Company is party to other litigation incidental to its business
from time to time. The Company is not currently a party to any litigation that
the Company believes, if determined adversely to
-68-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the Company, would have a material adverse effect on the Company's financial
condition or results of operations.
18. OTHER FINANCIAL DATA
STATEMENT OF EARNINGS INFORMATION
Other income (expense), net consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------
1998 1997 1996
- ----------------------------------------------------------------------------------
(IN MILLIONS)
<S> <C> <C> <C>
Foreign exchange gain (loss) $ 0.2 $ 2.2 $ 2.4
Gain (loss) on disposition of property, plant, and equip. (1.3) (0.6) 1.5
Royalty income -- 0.1 4.0
Government Grant -- 1.0 --
Equity income (loss) in investment 0.9 -- --
Other, net (1.2) 0.8 0.8
Interest income 2.5 2.3 1.5
-----------------------
$ 1.1 $ 5.8 $10.2
=======================
</TABLE>
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.
BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
JUNE 30,
- --------------------------------------------------------------------------------
1998 1997
---------------
Accrued expenses: (IN MILLIONS)
<S> <C> <C>
Employee compensation $ 47.5 $16.8
Accrual for repositioning and other special charges 34.8 --
Accrual for closing facilities and severance relating to SRS 39.2 --
Acquisition related contracts 21.7 --
Other 90.0 32.7
---------------
$233.2 $49.5
===============
</TABLE>
-69-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following tables set forth selected quarterly financial information.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
IN MILLIONS, EXCEPT PER SHARE DATA QUARTER QUARTER QUARTER QUARTER YEAR
- -------------------------------------------------------------------------------------------------------------------
1998
<S> <C> <C> <C> <C> <C>
Net sales $195.2 $ 340.7 $431.7 $417.7 $1,385.3
Gross profit 28.3 28.2 74.9 52.5 183.9
Operating income (loss) 1.2 (352.6) 23.6 3.6 (324.2)
Income (loss) before extraordinary loss (4.2) (334.2) (1.7) (18.5) (358.6)
Net earnings (loss) (4.2) (334.9) (1.7) (27.8) (368.6)
Basic earnings (loss) per share before extraordinary loss (0.13) (10.54) (0.05) (0.50) (10.73)
Diluted earnings (loss) per share before extraordinary loss (0.13) (10.54) (0.05) (0.50) (10.73)
Cash dividends per share 0.07 -- -- -- 0.07
1997
Net sales $158.7 $ 182.6 $209.4 $244.2 $ 794.9
Gross profit 41.6 36.7 38.0 47.3 163.6
Operating income 18.2 9.3 7.1 16.0 50.6
Net earnings 7.8 3.2 1.5 2.3 14.8
Basic earnings per share 0.25 0.10 0.05 0.07 0.47
Diluted earnings per share 0.25 0.10 0.05 0.07 0.46
Cash dividends per share 0.07 0.07 0.07 0.07 0.28
1996
Net sales $ 92.6 $ 105.7 $103.9 $129.5 $ 431.7
Gross profit 34.9 42.8 35.8 41.1 154.6
Operating income 19.4 26.9 19.7 24.8 90.8
Net earnings 12.6 17.8 14.9 17.7 63.0
Basic earnings per share 0.40 0.57 0.47 0.56 2.00
Diluted earnings per share 0.40 0.56 0.47 0.56 1.99
Cash dividends per share 0.05 0.05 0.07 0.07 0.24
</TABLE>
Amounts do not total to the annual earnings per share because each quarter and
the year are calculated separately based on average outstanding shares (basic)
and average outstanding and equivalent shares (diluted) during the periods.
The Company recognized a charge during the fourth quarter of fiscal 1998
relating to estimated losses on acquisition related contracts in accordance with
the Company's accounting policy for such contracts, which increased the net loss
by $20.2 million (see Note 15). In addition, the Company recorded a reduction
to the other special charges relating to the European OEM supply contract
(originally recorded in the second quarter of fiscal 1998), which decreased the
net loss by approximately $2.4 million (see Note 15-- "Other Special Charges").
Also, an adjustment was recorded in the fourth quarter of fiscal 1998 to conform
certain accruals established, in connection with the acquisition of SRS, to the
current interpretation of EITF 95-3, which increased the net loss by
approximately $2.9 million.
In the second quarter of fiscal 1998, the Company recorded repositioning,
impairment and other special charges aggregating $365.4, which include the
following: (i) a $259.5 million charge for repositioning and impairment (ii)
$77.5 million charge to the write off of in-process research and development and
(iii) $28.4 million charge against cost of sales for inventory and long term
customer contracts.
-70-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company recognized a charge during the fourth quarter of fiscal 1997, which
decreased net income by $2.2 million. This charge increased income tax expense
to reflect an increase in the effective tax rate for the year due to loss
carryforwards in foreign countries that could not be utilized as management had
originally anticipated. This adjustment reduced fourth quarter net income per
share by $0.7.
20. 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 domestic subsidiaries (the "Subsidiary Guarantors")
of the Company other than BTI Capital Trust. The Company's foreign subsidiaries
do not guarantee 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 condensed consolidating balance sheets as of June 30, 1998,
and 1997, condensed consolidating statements of earnings for the years ended
June 30, 1998, 1997 and 1996 and condensed consolidating cash flows for the
years ended June 30, 1998, 1997, 1996, for the Subsidiary Guarantors, the Non-
Guarantor Subsidiaries, Parent only, and the Company consolidated. Separate
financial statements for the Subsidiary Guarantors are not presented based on
management's determination that they do not provide additional information that
is material to investors.
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
JUNE 30, 1998
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR
(IN MILLIONS) GUARANTORS SUBSIDIARIES PARENT ONLY ELIMINATIONS CONSOLIDATED
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ (22.9) $ 19.0 $ 48.3 $ -- $ 44.4
Accounts receivable, net 138.8 135.9 0.6 -- 275.3
Inventories 57.3 51.8 -- -- 109.1
Other current assets 527.5 72.1 67.4 (574.7) 92.3
------------------------------------------------------------------------
Total current assets 700.7 278.8 116.3 (574.7) 521.1
Property, plant and equipment, net 203.1 129.5 32.6 365.2
Intangibles, net 431.1 257.8 3.2 -- 692.1
Other assets 25.0 73.4 1,015.4 (1,042.3) 71.5
------------------------------------------------------------------------
Total assets $1,359.9 $739.5 $1,167.5 $(1,617.0) $1,649.9
========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt -- $ 35.2 $ 11.7 $ 46.9
Accounts payable 84.9 158.9 11.1 254.9
Accrued expenses 229.0 235.4 346.6 (577.8) 233.2
------------------------------------------------------------------------
Total current liabilities 313.9 429.5 369.4 (577.8) 535.0
Long-term debt -- 25.8 825.3 851.1
Other long-term liabilities 10.5 16.1 (1.0) -- 25.6
------------------------------------------------------------------------
Total liabilities 324.4 471.4 1,193.7 (577.8) 1,411.7
Company Obligated Mandatorily Redeemable
Convertible Preferred Securities -- -- 250.0 250.0
Stockholders' equity 1,035.5 268.1 (276.2) (1,039.2) (11.8)
------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,359.9 $739.5 $1,167.5 $(1,617.0) $1,649.9
========================================================================
</TABLE>
-71-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
JUNE 30, 1997
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR
(IN MILLIONS) GUARANTORS SUBSIDIARIES PARENT ONLY ELIMINATIONS CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $-- $ 20.0 $ (1.3) $-- $18.7
Accounts receivable, net 78.3 130.9 6.9 (8.1) 208.0
Inventories 16.3 45.2 14.1 (0.3) 75.3
Other current assets 135.1 18.7 42.6 (182.9) 13.5
-----------------------------------------------------------------------
Total current assets 229.7 214.8 62.3 (191.3) 315.5
Property, plant and equipment, net 105.5 109.6 53.2 8.2 276.5
Intangibles, net 91.0 123.5 6.5 -- 221.0
Assets held for sale -- 52.6 -- -- 52.6
Other assets 28.7 2.1 261.6 (280.8) 11.6
-----------------------------------------------------------------------
Total assets $454.9 $502.6 $383.6 $(463.9) $877.2
=======================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $-- $33.7 $158.0 $-- $191.7
Accounts payable 18.2 98.5 5.0 (0.2) 121.5
Accrued expenses 0.3 134.5 5.7 (91.0) 49.5
-----------------------------------------------------------------------
Total current liabilities 18.5 266.7 168.7 (91.2) 362.7
Long-term debt -- 31.7 200.0 -- 231.7
Other long-term liabilities 0.3 12.9 3.1 -- 16.3
-----------------------------------------------------------------------
Total liabilities 18.8 311.3 371.8 (91.2) 610.7
Stockholders' equity 436.1 191.3 11.8 (372.7) 266.5
-----------------------------------------------------------------------
Total liabilities and stockholders' equity $454.9 $502.6 $383.6 $(463.9) $877.2
=======================================================================
</TABLE>
-72-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
JUNE 30, 1998
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR
(IN MILLIONS) GUARANTORS SUBSIDIARIES PARENT ONLY ELIMINATIONS CONSOLIDATED
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 815.1 $ 689.4 $-- $(119.2) $1,385.3
Cost of goods sold 699.4 621.2 -- (119.2) 1,201.4
---------------------------------------------------------------------------
Gross profit 115.7 68.2 -- -- 183.9
Selling, general and administrative expenses 14.7 37.1 26.8 78.6
Engineering, research, and development 40.9 18.9 13.4 73.2
Repositioning and impairment charges 104.3 116.3 38.9 259.5
In process research and development expenses 55.2 -- 77.5
22.3
Amortization of intangibles 12.3 6.0 1.0 19.3
---------------------------------------------------------------------------
Operating income (loss) (78.8) (165.3) (80.1) -- (324.2)
Interest income (expense), net 2.3 (9.1) (76.4) (83.2)
Other income (expense), net (27.8) 27.8 (1.4) (1.4)
---------------------------------------------------------------------------
Earnings (loss) before income taxes,
distributions on Company Obligated
Mandatorily Redeemable Preferred
Securities and extraordinary loss (104.3) (146.6) (157.9) -- (408.8)
Income Tax (benefit) (20.7) (3.2) (36.3) (60.2)
Distributions on Company Obligated
Mandatory Redeemable Convertible
Preferred Securities -- 10.0 10.0
---------------------------------------------------------------------------
Earnings (loss) before extraordinary loss (83.6) (143.4) (131.6) -- (358.6)
Extraordinary loss, net of tax benefit of $5.4 -- -- 10.0 -- 10.0
million
---------------------------------------------------------------------------
Net earnings (loss) $ (83.6) $(143.4) (141.6) -- $ (368.6)
===========================================================================
</TABLE>
-73-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
JUNE 30, 1997
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR
(IN MILLIONS) GUARANTORS SUBSIDIARIES PARENT ONLY ELIMINATIONS CONSOLIDATED
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $386.2 $453.9 $-- $(45.2) $794.9
Cost of goods sold 269.3 395.7 11.3 (45.0) 631.3
-------------------------------------------------------------------------
Gross profit 116.9 58.2 (11.3) (0.2) 163.6
Selling, general and administrative expenses 7.3 37.9 25.3 0.1 70.6
Engineering, research, and development 5.3 5.3 25.5 -- 36.1
Amortization of intangibles 1.1 4.9 0.4 (0.1) 6.3
-------------------------------------------------------------------------
Operating income 103.2 10.1 (62.5) (0.2) 50.6
Interest income (expense), net (0.3) (7.0) (17.2) -- (24.5)
Other income (expense), net 1.5 2.0 (0.4) 0.4 3.5
-------------------------------------------------------------------------
Earnings (loss) before income taxes 104.4 5.1 (80.1) 0.2 29.6
Income tax (benefit) 37.9 6.1 (29.2) -- 14.8
-------------------------------------------------------------------------
Net earnings (loss) $ 66.5 $ (1.0) $(50.9) $ 0.2 $ 14.8
=========================================================================
</TABLE>
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
JUNE 30, 1996
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR
(IN MILLIONS) GUARANTORS SUBSIDIARIES PARENT ONLY ELIMINATIONS CONSOLIDATED
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $363.7 $107.1 $-- $(39.1) $431.7
Cost of goods sold 205.0 94.2 17.4 (39.5) 277.1
------------------------------------------------------------------------
Gross profit 158.7 12.9 (17.4) 0.4 154.6
Selling, general and administrative expenses 10.9 7.1 20.2 -- 38.2
Engineering, research, and development 0.4 2.6 20.6 -- 23.6
Amortization of intangibles 0.6 1.4 -- -- 2.0
------------------------------------------------------------------------
Operating income 146.8 1.8 (58.2) 0.4 90.8
Interest income (expense), net 0.2 (2.3) 0.7 0.3 (1.1)
Other income (expense), net 7.6 0.8 0.5 (0.3) 8.6
------------------------------------------------------------------------
Earnings (loss) before income taxes 154.6 0.3 (57.0) 0.4 98.3
Income tax (benefit) 53.6 2.2 (20.5) -- 35.3
-------------------------------------------------------------------------
Net earnings (loss) $101.0 $ (1.9) $(36.5) $ 0.4 $ 63.0
========================================================================
</TABLE>
-74-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
JUNE 30, 1998
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR
(IN MILLIONS) GUARANTORS SUBSIDIARIES PARENT ONLY ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C> <C> <C>
Net earnings/ (loss) $( 83.6) $(143.4) $(141.6) $-- $(368.6)
Adjustments to reconcile net cash use in
Operating activities:
Depreciation and amortization 30.8 25.2 5.5 61.5
Other adjustments 133.1 144.1 41.0 318.2
Changes in operating assets and liabilities (90.4) 14.7 46.4 (29.3)
------------------------------------------------------------------------
Net cash (used in) provided by operating
activities (10.1) 40.6 (48.7) -- (18.2)
------------------------------------------------------------------------
Cash flows from investing activities: -- --
Capital expenditures (20.0) (40.7) (7.1) (67.8)
Cost of acquisitions, net of cash acquired -- -- (716.9) (716.9)
Proceeds from sale of assets and equipment 7.2 4.3 -- 11.5
------------------------------------------------------------------------
Net cash used in investing activities (12.8) (36.4) (724.0) (773.2)
Cash flows from financing activities:
------------------------------------------------------------------------
Net change in debt -- (4.5) 479.1 474.6
Net change in equity and preferred securities -- -- 343.2 343.2
------------------------------------------------------------------------
Net cash provided by (used in)
financing activities -- (4.5) 822.5 817.8
Effects of exchange rate changes on cash -- (0.7) -- (0.7)
Increase (decrease) in cash and cash equivalents $ (22.9) (1.0) 49.6 25.7
------------------------------------------------------------------------
Cash and cash equivalents at beginning of year -- 20.0 (1.3) $ 18.7
------------------------------------------------------------------------
Cash and cash equivalents at end of year $ (22.9) $ 19.0 $ 48.3 $ 44.4
========================================================================
</TABLE>
-75-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
JUNE 30, 1997
<TABLE>
<CAPTION>
SUBSIDIARY NON-GUARANTOR
(IN MILLIONS) GUARANTORS SUBSIDIARIES PARENT ONLY ELIMINATIONS CONSOLIDATED
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings/ (loss) $ 66.5 $ (1.0) $ (50.9) $ 0.2 $ 14.8
Adjustments to reconcile net cash use in
Operating activities:
Depreciation and amortization 21.9 20.1 6.5 48.5
Other adjustments 0.6 1.3 1.9
Changes in operating assets and liabilities (54.4) 144.7 (65.9) (0.2) 24.2
-------------------------------------------------------------------------
Net cash (used in) provided by operating
activities 34.6 163.8 (109.0) -- 89.4
-------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (35.6) (35.3) (5.0) (75.9)
Cost of acquisitions, net of cash acquired -- (140.7) (151.2) (291.9)
Investment in and advances to affiliates -- -- (0.9) (0.9)
Proceeds from sale of assets and equipment 0.8 0.6 -- -- 1.4
-------------------------------------------------------------------------
Net cash used in investing activities (34.8) (175.4) (157.1) -- (367.3)
-------------------------------------------------------------------------
Cash flows from financing activities:
Net change in debt -- (8.8) 219.1 210.3
Net change in equity -- -- (7.7) (7.7)
-------------------------------------------------------------------------
Net cash provided by (used in)
financing activities -- (8.8) 211.4 202.6
-------------------------------------------------------------------------
Effects of exchange rate changes on cash (1.8) -- (1.8)
Decrease in cash and cash equivalents (0.2) (22.2) (54.7) (77.1)
Cash and cash equivalents at beginning of year 0.2 42.2 53.4 -- 95.8
-------------------------------------------------------------------------
Cash and cash equivalents at end of year $ -- $ 20.0 $ (1.3) $ 18.7
=========================================================================
</TABLE>
-76-
<PAGE>
BREED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
JUNE 30, 1996
<TABLE>
<CAPTION>
(IN MILLIONS) SUBSIDIARY NON-GUARANTOR
GUARANTORS SUBSIDIARIES PARENT ONLY ELIMINATIONS CONSOLIDATED
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings/ (loss) $101.0 $ (1.9) $(36.5) $ 0.4 $ 63.0
Adjustments to reconcile net cash use in
operating activities:
Depreciation and amortization 13.5 1.3 5.3 20.1
Other adjustments (0.6) 1.0 0.4
Changes in operating assets and liabilities (74.1) 83.4 (51.2) (0.4) (42.3)
-------------------------------------------------------------------------
Net cash (used in) provided by operating
activities 39.8 82.8 (81.4) -- 41.2
-------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (42.2) (13.1) 9.9 (45.4)
Sale of short-term investments -- -- 10.6 10.6
Cost of acquisitions, net of cash acquired -- (45.5) (3.0) (48.5)
Deposit on Gallino acquisition -- -- (10.3) (10.3)
Proceeds from sale of assets and equipment 1.7 -- 1.0 -- 2.7
-------------------------------------------------------------------------
Net cash used in investing activities (40.5) (58.6) 8.2 (90.9)
-------------------------------------------------------------------------
Cash flows from financing activities:
Net change in debt -- 17.3 108.3 125.6
Net change in equity -- -- (4.8) (4.8)
-------------------------------------------------------------------------
Net cash provided by (used in)
financing activities -- 17.3 103.5 120.8
-------------------------------------------------------------------------
Effects of exchange rate changes on cash -- (1.6) -- (1.6)
Increase in cash and cash equivalents (0.7) 39.9 30.3 69.5
Cash and cash equivalents at beginning of year 0.9 2.2 23.2 -- 26.3
-------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 0.2 $ 42.1 $ 53.5 $ 95.8
=========================================================================
</TABLE>
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<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the directors
and executive officers of the Company as of September 28, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Johnnie Cordell Breed........ 54 Chairman of the Board of Directors and Chief
Executive Officer
Charles J. Speranzella, Jr... 42 Vice Chairman, President, Chief Operating Officer
Robert M. Rapone............. 41 Executive Vice President, Operations Worldwide
Frank J. Gnisci.............. 47 Executive Vice President and Chief Financial Officer
Robert J. Saltarelli......... 44 Treasurer
Lizanne Guptill.............. 44 Secretary
Allen K. Breed............... 71 Director
Larry W. McCurdy(2).......... 62 Director
Robert W. Shower(1).......... 61 Director
Alberto Negro(2)............. 59 Director
Dr.-Ing. Franz Wressnigg(1).. 54 Director
</TABLE>
_______________
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Johnnie Cordell Breed was elected Chairman of the Board of Directors in March
1998 and Chief Executive Officer in August 1997 and has been a director of the
Company since its inception in 1987. From August 1997 to March 1998, Mrs. Breed
served as Co-Chairman of the Board of Directors. She served as President and
Chief Operating Officer of the Company from September 1995 until August 1997 and
as Vice Chairman from 1987 through August 1995. In 1982, Mrs. Breed co-founded
Transcor, Inc., a provider of transportation travel services. She is currently
the Secretary, Treasurer and sole stockholder of Transcor, Inc. Mrs. Breed is
the wife of Allen K. Breed.
Charles J. Speranzella, Jr. was elected President and Chief Operating Officer
of the Company in June 1998, a director in October 1997 and Vice Chairman in
August 1997. He joined the Company as General Counsel and Assistant Secretary in
September 1994. He served as Managing Senior Vice President, General Counsel and
Assistant Secretary from February 1995 until July 1995. Mr. Speranzella also
served as President of BREED European Holdings, Inc. from June 1996 until
January 1997 and Executive Vice President, Operations Worldwide from January
1997 until September 1997. Mr. Speranzella was elected Corporate Secretary in
May 1995 and became Executive Vice President, General Counsel and Secretary in
July 1995. From 1979 until joining the Company, he held various senior positions
at Matra Hachette's Fairchild Space and Defense Corporation and Martin Marietta.
-78-
<PAGE>
Robert M. Rapone joined the Company as Executive Vice President, Operations
Worldwide in September 1997. From 1995 to 1997, Mr. Rapone was Vice President of
Operations for Morton ASP (later Autoliv) one of the largest independent
suppliers of airbag and seatbelt systems in the world. From 1989 to 1995, Mr.
Rapone was employed by Federal Mogul, most recently as Director of Connectivity.
Frank J. Gnisci joined the Company as Executive Vice President and Chief
Financial Officer in September 1997. From 1994 to 1997, Mr. Gnisci served as
Vice President of Finance for Terex Corporation, a manufacturer of heavy
construction vehicles and equipment. From 1991 to 1994, Mr. Gnisci was Vice
President of Finance for Babcock Industries, Inc., a manufacturer of conveyor
systems. Mr. Gnisci was Vice President and Controller of Gold Fields Mining
Corporation from 1987 to 1991.
Robert J. Saltarelli joined the Company as Treasurer in November 1997. From
1995 to 1997 Mr. Saltarelli served as Director of International and Corporate
Finance for Tupperware Corporation. From 1992 to 1995, Mr. Saltarelli was
Director of International Finance for W.R. Grace & Co., a chemical healthcare
company. Mr. Saltaralli served as Assistant Treasurer of Melville Corporation,
a specialty retailer, from 1990 to 1992.
Lizanne Guptill joined the Company in 1993 as legal assistant to the General
Counsel, specializing in corporate and business law. Prior to joining the
Company, Ms. Guptill was a Legal Assistant with the Corporate Legal Department
of Marriott International, Inc. since 1990. Ms. Guptill was employed as a Legal
Assistant with the General Corporate Division of Hayt, Hayt & Landau in Miami
from 1984 to 1990.
Allen K. Breed, founder of the Company, was elected Chairman Emeritus of the
Board of Directors of the Company in March 1998. From August 1997 to March 1998,
Mr. Breed served as Co-Chairman of the Board of Directors. Mr. Breed was
Chairman of the Board of Directors and Chief Executive Officer from the
Company's inception in 1987 until August 1997. Mr. Breed is the husband of
Johnnie Cordell Breed.
Larry W. McCurdy was elected a director of the Company in September 1992.
Since July 1998, Mr. McCurdy was President of DANA Automotive Aftermarket Group.
From March 1997 to July 1998, Mr. McCurdy has served as Chairman, President and
Chief Executive Officer of Echlin, Inc., an automotive components supplier
("Echlin"). From 1985 until March 1997, Mr. McCurdy served as President and
Chief Executive Officer of Moog Automotive, Inc., a manufacturer of automotive
aftermarket products (Moog Automotive, Inc. was sold to Cooper Industries, Inc.
in October 1992). From 1983 to 1985, Mr. McCurdy served as President and Chief
Operating Officer of Echlin. Prior to 1983, Mr. McCurdy held various senior
management positions with Tenneco Inc. Mr. McCurdy is a director of Lear Seating
Corporation and Mohawk Industries, Inc. and serves as a trustee of Milliken
University.
Robert W. Shower was elected a director of the Company in October 1997. From
1992 through his retirement in July 1996, Mr. Shower served as an officer and
director of Seagull Energy Corporation, an oil and gas exploration and
production company ("Seagull"). While at Seagull, Mr. Shower served as a Senior
Vice President from 1992 to 1994, as Chief Financial Officer from 1992 to 1996,
as an Executive Vice President from 1994 to 1996, and as a director from May
1992 through July 1996. Prior to joining Seagull, Mr. Shower served as Senior
Vice President, Corporate Development for Albert Fisher, Inc., a fruit and
vegetable distribution company, from 1991 until 1992. Mr. Shower currently
serves as a director of Lear Seating Corporation, Highlands Insurance Group,
Edge Petroleum Corporation and Nuevo Energy Corporation.
Alberto Negro was elected a director of the Company in November 1997. Mr.
Negro has served as President, Chief Executive Officer and a director of
MecaPlast USA since March 1998. Mr. Negro retired as Chief Executive Officer of
Fiat Auto USA, Inc. in June 1997 after 29 years of service with Fiat. Mr. Negro
also served as Chairman of SAE Overseas Meeting Group, a society of automotive
engineers, and served on the Executive Committee of recent IBEC and Convergence
Conferences from 1995 to 1997.
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<PAGE>
Dr.-Ing. Franz Wressnigg was elected a director of the Company in November
1997. Mr. Wressnigg has served as the Group President of Siemens Automotive, an
automotive parts manufacturer, since 1993. Previously he served as a member of
the Board of Directors of Siemens Austria, Vienna from 1989 until 1993 and in
various other management positions with Siemens since 1967. Dr. Wressnigg is the
designee of Siemens to serve on the Board of Directors pursuant to the
Stockholders Agreement described below.
Pursuant to the Stockholders Agreement entered into in connection with the
Siemens Investment, Mrs. Breed and her husband, who beneficially own an
aggregate of approximately 47% of the outstanding Common Stock as of March 15,
1998, have agreed to vote their shares to elect a designee of Siemens to the
Board of Directors. Siemens designated Dr. Wressnigg to be this director and he
was elected a director of the Company at the Company's annual stockholders'
meeting held on November 20, 1997. The holders of Series A Preference Shares
(initially Siemens) also have the right, voting as a class, to elect one
director of the Company under certain circumstances.
Executive officers of the Company are elected by the Board of Directors on an
annual basis and serve at the discretion of the Board of Directors.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under Section 16(a) of the Securities Exchange Act of 1934, all executive
officers, directors and persons that beneficially own more than 10% of the
Common Stock of the Company are required to file reports regarding the ownership
of such Common Stock, options and stock appreciation rights and any changes in
that ownership with the Securities and Exchange Commission. Specific due dates
for these reports have been established, and the Company is required to report
in the Proxy Statement any failure to comply therewith during the fiscal year
ended June 30, 1998. Based solely upon a review of the copies of such reports
furnished to the Company and certain representations of such persons, the
Company believes that all of these filing requirements were satisfied.
DIRECTOR COMPENSATION
As compensation for serving on the Board of Directors, members of the Board of
Directors who are not employees of the Company are paid $5,000 for attendance at
each Board meeting, $1,250 for participation in each telephonic Board meeting,
$1,000 for each committee meeting and $2,000 for serving as chairman of any
committee of the Board. These fees are in addition to participation in the
Company's 1992 Directors Stock Option Plan (the "1992 Director Plan").
Under the 1992 Director Plan, directors of the Company who are not employees
of the Company or any subsidiary are eligible to receive non-qualified options
to purchase shares of Common Stock of the Company. Under the 1992 Director
Plan, options are automatically granted to eligible directors after their
election on the date of each annual meeting of stockholders. The number of
shares of Common Stock covered by each director's options is determined by
dividing $50,000 by the fair market value of the Company's Common Stock on the
date of grant. Such options vest on the first anniversary of the date of grant
(or, if earlier, the day prior to the first annual meeting of stockholders of
the Company following the date of grant). The exercise price of options granted
under the 1992 Director Plan equal the fair market value of the Common Stock on
the date of grant. On November 20, 1997, options to purchase 2,685 shares of
Common Stock at an exercise price of $18.625 per share were granted to each of
Messrs. McCurdy, Negro and Shower.
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<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning the compensation
earned by the Chief Executive Officer of the Company and each of the four other
most highly compensated executive officers of the Company (collectively, the
"Named Executive Officers") during fiscal 1996, 1997 and 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION> LONG TERM
ANNUAL COMPENSATION (1) COMPENSATION
------------------------------------------------------------- ------------
AWARDS
-----------
SECURITIES
UNDERLYING ALL OTHER
FISCAL OTHER ANNUAL OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) B0NUS($) (2) COMPENSATION ($) (3) (#) (4) ($) (5)
- ------------------------------- ------- --------- ------------------- ------------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Johnnie Cordell Breed.......... 1998 414,299 0 27,341 0 4,500
Chief Executive Officer 1997 331,749 287,950 17,115 0 4,500
1996 283,032 220,000 44,376 0 4,500
Charles J. Speranzella, Jr. ... 1998 303,195 0 25,339 458,804 4,500
Vice Chairman, President 1997 210,784 115,000 58,881 7,485 4,500
and Chief Operating Officer 1996 198,672 43,125 74,461 90,607 40,661
Robert M. Rapone(6)............. 1998 236,550 0 75,005 400,000 4,500
Executive Vice President, 4,500
Worldwide Operations 4,500
Frank J. Gnisci(6).............. 1998 157,706 0 27,459 75,000 3,000
Executive Vice President
and Chief Financial Officer
Allen K. Breed.................. 1998 342,119 0 3,419 0 4,500
Former Chief Executive 1997 456,404 456,404 32,064 0 4,500
Officer 1996 455,812 441,000 36,466 0 4,500
Fred J. Musone(7)............... 1998 315,393 0 33,906 0 4,500
Former President and
Chief Operating Officer
</TABLE>
___________________
(1) The aggregate amount of perquisites and other personal benefits, if any, did
not exceed the lesser of $50,000 or 10% of the total annual salary and bonus
reported for each Named Executive Officer and has therefore been omitted.
(2) Amounts in this column represent bonuses earned under the Company's employee
incentive program for the respective fiscal years. Amounts earned in any
fiscal year are payable in the following fiscal year.
(3) Amounts in this column represent the value of certain executive benefits
provided by the Company.
(4) The Company does not have a long-term compensation program that includes
long-term incentive payouts. However, the 1994 Stock Incentive Plan, adopted
by the stockholders on November 17, 1994, provides participants under the
Plan performance-based compensation in the form of incentive stock options
or restricted stock awards.
(5) Amounts shown in this column represent the Company's contributions under its
tax-qualified and tax-deferred 401(k) savings plan, taxes paid by the
Company, and income realized from the
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<PAGE>
exercise of incentive stock options. The Company's 401(k) matching
contribution was $4,500 to each of Messrs. Breed, Speranzella, Rapone,
Gnisci and Mrs. Breed.
(6) Joined the Company in September 1997.
(7) Mr. Musone joined the Company in September 1997 and resigned as President
and Chief Operating Officer of the Company as of June 19, 1998.
OPTION GRANTS TABLE
The table below sets forth certain information relating to options granted
during fiscal 1998 to each Named Executive Officer. No stock appreciation
rights were granted to the executive officers during fiscal 1998.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS(1)
------------------------------------------------------ POTENTIAL REALIZABLE VALUE
NUMBER OF % OF TOTAL AT ASSUMED ANNUAL RATES
SECURITIES OPTIONS OF STOCK PRICE
UNDERLYING GRANTED TO APPRECIATION FOR OPTION
OPTIONS EMPLOYEES EXERCISE TERM ($)
GRANTED IN FISCAL PRICE PER EXPIRATION -------------------------
(#)(1) YEAR SHARE ($) DATE 5% 10%
----------- ----------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Johnnie C. Breed -- -- -- -- -- --
Charles J. Speranzella, Jr. 8,804 0.68 24.06 09/01/2007 133,215 337,593
400,000 31.11 21.25 05/20/2007 5,345,604 13,546,811
50,000 3.89 19.1875 05/20/2008 603,346 1,528,997
Robert M. Rapone. 400,000 31.11 21.25 09/01/2007 5,345,604 13,546,811
Frank J. Gnisci 25,000 1.94 21.25 05/20/2008 334,100 846,676
50,000 3.89 19.1875 603,346 1,528,997
Allen K. Breed -- -- -- -- -- --
Fred J. Musone............... -- -- -- -- -- --
</TABLE>
_____________
(1) All of the options are options to purchase Common Stock of the Company
granted under the 1994 Stock Incentive Plan.
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<PAGE>
AGGREGATED OPTIONS TABLE
The table below sets forth certain information with respect to options held at
the end of fiscal 1998 by each Named Executive Officer. No options were
exercised during fiscal 1998.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS/SARS AT
OPTIONS/SARS AT FISCAL FISCAL YEAR-END ($)
YEAR-END (#) (EXERCISABLE/
(EXERCISABLE/UNEXERCISABLE) UNEXERCISABLE)(1)
--------------------------- ---------------------
<S> <C> <C>
Johnnie C. Breed -- --
Charles J. Speranzella, Jr. 44,148/521,081 --
Robert M. Rapone............. 0/400,000 --
Frank J. Gnisci.............. 0/75,000 --
Allen K. Breed............... -- --
Fred J. Musone............... -- --
</TABLE>
_____________
(1) Value based on the last price per share ($15.3125) of the Company's Common
Stock on June 30, 1998, as reported on the New York Stock Exchange Composite
Tape, less exercise price.
EMPLOYMENT AGREEMENTS
The Company is party to employment agreements with Charles J. Speranzella,
Jr. and Robert M. Rapone, which were entered into on October 27, 1997 and
September 2, 1997, respectively (the "Employment Agreements"). Each Employment
Agreement provides for the employee to devote his full business time and
attention to the Company, and terminates four years after its inception unless
earlier terminated as described below.
Mr. Speranzella's employment agreement (the "Speranzella Agreement") provides
that he will serve as the Vice Chairman of the Board of Directors of the
Company. The Speranzella Agreement provides for an annual base salary of
$375,000 per year which may be increased at the discretion of the Board of
Directors, as well as an annual bonus of up to 50% of his base salary which may
be paid to Mr. Speranzella in the discretion of the Board of Directors.
Mr. Rapone's employment agreement (the "Rapone Agreement") provides that he
will serve as the Executive Vice President of Worldwide Operations. The Rapone
Agreement provides for an annual base salary of $300,000 per year, which may be
increased at the discretion of the Board of Directors, as well as an annual
bonus of up to 45% of his base salary in the discretion of the Board of
Directors. Each Employment Agreement also provides for reimbursement of
reasonable business expenses, an automobile allowance, health insurance and, in
the case of Mr. Rapone, payment of relocation expenses.
Under the provisions of the Employment Agreements, both Mr. Speranzella and
Mr. Rapone have been granted options to purchase 400,000 shares of Common Stock
of the Company at $21.25 per share (the "Incentive Options"). The Incentive
Options vest over a three year period based upon the price of the Company's
Common Stock reaching certain targeted levels. Additionally, the Employment
Agreements provide that Mr. Speranzella and Mr. Rapone are to receive on each of
the first, second and third anniversaries of their Employment Agreements options
to purchase 100,000 shares of Common Stock at the market price of the Company's
common stock on the date of the grant (the "Annual Options"). Each of the
Annual Options vest one year from the date of the grant.
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<PAGE>
The Employment Agreements are terminable upon the death or disability of the
employee, by the Company for "Cause" (as defined in the Employment Agreements),
by the Company without Cause, by the employee in the event that the employee's
base salary or responsibilities are reduced by the Company ("Changed
Circumstances"), by the employee on the occurrence of a change in control (as
defined in the Employment Agreements). Each Employment Agreement provides that,
in the event the employee's employment is terminated without Cause, for a change
in control or for Changed Circumstances (all as defined in the Employment
Agreements), such employee is to be paid as severance all base salary (exclusive
of bonus), auto allowance, health and welfare benefits and 401k company
contributions through the end of the Employment Agreement term. If the employee
is terminated as a result of a change in control, the employee is to be paid an
amount equal to three times his annual base salary in effect at the time of
termination, plus an amount equal to three times the amount of the highest
annual bonus awarded to the employee during the three immediately preceding
years as well as other allowances as discussed in the preceding sentence. The
Employment Agreements also subject the employees to non-compete, non-
solicitation and confidentiality restrictions.
During the past fiscal year, the Company was also party to an employment
agreement with Fred J. Musone which was entered into on September 2, 1997 (the
"Musone Agreement") which provided for Mr. Musone to be retained by the Company
as its the President and Chief Operating Officer. On June 18, 1998 the Company
and Mr. Musone amended the Musone Agreement whereby Mr. Musone resigned from the
Company and received from the Company: (i) a severance allowance of $986,524
payable in three installments through January 2, 1999, and (ii) continuing
health and welfare benefits payable by the Company for 24 months following the
date of resignation. Mr. Musone is subject to continuing non-compete, non-
solicitation and confidentiality restrictions.
The Company is party to a severance agreement with Frank J. Gnisci dated
August 12, 1997 (the "Severance Agreement"). Under the terms of the Severance
Agreement, if the Company terminates Mr. Gnisci employment for any reason other
than cause (as defined in the Severance Agreement) or substantially reduces Mr.
Gnisci's annual base salary or job functions, Mr. Gnisci is entitled to receive
from the Company a continuation of his then current annual base salary and
certain health and insurance benefits for a period of up to twelve months. If
during the twelve month period Mr. Gnisci accepts employment with an annual base
salary less than the annual base salary paid to him by the Company, the Company
is obligated to pay to Mr. Gnisci the difference between such salary levels. In
the event Mr. Gnisci accepts employment with an annual base salary in excess of
that paid to him by the Company, the Company is not obligated to make any
further severance payments to Mr. Gnisci.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Messrs. McCurdy and Negro. No
executive officer of the Company has served as a director or member of the
Compensation Committee (or other committee serving an equivalent function) of
any other entity, one of whose executive officers served as a director of or
member of the Compensation Committee of the Company.
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<PAGE>
ITEM 12. COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of September 15, 1998, (i) by
each person who is known to the Company to beneficially own more than 5% of the
outstanding shares of the Common Stock, (ii) by each executive officer of the
Company, (iii) by each director of the Company and (iv) by all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
OF COMMON STOCK
--------------------------------------
NUMBER PERCENTAGE
NAME OF BENEFICIAL OWNER(1) OF SHARES(2) OF CLASS(3)
- --------------------------- ---------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
Johnnie Cordell Breed 8,477,850 (4) 23.01
Charles J. Speranzella, Jr. 58,244 (5) *
Robert Rapone -- (6) --
Frank Gnisci 5,000 (7) *
Allen K. Breed 8,617,552 (8) 23.39
Larry W. McCurdy. 13,349 (9) *
Alberto Negro 1,000 *
Robert Shower 2,000 *
Dr. -Ing. Franz Wressnigg -- --
All executive officers and directors as a group (11 persons) 17,174,995 (10) 46.61
OTHER 5% STOCKHOLDERS:
A. Breed, Ltd. 8,477,750 (11) 23.01
J. Breed, Ltd. 8,477,750 (11) 23.01
Capital Research and Management Company 2,647,980 (12) 7.19
FMR Corp. 3,422,030 (13) 9.29
Pioneer Management Corporation 3,109,400 (14) 8.44
Siemens Aktiengesellschaft 4,883,227 (15) 13.25
</TABLE>
_______________
<TABLE>
<CAPTION>
* Less than 1%.
<S> <C>
</TABLE>
(1) The business address for Mr. and Mrs. Breed is 5300 Old Tampa Highway,
Lakeland, Florida 33811.
(2) Under the rules of the Securities and Exchange Commission, a person is
deemed to beneficially own securities if he or she has or shares the power
to vote or dispose, or to direct the vote or disposition, of such
securities or has the right to acquire such beneficial ownership within 60
days. Under these rules, more than one person may be deemed to
beneficially own the same securities and a person may be deemed to
beneficially own securities as to which he or she has no pecuniary
interest. Unless otherwise indicated, each person or entity named in the
table has sole voting and investment power with respect to all shares of
Common Stock listed as beneficially owned by such person or entity.
(3) In calculating the percentage ownership for a given individual or group,
the number of shares of Common Stock outstanding includes unissued shares
subject to options, warrants, rights or other
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<PAGE>
conversion privileges exercisable on or before November 14, 1998 held by
such individual or group, but are not deemed outstanding by any other
person or group.
(4) Includes 8,477,750 shares held by J. Breed, Ltd., a Texas limited
partnership. J. Breed, Inc., a Texas corporation, is the general partner
of J. Breed, Ltd. Mrs. Breed is the sole stockholder and director of J.
Breed, Inc. and, consequently, is deemed to beneficially own all of the
shares of Common Stock held by J. Breed, Ltd. Also includes 100 shares of
Common Stock held as a joint tenant with Mrs. Breed's spouse.
(5) Includes 56,864 shares of Common Stock which may be acquired upon the
exercise of stock options that are or will become exercisable on or before
November 14, 1998. Excludes 400,000 shares of Common Stock that may be
acquired pursuant to stock options exercisable if the trading price of the
Common Stock exceeds certain specified levels.
(6) Excludes 400,000 shares of Common Stock that may be acquired pursuant to
stock options exercisable if the trading price of the Common Stock exceeds
certain specified levels.
(7) Includes 5,000 shares of Common Stock which may be acquired upon the
exercise of stock options that are or will become exercisable on or before
November 14, 1998.
(8) Includes 8,477,750 shares of Common Stock held by A. Breed, Ltd., a Texas
limited partnership. A. Breed, Inc., a Texas corporation, is the general
partner of A. Breed, Ltd. Mr. Breed is the sole stockholder and director
of A. Breed, Inc. and, accordingly, is deemed to beneficially own all of
the shares of Common Stock held by A. Breed, Ltd. Also includes 100 shares
of Common Stock held as a joint tenant with Mr. Breed's spouse and 139,702
shares held by the Breed Charitable Foundation. Mr. Breed is a trustee of
the Breed Charitable Foundation and shares the power to vote and dispose
of the Common Stock beneficially owned by the Foundation.
(9) Includes 13,349 shares of Common Stock which may be acquired upon the
exercise of stock options that are or will become exercisable on or before
November 14, 1998.
(10) Includes 17,174,995 shares of Common Stock which may be acquired by
executive officers and directors upon the exercise of stock options which
are or will become exercisable on or prior to November 14, 1998.
(11) A. Breed, Ltd. and J. Breed, Ltd. are both located at 1366 Winding Way,
Cave Rock Estates, Nevada 89413.
(12) This information is based on a Schedule 13G filed with the Securities and
Exchange Commission on July 9, 1998. Capital Research and Management
Company's address is 333 South Hope Street, Los Angeles, CA 90071.
(13) Excludes 80,000 shares of Common Stock beneficially owned by Fidelity
International Limited ("FIL"). Prior to June 30, 1980, FIL was a wholly
owned subsidiary of Fidelity Management & Research Company, which is a
wholly owned subsidiary of FMR Corp. On June 30, 1980, Fidelity Management
& Research Company distributed all of the outstanding shares of FIL as a
dividend to the shareholders of FMR Corp. FMR Corp. does not have the
power to vote or dispose of these 80,000 shares and has taken the position
that it does not beneficially own such shares. This information is based
on Amendment No. 1 to Schedule 13G filed with the Securities and Exchange
Commission on March 10, 1998. FMR Corp.'s address is 82 Devonshire Street,
Boston, MA 02109.
(14) This information is based on Amendment No. 2 to Schedule 13G filed with
the Securities and Exchange Commission on January 5, 1998. Pioneering
Management Corporation's address is 60 State Street, Boston, MA 02109.
(15) Includes One Series A preferred Share, which is convertible into one share
of Common Stock. Siemens Aktiengesellschaft is located at
Wittelsbacherplatz 2, D-80333, Munich, Germany.
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<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since November 1992, the Company has engaged the services of Transcor,
Inc. ("Transcor") to support its travel requirements. Transcor has provided the
Company with airline tickets, computer services, ticket stock and car and hotel
rentals. Johnnie Cordell Breed is the sole stockholder of Transcor. During
fiscal 1998, Transcor received gross commissions of $72,303 based on
transactions placed by Transcor on behalf of the Company for $1,450,081 of
business. In addition, pursuant to the terms of a travel management agreement,
the Company is entitled to share in a portion of Transcor's revenues derived
from the Company. The Company incurs no cost or fees in connection with this
arrangement. The Company believes that the terms of its relationship with
Transcor are as favorable as those that were available through other travel
companies.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
The following Consolidated Financial Statements of the Company and its
consolidated subsidiaries and the Report of the Independent Auditors,
included in the Registrant's Annual Report to Shareholders for the year
ended June 30, 1995, are included in Part II, Item 8.
Report of Independent Certified Public Accountants.
Consolidated Statements of Operations for the years ended June 30, 1998,
1997 and 1996.
Consolidated Balance Sheets as of June 30, 1998, 1997 and 1996.
Consolidated Statements of Shareholders' Equity for the years ended June
30, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended June 30, 1998,
1997 and 1996.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules of the Company.
None. The required information is either not applicable or is included
in the financial statements or the notes thereto.
3. Exhibits.
EXHIBIT
NUMBER
------
2.1 Stock Purchase Agreement - MOMO S.p.A. and G. Holding
S.r.l., dated March 29, 1996, and Stock Purchase Agreement -
LANEBROOK LTD., dated March 29, 1996 (incorporated herein by
reference to Exhibits 2.1 and 2.2 to the Company's Form 8-
K/A filed on June 28, 1996)
2.2 Master Agreement, dated July 1, 1996, related to the
"Gallino Group" acquisition (incorporated herein by
reference to Exhibit 2.5 to the Company's 10-K filed on
September 29, 1997)
2.3 Amended and Restated Purchase Agreement, dated as of October
25, 1996, among UT Automotive, Inc., United Technologies
Automotive Systems, Inc., United Technologies Automotive
Systems de Mexico A.A. de C.V., IPCO, Inc. and Breed
Technologies, Inc. (incorporated herein by reference to the
Exhibit to the Company's Form 8-K/A filed March 25, 1997)
2.4 Stock Purchase Agreement, dated January 3, 1997, as amended
February 25, 1997, between the Company and BTI Investments,
Inc. (incorporated herein by reference to the Exhibit to the
Company's Form 8-K filed March 10, 1997)
2.5 Asset Purchase Agreement, dated as of August 27, 1997, among
AlliedSignal Inc. (and certain subsidiaries identified in
the Agreement) and the Company (and
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<PAGE>
certain subsidiaries identified in the Agreement)
(incorporated herein by reference to an Exhibit to the
Company's Form 8-K filed on November 14, 1997)
2.6 Amendment, dated October 3, 1997, to the Asset Purchase
Agreement, dated as of August 27, 1997, by and between
AlliedSignal Inc., a Delaware corporation, the Company and
the other parties thereto (incorporated herein by reference
to an Exhibit to the Company's Form 8-K filed on November
14, 1997)
3.1 Second Restated Certificate of Incorporation of the Company
(incorporated herein by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-8 (File No. 33-
54988))
3.2 Amended and Restated By-Laws of the Company (incorporated
herein by reference to Exhibit 3.3 to the Company's
Registration Statement on Form S-1 (File No. 33-51868) (the
"Form S-1"))
4.1 Specimen Certificate of Common Stock of the Company
(incorporated herein by reference to Exhibit 4.1 to the Form
S-1)
4.2 Form of Preferred Securities (incorporated herein by
reference to Exhibit 4.3 to the Company's Registration
Statement on Form S-3 (file no. 33-48231)).
4.3 Form of Convertible Debentures (incorporated herein by
reference to Exhibit 4.4 to the Company's Registration
Statement on Form S-3 (file no. 33-48231)).
4.4 Registration Rights Agreement, dated April 28, 1998, among
the Company, Nations BancMontgomery Securities, LLC and
Prudential Securities Incorporated (incorporated herein by
reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-4 (File No. 333-57671))
4.5 Amended and Restated Declaration of Trust, dated as of
November 25, 1997, between the Company, as Sponsor,
Wilmington Trust Company, as Delaware Trustee and
Institutional Trustee, and Charles J. Speranzella, Jr., Fred
J. Musone, and Frank J. Gnisci, as Regular Trustees
(incorporated herein by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-3 (File No. 333-
48231))
4.6 Indenture, dated as of November 25, 1997, between the
Company and Wilmington Trust Company, as Indenture Trustee
(incorporated herein by reference to Exhibit 4.2 to the
Company's Registration Statement on Form S-3 (File No. 333-
48231))
4.7 Common Securities Guarantee Agreement, dated as of November
25, 1997, by the Company, as Guarantor (incorporated herein
by reference to Exhibit 4.5 to the Company's Registration
Statement on Form S-3 (File No. 333-48231))
4.8 Preferred Securities Guarantee Agreement, dated as of
November 25, 1997, between the Company, as Guarantor, and
Wilmington Trust Company, as Preferred Guarantee Trustee
(incorporated herein by reference to Exhibit 4.6 to the
Company's Registration Statement on Form S-3 (File No. 333-
48231))
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<PAGE>
4.9 Amendment No. 1 to Warrant Agreement, dated March 2, 1998,
between the Company and NationsBank, N.A. (incorporated
herein by reference to Exhibit 4.9 to the Company's
Registration Statement on Form S-3 (File No. 333-48231))
4.10 Indenture, dated as of April 28, 1998, among the Company,
the Subsidiary Guarantors named therein and IBJ Schroder
Bank & Trust Company, as Trustee (incorporated herein by
reference to Exhibit 4.8 to the Company's Registration
Statement on Form S-3 (File No. 333-48231))
4.11 Amended and Restated Credit Agreement, dated as of April 28,
1998, by and among the Company, certain subsidiaries of the
Company designated as Borrowers therein, NationsBank,
National Association and certain other financial
institutions named therein as Lenders, and NationsBank,
National Association, as Agent for the Lenders (incorporated
herein by reference to Exhibit 4.9 to the Company's
Registration Statement on Form S-3 (File No. 333-48231))
4.12 Registration Rights Agreement, dated November 25, 1997, by
and among the Company, BTI Capital Trust, and Prudential
Securities Incorporated and Furman Selz LLC (incorporated
herein by reference to Exhibit 4.12 to the Company's
Registration Statement on Form S-3 (File No. 333-48231))
10.1 Company's 1992 Stock Option Plan (incorporated herein by
reference to Exhibit 10.12 to the Form S-1)
10.2 Company's 1992 Director Stock Option Plan (incorporated
herein by reference to Exhibit 10.13 to the Form S-1)
10.3 Company's 1992 Employee Stock Purchase Plan, as amended
(incorporated herein by reference to Exhibit 28 to the
Company's Registration Statement on Form S-8 (File No. 33-
54988))
10.4 Company's Employees' Retirement Savings Plan (incorporated
herein by reference to Exhibit 10.15 to the Form S-1)
10.5 Company's Employee Incentive Program (incorporated herein by
reference to Exhibit 10.16 to the Form S-1)
10.6 Company's 1994 Stock Incentive Plan (incorporated herein by
reference to the Company's Registration Statement on Form S-
8 (File No. 333-22723))
10.7 Stock Purchase Agreement, dated as of October 14, 1997, by
and between the Company and Siemens Aktiengesellschaft, a
company organized under the laws of the Federal Republic of
Germany (incorporated herein by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1997 filed February 12, 1998)
10.8 Make-Whole Agreement, dated as of October 30, 1997, by and
between the Company and Siemens Aktiengesellschaft, a
company organized under the laws of the Federal Republic of
Germany (incorporated herein by reference to Exhibit 10.1.1
to the Company's Form Quarterly Report on Form 10-Q for the
quarter ended December 31, 1997 filed February 12, 1998)
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<PAGE>
10.9 Registration Rights Agreement, dated as of October 30, 1997,
between the Company and Siemens Aktiengesellschaft, a
company organized under the laws of the Federal Republic of
Germany (incorporated herein by reference to Exhibit 10.1.2
to the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1997 filed February 12, 1998)
10.10 Stockholders Agreement, dated as of October 30, 1997, among
the Company and certain of its subsidiaries (incorporated
herein by reference to Exhibit 10.1.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended December
31, 1997 filed February 12, 1998)
10.11 Warrant Agreement, dated as of October 30, 1997, between
NationsBank, N.A. and the Company (incorporated herein by
reference to Exhibit 10.3 to the Company's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1997 filed
February 12, 1998)
10.12 Joint Venture Agreement, dated as of December 24, 1997,
between Siemens Aktiengesellschaft and the Company
(incorporated herein by reference to Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1997 filed February 12, 1998)
12.1 Computation of Ratio of Earnings to Fixed Charges
12.2 Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends
21. Subsidiaries of the Company (incorporated by reference to
Exhibit 21 to the Company's Annual Report on Form 10-K for
the year ended June 30, 1998 filed on September 29, 1998)
23.1 Consent of Ernst & Young LLP, Independent Certified Public
Accountants
23.2 Consent KPMG S.p.A., Independent Certified Public
Accountants (incorporated by reference to Exhibit 27 to the
Company's Annual Report on Form 10-K for the year ended June
30, 1998 filed on September 29, 1998)
27 Financial Data Schedule (incorporated by reference to
Exhibit 23.2 to the Company's Annual Report on Form 10-K for
the year ended June 30, 1998 filed on September 29, 1998)
99 Report of KPMG S.p.A., Independent Auditors (incorporated by
reference to Exhibit 99 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1998 filed on
September 29, 1998)
(b) Reports on Form 8-K
The following reports have been filed on Form 8-K with the Securities and
Exchange Commission during the last quarter of fiscal 1998: (a) the Company's
Current Report on Form 8-K filed on May 12, 1998, making "forward-looking
statements" to avail the Company to the corresponding safe-harbor in the
Securities Act of 1933 and the Securities Exchange Act of 1934, (b) the
Company's Current Report on Form 8-K filed on June 15, 1998, (i) amending
certain earnings per share information and selected financial history and (ii)
filing Management's Discussion and Analysis of the Company with respect to SRS
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<PAGE>
and Unaudited Pro Forma Condensed Consolidated Financial Statements of the
Company as Exhibit 99.1 thereto, (c) the Company's Current Report on Form 8-K
filed on June 24, 1998, announcing the resignation of Mr. Fred Musone on June
19, 1998 as President, Chief Operating Officer and member of the Board of
Directors of the Company and the succession of Mr. Charles S. Speranzella as
President and Chief Operating Officer, (d) the Company's Current Report on Form
8-K filed on August 31, 1998 announcing a delay in the release of the Company's
earnings for the quarter and year ended June 30, 1998, (e) the Company's Current
Report of Form 8-K on September 4, 1998 announcing certain information regarding
previously recorded repositioning and other special charges and other business
developments, (f) the Company's Current Report on Form 8-K on September 18, 1998
announcing the resolution of certain outstanding items with the Securities and
Exchange Commission and (g) the Company's Current Report on Form 8-K on
September 21, 1998 announcing the Company will restate its financial statements
for the second quarter ended December 31, 1997 and the third quarter ended March
31, 1998 to take into account changes in the repositioning and other special
charges.
(c) See Item 14(a)(3) and separate Exhibit Index attached hereto.
(d) Not applicable.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Johnnie Cordell Breed
--------------------------
Johnnie Cordell Breed
Chairman of the Board of Directors and
Chief Executive Officer
Date: September 30, 1998
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<PAGE>
EXHIBIT 12.1
------------
BREED TECHNOLOGIES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN MILLIONS, EXCEPT FOR RATIOS)
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
--------------------------------------------
1994 1995 1996 1997 1998
------- ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Earnings Computation
Pre-tax earnings (losses) from
continuing operations...... $73.0 $110.1 $ 98.3 $29.6 $(408.8)
Add: Fixed charges............. 1.4 1.2 3.0 29.4 89.4
Subtract: Capitalized Interest. -- -- -- (0.1) (0.1)
----- ------ ------ ----- -------
Total Earnings as Adjusted........ $74.4 $111.3 $101.3 $59.0 $(319.5)
===== ====== ====== ===== =======
Fixed Charges Computation
Interest expensed.............. $ 1.1 $ 0.8 $ 2.7 $26.8 $ 68.9
Capitalized interest........... -- -- -- 0.1 0.1
Amortization of deferred
financing costs.............. -- -- -- 0.7 16.8
Estimated interest factor
on operating leases.......... 0.3 0.4 0.3 1.8 3.6
----- ------ ------ ----- -------
Total Fixed Charges............... $ 1.4 $ 1.2 $ 3.0 $29.4 $ 89.4
===== ====== ====== ===== =======
Ratio of earnings to
fixed charges.................. 53.1 92.7 33.8 2.0 (--)
===== ====== ====== ===== =======
Insufficiency of earnings to
cover fixed charges............ $(408.9)
=======
</TABLE>
<PAGE>
EXHIBIT 12.2
------------
BREED TECHNOLOGIES, INC.
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(IN MILLIONS, EXCEPT FOR RATIOS)
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
-------------------------------------------
1994 1995 1996 1997 1998
-------- ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C>
Net Earnings (loss) before
extraordinary item.............. $44.6 $ 72.3 $ 63.0 $14.8 $(358.6)
Add: Income taxes.................. 28.4 37.8 35.3 14.8 (60.2)
----- ------ ------ ----- -------
Profit (loss) before income taxes.. $73.0 $110.1 $ 98.3 $29.6 $(418.8)
===== ====== ====== ===== =======
Fixed Charges
Interest expensed.................. $ 1.1 $ 0.8 $ 2.7 $26.8 $ 68.9
Capitalized interest............... -- -- -- 0.1 0.1
Amortization of deferred
financing costs.............. -- -- -- 0.7 16.8
Estimated interest factor on
operating leases............. 0.3 0.4 0.3 1.8 3.6
Dividends on redeemable
preferred stock.............. -- -- -- -- 10.0
----- ------ ------ ----- -------
-----
Total Fixed Charges................ $ 1.4 $ 1.2 $ 3.0 $29.4 $ 99.4
===== ====== ====== ===== =======
Earnings Computation
Profit (loss) before tax........ $73.0 $110.1 $ 98.3 $29.6 $(418.8)
Fixed charges 1.4 1.2 3.0 29.4 99.3
----- ------ ------ ----- -------
Total Earnings as Adjusted.......... $74.4 $111.3 $101.3 $59.0 $(319.5)
===== ====== ====== ===== =======
Ratio of earnings to
fixed charges................... 53.1 92.7 33.8 2.0 (---)
----- ------ ------ ----- -------
Insufficiency of earnings to cover
combined fixed charges and
preferred stock dividends........ $(418.8)
=======
</TABLE>
<PAGE>
EXHIBIT 23.1
------------
Consent of Independent Certified Public Accountants
We consent to the incorporation by reference in the Registration Statement
on Form S-8 (No. 33-54990) and Form S-8 (No. 33-73350) pertaining to the 1992
Stock Option Plan; the Registration Statement Form S-8 (No. 33-54986) pertaining
to the 1992 Director Stock Option Plan; the Registration Statement (Form S-8 No.
33-57958) pertaining to the 1992 Employee Stock Purchase Plan; and Registration
Statement on Form S-8 (No. 33-22423) pertaining to the 1992 Employee Stock
Purchase Plan, the 1992 Stock Option Plan, and the 1994 Stock Incentive Plan of
our report dated September 25, 1998, with respect to the consolidated financial
statements incorporated by reference in this Annual Report (Form 10-K/A) for the
year ended June 30, 1998.
/s/Ernst & Young LLP
Tampa, Florida
September 25, 1998
