UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the quarterly period ended: March 31, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Commission File No. 1-11474
--------------------
BREED TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
Delaware 22-2767118
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
5300 Old Tampa Highway
Lakeland, Florida 33811
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(941) 668-6000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
--------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO __.
As of February 15, 1999, 36,849,160 shares of the registrant's common
stock, par value $.01 per share, were outstanding.
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets - March 31, 1999
(Unaudited)and June 30, 1998 ......................... 1
Consolidated Condensed Statements of Operations (Unaudited)
Three and nine months ended March 31, 1999 and 1998... 3
Consolidated Condensed Statements of Cash Flows (Unaudited)
Nine months ended March 31, 1999 and 1998............. 4
Notes to Consolidated Condensed Financial Statements
(Unaudited) .......................................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ......................... 20
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.............................................. 30
ITEM 4. Submission of Matters to a Vote of Security Holders............ 30
ITEM 6. Exhibits and Reports on Form 8-K .............................. 30
SIGNATURES ............................................................ 31
i
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
BREED TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
IN MILLIONS, EXCEPT FOR SHARE DATA
<CAPTION>
March 31, June 30,
1999 1998
------------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 25.9 $ 44.4
Accounts receivable, principally trade 301.3 275.3
Inventories:
Raw materials 58.0 75.0
Work in process 22.7 18.2
Finished goods 18.4 15.9
----------- ----------
Total Inventories 99.1 109.1
------------ ----------
Income tax receivable 1.5 64.6
Prepaid expenses and other current assets 37.6 27.7
------------ ----------
Total Current Assets 465.4 521.1
Property, plant and equipment, net 322.2 365.2
Intangibles, net 549.6 692.1
Net assets held for sale 52.4 29.0
Other assets 34.5 42.5
Total Assets $ 1,424.1 $ 1,649.9
============ ==========
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
</TABLE>
- 1 -
<PAGE>
<TABLE>
BREED TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
IN MILLIONS, EXCEPT FOR SHARE DATA
<CAPTION>
March 31, June 30,
1999 1998
------------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Notes payable and current portion of long-term $ 607.7 $ 46.9
debt(Note 3)
Accounts payable 272.3 254.9
Accrued expenses 190.2 233.2
------------- ----------
Total Current Liabilities 1,070.2 535.0
Long-term debt (Note 3) 347.6 851.1
Other long-term liabilities 14.3 25.6
------------- ----------
Total Liabilities 1,432.1 1,411.7
============= ==========
Company obligated mandatorily redeemable convertible
preferred securities 250.0 250.0
Stockholders' Deficit:
Common stock, par value $0.01, authorized 75,000,000
shares,issued and outstanding 36,848,632 and 36,850,261
shares at March 31, 1999 and June 30, 1998,respectively 0.4 0.4
Series A Preference Stock par value $0.01, authorized
5,000,000 shares, issued and outstanding 1 share at
March 31, 1999 and June 30, 1998 -- --
Additional paid-in capital 197.4 197.6
Warrants 1.9 1.9
Retained deficit (424.5) (184.0)
Accumulated other comprehensive loss (Notes 4 and 5) (33.2) (27.4)
Unearned compensation -- (0.3)
------------- ----------
Total Stockholders' Deficit (258.0) (11.8)
------------- ----------
Total Liabilities and Stockholders' Deficit $ 1,424.1 $ 1,649.9
============= ==========
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
</TABLE>
- 2 -
<PAGE>
<TABLE>
BREED TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
IN MILLIONS, EXCEPT PER SHARE DATA
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -----------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $ 401.2 $ 431.7 $1136.6 $ 967.6
Cost of sales 357.0 356.8 998.0 836.1
-------- -------- -------- --------
Gross profit 44.2 74.9 138.6 131.5
-------- -------- -------- --------
Operating expenses:
Selling, general and administrative expenses 20.5 22.1 64.6 59.7
Research, development and engineering expenses 23.3 22.4 72.7 49.9
Repositioning and impairment charges (Notes 2 & 10) 135.2 -- 135.2 259.5
In-process research and development expenses -- -- -- 77.5
Amortization of intangibles 5.8 6.8 17.6 12.7
-------- -------- -------- --------
Total operating expenses 184.8 51.3 290.1 459.3
-------- -------- -------- --------
Operating income (loss) (140.6) 23.6 (151.5) (327.8)
Interest expense 23.1 28.2 65.2 63.7
Other income (expense), net (0.7) 2.8 -- 2.8
--------- --------- -------- --------
Loss before income taxes and distributions
on Company obligated mandatorily redeemable
convertible preferred securities (164.4) (1.8) (216.7) (388.7)
Income taxes (benefit)(Note 6) 3.1 (4.4) 4.9 (54.3)
Distributions on Company obligated mandatorily
redeemable convertible preferred securities 4.3 4.3 13.1 5.7
--------- --------- -------- --------
Loss before extraordinary item (171.8) (1.7) (234.7) (340.1)
Extraordinary loss net of tax benefit of $1.4 million -- -- -- (0.7)
--------- --------- -------- --------
Net loss $ (171.8) $ (1.7) $(234.7) $ (340.8)
========= ========= ======== ========
Loss per share (Note 7):
Basic loss per share
Loss before extraordinary item $ (4.66) $(0.05) $ (6.37) $ (10.33)
Extraordinary item -- -- -- (0.02)
--------- --------- -------- --------
Net loss $ (4.66) $(0.05) $ (6.37) $ (10.35)
========= ========= ======== ========
Diluted loss per share
Loss before extraordinary item $ (4.66) $(0.05) $ (6.37) $ (10.33)
Extraordinary item -- -- -- (0.02)
--------- --------- -------- --------
Net loss $ (4.66) $(0.05) $ (6.37) $ (10.35)
========= ========= ======== ========
Shares used for computation:
Basic 36.849 35.380 36.849 32.923
Diluted 36.849 35.380 36.849 32.923
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
</TABLE>
- 3 -
<PAGE>
<TABLE>
BREED TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
IN MILLIONS
<CAPTION>
Nine Months Ended March 31,
1999 1998
---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (234.7) $ (340.8)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 55.6 43.4
Changes in working capital items and other 139.0 267.5
---------- ---------
Net cash used in operating activities (40.1) (29.9)
---------- ---------
Cash Flows from Investing Activities:
Cost of acquisitions and capital expenditures (50.8) (760.1)
Proceeds from sale of assets 4.5 4.2
---------- ---------
Net cash used in investing activities (46.3) (755.9)
---------- ---------
Cash Flows from Financing Activities:
Proceeds from debt 489.5 1,182.0
Proceeds from Preference Stock issuance -- 554.0
Repayment of debt (432.3) (722.3)
Redemption of Preference Stock -- (210.0)
Cash dividends paid -- (2.2)
Proceeds from common stock issued -- 1.6
---------- ---------
Net cash provided by financing activities 57.2 803.1
---------- ---------
Effect of exchange rate changes on cash 10.7 (11.9)
---------- ---------
Net (decrease) increase in cash and cash equivalents (18.5) 5.4
Cash and cash equivalents at beginning of period 44.4 18.7
---------- ---------
Cash and cash equivalents at end of period $ 25.9 $ 24.1
========== =========
SEE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
</TABLE>
- 4 -
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
GENERAL - The accompanying unaudited consolidated condensed financial statements
of Breed Technologies, Inc. (the "Company" or "Breed") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and notes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and nine months ended March 31, 1999 are not
necessarily indicative of results that may be expected for the year ending June
30, 1999. The consolidated financial statements include the accounts of Breed
and all majority owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. For further information, refer to the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K/A for the year ended June 30, 1998.
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 customer's 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 under such agreements to the earliest date on which the Company can
terminate such agreements. Such losses are recognized at the time that the loss
is probable and reasonably estimable. Losses are estimated based upon
information available at the time of the estimate, including future production
volume estimates, length of the program and selling price and production cost
information.
NOTE 2 - REPOSITIONING AND IMPAIRMENT CHARGES
During the quarter ended December 31, 1997, the Company formulated a
repositioning program which is intended to (i) enhance the Company's
competitiveness and productivity, (ii) reduce costs and increase asset control
and (iii) improve processes and systems (the "Repositioning Program"). The
Company's Repositioning Program has been substantially completed as of March 31,
1999, with the remaining repositioning actions such as the sale of Gallino
Plastics (see Note 9) to be completed by June 30, 1999. Any excess accrual
balance will be adjusted in the June 1999 quarter results of operations.
During the nine months ended March 31, 1999, the repositioning and impairment
accrual was reduced by $9.5 million as a result of cash charges. The following
table sets forth the details and the cumulative activity relating to the
repositioning and impairment charge as of March 31, 1999:
<TABLE>
<CAPTION>
Accrual Accrual
Balance Balance
at June Cash Non-Cash at
IN MILLIONS 30, 1998 Reductions Reductions March
31, 1999
---------------------------------------- --------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Headcount reductions $ 15.9 $ 3.5 $ -- $ 12.4
Facility consolidations 18.9 6.0 -- 12.9
====================================== =========== ========== =========== ==========
Total $ 34.8 $ 9.5 $ -- $ 25.3
====================================== =========== ========== =========== ==========
</TABLE>
The Company is considering a second repositioning plan however, no formal
decision has been committed to by management or the Board of Directors.
- 5 -
<PAGE>
NOTE 3 - DEBT
<TABLE>
A summary of debt follows:
<CAPTION>
March 31, June 30,
1999 1998
----------- -----------
<S> <C> <C> <C> <C>
Term Loan A, interest at 8.01% and 7.825% at March 31, 1999,and
June 30, 1998, respectively, installments due 1999 through 2004 $ 297.6 $ 309.2
Term Loan B, interest at 8.51%and 8.075% at March 31, 1999, and
June 30, 1998, respectively, installments due 2005 through 2006 190.4 197.8
Revolver, interest at 8.00% at March 31, 1999 92.0
Senior Subordinated Notes, interest at 9.75% and 9.25% at March 31,
1999 and June 30, 1998 respectively, due April 15, 2008 330.0 330.0
Foreign short-term lines of credit, weighted average
interest rate of 5.67%, installments due various 20.4 30.4
Mortgages and equipment financing loans 24.9 30.6
----------- -----------
Total debt 955.3 898.0
Less current maturities 607.7 46.9
----------- -----------
Total long-term debt $ 347.6 $ 851.1
=========== ===========
</TABLE>
On April 28, 1998, the Company entered into a new $675.0 million credit
facility. At March 31, 1999, the Company had an aggregate of $580.0 million of
borrowings outstanding under the credit facility, which bore interest at a
weighted average rate of 8.1725% per annum at such date, and had aggregate
borrowing availability thereunder of $14.0 million. Because the Company would
have been in violation of certain financial covenants in the loan agreement
relating to the credit facility as of March 31, 1999, the Company obtained a
waiver of these covenants from the lenders that was effective from March 30,
1999 through June 29, 1999 (the "Fourth Waiver"). Pursuant to the Fourth Waiver,
the maximum borrowing availability under the company's revolving line of credit
was decreased from its original level of $150.0 million (including letters of
credit) to $125.0 million (including letters of credit). The Company paid the
lenders fees aggregating $1.1 million in connection with the Fourth Waiver.
On March 3, 1999 the Company obtained an additional waiver (the "Third Waiver")
in anticipation of the Company's disposition of its Gallino Plastics business.
The Third Waiver provided for the release from the credit facility's negative
pledge provision limiting the Company's ability to pledge its retained interest
in the new joint venture formed as a result of the disposition of the Gallino
Plastics business and removed certain restrictions that would have limited the
Company's ability to transfer the shares of its FAS S.p.A. and A.P. Co. S.r.l.
subsidiaries which are an integral part of the Gallino Plastics business. (See
the Subsequent Event Note as it relates to the Gallino Plastics business.)
On February 11, 1999, the Company obtained a waiver (the "Second Waiver") of the
net worth covenant in the loan agreement relating to the credit facility as well
as an event of default that existed due to the Company's failure to register
certain securities as required under certain agreements to which it is a party.
The Second Waiver was effective from February 13, 1999 through March 30, 1999.
In connection with the Second Waiver, the maximum borrowing availability under
the revolving line of credit was increased to $125.0 million (including letters
of credit) from $110.0 million (including letters of credit) previously
established at the granting of the "First Waiver" discussed below. The Company
paid the lenders fees aggregating $1.3 million in connection with the Second
Waiver.
- 6 -
<PAGE>
On December 31, 1998 the Company obtained a waiver (the "First Waiver") of the
net worth covenant in the loan agreement relating to the credit facility. The
First Waiver was effective from December 30, 1998 through February 12, 1999.
Pursuant to the First Waiver, the maximum borrowing availability under the
Company's revolving line of credit was decreased from $150.0 million (including
letters of credit) to $110.0 million (including letters of credit).
Although the Company intends to negotiate the necessary amendments on additional
waivers with its lenders, there can be no assurance that it will be able to do
so. Any amendment to the loan agreement must be approved by the lenders holding
more than 50% of the commitments and borrowings outstanding under the credit
facility. In the absence of a further waiver or an amendment to the loan
agreement, after June 29, 1999, the lenders would be entitled to exercise all of
their rights under the loan agreement including, without limitation, declaring
all amounts outstanding under the credit facility immediately due and payable
and/or exercising their rights with respect to the collateral securing the
credit facility which consists of, among other things, substantially all of the
real and personal property of the Company and its subsidiaries.
If the Company is unable to obtain a further waiver or amendment to the loan
agreement, the Company may not have sufficient cash to meet its working capital,
debt service and capital expenditure needs beyond June 29, 1999, in which case,
the Company may be required to obtain financing from other sources. There can be
no assurance that such financing will be available or, if available, that it
will be on terms satisfactory to the Company. Consequently, the inability to
obtain any such waiver, amendment or alternative financing would have a material
adverse effect on the Company's financial condition and results of operations.
Until such time as the credit facility is amended as discussed above or all
amounts outstanding under the credit facility are repaid in full, borrowings
outstanding under the credit facility will be classified as a current liability
on the Company's consolidated balance sheet.
On April 28, 1998, the Company issued and sold an aggregate of $330 million of
its 9.25% Senior Subordinated Notes due 2008 (the "Notes") in a private
transaction under Rule 144A under the Securities Act of 1933, as amended (the
"Securities Act") (the "Notes Offering"). In connection with the Notes Offering,
the Company entered into a registration rights agreement (the "Notes Agreement")
pursuant to which it agreed to offer to exchange the Notes for substantially
identical 9.25% Senior Subordinated Notes due 2008 registered under the
Securities Act (the "Exchange Offer"). Pursuant to the Notes Agreement, the
Company was required to complete the Exchange Offer by the date 180 days after
April 28, 1998 (the "Closing Date"). The Company filed the registration
statement relating to the Exchange Offer on June 24, 1998. Because the Exchange
Offer had not been consummated on or prior to the date 180 days after the
Closing Date as required under the Notes Agreement, the interest rate borne by
the Notes increased pursuant to the Notes Agreement by 0.25% on the 181st day
after the Closing Date. The interest rate increased thereafter by 0.25% on the
1st day of each subsequent 90-day period. The Notes bore interest at a rate of
9.75% per annum at March 31, 1999. The Exchange Offer was completed on April 12,
1999 restoring the interest rate with respect to the notes to the original rate
of 9.25% as of April 12, 1999.
On November 25, 1997, the Company sold $257.7 million of its 6.50% Convertible
Subordinated Debentures due 2027 (the "Convertible Debentures") to BTI 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 (the "Preferred
Securities Offering"). In connection with the Preferred Securities Offering, the
Company entered into a registration rights agreement (the "Preferred Securities
Agreement") pursuant to which it agreed to register (and cause BTI Capital Trust
to register), among other things, the Convertible Debentures and Preferred
Securities. Pursuant to the Preferred Securities Agreement, the Shelf
Registration Statement (as defined therein) was required to be effective on or
prior to June 17, 1998. The Company filed the Shelf Registration Statement on
March 18, 1998. Because the Shelf Registration Statement was not declared
effective by June 17, 1998, the interest rate on the Convertible Debentures and
the distribution rate applicable to the Preferred Securities increased by 0.25%,
payable in arrears, with the first quarterly payment due on the first interest
or distribution date following June 17, 1998.
- 7 -
<PAGE>
The Shelf Registration Statement was declared effective on March 11, 1999 and
the interest rate borne by the Notes and the Convertible Debentures and the
distribution rate in respect of the Preferred Securities was reduced to the
original amounts on March 11, 1999.
On May 12, 1999, the Company gave notice to BTI Capital Trust of its selection
of an Extension Period. Payments of interest on the Debt Securities will be
deferred, and no interest shall be due and payable during the Extension Period
the Company has selected. The Extension Period will not exceed 20 consecutive
quarters, including the quarter ending June 30, 1999, and no future payments
will be made during this time until further notice. As a result, BTI will defer
the quarterly dividend payment due May 15, 1999 relating to its convertible
preferred as permitted under the trust instrument.
NOTE 4 -COMPREHENSIVE INCOME OR LOSS
Effective July 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No.
130 establishes new rules for the reporting and display of comprehensive loss
and its components. The adoption of this Statement requires that foreign
currency translation adjustments be included in other comprehensive loss, which
prior to adoption were reported separately in stockholders' equity. There is no
tax effect because the Company intends to reinvest foreign earnings in foreign
business operations. Prior year financial statements have been reclassified to
conform to the requirements of SFAS No. 130.
<TABLE>
<CAPTION>
Nine months ended March 31,
--------------------------------
1999 1998
----------- ----------
<S> <C> <C>
Net loss $ (234.7) $ (340.8)
Foreign currency translation adjustment (5.8) (11.9)
----------- ----------
Comprehensive loss $ (240.5) $ (352.7)
=========== ==========
</TABLE>
NOTE 5 - FOREIGN CURRENCY TRANSLATIONS
The Company translates foreign currencies into U.S. dollars using quarter-end
exchange rates for foreign assets and liabilities and weighted average rates for
foreign income and expenses. Translation gains and losses arising from the
conversion of the foreign balance sheets and income statements into U.S. dollars
are reflected as a separate component of comprehensive loss and included in
other comprehensive loss in accumulated stockholders' deficit. With respect to
operations in Mexico, the functional currency is the U.S. dollar, and any gains
or losses from translations are included directly in income. During the nine
months ended March 31, 1999 key European currencies strengthened relative to the
U.S. dollar and then weakened to end the nine month period relatively unchanged.
As a result, the conversion of foreign balance sheets into U.S. dollars had very
little impact on the foreign currency translation adjustment reported for such
nine month period and the related assets and liabilities as measured in U.S.
dollars remained relatively constant. The change in the U.S. dollar during the
nine months ended March 31, 1999 did not have a material impact on the results
of operations.
NOTE 6 -INCOME TAXES
During the nine months ended March 31, 1999, the Company recorded foreign tax
expense of $5.4 million which was partially offset by a $0.5 million domestic
benefit for a tax credit. No other tax benefit was recognized for either
domestic or foreign purposes due to the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). SFAS
No. 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
need for a valuation allowance was addressed separately for domestic and foreign
purposes. For domestic purposes, the Company is in a cumulative loss position
and pursuant to SFAS No. 109, a valuation allowance was recorded by the Company
to offset the portion of the domestic deferred tax asset which, upon reversal,
could not be carried back against prior year's taxable income. A valuation
allowance has been recognized to reduce to zero, foreign net deferred tax
assets, primarily related to net operating loss carry-forwards in Finland, Spain
and the U.K. and restructuring charges in Italy. Income taxes will be paid in
foreign jurisdictions in which there is no ability to offset income earned in
such jurisdictions against tax loss carry-forwards.
- 8 -
<PAGE>
NOTE 7 - LOSS PER SHARE
<TABLE>
The following table sets forth the computation of the numerator and denominator
of the basic and diluted loss per share calculations:
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
----- ---- ---- ----
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BASIC LOSS
Loss before extraordinary item $ (171.8) $ (1.7) $ (234.7) $ (340.1)
Extraordinary item, net -- -- -- (0.7)
--------- -------- --------- ---------
Loss applicable to common stock $ (171.8) $ (1.7) $ (234.7) $ (340.8)
========= ======== ========= =========
Weighted average common shares outstanding 36.849 35.380 36.849 32.923
========= ======== ========= =========
BASIC LOSS PER SHARE
Loss before extraordinary item $ (4.66) $ (0.05) $ (6.37) $ (10.33)
Extraordinary item -- -- -- (0.02)
--------- --------- --------- ---------
Net loss $ (4.66) $ (0.05) $ (6.37) $ (10.35)
========= ========= ========= =========
DILUTED LOSS
Loss before extraordinary item $ (171.8) $ (1.7) $ (234.7) $ (340.1)
Extraordinary item, net -- -- -- (0.7)
--------- --------- --------- ----------
Loss applicable to common stock $ (171.8) $ (1.7) $ (234.7) $ (340.8)
========= ========= ========= ==========
Share computation:
Weighted average common shares outstanding 36.849 35.380 36.849 32.923
Effect of diluted securities:
Assumed exercise of stock options and * * * *
warrants
Series A Preference Stock * * * *
Company obligated mandatorily redeemable
convertible preferred securities * * * *
--------- --------- --------- ----------
Weighted average common shares outstanding
as adjusted 36.849 35.380 36.849 32.923
DILUTED LOSS PER SHARE
Loss before extraordinary item $ (4.66) $ (0.05) $ (6.37) $ (10.33)
Extraordinary item -- -- -- (0.02)
--------- --------- --------- ----------
Net loss $ (4.66) $ (0.05) $ (6.37) $ (10.35)
========= ========= ========= ==========
* ITEMS NOT ASSUMED IN THE COMPUTATION BECAUSE THEIR EFFECT IS ANTI-DILUTIVE
</TABLE>
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.
- 9 -
<PAGE>
Options to purchase 2,326,895 shares of common stock at prices between $6.875
and $32.25 per share were outstanding as of March 31, 1999 but were not included
in the computation of diluted earnings per share because the effect would be
anti-dilutive.
As part of the acquisition of VTI in June 1995, the Company issued to certain of
the former stockholders of VTI warrants to purchase up to 100,000 shares of
common stock between July 1, 1998 and June 30, 2000, at an exercise price of
$25.75 per share. The 100,000 shares subject to the VTI warrants have not been
included in the computation of diluted earnings per share for the three and nine
months ended March 31, 1999 because the effect would be anti-dilutive.
In connection with the bridge loan credit facility entered into in connection
with the acquisition of the safety restraints systems business ("SRS") of
AlliedSignal, the Company issued to NationsBank, N.A. a warrant to purchase
250,000 shares of common stock of the Company at an exercise price of $23.125
per share. The 250,000 shares subject to the NationsBank warrant have not been
included in the computation of diluted earnings per share for the three and nine
months ended March 31, 1999 because the effect would be anti-dilutive.
NOTE 8 - BSRS JOINT VENTURE
The Company and Siemens Aktiengesallschaft ("Siemens") completed formation of a
joint venture, known as BSRS Restraint Systems International GmbH & Co. KG
("BSRS"), in June 1998. Pursuant to the joint venture agreement between the
Company and Siemens, on June 30, 1998, the Company transferred various assets
relating to the development, research and testing of integrated occupant
protection systems having an aggregate value of $5.6 million (net book value
approximates fair value) to BSRS and Siemens contributed its shares in PARS
Ruckhaltesysteme GmbH, which operates crash test facilities and develops
occupant safety systems.
NOTE 9 - SUBSEQUENT EVENTS
The Company acquired Gallino in July 1996 primarily for its steering wheel
business. In 1997, the Company evaluated whether the nonsteering wheel business
of Gallino, consisting of the manufacture of instrument panel, bumper and other
plastic trim components, could be integrated into the core business of the
Company and determined that this non-core business was not compatible with the
Company's future plans.
During the fourth quarter of fiscal 1997, the Company committed to a plan to
dispose of the nonsteering wheel business. The Company recorded the nonsteering
wheel business at its net realizable value based on amounts set forth in a
letter of intent to sell the business to a third party. 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. 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 Assets Held for Sale.
On May 6, 1999, the Company completed the sale of 70% of the nonsteering wheel
business of Gallino for approximately $43.0 million subject to post closing
adjustments in connection with the establishment of a joint venture with Textron
Automotive Company, Inc. and Magneti Marelli S.p.A. The Company has retained a
30% interest in the joint venture, which will be known as Textron Breed
Automotive, S.r.l. The nonsteering wheel portion of Gallino reported $128.3
million in sales for the nine months ended March 1999. The results of the sale
of the nonsteering wheel business of Gallino will be included in the
Repositioning Program (See Note 2).
- 10 -
<PAGE>
NOTE 10 - ASSET IMPAIRMENT CHARGE
In view of the losses in 1999, and as a part of the Company's annual planning
process, the Company performed an impairment review of its long-lived assets
consistent with SFAS No. 121 "Accounting For Long-Lived Assets and for
Long-Lived Assets to be Disposed of". The Company determined that its European
seat belt business was impaired and wrote down the assets to the estimated fair
value based on discounted cash flows. The third quarter charge of $135.2 million
(no related tax effect) reduced intangible assets by $108.9 million and fixed
assets by $26.3 million. The Company also determined that its North American and
European airbag businesses, while not impaired at this time, could be impaired
in the future if those businesses do not achieve their expected results of
operations.
The Company acquired the European seat belt business in October 1997 as a part
of its acquisition of the worldwide safety restraint business of AlliedSignal.
In October 1997, the Company purchased substantially all the assets and assumed
certain liabilities of AlliedSignal (SRS) related to the design, development,
manufacturing, marketing and selling of automotive occupant restraint products
and systems (including, but not limited to seat belt and airbag assemblies and
components) for $710.0 million in cash subject to post-closing adjustments
stipulated in the asset purchase agreement.
The impairment charge was necessary because the European seat belt businesses
are performing materially worse than expected and have contracts to provide
products at losses or marginal profits. Consequently, the businesses are not
providing sufficient cash flows to recover the value of the long-lived assets.
NOTE 11 - FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES
The Company conducts a significant portion of its business through subsidiaries.
On April 28, 1998, the Company issued and sold an aggregate of $330 million of
9.25% Senior Subordinated Notes due 2008 ("the Notes"). The Notes of the Company
are guaranteed, jointly and severally on a senior subordinated basis, by the
domestic subsidiaries of the Company (the "Subsidiary Guarantors") other than
BTI Capital Trust and certain domestic subsidiaries owned by a foreign
subsidiary of the Company (the "Non-Guarantor Subsidiaries"). The Notes are
subordinated in right of payment to all indebtedness and other liabilities
(including trade payables) of the Non-Guarantor Subsidiaries.
Presented below are the condensed consolidating balance sheets as of March 31,
1999 and June 30, 1998, the condensed consolidating statements of operations for
the three and nine months ended March 31, 1999 and 1998 and the condensed
consolidating statements of cash flows for the nine months ended March 31, 1999
and 1998, for the Subsidiary Guarantors, the Non-Guarantor Subsidiaries, Parent
only and the Company consolidated.
- 11 -
<PAGE>
<TABLE>
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
MARCH 31, 1999
(Unaudited)
IN MILLIONS
<CAPTION>
NON-
SUBSIDIARY GUARANTOR PARENT
GUARANTORS SUBSIDIARIES ONLY ELIMINATIONS CONSOLIDATED
------------- ------------- -------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ (19.1) $ 21.4 $ 23.6 $ -- $ 25.9
Accounts receivable, principally trade 508.1 137.1 2.9 (346.8) 301.3
Inventories 52.6 47.6 -- (1.1) 99.1
Other current assets 11.2 17.6 10.3 -- 39.1
------------- ------------- -------- -------------- --------------
Total current assets 552.8 223.7 36.8 (347.9) 465.4
Property, plant and equipment, net 158.0 158.7 37.4 (31.9) 322.2
Intangibles, net 488.6 165.2 4.7 (108.9) 549.6
Net assets held for sale -- 84.8 (32.4) -- 52.4
Other assets 22.2 (5.4) 1,028.1 (1,010.4) 34.5
------------- ------------- -------- -------------- --------------
Total assets $ 1,221.6 $ 627.0 $ 1,074.6 $ (1,499.1) $ 1,424.1
============= ============= ======== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Notes payable and current portion of $ -- $ 27.7 $ 580.0 $ -- $ 607.7
long-term debt
Accounts payable 73.2 169.5 30.6 (1.0) 272.3
Accrued expenses 93.4 175.4 269.3 (347.9) 190.2
------------- ------------- -------- -------------- --------------
Total current liabilities 166.6 372.6 879.9 (348.9) 1,070.2
Long-term debt -- 17.6 330.0 -- 347.6
Other long-term liabilities 5.1 11.7 (2.5) -- 14.3
------------- ------------- -------- -------------- --------------
Total liabilities 171.7 401.9 1,207.4 (348.9) 1,432.1
Company obligated mandatorily redeemable
convertible preferred securities -- -- 250.0 -- 250.0
Stockholders' equity (deficit) 1,049.9 225.1 (382.8) (1,150.2) (258.0)
------------- ------------- -------- -------------- --------------
Total liabilities and $ 1,221.6 $ 627.0 $1,074.6 $ (1,499.1) $ 1,424.1
stockholders' equity (deficit) ============= ============= ======== ============== ==============
</TABLE>
- 12 -
<PAGE>
<TABLE>
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
JUNE 30, 1998
(Unaudited)
IN MILLIONS
<CAPTION>
NON-
SUBSIDIARY GUARANTOR PARENT
GUARANTORS SUBSIDIARIES ONLY ELIMINATIONS CONSOLIDATED
------------ -------------- -------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ (22.9) $ 19.0 $ 48.3 $ -- $ 44.4
Accounts receivable, principally trade 138.8 135.9 0.6 -- 275.3
Inventories 57.3 51.8 -- -- 109.1
Other current assets 527.5 72.1 67.4 (574.7) 92.3
------------ -------------- -------- -------------- --------------
Total current assets 700.7 278.8 116.3 (574.7) 521.1
Property, plant and equipment, net 203.1 129.5 32.6 -- 365.2
Intangibles, net 431.1 257.8 3.2 -- 692.1
Net assets held for sale -- 29.0 -- -- 29.0
Other assets 25.0 44.4 1,015.4 (1,042.3) 42.5
------------ -------------- -------- -------------- --------------
Total assets $ 1,359.9 $ 739.5 $1,167.5 $ 1,617.0) $ 1,649.9
============ ============== ======== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Notes payable and current portion of $ -- $ 35.2 $ 11.7 $ -- $ 46.9
long-term debt
Accounts payable 84.9 158.9 11.1 -- 254.9
Accrued expenses 229.0 235.4 346.6 (577.8) 233.2
------------ -------------- -------- -------------- --------------
Total current liabilities 313.9 429.5 369.4 (577.8) 535.0
Long-term debt -- 25.8 825.3 -- 851.1
Other long-term liabilities 10.5 16.1 (1.0) -- 25.6
------------ -------------- -------- -------------- --------------
Total liabilities 324.4 471.4 1,193.7 (577.8) 1,411.7
Company obligated mandatorily redeemable
convertible preferred securities -- -- 250.0 -- 250.0
Stockholders' equity (deficit) 1,035.5 268.1 (276.2) (1,039.2) (11.8)
------------ -------------- -------- -------------- --------------
Total liabilities and $ 1,359.9 $ 739.5 $1,167.5 $ (1,617.0) $ 1,649.9
stockholders' equity (deficit) ============ ============== ======== ============== ==============
</TABLE>
- 13 -
<PAGE>
<TABLE>
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999
(Unaudited)
IN MILLIONS
<CAPTION>
NON-
SUBSIDIARY GUARANTOR PARENT
GUARANTORS SUBSIDIARIES ONLY ELIMINATIONS CONSOLIDATED
------------- -------------- -------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net sales $ 216.9 $ 216.9 $ -- $ (32.6) $ 401.2
Cost of sales 199.0 187.0 3.6 (32.6) 357.0
------------- -------------- -------- -------------- --------------
Gross profit 17.9 29.9 (3.6) -- 44.2
------------- -------------- -------- -------------- --------------
Selling, general and administrative expenses 4.0 7.7 8.8 -- 20.5
Research, development and engineering expenses 12.8 8.7 1.8 -- 23.3
Impairment charges -- 135.2 -- -- 135.2
Amortization of intangibles 4.8 0.9 0.1 -- 5.8
------------- -------------- -------- -------------- --------------
Operating income (loss) (3.7) (122.6) (14.3) -- (140.6)
Interest expense -- 1.5 21.6 -- 23.1
Other income (expense), net (2.3) 6.3 (6.1) 1.4 (0.7)
------------- -------------- -------- -------------- --------------
Earnings (loss) before income taxes and
distributions on Company obligated
mandatorily redeemable convertible
preferred securities (6.0) (117.8) (42.0) 1.4 (164.4)
Income taxes (benefit) -- 3.1 -- -- 3.1
Distributions on Company obligated
mandatorily redeemable convertible
preferred securities -- -- 4.3 -- 4.3
------------- -------------- -------- -------------- --------------
Net earnings (loss) $ (6.0) $ (120.9) $ (46.3) $ 1.4 $ (171.8)
============= ============== ======== ============== ==============
</TABLE>
- 14 -
<PAGE>
<TABLE>
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1999
(Unaudited)
IN MILLIONS
<CAPTION>
NON-
SUBSIDIARY GUARANTOR PARENT
GUARANTORS SUBSIDIARIES ONLY ELIMINATIONS CONSOLIDATED
------------ -------------- -------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net sales $ 620.2 $ 622.7 $ -- $ (106.3) $ 1,136.6
Cost of sales 553.1 543.1 8.1 (106.3) 998.0
------------ -------------- -------- -------------- --------------
Gross profit 67.1 79.6 (8.1) -- 138.6
------------ -------------- -------- -------------- --------------
Selling, general and administrative expenses 12.9 25.5 26.2 -- 64.6
Research, development and engineering expenses 43.1 24.2 5.4 -- 72.7
Impairment charges -- 135.2 -- -- 135.2
Amortization of intangibles 15.5 2.9 (0.8) -- 17.6
------------ -------------- -------- -------------- --------------
Operating income (loss) (4.4) (108.2) (38.9) -- (151.5)
Interest expense -- 6.4 59.8 -- 66.2
Other income (expense), net (1.8) 11.3 (9.4) 0.9 1.0
------------ -------------- -------- -------------- --------------
Earnings (loss) before income taxes and
distributions on Company obligated
mandatorily redeemable convertible
preferred securities (6.2) (103.3) (108.1) 0.9 (216.7)
Income taxes (benefit) -- 4.9 -- -- 4.9
Distributions on Company obligated
mandatorily redeemable convertible
preferred securities -- -- 13.1 -- 13.1
------------ -------------- -------- -------------- --------------
Net earnings (loss) $ (6.2) $ (108.2) $(121.2) $ 0.9 $ (234.7)
============ ============== ======== ============== ==============
</TABLE>
- 15 -
<PAGE>
<TABLE>
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
(Unaudited)
IN MILLIONS
<CAPTION>
NON-
SUBSIDIARY GUARANTOR PARENT
GUARANTORS SUBSIDIARIES ONLY ELIMINATIONS CONSOLIDATED
------------- -------------- --------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net sales $ 269.3 $ 194.0 $ -- $ (31.6) $ 431.7
Cost of sales 220.4 169.1 (1.0) (31.7) 356.8
------------- -------------- --------- -------------- --------------
Gross profit 48.9 24.9 1.0 0.1 74.9
------------- -------------- --------- -------------- --------------
Selling, general and administrative expenses 4.6 10.4 7.0 0.1 22.1
Research, development and engineering expenses 16.3 5.9 0.2 -- 22.4
Repositioning and impairment charges -- -- -- -- --
In-process research and development expenses -- -- -- -- --
Amortization of intangibles 6.5 1.0 (0.7) -- 6.8
------------- -------------- --------- -------------- --------------
Operating income (loss) 21.5 7.6 (5.5) -- 23.6
Interest expense -- 2.5 25.7 -- 28.2
Other income (expense), net 2.0 1.4 (0.7) 0.1 2.8
------------- -------------- --------- -------------- --------------
Loss before income taxes and distributions
on Company obligated mandatorily redeemable
convertible preferred securities 23.5 6.5 (31.9) 0.1 (1.8)
Income taxes (benefit) 4.1 4.6 (13.1) -- (4.4)
Distributions on Company obligated mandatorily
redeemable convertible preferred securities -- -- 4.3 -- 4.3
------------- -------------- --------- -------------- --------------
Earnings (loss) before extraordinary loss 19.4 1.9 (23.1) 0.1 (1.7)
Extraordinary loss, net of tax benefit of -- -- -- -- --
$1.4 million
------------- -------------- --------- -------------- --------------
Net earnings (loss) $ 19.4 $ 1.9 $ (23.1) $ 0.1 $ (1.7)
</TABLE>
- 16 -
<PAGE>
<TABLE>
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1998
(Unaudited)
IN MILLIONS
<CAPTION>
NON-
SUBSIDIARY GUARANTOR PARENT
GUARANTORS SUBSIDIARIES ONLY ELIMINATIONS CONSOLIDATED
------------ -------------- -------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net sales $ 567.8 $ 488.0 $ -- $ (88.2) $ 967.6
Cost of sales 484.9 431.0 (1.6) (78.2) 836.1
------------ -------------- -------- -------------- --------------
Gross profit 82.9 57.0 1.6 (10.0) 131.5
------------ -------------- -------- -------------- --------------
Selling, general and administrative expenses 9.9 29.8 20.0 -- 59.7
Research, development and engineering expenses 24.5 12.7 12.7 -- 49.9
Repositioning and impairment charges (15.2) 1.9 282.8 (10.0) 259.5
In-process research and development charges 77.5 -- -- -- 77.5
Amortization of intangibles 10.8 3.1 (1.2) -- 12.7
------------ -------------- -------- -------------- --------------
Operating loss (24.6) 9.5 (312.7) -- (327.8)
Interest expense -- 5.7 58.0 -- 63.7
Other income (expense), net 3.3 0.3 (0.6) (0.2) 2.8
------------ -------------- -------- -------------- --------------
Loss before income taxes and distributions
on Company obligated mandatorily redeemable
convertible preferred securities (21.3) 4.1 (371.3) (0.2) (388.7)
Income taxes (benefit) 7.6 6.3 (68.2) -- (54.3)
Distributions on Company obligated mandatorily
redeemable convertible preferred securities -- -- 5.7 -- 5.7
------------ -------------- -------- -------------- --------------
Earnings (loss) before extraordinary loss (28.9) (2.2) (308.8) (0.2) (340.1)
Extraordinary loss, net of tax benefit of -- -- 0.7 -- 0.7
$0.4 million
------------ -------------- -------- -------------- --------------
Net loss $ (28.9) $ (2.2) $(309.5) $ (0.2) $ (340.8)
============ ============== ======== ============== ==============
</TABLE>
- 17 -
<PAGE>
<TABLE>
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOW
NINE MONTHS ENDED MARCH 31, 1999
(Unaudited)
IN MILLIONS
<CAPTION>
NON-
SUBSIDIARY GUARANTOR PARENT
GUARANTORS SUBSIDIARIES ONLY ELIMINATIONS CONSOLIDATED
------------ -------------- -------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 5.5 $ (106.4) $ (134.7) $ 0.9 $ (234.7)
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 32.7 22.1 0.8 -- 55.6
Changes in working capital items and other (8.7) 102.4 46.2 (0.9) 139.0
------------ -------------- -------- -------------- --------------
Net cash provided by (used in) operating activities 29.5 18.1 (87.7) -- (40.1)
------------ -------------- -------- -------------- --------------
Cash flows from investing activities:
Capital expenditures (21.0) (19.8) (10.0) -- (50.8)
Proceeds from sale of assets 1.1 3.4 -- -- 4.5
------------ -------------- -------- -------------- --------------
Net cash (used in) investing activities (19.9) (16.4) (10.0) -- (46.3)
------------ -------------- -------- -------------- --------------
Cash flows from financing activities:
Proceeds from debt -- 5.2 484.3 -- 489.5
Repayment of debt (5.8) (15.2) (411.3) -- (432.3)
------------ -------------- -------- -------------- --------------
Net cash provided by (used in) financing activities (5.8) (10.0) 73.0 -- 57.2
------------ -------------- -------- -------------- --------------
Effect of exchange rate changes on cash -- 10.7 -- -- 10.7
------------ -------------- -------- -------------- --------------
Increase (decrease) in cash and cash 3.8 2.4 (24.7) -- (18.5)
equivalents
Cash and cash equivalents at beginning of period (22.9) 19.0 48.3 -- 44.4
------------ -------------- -------- -------------- --------------
Cash and cash equivalents at end of period $ (19.1) $ 21.4 $ 23.6 $ -- $ 25.9
============ ============== ======== ============== ==============
</TABLE>
- 18 -
<PAGE>
<TABLE>
BREED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOW
NINE MONTHS ENDED MARCH 31, 1998
(Unaudited)
IN MILLIONS
<CAPTION>
NON-
SUBSIDIARY GUARANTOR PARENT
GUARANTORS SUBSIDIARIES ONLY ELIMINATIONS CONSOLIDATED
------------- ------------ --------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (28.5) $ (1.1) $ (311.0) $ (0.2) $ (340.8)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization 26.6 16.8 -- -- 43.4
Changes in working capital items and other (7.4) 10.4 264.3 0.2 267.5
------------- ------------ --------- -------------- ------------
Net cash provided by (used in)operating activities (9.3) 26.1 (46.7) -- (29.9)
------------- ------------ --------- -------------- ------------
Cash flows from investing activities:
Cost of acquisitions and capital expenditures (19.9) (33.6) (706.6) -- (760.1)
Proceeds from sale of assets 1.9 2.3 4.2
------------- ------------ --------- -------------- ------------
Net cash (used in) investing activities (18.0) (31.3) (706.6) -- (755.9)
------------- ------------ --------- -------------- ------------
Cash flows from financing activities:
Proceeds from debt -- 15.6 1,166.4 -- 1,182.0
Proceeds from Preference Stock issuance -- -- 554.0 -- 554.0
Repayment of debt (6.2) -- (716.1) -- (722.3)
Redemption of Preference Stock -- -- (210.0) -- (210.0)
Cash dividends paid -- -- (2.2) -- (2.2)
Proceeds from common stock issued -- -- 1.6 -- 1.6
------------- ------------ --------- -------------- ------------
Net cash provided by financing activities (6.2) 15.6 793.7 -- 803.1
------------- ------------ --------- -------------- ------------
Effect of exchange rate changes on cash -- (11.9) -- -- (11.9)
------------- ------------ --------- -------------- ------------
Increase (decrease) in cash and cash equivalents (33.5) (1.5) 40.4 -- 5.4
Cash and cash equivalents at beginning of period -- 20.0 (1.3) -- 18.7
------------- ------------ --------- -------------- ------------
Cash and cash equivalents at end of period $ (33.5) $ 18.5 $ 39.1 $ -- $ 24.1
============= ============ ========= ============== ============
</TABLE>
- 19 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
IMPLEMENTATION OF REPOSITIONING PROGRAM
The Company formulated the Repositioning Program during the quarter ended
December 31, 1997. As of March 31, 1999, the Company had reduced its global work
force by approximately 4,998 employees (compared to a net reduction of
approximately 4,300 employees as of December 31, 1998) and closed and/or sold
approximately 45 manufacturing facilities. During the nine months ended March
31, 1999, the Company incurred disruption costs of approximately $6.3 million
associated with closing and relocating manufacturing facilities in connection
with the Repositioning Program. These costs were included in cost of sales. The
Company's Repositioning Program has been substantially completed as of March 31,
1999 with the remaining repositioning actions, such as the sale of Gallino
Plastics (see Note 9) to be completed by June 30, 1999.
As of March 31, 1999, actions taken by the Company in connection with the
Repositioning Program have resulted in approximately $97.6 million in annual
cost savings to the Company. The benefit of cost savings realized to date has
been substantially offset by costs associated with an unusually high number of
product launches commenced during the three months ended September 30, 1998. In
addition, the Company believes that the benefit of anticipated cost savings
during fiscal 1999 attributable to the Repositioning Program will be further
offset in part due to the deteriorating business conditions at United Steering
Systmes, Custom Trim and the seat belt business acquired from AlliedSignal.
PRODUCT LAUNCHES
The Company's results of operations for the nine months ended March 31, 1999
were adversely impacted by a number of factors including higher costs associated
with an unusually high number of product launches commenced during the three
months ended September 30, 1998. During the three months ended September 30,
1998, the Company launched 44 products compared to 10 products launched during
the three months ended September 30, 1997 and an average of 15 products launched
during the second, third and fourth quarters of fiscal 1998 (which includes
product launches attributable to SRS, which was acquired on October 30, 1997). A
"launch" means the start of production of a product and the related activities
including, among other things, manufacturing, engineering, quality, sales and
administrative support necessary to bring a product into production. A "launch"
continues until such time as the Company is able to meet the customer's quality
and volume requirements for the product on a consistent basis with normal
production resources and is typically a resource intensive and complex process.
As a result of the higher than normal number of launches commenced during the
nine months ended March 31, 1999, the Company was required to allocate resources
during the period to such launches that would have otherwise been directed
towards implementing the Repositioning Program. For example, the Company could
not implement scheduled personnel reductions during such period pursuant to the
Repositioning Program and, in some instances, additional personnel were hired to
support these launches. In addition, the Company incurred significant costs
associated with (i) premium freight (both in receiving materials from vendors
and shipping products to customers) as a result of these product launches and
(ii) generally higher material content requirements in connection with launches
relating to seatbelt and airbag programs. To address the increased costs
relating to higher material content requirements, the Company is seeking
customer approval of certain engineering changes with respect to certain
programs that the Company believes will lower material costs for such programs,
has sought price reductions from certain vendors and, in some cases, has
increased prices for subject products. As a result of the reallocation of
resources and these significant costs, these launches adversely impacted the
Company's results of operations for the three and nine months ended March 31,
1999 and partially offset the benefit of cost savings realized under the
Repositioning Program to date.
- 20 -
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Net sales decreased 7% to $401.2 million for the three months ended March 31,
1999 from $431.7 million for the three months ended March 31, 1998. The decrease
in net sales was primarily due to lower sales in airbags of approximately $16.0
million, the continued decline in EMS sensor sales, lower sales in the steering
wheel division, primarily in Europe, of $3.2 million and the sale of Italtest on
January 1, 1999. These decreases were partially offset by increased sales of
seat belts compared to the prior year quarter.
EMS sensors sales decreased 48% to $13.9 million for the three months ended
March 31, 1999 from $26.6 million for the three months ended March 31, 1998.
This decrease was primarily due to lower demand as major customers continued to
shift from EMS sensors to electronic sensors. The Company believes that sales of
EMS sensors will continue to decline in the foreseeable future and are not
expected to have a material impact on the Company's future results.
Cost of sales was flat at $357.0 million for the three months ended March 31,
1999 compared to $356.8 million for the three months ended March 31, 1998.
Despite the decrease in sales during the quarter compared to last year, cost of
sales remained flat due to an increase in cost of sales in the seat belt
division due to the new product launches with higher production costs.
Gross profit decreased 41% to $44.2 million for the three months ended March 31,
1999 from $74.9 million for the three months ended March 31, 1998. Gross profit
as a percentage of net sales was 11% for the three months ended March 31, 1999
compared to 17% for the three months ended March 31, 1998. This decrease in
gross profit as a percentage of net sales during the three months ended March
31, 1999 was due to (i) a shift in product mix to a higher proportion of
products with lower average margins, primarily seat belts, than the average
margin attributable to products sold by the Company during the three months
ended March 31, 1998 and (ii) a shift in product mix from high margin EMS
sensors to lower margin products .
Selling, general and administrative expenses decreased 7% to $20.5 million for
the three months ended March 31, 1999 from $22.1 million for the three months
ended March 31, 1998. The decrease was attributable to generally lower selling,
general and administrative expenses company wide due to cost savings as a result
of the Company's Repositioning Program.
Research, development and engineering expenses increased 4% to $23.3 million for
the three months ended March 31, 1999 from $22.4 million for the three months
ended March 31, 1998. This increase reflected increased costs associated with HS
Technik and Design, which was acquired in May 1998, and an increase in spending
for new product development, additional application engineering costs associated
with future product launches, increasing demand for more sophisticated safety
systems by our customers and to meet government regulated specifications. This
increase was partially offset by cost savings relating to reduced headcount and
related expenses as a result of the Repositioning Program.
Amortization of intangibles decreased by $1.0 million during the three months
ended March 31, 1999. The decrease in amortization expense was primarily due to
refinement of the allocation of Purchase Price associated with the SRS
acquisition.
Operating loss excluding impairment charges for the three months ended March 31,
1999 was $5.4 million compared to an operating profit of $23.6 million for the
three months ended March 31, 1998. Operating loss as a percentage of net sales
was (1)% for the three months ended March 31, 1999 compared to a profit of 5%
for the three months ended March 31, 1998. The operating loss was primarily due
to lower sales volume and lower gross profit margin due to higher seat belt
production costs and declining EMS sensor sales and the one time charge for
impairment of $135.2 million in European seat belt operations (See Note 10).
- 21 -
<PAGE>
Interest expense including the distribution on the redeemable convertible
preferred securities for the three months ended March 31, 1999 decreased 15% to
$27.5 million. This decrease was primarily due to slightly lower average
interest rates during the third quarter this year versus third quarter last year
as well as lower bank fees.
During the three months ended March 31, 1999, the Company recorded a foreign tax
expense in the amount of $3.1 million. No tax benefit was recognized for either
domestic or foreign purposes due to the provisions of SFAS No. 109. SFAS No. 109
states that a valuation allowance is recognized if, it is more likely than not,
some portion or all of the deferred tax asset will not be realized. For both
domestic and foreign jurisdictions, a valuation allowance for the deferred
income tax benefit related to the current loss incurred has been recorded.
- 22 -
<PAGE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1999 COMPARED TO NINE MONTHS ENDED MARCH 31, 1998
Net sales increased 17% to $1,136.6 million for the nine months ended March 31,
1999 from $967.6 million for the nine months ended March 31, 1998. The increase
in net sales was due to the acquisition of SRS on October 30, 1997, which
accounted for approximately $267.4 million of the increase in net sales for the
nine months ended March 31, 1999.
EMS sensors sales decreased 47% to $43.1 million for the nine months ended March
31, 1999 from $81.3 million for the nine months ended March 31, 1998. This
decrease was primarily due to lower demand as major customers continued to shift
from EMS sensors to electronic sensors.. The Company believes that sales of EMS
sensors will continue to decline in the foreseeable future and are not expected
to have a material impact on the Company's future results.
Cost of sales increased 19% to $998.0 million for the nine months ended March
31, 1999 from $836.1 million for the nine months ended March 31, 1998. The
increase reflects additional production costs for the nine months ended March
31, 1999 resulting from the acquisition of SRS in fiscal 1998 and the unusually
high number of product launches commenced during the three months ended
September 30, 1998. See discussion above under "Product Launches". This increase
in production costs was partially offset by lower cost of sales associated with
the loss of sales volume as discussed above and a reduction in production costs
as a result of actions taken under the Repositioning Program. In addition, the
Company incurred approximately $6.3 million during the nine months ended March
31, 1999 related to disruption costs associated with the closing of
manufacturing facilities in connection with the Repositioning Program, as well
as a $1.3 million charge relating to settlement of a warranty claim.
Gross profit increased 5% to $138.6 million for the nine months ended March 31,
1999 from $131.5 million for the nine months ended March 31, 1998. Gross profit
as a percentage of net sales was 12% for the nine months ended March 31, 1999
compared to 14% for the nine months ended March 31, 1998. Gross profit for the
nine months ended March 31, 1998 reflected a $28.4 million charge against cost
of sales relating to manufacturing processes acquired in connection with the SRS
acquisition that were exited. Excluding this charge, gross profit as a
percentage of net sales for the nine months ended March 31, 1998 would have been
17% compared to 12% for the nine months ended March 31, 1999. This decrease in
gross profit as a percentage of net sales was due to (i) a shift in product mix
to a higher proportion of products with lower average margins, primarily seat
belts, than the average margin, attributable to products sold by the Company
during the nine months ended March 31, 1998, (ii) a shift in product mix from
EMS sensors to lower margin products, and (iii) higher production costs
associated with the unusually high number of product launches commenced during
the three months ended September 30, 1998.
Selling, general and administrative expenses increased 8.0% to $64.6 million for
the nine months ended March 31, 1999 from $59.7 million for the nine months
ended March 31, 1998. The increase was primarily attributable to expenses
aggregating $1.1 million incurred to settle a claim relating to the Lemelson bar
coding patent, costs associated with SRS, which was acquired in October 1997,
and bad debt expenses aggregating $0.6 million. This increase in selling,
general and administrative expenses was partially offset by cost savings
associated with the Repositioning Program.
Research, development and engineering expenses increased 46% to $72.7 million
for the nine months ended March 31, 1999 from $49.9 million for the nine months
ended March 31, 1998. This increase reflected increased costs associated with
the ongoing activities of SRS, which was acquired in October 1997, and HS
Technik and Design, which was acquired in May 1998, and an increase in spending
for new product development, additional application engineering costs associated
with future product launches, increasing demand for more sophisticated safety
systems by our customers, and to meet government regulated specifications. This
increase was partially offset by cost savings relating to reduced headcount and
related expenses as a result of the Repositioning Program.
- 23 -
<PAGE>
Amortization of intangibles increased by $4.9 million during the nine months
ended March 31, 1999. The increase in amortization expense was primarily the
result of the goodwill and other intangibles associated with the acquisition of
SRS.
Operating loss for the nine months ended March 31, 1999 was $151.5 million
compared to $327.8 million for the nine months ended March 31, 1998. Operating
loss as a percentage of net sales was (13)% for the nine months ended March 31,
1999 compared to (34)% for the nine months ended March 31, 1998. The operating
loss for the nine months ended March 31, 1998 includes $365.4 million in
one-time charges: (i) $259.5 million of repositioning and impairment charges,
(ii) a $77.5 million charge relating to the write-off of certain in-process
research and development, and (iii) a $28.4 million charge against cost of sales
for inventory and long-term contracts relating to manufacturing processes that
will be exited. Excluding these $365.4 million of charges, the decrease in
operating income was primarily due to the shift in product mix, product launches
and disruption costs discussed above and the one time charge for impairment of
$135.2 million in European seat belt operations.
Interest expense including the distribution on the redeemable convertible
preferred securities for the nine months ended March 31, 1999 increased 13% to
$78.3 million as compared to the nine months ended March 31, 1998. This increase
in interest expense was primarily due to the increase in average borrowings
outstanding as a result of the acquisition of SRS in October 1997. This increase
was offset partially by interest savings resulting from voluntary debt
reductions.
During the nine months ended March 31, 1999 the Company recorded a foreign tax
expense of $5.4 million which was partially offset by a $0.5 million domestic
benefit for a tax credit. No other tax benefit was recognized for either
domestic or foreign purposes due to the provisions of SFAS No. 109. SFAS No. 109
states that a valuation allowance is recognized if, it is more likely than not,
some portion or all of the deferred tax asset will not be realized. For both
domestic and foreign jurisdictions, a valuation allowance for the deferred
income tax benefit related to the current loss incurred has been recorded.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are for working capital, servicing the
Company's indebtedness and capital expenditures. The Company intends to fund
these cash needs with cash from operations together with borrowings available
under its credit facility. On April 28, 1998, the Company entered into a new
$675.0 million credit facility.
On April 28, 1998, the Company entered into a new $675.0 million credit
facility. At March 31, 1999, the Company had an aggregate of $580.0 million of
borrowings outstanding under the credit facility, which bore interest at a
weighted average rate of 8.1725% per annum at such date, and had aggregate
borrowing availability thereunder of $14.0 million. Because the Company would
have been in violation of certain financial covenants in the loan agreement
relating to the credit facility as of March 31, 1999, the Company obtained a
waiver of these covenants from the lenders that was effective from March 30,
1999 through June 29, 1999 (the "Fourth Waiver"). Pursuant to the Fourth Waiver,
the maximum borrowing availability under the company's revolving line of credit
was decreased from its original level of $150.0 million (including letters of
credit) to $125.0 million (including letters of credit). The Company paid the
lenders fees aggregating $1.1 million in connection with the Fourth Waiver.
On March 3, 1999 the Company obtained an additional waiver (the "Third Waiver")
in anticipation of the Company's disposition of its Gallino Plastics business.
The Third Waiver provided for the release from the credit facility's negative
pledge provision limiting the Company's ability to pledge its retained interest
in the new joint venture formed as a result of the disposition of the Gallino
Plastics business and removed certain restrictions that would have limited the
Company's ability to transfer the shares of its FAS S.p.A. and A.P. Co. S.r.l.
subsidiaries which are an integral part of the Gallino Plastics business. (See
the Subsequent Events Section as it relates to the Gallino Plastics business.)
- 24 -
<PAGE>
On February 11, 1999, the Company obtained a waiver (the "Second Waiver") of the
net worth covenant in the loan agreement relating to the credit facility as well
as an event of default that existed due to the Company's failure to register
certain securities as required under certain agreements to which it is a party.
The Second Waiver was effective from February 13, 1999 through March 30, 1999.
In connection with the Second Waiver, the maximum borrowing availability under
the revolving line of credit was increased to $125.0 million (including letters
of credit) from $110.0 million (including letters of credit) previously
established at the granting of the "First Waiver" discussed below. The Company
paid the lenders fees aggregating $1.3 million in connection with the Second
Waiver.
On December 31, 1998 the Company obtained a waiver (the "First Waiver") of the
net worth covenant in the loan agreement relating to the credit facility. The
First Waiver was effective from December 30, 1998 through February 12, 1999.
Pursuant to the First Waiver, the maximum borrowing availability under the
Company's revolving line of credit was decreased from $150.0 million (including
letters of credit) to $110.0 million (including letters of credit).
Although the Company intends to negotiate the necessary amendments on additional
waivers with its lenders, there can be no assurance that it will be able to do
so. Any amendment to the loan agreement must be approved by the lenders holding
more than 50% of the commitments and borrowings outstanding under the credit
facility. In the absence of a further waiver or an amendment to the loan
agreement, after June 29, 1999, the lenders would be entitled to exercise all of
their rights under the loan agreement including, without limitation, declaring
all amounts outstanding under the credit facility immediately due and payable
and/or exercising their rights with respect to the collateral securing the
credit facility which consists of, among other things, substantially all of the
real and personal property of the Company and its subsidiaries.
If the Company is unable to obtain a further waiver or amendment to the loan
agreement, the Company may not have sufficient cash to meet its working capital,
debt service and capital expenditure needs beyond June 29, 1999, in which case,
the Company may be required to obtain financing from other sources. There can be
no assurance that such financing will be available or, if available, that it
will be on terms satisfactory to the Company. Consequently, the inability to
obtain any such waiver, amendment or alternative financing would have a material
adverse effect on the Company's financial condition and results of operations.
Until such time as the credit facility is amended as discussed above or all
amounts outstanding under the credit facility are repaid in full, borrowings
outstanding under the credit facility will be classified as a current liability
on the Company's consolidated balance sheet.
On April 28, 1998, the Company issued and sold an aggregate of $330 million of
its 9.25% Senior Subordinated Notes due 2008 (the "Notes") in a private
transaction under Rule 144A under the Securities Act of 1933, as amended (the
"Securities Act") (the "Notes Offering"). In connection with the Notes Offering,
the Company entered into a registration rights agreement (the "Notes Agreement")
pursuant to which it agreed to offer to exchange the Notes for substantially
identical 9.25% Senior Subordinated Notes due 2008 registered under the
Securities Act (the "Exchange Offer"). Pursuant to the Notes Agreement, the
Company was required to complete the Exchange Offer by the date 180 days after
April 28, 1998 (the "Closing Date"). The Company filed the registration
statement relating to the Exchange Offer on June 24, 1998. Because the Exchange
Offer had not been consummated on or prior to the date 180 days after the
Closing Date as required under the Notes Agreement, the interest rate borne by
the Notes increased pursuant to the Notes Agreement by 0.25% on the 181st day
after the Closing Date. The interest rate increased thereafter by 0.25% on the
1st day of each subsequent 90-day period. The Notes bore interest at a rate of
9.75% per annum at March 31, 1999. The Exchange Offer was completed on April 12,
1999 restoring the interest rate with respect to the notes to the original rate
of 9.25% as of April 12, 1999.
- 25 -
<PAGE>
On November 25, 1997, the Company sold $257.7 million of its 6.50% Convertible
Subordinated Debentures due 2027 (the "Convertible Debentures") to BTI 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 (the "Preferred
Securities Offering"). In connection with the Preferred Securities Offering, the
Company entered into a registration rights agreement (the "Preferred Securities
Agreement") pursuant to which it agreed to register (and cause BTI Capital Trust
to register), among other things, the Convertible Debentures and Preferred
Securities. Pursuant to the Preferred Securities Agreement, the Shelf
Registration Statement (as defined therein) was required to be effective on or
prior to June 17, 1998. The Company filed the Shelf Registration Statement on
March 18, 1998. Because the Shelf Registration Statement was not declared
effective by June 17, 1998, the interest rate on the Convertible Debentures and
the distribution rate applicable to the Preferred Securities increased by 0.25%,
payable in arrears, with the first quarterly payment due on the first interest
or distribution date following June 17, 1998.
The Shelf Registration Statement was declared effective on March 11, 1999 and
the interest rate borne by the Notes and the Convertible Debentures and the
distribution rate in respect of the Preferred Securities was reduced to the
original amounts on March 11, 1999.
On May 12, 1999, the Company gave notice to BTI Capital Trust of its selection
of an Extension Period. Payments of interest on the Debt Securities will be
deferred, and no interest shall be due and payable during the Extension Period
the Company has selected. The Extension Period will not exceed 20 consecutive
quarters, including the quarter ending June 30, 1999, and no future payments
will be made during this time until further notice. As a result, BTI will defer
the quarterly dividend payment due May 15, 1999 relating to its convertible
preferred holders as permitted under the trust instrument.
Capital expenditures aggregated $50.8 million for the nine months ended March
31, 1999. Investments continue to be made to support productivity improvements,
cost reduction programs, finance new program launches, capital needs to improve
manufacturing efficiency and added capability for existing and new products and
reconfigurations of manufacturing facilities relating to the Repositioning
Program. The Company estimates that capital expenditures will aggregate
approximately $14.0 million during the remainder of fiscal 1999. Cash
investments in BSRS during the period were not material. The Company's ability
to invest in BSRS is limited under the Company's credit facility and the Senior
Subordinated Notes due 2008.
The Company has market risk exposure from the impact of interest rate changes.
The Company has elected to manage this risk through the maturity structure of
its borrowings and through the use of interest rate swap and cap instruments.
Currently, interest rates affecting approximately 33% of the Company's debt will
vary directly with market rates due to the short-term nature of its maturity and
the absence of interest rate management instruments associated with this debt.
Given the Company's present exposure to rate movements, each 0.5% change in
rates will impact interest approximately $1.5 million annually. This analysis
considers only the impact of the hypothetical interest rate changes and not the
overall economic activity impacting the Company.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculation causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company is a member of the Automotive Industry Action Group (AIAG), an
automotive trade association whose members are the North American vehicle
manufacturers and many large suppliers. These member organizations assemble as
the AIAG to tackle industry issues in supply, manufacturing, engineering,
quality and finance. The AIAG investigates the benefits of commonization in new
areas, examines established processes with an eye toward improvements and
compares procedures to determine best practices. The result of this work is the
development of new technologies and the standards that govern their usage. One
of the issues the AIAG has been charged with confronting is Year 2000 compliance
among automotive suppliers.
- 26 -
<PAGE>
As a member of the AIAG and in conjunction with our major customers, the Company
has used the AIAG guidelines for Y2K compliance. The phases prescribed by AIAG
are:
AWARENESS Within the Company the level of awareness of the significance of the
Y2K issue has been elevated through meetings and notifications throughout the
organization. This phase of the project is an ongoing effort.
INVENTORY The Company conducted a worldwide inventory of all computer hardware
and software (including business and operational applications, operating systems
and third party products) and other equipment that may be at risk, and
identified key third party businesses whose Y2K failure might most significantly
impact the Company. This phase has been completed.
RISK EVALUATION After the identification of each at-risk system, the Company
assessed how critical the system was to the business operation and the potential
impact of failure. Resources for remediation were allocated based on the level
of risk assigned. This phase has been completed.
REMEDIATION All but two critical systems had been remediated by March 1999, with
the two remaining systems' remediation efforts expected to be completed by June
1999. The Company will continue to address remediation of other systems on a
prioritized basis thereafter.
TESTING After remediation, all implemented solutions will be tested in isolation
and with their interface with all other systems. This phase is closely related
to the remediation phase and is scheduled for completion by June 30, 1999.
ACCEPTANCE AND IMPLEMENTATION This phase involves having functional experts
review test results and pre-established criteria to ensure compliance. This
phase assures that business processes or groups of components will function
correctly regardless of dates used. The Company expects all critical systems to
be accepted and implemented by August 31, 1999.
The Company has determined that it will be required to modify or replace
portions of its software and hardware so 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 compliant. Accordingly, the Company does not believe 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, once software is reprogrammed and
replaced for a system, the Company begins testing and implementation. These
phases run concurrently for different systems. Except for two, completion of the
remediation phase for all significant systems was completed by March 31, 1999,
with all remediated systems to be fully tested and implemented by August 31,
1999. The remediation of operating equipment is significantly more difficult
than the remediation of the information technology systems because some of the
manufacturers of that equipment are no longer in business. Testing of this
equipment is also more difficult than the testing of the information technology
systems. Once testing is complete, the operating equipment is ready for
immediate use. The Company completed its remediation efforts by March 31, 1999.
Testing and implementation of all critical equipment is expected to be completed
by June 30, 1999.
- 27 -
<PAGE>
The Company is in the process of working with suppliers and customers to ensure
that the Company's systems that interface directly with third parties are Year
2000 compliant by December 31, 1999. The Company has completed its assessment
efforts. Testing of all significant material systems was completed by March 31,
1999. Implementation is expected to be completed by June 30, 1999. Each vendor
queried believed its order entry and inventory management systems would be Year
2000 compliant by the end of 1999.
The Company has queried its important suppliers and customers that do not share
information systems with the Company. To date, the Company is not aware of any
suppliers or customers Year 2000 issue that would materially impact the
Company's results of operations or financial condition. However, the Company has
no means of ensuring that suppliers and customers will be Year 2000 ready. The
inability of its external agents to complete their Year 2000 resolution process
in a timely fashion could materially impact the Company. The effect of
noncompliance by its suppliers and customers is not determinable.
The Company will utilize both internal and external resources to reprogram or
replace, test and implement the software and operating equipment for Year 2000
modifications. The total cost of the Year 2000 project is estimated at $7
million and is being funded with cash from operations. To date, the Company has
incurred approximately $4.5 million ($4.5 million expensed) relating to all
phases of the Year 2000 project. Of the total remaining project costs, the
remaining $2.5 million relates to repair of hardware and software and will be
expensed as incurred.
The Company's plan to complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources, and
other factors. Estimates on the status of completion and the expected completion
dates are based on costs incurred to date compared to total expected costs.
However, there can be no guarantee these estimates will be achieved and actual
results could differ materially from those plans. Specific factors that might
cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
There can be no assurance that the Company will be completely successful in its
efforts to address Year 2000 issues. The Company could suffer lost sales or
other negative consequences, including, but not limited to, diversion of
resources, damage to the Company's reputation, increased service and warranty
costs and litigation, any of which could materially adversely affect the
Company's business operations or financial statements.
The Company is also dependent on third parties such as its customers, suppliers,
service providers and other business partners. If these or other third parties
fail to adequately address Year 2000 issues, the Company could experience a
negative impact on its business operations or financial statements. For example,
the failure of certain of the Company's principal suppliers to have Year 2000
compliant internal systems could impact the Company's ability to manufacture
and/or ship its products or to maintain adequate inventory levels for
production.
Although the Company has not yet developed a comprehensive contingency plan to
address situations that may result if the Company or the third parties upon
which the Company is dependent are unable to achieve Year 2000 readiness, the
Company's Year 2000 compliance program is ongoing and its ultimate scope, as
well as the consideration of contingency plans, will continue to be evaluated as
new information becomes available.
- 28 -
<PAGE>
FORWARD LOOKING STATEMENTS
Statements herein regarding estimated cost savings and the Company's anticipated
performance in future periods constitute forward-looking statements within the
meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934.
Such statements are subject to certain risks and uncertainties that could cause
actual amounts to differ materially from those projected. With respect to
estimated cost savings, management has made assumptions regarding, among other
things, the timing of plant closures, the amount and timing of expected
short-term operating losses and reductions in fixed labor costs. The realization
of cost savings is subject to certain risks, including, among other things, the
risks that expected operating losses have been underestimated, expected cost
reductions have been overestimated, unexpected costs and expenses will be
incurred and anticipated operating efficiencies will not be achieved. Further,
statements herein regarding the Company's performance in future periods are
subject to risks relating to, among other things, possible higher costs
associated with product launches, difficulties in integrating acquired
businesses, deterioration of relationships with material customers, possible
significant product liability claims, decreases in demand for the Company's
products and adverse changes in general market and industry conditions.
Management believes these forward-looking statements are reasonable; however,
undue reliance should not be placed on such forward-looking statements, which
are based on current expectations.
- 29 -
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company reported the matter entitled TAKATA CORPORATION ("TAKATA") V.
ALLIEDSIGNAL, INC. AND BREED TECHNOLOGIES, INC. (United States District Court,
District of Delaware, case no. 98-94) (the "Original Complaint") in Part II,
Item 3, "Legal Proceedings" of its 10K/A for the fiscal year ended June 30,
1998. 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
sought 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 ("Subsequent Claims"). These
claims are subject to partial indemnification by AlliedSignal under the APA.
During the quarter ended March 31, 1999, the Company settled all of the four
Subsequent Claims through a mutual release of claims as to certain of the
products and by securing license agreements with Takata which permit the Company
to manufacture the products for paid up and/or (depending upon volumes)
continuing royalties. The licenses, in the belief of management, will not have a
material adverse effect on the Company's financial condition or results of
operation. The subject of the Original Complaint remains responsibility of
AlliedSignal under the APA.
CENTOCO HOLDINGS LIMITED AND KS CENTOCO LTD. V. MAGNA INTERNATIONAL, INC., FRANK
STRONACH, MST AUTOMOTIVE, INC., MST AUTOMOTIVE OF AMERICA, INC., ACTS-ADVANCED
CAR TECHNOLOGY SYSTEMS, GMBH & CO. KG, TRW, INC. TRW AUTOMOTIVE SAFETY SYSTEMS,
GMBH, SIEMENS AG, BSRS RESTRAINT SYSTEMS INTERNATIONAL, GMBH & CO KG, BSRS
RESTRAINT SYSTEMS L.P. AND BREED TECHNOLOGIES, INC. ONTARIO COURT OF JUSTICE
(GENERAL DIVISION), FILE NO. 97-GD-41605. On or about March 11, 1999, a number
of parties, including the Company, were added to pending litigation in the
aforementioned matter. The lawsuit is based upon alleged violations of
intellectual property rights related to airbag technology and seeks declaratory
and injunctive relief, and damages in excess of $2.5 billion. The Complaint
alleges that certain technology owned by the plaintiffs was improperly
transferred to third parties through a complex series of licenses and corporate
mergers. One of the alleged recipients of this technology is Siemens, A.G. The
Company's only involvement in the case is as Siemens' partner in BSRS. While the
outcome of this lawsuit cannot be predicted with certainty, based upon currently
available information, the Company does not believe that this matter will have a
material adverse effect on the Company's financial condition or results of
operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
- 30 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Breed Technologies, Inc.
(REGISTRANT)
By: /S/ JOHN C. SONTHEIMER
----------------------------
John C. Sontheimer
Chief Financial Officer
- 31 -
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