-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CaN8NZPz94VeSssFoRjGwGaanzkYAgLJBGdGjO/M+HZyxE5qwZLE/N64Q+w7KFEf Ltwiud2RzkoAwrTFL91+IQ== 0000940180-98-001013.txt : 19980929 0000940180-98-001013.hdr.sgml : 19980929 ACCESSION NUMBER: 0000940180-98-001013 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19980928 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BREED TECHNOLOGIES INC CENTRAL INDEX KEY: 0000891531 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 222767118 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-11474 FILM NUMBER: 98716511 BUSINESS ADDRESS: STREET 1: 5300 OLD TAMPA HWY CITY: LAKELAND STATE: FL ZIP: 33811 BUSINESS PHONE: 9416686000 MAIL ADDRESS: STREET 1: PO BOX 33050 CITY: LAKELAND STATE: FL ZIP: 33811 10-K/A 1 FORM 10-K/A UNITED STATES 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 FOR THE FISCAL YEAR ENDED JUNE 30, 1997 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NO. 1-11474 _______________ BREED TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 22-2767118 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5300 OLD TAMPA HIGHWAY 33811 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, $.01 par value 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. [X] As of July 31, 1997, the approximate aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant was $263,834,000 based on the last reported sale price of the Company's Common Stock on the New York Stock Exchange as of the close of business on July 31, 1997. There were 31,679,217 shares of Common Stock outstanding as of July 31, 1997. DOCUMENTS OR PARTS INCORPORATED BY REFERENCE
Document Form 10K Part into Which the Document is Incorporated - --------------------------------------------------------- ------------------------------------------------------ Proxy Statement relating to Registrant's Annual Meeting Part III of Stockholders to be held on November 20, 1997
INDEX ----- The undersigned registrant hereby amends 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:
PAGE ---- ITEM 1. BUSINESS...................................................... 1 ITEM 2. FINANCIAL STATEMENTS Consolidated Balance Sheets................................... 10 Consolidated Statements of Earnings........................... 11 Consolidated Statements of Stockholders' Equity............... 12 Consolidated Statements of Cash Flows......................... 13 Notes to Consolidated Financial Statements.................... 14
i ITEM 1. BUSINESS BREED Technologies, Inc. (the "Company" or "BREED") designs, develops, manufactures and sells a complete range of occupant safety systems and other components including electronic and electromechanical sensors, airbag modules, inflators, steering wheels, and plastic exterior and interior components. The Company's reed switch and silicon micro- sensor products are used in a wide variety of automotive as well as industrial sensor and switching applications. Headquartered in Lakeland, Florida, BREED is one of the world's leading suppliers of automotive occupant safety systems and steering wheels, providing its global automotive customers with research and development, engineering and manufacturing support through its global network of facilities in 13 countries. BREED employs more than 11,100 people at its 57 facilities worldwide. BREED has acquired nine companies in the past three years, five in the area of electronic components and subassemblies and four in the area of steering wheels, interior/exterior components and automotive accessories. Throughout the world, BREED subsidiaries -- A/2/M, BREED Italia, Custom Trim, Force Imaging, Gallino Plasturgia, Hamlin, Italtest, MOMO, United Steering Systems and VTI Hamlin -- provide leading technologies to automotive, industrial and commercial markets. RECENT DEVELOPMENTS Recent acquisitions provide BREED with strategic vertical and horizontal integration, and strengthen our position as a major global supplier of fully integrated occupant safety systems. BREED completed several strategic acquisitions in fiscal 1997, including: . In July 1996, the steering wheel and plastic exterior and interior components business of the Gallino Group. . In October 1996, the steering wheel business of United Technologies Automotive, renamed United Steering Systems, which provided additional patented technologies and expanded BREED's customer base, and; . In March 1997, Custom Trim Ltd., the automobile industry's primary supplier of leather-wrapped steering wheels and shift knobs. These acquisitions, combined with the Company's acquisition of MOMO, established BREED as the world's largest supplier of steering wheels. This position enables BREED to bid on global steering wheel contracts and provides an entry point for bidding other global supply agreements in the area of occupant safety. To better integrate these acquisitions, and to enhance customer support and focus product development in the Company's core business, BREED restructured its business in three product divisions during the year. The new structure reflects the significant shift in BREED's product mix toward integrated occupant safety systems. The new business units are Electronics/Sensors, Steering Wheels & Interiors, and Air Bags/Inflators. On August 27, 1997, BREED entered into an Asset Purchase Agreement with AlliedSignal, Inc. to acquire its automotive safety restraint business. AlliedSignal Safety Restraint Systems has annual sales in excess of $900 million and employs 7,700 people in 14 plants in seven countries. It is the largest supplier of seatbelts and third largest supplier of airbags in the United States. Management believes that this strategic combination will make BREED an even stronger global competitor in fully integrated occupant safety systems. The transaction is expected to be completed following regulatory review, as well as other legal requirements in various countries where these businesses operate. 1 PRODUCTS ELECTRONIC PRODUCTS The Company's principal electronic product line consists of its component products, including sensors for airbag and non-airbag applications and other reed switch and reed relay products. In the airbag sensor market, the Company sells a range of electromechanical (EMS) sensors, which are based on its proprietary technology. These EMS sensor products include both ball-in-tube designs and reed switch designs which are used in vehicles sold in Europe and North America. The Company has manufactured and sold in excess of 90 million EMS sensors since 1987, and continues to maintain a significant market position in EMS sensors. These sensors are used as both complete sensing systems (typically two or three EMS sensors coupled with a diagnostic module) and in conjunction with electronic sensors (typically one or two EMS sensors per vehicle). Many vehicle manufacturers are considering and/or commencing the use of electronic sensing diagnostic systems (located in the occupant compartment of a vehicle). Increased use of electronic sensing diagnostic systems will reduce the use of EMS components in the crash sensing market. In response to this industry trend, the Company has completed development, and commenced marketing a series of electronic airbag sensing diagnostic modules (SDM) which include electronic discriminating sensors, electromechanical safing sensors and diagnostic circuitry. These SDM products are designed to meet vehicle manufacturer requirements for passenger compartment electronic sensing. Planned for this next model year is the 'next generation' BREED SDM, offering greater functionality while reducing costs. In order to maintain the Company's rigid cost and quality standards, BREED has vertically integrated the next generation of electronic sensors through Hamlin, VTI Hamlin and A2M (Enhanced Algorithm Capabilities). This enables the Company to control sourcing for the most critical components of its SDM. In non-airbag applications, the Company sells reed switch and silicon capacitive sensors for use in an increasing number of automotive and non- automotive (e.g., industrial and medical) products. Reed switch sensor products are used to sense position or proximity in a wide range of commercial equipment (photocopy machines, exercise equipment, security systems, cellular phones, etc.). The Company's silicon sensor products, which include designs to sense acceleration, pressure or angular rate changes, are used in automotive applications such as electronically controlled suspension, antilock braking, fuel vapor recovery and manifold absolute pressure products. In April 1996 the Company acquired Italtest. This company has high-quality electronics manufacturing capabilities and is currently making sensing diagnostic modules for BREED Italia's airbag systems. In May 1996 the Company acquired Force Imaging Technologies, Inc. (FIT). This company has a unique patented technology of variable force sensors that have many applications, including multi-function steering wheel capabilities, occupant sensing and automated seat belt tensioning. In November 1996 the Company acquired A/2/M. This company specializes in algorithm development and signal processing techniques. AIRBAG SYSTEMS AND COMPONENTS (INFLATORS, MODULES AND AMS) The Company produces driver-side, passenger-side, and side impact airbag systems. The Company has been supplying mechanically initiated inflators and modules since 1989, electronically initiated inflators and modules since 1994 and passenger side inflators and modules since 1995. The Company offers inflators for use in full size airbag systems (US requirement), its smaller Facebag systems (European 2 requirement) and side impact systems. These inflator products include inflators using sodium azide-based propellants, hybrid(compressed gas and propellant), "Eco-safe" non-sodium azide-based propellant, and stored gas designs. STEERING WHEEL/LEATHER WRAPPING The Company acquired Gallino (July 1, 1996) and MOMO (April 15, 1996), steering wheel suppliers to OEMs in Europe, Asia and the U.S. On October 25, 1996, the Company acquired the North American and United Kingdom steering wheel business of United Technologies. This acquisition allows the Company to supply steering wheels to OEMs in the United States, Canada, Mexico and the United Kingdom. It further enhances the Company's ability to provide complete integrated airbag steering wheels to OEMs. Additionally, the Company acquired the stock of BTI Investments, whose principal business is conducted under the trade name of Custom Trim. It primarily provides leather wrapping services for steering wheels and other automotive accessories. CUSTOMERS BREED's future success in the airbag business will depend in large part on its ability to supply complete occupant protection systems (crash sensors, airbag modules, steering wheels and integrated airbag/steering wheels) to meet the changing requirements of automobile manufacturers. 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. Such contracts 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 extend for life of the model, such agreements may be terminable by the customer during the term of the contract. Sales by the Company to Ford for fiscal 1995, 1996 and 1997 accounted for 37%, 33% and 25%, respectively, of the Company's total net sales for these periods. Sales by the Company to GM and Delphi (including Delco) for fiscal 1995, 1996 and 1997 accounted for 40%, 26% and 13%, respectively, of the Company's total net sales for these periods. Sales by the Company to the Fiat Group for fiscal 1996 and 1997 accounted for 14% and 32%, respectively, of the Company's sales. The Company supplies its sensor products primarily to vehicle OEMs, such as Ford, Fiat, Nissan, Mazda, and to Tier 1 suppliers, such as Delphi (through Delco). Although the Company has multi-year EMS supply agreements with Ford and Delphi (through Delco), these contracts do not commit such customers to purchase any specified quantities of products from the Company, and each of the agreements is subject to termination under certain conditions. Ford and GM are replacing EMS sensors with electronic sensors; however, BREED's EMS sensors are being used as auxiliary sensors in certain vehicles. BREED has expanded its product lines to include down-sized EMS sensors, electronic SDMs and silicon micro sensors, as well as additional EMS sensors designed for use in SDMs. In order to meet the demands of the increasing electronic sensor market, the Company has micro machining manufacturing, electronic assembly capabilities and algorithm technology. As the EMS sensor market shifts to electronic, BREED is adversely affected since there can be no assurance that these new products will achieve as broad a market position for the Company as it achieved with its current EMS sensor products; however, additional product lines including electronic sensing and steering wheels are favorably impacting BREED. 3 The Company supplies Fiat, Ford of Australia, Chrysler, Jaguar, Proton, and Ssangyong with airbag modules, and Delphi, Mazda and Suzuki with inflators. The Company has entered into a multi-year supply agreement with Fiat, Delphi, Proton and Nihon Plast under which the Company supplies inflators and airbag modules; these supply agreements are subject to termination under certain conditions. In addition, the Company supplies Fiat electronic sensing diagnostic modules. BREED has positioned itself through the acquisitions of MOMO, Gallino and United Steering Systems as the world's largest supplier of steering wheels. The Company's wood and leather steering wheels, light alloy wheels and other high- end car accessories are sold primarily to OEMs such as Ferrari, Lamborghini, Jaguar, Porsche, Honda, Fuji Heavy and Nissan. In addition, the Company sells these products to the aftermarket through its distribution centers. High-volume steering wheel customers include Ford, the Fiat Group, Chrysler and Nissan. Ford has changed their agreement structure from long-term agreements to Total Cost Management ("TCM") agreements. The major customers for the Company's leather wrapping business are TRW, Delphi, Petri, Toyota Gosei and Centoco. The Company sells its reed switch and silicon sensor products to a large number of manufacturers of equipment sold for automotive and non-automotive applications. Significant customers include Delphi (including Delco), Morton/Autoliv, Siemens, Bosch, Temic, TRW, Xerox, SMP and Nordic Track, as well as vehicle OEM customers, including Mitsubishi, Toyota and GM. SALES AND ENGINEERING SUPPORT The Company's customers require early involvement of their suppliers in the design and engineering aspects of product development. Automobile manufacturers seek the Company's assistance in airbag sensor and system design and calibration and the Company has assumed engineering responsibility for the development of certain components of these sensor airbag systems, including the performance testing necessary to ensure compliance with the standards and specifications. The Company has dedicated certain of its engineering staff to the support of its major customers. SUPPLIERS AND RAW MATERIALS The Company purchases many of the components for its products (including certain plastic parts, certain stampings, magnets, precision steel balls, contacts, certain electronic assemblies, certain wire harnesses, airbag doors/covers, printed wire boards, certain ignitor assemblies, labels, aluminum propellant cups, rubber/silicon seals, aluminum, leather) as finished components, and purchases 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 harnesses 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, certain stampings, magnets, contacts, certain electronic assemblies, certain wireharnesses, airbag doors/covers, certain 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. No significant supply problems have been encountered in recent years, and relationships with suppliers have generally been good. PATENTS, TRADEMARKS AND LICENSES The Company currently owns a significant number of United States and related foreign patents in certain countries, which expire on varying dates from 1997 through 2016. It also has trademarked several corporate icons. While the Company considers its patents and trademarks to be valuable assets, it does not 4 believe that its competitive position is dependent on patent and/or trademark protection or that its operations are dependent on any individual patent. The Company has granted licenses to specified portions of the Company's technology in exchange for ongoing royalties and other payments. The Company's licensees include Sensor Technology Co. Ltd., Tokai Rika and Oki. The Company pays royalties to United Technologies Corporation in connection with the sale and licensing of certain of the Company's EMS airbag sensor products. 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, 1997 was not significant. ENGINEERING 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 1995, 1996 and 1997, engineering, research and development expenses were approximately $18.5 million, $23.6 million and $36.1 million, respectively. The Company's research and development activities are focused on development of new airbag sensor, inflator and module products including integrated airbag, steering wheels with multifunction membrane sensors and enhancements or cost improvements for existing products. New airbag sensor products and technology which are subjects of this research and development activity include a series of electronic sensing diagnostic modules, down-sized spring-bias electromechanical sensors, and side impact and predictive sensing systems. New inflator and module products and technologies which are subjects of this research and development activity include mechanically and electrically initiated passenger-side systems, non-sodium azide-based products and side impact systems. The Company also is developing a new series of down-sized silicon capacitive sensors for acceleration, pressure and angular rate applications as well as membrane sensors for accessory function and occupant detection systems. In addition, the company is also working on developing micro machined and ultrasonic sensors for occupant detection systems. COMPETITION The Company competes with independent suppliers of steering wheels, airbag sensors, systems and their components. In addition, many of the Company's customers are integrated manufacturers which produce or could produce a substantial portion of their own requirements for certain airbag components. The Company competes primarily on the basis of its product quality, price, reliability, engineering support and production capabilities. The Company principally competes for new steering wheel sensor, inflator and leather wrapping business at the beginning of the development of 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 are placement supplier for existing models. The development of new models and redesign of existing 5 models generally begin three to five years and two to three years, respectively, prior to the marketing of such models to the public. AIRBAG SENSORS The Company's principal competitor in the market for electromechanical sensors is TRW. The Company's sensors also compete with electronic sensors currently offered or under development by competitors such as TRW, Robert Bosch GmbH ("Bosch"), Siemens, Morton/Autoliv, Temic, Nippondenso and Delphi (through Delco) and the internal electronics divisions of Ford. INFLATORS The current market for airbag inflators is dominated by a small number of companies, most of which have significant financial and other resources. The Company's principal competitors in the sale of inflators are Autoliv/Morton, TRW and Takata, which offer inflator products on a worldwide basis, and Temic, which offers inflator products in Europe. In addition, a number of competitors, including AlliedSignal, Inc., Magna, Morton/Autoliv and OEA Inc., have joint ventures for the development and sale of alternative inflator technologies. The Company's ability to compete effectively in the sale of inflator products may be limited by pre-existing contractual relationships between its competitors and certain automobile manufacturers. AIRBAG SYSTEMS The Company believes that its AMS systems are the only currently available airbag system using mechanical sensing and initiation. In selling these systems, the Company competes with independent suppliers of electrically initiated airbag systems and components and, in Japan, the Company's licensees, STC and Tokai Rika. The Company's competitors with respect to complete electrically initiated airbag systems include TRW, Takata Inc., Morton/Autoliv, AlliedSignal, Inc., Morton, Magna, Temic and manufacturers of airbag components for customers assembling their own airbag systems. REED SWITCH PRODUCTS The primary competition for the sale of reed switches are Phillips, N.V. and Oki. In addition, there are a number of small regional reed switch producers in North America, Europe and Asia. For value-added reed switch products such as position sensors, there are also several small regional competitors. For reed relay products, the primary competitors are C.P. Claire and Coto-Wabash. SILICON SENSOR PRODUCTS There exists a significant number of competitors in the market for various kinds of silicon microsensors, some of which have broad product offerings comparable to or greater than those of the Company. These include such companies as Texas Instruments, Inc., Motorola, Inc., Analog Devices, Inc., E.G.& G/IC Sensors, Inc., Sensonor, and the internal operations of certain vehicle and equipment manufacturers. However, the Company's sensor designs are proprietary and unique to the Company, and only a limited number of the Company's silicon sensor competitors offer capacitive technology. STEERING WHEELS AND ROAD WHEELS The North American steering wheel operations competes on sales to OEMs with TRW, Petri, Centoco, Toyota Gosei and Neaton. The European steering wheel companies compete in OEM sales with Morton/Autoliv, Dalphi Metal, Delphi and Petri. The luxury steering wheels of the Company compete 6 with NARDI. In Italy, competitors for road wheels include Fondmetal, OZ, and Speedline. Other competitors include BBS and ATS in Germany, Boid in the United States, and Taneisha in Japan. GOVERNMENT REGULATIONS AUTOMOTIVE REGULATIONS Airbag systems installed in automobiles sold in the United States must comply with government regulations. 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, lubricants, 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 United states. The Company believes that it is in substantial compliance with existing laws and regulations and has obtained or applied for the necessary permits to conduct its business operations. Compliance by the Company with applicable environmental laws has not had a material adverse effect on the Company's financial condition or competitive position to date. Although no assurances 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 in the future. PRODUCT LIABILITY The sale of airbag systems and components entails an inherent risk of product liability claims. Although the Company maintains product liability insurance, there can be no assurance that the coverage limits of the Company's insurance policies will be adequate. 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 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. However, there are no lawsuits pending against the Company which the Company believes at this time, to be material. With regard to the pending acquisition of AlliedSignal's Safety Restraint Systems Division, the company will not be responsible for any pending product liability matters. EMPLOYEES As of September 1, 1997, the Company has approximately 11,100 full time employees worldwide. The Company's United States employees are unionized in two locations, representing approximately 26% of the domestic workforce. The Company's hourly employees in Mexico, Italy and Finland are represented by labor unions. The Company has not experienced any legal work stoppages and considers its relations with its employees to be good. Wages are negotiated under the Company's Mexican union agreements in December of each year, with the full contract negotiation every two years. 7 EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding the Executive Officers of the Company are set forth as follows: Allen K. Breed 70 Chairman of the Board of Directors Johnnie Cordell Breed 53 Co-Chairman and Chief Executive Officer Charles J. Speranzella, Jr. 41 Vice Chairman Fred J. Musone 53 President, Chief Operating Officer Robert M. Rapone 14 Executive Vice President, Operations Worldwide Frank J. Gnisci 47 Executive Vice President, Chief Financial Officer Arthur R. Schauffert, Jr. 46 Treasurer Lizanne Guptill 42 Secretary Mr. Breed, founder of the Company, has been Chairman of the Company since its inception. Mr. Breed served as Chief Executive Officer through August, 1997. Mr. Breed is also Chairman, President and owner of BREED Corporation, a real estate holding Company. Mr. Breed is the husband of Johnnie Cordell Breed. Mrs. Breed was elected Co-Chairman of the Board and Chief Executive Officer of the Company on August 27, 1997 and has been a director of the Company since its inception. Mrs. Breed served as President and Chief Operating Officer from September, 1995. Mrs. Breed also serves as Vice President of BREED Corporation. 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. On August 27, 1997, Mr. Speranzella was elected Vice Chairman of the Company. Mr. Speranzella joined the Company as General Counsel and Assistant Secretary in September, 1994. He became Managing Senior Vice President, General Counsel and Assistant Secretary in February, 1995. Mr. Speranzella was elected Corporate Secretary in May, 1995. He was promoted to Executive Vice President, General Counsel and Secretary in July, 1995. Mr. Speranzella became President of BREED European Holdings, Inc. in June 1996 and Executive Vice President of World Wide Operations of the Company in January 1997. From 1979 until joining the Company, he held various senior positions at Matra Hachette's Fairchild Space and Defense Corporation and Martin Marietta. Mr. Musone joined the Company on September 2, 1997 as President and Chief Operating Officer. Prior to joining the Company, Mr. Musone was President and Chief Operating Officer of Morton International ASP/Autoliv, Inc., a manufacturer of automotive safety products, since 1995. He held various management positions with Federal Mogul Corporation from 1972 through 1995, the most recent position being President of Worldwide Manufacturing Operations. Mr. Rapone joined the Company as Executive Vice President, Operations Worldwide on September 2, 1997. Since 1995, Mr. Rapone was Vice President of Operations for Morton International ASP/Autoliv, Inc., a manufacturer of automotive safety products. From 1989-1995, Mr. Rapone was employed by Federal Mogul Corporation, serving most recently as Director of Connectivity. From 1983-1989, Mr. Rapone was employed by Texas Instruments in various management positions. Mr. Gnisci joined the Company as Executive Vice President, Chief Financial Officer on September 8, 1997. Prior to joining the Company, Mr. Gnisci was Vice President of Finance for Terex Corporation, a manufacturer of heavy duty construction vehicles and equipment, since 1994. From 1991-1994, Mr. Gnisci was Vice President of Finance for Babcock Industries, Inc., a manufacturer of conveyor 8 systems. Mr. Gnisci was employed by Gold Fields Mining Corporation from 1987- 1991 as Vice President and Controller. From 1979-1987, Mr. Gnisci was employed by Chicago Pneumatic Tool Company in various financial positions, including Assistant Controller and Director of Corporate Audit. Mr. Schauffert joined the Company in 1993 as Treasurer. Prior to that time, hews Treasurer and Assistant Secretary of Moog Automotive, Inc. He joined Moog in 1988 from St. Joe Minerals Corporation, where he held various positions, including Treasurer, from 1980 until 1987. Ms. Guptill joined the Company in 1993 as a 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 1984-1990. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES The information required by this Item is contained in the Company's financial statement footnote 9 under the heading "Information Related to Customers and Operations in Different Geographic Areas" on page 20 appearing elsewhere in this report. 9 ITEM 2. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS
JUNE 30, In thousands 1997 1996 - ------------------------------------------------------ --------- -------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 18,707 $ 95,830 Accounts receivable, principally trade 207,951 110,656 Inventories 75,347 52,890 Prepaid expenses 13,519 7,247 - ------------------------------------------------------ -------- -------- Total Current Assets 315,524 266,623 - ------------------------------------------------------ -------- -------- PROPERTY, PLANT AND EQUIPMENT Land 15,206 10,805 Buildings 106,122 73,342 Machinery and equipment 212,542 126,947 Construction in progress 28,013 14,417 - ------------------------------------------------------ -------- -------- 361,883 225,511 Less accumulated depreciation (85,433) (53,858) - ------------------------------------------------------ -------- -------- 276,450 171,653 - ------------------------------------------------------ -------- -------- INTANGIBLE ASSETS 220,956 45,053 NET ASSETS HELD FOR SALE 52,620 -- INVESTMENTS AND OTHER ASSETS 11,603 20,473 - ------------------------------------------------------ -------- -------- TOTAL ASSETS $877,153 $503,802 ====================================================== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable and current portion of long-term debt $191,744 $120,688 Accounts payable 121,505 33,940 Employee compensation and benefits 16,818 13,844 Accrued expenses 32,661 7,980 - ------------------------------------------------------ -------- -------- Total Current Liabilities 362,728 176,452 LONG-TERM DEBT 231,700 42,123 OTHER LONG-TERM LIABILITIES 16,306 10,147 - ------------------------------------------------------ -------- -------- TOTAL LIABILITIES 610,734 228,722 - ------------------------------------------------------ -------- -------- STOCKHOLDERS' EQUITY Common stock 317 316 Additional paid-in capital 77,470 76,652 Retained earnings 207,964 201,981 Foreign currency translation adjustments (18,843) (2,927) Unearned compensation (489) (942) - ------------------------------------------------------ -------- -------- TOTAL STOCKHOLDERS' EQUITY 266,419 275,080 - ------------------------------------------------------ -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $877,153 $503,802 ====================================================== ======== ========
See Notes to Consolidated Financial Statements 10 CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED JUNE 30, In thousands, except for per share data 1997 1996 1995 - ---------------------------------------- --------- --------- --------- NET SALES $794,880 $431,689 $400,972 Cost of sales 631,283 277,044 244,551 - ---------------------------------------- --------- --------- --------- Gross profit 163,597 154,645 156,421 - ---------------------------------------- --------- --------- --------- Selling, general and administrative 70,583 38,243 33,098 Engineering, research and development 36,121 23,588 18,506 Amortization of intangibles 6,310 2,001 286 - ---------------------------------------- --------- --------- --------- Operating income 50,583 90,813 104,531 Interest income (expense), net (24,460) (1,137) 704 Other income (expense), net 3,524 8,662 4,898 - ---------------------------------------- --------- --------- --------- Earnings before income taxes 29,647 98,338 110,133 Income taxes 14,800 35,300 37,800 NET EARNINGS $ 14,847 $ 63,038 $ 72,333 ======================================== ======== ========= ========= EARNINGS PER SHARE $0.47 $2.00 $2.30 ======================================== ======== ========= ========= Cash Dividends per Share $0.28 $0.24 $0.20 ======================================== ======== ========= ========= Average Shares Outstanding 31,648 31,550 31,434 ======================================== ======== ========= =========
See Notes to Consolidated Financial Statements 11 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOREIGN ADDITIONAL CURRENCY COMMON STOCK PAID-IN RETAINED TRANSLATION UNEARNED --------------- In thousands, except for per share data SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENTS COMPENSATION - ----------------------------------------- ----------------------------------------------------------------------------------- Balance at June 30, 1994 31,342,033 $313 $71,395 $ 80,477 $ (937) $ -- Shares issued under Stock Option Plans 52,024 $ 1 $ 686 -- -- -- Shares sold under Employee Stock Purchase Plan 51,843 -- 1,054 -- -- -- Shares terminated under Stock Incentive Plan, net of granted shares 69,490 1 1,927 -- -- (1,927) Compensation expense -- -- -- -- -- 296 Net Earnings -- -- -- 72,333 -- -- Translation adjustments -- -- -- -- (606) -- Cash dividends--$.24 per share -- -- -- (6,292) -- -- - ------------------------------------------ ---------- ----- ------ -------- -------- --------- Balance at June 30, 1995 31,515,390 315 75,062 146,518 (1,543) (1,631) Shares issued under Stock Option Plans 67,561 1 786 -- -- -- Shares sold under Employee Stock Purchase Plan 60,906 -- 1,038 -- -- -- Shares terminated under Stock Incentive Plan, net of granted shares (17,200) -- (459) -- -- 459 Compensation expense -- -- -- -- -- 230 Tax benefit from exercise of stock options -- -- 225 -- -- -- Net earnings -- -- -- 63,038 -- -- Translation adjustments -- -- -- -- (1,384) -- Cash dividends--$.24 per share -- -- -- (7,575) -- -- - ------------------------------------------ ---------- ----- ------ -------- -------- --------- Balance at June 30, 1996 31,626,657 316 76,652 201,981 (2,927) (942) Shares issued under Stock Option Plans 38,695 1 537 -- -- -- Shares sold under Employee Stock 27,082 -- 529 -- -- -- Purchase Plan Shares terminated under Stock Incentive (12,992) -- (364) -- -- 364 Plan, net of granted shares Compensation expense -- -- -- -- -- 89 Tax benefit from exercise of stock options -- -- 116 -- -- -- Net earnings -- -- -- 14,847 -- -- Translation adjustments -- -- -- -- (15,916) -- Cash dividends--$.28 per share -- -- -- (8,864) -- -- - ------------------------------------------ ---------- ----- ------ -------- -------- ---------- Balance at June 30, 1997 31,679,442 $317 $77,470 $207,964 $(18,843) $ (489) ========================================== ========== ===== ======= ======== ========= ===========
Preferred stock: Authorized 5,000,000 shares, par value $.001 per share. To date, none of these shares has been issued. Common stock: Authorized 50,000,000 shares, par value $.01 per share. See Notes to Consolidated Financial Statements 12 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30, In thousands 1997 1996 1995 - ----------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings........................................... $ 14,847 $ 63,038 $ 72,333 Adjustments: Depreciation of plant and equipment.................. 42,224 18,090 13,609 Amortization of intangible assets.................... 6,310 2,001 286 Deferred income taxes................................ 1,157 1,665 (1,550) Loss (gain) from sale of assets...................... 634 (1,517) (1,349) Compensation related to stock plan................... 89 230 296 Changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable............................... (16,284) (30,667) (5,473) Inventories....................................... 2,234 (1,548) (6,526) Prepaid expenses.................................. (720) (717) (334) Accounts payable.................................. 37,047 843 1,915 Accrued expenses.................................. (7,597) (9,215) (3,173) Other assets and liabilities...................... 9,418 (1,000) (891) - ----------------------------------------------------------------------------------------- Net cash provided by operating activities.............. 89,359 41,203 69,143 - ----------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, plant and equipment............. (75,851) (45,370) (69,268) Sale (purchases) of short-term investments, net........ -- 10,601 12,386 Cost of acquisitions, net of cash acquired............. (291,922) (48,507) (6,941) Deposit on Gallino acquisition......................... -- (10,299) -- Investment in and advances to affiliates............... (874) -- (6,376) Proceeds from sale of assets........................... 1,382 2,742 1,349 - ----------------------------------------------------------------------------------------- Net cash used in investing activities.................. (367,265) (90,833) (68,850) - ----------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from short-term borrowings.................... 577,688 86,957 5,486 Repayments of long-term debt and other borrowings...... (412,830) (6,356) (9,333) Proceeds from long-term debt........................... 45,441 45,000 -- Cash dividends paid.................................... (8,861) (6,938) (4,715) Common stock issued--options and stock plans........... 1,182 2,050 1,741 - ----------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities.... 202,620 120,713 (6,821) EFFECT OF EXCHANGE RATE CHANGES ON CASH................ (1,837) (1,608) (587) - ----------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents... (77,123) 69,475 (7,115) Cash and cash equivalents at beginning of year......... 95,830 26,355 33,470 - ----------------------------------------------------------------------------------------- Cash and cash equivalents at end of year............... $ 18,707 $ 95,830 $ 26,355 ========================================================================================= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest............................................. $ 20,776 $ 2,347 $ 1,794 Income taxes......................................... 12,914 32,230 39,520 Cost of Acquisitions: Working capital (deficiency), net of cash acquired... $ (23,534) $ 125 $ 6,824 Property, plant and equipment........................ (144,995) (18,021) (4,483) Patents.............................................. (16,000) -- (5,272) Cost in excess of net assets of businesses acquired.. (158,073) (35,718) (3,634) Other assets......................................... (2,231) (3,066) (451) Long-term debt and other long-term liabilities....... 52,911 8,173 75 - --------------------------------------------------------------------------------------- Net cost of acquisitions............................. $(291,922) $(48,507) $ (6,941) =========================================================================================
See Notes to Consolidated Financial Statements 13 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. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. REVENUE RECOGNITION The Company recognizes revenue when title and risk of loss transfers to its customers, which is generally upon shipment of products to customers. The Company generally enters into agreements with its customers at the beginning of a given vehicle's life to produce products. Once such agreements are entered into by the Company, fulfillment of the customers' purchasing requirements is generally the obligation of the Company for the entire production life of the vehicle (which generally averages five years). 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. 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. INTANGIBLE ASSETS Cost in excess of net assets of businesses acquired (goodwill) is being amortized on a straight-line basis over a period of 3 to 40 years and is stated net of accumulated amortization of $6,247,000 and $895,000 at June 30, 1997 and 1996, respectively. Goodwill is reevaluated when business events and circumstances indicate that the carrying amount may not be recoverable. Reevaluation is based on projections of undiscounted future cash flows. Patents are stated at cost less accumulated amortization of $1,271,000 and $527,000 at June 30, 1997 and 1996, respectively. These items, which were acquired in connection with the VTI Hamlin OY (VTI) and USS acquisitions, as discussed in Note 3, are capitalized and amortized on a straight-line basis over the average remaining life of the related patents. 14 TRANSLATION OF FOREIGN CURRENCIES AND FOREIGN EXCHANGE CONTRACTS All assets and liabilities in the balance sheets of foreign subsidiaries whose functional currency is other than the U.S. dollar are translated at year- end exchange rates except stockholders' equity which is translated at historical rates. Translation gains and losses are accumulated as a separate component of stockholders' equity. Foreign currency transaction gains and losses are included in determining net earnings. The Company uses foreign exchange contracts to hedge certain foreign denominated payables and receivables and also to hedge firm sales and purchase commitments. Realized and unrealized gains and losses are deferred and recognized as the related transactions are settled. The Company does not enter into foreign exchange contracts for trading purposes. At June 30, 1997, the Company had outstanding Canadian contracts to buy $43 million, maturing through January 1999 and to sell $9 million, maturing through August 1997. At June 30, 1996, the Company had outstanding contracts to sell 10.5 million German marks, maturing through June 1997. EARNINGS PER SHARE Earnings per share is computed by dividing net earnings by the weighted average shares of common stock outstanding during the year. The effect on earnings per share resulting from the assumed exercise of outstanding options is not material. RECLASSIFICATIONS Certain amounts in the prior years' Consolidated Financial Statements have been reclassified to conform to the current year's presentation. 2. FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK Financial instruments consist primarily of cash equivalents, short-term investments, accounts receivable, accounts payable and bank debt. At June 30, 1997, the fair value of these financial instruments approximates the carrying amount because of the short-term maturity of these items. The Company has entered into various agreements with three major customers to secure certain long-term sales contracts, however these do not commit the customers to purchase specific quantities of products from the Company. The agreement with Ford expires at the end of the 1999 model year. The Company is in the process of negotiating its long-term contract through the model year 2000 with Delco-GM. In addition, a long-term sales agreement with Fiat expires on December 31, 1999. Sales by the Company to Fiat in 1997 and 1996, accounted for 32% and 14%, respectively, of the Company's sales for such years. Sales by the Company to Ford in 1997, 1996 and 1995, accounted for 25%, 33% and 37%, respectively, of the Company's sales for such years. Sales by the Company to Delco-GM in 1997, 1996 and 1995, accounted for 13%, 26% and 40%, respectively, of the Company's sales for such years. Concentrations of credit risk with respect to trade accounts receivable are limited due to the strong financial condition of the Company's customer base. However, as of June 30, 1997, the Company's receivables from Fiat, Ford, and Delco-GM amounted to 38%, 12% and 8% respectively, of total trade accounts receivable. 15 3. ACQUISITIONS During the three years ended June 30, 1997, the Company made the acquisitions set forth below. The Hamlin merger was accounted for as a pooling of interests. All of the other acquisitions were accounted for by 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 1995 HAMLIN On August 31, 1994, the Company completed a merger with Hamlin, Incorporated (Hamlin), a manufacturer of crash sensors and reed switch products, with operations in the United States, Mexico and Europe. The Company issued 838,324 shares of common stock for all of the outstanding common stock of Hamlin. There were no adjustments necessary to conform the companies' methods of accounting. There were no significant transactions between the companies prior to the merger. VTI In June 1995, the Company acquired VTI, a Finnish company that designs and manufactures silicon capacitive micro machined acceleration, angular rate and differential pressure sensors, for $1.7 million in cash. Additionally, the Company issued stock warrants to certain of the former stockholders of VTI which enable the holders to purchase up to 100,000 shares of common stock between July 1, 1998 and June 30, 2000, at a purchase price of $25.75 ($2 above the market value of the Company's common stock at the date of acquisition). The purchase price exceeded the fair value of the net assets acquired by approximately $4.5 million. The resulting goodwill is being amortized on a straight-line basis over seven years. Concurrent with the purchase, the Company acquired, for $5.3 million in cash, technology rights to use awarded and pending patents and related intellectual property. FISCAL 1996 MOMO On April 15, 1996, the Company acquired all of the outstanding shares 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, for $45.2 million in cash. 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., an Italian manufacturer of printed circuit boards for the automotive, computer and telecommunications markets for $1.8 million in cash. The purchase price exceeded the fair value of the net assets acquired by $1.8 million. The resulting goodwill is being amortized over 10 years. 16 FORCE IMAGING TECHNOLOGIES, INC. On May 31, 1996, the Company acquired all of the outstanding shares of Force Imaging Technologies, Inc., a manufacturer of thin-profile variable force sensors for multi-function automotive capabilities for $3 million in cash. The purchase price exceeded the fair value of the net assets acquired by $2.8 million. The resulting goodwill is being amortized over 5 years. The pro forma unaudited results of operations for the years ended June 30, 1996 and 1995, assuming the purchase of the acquisitions had been consummated as of July 1, 1994, are as follows:
In thousands, except per share data 1996 1995 - --------------------------------------- ---------- ------------ Net sales $ 493,845 $ 482,885 Net earnings $ 59,768 $ 65,377 Net earnings per share $ 1.89 $ 2.08
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 was $126 million, comprised of cash of $74 million and liabilities assumed of $52 million. The acquisition was financed through borrowings on 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 (USS) On October 25, 1996, the Company completed the acquisition of certain assets and the assumption of certain liabilities of the "North American Steering Wheels Operation" of United Technologies 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, financed through 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 is being amortized on the straight-line basis over 40 years. CUSTOM TRIM On February 25, 1997, the Company completed the acquisition of the stock of BIT Investments, Inc. ("BIT"), a holding company that owned the Custom Trim group of companies, for $70 million. Additionally, up to $5 million may be paid on September 1, 2002, contingent upon BIT attaining certain operating profit targets for each of the years subsequent to the acquisition date. The acquired operations produce 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 funds used by the Company to acquire BIT were obtained from borrowings under the Company's Revolving Credit Agreements. The purchase price exceeded the fair market value of net assets acquired by $48 million. 17 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. 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, 1995, are as follows:
In thousands, except per share data 1997 1996 - ----------------------------------------- ---------- ----------- Net sales $ 901,058 $ 1,056,588 Net earnings $ 20,965 $ 45,897 Net earnings per share $ .66 $ 1.45
4. 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 (non-steering wheel business). In 1997, the Company evaluated whether the non-steering wheel business of Gallino could be integrated into the core business of the Company. 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 (non-steering wheel business). In July 1997, the Company signed a letter of intent to sell approximately 65 percent of substantially all of the net assets of Gallino's non-steering wheel business. The Company is negotiating with other prospective buyers for the remaining portion of Gallino's non-steering wheel business. For financial reporting purposes, the assets and liabilities attributable to all of Gallino's non-steering wheel business, which are recorded at amounts approximating their net realizable value, have been classified in the consolidated balance sheet as "Net assets held for sale" and consist of the following at June 30, 1997: In thousands - ---------------------------------------------- ------------- Current Assets $ 42,221 Property, plant and equipment, net 62,739 Other noncurrent assets 977 - ---------------------------------------------- ------------- Total assets 105,937 - ---------------------------------------------- ------------- Current liabilities 31,661 Other liabilities 21,656 - ---------------------------------------------- ------------- Total liabilities 53,317 - ---------------------------------------------- ------------- Net assets held for sale $ 52,620 ============================================== =============
5. INCOME TAXES The components of earnings before income taxes are as follows:
In thousands 1997 1996 1995 - ---------------------------- -------- -------- --------- Domestic $23,699 $98,285 $107,521 Foreign 5,948 53 2,612 - ---------------------------- -------- -------- ---------
18 ============================ $29,647 $98,338 $110,133 ======== ======== =========
The components of income tax expense are as follows:
In thousands 1997 1996 1995 - ------------------------- ---------- --------- --------- Current Federal $ 6,442 $30,818 $37,214 Foreign 6,434 2,001 750 State 767 816 1,386 - ------------------------- ---------- --------- --------- Total current 13,643 33,635 39,350 Deferred Federal 1,501 1,665 (1,550) Foreign (344) -- -- - ------------------------- ---------- --------- --------- Total deferred 1,157 1,665 (1,550) - ------------------------- ---------- --------- --------- Income taxes $14,800 $35,300 $37,800 ========================= ========== ========= =========
A provision for income taxes has not been made for the undistributed earnings of foreign subsidiaries of approximately $10 million at June 30, 1997, which have been or are intended to be permanently reinvested in expanded foreign business operations. The provision for income taxes differs from the expected federal tax provision as follows:
In thousands 1997 1996 1995 - ------------------------- ---------- --------- --------- Tax at U.S. statutory rate $ 10,260 $34,418 $38,547 State taxes, net of Federal tax benefit 498 530 900 Change in valuation allowance 1,816 2,161 (2,115) Amortization of goodwill, without tax benefit 1,300 -- -- Foreign rate differential 677 -- -- Reduction of taxes provided in prior years -- (1,154) -- Other 249 (655) 468 - ------------------------- ---------- --------- --------- $ 14,800 $35,300 $37,800 ========== ========= =========
19 The temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of June 30, 1997 and 1996, respectively, are presented below.
In thousands 1997 1996 - ------------------------- ---------- --------- Deferred tax assets Accrued expenses $ 5,132 $ 1,842 Net operating losses 3,977 -- Other 923 961 Valuation allowance (3,977) -- - ------------------------- ---------- --------- 6,055 2,803 ---------- --------- Deferred tax liabilities Depreciation and amortization (7,845) (892) Acquisition related asset basis differences -- (2,544) - ------------------------- ---------- --------- (7,845) (3,436) ---------- --------- $(1,790) $ (633) ========== =========
Management has determined, based on the Company's history of domestic taxable income and its expectation of the future, that domestic operating income of the Company will likely be sufficient to fully recognize the net deferred tax assets. At June 30, 1997, the Company has foreign net operating loss carryforwards (NOLs) for tax purposes of $11.7 million of which $6.1 million expires in the year 2006 and $1.7 million expires in the year 2007. The remaining NOLs have no expiration date. For financial reporting purposes, a valuation allowance of $4.0 million has been recognized to reduce the deferred tax assets related to those NOLs. 6. NOTES PAYABLE AND LONG-TERM DEBT During 1997, the Company replaced its $200 million unsecured domestic credit agreement. The Company now maintains two multi-currency credit agreements totaling $450 million that expire on April 29, 1998 ($250 million) and April 30, 2002 ($200 million). The amount outstanding under the new agreements at June 30, 1997, was $358 million of which $200 million is due April 30, 2002. The interest rate under the agreements is at or below the prime rate or, at the Company's option, LIBOR plus a margin. The weighted average interest rate on the outstanding borrowings at June 30, 1997, was 6.7%. A commitment fee of between .125% and .3% per year is paid on the unused portion of the commitment dependent upon the Company's level of leverage as set forth in the agreements. Under the terms of the agreements, the Company must maintain acceptable ratios, such as leverage ratio, minimum net worth, and interest coverage ratio. At June 30, 1997, the Company was in compliance with all covenants. 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. The amounts outstanding under these lines of credit with banks at June 30, 1997 and 1996 were $27.3 million and $34.1 million, respectively. 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 amounting to $38.1 million. 20 7. OTHER FINANCIAL DATA The components of inventories consist of the following:
In thousands 1997 1996 - ------------------------------------- ---------- --------- Finished goods $24,832 $19,439 Work in process 23,385 14,417 Raw materials 27,130 19,034 - ------------------------------------- ---------- --------- $75,347 $52,890 ========== =========
Other income (expense), net consists of the following:
In thousands 1997 1996 1995 - --------------------------------------- --------- -------- -------- Foreign exchange gain (loss), net $2,161 $2,385 $ (352) Gain (loss) on disposition of property, plant and equipment (634) 1,517 1,349 Royalty income 93 3,976 3,483 Government grant 1,000 -- -- Other, net 904 784 418 - --------------------------------------- --------- -------- -------- $3,524 $8,662 $4,898 ========= ======== ========
8. EMPLOYEE BENEFIT PLANS The Company's Omnibus Stock Plan provides for the granting of 2,500,000 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 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. 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 four- 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 21 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 63,744 in 1997 and 648,873 in 1996. No stock appreciation rights or performance shares were granted in 1997 or 1996. 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 50,000 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 5,310 in 1997 and 14,600 in 1996. Following is a summary of the option and warrant transactions for the years 1997 and 1996:
SHARES PRICE - ---------------------------------------------- --------------- ------------------ Balance at June 30, 1995 $ 622,028 $ 3.14 - $ 32 1/4 Granted 708,473 16 3/4 - 20 3/8 Exercised (67,561) 3.14 - 24 Canceled (113,704) 12 - 28 3/8 - ---------------------------------------------- --------------- ------------------ Balance at June 30, 1996 1,149,236 12 - 32 1/4 Granted 117,367 21 3/8 - 28 1/4 Exercised (38,695) 19 3/4 - 28 Canceled (127,547) 16 3/4 - 28 5/8 - ---------------------------------------------- --------------- ------------------ Balance at June 30, 1997 1,100,361 12 - 32 1/4 - ---------------------------------------------- --------------- ------------------ Exercisable at June 30, 1997 318,996 12 - 32 1/4 - ---------------------------------------------- --------------- ------------------ Shares reserved for future issuance 2,175,262 ============================================== =============== ==================
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, 1997, 1996 and 1995 amounted to $762,000, $911,000 and $669,000, respectively. The Company adopted Statement of Financial Accounting Standard No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," in fiscal 1997, but elected to continue to measure compensation cost using the intrinsic value method, in accordance with APB Opinion No 25 ("APB 25"), "Accounting for Stock Issued to Employees." Accordingly, no compensation cost for stock options has been recognized. If compensation cost had been determined based on the estimated fair value of options granted in 1997 and 1996, consistent with the methodology in SFAS 123, the pro forma effects on the Company's net earnings and income per share would not have been material. 22 9. INFORMATION RELATED TO CUSTOMERS AND OPERATIONS IN DIFFERENT GEOGRAPHIC AREAS The Company operates in one principal industry segment: the design, manufacture, and sale 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.
In thousands 1997 1996 1995 - ------------------------------------------------------ ------------ ----------- ---------- Net Sales to unaffiliated customers: North America $379,270 $324,565 $345,640 Europe 415,610 107,124 55,332 - ------------------------------------------------------ ------------ ----------- ---------- Total net sales $794,880 $431,689 $400,972 - ------------------------------------------------------ ------------ ----------- ---------- Transfers between geographic areas (eliminated in consolidation): North America $ 42,809 $ 51,057 $ 27,018 Europe 35,043 21,832 22,689 - ------------------------------------------------------ ------------ ----------- ---------- Total transfers $ 77,852 $ 72,889 $ 49,707 - ------------------------------------------------------ ------------ ----------- ---------- Earnings before income taxes Operating income: North America $ 46,597 $ 90,372 $100,800 Europe 3,986 2,442 4,017 Other income (expense), net (20,936) 7,525 5,602 - ------------------------------------------------------ ------------ ----------- ---------- Earnings before income taxes $ 29,647 $ 98,338 $110,133 - ------------------------------------------------------ ------------ ----------- ---------- Identifiable assets: North America $447,076 $196,776 $185,574 Europe 410,577 219,340 38,410 Corporate assets 19,500 87,686 54,714 - ------------------------------------------------------ ------------ ----------- ---------- Total assets $877,153 $503,802 $278,698 ====================================================== ============ =========== ==========
The Company also had foreign export sales from the United States amounting to $34,559,000, $27,354,000 and $24,515,000 for the years ended June 30, 1997, 1996 and 1995, 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. 23 10. COMMITMENTS AND CONTINGENCIES The Company is the subject of various lawsuits, claims and environmental contingencies. In the opinion of management, the expected liability resulting from these matters is adequately covered by amounts accrued, and will not have a material adverse effect on the Company's consolidated financial position or future results of operations. 11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following tables set forth selected quarterly financial information.
First Second Third Fourth Total In thousands, except per share data Quarter Quarter Quarter Quarter Year - ------------------------------------ ---------- ----------- ----------- ----------- -------- 1997 Net sales............................ $ 158,671 $ 182,567 $ 209,409 $ 244,233 $ 794,880 Gross profit......................... 41,648 36,690 37,955 47,304 163,597 Operating income..................... 18,210 9,330 7,128 15,915 50,583 Net earnings......................... 7,846 3,150 1,501 2,350 14,847 Earnings per share................... .25 .10 .05 .07 .47 Cash dividends per share............. .07 .07 .07 .07 .28 Market price range................... 18 1/2-27 1/8 22 5/8-28 1/2 19 1/4-27 1/4 17 3/8-23 17 3/8-28 1/2 1996 Net sales............................ $ 92,601 $ 105,655 $ 103,927 $ 129,506 $ 431,689 Gross profit......................... 34,864 42,844 35,841 41,096 154,645 Operating income..................... 19,446 26,854 19,671 24,842 90,813 Net earnings......................... 12,601 17,842 14,892 17,703 63,038 Earnings per share................... .40 .57 .47 .56 2.00 Cash dividends per share............. .05 .05 .07 .07 .24 Market price range................... 19 1/2-24 1/4 17-20 1/4 16 3/8-19 5/8 18 3/4-24 1/4 16 3/8-24 1/4 1995 Net sales............................ $ 87,359 $ 99,001 $ 109,876 $ 104,736 $ 400,972 Gross profit......................... 28,999 39,016 44,846 43,560 156,421 Operating income..................... 17,538 26,488 31,759 28,746 104,531 Net earnings......................... 11,231 18,191 21,984 20,927 72,333 Earnings per share................... .36 .58 .70 .66 2.30 Cash dividends per share............. .05 .05 .05 .05 .20 Market price range................... 25 1/4-33 3/4 25 1/2-36 3/8 20 1/4-29 18 3/8-24 1/4 18 3/8-36 3/8
The Company recognized a charge during the fourth quarter of 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 $.07. 24 12. SUBSEQUENT EVENT On August 27, 1997, the Company entered into an Asset Purchase Agreement with Allied Signal, Inc. ("Allied") to acquire substantially all of the assets and certain liabilities of Allied's worldwide automotive occupant restraint products and systems (the "Division"). These products include seat belt and airbag assemblies and components. The purchase price is $710 million in cash and is subject to post-closing adjustments based on the net asset value of the Division as of the closing date. Consummation of the acquisition is subject to several conditions, including clearance of the transaction by appropriate government agencies, consent of certain customers, and customary conditions to closing. Management is confident that the contingencies will be resolved favorably. The Company is considering various methods of financing the transaction, including additional bank borrowings and the private placement of equity and/or debt securities. For the year ended December 31, 1996, the Division had unaudited revenues of $951 million and unaudited operating income of $86 million. REPORT OF INDEPENDENT AUDITORS 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, 1997 and 1996, and the related consolidated statements of earnings, stockholders' equity, and cash flows for the years then ended. 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 audits. We did not audit the financial statements of MOMO S.p.A., a wholly-owned 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. The consolidated financial statements of BREED Technologies, Inc. and subsidiaries for the year ended June 30, 1995, were audited by other auditors whose report dated July 21, 1995, expressed an unqualified opinion on those statements. 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 1997 and 1996 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, 1997 and 1996, and the 25 consolidated results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. /s/Ernst & Young LLP July 31, 1997, except for Note 12, as to which the date is August 27, 1997 Tampa, Florida PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 3. Exhibits. The Registrant hereby files the following exhibits within this Form 10-K/A: 23.1 Consent of Ernst & Young LLP, Independent Auditors 23.2 Consent of KPMG Peat Marwick LLP, Independent Auditors 23.3 Consent of KPMG Peat Marwick LLP, Milan, Independent Auditors 99.1 Report of KPMG Peat Marwick LLP, Independent Auditors 99.2 Report of KPMG Peat Marwick LLP, Milan, Independent Auditors 26 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. Date: September 28, 1998 By: /s/ Frank J. Gnisci __________________________ Frank J. Gnisci Executive Vice President and Chief Executive Officer EX-23.1 2 CONSENT OF KPMG PEAT MARWICK, LLP EXHIBIT 23.1 ------------ Consent of Certified Public Accountants Re: Registration Statement on Form S-8 (No. 33-54986) Registration Statement on Form S-8 (No. 33-54988) Registration Statement on Form S-8 (No. 33-54990) Registration Statement on Form S-8 (No. 33-73350) Registration Statement on Form S-8 (No. 33-22423) We consent to incorporation by reference in the registration statements referenced above of BREED Technologies, Inc. of our report dated July 25, 1997 relating to the combined and consolidated statements of earnings, retained earnings, and cash flows of the Momo Group as of and for the year ended June 30, 1997 which report appears in the amended June 30, 1997 annual report on Form 10-K/A of BREED Technologies, Inc. /s/ KPMG Peat Marwick, LLP KPMG Peat Marwick, LLP Tampa, Florida September__, 1998 EX-23.2 3 CONSENT OF ERNST & YOUNG, LLP EXHIBIT 23.2 ------------ 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 on Form S-8 (No. 33-54986) pertaining to the 1992 Director Stock Option Plan; the Registration Statement on 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 July 31, 1997, except for the Note 12, as to which the date is August 27, 1997, with respect to the consolidated financial statements incorporated by reference in this Annual Report (Form 10-K/A) for the year ended June 30 1997. /s/ Ernst & Young LLP Ernst & Young LLP Tampa, Florida September 23, 1998 EX-23.3 4 CONSENT OF KPMG PEAT MARWICK, LLP, MILAN EXHIBIT 23.3 ------------ Consent of Certified Public Accountants Re: Registration Statement on Form S-8 (No. 33-54986) Registration Statement on Form S-8 (No. 33-54988) Registration Statement on Form S-8 (No. 33-54990) Registration Statement on Form S-8 (No. 33-73350) Registration Statement on Form S-8 (No. 33-22423) We consent to incorporation by reference in the registration statements referenced above of BREED Technologies, Inc. of our report dated 25 July 1997 relating to the combined and consolidated statements of earnings, retained earnings, and cash flows of the Momo Group as of and for the year ended 30 June 1997 which report appears in the amended 30 June 1997 annual report on Form 10- K/A of BREED Technologies, Inc. /s/ KPMG, S.p.A. Milan, Italy 28 September 1998 EX-99.1 5 REPORT OF KPMG PEAT MARWICK, LLP EXHIBIT 99.1 The Board of Directors and Stockholders BREED Technologies, Inc.; We have audited the consolidated statements of earnings, stockholders' equity, and cash flows of BREED Technologies, Inc. and subsidiaries for the year ended June 30, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standard require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of BREED Technologies, Inc. and subsidiaries for the year ended June 30, 1995, in conformity with generally accepted accounting principles. As discussed in note 1 notes to the consolidated financial statements, BREED Technologies, Inc. adopted provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, as of July 1, 1993. /s/ KPMG Peat Marwick, LLP KPMG Peat Marwick LLP Tampa, Florida July 21, 1995 EX-99.2 6 REPORT OF KPMG PEAT MARWICK, LLP, MILAN EXHIBIT 99.2 To the Board of Directors Of Momo S.p.A. We have audited the accompanying combined and consolidated balance sheet of the Momo group as of 30 June 1997 and the related combined and consolidated income statement, retained earnings and cash flows for the year then ended. These financial statements are the responsibility of the management of Momo, S.p.A. Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Momo Group as of 30 June 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles as defined in the United States. /s/ KPMG Peat Marwick KPMG Peat Marwick Milan, 25 July 1997 -----END PRIVACY-ENHANCED MESSAGE-----