United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 23, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-18348
BE AEROSPACE, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1209796
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1400 Corporate Center Way, Wellington, Florida 33414
(Address of principal executive offices) (Zip Code)
(561) 791-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
(Title of Class)
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 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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates was approximately $455.4 million on May 22, 2002 based on the
closing sales price of the registrant's common stock as reported on the Nasdaq
National Market as of such date.
The number of shares of the registrant's common stock, $.01 par value,
outstanding as of May 22, 2002 was 35,648,497 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the registrant's Proxy Statement to be filed with the
Commission in connection with the 2002 Annual Meeting of Stockholders are
incorporated by reference in Part III of this Form 10-K.
INDEX
PART I
ITEM 1. Business..............................................................3
ITEM 2. Properties...........................................................14
ITEM 3. Legal Proceedings....................................................15
ITEM 4. Submission of Matters to a Vote of Security Holders..................15
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters..............................................................16
ITEM 6. Selected Financial Data..............................................17
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................19
ITEM 7a. Quantitative and Qualitative Disclosures about Market Risk...........36
ITEM 8. Consolidated Financial Statements and Supplementary Data.............36
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................36
PART III
ITEM 10. Directors and Executive Officers of the Registrant...................37
ITEM 11. Executive Compensation...............................................41
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.......47
ITEM 13. Certain Relationships and Related Transactions.......................48
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......49
Index to Consolidated Financial Statements and Schedule.............F-1
PART I
In this Form 10-K, when we use the terms the "company," "B/E," "we," "us," and
"our," unless otherwise indicated or the context requires, we are referring to
BE Aerospace, Inc. and its consolidated subsidiaries. Certain disclosures
included in this Form 10-K constitute forward-looking statements that are
subject to risks and uncertainty. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Forward-Looking Statements."
ITEM 1. BUSINESS
INTRODUCTION
The Company
General
We are the world's largest manufacturer of cabin interior products for
commercial aircraft and business jets. We sell our manufactured products
directly to virtually all of the world's major airlines and airframe
manufacturers and a wide variety of general aviation customers. We believe that
we have achieved leading global market positions in each of our major product
categories, which include:
o commercial aircraft seats, including an extensive line of first class,
business class, tourist class and regional aircraft seats;
o a full line of aircraft food and beverage preparation and storage
equipment, including coffeemakers, water boilers, beverage containers,
refrigerators, freezers, chillers and microwave, high heat convection
and steam ovens;
o both chemical and gaseous aircraft oxygen delivery systems;
o business jet and general aviation interior products, including an
extensive line of executive aircraft seats, direct and indirect overhead
lighting systems, oxygen, safety and air valve products; and
o a broad line of aftermarket fasteners, covering over
100,000 Stock Keeping Units (SKUs).
We design, develop and manufacture a broad range of cabin interior
structures such as galleys and crew rests, and provide comprehensive aircraft
cabin interior reconfiguration and passenger-to-freighter conversion engineering
services and component kits.
Our company was organized as a corporation in Delaware in 1987. We have
substantially expanded the size, scope and nature of our business as a result of
a number of acquisitions. Since 1989, we have completed 22 acquisitions,
including three acquisitions during fiscal 2002, for an aggregate purchase price
of approximately $971.0 million in order to position ourselves as a preferred
global supplier to our customers. We have undertaken three major facility and
product line consolidation efforts, eliminating 22 facilities. We have also
implemented lean manufacturing and continuous improvement programs which
together with our common information technology platform has significantly
improved our productivity and gross and operating margins.
Industry Overview
The commercial and business jet aircraft cabin interior products industries
encompass a broad range of products and services, including aircraft seating
products, passenger entertainment and service systems, food and beverage
preparation and storage systems, oxygen delivery systems, lavatories, lighting
systems, evacuation equipment and overhead bins, as well as a wide variety of
engineering design, integration, installation, retrofit and certification
services.
Historically, the airline cabin interior products industry has derived
revenues from five sources:
o retrofit programs in which airlines purchase new interior furnishings to
overhaul the interiors of aircraft already in service;
o refurbishment programs in which airlines purchase components and
services to improve the appearance and functionality of certain cabin
interior equipment;
o new installation programs in which airlines purchase new equipment to
outfit newly delivered aircraft;
o spare parts; and
o equipment to upgrade the functionality or appearance of the aircraft
interior.
The retrofit and refurbishment cycles for commercial aircraft cabin interior
products differ by product category. Aircraft seating typically has a
refurbishment cycle of one to two years and a retrofit cycle of four to eight
years. Galley and lavatory structures as well as food and beverage preparation
and storage equipment are periodically upgraded or repaired, and require a
continual flow of spare parts, but may be retrofitted only once or twice during
the useful life of an aircraft.
Historically, about 70% of fasteners are used in the aftermarket. There is a
direct relationship between demand for fastener products and fleet size,
utilization, and age. Fasteners must be replaced at prescribed intervals and
such replacements also drive demand for fasteners.
Revenues for aerospace fastener products have been derived from the
following sources:
o mandated maintenance and replacement of specified parts and
o demand for structural modifications, cabin interior modifications and
passenger-to-freighter conversions.
We estimate that the commercial and business jet cabin interior products and
aerospace-grade fastener distribution industries had combined annual sales in
excess of $3.0 billion and $1.2 billion, respectively during fiscal 2002.
Recent Industry Conditions
The September 11 terrorist attacks have severely impacted conditions in the
airline industry. For the first time in the history of commercial aviation, all
domestic airlines were grounded for a period of three days. According to
industry sources, since resuming service, most major US carriers have
substantially reduced their flight schedules, parking or retiring approximately
15% of their fleets. The airlines have further responded by decreasing domestic
airfares by approximately 14% as compared to February of last year. As a result
of the double-digit decline in both traffic and airfares, airline revenues for
domestic carriers for the first calendar quarter of 2002 were down by 22%. As a
result of the substantial reduction in airline revenues arising from the
September 11 terrorist attacks, and their aftermath, as well as other factors,
such as the weakening economy, the U.S. airline industry incurred the largest
loss in its history in calendar 2001, totaling in excess of $7 billion.
Accordingly, the airlines are seeking to conserve cash in part by deferring or
eliminating cabin interior refurbishment programs and canceling or deferring
aircraft purchases. This has caused a substantial contraction in our business,
the extent and duration of which cannot be determined at this time. We have
taken swift actions to respond to the rapid change in industry conditions,
including consolidating five of our principal facilities into other existing
facilities, reducing headcount by about 1,000 positions, or 22% of our
workforce, freezing salaries and eliminating management bonuses for fiscal 2002.
Our principal customers are the world's commercial airlines. During the six
years ending with calendar 2000, the airlines significantly strengthened their
balance sheets and enhanced their liquidity as a result of improved
profitability, debt and equity financings and closely managed fleet expansion.
However, increases in pilot and other airline wages, coupled with higher fuel
prices and the softening of the global economy, were already negatively
impacting airline profitability prior to the events of September 11, 2001. The
combined impact of the recent recession and the events of September 11 has
negatively impacted discretionary airline spending for cabin interior
refurbishments and upgrades and new aircraft purchases. We expect that this will
have a material adverse impact on our business' results of operations and
financial condition until such time as conditions in the industry improve. While
management has developed and begun to implement what it believes is a sound plan
to counter these difficult conditions, it cannot guarantee that the plans are
adequate or will be successful.
Other factors expected to affect the cabin interior products industry are the
following:
Existing Installed Base. Existing installed product base typically generates
continued retrofit, refurbishment and spare parts revenue as airlines
maintain their aircraft cabin interiors. According to industry sources, the
world's active commercial passenger aircraft fleet consisted of
approximately 12,600 aircraft as of February 2002, including 3,500 aircraft
with fewer than 120 seats, 6,400 aircraft with between 120 and 240 seats and
2,700 aircraft with more than 240 seats. Further, based on industry sources,
we estimate that there are currently over 11,700 business jets currently in
service. Based on such fleet numbers, we estimate that the total worldwide
installed base of commercial and general aviation aircraft cabin interior
products, valued at replacement prices, was approximately $28.1 billion as
of February 23, 2002.
Expanding Worldwide Fleet. The expanding worldwide aircraft fleet is
expected to generate additional revenues from new installation programs,
while the increase in the size of the installed base is expected to generate
additional and continued retrofit, refurbishment and spare parts revenue.
Worldwide air traffic has grown every year since 1946 (except in 1974, 1991
and 2001). According to the January/February 2002 issue of the Airline
Monitor, worldwide air traffic is projected to grow at a compounded average
rate of 5.5% per year through 2020, increasing annual revenue passenger
miles from approximately 2.0 trillion in 2001 to approximately 5.5 trillion
by 2020. According to the Airbus Industrie Global Market Forecast published
in July 2000, the worldwide installed seat base, which we consider a good
indicator for potential growth in the aircraft cabin interior products
industry, is expected to increase from approximately 1.85 million passenger
seats at the end of 1999 to approximately 4.17 million passenger seats at
the end of 2019.
Growing Passenger-to-Freighter Conversion Business. Industry sources project
that air cargo traffic will grow by five percent to six percent annually
over the next twenty years, approximately double the forecasted economic
growth rate. Industry sources project that the size of the worldwide
freighter fleet will double over the next twenty years, with more than
approximately 3,000 aircraft being added, after taking retirements into
account. Industry sources also estimate that almost 70 percent of that
increase will come from converting commercial passenger jets to use as
freighters.
New Aircraft Deliveries. The number of new aircraft delivered each year is
an important determinant of fleet expansion and is generally regarded as
cyclical in nature. New aircraft deliveries (including regional jets) were
1,043 in 2000 and 1,162 in 2001. According to the Airline Monitor published
in February 2002, new deliveries are expected to decline significantly in
2002, with average annual new aircraft deliveries of approximately 900
during 2002 through 2006.
Business Jet and VIP Aircraft Fleet Expansion and Related Retrofit
Opportunities. Business jet manufacturers have experienced growth in new
aircraft deliveries similar to that experienced by the commercial jet
manufacturers. According to industry sources, business jet aircraft
deliveries amounted to 758 units in calendar 2000 and 791 units in calendar
2001. Industry sources indicate that approximately 7,815 business jets will
be built between 2000 and 2009 with a value of more than $123 billion.
Wide-body Aircraft Deliveries. The trend toward wide-body aircraft is
significant to us because wide-body aircraft require almost five times the
dollar value content for our products as compared to narrow-body aircraft.
Deliveries of wide-body, long-haul aircraft constitute an increasing share
of total new aircraft deliveries and are an increasing percentage of the
worldwide fleet. Wide-body aircraft represented 17% of all new commercial
aircraft delivered in 2001, and are expected to increase to 19% of new
deliveries in 2005 and 22% of new deliveries in 2006. Wide-body aircraft
currently carry up to three or four times the number of seats as narrow-body
aircraft and because of multiple classes of service, including large first
class and business class configurations, our average revenue per seat on
wide-body aircraft is substantially higher. Aircraft cabin crews on
wide-body aircraft may make and serve between 300 and 900 meals and may brew
and serve more than 2,000 cups of coffee and serve more than 400 glasses of
wine on a single flight.
New Product Development. The aircraft cabin interior products companies are
engaged in intensive development and marketing efforts for both new features
on existing products and totally new products. These products include a
broad range of amenities such as full electric "sleeper seats," convertible
seats, full face crew masks, advanced telecommunications equipment,
protective breathing equipment, oxygen generating systems, new food and
beverage preparation and storage equipment, kevlar barrier nets, de-icing
systems, crew rests and cabin management systems.
Engineering Services Markets. Historically, the airlines have relied
primarily on their own in-house engineering resources to provide
engineering, design, integration and installation services, as well as
services related to repairing or replacing cabin interior products that have
become damaged or otherwise non-functional. As cabin interior product
configurations have become increasingly sophisticated and the airline
industry increasingly competitive, the airlines have begun to outsource such
services in order to increase productivity and reduce costs and overhead.
Outsourced services include:
o engineering design, integration, project management, installation and
certification services;
o modifications and reconfigurations for commercial aircraft; and
o services related to the support of product upgrades.
Competitive Strengths
We believe that we have a strong competitive position attributable to a
number of factors, including the following:
Combination of Manufacturing and Cabin Interior Design Services. We have
continued to expand our products and services, believing that the airline
industry increasingly will seek an integrated approach to the design,
development, integration, installation, testing and sourcing of aircraft
cabin interiors. We believe that we are the only manufacturer of a broad
technologically-advanced line of cabin interior products with cabin interior
design capabilities. Based on our established reputation among the world's
commercial airlines for quality, service and product innovation, we believe
that we are well positioned to serve these customers.
Technological Leadership/New Product Development. We believe that we are a
technological leader in our industry, with what we believe is the largest
research and development organization in the cabin interior products
industry, currently comprised of approximately 560 engineers. We believe our
research and development effort and our on-site technicians at both the
airlines and airframe manufacturers enable us to play a leading role in
developing and introducing innovative products to meet emerging industry
trends and needs and thereby gain early entrant advantages.
Proven Track Record of Acquisition Integration. We have demonstrated the
ability to make strategic acquisitions and successfully integrate such
acquired businesses. Our acquisition strategy is subject to a number of
risks including increasing leverage, the application of restrictive
covenants in connection with additional debt incurred for any further
acquisitions and the costs of integrating any acquired companies.
Large Installed Base. We believe our large installed base of products,
estimated to be approximately $6.6 billion as of February 23, 2002 (valued
at replacement prices), is a strategic advantage. The airlines tend to
purchase spare parts and retrofits and refurbishment programs from the
supplier of the existing equipment. As a result, we expect our large
installed base to generate continued retrofit, refurbishment and spare parts
revenue as airlines continue to maintain, evolve and reconfigure their
aircraft cabin interiors.
Growth Opportunities
We believe that we have benefited from three major growth trends in the
aerospace industry.
Large Aftermarket Business. Our substantial installed base provides
significant ongoing revenues from replacements, upgrades, repairs and the
sale of spare parts. Approximately 63% of our revenues for the year ended
February 23, 2002 were derived from aftermarket activities. We believe that
we are well positioned to benefit when the airlines' financial condition and
liquidity improves as the airlines begin to make the expenditures for their
existing aircraft well before they begin to buy new aircraft. See "Recent
Industry Conditions."
Expansion of Worldwide Fleet and Shift Toward Wide-Body Aircraft. Through
2001, airlines were taking delivery of a large number of new aircraft due to
high load factors and the projected growth in air travel. Near term, we
expect new aircraft deliveries to decline but over time we expect the fleet
expansion to return to earlier projected levels. See "Recent Industry
Conditions."
Opportunity to Double the Size of our Addressable Markets through our
Fastener Distribution Business. Through the recent acquisition of M & M
Aerospace Hardware, Inc. (M & M), we have entered a new segment which
leverages B/E's key strengths. Because 70% of fastener demand is generated
by the existing worldwide fleet, demand for fasteners will increase over
time as the fleet expands, much like the market for cabin interior products.
We believe we have acquired an outstanding distribution business which
possesses excellent information technology, automated parts retrieval,
purchasing and customer relationship management systems. In addition, the
business has sufficient management, systems and industry knowledge to serve
as a platform for consolidation of this business segment.
Business Jet and VIP Aircraft Fleet Expansion and Related Retrofit
Opportunities. Recently, business jet airframe manufacturers have
experienced growth in new aircraft deliveries similar to that experienced by
commercial aircraft manufacturers. According to industry sources, executive
jet aircraft deliveries amounted to 343 units in calendar 1996 and 791 units
in calendar 2001. Industry sources indicate that executive jet aircraft
deliveries should be approximately 779 in calendar 2002. Several new
aircraft models, and larger business jets, including the Boeing Business
Jet, Bombardier Challenger and Global Express, Gulfstream V, the Falcon 900,
Airbus Business Jet, Cessna Citation X and Cessna Citation Excel, which have
been or are expected to be introduced over the next several years, are
expected to be significant contributors to new general aviation aircraft
deliveries going forward. Industry sources indicate that approximately 7,800
business jets will be built between 2002 and 2009 with a value of more than
$123 billion, and that the number of larger business jets, as described
above, as a percentage of total business jet deliveries will increase from
33% in calendar year 2001 to 38% in calendar year 2002. This is important to
our company because the typical cost of cabin interior products manufactured
for a Cessna Citation is approximately $162 thousand; whereas the same
contents for a larger business jet, such as the Boeing Business Jet could
range up to approximately $1.4 million. Advances in engine technology and
avionics and the emergence of fractional ownership of executive aircraft are
also important growth factors. In addition, the general aviation and VIP
aircraft fleet consists of over 11,700 aircraft with an average age of
approximately 15 years. As aircraft age or ownership changes, operators
retrofit and upgrade the cabin interior, including seats, sofas and tables,
sidewalls, headliners, structures such as closets, lavatories and galleys,
and related equipment including lighting and oxygen delivery systems. In
addition, operators generally reupholster or replace seats every five to
seven years. We believe that we are well positioned to benefit from the
retrofit opportunities due to:
o 15-year average age of the business jet fleet;
o operators who have historically reupholstered their seats may be more
inclined to replace these seats with lighter weight, more modern and
16G-compliant seating models; and
o our belief that we are the only manufacturer with the capability for
cabin interior design services, a broad product line for essentially all
cabin interior products and program management services.
Business Strategy
Our business strategy is to maintain a leadership position and to best serve
our customers by:
o offering the broadest and most integrated product lines and services in
the industry, including not only new product and follow-on product
sales, but also design, integration, installation and certification
services;
o pursuing the highest level of quality in every facet of our operations,
from the factory floor to customer support;
o aggressively pursuing initiatives of continuous improvement of our
manufacturing operations to reduce cycle time, lower cost, improve
quality and expand our margins;
o pursuing a worldwide marketing and product support approach focused by
airline and general aviation airframe manufacturer and encompassing our
entire product line; and
o pursuing selective strategic acquisitions.
Products and Services
We conduct our operations through strategic business units which have been
aggregated under three reportable segments: Commercial Aircraft Products,
Business Jet Products and Fastener Distribution.
Commercial Aircraft Products
Seating Products
Our company is the world's leading manufacturer of aircraft seats, offering
a wide selection of first class, business class, tourist class and commuter
seats. A typical seat manufactured and sold by our company includes the seat
frame, cushions, armrests and tray table, together with a variety of optional
features such as adjustable lumbar supports, footrests, reading lights,
head/neck supports, oxygen masks and telephones. We estimate that as of February
23, 2002 we had an aggregate installed base of approximately 1.0 million
aircraft seats valued at replacement prices of approximately $2.3 billion.
First and Business Classes. Based upon major airlines' program selection and
orders on hand, we are the leading worldwide manufacturer of premium class
seats. Our new line of international first class sleeper seats incorporate
full electric actuation, an electric ottoman, privacy panels and side-wall
mounted tables. Our recently released business class seats incorporate
features from over 25 years of seating design. The premium business class
seats include electrical or mechanical actuation, PC power ports,
telephones, leg rests, adjustable lumbar cushions, 4-way adjustable
headrests and fiber-optic reading lights. The first and business class
products are substantially more expensive than tourist class seats due to
these luxury appointments.
Convertible Seats. We have developed two types of seats that can be
converted from tourist class triple-row seats to business class double-row
seats with minimal conversion complexity. Convertible seats allow airline
customers the flexibility to adjust the ratio of business class to tourist
class seats for a given aircraft configuration. This seat is increasing in
popularity in the European market.
Tourist Class. We are a leading worldwide manufacturer of tourist class
seats and believe we offer the broadest such product line in the industry.
We have designed tourist class seats which incorporate features not
previously utilized in that class, such as laptop power ports and a number
of premium comfort features such as footrests, headrests and adjustable
lumbar systems.
Commuter (Regional Jet) Seats. We are the leading manufacturer of regional
aircraft seating in both the United States and worldwide markets. Our
Silhouette(TM) Composite seats are similar to commercial jet seats in
comfort and performance but typically do not have as many added comfort
features. Consequently, they are lighter weight and require less
maintenance.
Spares. Aircraft seats require regularly scheduled maintenance in the course
of normal passenger use. Airlines depend on seat manufacturers and secondary
suppliers to provide spare parts and kit upgrade programs. As a result, a
significant market exists for spare parts.
Interior Systems
We are the leading manufacturer of interior systems for both narrow- and
wide-body aircraft, offering a broad selection of coffee and beverage makers,
water boilers, ovens, liquid containers, refrigeration equipment, oxygen
delivery systems and a variety of other interior components. We estimate that as
of February 23, 2002 we had an aggregate installed base of such equipment,
valued at replacement prices, in excess of $1.0 billion.
Coffee Makers. We are the leading manufacturer of aircraft coffee makers. We
manufacture a broad line of coffee makers, coffee warmers and water boilers,
including the Flash Brew Coffee Maker, with the capability to brew 54 ounces
of coffee in one minute, and a Combi(TM) unit which will both brew coffee
and boil water for tea while utilizing 25% less electrical power than
traditional 5,000-watt water boilers. We also manufacture a
cappuccino/espresso maker.
Ovens. We are the leading supplier of a broad line of specialized ovens,
including high-heat efficiency ovens, high-heat convection ovens and warming
ovens. Our newest offering, the DS Steam Oven, represents a new method of
preparing food in-flight by maintaining constant temperature and moisture in
the food. It addresses the airlines' need to provide a wider range of foods
than can be prepared by convection ovens.
Refrigeration Equipment. We are the worldwide industry leader in the design,
manufacture and supply of commercial aircraft refrigeration equipment. We
manufacture a self-contained wine and beverage chiller, the first unit
specifically designed to rapidly chill wine and beverage on-board an
aircraft.
Oxygen Delivery Systems. We are a leading manufacturer of oxygen delivery
systems for both commercial and general aviation aircraft. We are the only
manufacturer with the capability to fully integrate overhead passenger
service units with either chemical or gaseous oxygen equipment. Our oxygen
equipment has been approved for use on all Boeing and Airbus aircraft and is
also found on essentially all general aviation and VIP aircraft.
Engineered Interior Structures, Components and Assemblies
We are a leader in designing and manufacturing galley structures, crew rest
compartments and components. We estimate that as of February 23, 2002, we
had an installed base of such equipment, valued at replacement prices, of
approximately $1.1 billion.
Engineering Design, Integration, Installation and Certification Services. We
are a leader in providing engineering, design, integration, installation and
certification services for commercial aircraft passenger cabin interiors. We
also offer our customers in-house capabilities to design, project manage,
integrate, test and certify reconfigurations and modifications for
commercial aircraft and to manufacture related products, including
engineering kits and interface components. We provide a broad range of
interior reconfiguration services which allow airlines to change the size of
certain classes of service, modify and upgrade the seating, install
telecommunications or entertainment options, relocate galleys, lavatories
and overhead bins, and install crew rest compartments.
Crew Rest Compartments. We are the worldwide leader in the design,
certification and manufacture of crew rest compartments. Crew rest
compartments are utilized by the flight crew during long-haul international
flights. A crew rest compartment is constructed utilizing lightweight cabin
interior technology and incorporating electrical, heating, ventilation and
air conditioning and lavatory and sleep compartments.
Galley Structures. Galley structures are generally custom designed to
accommodate the unique product specifications and features required by a
particular carrier. Galley structures require intensive design and
engineering work and are among the most sophisticated and expensive of the
aircraft's cabin interior products. We provide a variety of galley
structures, closets and class dividers, emphasizing sophisticated and higher
value-added galleys for wide-body aircraft. We also manufacture lavatories
for commercial and freighter aircraft.
Aerospace Components and Assemblies. We are a leading manufacturer of
complex high quality machined and fabricated metal components, assemblies
and kits for aerospace and defense customers with demanding end-use
applications. Our major products consist of gears, gear boxes, pistons and
piston assemblies and standard hydraulic fittings. Additionally, we
fabricate structural components and related items of fuselage, wing and
payload sections including wing skin and fuel tank enclosure parts for
commercial aircraft. Through these manufacturing activities we also provide
our customers with significant engineering, materials and technical
expertise.
Passenger to Freighter Conversions. We are a leading supplier of structural
design and integration services, including airframe modifications for
passenger-to-freighter conversions. We are the leading provider of Boeing
767 passenger to freighter conversions and have performed conversions for
Boeing 747-200 Combi, Boeing 747-200 (door only) and Airbus A300 B4
aircraft. Freighter conversions require sophisticated engineering
capabilities and very large and complex proprietary parts kits.
Business Jet Products
We are the leading manufacturer of a broad product line including a complete
line of business jet seating products, direct and indirect lighting, air valves
and oxygen delivery systems as well as sidewalls, bulkheads, credenzas, closets,
galley structures, lavatories, tables and sofas. We have the capability to
provide complete interior packages, including all design services, all interior
components and program management services for executive aircraft interiors. We
are the preferred supplier of seating products and direct and indirect lighting
systems of essentially every general aviation airframe manufacturer. We estimate
that as of February 23, 2002 we had an aggregate installed base of such
equipment, valued at replacement prices, of approximately $1.4 billion.
Fastener Distribution
We entered the Fastener Distribution segment through the acquisition of M &
M in September 2001. We estimate that as of February 23, 2002 we had an
aggregate installed base of $800 million. Through M & M we offer one of the
broadest lines of fasteners and inventory management services worldwide.
Approximately 70% of fastener sales are to the aftermarket, and over 30% of
orders are shipped the same day that they are received. With over 100,000 Stock
Keeping Units ("SKUs") and next day service, we serve as a distributor for
almost every major aerospace fastener manufacturer. Our service offerings
include inventory replenishment and management, electronic data interchange,
special packaging and bar-coding, quality assurance testing and purchasing
assistance. Our seasoned purchasing and sales team, coupled with
state-of-the-art information technology and automated retrieval systems, provide
the basis for our reputation for high quality and rapid (overnight) delivery.
Research, Development and Engineering
We work closely with commercial airlines to improve existing products and
identify customers' emerging needs. Our expenditures in research, development
and engineering totaled $43.5 million, $48.9 million and $54.0 million for the
years ended February 23, 2002, February 24, 2001 and February 26, 2000,
respectively. We employed approximately 560 professionals in the engineering and
product development areas. We believe that we have the largest engineering
organization in the cabin interior products industry, with software, electronic,
electrical and mechanical design skills, as well as substantial expertise in
materials composition and custom cabin interior layout design and certification.
Marketing and Customers
We market and sell our commercial aircraft products directly to virtually
all of the world's major airlines and aircraft manufacturers. Airlines select
manufacturers of cabin interior products primarily on the basis of custom design
capabilities, product quality and performance, on-time delivery, after-sales
customer service, product support and price. We believe that our large installed
base, our timely responsiveness in connection with the custom design,
manufacture, delivery and after-sales customer service and product support of
our products and our broad product line and stringent customer and regulatory
requirements all present barriers to entry for potential new competitors in the
cabin interior products market.
We believe that airlines prefer our integrated worldwide marketing approach,
which is focused by airline and encompasses our entire product line. Led by a
senior executive, teams representing each product line serve designated airlines
that together accounted for almost 63% of the purchases of products manufactured
by our company during the fiscal year ended February 23, 2002. These airline
customer teams have developed customer-specific strategies to meet each
airline's product and service needs. We also staff "on-site" customer engineers
at major airlines and airframe manufacturers to represent our entire product
line and work closely with the customers to develop specifications for each
successive generation of products required by the airlines. These engineers help
customers integrate our wide range of cabin interior products and assist in
obtaining the applicable regulatory certification for each particular product or
cabin configuration. Through our on-site customer engineers, we expect to be
able to more efficiently design and integrate products which address the
requirements of our customers. We provide program management services,
integrating all on-board cabin interior equipment and systems, including
installation and Federal Aviation Administration certification, allowing
airlines to substantially reduce costs. We believe that we are one of the only
suppliers in the commercial aircraft cabin interior products industry with the
size, resources, breadth of product line and global product support capability
to operate in this manner.
We market our business jet products directly to all of the world's general
aviation airframe manufacturers, modification centers and operators. Business
jet owners typically rely upon the airframe manufacturers and completion centers
to coordinate the procurement and installation of their interiors. Business jet
owners select manufacturers of business jet products on a basis similar to that
for commercial aircraft interior products; customer design capabilities, product
quality and performance, on-time delivery, after-sales customer service, product
support and price. We believe that potential new competitors would face a number
of barriers to entering the cabin interior products market. Barriers to entry
include regulatory requirements, our large installed product base, our custom
design capability, manufacturing capability, delivery, and after-sales customer
service, product support and our broad product line.
We market our aerospace fasteners directly to the airlines, completion
centers, first tier suppliers to the airframe manufacturers, the airframe
manufacturers and other distributors. We believe that our key competitive
advantages are the breadth of our product offerings and our ability to deliver
on a timely basis. We believe that our broad product offerings of aerospace
fasteners and our ability to deliver products on a next day basis and our core
competencies in product information management, purchasing and logistics
management provide strong barriers to entry.
Our program management approach assigns a program manager to each
significant contract. The program manager is responsible for all aspects of the
specific contract, including managing change orders, negotiating related
non-recurring engineering charges, monitoring the progress of the contract
through its scheduled delivery dates and overall contract profitability. We
believe that our customers benefit substantially from our program management
approach, including better on-time delivery and higher service levels. We also
believe our program management approach results in better customer satisfaction
and higher profitability over the life of a contract.
As of February 23, 2002, our sales and marketing organization consisted of
274 persons, along with 25 independent sales representatives. Our sales to
non-U.S. customers were approximately $288 million for the fiscal year ended
February 23, 2002, $280 million for the fiscal year ended February 24, 2001 and
$311 million for the fiscal year ended February 26, 2000, or approximately 42%,
42% and 43%, respectively, of net sales during such periods. During fiscal 2002,
approximately 76% of our total revenues were derived from the airlines compared
with 86% in fiscal 2001. Approximately 63% of our revenues during fiscal 2002
and 60% of our revenues during fiscal 2001 were from refurbishment, spares and
upgrade programs. During the years ended February 23, 2002, February 24, 2001
and February 26, 2000, no single customer accounted for more than 10% of total
revenues. The portion of our revenues attributable to particular airlines varies
from year to year because of airlines' scheduled purchases of new aircraft and
for retrofit and refurbishment programs for their existing aircraft.
Backlog
We estimate that our backlog at February 23, 2002 was approximately $480.0
million, and $600.0 million on February 24, 2001. Of our backlog at February 23,
2002, approximately 59% is deliverable by the end of fiscal 2003; 64% of our
total backlog is with North American carriers, approximately 17% is with
European carriers and approximately 10% is with Asian carriers.
Customer Service
We believe that our customers place a high value on customer service and
product support and that such service is a critical factor in our industry. The
key elements of such service include:
o rapid response to requests for engineering designs, proposal requests
and technical specifications;
o flexibility with respect to customized features;
o on-time delivery;
o immediate availability of spare parts for a broad range of products; and
o prompt attention to customer problems, including on-site customer
training.
Customer service is particularly important to airlines due to the high cost
to the airlines of late delivery, malfunctions and other problems.
Warranty and Product Liability
We warrant our products, or specific components thereof, for periods ranging
from one to ten years, depending upon product type and component. We generally
establish reserves for product warranty expense on the basis of the ratio of
warranty costs incurred by the product over the warranty period to sales of the
product. Actual warranty costs reduce the warranty reserve as they are incurred.
We periodically review the adequacy of accrued product warranty reserves and
revisions of such reserves are recognized in the period in which such revisions
are determined.
We also carry product liability insurance. We believe that our insurance is
generally sufficient to cover product liability claims.
Competition
The commercial aircraft cabin interior products market is relatively
fragmented, with a number of competitors in each of the individual product
categories. Due to the global nature of the commercial industry, competition in
product categories comes from both U.S. and foreign manufacturers. However, as
aircraft cabin interiors have become increasingly sophisticated and technically
complex, airlines have demanded higher levels of engineering support and
customer service than many smaller cabin interior products suppliers can
provide. At the same time, airlines have recognized that cabin interior product
suppliers must be able to integrate a wide range of products, including
sophisticated electronic components, particularly in wide-body aircraft. We
believe that the airlines' increasing demands on their suppliers will result in
a consolidation of those suppliers that remain. We have participated in this
consolidation through strategic acquisitions and internal growth and we intend
to continue to participate in the consolidation.
Our principal competitors for seating products are Group Zodiac S.A. and
Keiper Recaro GmbH. Our primary competitors for interior systems products are
Britax PLC, JAMCO, Scott Aviation and Intertechnique. Our principal competitors
in the passenger-to-freighter conversion business include Boeing Airplane
Services, Elbe Flugzeugwerko GMBH, a division of EADS, Israel Aircraft
Industries, Pemco World Air Services and Aeronavili. Our principal competitors
for other product and service offerings in our engineered interior structures,
components and assemblies include TIMCO, JAMCO, Britax PLC, and Driessen
Aircraft Interior Systems. The market for business jet products is highly
fragmented, consisting of numerous competitors, the largest of which is Decrane
Aircraft Holdings. Our primary competitors in the fastener distribution market
are Honeywell Hardware Products Group, Wesco Aircraft Hardware, C.J. Fox and
Pentacon, Inc.
Manufacturing and Raw Materials
Our manufacturing operations consist of both the in-house manufacturing of
component parts and sub-assemblies and the assembly of our specified and
designed component parts that are purchased from outside vendors. We maintain
state-of-the-art facilities, and we have an ongoing strategic manufacturing
improvement plan utilizing lean manufacturing processes. We constantly strive
for continuous improvement from implementation of these plans for each of our
product lines. These activities should lower production costs, shorten cycle
times and reduce inventory requirements and at the same time improve product
quality, customer response and profitability.
Government Regulation
The Federal Aviation Administration prescribes standards and licensing
requirements for aircraft components, and licenses component repair stations
within the United States. Comparable agencies regulate such matters in other
countries. We hold several Federal Aviation Administration component
certificates and perform component repairs at a number of our U.S. facilities
under Federal Aviation Administration repair station licenses. We also hold an
approval issued by the UK Civil Aviation Authority to design, manufacture,
inspect and test aircraft seating products in Leighton Buzzard, England and in
Kilkeel, Northern Ireland. We also have the necessary approvals to design,
manufacture, inspect, test and repair our interior systems products in
Nieuwegein, Netherlands.
In March 1992, the Federal Aviation Administration adopted Technical
Standard Order C127, or TSO C127, requiring that all seats on certain new
generation commercial aircraft installed after such date be certified to meet a
number of new safety requirements, including the ability to withstand a 16G
force. We understand that the Federal Aviation Administration plans to adopt in
the near future additional regulations which will require that within the next
five years all seats, including those on existing older commercial aircraft
which are subject to the Federal Aviation Administration's jurisdiction, will
have to comply with similar seat safety requirements. We have developed 32
different seat models that meet these new seat safety regulations, have
successfully completed thousands of tests to comply with TSO C127 and, based on
our installed base of 16G seats, are the recognized industry leader in this
area.
Environmental Matters
Our operations are subject to extensive and changing federal, state and
foreign laws and regulations establishing health and environmental quality
standards, including those governing discharges and pollutants into the air and
water and the management and disposal of hazardous substances and wastes. We may
be subject to liability or penalties for violations of those standards. We are
also subject to laws and regulations, such as the Federal Superfund law and
similar state statutes, governing remediation of contamination at facilities
that we currently or formerly owned or operated or to which we send hazardous
substances or wastes for treatment, recycling or disposal. We believe that we
are currently in compliance, in all material respects, with all environmental
laws and regulations. However, we could become subject to future liabilities or
obligations as a result of new or more stringent interpretations of existing
laws and regulations. In addition, we may have liabilities or obligations in the
future if we discover any environmental contamination or liability relating to
our facilities or operations.
Patents
We currently hold 112 United States patents and 84 international patents,
covering a variety of products. We believe that the termination, expiration or
infringement of one or more of such patents would not have a material adverse
effect on our company.
Employees
As of February 23, 2002, we had approximately 4,100 employees. Approximately
66% of our employees are engaged in manufacturing, 14% in engineering, research
and development and 20% in sales, marketing, product support and general
administration. Unions represent approximately 13% of our worldwide employees. A
labor contract representing 250 U.S. employees expires on May 4, 2003. The labor
contract with the only other domestic union, which represents approximately 2%
of our employees, also runs through the year 2003. We consider our employee
relations to be good.
ITEM 2. PROPERTIES
As of February 23, 2002, we had 11 principal operating facilities,
comprising an aggregate of approximately 1.3 million square feet of space. The
following table describes the principal facilities and indicates the location,
function, approximate size and ownership status of each location.
Facility
Size
Segment Location Purpose (Sq. Feet) Ownership
- -------------------------------------- --------------------------------- ---------------- ------------ ---------------
Commercial Aircraft Products Winston-Salem, North Carolina... Manufacturing 264,800 Owned
- -------------------------------------- Leighton Buzzard, England....... Manufacturing 114,000 Owned
Kilkeel, Northern Ireland....... Manufacturing 100,500 Owned
Anaheim, California............. Manufacturing 98,000 Leased
Lenexa, Kansas.................. Manufacturing 80,000 Owned
Nieuwegein, The Netherlands..... Manufacturing 47,350 Leased
Arlington, Washington........... Manufacturing 110,000 Leased
Machined products, California... Manufacturing 150,800 Owned
- -------------------------------------- --------------------------------- ---------------- ------------ ---------------
Business Jet Products Miami, Florida.................. Manufacturing 110,000 Leased
- -------------------------------------- Holbrook, New York.............. Manufacturing 20,100 Leased
- -------------------------------------- --------------------------------- ---------------
Fastener Distribution Miami, Florida.................. Distribution 210,000 Owned
- -------------------------------------- --------------------------------- ---------------
Corporate Wellington, Florida............. Administrative 17,700 Owned
- -------------------------------------- --------------------------------- ------------ ---------------
------------
1,323,250
We believe that our facilities are suitable for their present intended
purposes and adequate for our present and anticipated level of operations.
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ITEM 3. LEGAL PROCEEDINGS
We are not a party to litigation or other legal proceedings that we believe
could reasonably be expected to have a material adverse effect on our company's
business, financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the last quarter of the fiscal year covered by this Form 10-K, we did
not submit any matters to a vote of security holders, through the solicitation
of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the Nasdaq National Market under the symbol
"BEAV." The following table sets forth, for the periods indicated, the range of
high and low per share sales prices for the common stock as reported by Nasdaq.
(Amounts in Dollars)
High Low
Fiscal Year Ended February 26, 2000
First Quarter $21.12 $13.50
Second Quarter 22.25 16.50
Third Quarter 18.19 5.75
Fourth Quarter 9.87 6.38
Fiscal Year Ended February 24, 2001
First Quarter 9.00 5.88
Second Quarter 16.38 6.38
Third Quarter 17.25 11.81
Fourth Quarter 23.94 13.06
Fiscal Year Ended February 23, 2002
First Quarter 25.88 17.69
Second Quarter 23.84 15.49
Third Quarter 18.19 3.50
Fourth Quarter 9.95 6.31
On May 16, 2001, as part of a 5.75 million share offering, we completed the
sale of approximately 2.8 million primary shares of common stock at $19.50 per
share. As described in "Overview" in Item 7, approximately 2.9 million shares of
our common stock were issued to the former owners of the four companies acquired
effective February 24, 2001. These shares were sold on behalf of the former
owners as part of the offering, for which they received approximately $53.1
million. We received approximately $50.3 million, net of estimated offering
costs, from the sale of the 2.8 million shares. Following this offering we had
approximately 32.1 million shares outstanding. On May 22, 2002 the closing price
of our common stock as reported by Nasdaq was $13.00 per share. As of such date,
we had 887 shareholders of record, and we estimate that there are approximately
15,300 beneficial owners of our common stock. We have not paid any cash
dividends in the past, and we have no present intention of doing so in the
immediate future. Our Board of Directors intends, for the foreseeable future, to
retain any earnings to reduce indebtedness and finance our future growth, but
expects to review our dividend policy regularly. The Indentures pursuant to
which our 8 7/8%, 8% and 9 1/2% Senior Subordinated Notes were issued, permit
the declaration of cash dividends only in certain circumstances described
therein.
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ITEM 6. SELECTED FINANCIAL DATA
(In millions, except per share data)
During fiscal 1999, we acquired Aerospace Interiors, Inc., Puritan-Bennett
Aero Systems Co., substantially all of the assets of Aircraft Modular Products,
Aerospace Lighting Corporation and SMR Aerospace, Inc., and its affiliates
("1999 Acquisitions"). Effective as of February 24, 2001, we acquired Alson
Industries, Inc., T.L. Windust Machine, Inc., Maynard Precision, Inc. and DMGI,
Inc. ("2001 Acquisitions"). During fiscal 2002, we acquired M&M Aerospace
Hardware, Inc., Nelson Aero Space, Inc. and Denton Jet Interiors, Inc. ("2002
Acquisitions"). Results for each of these acquisitions are included in our
operations in the financial data below since the date of acquisition. The
financial data as of and for the fiscal years ended February 23, 2002, February
24, 2001, February 26, 2000, February 27, 1999 and February 28, 1998 have been
derived from financial statements which have been audited by our independent
auditors. The following financial information is qualified by reference to, and
should be read in conjunction with, our historical financial statements,
including notes thereto, which are included elsewhere in this Form 10-K.
Year Ended
-----------------------------------------------------------------
Feb. 23, Feb. 24, Feb. 26, Feb. 27, Feb. 28,
2002(a)(b) 2001(c) 2000(d) 1999(e) 1998(f)
-------- ------ ------ ------ ------
Statements of Operations Data:
Net sales.................................... $ 680.5 $666.4 $723.3 $701.3 $488.0
Cost of sales................................ 530.1 416.6 543.6 522.9 309.1
-------- ------ ------ ------ ------
Gross profit................................. 150.4 249.8 179.7 178.4 178.9
Operating expenses:
Selling, general and administrative........ 114.4 100.8 94.9 83.6 58.6
Research, development and engineering...... 43.5 48.9 54.0 56.2 45.7
Amortization............................... 25.0 23.4 24.1 22.5 11.2
Transaction gain, expenses and other expenses - - - 53.9 4.7
-------- ------ ------ ------ ------
Operating earnings (loss).................... (32.5) 76.7 6.7 (37.8) 58.7
Equity in losses of unconsolidated subsidiary - - 1.3 - -
Interest expense, net........................ 60.5 54.2 52.9 41.7 22.8
-------- ------ ------ ------ ------
Earnings (loss) before income taxes and
extraordinary item......................... (93.0) 22.5 (47.5) (79.5) 35.9
Income taxes ................................ 1.8 2.2 3.3 3.9 5.4
-------- ------ ------ ------ ------
Earnings (loss) before extraordinary item ... (94.8) 20.3 (50.8) (83.4) 30.5
Extraordinary item........................... 9.3 - - - 8.9
-------- ------ ------ ------ ------
Net earnings (loss)................... ..... $ (104.1) $ 20.3 $(50.8) $(83.4) $ 21.6
======== ====== ====== ====== ======
Basic earnings (loss) per share:
Earnings (loss) before extraordinary item.... $ (2.90) $ 0.80 $(2.05) $(3.36) $ 1.36
Extraordinary item........................... (0.28) - - - $(0.40)
-------- ------ ------ ------ -------
Net earnings (loss).......................... $ (3.18) $ 0.80 $(2.05) $(3.36) $ 0.96
======== ====== ====== ====== ======
Weighted average common shares............... 32.7 25.4 24.8 24.8 22.4
Diluted earnings (loss) per share:
Earnings (loss) before extraordinary item.... $ (2.90) $ 0.78 $(2.05) $(3.36) $ 1.30 (f)
Extraordinary item........................... (0.28) - - - $(0.38)
-------- ------ ------ ------ ------
Net earnings (loss).......................... $ (3.18) $ 0.78 $(2.05) $(3.36) $ 0.92
======== ====== ====== ====== ======
Weighted average common shares............... 32.7 25.9 24.8 24.8 23.4
Balance Sheet Data (end of period):
Working capital.............................. $ 304.8 $174.9 $129.9 $143.4 $262.5
Intangible and other assets, net ............ 529.2 433.4 425.8 452.0 195.7
Total assets................................. 1,128.3 936.0 881.8 904.3 681.8
Long-term debt............................... 853.5 603.8 618.2 583.7 349.6
Stockholders' equity......................... 121.1 135.3 64.5 115.9 196.8
SELECTED FINANCIAL DATA (continued)
Footnotes to Table
(a) In response to the terrorist attacks on September 11, 2001 and the
resulting impact on the airline industry during the third quarter of
fiscal 2002, we adopted and began to implement a facility consolidation
plan designed to re-align our capacity and cost structure consistent
with changed conditions in the airline industry. This plan includes
closing five facilities, reducing the number of principal production
facilities from 16 to 11, and reducing our workforce by approximately
1,000 employees. The estimated cost of this facility consolidation plan
is expected to be approximately $98.9, of which the cash portion of
$15.6 is primarily related to involuntary severance programs, lease
termination costs and preparing facilities for disposal and sale; $62.9
is related to write-downs of property, plant and equipment, inventory
and other assets; and $20.4 is related to the impairment of certain
intangible assets rendered useless as a result of industry conditions
and facility consolidation. The charge has been included as a component
of cost of sales for the year ended February 23, 2002. We also incurred
approximately $5.7 of transition costs related to this plan during our
third and fourth quarters which have been included as a component of
cost of sales.
(b) In fiscal 2002, we incurred an extraordinary charge of $9.3 (net of tax)
for unamortized debt issue costs, redemption premiums and expenses
related to the early retirement of our 9 7/8% Senior Subordinated Notes
due February 1, 2006. Excluding such charge and the costs described in
(a) above, our operating earnings and net earnings were $72.1 and $9.8,
respectively.
(c) Our operating results during fiscal 2001 were negatively impacted by
costs related to recently completed acquisitions and the termination of
a proposed initial public offering by our subsidiary Advanced Thermal
Sciences. These items reduced our net earnings by $8.3. Excluding such
costs for the year ended February 24, 2001, our operating earnings were
$85.0 and net earnings were $27.7.
(d) Our operating results during fiscal 2000 were negatively impacted due to
operational problems in our seating operations. These problems, which
have since been resolved, arose due to a misalignment between our
manufacturing processes, our newly installed Enterprise Resource
Planning, or ERP, system and our product and service line
rationalization. The aggregate impact of these problems on our results
for the year ended February 26, 2000 was $94.4. Substantially all of
these costs have been included as a component of cost of sales.
Excluding such costs and charges for the year ended February 26, 2000,
our gross profit was $263.3, our gross margin was 36.4%, our operating
earnings were $101.1 and our net earnings were $40.6.
(e) As a result of acquisitions in 1999, we recorded a charge of $79.2 for
the write-off of acquired in-process research and development and
acquisition-related expenses. We also sold a 51% interest in our
in-flight entertainment business, as a result of which we recorded a
gain of $25.3. Transaction gain, expenses and other expenses for the
year ended February 27, 1999 consist of the in-process research and
development and other acquisition expenses, offset by the gain
attributable to the sale of our in-flight entertainment business. During
fiscal 1999, we implemented a restructuring plan. In connection
therewith we closed 7 plants and reduced our workforce by approximately
1,000 positions. As a result, we incurred $87.8 of cost which included
both the restructuring referred to above, the rationalization of related
product lines and the introduction of new products. Excluding such costs
and expenses and the gain attributable to the sale, our gross profit was
$266.3, our operating earnings were $103.9 and our net earnings were
$51.6.
(f) In fiscal 1998, we settled a long-running dispute with the U.S.
Government over export sales made to Iran Air between 1992 and 1995. We
recorded a charge of $4.7 in fiscal 1998 related to fines, civil
penalties and associated legal fees arising from the settlement. We
incurred an extraordinary charge of $9.0 during fiscal 1998 for
unamortized debt issue costs, tender and redemption premiums and fees
and expenses related to the repurchase of our 9 3/4 % Senior Notes due
2003.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Dollars in millions, except per share amounts)
INTRODUCTION
Management's discussion and analysis of results of operations and financial
condition ("MD&A") is provided as a supplement to the accompanying consolidated
financial statements and footnotes to help provide an understanding of our
financial condition, changes in financial condition and results of operations.
The MD&A is organized as follows:
Overview. This section provides a general description of our company's
businesses, as well as recent significant transactions that have either
occurred during 2001 or early 2002 that we believe are important in
understanding the results of operations and anticipating future trends in
those operations.
Results of Operations. This section provides an analysis of our results of
operations for all three years presented in the accompanying consolidated
statements of operations. In addition, we provide a brief description of
transactions and events that impact the comparability of the results being
analyzed.
Liquidity and Capital Resources. This section provides an analysis of our
cash flows, as well as a discussion of outstanding debt and commitments,
both firm and contingent, that existed as of February 23, 2002. Included is
a discussion of the amount of financial capacity available to fund future
commitments, as well as a discussion of other financing arrangements.
New Accounting Pronouncements. This section describes significant new
accounting pronouncements and the timing of their adoption and estimated
impact, if known, to the financial statements.
Critical Accounting Policies. This section discusses those accounting
policies that both are considered important to our financial condition and
results, and require significant judgment and estimates on the part of
management in their application. In addition, all of our significant
accounting policies, including the critical accounting policies, are
summarized in Note 1 to the accompanying consolidated financial statements.
Risk Factors and Forward-looking Statements. These sections discuss
important risk factors and how certain of our forward-looking statements
throughout MD&A are based on management's present expectations about future
events and are inherently susceptible to uncertainty and changes in
circumstances.
OVERVIEW
We are the world's largest manufacturer of cabin interior products for
commercial aircraft and for business jets. We are also a leader in the
distribution of aftermarket fasteners. We serve virtually all major airlines and
a wide variety of business jet customers and airframe manufacturers. We believe
that we have achieved leading global market positions in each of our major
product categories, which include:
o commercial aircraft seats, including an extensive line of first class,
business class, tourist class and regional aircraft seats;
o a full line of aircraft food and beverage preparation and storage
equipment, including coffeemakers, water boilers, beverage containers,
refrigerators, freezers, chillers and ovens;
o both chemical and gaseous aircraft oxygen delivery systems;
o business jet and general aviation interior products, including an
extensive line of executive aircraft seats, indirect overhead lighting
systems, oxygen, safety and air valve products; and
o a broad line of aftermarket fasteners, covering over 100,000 SKUs.
We design, develop and manufacture a broad range of cabin interior
structures such as galleys and crew rests, and provide comprehensive aircraft
cabin interior reconfiguration and passenger-to-freighter conversion engineering
services and component kits.
We generally derive our revenues from two primary sources: refurbishment or
upgrade programs for the existing worldwide fleets of commercial and general
aviation aircraft and new aircraft deliveries. We believe our large installed
base of products, estimated to be approximately $6.6 billion as of February 23,
2002 (valued at replacement prices), gives us a significant advantage over our
competitors in obtaining orders both for spare parts and for refurbishment
programs, principally due to the tendency of the airlines to purchase equipment
for such programs from the original supplier.
We have substantially expanded the size, scope and nature of our business
through a number of acquisitions. Since 1989, we have completed 22 acquisitions,
including four during fiscal 2001, and three during fiscal 2002 for an aggregate
purchase price of approximately $971.0 in order to position ourselves as the
preferred global supplier to our customers.
During the period from 1989 to 1996, we acquired nine commercial aircraft
cabin interior products manufacturers for approximately $290.0. Through these
acquisitions we built worldwide market leadership positions and became the
number one manufacturer for a large number of product offerings. At the same
time, we rationalized our businesses and began re-engineering our operations. We
integrated the acquisitions by eliminating 11 operating facilities and
consolidating personnel at the acquired businesses, resulting in headcount
reductions of approximately 1,300 employees through January 1998.
During fiscal 1999 we completed six acquisitions for approximately $387.0.
Through these acquisitions we extended our product offerings into oxygen systems
and we entered three new markets. These markets include the structural
reconfiguration of passenger cabins, the conversion of passenger aircraft to
freighters and the business jet cabin interiors market. During the fourth
quarter of fiscal 1999, we launched a series of initiatives directed towards
expanding our profit margins by consolidating these operations, improving
productivity, reducing costs and inventory levels and speeding production of
finished products. These actions included eliminating seven principal
facilities, reducing our employment base by over 1,000 employees during fiscal
2000 and rationalizing our product offerings. The plan also included initiatives
to install company-wide information technology and engineering design systems
and implement lean manufacturing techniques in our remaining factories. We
recognized a charge in the fourth quarter of fiscal 1999 of $87.8 to provide for
the entire amount of the restructuring, along with costs associated with new
product introductions, all of which was charged to cost of sales.
During fiscal 2000, we restructured our seating products operations and
decided to discontinue certain product and service offerings. This product line
rationalization eliminated two additional facilities. It also resulted in a
headcount reduction of approximately 700. The total cost of this product and
service line rationalization was approximately $34.3.
Effective February 24, 2001 we completed the acquisition of four companies
that specialize in manufacturing precision-machined components and assemblies
for the aerospace industry. We acquired these businesses, Alson Industries,
Inc., T.L. Windust Machine, Inc. DMGI, Inc. and Maynard Precision, Inc., for an
aggregate purchase price of approximately $70.1.
In May 2001, we acquired the outstanding common stock of Nelson Aero Space,
Inc. for a cash consideration of approximately $20.0. In July 2001, we acquired
the outstanding common stock of Denton Jet Interiors, Inc. for approximately
$16.0.
On September 14, 2001, we acquired M & M for a purchase price of $184.7. M &
M is a leading distributor of aerospace fasteners. The M & M acquisition was
completed by issuing to the former shareholders a total of approximately 1.9
million shares of our stock, paying them $152.0 in cash and assuming current
liabilities of approximately $8.8. We financed this acquisition through cash on
hand and approximately $100.0 of borrowings under our bank credit facility.
The rapid decline in industry conditions brought about by the terrorist
attacks on September 11, 2001 caused us to implement a facility consolidation
plan designed to re-align our capacity and cost structure with changed
conditions in the airline industry. The facility consolidation plan includes
closing five facilities and reducing workforce by approximately 1,000 employees.
We recognized a charge of $98.9 to provide for the total cost of the facility
consolidation plan, all of which has been included in cost of sales for the year
ended February 23, 2002.
All of the aforementioned initiatives to integrate, rationalize and
restructure the businesses acquired through fiscal 2002 had an aggregate cost of
approximately $285.3 and have already been expensed. These initiatives enabled
us to eliminate 22 facilities and reduce headcount by over 4,000 employees. We
believe these initiatives will enable us to substantially expand profit margins,
strengthen the global business management focus on our core product categories,
more effectively leveraging our resources and improve our ability to rapidly
react to changing business conditions. In conjunction with these efforts, we
have also implemented a company-wide information technology system, a
company-wide engineering system and initiated lean manufacturing techniques in
our remaining facilities. Common management information and engineering systems
and lean manufacturing processes across all operations, coupled with a
rationalized product offering, are expected to provide us with the ongoing
benefit of a generally lower cost structure, and expanding gross and operating
margins.
New product development is a strategic tool for our company. Our customers
regularly request that we engage in new product development and enhancement
activities. We believe that these activities, if properly focused and managed,
will protect and enhance our leadership position. Research, development and
engineering spending have been approximately 6-7% of sales for the past several
years, and is expected to remain at that level for the foreseeable future.
We also believe in providing our businesses with the tools required to
remain competitive. In that regard, we have, and will continue to invest in
property and equipment that enhances our productivity. Over the past two years,
annual capital expenditures were approximately $13.0-19.0. Taking into
consideration our recent capital expenditure investments, current industry
conditions and the recent acquisitions, we expect that annual capital
expenditures will be approximately $15.0-19.0 for the next few years.
All dollar amounts in the following discussion and analysis are presented in
millions of dollars, except per share amounts.
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RESULTS OF OPERATIONS
Year Ended February 23, 2002 Compared with Year Ended February 24, 2001
Impact of Terrorist Attacks on Our Business
The rapid decline in industry conditions brought about by the terrorist
attacks on September 11, 2001 caused us to develop and implement a facility
consolidation plan designed to re-align our capacity and cost structure with
changed conditions in the airline industry. The facility consolidation plan
includes closing five facilities and reducing workforce by approximately 1,000
employees. We recognized a charge of $98.9, of which the cash portion of $15.6
is primarily related to severance programs, lease termination costs and
preparing facilities for disposal and sale; $62.9 is related to write-downs of
inventory, property, plant and equipment; and $20.4 is related to the impairment
of certain intangible assets as a result of industry conditions and facility
consolidation. In addition, during the fourth quarter, we incurred approximately
$4.7 of transition costs associated with the facilities and personnel
consolidation program. The charge and transition costs have been included in
cost of sales for the year ended February 23, 2002.
Consolidated Results
Revenues were negatively impacted by the severe change in industry
conditions following the terrorist attacks on September 11, 2001. Net sales for
fiscal 2002 were $680.5, which is $14.1 or 2.1% greater than net sales of $666.4
for the comparable period in the prior year. However, excluding revenues from
acquisitions, revenues declined by approximately 12.9%.
Sales for each of our segments, as calculated to include and exclude
acquisitions completed in fiscal 2002 are set forth in the following table:
FY 2002 Change
Excluding Excluding
FY 2002 Acquisitions FY 2001 Change Acquisitions
--------------- ----------------- ------------- ------------- -----------------
Commercial Aircraft Products $550.6 $497.6 $580.3 $(29.7) $(82.7)
Business Jet Products 85.6 82.6 86.1 (.5) (3.5)
Fastener Distribution 44.3 - - 44.3 -
--------------- ----------------- ------------- ------------- -----------------
$680.5 $580.2 $666.4 $ 14.1 $(86.2)
Sales of commercial aircraft products were $82.7 or 14.3% lower than sales
in the prior year on a comparable basis, due to the recession in the airline
industry and the further downturn in industry conditions following September 11,
2001.
Gross profit was $255.0, or 37.5% of net sales for fiscal 2002, excluding
facility consolidation expenses of $104.6, as compared to $249.8 or 37.5% of net
sales in the comparable period in the prior year. The decline in the gross
margin before such costs was primarily due to the lower revenue levels along
with the mix of products sold, including the impact of a lower spares sales
immediately following the September 11 terrorist attacks.
Selling, general and administrative expenses were $114.4 or 16.8% of net
sales for fiscal 2002 as compared to $100.8 or 15.1% of net sales in fiscal
2001. The $13.6 year over year increase in selling, general and administrative
expenses resulted from $13.0 of such costs related to recent acquisitions.
Included in selling, general and administrative expenses for fiscal 2002 and
2001 were approximately $6.8 and $8.3, respectively, of costs related to
acquisitions we completed during each respective fiscal year.
Research, development and engineering expenses were $43.5 or 6.4% of net
sales for fiscal 2002, as compared with $48.9 or 7.3% of sales in fiscal 2001.
The year over year decrease in research, development and engineering expenses is
primarily attributable to the timing of customer programs along with austerity
measures we implemented subsequent to the September 11 terrorist attacks.
Amortization expense for fiscal 2002 was $25.0 as compared to $23.4 in the
prior year. The year over year increase in amortization expense is due to recent
acquisitions. We are assessing the impact of SFAS 142 on our financial position
and results of operations and we currently believe the recurring impact will be
to reduce amortization expense by approximately $15.0 annually, commencing in
our fiscal 2003.
We generated operating earnings of $78.9 or 11.6% of net sales for fiscal
2002, excluding facility consolidation and related expenses of $111.4. This was
$6.1 or 7.2% lower than operating earnings of $85.0 or 12.8% of net sales during
the comparable period in the prior year. The decrease in operating earnings in
the current period is primarily attributable to the lower level of revenues from
our businesses following the terrorist attacks on September 11, 2001.
Interest expense, net was $60.5 for fiscal 2002, or $6.3 greater than
interest expense of $54.2 for the prior year. The increase in interest expense
is due to the larger amount of outstanding debt created by the refinancing of
certain indebtedness during fiscal 2002 along with the impact of recent
acquisitions.
Earnings before facility consolidation and acquisition-related expenses,
income taxes, and extraordinary item in fiscal 2002 were $18.4, which was $12.4
or 40.3% lower than pretax earnings in the prior year of $30.8. The lower level
of revenues and facility consolidation costs during fiscal 2002 resulted in a
loss before income taxes and extraordinary item of $(93.0) or $(115.5) less than
pretax earnings in the prior year of $22.5.
Income tax expense for fiscal 2002 was $1.8 as compared to $2.2 in the prior
year. The company recorded a $9.3 extraordinary item during fiscal 2002 related
to the early extinguishment of certain long term debt.
Net (loss) earnings were $(104.1) or $(3.18) per share (diluted) for fiscal
2002, as compared to net earnings of $20.3 or $0.78 per share (diluted) for the
prior year.
Year Ended February 24, 2001 Compared with Year Ended February 26, 2000
Net sales for fiscal 2001 were $666.4, a decrease of $56.9, or 7.9% as
compared to the prior year. The year over year decrease in sales is primarily
attributable to lower shipments of seating products and galley structures, as
well as decisions made in the prior year to discontinue certain low-margin
products and services. The decreased sales of seating and galley structures are
consistent with the 11% reduction in new aircraft deliveries in calendar 2000 as
compared to calendar 1999, and also reflect last year's problems in our seating
business, which have since been resolved.
Improved gross and operating profit margins were key contributors to B/E's
improved financial performance for fiscal 2001 compared to fiscal 2000. Gross
profit was $249.8 (37.5% of net sales) for fiscal 2001. Gross profit was $70.1
higher than fiscal 2000 gross profit of $179.7 (24.8% of net sales), reflecting
a gross margin improvement of 1,270 basis points compared to fiscal 2000. The
previous year's gross margin was adversely impacted by manufacturing problems in
our seating operations. The gross margin improvement was due to two principal
factors: the turnaround in our seating business and the success of our
continuous improvement initiatives. Aided by our information technology
investments, these initiatives are enabling us to substantially improve both
quality and productivity and reduce costs, particularly in our manufacturing
operations.
Selling, general and administrative expenses were $100.8 (15.1% of net
sales) for fiscal 2001, which was $5.9 greater than the prior-year amount of
$94.9 (13.1% of net sales).
Research, development and engineering expenses were $48.9 (7.3% of net
sales) for fiscal 2001, a decrease of $5.1 compared to $54.0 (7.5% of net sales)
for the previous year. The decrease is primarily due to substantially lower
spending in our seating and galley operations.
Amortization expense for fiscal 2001 was $23.4 (3.5% of net sales) as
compared to $24.1 (3.3% of net sales) in the prior year.
Operating earnings, excluding acquisition-related expenses and IPO costs,
were $85.0 (12.8% of net sales) for fiscal 2001, excluding $8.3 of costs related
to the four recent acquisitions and the termination of Advanced Thermal
Sciences' (a wholly-owned subsidiary) initial public offering. Including such
costs, operating earnings were $76.7 (11.5% of net sales) during fiscal 2001, as
compared to $6.7 (0.9% of net sales) in the prior year.
Interest expense, net was $54.2 during fiscal 2001, or $1.3 greater than
interest expense of $52.9 for the prior year. The increase is primarily due to
higher interest rates on the company's bank borrowings.
Earnings before income taxes during fiscal 2001 were $30.8 excluding the
acquisition-related and IPO costs. Including such costs, earnings before income
taxes were $22.5 for fiscal 2001 compared to a loss of $(47.5) in the previous
year.
Income tax expense for fiscal 2001 was $2.2 as compared to $3.3 in the prior
year.
B/E's net earnings for fiscal 2001 were $27.7, excluding the
acquisition-related and IPO costs. Including such costs, net earnings were
$20.3, or $0.80 per share (basic) and $0.78 (diluted), as compared to a net loss
of $(50.8) or $(2.05) per share (basic and diluted) in the previous year.
LIQUIDITY AND CAPITAL RESOURCES
Current Financial Condition
Our liquidity requirements consist of working capital needs, ongoing capital
expenditures and payments of interest and principal on our indebtedness. Our
primary requirements for working capital are directly related to the level of
our operations; working capital, primarily accounts receivable and inventories,
fluctuate with the demand for our product. Our working capital was $304.8 as of
February 23, 2002, as compared to $174.9 as of February 24, 2001.
At February 23, 2002, our cash and cash equivalents were $159.5, as compared
to $60.3 at February 24, 2001. This increase in cash, in part, is attributable
to borrowings outstanding on our bank line of credit and the timing of our
semi-annual interest payments on our subordinated debt coupled with an
aggressive working capital management program. During our fourth quarter,
accounts receivable decreased by approximately $10.0.
We hold a promissory note from Thomson -- CSF Holding Corporation, a
subsidiary of The Thales Group (a publicly traded French company with over $9
billion in sales). We are currently involved in a dispute with Thales over
certain terms of the purchase and sale agreement. Thomson -- CSF Holding
Corporation failed to make payments on the promissory notes when due, and in
December 2000 we initiated arbitration proceedings against Thales and its parent
Thomson. These obligations to us are guaranteed by Thomson -- CSF Sextant, Inc.
The arbitration against Thales and Thomson is expected to be resolved during
fiscal 2003.
Cash Flows
Cash provided from operating activities was $57.9 for fiscal 2002 and $57.9
for fiscal 2001. The primary source of cash during fiscal 2002 was a net loss of
$104.1 offset by non-cash facility consolidation charges of $83.3, charges for
depreciation and amortization of $46.8, an extraordinary item of $9.3, other
non-cash expenses of $2.6, a decrease in accounts receivable of $19.7, a
decrease in inventories and other current assets of $35.2. These sources of cash
were partly offset by cash used to reduce payables and accruals of $36.8.
In connection with financing activities, we raised approximately $356.0
through a series of capital market transactions. In April 2001 we sold $250.0 of
8 7/8% senior subordinated notes and completed a $106.0 common stock offering at
$19.50 per share (about half of the proceeds were from the sale of shares issued
by the company, the other half were shares we registered on behalf of selling
shareholders in fiscal 2001 acquisitions, which we completed as of February 24,
2001). We also established a new $150.0 line of credit during the year. Net of
underwriting discounts and related costs, these transactions generated
approximately $450.0 of cash for the company.
We used approximately $171.7 of the subordinated notes proceeds to repay
debt; we used $105.0 to retire some higher priced (9 7/8%) senior subordinated
notes and we used another $66.7 to repay our then-outstanding balance under our
line of credit.
We used approximately $188.0 of the proceeds to complete several
acquisitions during the year; we acquired Nelson Aero Space for approximately
$20.0 in cash, we acquired Denton Jet Interiors for approximately $16.0 in cash
and we acquired M&M Aerospace for approximately $184.7, the cash portion of
which was $152.0. The balance of the proceeds from our financing activities is
included in our cash balances at February 23, 2002.
Capital Spending
Our capital expenditures were $13.9 and $17.2 during fiscal 2002 and fiscal
2001, respectively. The year over year decrease in capital expenditures is
primarily attributable to recently implemented austerity measures along with a
reduction in spending for management information system enhancements and plant
modernization. We anticipate ongoing annual capital expenditures of
approximately $15.0-$19.0 for the next several years. We have no material
commitments for capital expenditures. We have, in the past, generally funded our
capital expenditures from cash from operations and funds available to us under
our bank credit facility. We expect to fund future capital expenditures from
cash on hand and from operations and from funds available to us under our bank
credit facility. In addition, since 1989, we have completed 22 acquisitions for
an aggregate purchase price of approximately $971.0. We have financed these
acquisitions primarily through issuances of debt and equity securities,
including our 8 7/8%, 8% and 9 1/2% senior subordinated notes.
Outstanding Debt and Other Financing Arrangements
In August 2001, we established a new bank credit facility consisting of a
$150.0 revolving credit facility which expires in August 2006. The bank credit
facility is collateralized by our accounts receivable, inventories and by
substantially all of our other personal property. At February 23, 2002,
indebtedness under the existing bank credit facility consisted of revolving
credit facility outstanding borrowings of $145.0 (bearing interest at LIBOR plus
2.5%) and letters of credit aggregating approximately $4.7 (bearing interest at
LIBOR plus 2.5%, as defined). The bank credit facility, which requires no
principal payments until 2006, contains customary affirmative covenants,
negative covenants and conditions of borrowing, all of which were met as of
February 23, 2002. The interest rate margin on the bank credit facility may
increase in the event of certain changes to our financial leverage ratios.
In connection with a recapitalization of the company in April 2001, the
company issued $250.0 of 8 7/8% Senior Subordinated Notes due 2011, pursuant to
an Indenture dated April 17, 2001, between the company and the Bank of New York,
as trustee, and sold the notes to Merrill Lynch & Co., Credit Suisse First
Boston, JP Morgan, CIBC World Markets and First Union Securities, Inc. On July
27, 2001, the company exchanged the outstanding 8 7/8% Senior Subordinated Notes
due 2011 with an aggregate value of $250.0 principal amount for 8 7/8% Senior
Subordinated Notes due 2011, Series B, registered under the Securities Act of
1933.
Long-term debt consists principally of our newly issued 8 7/8% senior
subordinated notes, 9 1/2% senior subordinated notes and 8% senior subordinated
notes. The $250.0 of 8% notes mature on March 1, 2008, the $200.0 of 9 1/2%
notes mature on November 1, 2008 and the $250.0 of 8 7/8% notes mature on May 1,
2011. The notes are unsecured senior subordinated obligations and are
subordinated to all of our senior indebtedness. Each of the 8% notes, 8 7/8%
notes and 9 1/2% notes contain restrictive covenants, including limitations on
future indebtedness, restricted payments, transactions with affiliates, liens,
dividends, mergers and transfers of assets, all of which were met by us as of
February 23, 2002. A breach of such covenants, or the covenants under our bank
credit facility, that continues beyond any grace period can constitute a
default, which can limit the ability to borrow and can give rise to a right of
the lenders to terminate the applicable facility and/or require immediate
repayment of any outstanding debt.
Contractual and Other Obligations
The following charts reflect our contractual obligations and commercial cash
commitments as of February 23, 2002. Commercial commitments include lines of
credit, guarantees and other potential cash outflows resulting from a contingent
event that requires performance by us or our subsidiaries pursuant to a funding
commitment.
Contractual Obligations Total 2003 2004 2005 2006 2007 Thereafter
-------------- ------------- ----------- ----------- ----------- ------------ --------------
Long-term debt $854.8 $ 1.3 $ 4.3 $0.6 $ 0.1 $148.8 $699.7
Operating leases 31.3 8.9 6.6 4.0 3.2 2.6 6.0
Capital lease obligations 0.2 0.2 - - - - -
------ ----- ----- ---- ----- ------ ------
Total $886.3 $10.4 $10.9 $4.6 $ 3.3 $151.4 $705.7
====== ===== ===== ==== ===== ====== ======
Commercial Commitments
Letters of Credit $ 4.7 $ 4.7 - - - - -
We believe that the cash flow from operations which provides us with our
ability to fund our operations, make planned capital expenditures, make
scheduled payments and refinance our indebtedness depends on our future
operating performance, which, in turn, are subject to prevailing economic
conditions and to financial, business and other factors, some of which are
beyond our control.
The September 11, 2001 terrorist attacks have severely impacted conditions
in the airline industry. Accordingly, the airlines are seeking to conserve cash
in part by deferring or eliminating cabin interior refurbishment programs and
cancelling or deferring aircraft purchases. This has caused a substantial
contraction in our business, the extent and duration of which cannot be
determined at this time. See "Dependence on Conditions in the Airline Industry."
Deferred Tax Assets
We established a valuation allowance related to the utilization of our
deferred tax assets because of uncertainties that preclude us from determining
that it is more likely than not that it will be able to generate taxable income
to realize such assets during the federal operating loss carryforward period,
which begins to expire in 2012. Such uncertainties include recent cumulative
losses, the highly cyclical nature of the industry in which we operate, risks
associated with our facility consolidation plan, our high degree of financial
leverage, risks associated with new product introductions, recent increases in
the cost of fuel and its impact on our airline customers, and risks associated
with the integration of acquired businesses. We monitor these uncertainties, as
well as other positive and negative factors that may arise in the future, as we
assess the necessity for a valuation allowance for our deferred tax assets.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations." SFAS 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The company has adopted SFAS 141 and applied its
new purchase accounting requirements to the acquisition of M & M Aerospace.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." We are required to
adopt SFAS 142 for our fiscal year beginning February 24, 2002. SFAS 142
requires, among other things, the discontinuance of goodwill amortization. In
addition, the standard includes provisions for the reclassification of certain
existing recognized intangibles as goodwill, reassessment of the useful lives of
existing recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill. SFAS 142 also
requires us to complete a transitional goodwill impairment test six months from
the date of adoption.
We are assessing but have not yet determined the impact of fully adopting
SFAS 142 on our financial position and results of operations. We currently
believe the recurring impact will be to reduce amortization expense by
approximately $15.0 annually, commencing in fiscal 2003.
In June 2001, the FASB issued SFAS No. 143, Accounting for Retirement
Obligations. SFAS 143 establishes accounting standards for the recognition and
measurement of an asset retirement obligation and its associated asset
retirement cost. It also provides accounting guidance for legal obligations
associated with the retirement of tangible long-lived assets. SFAS 143 is
effective for fiscal years beginning after June 15, 2002, with early adoption
permitted. The company is currently evaluating the provisions of SFAS 143 but
expects that the provisions of SFAS 143 will not have a material impact on its
consolidated results of operations and financial position upon adoption.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses the financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of" and will be effective
on February 24, 2002. We are assessing the impact, if any, SFAS No. 144 will
have on our consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities at the date of our financial statements. Actual results may
differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. We believe that
our critical accounting policies are limited to those described below. For a
detailed discussion on the application of these and other accounting policies,
see Note 1 in the notes to the consolidated financial statements.
Revenue Recognition
Sales of products are recorded on the date of shipment and passage of title,
or if required, upon acceptance by the customer. Service revenues are recorded
when services are performed. Revenues and costs under certain long-term
contracts are recognized using contract accounting under the
percentage-of-completion method. The company sells its products primarily to
airlines and aircraft manufacturers worldwide, including occasional sales
collateralized by letters of credit. The company performs ongoing credit
evaluations of its customers and maintains reserves for estimated credit losses.
Actual losses have been within management's expectations.
We apply judgment to ensure that the criteria for recognizing sales are
consistently applied and achieved for all recognized sales transactions.
Accounts Receivable
We perform ongoing credit evaluations of our customers and adjust credit
limits based upon payment history and the customer's current credit worthiness,
as determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain a provision for
estimated credit losses based upon our historical experience and any specific
customer collection issues that we have identified. While such credit losses
have historically been within our expectations and the provisions established,
we cannot guarantee that we will continue to experience the same credit loss
rates that we have in the past.
Inventories
We value our inventory at the lower of cost or market. We regularly review
inventory quantities on hand and record a provision for excess and obsolete
inventory based primarily on our estimated forecast of product demand and
production requirements. As demonstrated during fiscal 2002, demand for our
products can fluctuate significantly. Our estimates of future product demand may
prove to be inaccurate, in which case we may have understated or overstated the
provision required for excess and obsolete inventory. In the future, if our
inventory is determined to be overvalued, we would be required to recognize such
costs in our cost of goods sold at the time of such determination. Likewise, if
our inventory is determined to be undervalued, we may have over-reported our
costs of goods sold in previous periods and would be required to recognize such
additional operating income at the time of sale.
Long-Lived Assets (including Tangible and Intangible Assets and Goodwill)
To conduct our global business operations and execute our strategy, we
acquire tangible and intangible assets. We periodically evaluate the
recoverability of the carrying amount of our long-lived assets (including
property, plant and equipment, goodwill and other intangible assets) whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be fully recoverable. An impairment is assessed when the undiscounted
expected future cash flows derived from an asset are less than its carrying
amount. Impairments are recognized in operating earnings. We continually apply
judgment when applying these impairment rules to determine the timing of the
impairment test, the undiscounted cash flows used to assess impairments, and the
fair value of an impaired asset. The dynamic economic environment in which each
of our businesses operate and the resulting assumptions used to estimate future
cash flows impact the outcome of all impairment tests.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements we
are required to estimate our income taxes in each of the jurisdictions in which
we operate. This process involves us estimating our actual current tax exposure
together with assessing temporary differences resulting from differing treatment
of items, such as deferred revenue, for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included
within our consolidated balance sheet. We must then asses the likelihood that
our deferred tax assets will be recovered from future taxable income and to the
extent we believe that recovery is not likely, we must establish a valuation
allowance. To the extent we establish a valuation allowance or increase this
allowance in a period, we must include an expense within the tax provision in
the statement of operations.
Significant management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. We have recorded a
valuation allowance of $106.3 million as of February 23, 2002, due to
uncertainties related to our ability to utilize some of our deferred tax assets,
primarily consisting of certain net operating income losses carried forward and
foreign tax credits, before they expire. The valuation allowance is based on our
estimates of taxable income by jurisdiction in which we operate and the period
over which our deferred tax assets will be recoverable. In the event that actual
results differ from these estimates or we adjust these estimates in future
periods we may need to establish additional valuation allowance which could
materially impact our financial position and results of operations.
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RISK FACTORS
We are directly dependent upon the conditions in the airline industry and a
severe and prolonged downturn could negatively impact our results of operations
The September 11 terrorist attacks have severely impacted conditions in the
airline industry. For the first time in the history of commercial aviation, all
domestic airlines were grounded for a period of three days. Since resuming
service, most major US carriers have substantially reduced their flight
schedules, parking or retiring approximately 15% of their fleets. The airlines
have further responded by decreasing domestic airfares by approximately 14% as
compared to last year. As a result of the double-digit decline in both traffic
and airfares, airline revenues for domestic carriers for the first calendar
quarter of 2002 were down by 22% Industry-wide workforce reductions announced by
the airlines, airframe manufacturers and the related suppliers to these
industries have exceeded 100,000 employees. As a result of the substantial
reduction in airline traffic arising from the September 11 terrorist attacks and
their aftermath, as well as other factors, such as the weakening economy, the
airline industry incurred the largest loss in history in calendar 2001, totaling
in excess of $7 billion. Accordingly, the airlines are seeking to conserve cash
in part by deferring or eliminating cabin interior refurbishment programs and
canceling or deferring aircraft purchases. This will cause a substantial
contraction in the company's business, the extent and duration of which cannot
be determined at this time. The company has taken swift actions to respond to
the rapid change in industry conditions, including consolidating five of its
principal facilities into existing facilities, reducing headcount by about 1,000
positions, or 22%, freezing salaries and eliminating all management bonuses for
fiscal 2002.
Our principal customers are the world's commercial airlines. Through
calendar 2000, airline company balance sheets had been substantially
strengthened and their liquidity significantly enhanced over the past several
years as a result of improved profitability, debt and equity financings and a
closely managed fleet expansion. However, increases in pilot and other airline
wages, coupled with fuel prices and the softening of the global economy were
already negatively impacting airline profitability during calendar 2001. The
combined impact of the recent recession and the events of September 11 are
expected to negatively impact discretionary airline spending, including for new
aircraft and cabin interior refurbishments and upgrades, is expected to have a
material adverse effect on our business results of operations and financial
condition until such time that conditions in the industry improve. While
management has developed and begun to implement what it believes is a sound plan
to counter these difficult conditions, it is not yet determinable whether its
plans are adequate or will be successful.
The airline industry is also undergoing a process of consolidation and
significantly increased competition. Such consolidation could result in a
reduction of future aircraft orders as overlapping routes are eliminated and
airlines seek greater economies through higher aircraft utilization.
Our substantial indebtedness could limit our ability to obtain additional
financing and will require that a significant portion of our cash flow be used
for debt service
We have substantial indebtedness and, as a result, significant debt service
obligations. As of February 23, 2002, we had approximately $854.8 aggregate
amount of indebtedness outstanding, representing approximately 85% of total
capitalization.
The degree of our leverage and, as a result, significant debt service
obligations, could have significant consequences to purchasers or holders of our
shares of common stock, including:
o limiting our ability to obtain additional financing to fund our growth
strategy, working capital requirements, capital expenditures,
acquisitions, debt service requirements or other general corporate
requirements;
o limiting our ability to use operating cash flow in other areas of our
business because we must dedicate a substantial portion of those funds
to fund debt service obligations;
o increasing our vulnerability to adverse economic and industry
conditions; and
o if we are able to replace our bank credit facility, increasing our
exposure to interest rate increases because borrowings under a new bank
credit facility will likely be at variable interest rates.
We may not be able to generate the necessary amount of cash to service our
indebtedness, which may require us to refinance our debt, obtain additional
financing or sell assets
Our ability to satisfy our debt service obligations will depend upon, among
other things, our future operating performance and our ability to refinance
indebtedness when necessary. Each of these factors is to a large extent
dependent on economic, financial, competitive and other factors beyond our
control. If, in the future, we cannot generate sufficient cash from operations
to meet our debt service obligations, we will need to refinance, obtain
additional financing or sell assets. Our business may not generate cash flow,
and we may not be able to obtain funding, sufficient to satisfy our debt service
requirements.
We have significant financial and operating restrictions in our debt instruments
that may have an adverse affect on our operations
The indentures governing our outstanding notes contain numerous financial
and operating covenants that limit our ability to incur additional indebtedness,
to create liens or other encumbrances, to make certain payments and investments,
including dividend payments and to sell or otherwise dispose of assets and merge
or consolidate with other entities. Agreements governing future indebtedness
could also contain significant financial and operating restrictions. Our bank
credit facility contains customary affirmative and negative covenants. A failure
to comply with the obligations contained in any current or future agreements
governing our indebtedness, including our indentures, could result in an event
of default under our bank credit facilities, or such indentures, which could
permit acceleration of the related debt and acceleration of debt under other
instruments that may contain cross-acceleration or cross-default provisions. We
are not certain whether we would have, or be able to obtain, sufficient funds to
make these accelerated payments.
The airline industry is heavily regulated and failure to comply with applicable
laws could reduce our sales, or require us to incur additional costs to achieve
compliance, which could reduce our results of operations
The Federal Aviation Administration prescribes standards and licensing
requirements for aircraft components, including virtually all commercial airline
and general aviation cabin interior products, and licenses component repair
stations within the United States. Comparable agencies, such as the U.K. Civil
Aviation Authority and the Japanese Civil Aviation Board, regulate these matters
in other countries. If we fail to obtain a required license for one of our
products or services or lose a license previously granted, the sale of the
subject product or service would be prohibited by law until such license is
obtained or renewed. In addition, designing new products to meet existing
regulatory requirements and retrofitting installed products to comply with new
regulatory requirements can be both expensive and time consuming.
From time to time the FAA proposes new regulations. These new regulations
generally cause an increase in costs to comply with these regulations; when the
FAA first enacted Technical Standard Order C127, all seating companies were
required to meet these new rules. Compliance with this rule required industry
participants to spend millions of dollars on engineering, plant and equipment to
comply with the regulation. A number of smaller seating companies decided that
they did not have the resources, financial or otherwise, to comply with these
rules and they either sold their businesses or ceased operations.
To the extent the FAA implements rule changes in the future, we may incur
additional costs to achieve compliance.
There are risks associated with the implementation of our facility
consolidation program; failure to integrate our combined operations successfully
could lead to a loss of revenues and customers.
We have developed a comprehensive facility consolidation plan, which is
designed to reduce our capacity and fixed costs consistent with current demand
and anticipated demand. This plan involves shutting five principal facilities,
transferring the operations to another facility while maintaining an ongoing
business for the transferred operations. If we are not successful in
implementing this plan, our costs may not be as currently anticipated, we may
incur delays in delivering products to our customers, which could result in
significant penalty payments to our customers and the airframe manufacturers.
While the facility consolidation program is on track as of the date of this
report, there can be no assurance that we will be successful in the
implementation of this effort or that we will not incur liabilities as a result
thereof.
The airline industry is subject to extensive health and environmental
regulation, any violation of which could subject us to significant liabilities
and penalties
We are subject to extensive and changing federal, state and foreign laws and
regulations establishing health and environmental quality standards, and may be
subject to liability or penalties for violations of those standards. We are also
subject to laws and regulations governing remediation of contamination at
facilities currently or formerly owned or operated by us or to which we have
sent hazardous substances or wastes for treatment, recycling or disposal. We may
be subject to future liabilities or obligations as a result of new or more
stringent interpretations of existing laws and regulations. In addition, we may
have liabilities or obligations in the future if we discover any environmental
contamination or liability at any of our facilities, or at facilities we may
acquire.
We compete with a number of established companies, some of which have
significantly greater financial, technological and marketing resources than we
do and we may not be able to compete effectively with these companies
We compete with numerous established companies. Some of these companies,
particularly in the passenger-to-freighter conversion business, have
significantly greater financial, technological and marketing resources than we
do. Our ability to be an effective competitor will depend on our ability to
remain the supplier of retrofit and refurbishment products and spare parts on
the commercial fleets on which our products are currently in service. It will
also depend on our success in causing our products to be selected for
installation in new aircraft, including next-generation aircraft, and in
avoiding product obsolescence. Our ability to maintain or expand our market
position in the rapidly growing passenger-to-freighter conversion business will
depend on our success in being selected to convert specific aircraft, our
ability to maintain and enhance our engineering design, our certification and
program management capabilities and our ability to effectively use our recent
acquisitions to manufacture a broader range of structural components, connectors
and fasteners used in this business.
If we are unable to manufacture quality products and to deliver our products on
time, we may be subject to increased costs or loss of customers or orders, which
could reduce our results of operations
During the latter part of fiscal 1999 and throughout fiscal 2000, we
experienced significant operating inefficiencies in our seating programs which
resulted in delayed deliveries to customers, increased re-work of seating
products, claims for warranty, penalties, out of sequence charges, substantial
increases in air freight and other expedite-related costs. In addition, as a
result of our late customer deliveries, certain airlines diverted their seating
programs to other manufacturers. To the extent we suffer any of these
inefficiencies or shortcomings in the future we will likely experience
significant penalties and loss of customers.
Our acquisition strategy may be less successful than we expect and therefore,
our growth may be limited
We intend to consider future acquisitions. We intend to consider future
strategic acquisitions, some of which could be material to us and which may
include companies that are substantially equivalent or larger in size compared
to us. We continually explore and conduct discussions with many third parties
regarding possible acquisitions. As of the date of this prospectus, we have no
acquisition agreements to acquire any business or assets. Our ability to
continue to achieve our goals may depend upon our ability to identify and
successfully acquire attractive companies, to effectively integrate such
companies, achieve cost efficiencies and to manage these businesses as part of
our company.
We will have to integrate any acquisitions into our business. The
difficulties of combining the operations, technologies and personnel of
companies we acquire, including those we acquired during fiscal 2002, into our
company include:
o coordinating and integrating geographically separated organizations; and
o integrating personnel with diverse business backgrounds.
We may not be able to effectively manage or integrate the acquired
companies. Further, we may not be successful in implementing appropriate
operational, financial and management systems and controls to achieve the
benefits expected to result from these acquisitions. Our efforts to integrate
these businesses could be affected by a number of factors beyond our control,
such as regulatory developments, general economic conditions, increased
competition and the loss of certain customers resulting from the acquisitions.
In addition, the process of integrating these businesses could cause an
interruption of, or loss of momentum in, the activities of our existing business
and the loss of key personnel and customers. The diversion of management's
attention and any delays or difficulties encountered in connection with the
transition and integration of these businesses could have a material adverse
effect on our business and results of operations. Further, the benefits that we
anticipate from these acquisitions may not develop.
We will have to finance any future acquisitions. Depending upon the
acquisition opportunities available, we may need to raise additional funds or
arrange for additional bank financing. We may seek such additional funds through
public offerings or private placements of debt or equity securities or bank
loans. We also intend to replace our existing bank credit facility with a new
facility as soon as reasonably practicable. Issuance of additional equity
securities by us could result in substantial dilution to stockholders. The
incurrence of additional indebtedness by us could have adverse consequences to
stockholders as described above. In the absence of such financing, our ability
to make future acquisitions in accordance with our business strategy, to absorb
adverse operating results, to fund capital expenditures or to respond to
changing business and economic conditions may be adversely affected, all of
which may have a material adverse effect on our business, results of operations
and financial condition.
There are risks inherent in international operations that could have a material
adverse effect on our business operations
Our operations are primarily in the United States, with approximately 21% of
our sales during fiscal 2002 coming from our foreign operations in the United
Kingdom and the Netherlands. While the majority of our operations is based
domestically, each of our facilities sells to airlines all over the world. As a
result, 40% or more of our consolidated sales for the past three fiscal years
were to airlines located outside the United States. We have direct investments
in a number of subsidiaries in foreign countries (primarily in Europe).
Fluctuations in the value of foreign currencies affect the dollar value of our
net investment in foreign subsidiaries, with these fluctuations being included
in a separate component of stockholders' equity. Operating results of foreign
subsidiaries are translated into U.S. dollars at average monthly exchange rates.
At February 23, 2002, we reported a cumulative foreign currency translation
amount of $(25.8 million) in stockholders' equity as a result of foreign
currency adjustments, and we may incur additional adjustments in future periods.
In addition, the U.S. dollar value of transactions based in foreign currency
(collections on foreign sales or payments for foreign purchases) also fluctuates
with exchange rates. If in the future a substantial majority of our sales were
not denominated in the currency of the country of product origin, we could face
increased currency risk. Also, changes in the value of the U.S. dollar or other
currencies could result in fluctuations in foreign currency translation amounts
or the U.S. dollar value of transactions and, as a result, our net earnings
could be adversely affected. Our largest foreign currency exposure results from
activity in Euros and British pounds.
We may engage in hedging transactions in the future to manage or reduce our
foreign exchange risk. However, our attempts to manage our foreign currency
exchange risk may not be successful and, as a result, our results of operations
and financial condition could be adversely affected.
Our foreign operations could also be subject to unexpected changes in
regulatory requirements, tariffs and other market barriers and political and
economic instability in the countries where we operate. Due to our foreign
operations we could be subject to such factors in the future and the impact of
any such events that may occur in the future could subject us to additional
costs or loss of sales, which could adversely affect our operating results.
Our total assets include substantial intangible assets. The write-off of a
significant portion of unamortized intangible assets would negatively affect our
results of operations.
Our total assets reflect substantial intangible assets. At February 23,
2002, goodwill and identified intangibles and other assets, net, represented
approximately 47% of total assets and 437% of stockholders' equity. Intangible
assets consist of goodwill and other identified intangible assets associated
with our acquisitions, representing the excess of cost over the fair value of
tangible assets we have acquired since 1989. We may not be able to realize the
value of these assets. Goodwill and identified intangible assets are amortized
on a straight-line basis over their estimated useful lives, ranging from 3 to 30
years. At each balance sheet date, we assess whether there has been an
impairment in the value of intangible assets. If the carrying value of the asset
exceeds the estimated undiscounted future cash flows from operating activities
of the related business, an impairment is deemed to have occurred. In this
event, the amount is written down accordingly. Under current accounting rules,
this would result in a charge of operating earnings. Any determination requiring
the write-off of a significant portion of unamortized goodwill and identified
intangible assets would negatively affect our results of operations and total
capitalization, which could be material. As of February 23, 2002, we have
determined that no impairment existed.
Risks Associated with our Capital Stock
Provisions in our charter documents may discourage potential acquisitions of our
company, even those which the holders of a majority of our common stock may
favor
Our restated certificate of incorporation and by-laws contain provisions
that may have the effect of discouraging a third party from making an
acquisition of us by means of a tender offer, proxy contest or otherwise. Our
restated certificate of incorporation and by-laws:
o classify the board of directors into three classes, with directors of
each class serving for a staggered three-year period;
o provide that directors may be removed only for cause and only upon the
approval of the holders of at least two-thirds of the voting power of
our shares entitled to vote generally in the election of such directors;
o require at least two-thirds of the voting power of our shares entitled
to vote generally in the election of directors to alter, amend or repeal
the provisions relating to the classified board and removal of directors
described above;
o permit the board of directors to fill vacancies and newly created
directorships on the board;
o restrict the ability of stockholders to call special meetings; and
o contain advance notice requirements for stockholder proposals.
Such provisions would make the removal of incumbent directors more difficult and
time-consuming and may have the effect of discouraging a tender offer or other
takeover attempt not previously approved by the board of directors.
Our board of directors has declared a dividend of one preferred share
purchase right for each share of common stock outstanding. A right will also be
attached to each share of common stock subsequently issued. The rights will have
certain anti-takeover effects. If triggered, the rights would cause substantial
dilution to a person or group of persons that acquires more than 15.0% of our
common stock on terms not approved by our board of directors. The rights could
discourage or make more difficult a merger, tender offer or other similar
transaction.
Under our restated certificate of incorporation, our board of directors also
has the authority to issue preferred stock in one or more series and to fix the
powers, preferences and rights of any such series without stockholder approval.
The board of directors could, therefore, issue, without stockholder approval,
preferred stock with voting and other rights that could adversely affect the
voting power of the holders of common stock and could make it more difficult for
a third party to gain control of us. In addition, under certain circumstances,
Section 203 of the Delaware General Corporation Law makes it more difficult for
an "interested stockholder", or generally a 15% stockholder, to effect various
business combinations with a corporation for a three-year period.
You may not receive cash dividends on our shares
We have never paid a cash dividend and do not plan to pay cash dividends on
our common stock in the foreseeable future. We intended to retain our earnings
to finance the development and expansion of our business and to repay
indebtedness. Also, our ability to declare and pay cash dividends on our common
stock is restricted by covenants in our outstanding notes and Bank Credit
Facility.
If the price of our common stock continues to fluctuate significantly, you could
lose all or a part of your investment
Since the beginning of fiscal 2002, the closing price of our common stock
has ranged from a low of $3.50 to a high of $25.88. The price of our common
stock is subject to sudden and material increases and decreases, and decreases
could adversely affect investments in our common stock. The price of our common
stock could fluctuate widely in response to:
o our quarterly operating results;
o changes in earnings estimates by securities analysts;
o changes in our business;
o changes in the market's perception of our business;
o changes in the businesses, earnings estimates or market perceptions of
our competitors or customers;
o changes in general market or economic
conditions; and
o changes in the legislative or regulatory environment.
In addition, the stock market has experienced extreme price and volume
fluctuations in recent years that have significantly affected the quoted prices
of the securities of many companies, including companies in our industry. The
changes often appear to occur without regard to specific operating performance.
The price of our common stock could fluctuate based upon factors that have
little or nothing to do with our company and these fluctuations could materially
reduce our stock price.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements, including statements
regarding the future benefits of corrective actions in the company's seating
business, implementation and expected benefits of lean manufacturing and
continuous improvement programs, the company's dealings with customers and
partners, the consolidation of facilities, integration of acquired businesses,
productivity improvements from recent information technology investments, the
roll-out of the company's e-commerce system, ongoing capital expenditures, the
adequacy of funds to meet the company's capital requirements, the ability to
refinance our indebtedness, if necessary, the reduction of debt, the potential
impact of new accounting pronouncements, the allocation of M & M's purchase
price, the impact on our business of the September 11, 2001 terrorist attacks
and the resolution of the company's arbitration against Thales. These
forward-looking statements include risks and uncertainties, and the company's
actual experience may differ materially from that anticipated in such
statements. Factors that might cause such a difference include those discussed
in the company's filings with the Securities and Exchange Commission, under the
heading "Risk Factors" in this Form 10-K, as well as future events that may have
the effect of reducing the company's available operating income and cash
balances, such as unexpected operating losses, the impact of rising fuel prices
on our airline customers, delays in, or unexpected costs associated with, the
integration of our acquired businesses, conditions in the airline industry,
problems meeting customer delivery requirements, the company's success in
winning new or expected refurbishment contracts from customers, capital
expenditures, cash expenditures related to possible future acquisitions,
facility closures, product transition costs, labor disputes involving us, our
significant customers or airframe manufacturers, the possibility of a write-down
of intangible assets, delays or inefficiencies in the introduction of new
products or fluctuations in currency exchange rates.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are cautioned not to unduly rely on such forward-looking statements when
evaluating the information presented herein. These statements should be
considered only after carefully reading this entire Form 10-K and the documents
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of risks, including foreign currency
fluctuations and changes in interest rates affecting the cost of our
variable-rate debt.
Foreign currency - We have direct operations in Europe that receive revenues
from customers in various currencies and purchase raw materials and
component parts from foreign vendors in various currencies. Accordingly, we
are exposed to transaction gains and losses that could result from changes
in foreign currency exchange rates relative to the U.S. dollar. The largest
foreign currency exposure results from activity in British pounds and Euros.
From time to time, the company and its foreign subsidiaries may enter into
foreign currency exchange contracts to manage risk on transactions conducted
in foreign currencies. At February 23, 2002, we had no outstanding forward
currency exchange contracts. We did not enter into any other derivative
financial instruments.
Interest Rates - At February 23, 2002, we had adjustable rate debt of $145.0
million and fixed rate debt of $699.7 million. The weighted average interest
rate for the adjustable and fixed rate debt was approximately 4.77% and
9.10%, respectively, at February 23, 2002. If interest rates were to
increase by 10% above current rates, the estimate impact on our financial
statements would be to reduce pretax income by approximately $0.7 million.
We do not engage in transactions intended to hedge our exposure to changes
in interest rates.
As of February 23, 2002, we maintained a portfolio of securities consisting
mainly of taxable, interest-bearing deposits with weighted average maturities of
less than three months. If short-term interest rates were to increase or
decrease by 10%, we estimate interest income would increase or decrease by
approximately $0.3 million.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this section is set forth beginning from page
F-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding our directors and
executive officers as of April 20, 2002. Officers of our company are elected
annually by the Board of Directors.
Title Age Position
Amin J. Khoury......... 63 Chairman of the Board
Robert J. Khoury....... 60 President, Chief Executive Officer and Director
Jim C. Cowart.......... 50 Director *
Richard G. Hamermesh... 54 Director*
Brian H. Rowe.......... 70 Director**
Jonathan M. Schofield.. 61 Director*,**
Thomas P. McCaffrey.... 48 Corporate Senior Vice President of Administration,
Chief Financial Officer and Assistant Secretary
Michael B. Baughan..... 43 Group Vice President and General Manager,
Seating Products Group
Roman G. Ptakowski..... 53 Group Vice President and General Manager,
Interior Systems Group
Scott A. Smith......... 47 Group Vice President and General Manager,
Flight Structures Group
Robert A. Marchetti.... 60 Group Vice President and General Manager,
Machined Products Group
Mark D. Krosney........ 56 Group Vice President and General Manager,
Business Jet Group
Edmund J. Moriarty..... 58 Corporate Vice President-Law,
General Counsel and Secretary
Jeffrey P. Holtzman.... 46 Vice President-Finance and Treasurer
Stephen R. Swisher..... 43 Vice President-Finance and Controller
- --------
* Member, Audit Committee
** Member, Stock Option and Compensation Committee
Director Classification
Our Restated Certificate of Incorporation provides that the Board of
Directors is to be divided into three classes, each nearly as equal in number as
possible, so that each director (in certain circumstances after a transitional
period) will serve for three years, with one class of directors being elected
each year. The Board is currently comprised of two Class I Directors (Brian H.
Rowe and Jim C. Cowart), two Class II Directors (Robert J. Khoury and Jonathan
M. Schofield) and two Class III Directors (Amin J. Khoury and Richard G.
Hamermesh). The terms of the Class I, Class II and Class III Directors expire at
the end of each respective three year term and upon the election and
qualification of successor directors at annual meetings of stockholders held at
the end of each fiscal year. Our executive officers are elected annually by the
Board of Directors following the annual meeting of stockholders and serve at the
discretion of the Board of Directors.
Current Directors
Amin J. Khoury has been our Chairman of the Board since July 1987 when he
founded the company and was Chief Executive Officer until April 1, 1996. Mr.
Khoury is currently the Chairman and Chief Executive Officer of Advanced Thermal
Sciences Corporation, our wholly owned subsidiary, the Chairman of the Board of
Directors of Applied Extrusion Technologies, Inc., a manufacturer of oriented
polypropylene films used in consumer products labeling and packaging
applications, a member of the Board of Directors of Brooks Automation, Inc., a
leading supplier of integrated automation solutions for the global
semiconductor, data storage and flat panel display manufacturing industries, and
a member of the Board of Directors of Synthes-Stratec, the world's leading
orthopedic trauma medical device company. Mr. Khoury is the brother of Robert J.
Khoury.
Robert J. Khoury has been a Director since July 1987, when he co-founded the
company. He currently serves as President and Chief Executive Officer. From
April 1996 through August 2000, he served as Vice Chairman. Mr. Khoury is a
board member of Mar-Test, Inc., a leading test lab for low cycle fatigue
testing. Mr. Khoury is the brother of Amin J. Khoury.
Jim C. Cowart has been a Director since November 1989. Mr. Cowart is
currently a Principal of Cowart & Co. LLC and Auriga Partners, Inc., private
capital firms retained from time to time by the company for strategic planning,
competitive analysis, financial relations and other services. From August 1999
to May 2001, he was Chairman of QualPro Corporation, an aerospace components
manufacturing company, and from February 1998 to November 2000, Mr. Cowart was
Chairman and CEO of E-Com Architects, Inc., a computer software company. From
January 1993 to November 1997, he was the Chairman and CEO of Aurora Electronics
Inc. Previously, Mr. Cowart was a founding general partner of Capital Resource
Partners, a private investment capital manager, and he held various positions in
investment banking and venture capital with Lehman Brothers, Shearson Venture
Capital and Kidder, Peabody & Co.
Richard G. Hamermesh has been a Director since July 1987. Dr. Hamermesh is
currently a Professor of Management Practice at the Harvard Business School.
From 1987 to 2001, he was a co-founder and a Managing Partner of The Center for
Executive Development, an executive education and development consulting firm.
Prior to this, from 1976 to 1987, Dr. Hamermesh was a member of the faculty of
the Harvard Business School. He is also an active investor and entrepreneur,
having participated as a principal, director and investor in the founding and
early stages of 15 organizations. Dr. Hamermesh is also a director of Applied
Extrusion Technologies, Inc., a manufacturer of oriented polypropylene films
used in consumer products labeling and packaging applications.
Brian H. Rowe has been a Director since July 1995. He is currently Chairman
Emeritus of GE Aircraft Engines, a principal business unit of the General
Electric Company, where he also served as Chairman from September 1993 through
January 1995 and as President from 1979 through 1993. Since February 2001, Mr.
Rowe has acted as Chairman of Atlas Air, an air cargo carrier, where he has
served as a director since March 1995. Mr. Rowe is also a director of the
following companies since the date listed: December 1995--Textron Inc., a
manufacturer of aircraft, automobile components, an industrial segment, systems
and components for commercial aerospace and defense industries, and financial
services; December 1998--Convergys Corporation, an outsourcing, integration,
billing and customer management services company; December 1998--Acterna
Corporation, a test equipment and communication systems manufacturing company;
and October 2000--Fairchild-Dornier, a regional aircraft manufacturer.
Jonathan M. Schofield has been a Director since April 2001. Mr. Schofield
recently retired from Airbus Industrie of North America, Inc., a subsidiary of
Airbus Industrie, a manufacturer of large civil aircraft. From December 1992
through February 2000, Mr. Schofield served as Chairman of the Board and CEO,
and served as Chairman from February 2000 until his retirement in March 2001.
From 1989 until he joined Airbus, Mr. Schofield was President of United
Technologies International Corporation. Mr. Schofield serves on the Board of
Overseers for the University of Connecticut's School of Business Administration,
and presently sits on the Boards of Aviall, Inc., SS&C Technologies, Inc., and
FlightTime Corporation.
Executive Officers
Thomas P. McCaffrey has been Corporate Senior Vice President of
Administration and Chief Financial Officer since May 1993. From August 1989
through May 1993, Mr. McCaffrey was an Audit Director with Deloitte & Touche
LLP, and from 1976 through 1989 served in several capacities, including Audit
Partner, with Coleman & Grant. We entered into an employment agreement with Mr.
McCaffrey extending through three years from any date of which the term is being
determined.
Michael B. Baughan has been Group Vice President and General Manager of
Seating Products since May 1999. From September 1994 to May 1999, Mr. Baughan
was Vice President, Sales and Marketing for Seating Products. Prior to 1994, Mr.
Baughan held various positions including President of AET Systems, Manager of
Strategic Initiatives at The Boston Company (American Express) and Sales
Representative at Dow Chemical Company.
Roman G. Ptakowski has been Group Vice President and General Manager of
Interior Systems since December 1997. From September 1995 through December 1997,
Mr. Ptakowski was Vice President, Sales and Marketing for Galley Products. From
January 1995 through August 1995, Mr. Ptakowski served as Senior Vice President,
Marketing for Farrel Corporation. Prior to that he was with the ABB Power T&D
Company Inc. and Westinghouse Electric Corp. for 25 years, with his last
position being General Manager of their Protective Relay Division.
Scott A. Smith has been Group Vice President and General Manager of Flight
Structures since February 1999. From April 1998 to February 1999, Mr. Smith was
the Vice President and General Manager of the In-Flight Entertainment business
sold to a wholly-owned subsidiary of Sextant Avionique, S.A. From December 1995
through March 1998, Mr. Smith was with Toshiba American Information Electronics
with his last position being Senior Vice President, Sales of the Americas. From
December 1992 to February 1994, Mr. Smith served as Corporate Vice President of
Engineering, and from February 1994 to September 1995, served as the General
Manager of the Desktop and Server Product Division of AST Research. Prior to
that, Mr. Smith was with IBM for 16 years and served in numerous capacities,
including Systems Manager of the engineering team that developed IBM's first PC
server and advanced desktop, Staff Assistant to the Chairman of the Board and
Director of Visual Subsystems Group.
Robert A. Marchetti has been Group Vice President and General Manager of
Machined Products Group since February 2001. From 1997 to January 2001 Mr.
Marchetti was with Fairchild Corporation's Fasteners Division with his last
position being Senior Vice President and Chief Operating Officer. From 1990 to
1997, Mr. Marchetti served as a corporate officer of UNC Inc. where he held
several senior positions, Corporate VP of Marketing, President of
Tri-Remanufacturing and Chief Operating Officer of the Accessory Overhaul
Division. From 1989 to 1990, he served as President of AWA Incorporated. From
1986 through 1989, Mr. Marchetti was Vice President of Marketing at General
Electric Aircraft Engines and he was General Manager for a Component Repair
Division. Prior to that he held several sales and general management positions
from 1965 through 1986 with Copperweld Corporation and Carlisle Corporation.
Mark D. Krosney has been Group Vice President and General Manager of
Business Jet Group since January 2001. From February 1996 through December 2000,
Mr. Krosney was Vice President of Engineering for Seating Products. From 1994 to
1996, Mr. Krosney served as General Manager for A.W. Chesterton. From 1992 to
1994, Mr. Krosney was with Johnson Controls, Automotive System Group, where his
last position was General Manager of the Seat Mechanisms Group. Prior to that he
was with United Technologies Corporation for 22 years, where he held positions
as Divisional Director of Technology for Control Systems, Director of Product
Development and Marketing of Diesel Systems and member of the Senior Committee
for UTC Corporation.
Edmund J. Moriarty has been Corporate Vice President-Law, General Counsel
and Secretary since November 16, 1995. From 1991 to 1995, Mr. Moriarty served as
Vice President and General Counsel to Rollins, Inc., a national service company.
From 1982 through 1991, Mr. Moriarty served as Vice President and General
Counsel to Old Ben Coal Company, a wholly owned coal subsidiary of The Standard
Oil Company.
Jeffrey P. Holtzman has been Vice President-Finance and Treasurer since
August 1999. Mr. Holtzman has been a Vice President since November 1996 and
Treasurer since September 1993. From June 1986 to July 1993, Mr. Holtzman served
in several capacities at FPL Group, Inc., including Assistant Treasurer and
Manager of Financial Planning. Mr. Holtzman previously worked for Mellon Bank,
Gulf Oil Corporation and Ernst & Young L.L.P.
Stephen R. Swisher has been Vice President-Finance and Controller since
August 1999. Mr. Swisher has been Controller since 1996 and served as Director
of Finance from 1994 to 1996. Prior to 1994, Mr. Swisher held various positions,
including Accounting Manager at Burger King Corporation and Audit Manager with
Deloitte & Touche LLP.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our directors and executive officers, and persons who own more than ten percent
of a registered class of the company's equity securities, to file with the
Securities and Exchange Commission (the "SEC") initial reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the company. Officers, directors and greater-than-ten-percent shareholders are
required by SEC regulations to furnish the company with copies of all Section
16(a) forms they file.
To our knowledge, based solely on a review of the copies of such reports
furnished to the company and, with respect to its officers and directors,
written representations that no other reports were required, during Fiscal 2002,
all Section 16(a) filing requirements applicable to its officers, directors and
greater-than-ten-percent beneficial owners were complied with.
In making the above statements, we have relied on the written
representations of our directors and officers and copies of the reports that
have been filed with the SEC.
ITEM 11. EXECUTIVE COMPENSATION
Compensation of Executive Officers
The following table sets forth information with respect to the compensation
of our Chief Executive Officer and the seven other most highly paid executive
officers (the "Named Executive Officers") for the fiscal years ended February
2002, 2001 and 2000.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Securities
Annual Compensation Underlying All Other
Name and Principal Position Year Salary($) Bonus($) Options(#) Compensation($)
--------------------------- ----- ------------ --------- ------------- -----------------
Amin J. Khoury..................................... 2002 861,511 0 120,000(5) 53,883(1)
Chairman 2001 744,034 485,000 65,000 29,146
2000 667,316 0 240,000 48,539
Robert J. Khoury................................... 2002 706,696 0 120,000 48,799(1)
President and 2001 637,992 485,000 65,000 25,520
Chief Executive Officer 2000 617,318 0 240,000 46,539
Thomas P. McCaffrey................................ 2002 343,350 0 80,000 25,911(1)
Corporate Senior Vice President of 2001 309,304 220,000 45,000 12,372
Administration and Chief Financial Officer 2000 299,924 0 120,000 20,735
Scott A. Smith..................................... 2002 302,136 0 60,000 22,344(1)
Group Vice President and 2001 297,696 170,000 35,000 15,388
General Manager - Flight Structures 2000 288,273 87,000 60,000 5,000
Michael B. Baughan................................. 2002 235,664 0 60,000 19,683(1)
Group Vice President and 2001 223,657 170,000 35,000 10,466
General Manager - Seating Products 2000 188,153 38,000 98,000 6,019
Roman G. Ptakowski................................. 2002 232,678 0 60,000 20,085(1)
Group Vice President and 2001 219,300 170,000 35,000 13,838
General Manager - Interior Systems 2000 192,435 136,000 105,000 14,217
Mark D. Krosney.................................... 2002 217,474 0 90,000 67,088(2)
Group Vice President and 2001 136,207 0 0 5,448
General Manager - Business Jet Group 2000 178,432 12,000 5,000 47,492(3)
Robert A. Marchetti (6)............................ 2002 209,205 0 85,000 244,317(4)
Group Vice President and
General Manager - Machined Products
Group
- --------------
(1) Represents contributions to our 401(k) Plan and Supplemental Executive
Retirement Plan.
(2) Represents contributions to our 401(k) Plan and Supplemental Executive
Retirement Plan of $10,884 and relocation expenses of $56,204.
(3) Represents contributions to our 401(k) Plan and Supplemental Executive
Retirement Plan of $8,492 and relocation expenses of $39,000.
(4) Represents contributions to our 401(k) Plan and Supplemental Executive
Retirement Plan of $6,507 and relocation expenses of $237,810.
(5) On September 2, 2001, Mr. Amin Khoury purchased 600,000 restricted
shares of common stock of Advanced Thermal Sciences Corporation ("ATS"),
our wholly owned subsidiary at a purchase price of $0.26 per share,
which was the fair market value of the ATS common stock on the date of
purchase. The restricted shares are subject to a right of repurchase at
the original purchase price that lapses over a three-year period (25% on
the date of purchase and 25% on the three succeeding annual anniversary
dates) subject to acceleration in certain instances. The restricted
shares were purchased pursuant to an incentive stock option that was
exercised immediately following grant. Mr. Khoury will be entitled to
receive dividends on the ATS restricted shares, to the extent they are
declared.
(6) Mr. Marchetti commenced his employment with us as of February 26, 2001.
Stock Options
The following tables sets forth information concerning stock options
granted to the Named Executive Officers in Fiscal 2002.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
Potential
Realized Value
at Assumed Rates of
Number of % of Total Stock Price
Securities Options Appreciation for
Underlying Granted to Option Term(3)
Options Employees in Exercise Expiration --------------
Name Granted(1)(#) Fiscal Year(2) Price ($/Sh) Date 5% 10%
------------- -------------- ------------ ---- -- ---
Amin J. Khoury...................120,000 6.23% $ 4.08 9/21/11 $307,958 $780,422
Robert J. Khoury.................120,000 6.23% $ 4.08 9/21/11 $307,958 $780,422
Thomas P. McCaffrey...............80,000 4.15% $ 4.08 9/21/11 $205,306 $520,282
Scott A. Smith....................60,000 3.12% $ 4.08 9/21/11 $153,979 $390,211
Michael B. Baughan................60,000 3.12% $ 4.08 9/21/11 $153,979 $390,211
Roman G. Ptakowski................60,000 3.12% $ 4.08 9/21/11 $153,979 $390,211
Mark D. Krosney...................30,000 1.56% $21.88 2/26/11 $412,876 $1,046,302
60,000 3.12% $ 4.08 9/21/11 $153,979 $390,211
Robert A. Marchetti...............25,000 1.30% $21.88 2/26/11 $344,063 $871,918
60,000 3.12% $ 4.08 9/21/11 $153,979 $390,211
- --------------
(1) All of the above stock option awards vest over a three-year period (25%
on the date of grant and 25% on the three succeeding grant annual
anniversary dates). The exercise prices were based on the fair market
value (as determined in accordance with our 2001 Stock Option Plan) of
the shares of common stock at the time the options were granted. The
exercise price may be paid in cash or by any other lawful means
authorized by the Board of Directors. Options terminate ten years after
the date of grant or three months following termination of the
optionee's employment, whichever occurs earlier.
(2) During Fiscal 2002, we granted to our employees options covering
1,925,500 shares of common stock.
(3) The dollar amounts under these columns are the result of calculations at
the 5% and 10% rates set by the Securities and Exchange Commission and
therefore are not intended to forecast possible future appreciation, if
any, of the stock price of the company. If our stock price were in fact
to appreciate at the assumed 5% or 10% annual rate for the ten-year term
of these options, a $1,000 investment in our common stock would be worth
$1,629 and $2,594 respectively, at the end of the term.
Option Exercises and Fiscal Year-End Holdings
The following table provides information concerning stock option exercises
in fiscal 2002 and the number and value of unexercised stock options held by
each Named Executive Officer as of February 23, 2002.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
Number of Value of Unexercised
Unexercised Options In The Money Options
At February 23, 2002 At February 23, 2002(1)
Shares Value --------------------- -----------------------
Acquired Realized Exercisable Unexercisable Exercisable Unexercisable
Amin J. Khoury............. -- $ -- 602,500 182,500 $108,600 $325,800
Robert J. Khoury........... -- $ -- 502,500 182,500 $108,600 $325,800
Thomas P. McCaffrey........ -- $ -- 337,500 112,500 $ 72,400 $217,200
Scott A. Smith............. -- $ -- 202,500 77,500 $ 54,300 $162,900
Michael B. Baughan......... 28,750 $387,850 109,250 87,000 $ 54,300 $162,900
Roman G. Ptakowski......... -- $ -- 181,250 88,750 $ 54,300 $162,900
Mark D. Krosney............ -- $ -- 63,750 68,750 $ 54,300 $162,900
Robert A. Marchetti........ -- $ -- 21,250 63,750 $ 54,300 $162,900
- --------------
(1) The amounts in this column reflect the difference between the closing
price of a share of our common stock on the Nasdaq National Market on
February 22, 2002, the last trading day of the fiscal year, of $7.70,
and the options exercise price. The actual value of unexercised options
fluctuate depending on the price of our common stock.
Retirement Arrangements
Pursuant to the employment agreement with Mr. Amin J. Khoury, upon the
earlier of the Expiration Date (as defined) or termination of his employment,
Mr. Khoury, or his designee, as the case may be, is entitled to receive
retirement compensation (the "Retirement Compensation") in a lump sum equal to
the product of (i) Mr. Khoury's highest annual salary (as defined) paid to him
during his employment with the company multiplied by (ii) the number of years of
service provided by Mr. Khoury to the company. The Retirement Compensation will
become due as a result of a change of control (as defined), as a result of any
other termination of Mr. Khoury's employment agreement, or as otherwise provided
pursuant to the terms of the grantor trust established to fund the company's
retirement obligations to the executives, net of any prior distributions. See
discussion of Employment Contracts below for Retirement Compensation payable
after a change in control.
Pursuant to the employment agreement with Mr. Robert J. Khoury, upon the
earlier of the Expiration Date (as defined) or termination of his employment,
Mr. Khoury, or his designee, as the case may be, is entitled to receive
retirement compensation (the "Retirement Compensation") in a lump sum equal to
the product of (i) 150% of Mr. Khoury's highest annual salary (as defined) paid
to him during his employment with the company multiplied by (ii) the number of
years of service provided by Mr. Khoury to the company. The Retirement
Compensation will become due as a result of a change of control (as defined), as
a result of any other termination of Mr. Khoury's employment agreement, or as
otherwise provided pursuant to the terms of the grantor trust established to
fund the company's retirement obligations to the executives, net of any prior
distributions. See discussion of Employment Contracts below for Retirement
Compensation payable after a change in control.
Pursuant to the employment agreement with Mr. Thomas P. McCaffrey, we will
provide retirement compensation to Mr. McCaffrey, or his designee (the
"Retirement Compensation") in a lump sum equal to the product of (i) one-half
his average annual salary for the three completed years immediately prior to his
termination multiplied by (ii) the number of years of service provided by the
executive to the company. The Retirement Compensation will become due as a
result of a change of control (as defined), as a result of any other termination
of the executive's employment agreement, or as otherwise provided pursuant to
the terms of the grantor trust established to fund the company's retirement
obligations to the executives, net of any prior distributions. See discussion of
Employment Contracts below for Retirement Compensation payable after a change in
control.
Employment Contracts
Amin J. Khoury. Mr. Amin Khoury is party to an employment agreement,
amended as of May 15, 2002. The term of the agreement extends through three
years from any date as of which the term is being determined (the "Expiration
Date") unless earlier terminated. Under the employment agreement, Mr. Khoury
receives a base salary of $765,000 per year, subject to cost of living and other
increases as determined from time to time by the Board of Directors. Mr. Khoury
is also entitled to receive an annual incentive bonus from the company at the
discretion of the Board of Directors. The agreement also provides that Mr.
Khoury and his spouse will receive medical, dental, health and executive medical
reimbursement benefits under our plans for the remainder of their lives.
In the event of Mr. Khoury's death, his designee will receive (i) an amount
equal to the salary that would have been due to Mr. Khoury from the date of his
death until the Expiration Date, plus (ii) the Retirement Compensation
(described above); provided, however, that in no event will the aggregate amount
payable upon Mr. Khoury's death be less than twenty times the maximum annual
salary paid to Mr. Khoury during his employment by the company. We have
purchased life insurance policies that would fully pay the death benefit due
upon Mr. Khoury's death. In the event of Mr. Khoury's incapacity, he will
receive, through the Expiration Date, (i) two times his highest annual salary,
(ii) and continued health and welfare benefits. In addition, Mr. Khoury will be
entitled to a lump sum payment of the Retirement Compensation.
Upon a change of control (as defined), Mr. Khoury will receive a lump sum
payment equal to the sum of (a) one and one-half times the base salary and
incentive bonus (calculated at 100% of his base salary) (the "Salary") that he
would have received during the then-remaining term of his agreement and (b) two
times his base salary for the then-remaining term of his agreement. Through the
Expiration Date, Mr. Khoury would also continue to receive the Salary and
continued health, welfare and perquisite benefits. Mr. Khoury would also be
entitled to receive a lump sum payment of the Retirement Compensation he would
have been entitled to receive had he continued his employment until May 28,
2003. Upon the execution of an agreement that would, if consummated, constitute
a change in control, all stock options held by Mr. Khoury will immediately vest
and become exercisable. The Employment Agreement also provides that in the event
that any payments made to Mr. Khoury that are contingent upon a change in
control are subject to excise tax as an "excess parachute payment" under the
Internal Revenue Code, Mr. Khoury would also receive a parachute excise tax
"gross-up" payment.
In the event his employment is terminated for any reason other than his
death or incapacity, Mr. Khoury is entitled to a lump sum severance amount equal
to his annual salary. In addition, during the five years following Mr. Khoury's
termination of employment for any reason other than death, we will continue to
provide him other perquisite benefits.
During the term of the agreement and for a period of two years thereafter,
Mr. Khoury may not compete with us or solicit our employees. In addition, Mr.
Khoury is subject to a confidentiality provision that lasts indefinitely.
Mr. Khoury is also party to an employment agreement with Advanced Thermal
Sciences Corporation, our wholly owned subsidiary ("ATS"), dated July 12, 2000,
pursuant to which he serves as Chairman of the board of directors and Chief
Executive Officer of ATS. The term of his agreement with ATS initially expires
on July 12, 2005, but it is automatically renewed for consecutive one-year
periods until either Mr. Khoury or ATS gives the other party at least 30 days'
written notice prior to the end of the then-applicable expiration date. Under
his employment agreement with ATS, Mr. Khoury receives a base salary of $100,000
per year, subject to adjustment from time to time by ATS's board of directors.
Mr. Khoury is also entitled to receive an annual performance incentive bonus at
the discretion of ATS's board of directors. During Mr. Khoury's employment with
ATS, he is entitled to participate in any applicable stock option plans of ATS.
Upon termination of his service with ATS for any reason, Mr. Khoury will receive
salary and benefit continuation for twelve months.
Upon termination (or constructive termination) of Mr. Khoury's employment
with ATS resulting from a change of control of ATS (as defined), he will receive
a lump sum amount equal to his salary (as in effect as of the termination date)
and continuation of his salary, bonus, benefits and prerequisites through the
expiration date of his then-current term.
Robert J. Khoury. Mr. Robert Khoury is party to an employment agreement with
the company, amended as of May 15, 2002. The term of the employment agreement
extends through the Expiration Date, unless otherwise terminated. Under the
employment agreement, Mr. Khoury receives a base salary of $710,000 per year,
subject to cost of living and other increases as determined from time to time by
the Board of Directors. Mr. Khoury is also entitled to receive an annual
incentive bonus at the discretion of the Board of Directors. In all other
respects, Mr. Khoury's employment agreement contains substantially similar
provisions to those in Mr. Amin J. Khoury's employment agreement as described
above; however, Mr. Khoury is not an employee of ATS.
Thomas P. McCaffrey. Mr. McCaffrey is party to an employment agreement
which was amended May 15, 2002, and which extends through three years from any
date as of which the term is being determined unless sooner terminated (the
"Expiration Date"). Under the employment agreement, Mr. McCaffrey receives a
base salary of $345,000 per year subject to cost of living and other increases
as determined from time to time by the Board of Directors. Mr. McCaffrey is also
entitled to receive an annual incentive bonus at the discretion of the Board of
Directors.
In the event of Mr. McCaffrey's death, his designee will receive (i) amount
equal to the salary that would have been due to Mr. McCaffrey through the
Expiration Date and (ii) the Retirement Compensation. In the event of Mr.
McCaffrey's incapacity, he will receive (i) his salary and welfare benefits
through the Expiration Date and (ii) the Retirement Compensation. If Mr.
McCaffrey is terminated for cause (as defined) he will only be entitled to
receive his unpaid salary and benefits accrued through the date of termination.
Upon a change in control (as defined), Mr. McCaffrey will receive (i) a
lump sum amount equal to (a) two times his then-current salary and (b) two times
the base salary that he would have received through the Expiration Date, (ii)
continued life insurance and welfare benefits for a period of five years after
the Expiration Date and (iii) the Retirement Compensation, less any previously
distributed amounts. In addition, upon the execution of an agreement that would
constitute a change in control (regardless of whether such agreement is
consummated) all stock options held by Mr. McCaffrey will immediately vest and
become exercisable. In the event that any payments made to Mr. McCaffrey that
are contingent upon a change in control constitute an "excess parachute payment"
under the Internal Revenue Code, Mr. McCaffrey will be entitled to receive an
excise tax "gross-up" payment from the company.
In the event his employment is terminated for any reason other than his
death or incapacity, Mr. McCaffrey is also entitled to a lump sum severance
amount equal to his annual salary.
Scott A. Smith. Mr. Smith is party to an employment agreement dated March
6, 1998 that is automatically renewed for consecutive one-year periods until
either Mr. Smith or the company gives the other party at least 30 days written
notice prior to the end of the next calendar year. Pursuant to the employment
agreement, Mr. Smith receives a base salary of $321,100 per year, subject to
adjustment from time to time by the Board of Directors. Mr. Smith is also
entitled to receive an annual incentive bonus at the discretion of the Board of
Directors, which may not exceed 100% of his then current salary. In the event of
Mr. Smith's death, his designee will receive an amount equal to the salary that
would have been due through the expiration of the then-applicable term. In the
event of Mr. Smith's incapacity, Mr. Smith will continue to receive his then
current salary and benefits through the expiration date of the then-applicable
term or until Mr. Smith obtains alternate employment. In the event there is a
change in control (as defined) prior to the expiration date as a result of which
Mr. Smith's employment is terminated or he resigns because of a change in his
position, powers, duties, salary or benefits, Mr. Smith will receive (i) a lump
sum amount equal to his then-current salary and (ii) salary and benefit
continuation through the expiration date of the then-applicable term.
Roman G. Ptakowski. Mr. Ptakowski is party to an employment agreement dated
December 8, 1997 that is automatically renewed for additional one-year terms
unless either Mr. Ptakowski or the company gives the other party at least 30
days written notice prior to the then-applicable expiration date. Under the
terms of his employment agreement, Mr. Ptakowski receives an annual salary of
$247,286 per year subject to adjustment from time to time by the Board of
Directors. In all other respects, Mr. Ptakowski's agreement is substantially
similar to Mr. Smith's employment agreement.
Michael B. Baughan. Mr. Baughan is party to an employment agreement dated
May 28, 1999 that is automatically renewed for additional one-year terms unless
either Mr. Baughan or the company gives the other party at least 30 days written
notice prior to the then-applicable expiration date. Under the terms of his
employment agreement, Mr. Baughan receives an annual salary of $251,550 per year
subject to adjustment from time to time by the Board of Directors. In all other
respects, Mr. Baughan's agreement is substantially similar to Mr. Smith's
employment agreement.
Mark D. Krosney. Mr. Krosney is party to an employment agreement dated
January 15, 2001 that is automatically renewed for additional one-year terms
unless either Mr. Krosney or the company gives the other party at least 30 days
written notice prior to the then-applicable expiration date. Under the terms of
his employment agreement, Mr. Krosney receives an annual salary of $231,114 per
year subject to adjustment from time to time by the Board of Directors. In all
other respects, Mr. Krosney's agreement is substantially similar to Mr. Smith's
employment agreement.
Robert A. Marchetti. Mr. Marchetti is party to an employment agreement
dated February 26, 2001 that is automatically renewed for additional one-year
terms unless either Mr. Marchetti or the company gives the other party at least
30 days written notice prior to the then-applicable expiration date. Under the
terms of his employment agreement, Mr. Marchetti receives an annual salary of
$231,114 per year subject to adjustment from time to time by the Board of
Directors. In all other respects, Mr. Marchetti's agreement is substantially
similar to Mr. Krosney's employment agreement.
Compensation of Directors
Directors who are also our employees receive no additional compensation for
serving on our Board of Directors. Directors who are not also our employees (the
"Eligible Directors") receive compensation of $12,500 per calendar quarter, half
in cash and half in our common stock pursuant to our Non-Employee Directors
Deferred Stock Plan. The portion of the compensation paid in the form of shares
of common stock is held in an account until the termination of a director's
service, when the shares are distributed to the director in the form elected.
The Board of Directors has the authority to accelerate the distribution of the
shares in extraordinary circumstances. In the event of a change of control (as
defined), the share accounts will be distributed to the directors in a lump sum.
Eligible Directors are also entitled to participate in our 2001
Non-Employee Directors' Stock Option Plan, as amended from time to time. Under
our Plan, each Eligible Director is awarded options to purchase 5,000 shares of
common stock on December 15th of each year the plan is in effect, provided he or
she is an Eligible Director on that date. In addition, each Eligible Director is
awarded options to purchase 35,000 shares of common stock as of the date of his
or her first election as a director. The exercise price of all options granted
under the 2001 Non-Employee Directors' Plan may not be less than 100% of the
fair market value of our common stock on the date of the grant. Options expire
10 years after the date of grant and become exercisable with respect to 25% of
the shares on each of the first through fourth anniversaries of the date of
grant, subject to certain conditions that accelerate vesting. On December 17,
2001, each of the following directors was awarded an option to purchase 5,000
shares of common stock at a price of $8.75 per share: Jim C. Cowart, Richard G.
Hamermesh, Jonathan M. Schofield and Brian H. Rowe.
[Remainder of this page intentionally left blank]
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table and notes thereto set forth certain information with
respect to the beneficial ownership of our common stock as of May 14, 2002 by
(i) each person who is known to us to beneficially own more than 5% of the
outstanding shares of common stock of the company; (ii) each of our chief
executive officer and the seven other most highly paid executive officers in
Fiscal 2002 and each of our directors; and (iii) all of our executive officers
and directors as a group. Except as otherwise indicated, each of the
stockholders named below has sole voting and investment power with respect to
the shares of common stock beneficially owned:
Common Stock
Beneficially Owned
Percent of
Number of Outstanding
Shares Shares(1)
--------- -----------
ICM Asset Management, Inc........................................................ 4,099,692 10.75%
601 West Main Avenue
Spokane, WA 99201
Mellon Financial Corporation..................................................... 2,114,030 5.55%
One Mellon Center
Pittsburgh, PA 15258
Amin J. Khoury+*................................................................. 760,000 (2) 1.99%
Robert J. Khoury+*............................................................... 584,055 (3) 1.53%
Thomas P. McCaffrey+............................................................. 410,085 (4) 1.08%
Jim C. Cowart*................................................................... 286,200 (5) **
Scott A. Smith+.................................................................. 235,314 (6) **
Roman G. Ptakowski+.............................................................. 183,028 (7) **
Brian H. Rowe*................................................................... 155,000 (8) **
Michael B. Baughan+.............................................................. 131,648 (9) **
Mark D. Krosney+................................................................. 56,750 (10) **
Richard G. Hamermesh*............................................................ 49,850 (11) **
Robert A. Marchetti+............................................................. 28,478 (12) **
Jonathan M. Schofield*........................................................... 12,750 (13) **
All Directors and Executive Officers as a group (14 Persons)..................... 3,104,879 8.14%
- --------------
+ Named Executive Officer
* Director of the company
** Less than 1 percent
(1) The number of shares of common stock deemed outstanding includes: (i)
35,462,101 shares of common stock outstanding as of May 15, 2002 and (ii)
shares of common stock subject to outstanding stock options which are
exercisable by the named individual or group in the next sixty days
(commencing May 15, 2002).
(2) Includes 637,500 shares issuable upon the exercise of stock options
exercisable in the next sixty days. Excludes options to purchase 147,500
shares of common stock that are not exercisable in the next sixty days.
Excludes shares owned by children and grandchildren in which Mr. Khoury has
no beneficial interest.
(3) Includes 537,500 shares issuable upon the exercise of stock options
exercisable in the next sixty days and shares owned pursuant to our 401(k)
Plan. Excludes options to purchase 147,500 shares of common stock that are
not exercisable in the next sixty days.
(4) Includes 355,000 shares issuable upon the exercise of stock options
exercisable in the next sixty days and shares owned pursuant to our 401(k)
Plan. Excludes options to purchase 95,000 shares of common stock that are
not exercisable in the next sixty days.
(5) Includes 97,500 shares issuable upon the exercise of stock options
exercisable in the next sixty days. Excludes options to purchase 12,500
shares of common stock that are not exercisable in the next sixty days.
(6) Includes 205,000 shares issuable upon the exercise of stock options
exercisable in the next sixty days and shares owned pursuant to our 401(k)
Plan. Excludes options to purchase 75,000 shares of common stock that are
not exercisable in the next sixty days.
(7) Includes 173,750 shares issuable upon the exercise of stock options
exercisable in the next sixty days and shares owned pursuant to our 401(k)
Plan. Excludes options to purchase 81,250 shares of common stock that are
not exercisable in the next sixty days.
(8) Includes 57,500 shares issuable upon the exercise of stock options
exercisable in the next sixty days. Excludes options to purchase 12,500
shares of common stock that are not exercisable in the next sixty days.
(9) Includes 123,750 shares issuable upon the exercise of stock options
exercisable in the next sixty days and shares owned pursuant to our 401(k)
Plan. Excludes options to purchase 72,500 shares of common stock that are
not exercisable in the next sixty days.
(10) Includes 56,250 shares issuable upon the exercise of stock options
exercisable in the next sixty days. Excludes options to purchase 61,250
shares of common stock that are not exercisable in the next sixty days.
(11) Includes 16,250 shares issuable upon the exercise of stock options
exercisable in the next sixty days. Excludes options to purchase 12,500
shares of common stock that are not exercisable in the next sixty days.
(12) Includes 27,500 shares issuable upon the exercise of stock options
exercisable in the next sixty days and shares owned pursuant to our 401(k)
Plan. Excludes options to purchase 57,500 shares of common stock that are
not exercisable in the next sixty days.
(13) Includes 8,750 shares issuable upon the exercise of stock options
exercisable in the next sixty days. Excludes options to purchase 31,250
shares of common stock that are not exercisable in the next sixty days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Relationships and Related Transactions
In 1990, we adopted a formal policy whereby all transactions between our
officers, directors, principal stockholders or other affiliates must be on terms
no less favorable to the company than could be obtained from unaffiliated third
parties on an arm's-length basis, and such transactions will be approved by a
majority of our independent and disinterested directors.
During fiscal 2002, Jim C. Cowart, a director of the company, received
compensation for his involvement in our acquisition program and for various
consulting services he performed for us. We issued an aggregate of 51,345 shares
of common stock to JCDL, Inc. as nominee for Mr. Cowart and David Lahar in
connection with our acquisition of Alson Industries, Inc., T.L. Windust Machine,
Inc., DMGI, Inc. and Maynard Precision, Inc. Of the shares of common stock held
by JCDL, Inc., 33,600 (with an aggregate fair market value of $750,000) were
beneficially owned by Mr. Cowart. Mr. Cowart also received a cash payment of
$200,000 during fiscal 2002 for consulting services provided to us relating to
our acquisition of Nelson Aero Space, Inc. and M & M Aerospace Hardware, Inc.
[Remainder of this page intentionally left blank]
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
1. Consolidated Financial Statements
Independent Auditors' Report.
Consolidated Balance Sheets, February 23, 2002 and February 24, 2001.
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the Years Ended February 23, 2002, February 24, 2001 and February
26, 2000.
Consolidated Statements of Stockholders' Equity for the Years Ended
February 23, 2002, February 24, 2001 and February 26, 2000.
Consolidated Statements of Cash Flows for the Years Ended February 23,
2002, February 24, 2001 and February 26, 2000.
Notes to Consolidated Financial Statements for the Years Ended February
23, 2002, February 24, 2001 and February 26, 2000.
2. Consolidated Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
All other consolidated financial statement schedules are omitted
because such schedules are not required or the information required has
been presented in the aforementioned consolidated financial statements.
3. Exhibits - The exhibits listed in the following "Index to Exhibits" are
filed with this Form 10-K or incorporated by reference as set forth
below.
(b) The following reports and registration statements were filed during
the quarter ended February 23, 2002.
None
(c) The exhibits listed in the following "Index to Exhibits" are filed with
this Form 10-K or incorporated by reference as set forth below.
(d) Additional Financial Statement Schedules - None.
INDEX TO EXHIBITS
Exhibit
Number Description
Exhibit 3 Articles of Incorporation and By-Laws
3.1 Amended and Restated Certificate of Incorporation (1)
3.2 Certificate of Amendment of the Restated Certificate of Incorporation (2)
3.3 Certificate of Amendment of the Restated Certificate of Incorporation (8)
3.4 Amended and Restated By-Laws (9)
Exhibit 4 Instruments Defining the Rights of Security Holders,
including debentures
4.1 Specimen Common Stock Certificate (1)
4.2 Form of Note for the Registrant's 9 1/2% Senior Subordinated Notes (10)
4.3 Indenture dated November 2, 1998 between The Bank of New York, as trustee,
and the Registrant relating to the Registrant's 9 1/2% Senior Subordinated
Notes (10)
4.4 Form of Note for the Registrant's 8% Series B Senior Subordinated
Notes (3)
4.5 Indenture dated February 13, 1998 for the Registrant's issue of 8%
Senior Subordinated Notes (3)
4.6 Indenture dated April 17, 2001 between The Bank of New York, as
trustee, and the Registrant relating to the Registrant's 8 7/8% Senior
Subordinated Notes and Series B 8 7/8% Senior Subordinated Notes (15)
4.7 Form of Note for the Registrant's 8 7/8% Senior Subordinated Notes
and Series B Subordinated Notes (15)
4.8 Rights Agreement between the Registrant and BankBoston, N.A.,
as rights agent, dated as of November 12, 1998 (9)
Exhibit 10(i) Material Contracts
10.1 Credit Agreement dated as of August 21, 2001 between the Registrant,
Lenders, JP Morgan Securities Inc. and The Chase Manhattan Bank (17)
10.2 Amendment No. 1 to the Credit Agreement (18)
10.3 Acquisition Agreement dated as of December 14, 1995 by and among the
Registrant, Eagle Industrial Products Corporation, Eagle Industries, Inc.
and Great American Management and Investment, Inc. (4)
10.4 Asset Purchase Agreement dated as of April 16, 1998 by and between
Stanford Aerospace Group, Inc. and the Registrant (5)
10.5 Stock Purchase Agreement dated as of March 31, 1998 by and between the
Registrant and Puritan Bennett Corporation (6)
10.6 Acquisition Agreement dated July 21, 1998 among the Registrant and Sellers
named therein (21)
10.7 Agreement with Thomson-CSF Sextant, Inc. for the sale of a 49% interest
in the company's In-Flight Entertainment business (13)
10.8 Acquisition Agreement dated as of August 10, 2001 among the Registrant and
the Shareholders of M&M Aerospace, Inc. (16)
Exhibit 10(ii) Leases
10.09 Lease dated October 20, 1997 by and between Snap-on Incorporated,
as lessor and Aerospace Lighting Corp.,
as lessee related to the Holbrook, New York property.*
Exhibit
Number Description
10.10 Lease dated October of 1998 between Kilroy Realty, L.P., as lessor and
the Registrant, as lessee, related to the Anaheim, California property.*
10.11 Lease dated October 16, 1997, by and between Flight Structures, Inc, as
the lessee and Arlington Developers, as lessor related to the
Arlington, Washington property.*
10.12 Lease dated May 5, 2000, by and between Arlington Associates, as landlord
and Flight Structures, Inc., as tenant related to the
Arlington, Washington property.*
10.13 Lease dated June 9, 1997, by and between Pacific Industrual Park LP1 and
Flight Structures, Inc., as tenant related to the
Arlington, Washington property.*
10.14 Lease dated February 20, 2001, between Pelmad Corporation, as landlord
and the Registrant, as tenant related to the Miami, Florida property.*
Exhibit 10(iii) Executive Compensation Plans and Arrangements
10.15 Amended and Restated Employment Agreement as of September 14, 2001
Between the Registrant and Amin J. Khoury. (17)
10.16 Amendment No. 1 to Amended and Restated Employment Agreement dated
May 15, 2002 between the Registrant and Amin J. Khoury.*
10.17 Amended and Restated Employment Agreement as of September 14, 2001 Between
the Registrant and Robert J. Khoury. (17)
10.18 Amendment No. 1 to Amended and Restated Employment Agreement dated
May 15, 2002 between the Registrant and Robert J. Khoury.*
10.19 Amended and Restated Employment Agreement as of September 14, 2001
Between the Registrant and Thomas P. McCaffrey. (17)
10.20 Amendment No. 1 to Amended and Restated Employment Agreement dated
September 14, 2001 between the Registrant and Thomas P. McCaffrey.*
10.21 Amendment No. 2 to Amended and Restated Employment Agreement dated
May 15, 2002 between the Registrant and Thomas P. McCaffrey.*
10.22 Employment Agreement dated as of March 6, 1998 between the Registrant
and Scott A. Smith.*
10.23 Employment Agreement dated as of December 7, 1997 between the Registrant
and Roman G. Ptakowski.*
10.24 Employment Agreement dated as of May 28, 1999 between the Registrant
and Michael B. Baughan.*
10.25 Employment Agreement dated as of January 15, 2001 between the Registrant
and Mark D. Krosney.*
10.26 Employment Agreement dated as of February 26, 2001 between the Registrant
and Robert A. Marchetti.*
10.27 Amended and Restated 1989 Stock Option Plan. (19)
10.28 Amendment No. 1 to Amended and Restated 1989 Stock Option Plan. (12)
10.29 1991 Directors' Stock Option Plan. (7)
10.30 United Kingdom 1992 Employee Share Option Scheme. (2)
10.31 1996 Stock Option Plan. (19)
10.32 Amendment No. 1 to the 1996 Stock Option Plan. (12)
10.33 Amendment No. 2 to the 1996 Stock Option Plan. (14)
10.34 2001 Stock Option Plan. (20)
10.35 2001 Directors' Stock Option Plan. (20)
10.36 1994 Employee Stock Purchase Plan (Amended and Restated as of
January 19, 2000). (14)
10.37 Supplemental Executive Deferred Compensation Plan III. (11)
Exhibit 12 Statements re computation of ratios
12.1 Statement of computation of ratio of earnings to fixed charges*
Exhibit 21 Subsidiaries of the Registrant
21.1 Subsidiaries *
Exhibit 23 Consents of Experts and Counsel
23.1 Consent of Independent Accountants - Deloitte & Touche LLP*
- ------------------
* Filed herewith.
(1) Incorporated by reference to the company's Registration Statement
on Form S-1, as amended (No. 33-33689), filed with the Commission on
March 7, 1990.
(2) Incorporated by reference to the company's Registration Statement
on Form S-1, as amended (No. 333-54146), filed with the Commission on
November 3, 1992.
(3) Incorporated by reference to the company's Registration Statement
on Form S-4 (No. 333-47649), filed with the Commission on March 10, 1998.
(4) Incorporated by reference to the company's Current Report on Form 8-K
dated December 14, 1995, filed with the Commission on December 28,
1995.
(5) Incorporated by reference to the company's Current Report on Form 8-K
dated May 8, 1998, filed with the Commission on May 8, 1998.
(6) Incorporated by reference to the company's Current Report on Form 8-K
dated March 31, 1998, filed with the Commission on April 27, 1998.
(7) Incorporated by reference to the company's Registration Statement on
Form S-8 (No. 333-48010), filed with the Commission on May 26, 1992.
(8) Incorporated by reference to the company's Registration Statement on
Form S-3 (No. 333-60209), filed with the Commission on July 30, 1998.
(9) Incorporated by reference to the company's Current Report on Form 8-K
dated November 12, 1998, filed with the Commission on November 18,
1998.
(10) Incorporated by reference to the company's Registration Statement on
Form S-4 (No. 333-67703), filed with the Commission on January 13, 1999.
(11) Incorporated by reference to the company's Quarterly Report on Form
10-Q for the quarter ended May 29, 1999, filed with the Commission on
July 9, 1999.
(12) Incorporated by reference to the company's Registration Statement on
Form S-8 (No. 333-89145), filed with the Commission on October 15, 1999.
(13) Incorporated by reference to the company's Quarterly Report on Form
10-Q for the quarter ended November 27, 1999, filed with the Commission
on January 7, 2000.
(14) Incorporated by reference to the company's Registration Statement on
Form S-8 (No. 333-30578), filed with the Commission on February 16, 2000.
(15) Incorporated by reference to the company's Registration Statement on
Form S-4 (No. 333-62674) as filed with the Commission on June 8, 2001.
(16) Incorporated by reference to the company's Current Report on Form 8-K
dated August 10, 2001 and filed with the Commission on August 21, 2001.
(17) Incorporated by reference to the company's Quarterly Report on Form
10-Q for the quarter ended August 25, 2001, filed with the Commission
on October 9, 2001.
(18) Incorporated by reference to the company's Quarterly Report on Form
10-Q for the quarter ended November 24, 2001, filed with the Commission
on January 8, 2002.
(19) Incorporated by reference to the company's Registration Statement on
Form S-8 (No. 333-14037), filed with the Commission on October 15, 1996.
(20) Incorporated by reference to the company's Registration Statement on
Form S-8 (No. 333-71442), filed with the Commission on October 11, 2001.
(21) Incorporated by reference to the company's Current Report on Form 8-K
dated August 24, 1998, filed with the Commission on August 24, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized.
BE AEROSPACE, INC.
By: /s/
------------------------
Robert J. Khoury
President and Chief Executive Officer
Dated: May 14, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this Form
10-K has been signed on May 14, 2002 by the following persons on behalf of the
registrant in the capacities indicated.
Signature Title
Chairman
- -----------------------------------
Amin J. Khoury
President and Chief Executive Officer
- -----------------------------------
Robert J. Khoury
Corporate Senior Vice President of
Administration and Chief
Financial Officer
- -----------------------------------
Thomas P. McCaffrey (principal financial and accounting officer)
Director
- -----------------------------------
Jim C. Cowart
Director
- -----------------------------------
Richard G. Hamermesh
Director
- -----------------------------------
Brian H. Rowe
Director
- -----------------------------------
Jonathan M. Schofield
ITEM 8. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Balance Sheets, February 23, 2002 and February 24, 2001 F-3
Consolidated Statements of Operations and Comprehensive F-4
Income (Loss) for the Years Ended February 23, 2002,
February 24, 2001 and February 26, 2000
Consolidated Statements of Stockholders' Equity for the Years Ended F-5
February 23, 2002, February 24, 2001 and February 26, 2000
Consolidated Statements of Cash Flows for the Years Ended F-6
February 23, 2002, February 24, 2001 and February 26, 2000
Notes to Consolidated Financial Statements for the Years Ended F-7
February 23, 2002, February 24, 2001 and February 26, 2000
Consolidated Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for the Years Ended F-23
February 23, 2002, February 24, 2001 and February 26, 2000
[Remainder of page intentionally left blank]
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
BE Aerospace, Inc.
Wellington, Florida
We have audited the accompanying consolidated balance sheets of BE
Aerospace, Inc. and subsidiaries as of February 23, 2002 and February 24, 2001,
and the related consolidated statements of operations and comprehensive income
(loss), stockholders' equity, and cash flows for each of the three fiscal years
in the period ended February 23, 2002. Our audits also included the financial
statement schedule on page F-23. These financial statements and financial
statement schedule are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of BE Aerospace, Inc. and
subsidiaries as of February 23, 2002 and February 24, 2001, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended February 23, 2002, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
DELOITTE & TOUCHE LLP
Costa Mesa, California
April 8, 2002
CONSOLIDATED BALANCE SHEETS, FEBRUARY 23, 2002 AND FEBRUARY 24, 2001 (In
millions, except per share data)
ASSETS 2002 2001
- ------ ---- ----
Current Assets:
Cash and cash equivalents $ 159.5 $ 60.3
Accounts receivable - trade, less allowance for doubtful
accounts of $4.9 (2002) and $2.6 (2001) 93.3 99.7
Inventories, net 157.0 135.0
Other current assets 46.6 50.1
--------- --------
Total current assets 456.4 345.1
Property and equipment, net 142.7 157.5
Goodwill, net 333.1 216.1
Identified intangibles and other assets, net 196.1 217.3
--------- --------
$ 1,128.3 $ 936.0
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 48.1 $ 64.7
Accrued liabilities 102.2 99.7
Current portion of long-term debt 1.3 5.8
--------- --------
Total current liabilities 151.6 170.2
--------- --------
Long-term debt (Note 9) 853.5 603.8
Other liabilities 2.1 26.7
Commitments and contingencies (Note 11)
Stockholders' Equity:
Preferred stock, $0.01 par value; 1 million shares
authorized; no shares outstanding - -
Common stock, $0.01 par value; 50 million shares
authorized; 34.4 million (2002) and 28.5 million (2001)
shares issued and outstanding 0.3 0.3
Additional paid-in capital 405.3 311.5
Accumulated deficit (258.7) (154.6)
Accumulated other comprehensive loss (25.8) (21.9)
--------- --------
Total stockholders' equity 121.1 135.3
--------- --------
$ 1,128.3 $ 936.0
========= ========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) FOR THE
YEARS ENDED FEBRURY 23, 2002, FEBRUARY 24, 2001 AND FEBRUARY 26, 2000
(In millions, except per share data)
Year Ended
----------------------------------------------------
February 23, February 24, February 26,
2002 2001 2000
-------- --------- ---------
Net sales $ 680.5 $ 666.4 $ 723.3
Cost of sales (Note 3) 530.1 416.6 543.6
-------- --------- ---------
Gross profit 150.4 249.8 179.7
Operating expenses:
Selling, general and administrative 114.4 100.8 94.9
Research, development and engineering 43.5 48.9 54.0
Amortization of intangible assets 25.0 23.4 24.1
-------- --------- ---------
Total operating expenses 182.9 173.1 173.0
-------- --------- ---------
Operating (loss) earnings (32.5) 76.7 6.7
Equity in losses of unconsolidated subsidiary - 1.3
Interest expense, net 60.5 54.2 52.9
-------- --------- ---------
(Loss) earnings before income taxes and extraordinary item (93.0) 22.5 (47.5)
Income taxes 1.8 2.2 3.3
-------- --------- ---------
Net (loss) earnings before extraordinary item (94.8) 20.3 (50.8)
Extraordinary item 9.3 - -
-------- --------- ---------
Net (loss) earnings (104.1) 20.3 (50.8)
Other comprehensive loss:
Foreign exchange translation adjustment (3.9) (11.3) (4.5)
-------- --------- ---------
Comprehensive (loss) income $ (108.0) $ 9.0 $ (55.3)
======== ========= =========
Basic (loss) earnings per share before extraordinary item $ (2.90) $ 0.80 $ (2.05)
Extraordinary item $ (0.28) - -
-------- --------- ---------
Basic (loss) earnings per share $ (3.18) $ 0.80 $ (2.05)
======== ========= =========
Weighted average common shares 32.7 25.4 24.8
======== ========= =========
Diluted (loss) earnings per share before extraordinary item $ (2.90) $ 0.78 $ (2.05)
Extraordinary item (0.28) - -
-------- --------- ---------
Diluted (loss) earnings per share $ (3.18) $ 0.78 $ (2.05)
======== ========= =========
Weighted average common shares 32.7 25.9 24.8
======== ========= =========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED FEBRUARY 23, 2002, FEBRUARY 24, 2001 AND FEBRUARY 26, 2000
(in millions)
Accumulated
Additional Other Total
Common Stock Paid-in Accumulated Comprehensive Stockholders'
Shares Amount Capital Deficit Loss Equity
------ ------ ------- ------- ---- ------
Balance, February 27, 1999 24.6 $ 0.2 $245.8 $(124.1) $ (6.1) $115.8
Sale of stock under
employee stock purchase plan 0.1 - 1.3 - - 1.3
Exercise of stock options - - 0.5 - - 0.5
Employee benefit plan
matching contribution 0.2 - 2.1 - - 2.1
Net loss - - - (50.8) - (50.8)
Foreign currency translation
adjustment - - - - (4.5) (4.5)
---- ------ ------ -------- ------ ------
Balance, February 26, 2000 24.9 0.2 249.7 (174.9) (10.6) 64.4
Sale of stock under
employee stock purchase plan 0.3 - 2.1 - - 2.1
Exercise of stock options 0.6 - 6.4 - - 6.4
Employee benefit plan
matching contribution 0.2 - 1.9 - - 1.9
Issuance of stock in connection
with acquisitions 2.5 0.1 51.4 - - 51.5
Net earnings - - - 20.3 - 20.3
Foreign currency translation
adjustment - - - - (11.3) (11.3)
---- ------ ------ ------- ------ ------
Balance, February 24, 2001 28.5 0.3 311.5 (154.6) (21.9) 135.3
Sale of stock under
employee stock purchase plan 0.1 - 1.9 - - 1.9
Exercise of stock options 0.4 - 4.2 - - 4.2
Employee benefit plan
matching contribution 0.2 - 2.6 - - 2.6
Issuance of stock in connection
with acquisitions 2.4 - 42.9 - - 42.9
Sale of common stock
under public offering 2.8 - 42.2 - - 42.2
Net loss (104.1) (104.1)
Foreign currency translation
adjustment - - - - (3.9) (3.9)
---- ------ ------ ------- ------ ------
Balance, February 23, 2002 34.4 $ 0.3 $405.3 $(258.7) $(25.8) $121.1
==== ====== ====== ======= ====== ======
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 23, 2002, FEBRUARY 24, 2001 AND FEBRUARY 26, 2000
(in millions)
CASH FLOWS FROM OPERATING ACTIVITIES: 2002 2001 2000
---- ---- ----
Net (loss) earnings $(104.1) $ 20.3 $ (50.8)
Adjustments to reconcile net (loss) earnings to
net cash flows provided by operating activities:
Extraordinary item 9.3 - -
Depreciation and amortization 46.8 42.8 42.2
Provision for accounts receivable 1.9 0.6 2.0
Deferred income taxes - - 1.1
Impairment of property and equipment, inventories
and other assets 62.9 - -
Impairment of intangible assets 20.4 - -
Non-cash employee benefit plan contributions 2.6 1.9 2.1
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable 19.7 6.0 34.4
Inventories 3.9 (6.4) (8.8)
Other current assets 31.3 1.8 (10.1)
Payables, accruals and other liabilities (36.8) (9.1) 4.8
------- ------ -------
Net cash flows provided by operating activities 57.9 57.9 16.9
------- ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (207.9) - -
Capital expenditures (13.9) (17.2) (33.2)
Change in intangibles and other assets (9.2) (0.9) (16.2)
------- ------ -------
Net cash flows used in investing activities (231.0) (18.1) (49.4)
------- ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Bank Credit Facility 155.0 - 97.0
Repayments of Bank Credit Facility (66.7) (24.5) (68.1)
Proceeds from issuance of stock, net of expenses 48.3 8.5 1.8
Principal payments on long-term debt (112.1) - -
Proceeds from long-term debt 248.4 - -
------- ------ -------
Net cash flows provided by (used in) financing activities 272.9 (16.0) 30.7
------- ------ -------
Effect of exchange rate changes on cash flows (0.6) (0.9) (0.3)
------- ------ -------
Net increase (decrease) in cash and cash equivalents 99.2 22.9 (2.1)
Cash and cash equivalents, beginning of year 60.3 37.4 39.5
------- ------ -------
Cash and cash equivalents, end of year $ 159.5 $ 60.3 $ 37.4
======= ====== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during year for:
Interest, net $ 56.7 $ 56.2 $ 51.7
Income taxes, net 1.6 2.9 4.9
Interest capitalized in computer equipment and software - 0.3 1.5
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
Stock issued in connection with acquisitions 42.9 51.5 -
Liabilities assumed and accrued acquisition
costs incurred in connection with the
acquisitions 11.2 14.5 -
Reclassification of Sextant Note from long-term
other asset to other current asset - 15.7 -
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 23, 2002, FEBRUARY 24, 2001 AND FEBRUARY 26, 2000
(in millions, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation - BE Aerospace, Inc. and its
wholly-owned subsidiaries (the "company" or "B/E") designs, manufactures, sells
and services a broad line of commercial aircraft and business jet cabin interior
products consisting of a broad range of seating products, interior systems,
including structures as well as all food and beverage storage and preparation
equipment and distributes aerospace fasteners. The company's principal customers
are the operators of commercial and business jet aircraft and aircraft
manufacturers. As a result, the company's business is directly dependent upon
the conditions in the commercial airline, business jet and aircraft
manufacturing industries. The accompanying financial statements are prepared in
accordance with accounting principles generally accepted in the United States.
Consolidation - The accompanying consolidated financial statements include
the accounts of BE Aerospace, Inc. and its wholly-owned subsidiaries. All
intercompany transactions and balances have been eliminated in consolidation.
The company's fiscal year ends on the last Saturday in February.
Use of Estimates - The preparation of the consolidated financial
statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
Revenue Recognition - Sales of parts, assembled products and equipment are
recorded on the date of shipment and passage of title or, if required, upon
acceptance by the customer. Service revenues are recorded when services are
performed. Revenues and costs under certain long-term contracts are recognized
using contract accounting under the percentage-of-completion method. The company
sells its products primarily to airlines worldwide, including occasional sales
collateralized by letters of credit. The company performs ongoing credit
evaluations of its customers and maintains reserves for estimated credit losses.
Income Taxes - The company provides deferred income taxes for temporary
differences between amounts of assets and liabilities recognized for financial
reporting purposes and such amounts recognized for income tax purposes. Deferred
income taxes are computed using enacted tax rates that are expected to be in
effect when the temporary differences reverse. A valuation allowance related to
a deferred tax asset is recorded when it is more likely than not that some
portion or all of the deferred tax asset will not be realized.
Warranty Costs - Estimated costs related to product warranties are accrued
at the time products are sold.
Cash Equivalents - The company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents.
Accounts Receivable - We perform ongoing credit evaluations of our
customers and adjust credit limits based upon payment history and the customer's
current credit worthiness, as determined by our review of their current credit
information. We continuously monitor collections and payments from our customers
and maintain a provision for estimated credit losses based upon our historical
experience and any specific customer collection issues that we have identified.
While such credit losses have historically been within our expectations and the
provisions established, we cannot guarantee that we will continue to experience
the same credit loss rates that we have in the past.
Inventories - We value our inventory at the lower of cost or market. We
regularly review inventory quantities on hand and record a provision for excess
and obsolete inventory based primarily on our estimated forecast of product
demand and production requirements. As demonstrated during fiscal 2002, demand
for our products can fluctuate significantly. Our estimates of future product
demand may prove to be inaccurate, in which case we may have understated or
overstated the provision required for excess and obsolete inventory. In the
future, if our inventory is determined to be overvalued, we would be required to
recognize such costs in our cost of goods sold at the time of such
determination. Likewise, if our inventory is determined to be undervalued, we
may have over-reported our costs of goods sold in previous periods and would be
required to recognize such additional operating income at the time of sale.
Goodwill and Identified Intangible Assets - Intangible assets consist of
goodwill and other identified intangible assets associated with the company's
acquisitions. Goodwill and other identified intangible assets acquired prior to
June 30, 2001 are amortized on a straight-line basis over their estimated useful
lives. Goodwill purchased in connection with the M & M acquisition was accounted
for under the provisions of Statement of Financial Accounting Standards No. 141
and, accordingly, was not amortized during the six months ended February 23,
2002. At each balance sheet date, management assesses whether there has been any
impairment in the value of intangible assets. If the carrying value of the asset
exceeds the estimated undiscounted future cash flows from operating activities
of the related business, an impairment is deemed to have occurred. In this
event, the asset is written down accordingly. During the year ended February 23,
2002, management determined that certain intangible assets having an unamortized
cost of $20.4 had been permanently impaired as a result of the decline in
industry conditions and facility consolidation.
Long-Lived Assets - The company accounts for the impairment and
disposition of long-lived assets in accordance with SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
In accordance with SFAS No. 121, long-lived assets are reviewed for events or
changes in circumstances that indicate that their carrying value may not be
recoverable. During the year ended February 23, 2002, management determined that
certain property, plant and equipment had been permanently impaired as a result
of the decline in industry conditions and facility consolidation. As a result,
the company recorded a charge of $24.1 in the third quarter of the year ended
February 23, 2002.
Research and Development - Research and development expenditures are
expensed as incurred.
Foreign Currency Translation - The assets and liabilities of subsidiaries
located outside the United States are translated into U.S. dollars at the rates
of exchange in effect at the balance sheet dates. Revenue and expense items are
translated at the average exchange rates prevailing during the period. Gains and
losses resulting from foreign currency transactions are recognized currently in
income, and those resulting from translation of financial statements are
accumulated as a separate component of stockholders' equity.
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which the company adopted beginning fiscal
2002. SFAS No. 133 requires the company to record all derivatives on the balance
sheet at fair value. The company does not currently hold derivatives or engage
in hedging activities; therefore, its implementation did not have a material
effect on the company's financial statements.
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations." SFAS 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The company has adopted SFAS 141 for acquisitions
occurring subsequent to June 30, 2001 (see Note 2).
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." The company is
required to adopt SFAS 142 for its fiscal year beginning February 24, 2002. SFAS
142 requires, among other things, the discontinuance of goodwill amortization.
In addition, the standard includes provisions for the reclassification of
certain existing recognized intangibles as goodwill, reassessment of the useful
lives of existing recognized intangibles, reclassification of certain
intangibles out of previously reported goodwill and the identification of
reporting units for purposes of assessing potential future impairments of
goodwill. SFAS 142 also requires the company to complete a transitional goodwill
impairment test six months from the date of adoption.
The company is currently assessing but has not yet determined the impact of
fully adopting SFAS 142 on its financial position and results of operations. The
company currently believes the recurring impact will be to reduce amortization
expense by approximately $15.0 annually, commencing in fiscal 2003.
In June 2001, the FASB issued SFAS No. 143, Accounting for Retirement
Obligations. SFAS 143 establishes accounting standards for the recognition and
measurement of an asset retirement obligation and its associated asset
retirement cost. It also provides accounting guidance for legal obligations
associated with the retirement of tangible long-lived assets. SFAS 143 is
effective for fiscal years beginning after June 15, 2002, with early adoption
permitted. The company is currently evaluating the provisions of SFAS 143 but
expects that the provisions of SFAS 143 will not have a material impact on its
consolidated results of operations and financial position upon adoption.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses the financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of" and will be effective
on February 24, 2002. We are assessing the impact, if any, SFAS No. 144 will
have on our consolidated financial statements.
Reclassifications - Certain reclassifications have been made to the prior
year financial statements to conform to the February 23, 2002 presentation.
2. ACQUISITIONS AND DISPOSITION
The company has completed a number of acquisitions and a disposition. The
following is a summary of these transactions:
2002 Acquisitions
Effective May 8, 2001, the company acquired the outstanding common stock of
Nelson Aero Space, Inc. for approximately $20.0. Effective July 18, 2001, the
company acquired the outstanding common stock of Denton Jet Interiors, Inc. for
approximately $16.0. Both of the transactions have been accounted for using
purchase accounting. The assets purchased and liabilities assumed have been
reflected in the accompanying balance sheet as of February 23, 2002.
On September 14, 2001, the company acquired M & M Aerospace Hardware, Inc.
("M & M") for $184.7. M & M is a leading distributor of aerospace fasteners. The
M & M acquisition was completed by issuing to the former shareholders a total of
approximately 1.9 million shares of B/E stock valued at $32.7, paying them
$152.0 in cash and assuming current liabilities of approximately $8.8. The
company financed this acquisition through cash on hand and approximately $100.0
of borrowings under its bank credit facility. This transaction has been
accounted for using purchase accounting and has been included in the company's
operations since the date of acquisition.
The company has not yet completed the evaluation and allocation of the
purchase price for the 2002 acquisitions as the appraisals associated with the
valuation of certain tangible assets are not yet complete. The company does not
believe that the appraisals will materially modify the preliminary purchase
price allocation.
The initial purchase price of M & M has been allocated based on
independent appraisals and management's estimates as follows:
Accounts receivable $ 13.4
Inventories 53.8
Other current assets 0.2
Property and equipment 16.7
Goodwill, (non-amortizing, tax deductible) 88.3
Trademark (indefinite life, non-amortizing) 19.4
Noncompete agreement (useful life of 8 years) 1.7
Current liabilities (8.8)
-----
$184.7
======
The company believes that the M&M acquisition resulted in the recognition of
goodwill primarily because of its industry position, management strength and
potential to serve as a platform for the consolidation of the business segment.
The following pro forma unaudited financial data for 2002 is presented to
illustrate the estimated effects of the 2002 acquisitions and 2001 acquisitions
as if the transactions had occurred as of the beginning of each fiscal period
presented. These results for fiscal 2002 include approximately $40.0 of
inventory adjustments recorded by M&M in the period prior to the acquisition.
2002 2001
---------------- -----------------
Net sales $ 741.4 $ 824.0
Net (loss) earnings before extraordinary item 123.9 36.3
Diluted (loss) earnings per share before
extraordinary item $ (3.67) $ 1.18
Net (loss) earnings (133.2) 36.3
Diluted (loss) earnings per share $ (3.95) $ 1.18
The company recorded costs and expenses associated with the acquisition of
M & M of approximately $6.8 which is included as a component of selling, general
and administrative expenses in the accompanying Consolidated Statements of
Operations for the year ended February 23, 2002.
2001 Acquisitions
Effective February 24, 2001, the company acquired four companies, Alson
Industries, Inc., T.L. Windust Machine, Inc., DMGI, Inc. and Maynard Precision,
Inc. (the "2001 Acquisitions"). These businesses specialize in manufacturing
precision-machined components and assemblies for the aerospace industry. The
2001 Acquisitions were completed by issuing to the former stockholders a total
of approximately 2.9 million shares of B/E common stock, paying them a total of
approximately $5.3 in cash and assuming or repaying indebtedness of
approximately $11.8. The consideration represents an aggregate purchase price of
approximately $70.1. Each of these transactions has been accounted for using
purchase accounting. The assets purchased and liabilities assumed have been
reflected in the accompanying balance sheet as of February 24, 2001.
The aggregate purchase price for the 2001 Acquisitions has been allocated
based on independent appraisals and management's estimates as follows:
Accounts receivable $ 4.9
Inventories 5.8
Other current assets 0.6
Property and equipment 10.6
Goodwill 50.2
Intangible assets and other 6.3
-----
$78.4
=====
The company recorded costs and expenses associated with the 2001
Acquisitions of approximately $5.8. The costs for the 2001 acquisitions include
costs associated with consolidation and integration of existing facilities
including lease termination costs and the impairment of property and equipment,
and retention benefits to existing employees in accordance with EITF 94-3 and
SFAS 121. These costs, along with approximately $2.5 of costs and expenses
attributable to the termination of the initial public offering of a subsidiary,
Advanced Thermal Sciences Corporation, have been presented as a component of
selling, general and administrative expenses in the accompanying Consolidated
Statements of Operations for the year ended February 24, 2001.
Disposition
In-Flight Entertainment Business
On February 25, 1999, the company completed the sale of a 51% interest in
its In-Flight Entertainment ("IFE") business to Sextant Avionique, Inc.
("Sextant"), a wholly-owned subsidiary of Sextant Avionique, S.A. (the "IFE
Sale"). The company sold its 51% interest in IFE for $62.0 in cash. Terms of the
purchase agreement provided for the final price for the 51% interest to be
determined on the basis of operating results for the IFE business over the
two-year period ending February 28, 2001. The company used substantially all of
the proceeds from the IFE Sale to repay a portion of its bank line of credit. On
October 5, 1999, the company completed the sale of its remaining 49% equity
interest in IFE to Sextant and this sale did not result in a significant gain.
Total consideration for 100% of its equity interest in IFE, intra-entity
obligations and the provision of marketing, product and technical consulting
services will range from a minimum of $93.6 up to $123.3 (inclusive of the $62.0
received in February 1999 for the sale of a 51% interest in IFE). Terms of the
agreement provide for the company to receive payments of $15.7 on October 5,
2000 and 2001, (the "IFE obligations") which are included in other current
assets net, in the accompanying financial statements as of February 23, 2002. A
third and final payment will be based on the actual sales and booking
performances over the period from March 1, 1999 to December 31, 2001. The IFE
obligations are guaranteed by Thomson-CSF, a parent company of Sextant
Avionique, S.A.. Sextant has not made any of the payments due to BE Aerospace,
Inc. under the terms of the purchase and sale agreement. The company has
initiated arbitration proceedings to compel payment. Sextant has counterclaimed
against the company, claiming various breaches of the IFE Sale agreements. The
company expects that this will be resolved and the amount collected during
fiscal 2003.
3. FACILITY CONSOLIDATIONS AND OTHER SPECIAL CHARGES
The rapid decline in industry conditions brought about by the terrorist
attacks on September 11, 2001 caused the company to implement a facility
consolidation plan designed to re-align its capacity and cost structure with
changed conditions in the airline industry. Under the plan, the company intends
to close five facilities and reduce its workforce by about 1,000 employees. As a
result, the company recorded a charge of $98.9 which included cash expenses of
approximately $15.6 and non-cash charges totaling approximately $62.9 associated
with the write-down of fixed assets, inventory and other assets and $20.4
million associated with the impairment of related intangible assets. In
addition, the company incurred approximately $5.7 of transition costs associated
with the facilities and personnel consolidation program, which are expensed as
incurred. The charge has been included in cost of sales for the year ended
February 23, 2002.
The $15.6 of cash charges related to involuntary severance and benefit
programs for approximately 1,000 employees, lease termination costs and
preparing facilities of disposal and sale. As of February 23, 2002, the company
had terminated approximately 201 employees and paid $1.1 in severance and
related termination benefits. As of April 30, 2002, 536 employees had been
terminated leaving approximately 464 employees to be terminated by November 30,
2002. The balance of the accrual for cash charges was related to lease
termination costs and estimated costs of preparing facilities for disposal and
sale, of which $2.0 was paid as of February 23, 2002.
Non-cash charges included impairment charges relating to property and
equipment ($24.1), inventory ($34.5) and other assets ($4.3). The charge
associated with property and equipment resulted from the decision to close five
factories and relocate production activities to other facilities. As a result of
changed industry conditions, early retirement of aircraft, program cancellations
and modifications and plant closures, the combined carrying value of inventories
and other assets at seven plants was reduced by approximately $38.8. As of
February 23, 2002, approximately $24.1 of inventory and other assets had been
charged off and physically disposed of.
Due to changed industry conditions, early retirement of aircraft and related
product lines and plant closures, certain intangible assets having an aggregate
carrying value of approximately $20.4 were determined to be permanently impaired
and were written off as of February 23, 2002.
Cash requirements related to facility consolidation activities were funded
from operations. Pretax cash outlays are expected to aggregate approximately
$12.5 during fiscal 2003.
The following table summarizes the facility consolidation costs accrued
during the year ended February 23, 2002:
Original Paid Balance at
Accrual Dispositions In Cash Feb. 23, 2002
-------------- -------------- --------------- ----------------
Accrued liability for severance, lease
termination and other costs $15.6 $ - $(3.1) $12.5
Impaired inventories, property and equipment 62.9 (50.8) - 12.1
Impaired intangible assets 20.4 (20.4) - -
-------------- -------------- --------------- ----------------
$98.9 $(71.2) $(3.1) $24.6
============== ============== =============== ================
4. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the weighted average cost method. Finished goods and work in process
inventories include material, labor and manufacturing overhead costs.
Inventories consist of the following:
2002 2001
---- ----
Raw materials and component parts $ 53.4 $ 54.6
Work-in-process 32.6 39.3
Finished goods 71.0 41.1
------ ------
$157.0 $135.0
====== ======
5. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated and amortized
generally on the straight-line method over their estimated useful lives of two
to thirty years (or the lesser of the term of the lease as to leasehold
improvements, as appropriate). Property and equipment consist of the following:
Useful Life
(Years) 2002 2001
----- ---- ----
Land, buildings and improvements 10-30 $ 61.2 $ 60.1
Machinery 3-13 56.6 57.3
Tooling 3-10 15.8 32.1
Computer equipment and software 4-15 81.8 77.5
Furniture and equipment 2-10 9.4 7.2
------ ------
224.8 234.2
Less accumulated depreciation and amortization (82.1) (76.7)
------ ------
$142.7 $157.5
====== ======
6. GOODWILL
Goodwill arising from business acquisitions is stated at cost, and for
acquisitions prior to June 30, 2001, is amortized over 30 years. The historical
cost and accumulated amortization are as follows:
2002 2001
---- ----
Goodwill $372.1 $246.3
Less accumulated amortization (39.0) (30.2)
------ ------
$333.1 $216.1
====== ======
7. IDENTIFIED INTANGIBLES AND OTHER ASSETS
Intangibles and other assets consist of the following:
Useful Life
(Years) 2002 2001
------- ---- ----
Developed technologies 4-20 $108.7 $108.7
Trademarks and patents 7-30 24.6 22.7
Trademarks non-amortizing 19.4 -
Technical qualifications, plans and drawings 3-30 25.5 50.0
Replacement parts annuity 3-30 23.4 23.6
Covenant not to compete 3-10 15.5 11.6
Other identified intangibles 10 15.1 19.0
Product approvals 3-22 14.2 24.5
Debt issue costs 5-10 23.0 23.8
Other assets 0.2 18.9
------ ------
269.6 302.8
Less accumulated amortization (73.5) (85.5)
------ ------
$196.1 $217.3
====== ======
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
2002 2001
---- ----
Other accrued liabilities $ 23.4 $ 36.9
Accrued restructuring 12.5 -
Accrued salaries, vacation and related benefits 17.0 28.4
Accrued interest 24.1 17.1
Accrued acquisition expenses 13.9 7.4
Accrued product warranties 11.3 9.9
------ ------
$102.2 $ 99.7
====== ======
9. LONG-TERM DEBT
Long-term debt consists of the following:
2002 2001
---- ----
8% Senior Subordinated Notes $249.7 $249.6
8 7/8% Senior Subordinated Notes 250.0 -
9 1/2% Senior Subordinated Notes 200.0 200.0
9 7/8% Senior Subordinated Notes - 100.0
Bank Credit Facility 145.0 56.7
Other long-term debt 10.1 3.3
------ ------
854.8 609.6
Less current portion of long-term debt (1.3) (5.8)
------ ------
$853.5 $603.8
====== ======
8% Senior Subordinated Notes
The 8% Senior Subordinated Notes (the "8% Notes") are unsecured senior
subordinated obligations of the company, subordinated to any senior indebtedness
of the company and mature on March 1, 2008. Interest on the 8% Notes is payable
semiannually in arrears on March 1 and September 1 of each year. The 8% Notes
are redeemable at the option of the company, in whole or in part, on or after
March 1, 2003, at predetermined redemption prices together with accrued and
unpaid interest through the date of redemption. Upon a change of control (as
defined), each holder of the 8% Notes may require the company to repurchase such
holder's 8% Notes at 101% of the principal amount thereof, plus accrued interest
to the date of such purchase.
8 7/8% Senior Subordinated Notes
In April 2001, the company sold $250.0 of 8 7/8% senior subordinated notes
due 2011. The net proceeds less estimated debt issue costs received from the
sale of the notes were approximately $242.8. Approximately $105.0 of proceeds
were used to redeem the $100 9 7/8% senior subordinated notes due 2006 and
approximately $66.7 of proceeds were used to repay balances outstanding under
our previous bank credit facility, which was then terminated.
The 8 7/8% Notes are unsecured senior subordinated obligations of the
company, subordinated to all existing and future senior indebtedness and mature
on May 1, 2011. Interest on the 8 7/8% Notes is payable semiannually in arrears
on May 1 and November 1 of each year. The 8 7/8% Notes are redeemable, at the
option of the company, in whole or in part, at any time on or after May 1, 2006,
at predetermined redemption prices together with accrued and unpaid interest
through the date of redemption. In addition, at any time prior to May 1, 2004,
the company may redeem up to 35% of the aggregate principal amount of the Notes
originally issued with the net proceeds of a public equity offering at 108.875
of the principal amount thereof, plus accrued interest, if at least 65% of the
aggregate amount of the notes originally issued remains outstanding after the
redemption. Upon a change in control (as defined), each holder of the 8 7/8%
Notes may require the company to repurchase such holder's 8 7/8% Notes at 101%
of the principal amount thereof, plus accrued interest to the date of such
purchase.
The 9 7/8% Senior Subordinated Notes (the "9 7/8% Notes") were senior
unsecured obligations of the company. The company redeemed the 9 7/8% Notes at a
redemption price equal to 104.97% of the principal amount, together with the
accrued interest to the redemption date. The company incurred an extraordinary
charge of $9.3 (net of tax) for unamortized debt issue costs, redemption
premiums and fees and expenses related to the redemption of the 9 7/8% Senior
Subordinated Notes.
9 1/2% Senior Subordinated Notes
The 9 1/2% Senior Subordinated Notes (the "9 1/2 Notes") are unsecured
senior subordinated obligations and are subordinated to any senior indebtedness
of the company and mature on November 1, 2008. Interest on the 9 1/2% Notes is
payable semiannually in arrears on May 1 and November 1 of each year. The 9 1/2%
Notes are redeemable at the option of the company, in whole or in part, at any
time after November 1, 2003 at predetermined redemption prices together with
accrued and unpaid interest through the date of redemption. Upon a change of
control (as defined), each holder of the 9 1/2% Notes may require the company to
repurchase such holder's 9 1/2% Notes at 101% of the principal amount thereof,
plus accrued and unpaid interest to the date of such purchase.
The 8% Notes, 8 7/8% Notes and 9 1/2% Notes contain certain restrictive
covenants, including limitations on future indebtedness, restricted payments,
transactions with affiliates, liens, dividends, mergers and transfers of assets,
all of which were met by the company as of February 23, 2002.
Bank Credit Facility
In August 2001, the company secured a new credit facility with J. P.
Morgan Chase (the "Bank Credit Facility"). The Bank Credit Facility consists of
$150.0 revolving credit facility (of which $100.0 may be utilized for
acquisitions). The Bank Credit Facility expires in August 2006 and is
collateralized by substantially all of the company's accounts receivable,
inventories and other personal property. At February 23, 2002, indebtedness
under the existing Bank Credit Facility consisted of letters of credit
aggregating approximately $4.7 and outstanding borrowings under the revolving
facility aggregating $145.0 (bearing interest at LIBOR plus 2.5%, or
approximately 4.77% as of February 23, 2002). The Bank Credit Facility contains
customary affirmative covenants, negative covenants and conditions of
borrowings, all of which were met by the company as of February 23, 2002.
A previous bank credit facility with J. P. Morgan Chase was terminated in
April 2001. This facility consisted of a $100.0 revolving credit facility and an
acquisition facility of $29.7. At February 24, 2001, indebtedness under this
previous bank credit facility consisted of revolving credit facility outstanding
borrowings of $27.0 (bearing interest at LIBOR plus 2.5%, or approximately 8.8%)
letters of credit aggregating approximately $4.6 and outstanding borrowings
under the acquisition facility aggregating $29.7 (bearing interest at LIBOR plus
2.5%, or approximately 9.2% as of February 24, 2001). This bank credit facility
was repaid and cancelled on April 17, 2001.
B/E Aerospace (UK) Limited, one of our subsidiaries, has a revolving line
of credit agreement aggregating approximately $7.3. This credit agreement is
collateralized by accounts receivable and inventory of B/E Aerospace (UK)
Limited. There were no borrowings outstanding under the credit agreement as of
February 23, 2002.
Maturities of long-term debt are as follows:
Year ending February,
2003 $ 1.3
2004 4.3
2005 0.6
2006 0.1
2007 148.8
Thereafter 699.7
--------
Total $ 854.8
========
Interest expense amounted to $66.2, $57.9 and $54.9 for the years ended
February 23, 2002, February 24, 2001 and February 26, 2000, respectively.
10. INCOME TAXES
Income tax expense consists of the following:
2002 2001 2000
---- ---- ----
Current:
Federal $ 0.7 $ 1.3 $ -
State - - -
Foreign 1.1 0.9 2.2
----- ----- -----
1.8 2.2 2.2
Deferred:
Federal 22.9 8.3 (19.3)
State 3.8 2.5 (1.6)
Foreign 4.0 1.1 0.7
----- ----- -----
30.7 11.9 (20.2)
Change in valuation allowance (30.7) (11.9) 21.3
----- ----- -----
$ 1.8 $ 2.2 $ 3.3
===== ===== =====
The difference between income tax expense and the amount computed by
applying the statutory U.S. federal income tax rate (35%) to the pretax earnings
before extraordinary item consists of the following:
2002 2001 2000
---- ---- ----
Statutory U.S. federal income tax expense (benefit) $ (32.5) $ 7.9 $(16.6)
Operating loss (with) without tax benefit 28.2 (10.9) 16.8
Goodwill amortization 3.2 3.3 2.5
Foreign tax rate differential 2.5 1.3 0.1
Meals and entertainment 0.2 0.3 0.3
Officer's life insurance 0.2 0.3 0.4
Other, net - - (0.2)
------- ------ ------
$ 1.8 $ 2.2 $ 3.3
======= ====== ======
The tax effects of temporary differences and carryforwards that give rise
to deferred income tax assets and liabilities consist of the following:
2002 2001 2000
---- ---- ----
Inventory reserves $ 8.9 $ 6.3 $ 6.2
Acquisition accruals (7.3) (6.4) (4.5)
Warranty accruals 4.8 3.5 8.0
Accrued liabilities 15.0 10.6 9.2
Other 2.1 1.5 1.1
------- ------ ------
Net current deferred income tax asset 23.5 15.5 20.0
------- ------ ------
Intangible assets (7.6) (11.1) (12.7)
Depreciation (15.5) (11.8) (3.7)
Net operating loss carryforward 83.0 48.3 51.3
Research credit carryforward 7.1 7.1 4.6
Deferred compensation 1.1 11.3 9.9
Research and development expense 19.2 20.9 22.6
Software development costs (5.5) (5.4) (5.4)
Other 1.0 0.8 0.8
------- ------ ------
Net noncurrent deferred income tax asset 82.8 60.1 67.4
------- ------ ------
Valuation allowance (106.3) (75.6) (87.4)
------- ------ ------
Net deferred tax assets (liabilities) $ - $ - $ -
======= ====== ======
The company established a valuation allowance of $106.3, as of February
23, 2002 related to the utilization of its deferred tax assets because of
uncertainties that preclude it from determining that it is more likely than not
that the company will be able to generate taxable income to realize such assets
during the federal operating loss carryforward period, which begins to expire in
2012. Such uncertainties include the impact of changing fuel prices on the
company's customers, recent cumulative losses, the highly cyclical nature of the
industry in which it operates, economic conditions impacting the airframe
manufacturers and the airlines, the company's high degree of financial leverage,
risks associated with new product introductions and risks associated with the
integration of acquisitions. The company monitors these as well as other
positive and negative factors that may arise in the future, as it assesses the
necessity for a valuation allowance against its deferred tax assets.
As of February 23, 2002, the company had federal, state and foreign net
operating loss carryforwards of $191.4, $138.4 and $3.5, respectively. The
federal and state net operating loss carryforwards begin to expire in 2012 and
2003, respectively. Approximately $17.2 of the company's net operating loss
carryforward is related to the exercise of stock options and will be credited to
additional paid-in capital rather than income tax expense when utilized.
As of February 23, 2002, the company had federal research tax credit and
alternative minimum tax credit carryforwards of $7.1 and $1.0, respectively. The
federal research tax credits begin to expire in 2012.
The company has not provided for any residual U.S. income taxes on the
approximately $18.2 of earnings from its foreign subsidiaries because such
earnings are intended to be indefinitely reinvested. Such residual U.S. income
taxes, if provided for, would be immaterial.
The company's federal tax returns for the years ended February 22, 1997,
February 28, 1998 and February 27, 1999 are currently under examination by the
Internal Revenue Service. Management believes that the resolution of this
examination will not have a material adverse effect on either the company's
results of operations or financial position.
11. COMMITMENTS AND CONTINGENCIES
Leases -- The company leases certain of its office, manufacturing and
service facilities and equipment under operating leases, which expire at various
times through July 2009. Rent expense for fiscal 2002, 2001 and 2000 was
approximately $9.7, $12.3 and $13.6, respectively. Future payments under
operating leases with terms currently greater than one year are as follows:
Fiscal year ending in February:
2003 $ 8.9
2004 6.6
2005 4.0
2006 3.2
2007 2.6
Thereafter 6.0
-----
$31.3
=====
Litigation -- The company is a defendant in various legal actions arising
in the normal course of business, the outcomes of which, in the opinion of
management, neither individually nor in the aggregate are likely to result in a
material adverse effect to the company's financial statements.
Employment Agreements -- The company has employment and compensation
agreements with three key officers of the company. One of the agreements
provides for an officer to earn a minimum of $765 thousand per year through a
three year period ending from any date after which it is measured, adjusted
annually for changes in the consumer price index (as defined) or as determined
by the company's Board of Directors, as well as a deferred compensation benefit
equal to the product of the years worked by 150% of the highest annual salary
paid over the period. Such deferred compensation is payable in a lump sum, less
any prior distributions.
A second agreement provides for an officer to receive annual minimum
compensation of $710 thousand per year through a three year period ending from
any date after which it is measured, adjusted annually for changes in the
consumer price index (as defined) or as determined by the company's Board of
Directors, as well as a deferred compensation benefit equal to the product of
the years worked by the highest annual salary paid over the period. In all other
respects, this officer's employment agreement contains similar provisions to
those described above in the first agreement.
A third agreement provides for an officer to receive annual minimum
compensation of $345 thousand per year through a three year period ending from
any date after which it is measured, adjusted annually for changes in the
consumer price index (as defined) or as determined by the company's Board of
Directors, as well as a deferred compensation benefit equal to the product of
the number of years worked by one-half of this officer's average highest three
year's annual salary (as defined). Such deferred compensation is payable in a
lump sum, less any prior distributions.
Deferred compensation for these three officers has been accrued as
provided for under the above mentioned employment agreements. Through December
31, 2001, the company funded these and other deferred compensation obligations
through corporate-owned life insurance policies and other investments, all of
which were maintained in an irrevocable rabbi trust. The rabbi trust was
terminated and the funds were deposited into individual retirement accounts for
the benefit of the executives in January 2002. All contributions and prior
deferred compensation made subsequent to January 2002 are maintained in
individual grantor trusts on behalf of each of the executives. In addition, the
company has employment agreements with certain other key members of management
that provide for aggregate minimum annual base compensation of $2.9 million
expiring on various dates through the year 2002.
12. EMPLOYEE RETIREMENT PLANS
The company sponsors and contributes to a qualified, defined contribution
Savings and Investment Plan covering substantially all U.S. employees. The
company also sponsors and contributes to nonqualified deferred compensation
programs for certain other employees. The company has invested in
corporate-owned life insurance policies to assist in funding certain of these
programs. The cash surrender values of these policies and other investments
associated with these plans are maintained in an irrevocable rabbi trust and are
recorded as assets of the company. In addition, the company and its subsidiaries
participate in government-sponsored programs in certain European countries. In
general, the company's policy is to fund these plans based on legal
requirements, tax considerations, local practices and investment opportunities.
The BE Aerospace Savings and Investment Plan was established pursuant to
Section 401(k) of the Internal Revenue Code. Under the terms of the plan,
covered employees are allowed to contribute up to 15% of their pay, limited to
$10.5 thousand per year. The company match is equal to 50% of employee
contributions, subject to a maximum of 8% of an employee's pay and is generally
funded in company stock. Total expense for the plan was $3.4, $1.9 and $2.1 for
the years ended February 23, 2002, February 24, 2001 and February 26, 2000,
respectively. Participants vest 100% in the company match after three years of
service.
The BE Supplemental Executive Retirement Plan was an unfunded plan
maintained for the purpose of providing deferred compensation for certain
employees. This plan, which was terminated effective January 2, 2002, allowed
certain employees to annually elect to defer a portion of their compensation, on
a pre-tax basis, until their retirement. The retirement benefit to be provided
is based on the amount of compensation deferred, company cash match and earnings
on participant deferrals. Deferred compensation expense was $0.3, $0.2 and $0.3
in fiscal 2002, 2001 and 2000, respectively.
13. STOCKHOLDERS' EQUITY
Earnings (Loss) Per Share. Basic earnings per common share are determined
by dividing earnings available to common shareholders by the weighted average
number of shares of common stock. Diluted earnings per share are determined by
dividing earnings available to common shareholders by the weighted average
number of shares of common stock and dilutive common stock equivalents
outstanding (all related to outstanding stock options discussed below).
The following table sets forth the computation of basic and diluted net
(loss) earnings per share for the years ended February 23, 2002, February 24,
2001 and February 26, 2000:
2002 2001 2000
---- ---- ----
Numerator - Net (loss) earnings $(104.1) $20.3 $(50.8)
======= ===== ======
Denominator:
Denominator for basic earnings (loss) per share -
Weighted average shares 32.7 25.4 24.8
Effect of dilutive securities -
Employee stock options - 0.5 -
------- ----- ------
Denominator for diluted (loss) earnings per share -
Adjusted weighted average shares 32.7 25.9 24.8
======= ===== ======
Basic net (loss) earnings per share $(3.18) $0.80 $(2.05)
======= ===== ======
Diluted net (loss) earnings per share $(3.18) $0.78 $(2.05)
======= ===== ======
The company excluded approximately 1.1 million and 0.2 million of dilutive
securities from the calculation of loss per share for the years ended February
23, 2002 and February 26, 2000, respectively.
Stock Option Plans. The company has various stock option plans, including
the Amended and Restated 1989 Stock Option Plan, the 1991 Directors Stock Option
Plan, the 1992 Share Option Scheme and the Amended and Restated 1996 Stock
Option Plan (collectively, the "Option Plans"), under which shares of the
company's common stock may be granted to key employees and directors of the
company. The Option Plans provide for granting key employees options to purchase
the company's common stock. Options are granted at the discretion of the Stock
Option and Compensation Committee of the Board of Directors. Options granted
vest 25% on the date of grant and 25% per year thereafter.
The following tables set forth options granted, canceled, forfeited and
outstanding:
February 23, 2002
Options Option Price Weighted Average
(in thousands) Per Share Price Per Share
-------------- --------- ---------------
Outstanding, beginning of period 6,056 $6.94 - $31.50 $17.30
Options granted 1,980 4.08 - 21.88 5.55
Options exercised (365) 4.08 - 22.75 11.60
Options forfeited (612) 4.08 - 29.87 19.93
------
Outstanding, end of period 7,059 4.08 - 31.50 14.41
======
Exercisable at end of year 4,535 $4.08 - $31.50 $17.43
======
February 24, 2001
Options Option Price Weighted Average
(in thousands) Per Share Price Per Share
-------------- --------- ---------------
Outstanding, beginning of period 5,808 $7.00 - $31.50 $18.00
Options granted 1,231 6.94 - 16.00 12.05
Options exercised (600) 6.94 - 19.00 10.61
Options forfeited (383) 6.94 - 29.88 19.98
------
Outstanding, end of period 6,056 6.94 - 31.50 17.30
======
Exercisable at end of year 3,793 $6.94 - $31.50 $19.54
======
February 26, 2000
Options Option Price Weighted Average
(in thousands) Per Share Price Per Share
-------------- --------- ---------------
Outstanding, beginning of period 3,999 $ 7.00 - $31.50 $21.42
Options granted 2,335 7.00 - 17.75 12.93
Options exercised (49) 7.63 - 20.81 8.93
Options forfeited (477) 16.13 - 29.88 22.57
-----
Outstanding, end of period 5,808 7.00 - 31.50 18.00
=====
Exercisable at end of year 3,204 $ 7.00 - $31.50 $19.13
=====
At February 23, 2002, options were available for grant under each of the
company's Option Plans.
Options Outstanding
at February 23, 2002
--------------------------------------------------------------------------------------------------------------
Weighted Weighted
Options Average Average Weighted
Range of Outstanding Exercise Remaining Options Average
Exercise Price (in thousands) (years) Contractual Life Exercisable Exercise
-------------- -------------- --------- ---------------- ----------- --------
$4.08 1,570 $4.08 9.58 352 $4.08
$6.75 - $8.50 1,211 $8.04 7.32 757 $8.26
$8.62 - $17.75 1,970 $14.51 7.51 1,212 $14.97
$18.37 - $21.50 1,271 $20.30 5.96 1,223 $20.36
$21.88 - $31.50 1,037 $28.24 5.74 991 $28.52
----- -----
7,059 4,535
===== =====
The estimated fair value of options granted during fiscal 2002, fiscal
2001 and fiscal 2000 was $4.17 per share, $7.80 per share and $10.70 per share,
respectively. The company applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for its stock option and purchase plans.
Accordingly, no compensation cost has been recognized for its stock option plans
and stock purchase plan. Had compensation cost for the company's stock option
plans and stock purchase plan been determined consistent with SFAS No. 123, the
company's net (loss) earnings and net (loss) earnings per share for the years
ended February 23, 2002, February 24, 2001 and February 26, 2000 would have been
reduced to the pro forma amounts indicated in the following table:
2002 2001 2000
---- ---- ----
As reported
Net (loss) earnings $(104.1) $20.3 $(50.8)
Diluted net (loss) earnings per share (3.18) 0.78 (2.05)
Pro forma
Net (loss) earnings $(113.3) $ 5.7 $(69.6)
Diluted net (loss) earnings per share (3.35) 0.22 (2.81)
Weighted average
Weighted average and pro forma
weighted average common shares 32.7 25.9 24.8
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for options granted in fiscal 2002, 2001 and 2000: risk-free
interest rates of 4.4%, 6.1% and 5.5%, expected dividend yields of 0.0%;
expected lives of 3.5 years, 3.5 years and 3.5 years; and expected volatility of
85%, 70% and 114%, respectively.
14. EMPLOYEE STOCK PURCHASE PLAN
The company has established a qualified Employee Stock Purchase Plan, the
terms of which allow for qualified employees (as defined) to participate in the
purchase of designated shares of the company's common stock at a price equal to
the lower of 85% of the closing price at the beginning or end of each
semi-annual stock purchase period. The company issued 136 thousand and 284
thousand shares of common stock during fiscal 2002 and 2001, respectively,
pursuant to this plan at an average price per share of $14.29 and $7.54,
respectively.
15. SEGMENT REPORTING
The company is organized based on the products and services it offers.
Under this organizational structure, the company has three reportable segments:
Commercial Aircraft Products, Business Jet Products and Fastener Distribution.
The company's Commercial Aircraft Products segment consists of eight operating
units while the Business Jet and Fastener Distribution segments consist of two
and one principal operating units, respectively.
Each segment reports its results of operations and makes requests for
capital expenditures and acquisition funding to the company's chief operational
decision-making group. This group is presently comprised of the Chairman, the
President and Chief Executive Officer, and the Corporate Senior Vice President
of Administration and Chief Financial Officer. Each operating segment has
separate management teams and infrastructures dedicated to providing a full
range of products and services to their commercial, business jet and aircraft
manufacturing customers.
The following table presents net sales and other financial information by
business segment:
FISCAL 2002
Commercial
Aircraft Business Fastener
Products Jet Products Distribution Consolidated
----------------- ----------------- --------------- ---------------
Net sales $550.6 $ 85.6 $ 44.3 $ 680.5
Operating earnings (loss) (40.1) 6.0 1.6 (32.5)
Total assets 674.3 204.2 249.8 1,128.3
Capital expenditures 11.1 2.2 0.6 13.9
Depreciation and amortization 34.9 10.6 1.3 46.8
FISCAL 2001
Commercial
Aircraft Business Fastener
Products Jet Products Distribution Consolidated
----------------- ----------------- --------------- ---------------
Net sales $580.3 $ 86.1 $ - $666.4
Operating earnings 62.5 14.2 - 76.7
Total assets 739.8 196.2 - 936.0
Capital expenditures 12.6 4.6 - 17.2
Depreciation and amortization 33.4 9.4 - 42.8
FISCAL 2000
Commercial
Aircraft Business Fastener
Products Jet Products Distribution Consolidated
----------------- ----------------- --------------- ---------------
Net sales $642.3 $ 81.0 $ - $723.3
Operating earnings (loss) (6.5) 13.2 - 6.7
Total assets 688.9 192.9 - 881.8
Capital expenditures 31.2 2.0 - 33.2
Depreciation and amortization 32.7 9.5 - 42.2
Through February 24, 2001, we operated in the (1) commercial aircraft
products, (2) business jet products and (3) engineering services segments of the
commercial airline and general aviation industry. Following the purchase of M &
M Aerospace, Inc., we realigned our business to operate in the following
segments - (1) commercial aircraft products, (2) business jet products and (3)
fastener distribution.
Revenues for similar classes of products or services within these
business segments for the fiscal years ended February 2002, 2001 and 2000 are
presented below:
Year Ended
Feb 23, Feb 24, Feb. 26,
2002 2001 2000
---- ---- ----
Commercial aircraft products:
Seating products $247.8 $288.0 $324.9
Interior systems products 152.6 151.6 144.8
Engineered interior structures, components
and assemblies 150.2 140.6 172.5
------------ -------------- -------------
550.6 580.2 642.2
Business jet products 85.6 86.2 81.1
Fastener distribution 44.3 - -
------------ -------------- -------------
Net sales $680.5 $666.4 $723.3
============ ============== =============
The company operated principally in two geographic areas, the United States
and Europe (primarily the United Kingdom), during the years ended February 23,
2002, February 24, 2001 and February 26, 2000. There were no significant
transfers between geographic areas during the period. Identifiable assets are
those assets of the company that are identified with the operations in each
geographic area.
The following table presents net sales and operating (loss) earnings for
the years ended February 23, 2002, February 24, 2001 and February 26, 2000 and
identifiable assets as of February 23, 2002, February 24, 2001 and February 26,
2000 by geographic area:
2002 2001 2000
---- ---- ----
Net sales:
United States $ 535.7 $ 503.8 $ 510.7
Europe 144.8 162.6 212.6
--------- ------- -------
Total: $ 680.5 $ 666.4 $ 723.3
========= ======= =======
Operating (loss) earnings:
United States $ (30.3) $ 65.4 $ (3.1)
Europe (2.2) 11.3 9.8
--------- ------- -------
Total: $ (32.5) $ 76.7 $ 6.7
========= ======= =======
Identifiable assets:
United States $ 948.7 $ 756.7 $ 704.4
Europe 179.6 179.3 177.4
--------- ------- -------
Total: $ 1,128.3 $ 936.0 $ 881.8
========= ======= =======
Export sales from the United States to customers in foreign countries
amounted to approximately $113.7, $160.8 and $188.5 in fiscal 2002, 2001 and
2000, respectively. Net sales to all customers in foreign countries amounted to
$288.3, $279.8 and $311.1 in fiscal 2002, 2001 and 2000, respectively. Net sales
to Europe amounted to 20%, 22% and 26% in fiscal 2002, 2001 and 2000,
respectively. Net sales to Asia amounted to 12%, 10% and 11% in fiscal 2002,
2001 and 2000, respectively. Major customers (i.e., customers representing more
than 10% of net sales) change from year to year depending on the level of
refurbishment activity and/or the level of new aircraft purchases by such
customers. There were no major customers in fiscal 2002, 2001 and 2000.
16. FAIR VALUE INFORMATION
The following disclosure of the estimated fair value of financial
instruments at February 23, 2002 and February 24, 2001 is made in accordance
with the requirements of SFAS No. 107, Disclosures about Fair Value of Financial
Instruments. The estimated fair value amounts have been determined by the
company using available market information and appropriate valuation
methodologies; however, considerable judgment is required in interpreting market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the company
could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
The carrying amounts of cash and cash equivalents, accounts
receivable-trade, and accounts payable are a reasonable estimate of their fair
values. At February 23, 2002, the company's 8 7/8% Notes had a carrying value of
$250.0 and a fair value of $211.2. At February 23, 2002 and February 24, 2001,
the company's 8% Notes had carrying values of $249.7 and $249.6 and fair values
of $209.3 and $245.2, respectively. At February 23, 2002 and February 24, 2001,
the company's 9 1/2% Notes had a carrying value of $200.0 and fair values of
$176.5 and $207.5, respectively. The carrying amounts under the Bank Credit
Facility are a reasonable estimate of fair value as interest is based upon
floating market rates.
The fair value information presented herein is based on pertinent
information available to management as of February 23, 2002. Although management
is not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these consolidated financial statements since that date, and current
estimates of fair value may differ significantly from the amounts presented
herein.
17. SELECTED QUARTERLY DATA (Unaudited)
Summarized quarterly financial data for fiscal 2002 and 2001 are as
follows:
Year Ended February 23, 2002
---------------- ----------------- ----------------- ----------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------------- ----------------- ----------------- ----------------
Net sales $176.8 $179.1 $172.8 $151.8
Gross profit (loss) 65.9 69.0 (37.8) 53.3
Net income before extraordinary item 7.8 8.9 (106.2) (5.3)
Net earnings (loss) (1.5) 8.9 (106.2) (5.3)
Basic net earnings (loss) per share (0.05) 0.28 (3.08) (0.15)
Diluted net earnings (loss) per share (0.05) 0.27 (3.08) (0.15)
Year Ended February 24, 2001
---------------- ----------------- ----------------- ----------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------------- ----------------- ----------------- ----------------
Net sales $169.1 $164.1 $167.4 $165.8
Gross profit 61.6 60.8 63.5 63.9
Net earnings 4.4 4.7 7.9 3.3
Basic net earnings per share 0.18 0.19 0.31 0.12
Diluted net earnings per share 0.18 0.19 0.30 0.12
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED FEBRUARY 23, 2002, FEBRUARY 24, 2001 AND FEBRUARY 26, 2000
(Dollars in thousands)
BALANCE BALANCE
AT BEGINNING AT END
OF YEAR EXPENSES OTHER DEDUCTIONS OF YEAR
-------- -------- ------ ---------- -------
DEDUCTED FROM ASSETS:
- ---------------------
Allowance for doubtful accounts:
2002 $2.6 $1.9 $1.3 (2) $0.9 $4.9
2001 3.9 0.6 (0.4) (4) 1.5 2.6
2000 2.6 2.0 (0.1) 0.6 3.9
Reserve for obsolete inventories:
2002 $16.1 $11.7 (1) $8.0 (2) $7.9 (1) $27.9
2001 16.5 13.6 0.7 (4) 14.7 16.1
2000 21.1 11.4 (3) (2.2) 13.8 (3) 16.5
(1) Excludes $34.5 million of inventory impairments associated with the
company's fiscal 2002 facility consolidation plan.
(2) Balances associated with the 2002 acquisitions.
(3) During fiscal 2000, the company recorded a charge associated with the
rationalization of its product offerings and disposal of a substantial
portion of such inventories.
(4) Balances associated with the 2001 acquisitions.
EXHIBIT 12.1
Computation of Ratio of Earnings to Fixed Charges
(Unaudited)
in millions
Fiscal Year Ended
------------- ------------- -------------- ------------ -------------
2/23/2002 2/24/2001 2/26/2000 2/27/1999 2/28/1998
------------- ------------- -------------- ------------ -------------
Earnings:
(Loss) earnings before income taxes and
extraordinary items $ (93.0) $ 22.5 $ (47.5) $ (79.5) $ 35.9
Fixed charges, excluding capitalized interest 68.5 60.4 57.4 46.8 27.3
------- ------ ------- ------- ------
Earnings $ (24.5) $ 82.9 $ 9.9 $ (32.7) $ 63.2
------- ------ ------- ------- ------
Fixed Charges:
Interest expense $ 66.2 $ 57.9 $ 54.9 $ 44.8 $ 25.8
Capitalized interest - 0.3 1.5 2.1 0.5
Amortization of deferred debt issuance costs 2.3 2.5 2.5 2.0 1.5
------- ------ ------- ------- ------
Total Fixed Charges $ 68.5 $ 60.7 $ 58.9 $ 48.9 $ 27.8
------- ------ ------- ------- ------
Ratio of (loss) earnings to total fixed charges * 1.4 0.2 * 2.3
======= ====== ======= ======= ======
Earnings were insufficient to cover fixed charges by $93.0 and $81.6 for the
fiscal years ended February 23, 2002 and February 27, 1999, respectively.
EXHIBIT 21.1
List of Subsidiaries
BE Aerospace, Inc.
BE Aerospace (USA), Inc.
BE Aerospace Netherlands BV
Royal Inventum, BV
BE Aerospace (UK) Holdings Limited BE Aerospace (Services) BV BE Aerospace (UK)
Limited AFI Holdings Ltd.
CF Taylor (B/E) UK Limited
C.F. Taylor (Wales) Ltd.
B/E Aerospace Services, Inc.
Advanced Thermal Sciences Corporation
Acurex Corporation
B/E Aerospace International Ltd.
Nordskog Industries, Inc.
Burns Aerospace Europe (SARL)
BE Aerospace (France) SARL
BE Intellectual Property, Inc.
Aerospace Lighting Corporation
Flight Structures, Inc.
BE Aerospace Canada, Inc.
B/E Aerospace (Canada) Company
BE Aerospace El Salvador, Inc.
BE Aerospace El Salvador, Sociedad Amonima de Capital Variable BE Aerospace
Australia, Inc.
IFE Sales, LLC
T.L. Windust Machine, Inc.
DMGI, Inc.
B/E Aerospace Machined Products, Inc.
Maynard Precision, Inc.
Modoc Engineering Corporation
T-Cube, Inc.
Denton Jet Interiors, Inc.
Modern Metals, Inc.
Nelson Aero Space, Inc.
M&M Aerospace Hardware SARL
M&M Aerospace Hardware GmbH
M&M Aerospace Hardware Ltd.
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
Nos. 333-66834, 333-68334, 333-89145, 333-30578, 333-14037, 33-48119, 33-72194
and 33-82894 on Form S-8 of BE Aerospace, Inc. of our report dated April 8,
2002, appearing in this Annual Report on Form 10-K of BE Aerospace, Inc. for the
year ended February 23, 2002.
DELOITTE & TOUCHE LLP
Costa Mesa, California
May 23, 2002