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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended February
22, 1997
[ ] 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
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
06-1209796
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
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Act 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 $540,250,953 on April 30, 1997 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 April 30, 1997 was 21,939,125 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Those sections of the Registrant's Proxy Statement to be filed with the
Commission in connection with its 1997 Annual Meeting of Stockholders to be
held on August 6, 1997, described in Part III hereof, are incorporated by
reference in this report.
INDEX
PART I
ITEM 1. Business ........................................................ 3
ITEM 2. Properties ...................................................... 14
ITEM 3. Legal Proceedings ............................................... 16
ITEM 4. Submission of Matters to a Vote of Security Holders.............. 16
Executive Officers of the Registrant ............................ 17
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters 20
ITEM 6. Selected Financial Data 21
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................... 23
ITEM 8. Financial Statements and Supplementary Data ..................... 29
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ............................................ 29
PART III
ITEM 10. Directors and Executive Officers of the Registrant............. 30
ITEM 11. Executive Compensation......................................... 30
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.. 30
ITEM 13. Certain Relationships and Related Transactions................. 30
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K........................................ 30
Index to Consolidated Financial Statements and Schedule........... F-1
1
PART I
This Item 1 "Business" includes forward-looking statements which involve
risks and uncertainties. The Company's actual experience may differ
materially from that discussed in such statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors" contained in Exhibit 99 hereto, as well as future events that have
the effect of reducing the Company's operating income and available cash
balances, such as unexpected operating losses or delays in the integration of
the Company's seating business, the delivery of the Company's MDDS
interactive video system, customer delivery requirements, new or expected
refurbishments, or cash expenditures related to possible future acquisitions.
ITEM 1. BUSINESS.
INTRODUCTION
BE Aerospace, Inc. ("B/E" or the "Company") is the world's largest
manufacturer of commercial aircraft cabin interior products, serving
virtually all of the major airlines in the world with a broad line of
products, including aircraft seats, a full line of food and beverage
preparation and storage equipment, galley structures and in-flight
entertainment systems. In addition, B/E provides services and specialty
products for aircraft cabin interiors.
Management believes that the Company has achieved the leading global
market position in each of its major product categories. B/E is the largest
manufacturer of airline seats in the world, offering an extensive line of
first class, business class, tourist class and commuter seats. The Company is
also the world's largest manufacturer of galley equipment for both narrow-
and wide-body aircraft, including a wide selection of coffee and beverage
makers, water boilers, ovens, liquid containers, refrigeration equipment and
galley structures. In addition, the Company is the leading manufacturer of
passenger entertainment and service systems ("PESS"), including passenger
control systems and individual passenger in-flight entertainment systems. The
Company believes that individual passenger in-flight entertainment systems
will be the fastest growing, and among the largest, product categories in the
commercial aircraft cabin interior products industry in the future.
B/E's substantial installed base provides significant ongoing revenues
from replacements, repairs and spare parts. Approximately two-thirds of the
Company's revenues in the fiscal year ended February 22, 1997 ("fiscal 1997")
were derived from retrofit, upgrade, refurbishment and spare parts sales and
services. Revenues from these sources, along with the Company's position as a
low cost producer, enabled B/E to maintain its operating profitability during
the several-year period prior to 1994, despite one of the most serious
economic downturns ever suffered by the airline industry. During this period,
airlines sought to conserve cash by reducing or deferring scheduled cabin
interior refurbishment and upgrade programs and purchases of new aircraft.
Since early 1994, the airlines have experienced a significant turnaround
in operating results, with the domestic airline industry achieving record
operating earnings during calendar 1995 and 1996. The world's airlines have
also substantially strengthened their balance sheets during the past several
years through record operating earnings and through the issuance of debt and
equity securities. During fiscal 1997, the airlines began to initiate
retrofit and refurbishment programs that had been deferred over the past
several years. At the same time, airlines began to place orders with the
major airframe manufacturers, which is expected to significantly increase the
delivery rates for new aircraft beginning in calendar year 1997. During the
past year, B/E has begun to experience substantial growth in its backlog,
driven principally from refurbishment and retrofit programs. The Company
believes that it is well positioned to benefit from the growth in airline
profitability.
2
INDUSTRY OVERVIEW
The commercial aircraft cabin interior products industry encompasses a
broad range of products and services, including not only aircraft seating
products, passenger entertainment and service systems, and food and beverage
preparation and storage systems, but also lavatories, lighting systems,
evacuation equipment and overhead bins. Management estimates that the
industry had annual sales in excess of $1.5 billion during fiscal 1997.
Historically, revenues in the cabin interior products industry have been
derived from five sources: (i) retrofit programs in which airlines purchase
new components to substantially overhaul the interiors of aircraft already in
service; (ii) refurbishment programs in which airlines purchase components
and services to improve the appearance and functionality of certain cabin
interior equipment; (iii) new installation programs in which airlines
purchase new equipment to outfit newly delivered aircraft; (iv) spare parts;
and (v) 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 seven to
eight years, although during the industry downturn, these periods tended to
be extended. See "-Recent Industry Conditions." Galley structures and
products are periodically upgraded or repaired, and require a continual flow
of spare parts, but may be retrofitted only once or twice during the life of
the aircraft.
The various product categories currently manufactured by the Company
include:
AIRCRAFT SEATS. This is the largest single product category in the
industry and includes first class, business class, tourist class and commuter
seats. Management estimates that the aggregate size of the worldwide aircraft
seat market (including spare parts) during fiscal 1997, which still reflected
economic conditions stemming from the recent airline industry downturn, was
in excess of $470 million. Approximately ten companies worldwide, including
the Company, supply aircraft seats.
PASSENGER ENTERTAINMENT AND SERVICE SYSTEMS (PESS). This product
category includes individual seat video systems, overhead video
projection systems, audio distribution systems, passenger control units
("PCUs") and related wiring and harness assemblies and sophisticated
interactive telecommunications and entertainment systems. Management
estimates that the aggregate size of the worldwide PESS market was
approximately $300 million during fiscal 1997. Industry sources expect the
PESS market to increase substantially in the near term as individual
passenger entertainment systems become standard in-flight entertainment
equipment in first, business and tourist classes on wide-body, and with the
further development of live broadcast in-flight television, many narrow-body
aircraft. PESS products are currently supplied by approximately five
companies worldwide.
GALLEY PRODUCTS. This product category includes complete galley systems
for both narrow- and wide-body aircraft, including a wide selection of coffee
and beverage makers, water boilers, ovens, liquid containers, air chillers,
wine coolers and other refrigeration equipment and galley components.
Management estimates that the aggregate size of the worldwide galley
equipment market during fiscal 1997 was in excess of $375 million. The
majority of the Company's sales of galley products have been associated with
deliveries of new aircraft to the airlines. While there are approximately 22
companies worldwide who supply galley equipment to the airline industry, the
Company is the only manufacturer with a complete line of galley equipment.
3
The Company operates in the commercial aircraft cabin interior products
segment of the commercial airlines supplier industry. Revenues for similar
classes of products or services within this business segment for the three
most recent fiscal years are presented below:
FISCAL YEAR
----------------------
1997 1996 1995
(UNAUDITED; DOLLARS IN MILLIONS)
Seating products .......................... $ 217 $ 97 $ 100
Galley products ........................... 101 79 81
Passenger entertainment and service systems 52 33 34
Services .................................. 42 23 14
----- ----- -----
Total revenues ............................ $ 412 $ 232 $ 229
===== ===== =====
RECENT INDUSTRY CONDITIONS
The Company's principal customers are the world's commercial airlines.
The airlines incurred record losses during the three-year period ended
December 31, 1993. The losses incurred during the downturn seriously impaired
airline balance sheets and negatively influenced airline purchasing decisions
with respect to both new aircraft and refurbishment programs. The domestic
airlines in large part returned to profitable operations during calendar
years 1994 through 1996, and have substantially restored their balance sheets
since then through cash generated from operations and debt and equity
placements. This improvement in the airlines profitability and liquidity has,
in turn, led to an increase in refurbishment and retrofit programs, which
coupled with spares revenues generated approximately two thirds of the
Company's revenues in fiscal 1997. Further, throughout calendar 1996, the
aircraft manufacturers began experiencing a significant increase in new
aircraft orders. Among those factors expected to affect the cabin interior
products industry are the following:
LARGE EXISTING INSTALLED BASE. According to Current Market Outlook
published by the Boeing Commercial Airline Group in 1997 (the "Boeing
Report"), the world passenger aircraft fleet, as of the end of calendar 1996,
consisted of 11,505 aircraft, including 3,136 aircraft with fewer than 120
seats, 5,308 aircraft with between 120 and 240 seats and 3,061 aircraft with
more than 240 seats. Based on such fleet numbers, management estimates that
the total worldwide installed base of commercial aircraft cabin interior
products, valued at replacement prices, was approximately $7.5 billion at the
end of 1996. This existing installed base will generate continued retrofit,
refurbishment and spare parts revenue, particularly in light of the
deterioration of existing cabin interior functionality and aesthetics
resulting from the airlines' deferral of refurbishment programs in recent
years.
EXPANDING WORLDWIDE FLEET. Worldwide air traffic has grown in every year
since 1946 (except in 1990) and, according to the Boeing Report, is projected
to grow at a compounded average rate of approximately five percent per year
through 2016, increasing annual revenue passenger miles from approximately
1.7 trillion in 1996 to approximately 4.5 trillion by 2016. The Boeing Report
indicates that the airlines are experiencing extremely high load factors and
that a significant number of new aircraft will be purchased to meet the
growth in worldwide air travel, which is expected to increase by over 70%
over the next 10 years. According to the Boeing Report, the worldwide fleet
of commercial passenger aircraft is projected to expand from approximately
11,500 at the end of 1996 to approximately 23,600 by the end of 2016. The
Company believes that growth in new aircraft deliveries will begin in 1997.
For example, Boeing has indicated that it shipped 218 aircraft in 1996, and
that it plans to ship 369 aircraft in 1997, 528 in 1998, 562 in 1999 and 576
in 2000. The Company generally receives orders related to new deliveries
approximately six months before an aircraft is delivered. According to Airbus
Industrie Global Market Forecast published in March 1995 (the "Airbus
Industrie Report"), the worldwide installed seat base, which management
considers to be a good indicator for potential growth in the aircraft cabin
interior products industry, is expected to increase from approximately 1.6
million passenger seats at the end of 1994 to approximately 3.9 million
passenger seats at the end of 2014. The expanding worldwide fleet will
generate additional revenues from new installation programs and the increase
4
in the size of the base will generate additional and continual retrofit,
refurbishment and spare parts revenue.
WIDE-BODY AIRCRAFT ORDERS. Orders for wide-body, long-haul aircraft
constitute an increasing share of total new airframe orders. According to the
July 1996 Airline Monitor, the percentage of Boeing aircraft deliveries
projected to be wide-body aircraft for 1996 through 1998 is 43%, as compared
to 32% for the three-year period ended December 31, 1995. Wide-body aircraft
currently carry up to three times the number of seats as narrow-body
aircraft, and because of multiple classes of service, including large first
class and business class configurations, the Company's average revenue per
seat on wide-body aircraft is also higher. Aircraft 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 on a single flight. As a result, wide-body
aircraft may require as much as seven times the dollar value of cabin
interior products as narrow-body aircraft, as well as products which are
technically more sophisticated and typically more expensive. Further,
individual passenger in-flight entertainment systems are installed
principally on wide-body aircraft. Airlines are increasingly demanding such
systems for long-haul flights to attract and retain customers, especially as
the quality of in-flight entertainment has become a differentiating factor in
passengers' airline selection decisions. Such systems also provide the
airlines with the opportunity to increase revenues per passenger mile,
without raising ticket prices, by charging individually for services used.
For these reasons, management believes that in the future, interactive
in-flight entertainment systems will be installed on a vast majority of all
wide-body aircraft and, with the further development of live broadcast
in-flight television, many narrow-body planes.
NEW PRODUCT DEVELOPMENT. The commercial aircraft cabin interior products
industry is engaged in intensive development and marketing efforts for a
number of new products, including convertible seats, interactive individual
passenger entertainment systems, advanced telecommunications equipment and
new galley equipment. Interactive video technology provides a passenger with
a wide range of computer capabilities, which are designed to accept
information generated by the passenger and communicate such information to
the cabin crew for assisting passengers and crew with food service selection,
the purchase of duty-free goods, information in connection with the arrival
time, connecting flights, gate and other passenger information, as well as
facilitate effective on-board inventory control and provide individual
entertainment. New cabin interior products will generate new installation and
retrofit revenues as well as service revenues from equipment maintenance,
inspection and repair.
UPGRADE, MAINTENANCE, INSPECTION AND REPAIR SERVICE MARKETS.
Historically the airlines have relied on their airframe and engine mechanics
to repair or replace 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 product upgrades (such as the installation of a telecommunications
module or individual passenger entertainment unit in an aircraft seat not
originally designed to accommodate such equipment), cabin interior product
maintenance and inspection, as well as other repair services.
5
COMPETITIVE STRENGTHS AND BUSINESS STRATEGY
The Company believes that it has a strong competitive position
attributable to a number of factors including the following:
LEADING MARKET SHARE AND SIGNIFICANT INSTALLED BASE. Management believes
that the Company has achieved the leading global market positions in each of
its major product categories. The Company believes its market share provides
it with significant competitive advantage in serving its customers, including
economies of scale and the ability to commit greater product development,
global product support and marketing resources. Furthermore, because of
economies of scale, in part attributable to its large market shares and its
approximate $2.8 billion installed base of cabin interior equipment (valued
at replacement prices as of February 22, 1997), the Company believes it is
among the lowest cost producers in the cabin interior products industry. The
Company also believes that its large installed base provides B/E with a
significant advantage over competitors in obtaining orders for retrofit and
refurbishment programs, principally because airlines tend to purchase
equipment from the original supplier. In addition, because of the need for
compatible spare parts at airline maintenance depots and the desire of
airlines to maximize fleet commonality, a single vendor is typically used for
all aircraft of the same type operated by a particular airline. Finally, B/E
is well positioned to obtain on-going upgrade, maintenance, inspection and
repair service contracts due to the breadth of its product line and the size
of its installed base.
BROADEST PRODUCT LINE IN THE INDUSTRY. Management believes the Company
offers more technologically advanced products for the cabin interiors of
commercial aircraft than any other manufacturer. With an established
reputation for quality, service and product innovation, the Company enjoys
broad recognition among the world's commercial airlines. The Company
maintains a constant dialogue with a wide array of existing and potential
customers, enabling it to become aware of emerging industry trends and needs
and thereby play a leading role in product development. The Company has
continued to expand its product line, believing that the airline industry
increasingly will seek an integrated approach to the development, testing and
sourcing of the aircraft's cabin interior.
TECHNOLOGICAL LEADERSHIP/NEW PRODUCT DEVELOPMENT. Management believes
that the Company is a technological leader in its industry, with the largest
R&D organization in the industry, currently comprised of 320 engineers. The
Company believes that its R&D effort and its on-site engineers at both the
airlines and airframe manufacturers enable B/E to consistently introduce
innovative products and thereby gain early entrant advantages and substantial
market shares. Examples of such product development include: the Company's
family of in-flight entertainment systems, which it believes to be superior
to existing operational systems in terms of performance, reliability, weight,
heat generation and flexibility to adapt to changing technology; a
cappuccino/espresso maker; a quick chill wine cooling system; and a
constant-pressure, steam cooking oven, which the Company believes
substantially improves the appearance, aroma and taste of airline food.
6
The Company's business strategy is to maintain its leadership position
and best serve its airline customers by (i) offering the broadest and most
integrated product line in the industry for both new product sales and
follow-on products and services; (ii) pursuing a worldwide marketing approach
focused by airline and encompassing the Company's entire product line; (iii)
remaining the technological leader, as well as significantly growing its
installed base of products, in the developing in-flight individual passenger
entertainment market; (iv) enhancing its position in the growing upgrade,
maintenance, inspection and repair services market; and (v) pursuing
selective strategic acquisitions in the commercial aircraft cabin interior
products industry.
GROWTH OPPORTUNITIES
B/E believes that it is benefiting from three major growth trends
occurring in the commercial aircraft cabin interior products industry:
INCREASE IN REFURBISHMENT AND UPGRADE ORDERS. B/E's substantial
installed base provides significant ongoing revenues from replacements,
upgrades, repairs and spare parts. Approximately two-thirds of B/E's revenues
and operating earnings for the year ended February 22, 1997 were derived from
refurbishment, retrofit and upgrade orders. In the late 1980s and early
1990s, the airline industry suffered a significant downturn, which resulted
in a deferral of cabin interior maintenance expenditures. Since early 1994,
the airlines have experienced a turnaround in operating results, leading the
domestic airline industry to record operating earnings during 1995 and 1996.
Deterioration of cabin interior product functionality and aesthetics within
the commercial airline fleets during the industry downturn has encouraged
airlines to increase spending on refurbishments and upgrades. The Company
believes that it is well positioned to benefit over the next several years as
a result of the airlines' dramatically improved financial condition and
liquidity and the need to refurbish and upgrade cabin interiors. The
Company's recent growth in backlog, revenues and operating earnings has been
primarily from refurbishment and upgrade programs, and the Company is
currently experiencing a high level of new order quote activity related to
such programs.
EXPANSION OF WORLDWIDE FLEET AND SHIFT TOWARD WIDE-BODY AIRCRAFT. B/E
will benefit from the significant number of new aircraft which will need to
be purchased to meet projected growth in worldwide air travel in three ways:
(a) shipments of interior products to equip these new aircraft; (b) expansion
in the overall fleet, leading to more potential refurbishment and upgrade
revenues; and (c) a shift in new aircraft shipments toward wide-body
aircraft, which require substantially more seats, galley equipment and
in-flight entertainment products per aircraft than do narrow-body aircraft.
The Company expects the impact of new aircraft deliveries to begin to be felt
in the commercial aircraft cabin interior product industry during calendar
1997. See "Industry Overview-- Recent Industry Conditions."
7
EMERGENCE OF INDIVIDUAL PASSENGER IN-FLIGHT ENTERTAINMENT SYSTEMS AS A
MAJOR NEW PRODUCT CATEGORY. Airlines increasingly are demanding individual
passenger in-flight entertainment systems as a method to attract and retain
customers, as the availability of such service affects passengers' decisions
on airline selection. These systems also provide the airlines with the
opportunity to generate increased revenues, without raising ticket prices, by
charging passengers for the services used. The Company expects that
individual passenger in-flight entertainment systems will be the fastest
growing, and among the largest, product categories in the commercial aircraft
cabin interior products industry in the future.
PRODUCTS AND SERVICES
Seating Products
The 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 the Company includes
the seat frame, cushions, armrests and tray table, together with a variety of
optional features such as in-flight entertainment systems, oxygen masks and
telephones. Management estimates that the Company has an aggregate installed
base as of February 22, 1997 of aircraft seats, valued at replacement prices,
of approximately $1.5 billion comprised of more than 840,000 seats.
TOURIST CLASS. The Company is the leading worldwide manufacturer of
tourist class seats. B/E has designed tourist class seats which incorporate
features not previously utilized in that class, such as top-mounted passenger
control units, footrests and improved oxygen systems.
FIRST AND BUSINESS CLASSES. First class and business class seats are
generally larger, heavier and more complicated in design, and are
substantially more expensive than tourist class aircraft seats. The Company's
first class seats and certain of its business class seats are equipped with
articulating bottom cushion suspension systems, sophisticated hydraulic
leg-rests, lumbar massage devices, adjustable thigh support cushions, reading
lights, adjustable head and neck supports and large tables.
CONVERTIBLE SEATS. The Company has developed two types of seats which
can be converted from tourist class triple-row seats to business class
double-row seats with minimal conversion complexity. Convertible seats allow
airline customers to optimize the ratio of business class to tourist class
seats for a given aircraft configuration.
COMMUTER SEATS. The Company is the leading manufacturer of commuter
seats in both the U.S. and worldwide markets. The Company's Silhouette(TM)
Composite commuter seats are similar to commercial jet seats in comfort and
performance but are lightweight and require minimal maintenance.
SPARES. Aircraft seats are exposed to significant stress in the course
of normal passenger activity, and certain seat parts are particularly
susceptible to damage from continued use. As a result, a significant market
exists for spare parts.
8
Passenger Entertainment and Service Systems
Management estimates that the Company has the largest installed base of
PESS products in the world, which, valued at replacement prices, is
approximately $300 million. The Company has the leading share of the market
for PCUs and related wiring and harness assemblies, and has developed
products aimed at other portions of the PESS market, including individual
seat video systems, advanced multiplexer and hard-wired distribution systems
and other products. The Company believes that it is a market leader in
individual passenger in-flight entertainment systems and that this product
category will be the fastest growing, and among the largest, product
categories in the commercial aircraft cabin interior products industry in the
future.
INDIVIDUAL PASSENGER ENTERTAINMENT. The Company has developed a number
of in-flight entertainment systems that are designed to meet the
technological and price specifications of the airlines:
B/E 2000. The B/E 2000, introduced in 1991, is one of the Company's
first-generation individual in-flight video systemS and offers centralized
electronic distribution of a limited range of programming. Since its
introduction, the Company has installed approximately 24,500 units of the B/E
2000 and earlier generation individual passenger video systems to 10
airlines.
MDDS FAMILY. The Company has developed a family of next-generation,
individual passenger in-flight entertainment products, which includes the
2000M and the MDDS:
B/E 2000M -- The B/E 2000M is an in-flight entertainment system that
offers similar functionality to the 2000 but is designed to be upgradeable to
the Company's fully interactive MDDS. Since its introduction in 1994, the
Company has installed approximately 3,000 units.
MDDS -- B/E's MDDS is a state-of-the-art, fully interactive individual
passenger in-flight entertainment system which has the capacity to offer
numerous movies on demand, telecommunications, gaming, Nintendo(TM), Sega(TM)
and PC-based games, in-flight shopping and, in the future, live television,
among other services. The system was first installed, on a limited basis, on
a British Airways Boeing 747-400 in November 1995 and, upon successful
completion of live tests, is expected to be installed in all classes of
service on approximately 90 aircraft. In March 1996, the Company installed
MDDS on an Air France 747-400 with video on demand provided to all First and
Business classes, and to date, has been performing within expectations.
Although MDDS is not yet in commercial production, on November 6, 1996, B/E
announced that the MDDS (including the B/E 2000M) is now being offered by
Boeing to its customers as a line fit option for both the B777 and B747
aircraft, allowing airlines to specify the MDDS as their in-flight
entertainment system of choice on these Boeing aircraft. Prior to this
announcement, the MDDS could only be installed as a retrofit option after the
airlines took initial delivery of new aircraft.
9
As of February 22, 1997, B/E had entered into agreements to supply
individual passenger entertainment systems to a number of airlines, including
United Airlines, Air France, British Airways and KLM, and had an in-flight
entertainment systems backlog of approximately $240 million.
PCUS, WIRING AND HARNESS ASSEMBLIES. The Company's PCU product line is
the broadest in the industry, including over 300 different designs which are
functionally similar but differ widely due to the style preferences and
technical requirements of the various airlines. Wiring and harness assemblies
(which stabilize installed wiring) are sold as a package with PCUs and vary
as widely as PCU types.
DISTRIBUTION SYSTEMS. The Company has manufactured hard-wired audio
(since 1963) and video distribution systems (since 1992) and is currently the
principal supplier of such systems to the airline industry. The Company also
offers frequency division multiplex distribution systems which deliver
substantially improved audio performance compared to competitors' multiplex
systems.
Galley Equipment and Structures
The Company is the world's largest manufacturer of galley equipment for
both narrow- and wide-body aircraft, offering a wide selection of galley
structures, coffee and beverage makers, water boilers, ovens, liquid
containers, refrigeration equipment and other galley components. Management
estimates that the Company has an aggregate installed base of galley
equipment and structures, valued at replacement prices, of approximately $1.0
billion.
COFFEE MAKERS. The Company is the leading manufacturer of aircraft
coffee makers, with the Cmpany's equipment currently installed in virtually
every type of aircraft for almost every major airline. The Company
manufactures 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, a Combi(TM) unit which will brew both coffee and
boil water for tea while utilizing 25% less electrical power than traditional
5,000 watt water boilers, and a recently introduced cappuccino/espresso
maker.
OVENS. The Company is the leading supplier of a broad line of
specialized ovens, including high-heat efficiency ovens, high-heat convection
ovens, and warming ovens. The Company's newest offering, the DS-2000 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.
10
REFRIGERATION EQUIPMENT. The Company is the worldwide industry leader in
the design, manufacture, and supply of commercial aircraft refrigeration
equipment. The Company recently introduced a self-contained wine and beverage
chiller, the first unit specifically designed to rapidly chill wine and
beverages on board an aircraft.
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. The Company provides a variety of galley
structures, closets and class dividers, emphasizing sophisticated and higher
value-added galleys for wide-body aircraft.
Services and Speciality Products
The Company is an active participant in the growing service and custom
products markets. Management believes that the Company's broad and integrated
product line and close relationships with its airline and leasing customers
position the Company to become a leading service provider in this market.
Most participants in this market are small, and management believes that the
Company is the only major product manufacturer in the industry currently
participating in this market.
SERVICES. The Company provides a comprehensive compliment of services
for cabin interior products on board aircraft either between flights or on an
overnight basis, or at one of more of seven service centers in the worldwide
service network. The spectrum of services includes systems check and
components repair, parts inventory and management, refurbishment of seating
products, on board surveys regarding status and product installations, as
well as data support functions such as loading and updating of in-flight
systems entertainment software, direct satellite broadcast systems support
and systems integration.
SPECIALTY PRODUCTS. The Company manufactures several specialty products
for the commercial airline industry including flight attendant seats,
observer seats, and custom products in the passenger seating area. The
Company maintains a staff of engineers to design and certify various modules
and kits to accommodate individual passenger video and telecommunications
modules in seat backs and center consoles which were originally not designed
for such applications. The Company believes it is able to provide products
for unique applications more rapidly than original manufacturers.
RESEARCH, DEVELOPMENT AND ENGINEERING
The Company works closely with commercial airlines to improve existing
products and identify customers' emerging needs. B/E's expenditures in
research, development and engineering totaled $37.1 million, $58.3 million,
and $12.9 million for the fiscal years ended February 22, 1997, February 24,
1996, and February 25, 1995, respectively. The decrease in expenses during
11
the current year is the result of a decrease in the level of activity
associated with the MDDS interactive entertainment system, offset somewhat by
an increase in product development activity in the Seating Products Group.
B/E employs 320 professionals in the engineering and product development
areas. The Company believes that it has the largest engineering organization
in the cabin interior products industry, with not only software, electronic,
electrical and mechanical design skills but also substantial expertise in
materials composition and custom cabin interior layout design.
MARKETING AND CUSTOMERS
The Company markets and sells its products directly to virtually all of
the world's major airlines. B/E has a sales and marketing organization of 119
persons, along with 26 independent sales representatives. B/E sales to non-US
airlines were $203.4 million, $124.5 million, and $114.5 million for the
fiscal years ended February 22, 1997, February 24, 1996, and February 25,
1995, respectively, or approximately 49%, 54%, 50%, respectively, of net
sales during such periods.
Airlines select manufacturers of cabin interior products primarily on
the basis of custom design capabilities, product quality and performance, on
time delivery, after-sales service and price. B/E believes that its large
installed base, its timely responsiveness in connection with the custom
design, manufacture, delivery and after-sales service of its products and its
broad product line and stringent customer and regulatory requirements all
present barriers to entry for potential new competitors in the cabin interior
products market.
The Company believes that its integrated worldwide marketing approach,
focused by airline and encompassing the Company's entire product line, is
preferred by airlines. Led by a B/E senior executive, teams representing each
product line serve designated airlines which together account for
approximately 60% of the purchases of products manufactured by B/E. These
airline customer teams have developed customer specific strategies to meet
each airline's product and service needs. The Company also staffs "on-site"
customer engineers at major airlines and airframe manufacturers to represent
its 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 the wide range of cabin
interior products and assist in obtaining the applicable regulatory
certification for each particular product or cabin configuration. Through its
on-site customer engineers, the Company expects to be able to more
efficiently design and integrate products which address the requirements of
its customers. The Company provides program management services, integrating
all on-board cabin interior equipment and systems, including installation and
FAA certification, allowing airlines to substantially reduce costs. The
Company believes that it is 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.
12
BACKLOG
Management estimates that B/E's backlog at February 22, 1997 was
approximately $570 million, approximately 44% of which management believes to
be deliverable in fiscal 1998, compared with a backlog of $450 million on
February 24, 1996. As of February 22, 1997, approximately $155 million of the
Company's backlog was represented by the British Airways MDDS program which
is subject to satisfactory completion of flight trials ($110 million as of
February 24, 1996).
CUSTOMER SERVICE
The Company believes that it provides the highest level of customer
service and produc support available in the commercial aircraft cabin
interior products industry and that such service is a critical factor in the
Company's success. The key elements of such service include (i) rapid
response to requests for engineering designs, proposal requests and technical
specifications; (ii) flexibility with respect to customized features; (iii)
on-time delivery; (iv) immediate availability of spare parts for a broad
range of products; and (v) 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
The Company warrants its products, or specific components thereof, for
periods ranging from one to seven years, depending upon product type and
component. The Company generally establishes 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 over the warranty period.
Actual warranty costs reduce the warranty reserve as they are incurred.
Management periodically reviews the adequacy of accrued product warranty
reserves; and revisions of accrued product warranty reserves are recognized
in the period in which such revisions are determined.
The Company also carries product liability insurance. The Company
believes that its 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 airline 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
13
of products, including sophisticated electronic components, particularly in
wide-body aircraft. Management believes that these increasing demands of
airlines upon their suppliers will result in a number of suppliers leaving
the cabin interior products industry and a consolidation of those suppliers
which remain. The Company has participated in this consolidation through
strategic acquisitions and internal growth and intends to continue to
participate in the consolidation.
The Company's principal competitors for seating products include Group
Zodiac S.A., Keiper Recaro GmbH, and a number of other producers in the
European community and Japan. The Company's principal competitors for PESS
products are Matsushita Electronics ("MAS") and Hughes Avicom as to PCUs, and
MAS as to individual seat video systems. The Company's primary competitors
for galley products are JAMCO Limited and Buderus Sell GmbH (a subsidiary of
Buderus, Inc.).
MANUFACTURING AND RAW MATERIALS
The Company's manufacturing operations consist of both the in-house
manufacturing of component parts and sub-assemblies and the assembly of
Company specified and designed component parts which are purchased from
outside vendors. The Company maintains state-of-the-art facilities, and
management has an on-going strategic manufacturing improvement plan utilizing
focused factories and cellular production technologies. Management expects
that continuous improvement from implementation of this plan for each of its
product lines will occur over the next several years and should lower
production costs, cycle times and inventory requirements and at the same time
improve product quality and customer response.
GOVERNMENT REGULATION
The FAA 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. The Company
holds several FAA component certificates and performs component repairs at a
number of its US facilities under FAA repair station licenses. The Company
also holds 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 and the necessary approvals to
design, manufacture, inspect, test and repair its galley products in
Nieuwegein, The Netherlands and to inspect, test and repair products at its
six service centers throughout the world.
In March 1992, the FAA adopted Technical Standard Order C127 which
requires that all seats on certain new generation commercial aircraft
installed after such date be certified to meet a number of new safety
requirements, including an ability to withstand a 16G force. Management
understands that the FAA 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 FAA's jurisdiction, will have to comply with similar seat safety
requirements. At February 22, 1997, the Company had developed eleven
different seat models which meet these new seat safety regulations.
14
PATENTS
B/E currently holds 48 United States patents and 51 international
patents, covering a variety of products. However, the Company believes that
the termination, expiration or infringement of one or more of such patents
would not have a material adverse effect on the business or prospects of the
Company.
EMPLOYEES
As of February 22, 1997, B/E had approximately 3,140 employees.
Approximately 80% of these employees are engaged in manufacturing, 10% in
engineering, research and development, and 10% in sales, marketing, product
support and general administration. Approximately 14% of the employees are
represented by a union. On April 25, 1997, the Company completed negotiations
with its only domestic union which represents 12% of the Company's employees.
This contract, which covers a period of three years, was ratified by the
members of the union on April 26, 1997. B/E considers its employee relations
to be good.
15
ITEM 2. PROPERTIES
As of February 22, 1997, B/E had 17 principal facilities, comprising an
aggregate of approximately 1,077,750 square feet of space. The following
table describes the principal facilities and indicates the location,
function, approximate size and ownership status of each:
FACILITY
SIZE
LOCATION PRODUCTS AND FUNCTION (SQ. FEET) OWNERSHIP
- -------- --------------------- ---------- ---------
CORPORATE
Wellington, Florida Corporate headquarters, finance, marketing sales 17,700 Owned
Longwood, Florida Administration 1,300 Leased
Seating Products
Litchfield, Connecticut Manufacturing, service and warehousing 147,700 Owned
Winston-Salem, North Carolina Seating products group headquarters, research and
development,finance, marketing, sales and manufacturing 264,800 Owned
Leighton Buzzard, England Manufacturing, service, research and
and development, sales support, finance and
warehousing. 114,000 Owned(a)
Kilkeel, Northern Ireland Manufacturing, sales support and warehousing 38,500 Owned
GALLEY PRODUCTS:
Anaheim, California Manufacturing, service, research and development,
sales support, finance and 57,100 Leased
finance and warehousing
Delray Beach, Florida Manufacturing, service, research and development, sales
support, finance and warehousing; galley products
group headquarters 52,000 Owned
Jacksonville, Florida Manufacturing, service, engineering, and warehousing 75,000 Owned
Nieuwegein, The Netherlands Manufacturing, service, research and development,
sales support, finance and warehousing 39,000 Leased
PESS PRODUCTS:
Irvine, California Manufacturing, service, research and development,
sales support, finance and warehousing; in-flight 106,700 Leased
entertainment group headquarters
Services:
Orange, California Upgrade, maintenance, inspection and repair,
finance, sales support and warehousing, service
group headquarters 106,300 Leased
16
FACILITY
SIZE
LOCATION PRODUCTS AND FUNCTION SQ. FEET OWNERSHIP
- -------- --------------------- --------
Longwood, Florida Upgrade, maintenance, inspection and repair 5,300 Leased
Burnsville, Minnesota Upgrade, maintenance, inspection and repair 7,200 Leased
Linden, New Jersey Upgrade, maintenance, inspection and repair 5,800 Leased
Redmond, Washington Upgrade, maintenance, inspection and repair 5,350 Leased
Chesham, England Upgrade, maintenance, inspection and repair 34,000 Owned
(a) B/E's owned properties in England are mortgaged to Barclays Bank PLC
to collateralize credit facilities of FEEL in aggregate amounts of up to
approximately 3.0 million pounds.
The Company believes that its facilities are suitable for their present
intended purposes and adequate for the Company's present and anticipated
level of operations. As a result of recent conditions in the airline industry
as described in "Industry Overview-Recent Industry Conditions," B/E's
facilities have been substantially underutilized for the past several years.
The Company believes that its ongoing facility integration program, together
with anticipated continued growth in airline profitability, should result in
significant improvement in the degree of utilization in the Company's
facilities.
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17
ITEM 3. LEGAL PROCEEDINGS.
In July 1995, B/E became aware that the U.S. Attorney's Office for the
District of Connecticut, in conjunction with the Department of Commerce and
the U.S. Customs Service, is conducting a grand jury investigation focused on
possible non-compliance by B/E with certain statutory and regulatory
provisions relating to export licensing and controls. The investigation
relates primarily to the sale of passenger seats and related spare parts for
civilian commercial passenger aircraft to Iran Air from 1992 through
mid-1995. B/E has been advised that it is a target of the investigation. An
employee of a foreign based subsidiary of B/E has been charged with offenses
relating to the investigation. The investigation is continuing, and the
Company intends to defend itself vigorously, nevertheless, the ultimate
outcome of the investigation cannot presently be determined. An adverse
outcome could have a material adverse effect upon the operations and/or
financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the last quarter of the fiscal year covered by this report, the
Company did not submit any matters to a vote of security holders, through the
solicitation of proxies or otherwise.
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18
EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth information regarding the directors and
executive officers of the Company. Officers of the Company are elected
annually by the Board of Directors.
NAME AGE POSITION
- ---- --- --------
Amin J. Khoury 58 Chairman of the Board
Robert J. Khoury 55 Vice Chairman of the Board and Chief Executive Officer and Director
Paul E. Fulchino 50 President, Chief Operating Officer and Director
Marco C. Lanza 40 Corporate Executive Vice President, Marketing and Product Development
Thomas P. McCaffrey 43 Corporate Senior Vice President of Administration, Chief Financial Officer
and Assistant Secretary
Edmund J. Moriarty 52 Corporate Vice President-Law, General Counsel and Secretary
Jeffrey P. Holtzman 41 Corporate Vice President, Treasurer and Assistant Secretary
G. Bernard Jewell 54 Group Vice President and General Manager, Seating Products Group
E. Ernest Schwartz 60 Group Vice President and General Manager, Galley Products Group
Arthur H. Lipton 58 Group Vice President and General Manager, In-Flight Entertainment Group
Jim C. Cowart 45 Director^
Richard G. Hamermesh 49 Director*^
Brian H. Rowe 65 Director
Hansjoerg Wyss 61 Director*
* Member, Audit Committee.
^ Member, Stock Option and Compensation Committee.
19
The Company's Restated Certificate of Incorporation provides that the
Board of Directors is classified into three classes, as nearly as equal in
number as possible, so that each director (after a transitional period) will
serve for three years, with one class of directors being elected each year.
The Board is currently comprised of three Class I Directors (Brian H. Rowe,
Jim C. Cowart and Paul E. Fulchino), two Class II Directors (Robert J. Khoury
and Hansjoerg Wyss) 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 upon the election and qualification of successor directors at annual
meetings of stockholders held following the end of fiscal years 1998, 1996
and 1997, respectively. The executive officers of the Company are elected
annually by the Board of Directors following the annual meeting of
stockholders and serve at the discretion of the Board of Directors.
AMIN J. KHOURY has been Chairman of the Board of the Company since July
1987 and was Chief Executive Officer until April 1, 1996. Since 1986, Mr.
Khoury has also been the Managing Director of The K.A.D. Companies, Inc., an
investment, venture capital and consulting firm. Mr. Khoury is currently 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, and a member of the Board of Directors
of Brooks Automation, Inc., the leading manufacturer in the U.S. of vacuum
central wafer handling systems for semiconductor manufacturing. Mr. Khoury is
employed by the Company pursuant to an Employment Agreement which expires in
2002. Mr. Khoury is the brother of Robert J. Khoury.
ROBERT J. KHOURY has been a Director of the Company since July 1987. Mr.
Khoury was elected Vice Chairman and Chief Executive Officer effective April
1, 1996; from July 1987 until that date, Mr. Khoury served as the Company's
President and Chief Operating Officer. From 1986 to 1987, Mr. Khoury was Vice
President of The K.A.D. Companies, Inc. The Company has entered into an
Employment Agreement with Mr. Khoury which expires in 2001. Mr. Khoury is the
brother of Amin J. Khoury.
PAUL E. FULCHINO was elected a Director and President and Chief
Operating Officer of the Company effective April 1, 1996. From 1990 to 1996,
Mr. Fulchino served as President and Vice Chairman of Mercer Management
Consulting, Inc. ("Mercer"), a general management consulting firm with over
1,100 employees. In addition to his management responsibilities as President
of Mercer, Mr. Fulchino also had responsibility for advising clients
throughout the world, particularly with respect to the transportation
industry, including a number of major airlines. The Company has entered into
an Employment Agreement with Mr. Fulchino extending through March 31, 1999.
MARCO C. LANZA has been the Corporate Executive Vice President,
Marketing and Product Development since January 1994. From March 1992 through
January 1994, Mr. Lanza was Vice President and General Manager of the
In-flight Entertainment Group of the Company. From 1987 through February
1992, Mr. Lanza was Vice President, Marketing and Product Development of the
Company. The Company has entered into an Employment Agreement with Mr. Lanza
extending through December 31, 1999.
20
THOMAS P. MCCAFFREY has been Corporate Senior Vice President of
Administration, Chief Financial Officer and Assistant Secretary 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. The Company has
entered into an Employment Agreement with Mr. McCaffrey extending through
December 31, 1999.
EDMUND J. MORIARTY has been Corporate Vice President, 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 Treasurer since September 1993 and
Corporate Vice President since November 1996. 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 and Arthur Young & Company.
G. BERNARD JEWELL has been Vice President and General Manager of the
Company's Seating Products Group since March 1996. From February 1994 through
February 1996, Mr. Jewell was Group Vice President, Services Group of the
Company. From April 1992 through January 1994, Mr. Jewell was Group Vice
President, Marketing and Product Development of the Company. From 1988 to
1992, Mr. Jewell was President of Burns Aerospace Corporation, a manufacturer
of commercial aircraft cabin interior products.
E. ERNEST SCHWARTZ has been Vice President and General Manager of the
Galley Products Group of the Company since March 1992. From 1986 through
February 1992, Mr. Schwartz was President of Aircraft Products Company, which
was acquired by the Company in 1992.
ARTHUR H. LIPTON has been the Vice President and General Manager of the
In-flight Entertainment Group since July 1995. From 1990 to 1995, Mr. Lipton
was the Senior Vice President and General Manager of the Wyse Technology
Display Division. Prior to that he was with the Xerox Corporation for 20
years with his last position being Vice President and General Manager of
their Imaging Business Unit.
JIM C. COWART has been a Director of the Company since November 1989.
Since January 1993, Mr. Cowart has been the Chairman of the Board of
Directors and Chief Executive Officer of Aurora Electronics, Inc. Since
January 1992, Mr. Cowart has also been a Director of EOS Capital, Inc., a
private capital firm retained by the Company for strategic planning,
competitive analysis, financial relations and other services. From 1987 until
1991, Mr. Cowart was a general partner of Capital Resource Partners, a
private capital investment manager. From 1982 to 1987, Mr. Cowart was a
Senior Vice President of Investment Banking at Shearson Lehman Brothers and
was the President of Shearson Venture Capital, Inc.
21
RICHARD G. HAMERMESH has been a Director of the Company since July 1987.
Since August 1987, Dr. Hamermesh has been the Managing Partner of the Center
for Executive Development, an independent management consulting company, and,
from December 1986 to August 1987, Dr. Hamermesh was an independent
consultant. Prior to such time, Dr. Hamermesh was on the faculty at the
Harvard Business School. Dr. Hamermesh is also a Director of Applied
Extrusion Technologies, Inc.
BRIAN H. ROWE has been a Director of the Company since July 1995. Mr.
Rowe 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. From March 1994 to November 1995, Mr. Rowe served as a Director
of Astrostructures Hamble Limited, a manufacturer of military and civil
aircraft components. Since March 1995, Mr. Rowe has also been a Director of
Atlas Air Inc., an air cargo carrier. Since January 1980 Mr. Rowe has been a
Director of Fifth Third Bank, an Ohio banking corporation. Since October
1995, Mr. Rowe has been a Director of Cincinnati Bell Inc., a communications
services company. Since December 1995, Mr. Rowe has also been a Director of
Stewart & Stevenson Services, Inc., a custom packager of engine systems, and
Textron Inc., a manufacturer of mechanical devices for aircraft and other
applications. Since January 1996, Mr. Rowe has served as Executive Vice
Chairman of American Regional Aircraft Industries, Inc.
HANSJOERG WYSS has been a Director of the Company since October 1989.
Since 1977, Mr. Wyss has been a Director and the Chairman and Chief Executive
Officer of Synthes (U.S.A.) and Synthes (Canada), Ltd., manufacturers and
distributors of orthopedic implants and instruments. Mr. Wyss is also a
Director of Applied Extrusion Technologies, Inc.
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22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's 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 closing prices for the Common Stock as
reported by Nasdaq.
HIGH LOW
FISCAL YEAR ENDED FEBRUARY 25, 1995
First Quarter 11 1/2 7 7/8
Second Quarter 9 1/2 7 3/8
Third Quarter 9 1/4 7 1/2
Fourth Quarter 8 1/2 5 3/8
FISCAL YEAR ENDED FEBRUARY 24, 1996
First Quarter 8 5/8 5 1/4
Second Quarter 9 1/4 7 1/4
Third Quarter 9 9/16 7 1/2
Fourth Quarter 13 5/8 8 7/8
FISCAL YEAR ENDED FEBRUARY 22, 1997
First Quarter 16 1/4 9 7/8
Second Quarter 16 3/4 12 3/8
Third Quarter 25 1/8 15 1/2
Fourth Quarter 29 22 3/4
On April 30, 1997 the closing price of the Common Stock as reported by
Nasdaq was $24.625 per share. As of such date, the Company had 327
shareholders of record, and management estimates that there are approximately
9,627 beneficial owners of the Company's Common Stock. The Company has not
paid any cash dividends in the past, and management has no present intention
of doing so in the immediate future. The Company's Board of Directors intend,
for the foreseeable future, to retain any earnings to finance the future
growth of the Company, but expect to review its dividend policy regularly.
The Indentures pursuant to which the Company's 9 3/4% Senior Notes and 9 7/8%
Senior Subordinated Notes were issued and the terms of the Company's credit
facilities, permit the declaration or payment of cash dividends only in
certain circumstances described therein.
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23
ITEM 6. SELECTED FINANCIAL DATA.
(In thousands, except per share data)
On April 2, 1992, B/E acquired the stock of Flight Equipment Engineering
Limited ("FEEL"). During fiscal year 1994, B/E completed the following
acquisitions: On April 29, 1993, B/E acquired all of the stock of Royal
Inventum, B.V. ("Inventum"); on August 23, 1993, B/E acquired all of the
stock of Nordskog Industries ("Nordskog"); on August 26, 1993, B/E acquired
all of the stock of Acurex Corporation ("Acurex"); and on October 13, 1993,
B/E acquired substantially all of the assets of Philips Airvision
("Airvision"). On January 24, 1996, B/E acquired all of the stock of Burns
Aerospace Corporation ("Burns"). Each of B/E's acquisitions has been
accounted for as a purchase, and the results of the acquired businesses are
included in B/E's historical financial data from the date of acquisition. The
financial data for the fiscal years ended February 22, 1997, February 24,
1996, February 25, 1995, February 26, 1994 and February 27, 1993, have been
derived from financial statements which have been audited by B/E's
independent auditors. The following financial information is qualified by
reference to, and should be read in conjunction with, the financial
statements, including notes thereto, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this Annual Report.
Year Ended
---------------------------------------------------------------
Feb. 22, Feb. 24. Feb. 25, Feb, 26, Feb. 27,
1997 1996 1995 1994 1993
Consolidated Statement of Operations:
Net sales ..................................... $ 412,379 $ 232,582 $ 229,347 $ 203,364 $ 198,019
Cost of sales ................................. 270,557 160,031 154,863 136,307 137,690
------- ------- ------- ------- -------
Gross profit .................................. 141,822 72,551 74,484 67,057 60,329
Operating expenses:
Selling, general and administrative ....... 51,734 42,000 31,787 28,164 21,698
Research, development and engineering .... 37,083 58,327 (a) 12,860 9,876 11,299
Amortization expense ...................... 10,607 9,499 9,954 7,599 4,551
Other expenses ............................ -- 4,170 23,736 (b) -- --
----- ----- ------ ------ ------
Operating earnings (loss) .................... 42,398 (41,445) (3,853) 21,418 22,781
Interest expense, net ........................ 27,167 18,636 15,019 12,581 3,955
------ ------ ------ ------ -----
Earnings (loss) before income taxes (benefit),
cumulative effect of accounting
change and extraordinary item ............. 15,231 (60,081) (18,872) 8,837 18,826
Income taxes (benefit) ........................ 1,522 -- (6,806) 3,481 6,676
----- ------ ------ ----- -----
Earnings (loss)
before cumulative effect of
accounting change and extraordinary item .. 13,709 (60,061) (12,066) 5,356 12,150
Cumulative effect of accounting change ........ -- (23,332)(a) -- -- --
Extraordinary item, net of tax effect ......... -- -- -- --
-- -- -- -- (522)(c)
--------- --------- --------- --------- ---------
Net earnings (loss) ........................... $ 13,709 $ (83,413) $ (12,066) $ 5,356 $ 11,628
========= ========= ========= ========= =========
Net earnings (loss) per common share:
Continuing operations ..................... $ .72 $ (3.71) $ ( 0.75) $ 0.35 $ 1.03
Cumulative effect of accounting change .... -- (1.44)(a) -- -- --
Extraordinary item, net of tax effect ..... -- -- -- -- (0.05)(c)
--------- -------- -------- -------- ---------
Net earnings (loss) per common share .......... $ .72(d) $(5.15) $ (0.75) $ 0.35 $ 0.98
========= ========= ========= ========= =========
Common and common equivalent shares ........... 19,107 16,185 16,021 15,438 11,847
24
Consolidated Balance Sheet FEB. 22, 1997 FEB. 24, 1996 FEB. 25, 1995 FEB. 26, 1994 Feb. 27, 1993
(end of period):
Working capital........... $122,174 $ 41,824 $ 76,563 $ 76,874 $133,661
Total assets............. 491,089 433,586 379,954 375,009 314,055
Long-term debt............ 225,402 273,192 172,693 159,170 127,743
Stockholders' equity...... 165,761 44,157 125,331 133,993 107,974
(a) In fiscal 1996, the Company changed its method of accounting
relating to the capitalization of pre-contract engineering costs that were
previously included as a component of inventories and amortized to earnings
as the product was shipped. Effective February 26, 1995, such costs have been
charged to research, development and engineering and expensed as incurred
and, as a result, periods prior to fiscal 1996 are not comparable. In
connection with such change in accounting, the Company recorded a charge to
earnings of $23.3 million. See Note 2 of Notes to Consolidated Financial
Statements.
(b) In fiscal 1995, the Company charged to earnings $23.7 million of
expenses primarily related to intangible assets and inventories associated
with the Company's earlier generations of passenger entertainment systems.
(c) As a result of the sale of Senior Notes in 1993, the Company wrote
off the unamortized portion of certain debt issuance costs related to its
prior credit agreement.
(d) As required by APB 15, the supplemental earnings (loss) per common
share data give effect to: (i) the assumed issuance of 2,566,559 shares of
Common Stock by the Company which would be necessary to generate proceeds
(using an assumed share price of $25), net of estimated offering costs,
sufficient to repay $57.6 million of indebtedness; and (ii) the elimination
of interest expense related to such borrowings for each period, net of tax.
The supplemental data do not give effect to the issuance of an additional
1,433,441 shares of Common Stock sold by the Company.
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25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations" includes forward looking statements which involve
risks and uncertainties. The Company's actual experience may differ
materially from that discussed in such statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors" contained in Exhibit 99 hereto, as well as future events that have
the effect of reducing the Company's operating income and available cash
balances, such as unexpected operating losses or delays in the integration of
the Company's seating business, the delivery of the Company's MDDS
interactive video system, customer delivery requirements, new or expected
refurbishments, or cash expenditures related to possible future acquisitions.
(In thousands, except share and per share data)
INTRODUCTION
B/E is the world's leading manufacturer of commercial aircraft interior
products. B/E's products include an extensive line of first, business,
tourist class and commuter seats, a broad range of galley products including
coffee and beverage makers, ovens, liquid containers, refrigeration equipment
and galley structures, as well as a line of individual passenger in-flight
entertainment products including both distributed audio/video and interactive
video systems. B/E markets and sells its products to its customers, the
airlines, through a direct sales organization , focused by airline and
encompassing B/E's entire product line.
B/E's revenues are generally derived from two primary sources:
refurbishment or upgrade programs for the airlines' existing worldwide
fleets, and new aircraft deliveries. B/E believes its large installed base of
products, estimated to be approximately $2.8 billion as of February 22, 1997
(valued at replacement prices), gives it a significant advantage over
competitors in obtaining orders for refurbishment programs, principally due
to the tendency of the airlines to purchase equipment for such programs from
the original supplier. With the exception of spare parts sales, B/E's
revenues are generated from programs initiated by the airlines which may vary
significantly from year to year in terms of size, mix of products and length
of delivery. As a result, B/E's revenues and margins may fluctuate from
period to period based upon the size and timing of the program and the type
of products sold. Historically, B/E experienced certain trends in its two
revenue drivers: as the airlines took deliveries of large numbers of new
aircraft, refurbishment programs as a percentage of revenues declined and,
similarly, when new aircraft deliveries declined, refurbishment programs
tended to increase in number and size. During the most recent airline
industry recession, which ended in 1994, the airlines significantly depleted
their cash reserves and incurred record losses. In an effort to improve their
liquidity, the airlines conserved cash by reducing or deferring cabin
interior refurbishment and upgrade programs and purchases of new aircraft. As
26
a result, in contrast with historical experience, B/E experienced declines in
the number of both new orders and refurbishments.
Since early 1994, the airlines have experienced a significant turnaround
in operating results, with the domestic airline industry achieving record
operating earnings during calendar 1995 and 1996. Consequently, during fiscal
1997, B/E has experienced significant growth in its backlog. The growth in
backlog, coupled with the Burns acquisition, has led to a significant
expansion of the Company's revenues and operating earnings during fiscal
1997. This growth is a reflection of the airlines' need to begin refurbishing
worn fleets and their ability to do so as a result of the strengthening of
the airlines' balance sheets.
B/E has substantially expanded the size, scope and nature of its
business as a result of a number of acquisitions. During the fiscal year
ended February 26, 1994, B/E completed the following acquisitions: (a) on
April 29, 1993, the Company acquired, through a Dutch holding company, all of
the capital stock of Inventum, a supplier of galley inserts including ovens,
beverage makers and water boilers to airlines located primarily in Europe and
the Pacific Rim; (b) on August 23, 1993, the Company acquired all of the
capital stock of Nordskog, an industry pioneer in galley structures and
inserts; (c) on August 26, 1993, the Company acquired all of the capital
stock of Acurex, the leading worldwide supplier of commercial aircraft
refrigeration products; and (d) on October 13, 1993, the Company acquired
substantially all of the assets and certain of the liabilities of Airvision,
a manufacturer of in-flight entertainment equipment. On January 24, 1996, the
Company acquired all of the stock of Burns, an industry leader in commercial
aircraft seating. While the Company will continue to be susceptible to
industry-wide conditions, management believes that the Company's
significantly more diversified product line and revenue base achieved through
acquisitions has reduced its exposure to demand fluctuations in any one
product area.
The Burns acquisition has had a significant impact on B/E's results of
operations. Burns was one of the three leading North American suppliers of
commercial aircraft passenger seats, with a base of airline customers that
was largely complementary to that of B/E. By consolidating engineering,
marketing, administration and manufacturing operations of the two companies,
B/E has been able to reduce fixed costs, thereby enhancing its low-cost
position. These efforts have allowed B/E to increase its engineering
capabilities, expand seat production capacity to over 200,000 seats per year
and provide a substantially higher level of product support.
B/E's business strategy is to maintain its market leadership position
through various initiatives, including new product development. In fiscal
1996, research, development and engineering expenses totaled $58,327, or 25%
of net sales, primarily consisting of costs related to the development of the
MDDS, with the balance attributable to its seating products and galley
businesses. During the year ended February 22, 1997, primarily as a result of
the substantial completion of the engineering associated with the development
of the MDDS, such expenses were $37,083, or 9% of net sales. The Company
27
expects that its research, development and engineering expenses will increase
in fiscal 1998 as a result of the introduction of the MDDS as a line fit
option on the Boeing B777 and B747 aircraft.
RESULTS OF OPERATIONS -- YEAR ENDED FEBRUARY 22, 1997 COMPARED TO YEAR
ENDED FEBRUARY 24, 1996
Sales for the year ended February 22, 1997 were $412,379, or 77% higher
than sales of $232,582 for the comparable period in the prior year. The
increase in sales is attributable to substantially higher unit volume
shipments of all the Company's products as a result of improving industry
conditions. Of the $179,797 increase in sales for the year, $103,800 was due
to increased seating and services revenues directly related to the
acquisition of Burns. Excluding the effect of the Burns acquisition, sales
increased 33% year over year.
At February 22, 1997, the Company's backlog was approximately $570,000,
up from $450,000 at February 24, 1996. New order bookings in the year ended
February 22, 1997 of $532,000 were $305,000 greater than new order bookings
of $227,000 for the comparable period in the prior year. Management estimates
that approximately 44% of its backlog is deliverable during fiscal 1998.
Gross profit was $141,822, or 34.4% of sales, for the year ended
February 22, 1997 and was $69,271 higher than gross profit for the comparable
period in the prior year of $72,551, which represented 31.2% of sales. The
increase in gross profit is primarily the result of the higher sales volumes
and the mix of products and services sold.
Selling, general and administrative expenses were $51,734, or 12.5% of
sales, for the year ended February 22, 1997. This was $9,734 higher than
selling, general and administrative expenses for the comparable period in the
prior year of $42,000, or 18.1% of sales, principally due to the substantial
increases in revenues and the acquisition of Burns.
Research, development and engineering expenses were $37,083, or 9.0% of
sales, for the year ended February 22, 1997. For the comparable period in the
prior year, research and development expense was $58,327, or 25.1% of sales.
The decrease in expenses during the current year is the result of a decrease
in the level of activity associated with the MDDS interactive entertainment
system, offset somewhat by an increase in product development activity in the
Seating Products Group.
Amortization expense for the year February 22, 1997 of $10,607 was
$1,108 more than the amount recorded in fiscal 1996 as a result of the Burns
acquisition.
Net interest expense was $27,167 for the year ended February 22, 1997,
or $8,531 higher than the net interest expense of $18,636 recorded for the
comparable period in the prior year, and is due to the increase in the
Company's long-term debt outstanding throughout most of fiscal 1997 as a
result of the Senior Subordinated Notes issued at the time of the Burns
acquisition.
28
Earnings before income taxes of $15,231 for the year ended February 22,
1997 were $75,312 more than the loss before income taxes of $60,081 in the
prior year.
Income taxes for the year ended February 22, 1997 were $1,522, or 10% of
earnings before income taxes, as compared to no tax provision in fiscal 1996.
Net earnings were $13,709, or $.72 per share, for the year ended
February 22, 1997 as compared to a net loss of $(83,413) or $(5.15) per share
for the comparable period in the prior year, which included the cumulative
effect of an accounting change of $23,332.
RESULTS OF OPERATIONS - YEAR ENDED FEBRUARY 24, 1996 COMPARED WITH YEAR
ENDED FEBRUARY 25, 1995
Sales for the year ended February 24, 1996 were $232,582 or 1% greater
than sales of $229,347 in the prior year. This increase in sales is primarily
related to the inclusion of results of operations of Burns, which was
acquired during the fourth quarter of fiscal 1996. Offsetting this increase
in revenues was the negative impact of a ten-week strike at Boeing, which
ended December 14, 1995.
At February 24, 1996, the Company's backlog stood at approximately
$450,000, up from $331,000 at February 25, 1995. The increase in backlog is
attributable to the acquisition of Burns, along with solid growth from orders
placed by the airlines. During the year ended February 24, 1996, and for the
first time in over two years, the airlines placed orders for the Company's
seating and galley products in excess of its shipment levels, resulting in an
increase in its seating and galley products backlog.
Gross profit was $72,551 or 31.2% of sales for the year ended February
24, 1996 and was $1,933 less than gross profit for the prior year of $74,484
which represented 32.5% of sales. The decrease in gross profit during the
year ended February 24, 1996 is primarily the result of the mix of products
sold.
Selling, general and administrative expenses were $42,000 (18.1% of
sales) for the year ended February 24, 1996. This was $10,213 higher than the
comparable period in the prior year of $31,787 (13.9% of sales), principally
due to costs associated with the Burns acquisition and related organizational
changes brought about by this acquisition, higher promotional and selling
costs associated with B/E's participation in annual industry trade shows, and
higher medical benefits and legal costs during fiscal 1996.
Effective as of the beginning of fiscal 1996 the Company changed its
method of accounting for pre-contract engineering expenditures associated
with customer orders. These expenditures, which previously were carried in
inventory for amortization over future deliveries, are now expensed as
incurred. As a result of this change in accounting method, research,
development and engineering for the year ended February 24, 1996 increased by
$45,467 to $58,327 , as compared to $12,860 in the prior year.
29
Amortization expense for the year ended February 24, 1996 of $9,499 was
$455 less than the amount recorded in the prior year and is due to the lower
level of intangible assets being amortized during fiscal 1996.
Other expenses were $4,170 for the year ended February 24, 1996 and
relate to costs associated with the integration and consolidation of the
Company's European seating business. Other expenses for the year ended
February 25, 1995 were $23,736 and related primarily to a charge associated
with B/E's earlier generations of passenger entertainment systems.
Interest expense, net was $18,636 for the year ended February 24, 1996
or $3,617 higher than the prior year. This increase is the result of an
increase in the amount of the Company's long-term debt outstanding, as well
as higher interest rates.
No income tax benefit was provided for the year ended February 24, 1996
as compared to a tax benefit of $6,806 (36%) for the prior year.
The Company recorded the cumulative effect of an accounting change of
$23,332 during the year ended February 24, 1996. Such amount represents the
total amount of capitalized pre-contract engineering costs which were
included in inventories as of February 25, 1995.
The net loss for fiscal 1996 was ($83,413) or $(5.15) per share as
compared to a net loss of ($12,066) or $(.75) per share in the prior year.
RESULTS OF OPERATIONS YEAR ENDED FEBRUARY 25, 1995 (FISCAL 1995)
COMPARED WITH YEAR ENDED FEBRUARY 26, 1994 (FISCAL 1994)
Sales for the year ended February 25, 1995 were $229,347 or 13% higher
than sales of $203,364 in the prior year. The increase in sales was primarily
related to the results of operations of businesses acquired at the end of the
second quarter of fiscal 1994. The level of activity in the cabin interior
products industry continued to reflect the depressed conditions within the
airline industry.
At February 25, 1995, B/E's backlog stood at $331,000 up from $241,000
at February 26, 1994. Substantially all of the growth in backlog was
attributable to B/E's in-flight entertainment products; backlog for B/E's
seating and galley products continued to decline through fiscal 1995 as a
result of the depressed conditions present in the airline industry.
Gross profit was $74,484 or 32% of sales, for the year ended February
25, 1995 and was $7,427 or 11%, greater than the prior year's gross profit of
$67,057 which represented 33% of sales. The increase in gross profit during
the fiscal year ended February 25, 1995 was in large part the result of
higher revenues associated with the businesses acquired at the end of the
second quarter of fiscal 1994.
Selling, general and administrative expenses were $31,787 or 14% of
sales, for the year ended February 25, 1995. This was $3,623 or 13%, higher
than the selling, general and administrative expenses for the comparable
period in the prior year of $28,164 (14% of sales), principally due to the
acquisitions completed during fiscal 1995.
30
Research and development expenses were $12,860 or 6% of sales, for the
fiscal year ended February 25, 1995. For the prior year, research and
development expenses were $9,876 or 5% of sales. The increase in research and
development was attributable to B/E's ongoing new product development
programs.
Amortization expense for the fiscal year ended February 25, 1995 of
$9,954 was $2,355 or 31%, higher than the amount recorded in the prior year,
and was due to the acquisitions completed during fiscal 1995.
Other expenses for the fiscal year ended February 25, 1995 consisted of
a charge of $23,736 related primarily to intangible assets and inventories
associated with B/E's earlier generations of passenger entertainment systems.
The introduction of B/E's MDDS, which B/E expects to become the industry's
standard for in-flight passenger and service entertainment, has captured the
dominant market share with it receiving contract awards from major airlines
totaling more than $250 million since fiscal 1995. The MDDS also caused major
carriers to convert programs for earlier products of B/E to the MDDS and has
resulted in two of B/E's principal competitors offering to develop for the
airlines systems similar to B/E's MDDS. These events caused the in-flight
entertainment industry to re-evaluate its product offerings and, in the
process, have impaired the value of certain of its assets. As a result,
during the year ended February 25, 1995, B/E wrote down certain of its assets
principally related to its earlier systems.
Principally due to the other expenses described above, B/E recorded a
net operating loss of ($3,853) for the fiscal year ended February 25, 1995,
as compared to operating earnings of $21,418 in the prior year. Operating
earnings for the period before the special charge mentioned above were
$19,883.
Net interest expense of $15,019 for the fiscal year ended February 25,
1995 was $2,438 or 19%, higher than the prior year. This increase was the
result of an increase in the amount of B/E's long-term debt outstanding, as
well as higher interest rates.
An income tax benefit of ($6,806) (36% of the loss before income taxes)
was recognized principally as the result of the charge described above.
Income tax expense for the fiscal year ended February 26, 1994 was $3,481 or
39% of earnings before income taxes.
The net loss for fiscal 1995 was $(12,066) or $(.75) per share as
compared to net earnings of $5,356 or $.35 per share in the prior year,
principally due to the charge.
31
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements consist primarily of working
capital needs and scheduled payments of interest on its indebtedness. As a
result of the Burns acquisition, the Company has significantly increased cash
requirements for the payment of interest on its outstanding borrowings.
B/E's primary requirements for working capital have been directly
related to increased accounts receivable and inventory levels as a result of
revenue growth. B/E's working capital was $122,174 as of February 22, 1997,
compared to $41,824 as of February 24, 1996.
In January 1996, the Company amended its existing credit facilities with
The Chase Manhattan Bank by increasing the aggregate principal amount that
may be borrowed thereunder to $100,000 (the "Bank Credit Facility"). The Bank
Credit Facility consists of a $25,000 Reducing Revolver and a $75,000
Revolving Facility. The amount of the Reducing Revolver will be reduced
automatically by 12.5% on April 19, 1999 and on each of the seven succeeding
quarterly anniversaries of such date. The Reducing Revolver is collateralized
by all of the issued and outstanding capital stock of Acurex, a wholly owned
subsidiary, and has a five year maturity. The Revolving Facility is
collateralized by all of the Company's accounts receivable, all of its
inventory and substantially all of its other personal property and has a
five-year maturity. The Bank Credit Facility contains customary affirmative
covenants, negative covenants and conditions of borrowing. At February 22,
1997, indebtedness under the Bank Credit Facility were letters of credit
amounting to approximately $5,100. The Company has approximately $94,900
under its bank credit facility for subsequent borrowings.
The Senior Notes and Senior Subordinated Notes are due March 1, 2003 and
February 1, 2006, respectively.
At February 22, 1997, the Company's cash and cash equivalents were
$44,149 as compared to $15,376 at February 24, 1996. Cash used in operating
activities during the twelve months ended February 22, 1997 was $10,591 and
cash used in operating activities in fiscal 1996 was $34,562. The primary
source of cash during the year ended February 22, 1997 was net earnings of
$13,709, non-cash charges for depreciation and amortization of $24,147 and
approximately $106,082 from the issuance of common stock, offset by a use of
cash of $38,902 related to increases in receivables and inventories and
$12,603 related to decreases in other assets and liabilities. The primary
source of cash during the year ended February 24, 1996 was non-cash charges
for depreciation and amortization of $18,435 and the cumulative effect of the
accounting change of $23,332 which was offset by a use of cash for research,
development and engineering of $58,327 and for inventory of $11,929.
The Company's capital expenditures were $14,471, $13,656 and $12,172
during the year ended February 22, 1997, February 24, 1996 and February 25,
1995, respectively. The Company anticipates ongoing capital expenditures of
approximately $20 million per year for the next several years.
The Company believes that cash flow from operations and availability
under the Bank Credit Facility will provide adequate funds for its working
32
capital needs, planned capital expenditures and debt service obligations
through the term of the Bank Credit Facility. The Company believes that it
will be able to refinance the Bank Credit Facility prior to its termination,
although there can be no assurance that it will be able to do so. The
Company's ability to fund its operations and make planned capital
expenditures, to make scheduled payments and to refinance its indebtedness
depends on its future operating performance and cash flow, which, in turn,
are subject to prevailing economic conditions and to financial, business and
other factors, some of which are beyond its control.
INDUSTRY CONDITIONS
The Company's customers are the world's commercial airlines. As a
result, the Company's business is directly dependent upon the conditions in
the commercial airline industry. In the late 1980s and early 1990s the world
airline industry suffered a severe downturn which resulted in record losses
and several air carriers seeking protection under bankruptcy laws. As a
consequence, during such period, airlines sought to conserve cash by reducing
or deferring scheduled cabin interior refurbishment and upgrade programs and
delaying purchases of new aircraft. This led to a significant contraction in
the commercial aircraft cabin interior products industry, and a decline in
the Company's business and profitability. Over the last two years, the
airline industry has experienced a dramatic economic turnaround in
profitability and balance sheet strength, and a number of the world's
airlines have placed significant orders for new aircraft over the past twelve
months. Industry sources are now predicting that new aircraft deliveries will
increase substantially over the next several years. There can be no assurance
that the recent profitability of the airline industry will continue or that
the airlines will maintain or increase expenditures on cabin interior
products for refurbishments or new aircraft.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This information required by this section is set forth on pages F-1
through F-20 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
[Remainder of page intentionally left blank]
33
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information set forth under the caption "Election of Directors" in the
proxy statement to be filed with the Commission in connection with Company's
1997 Annual Meeting of Stockholders (the "Proxy Statement") is incorporated
by reference herein.
Information relating to the executive officers of the Company is set
forth in Part I of this report under the caption "Executive Officers of the
Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
Information set forth under the caption "Executive Compensation" in the
Proxy Statement is incorporated by reference herein. The Compensation
Committee Report and the Performance Graph included in the Proxy Statement
are not incorporated herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information set forth under the caption "Beneficial Ownership of Shares"
in the Proxy Statement is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information set forth under the caption "Certain Transactions" in the
Proxy Statement is incorporated by reference herein.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements (See page F-1).
Consolidated Balance Sheets, February 22, 1997 and February 24, 1996.
Consolidated Statements of Operations for the Years Ended February 22,
1997, February 24, 1996, February 25, 1995.
Consolidated Statements of Stockholders' Equity for the Years Ended
February 22, 1997, February 24, 1996, February 25, 1995.
Consolidated Statements of Cash Flows for the Years Ended February 22,
1997, February 24, 1996, February 25, 1995.
Notes to Consolidated Financial Statements for the Years Ended February
22, 1997, February 24, 1996, February 25, 1995.
34
2. Financial Statement Schedules.
Schedule II - Valuation and Qualifying Accounts for the Years Ended
February 22, 1997, February 24, 1996 and February 25, 1995.
3. Exhibits.
The following exhibits are filed herewith:
Exhibit 23 Consent of Deloitte & Touche LLP
Exhibit 27 Financial Data Schedule for the Fiscal Year Ended
February 22, 1997
Exhibit 99.1 Risk Factors
Exhibit 99.2 BE Aerospace, Inc. Savings and Profit Sharing Plan and
Trust--Financial Statements for the Ten Months Ended December
31, 1995 and the Year Ended February 28, 1995, Supplemental
Schedules and Independent Auditors' Report
Exhibit 99.3 BE Aerospace, Inc. 1994 Employee Stock Purchase Plan--Financial
Statements as of February 29, 1996 and February 28, 1995; and
for the Year Ended February 29, 1996 and the period from May
15, 1994 (inception) to February 28, 1995 and Independent
Auditors' Report
35
The following exhibits previously have been filed with the Commission
under the Securities Act of 1933 and/or the Securities Exchange Act of 1934
and are incorporated by reference herein. (i) the Registrant's Registration
Statement on Form S-1, as amended (No. 33-33689), filed with the Commission
on March 7, 1990 (referred to below as "33-33689"); (ii) the Registrant's
Registration Statement on Form S-1, as amended (No. 33-43147), filed with the
Commission on October 3, 1991 (referred to below as "33-43147"); (iii) the
Registrant's Registration Statement on Form S-1, as amended (No. 33-54146),
filed with the Commission on November 3, 1992 (referred to below as
"33-54146"); (iv) the Registrant's Registration Statement on Form S-3, as
amended (No. 33-57798) filed with the Commission on February 2, 1993
(referred to below as "33-57798"); (v) the Registrant's Registration
Statement on Form S-2 (No. 33-66490) filed with the Commission on July 23,
1993 (referred to below as "33-66490"); (vi) the Registrant's Registration
Statement on Form S-8 (No. 33-48119), filed with the Commission on May 26,
1992 (referred to below as "33-48119"); (vii) the Registrant's Registration
Statement on Form S-8 (No. 33-72194), filed with the Commission on November
29, 1993 (referred to below as "33-72194"); (viii) the Registrant's
Registration Statement on Form S-8 (No. 33-82894), filed with the Commission
on August 16, 1994 (referred to below as "33-82894"); (ix) the Registrant's
Registration Statement on Form S-4 (No. 333-00433, filed with the Commission
on January 26, 1996 (referred to below as '"33-00433");(x) the Registrant's
Current Report on Form 8-K dated March 5, 1992, filed with the Commission on
March 6, 1992 (referred to below as "March 1992 8-K"); (xi) the Registrant's
Current Report on Form 8-K dated April 16, 1992, filed with the Commission on
April 17, 1992 (referred to below as "April 8-K"); (xii) the Registrants'
Current Report on Form 8-K dated August 23, 1993, filed with the Commission
on September 7, 1994 (referred to below as "August 8-K"); (xiii) the
Registrant's Current Report on Form 8-K dated December 14, 1995 filed with
the Commission on December 28, 1995 (referred to below as "December 8-K");
(xiv) the Registrant's Current Report on Form 8-K dated March 26, 1996, filed
with the Commission on April 5, 1996 (referred to below as "March 1996
8-K");(xv);the Registrant's Annual Report on Form 10-K for the seven-month
transition period ended February 29, 1992, filed with the Commission on May
27, 1992 (referred to below as "1992 10-K"); (xvi) the Registrant's Report on
Form 10-K, as amended, for the fiscal year ended February 27, 1993, filed
with the Commission on May 13, 1993 (referred to below as "1993 10-K");
(xvii) the Registrant's Annual Report on Form 10-K, as amended, for the
fiscal year ended February 26, 1994, filed with the Commission on May 23,
1994 (referred to below as "1994 10-K"); and (xviii) the Registrant's Annual
Report on Form 10-K, for the fiscal year ended February 25, 1995, filed with
the Commission on May 24, 1995 (referred to below as "1995 10-K").
36
Exhibit number and filing
reference from which Exhibits
are incorporated by reference
-----------------------------
Exhibit 3. Articles of Incorporation and By-Laws
3.1 Amended and Restated Certificate of Incorporation 3.1 33-33689
3.2 Certificate of Amendment of the Restated Certificate 3 33-54146
of Incorporation
3.3 Amended and Restated By-Laws 3.2 March 8-K
Exhibit 4. Instruments defining the rights of security holders,
including debentures
4.1 Specimen Common Stock Certificate 4 33-33689
4.2 Form of Note for the Registrant's issue of 9 3/4% Senior Notes 4.1 33-57798
4.3 Indenture dated March 3, 1993 between U.S. Trust 4.2 33-57798
Company of New York, as trustee, and the Registrant
relating to the Registrant's 9 3/4% Senior Notes
4.4 First Supplemental Indenture to Indenture dated March 3, 1993 for 4.2 333-00433
the Registrant's 9 3/4% Senior Notes
4.5 Form of Note for the Registrant's 9 7/8% Senior Subordinated Notes 4.3 333-00433
4.6 Form of Note for the Registrant's Series B 9 7/8% Senior 4.3 333-00433
Subordinated Notes
4.7 Indenture dated January 24, 1996 between Fleet National Bank, as 4.1 333-00433
trustee, and the Registrant relating to the Registrant's 9 7/8%
Senior Subordinated Notes and Series B 9 7/8% Senior Subordinated
Notes
4.8 Form of Stockholders' Agreement by and among the 4.4 33-66490
Registrant, Summit Ventures II, L.P., Summit Investors II,
L.P. and Wedbush Capital Partners
37
Exhibit number and filing
reference from which Exhibits
are incorporated by reference
-----------------------------
Exhibit 10(i) Material Contracts
10.4 Supply Agreement dated as of April 17, 1990 between 10.7 33-33689
the Registrant and Applied Extrusion Technologies, Inc.
10.5 Amended and Restated Credit Agreement (the "Chase Credit 10.33 1994 10-K
Agreement"), dated as of May 18, 1994 among the Registrant, the
banks named therein and The Chase Manhattan Bank, N.A. as agent
10.6 Amendment No. 1 dated May 18, 1994 to the Chase Credit Agreement 10.33 1995 10-K
10.7 Amendment No. 2 dated January 19, 1996 to the Chase Credit Agreement 10.3 333-00433
10.8 Receivables Sales Agreement dated January 24, 1996 among the 10.1 333-00433
Registrant, First Trust of Illinois, N.A. and Centrally Held Eagle
Receivables Program, Inc.
10.9 Escrow Agreement dated January 24, 1996 among the Registrant, Eagle 10.2 333-00433
Industrial Products Corporation and First Trust of Illinois, NA, as
Escrow Agent
10.10 Acquisition Agreement dated as of December 14, 1995 by and among 1 December 8-K
the Registrant, Eagle Industrial Products Corporation, Eagle
Industries, Inc., and Great American Management and Investment, Inc.
10.11 Flight Equipment and Engineering Limited ("FEEL") Stock 2.1 April 8-K
Purchase Agreement among FEEL Holdings Limited,
Dr. Ling Kai K'ung, Mr. John Frederick Branham
("Mr. Branham"), Mr. John Tcheng and the Registrant dated
April 2, 1992
10.12 Agreement among Boustead Industries Limited, FEEL, 10.26 1993 10-K
Boustead PLC and the Registrant relating to the sale
and purchase of the entire issued share capital of Fort Hill
Aircraft Holdings Limited dated February 8, 1993
10.13 Acquisition Agreement among the Registrant, 10.28 1993 10-K
Inventum and B.V. Industrieele Maatschappij dated
as of April 29, 1993
38
Exhibit 10(ii) Leases
Exhibit number and filing
reference from which Exhibits
are incorporated by reference
-----------------------------
10.14 Lease dated May 15, 1992 between McDonnell Douglas Realty 10.1 33-54148
Company, as lessor, and the Registrant, as lessee, relating
to the Irvine, California property
10.15 Lease dated September 1, 1992 relating to the Wellington, 10.2 33-54146
Florida property
10.16 Chesham, England Lease dated October 1, 1973 10.13(a) 1992 10-K
between Drawheath Limited and The Peninsular and Oriental Steam
Navigation Company (assigned in February 1985)
10.17 Kilkeel, Northern Ireland Lease dated April, 1984 10.27 1993 10-K
between The Department of Economic Development
and Aircraft Furnishing International Limited.
10.18 Utrecht, The Netherlands Lease dated December 15, 1988 10.29 1993 10-K
between the Pension Fund Foundation for Food Supply Commodity Boards
and Inventum
10.19 Utrecht, The Netherlands Lease dated January 31, 1992 10.30 1993 10-K
between G.W. van de Grift Onroerend Goed B.V.
and Inventum
10.20 Lease dated October 25, 1993 relating to the property 10.32 1994 10-K
in Longwood, Florida.
Exhibit 10(iii) Executive Compensation Plans and Arrangements
10.21 Amended and Restated 1989 Stock Option Plan 28.1 33-48119
10.22 Directors' 1991 Stock Option Plan 28.2 33-48119
10.23 1990 Stock Option Agreement with Richard G. Hamermesh 28.3 33-48119
10.24 1990 Stock Option Agreement with B. Martha Cassidy 28.4 33-48119
10.25 1990 Stock Option Agreement with Jim C. Cowart 28.5 33-48119
10.26 1990 Stock Option Agreement with Petros A. Palandjian 28.7 33-48119
39
Exhibit number and filing
reference from which Exhibits
are incorporated by reference
-----------------------------
10.27 1990 Stock Option Agreement with Hansjoerg Wyss 28.8 33-48119
10.28 1991 Stock Option Agreement with Amin J. Khoury 28.9 33-48119
10.29 1991 Stock Option Agreement with Jim C. Cowart 28.10 33-48119
10.30 1992 Stock Option Agreement with Amin J. Khoury 28.11 33-48119
10.31 1992 Stock Option Agreement with Jim C. Cowart 28.12 33-48119
10.32 1992 Stock Option Agreement with Paul W. Marshall 28.13 33-48119
10.33 1992 Stock Option Agreement with David Lahar 28.14 33-48119
10.34 United Kingdom 1992 Employee Share Option Scheme 10.4 33-54146
10.35 1994 Employee Stock Purchase Plan 99 33-82894
10.36 Employment Agreement dated as of January 1, 1992 10.12(a) 1992 10-K
between the Registrant and Amin J. Khoury (the "A. Khoury
Agreement")
10.37 Amendment No. 2 dated as of April 1, 1996 to the A. Khoury 10.2 March 1996 8-K
Agreement
10.38 Employment Agreement dated as of March 1, 1992 10.12(b) 1992 10-K
between the Registrant and Robert J. Khoury (the "R. Khoury
Agreement")
10.39 Amendment No. 2 dated as of January 1, 1996 to the R. Khoury 10.3 March 1996 8-K
Agreement
10.40 Employment Agreement dated as of March 1, 1992 10.12(c) 1992 10-K
between the Registrant and Marco Lanza (the "Lanza Agreement")
40
Exhibit number and filing
reference from which Exhibits
are incorporated by reference
-----------------------------
10.41 Amendment No. 1 dated as of January 1, 1996 to the Lanza Agreement 10.5 March 1996 8-K
10.42 Employment Agreement dated as of April 1, 1992 10.12(e) 1992 10-K
between the Registrant and G. Bernard Jewell
10.43 Employment Agreement dated as of May 1, 1994 between 10.34 1994 10-K
the Registrant and Thomas P. McCaffrey (the "McCaffrey Agreement")
10.44 Amendment No 1. dated as of January 1, 1996 to the McCaffrey 10.4 March 1996 8-K
Agreement
10.45 Employment Agreement dated as of April 1, 1996 by and between the 10.1 March 1996 8-K
Registrant and Paul E. Fulchino
Exhibit 21 Subsidiaries of the registrant 21 1993 10-K
(b) Reports on Form 8-K: None.
[Remainder of page intentionally left blank]
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
B/E AEROSPACE, INC.
By /s/ Robert J. Khoury
Robert J. Khoury
Vice Chairman and Chief Executive Officer
Dated: May 8, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed on May 8, 1997 by the following persons on behalf
of the registrant in the capacities indicated.
Signature Title
-------- -----
/s/ Amin J. Khoury Chairman
/s/ Robert J. Khoury Vice Chairman and Chief
Executive Officer and Director
/s/ Paul E. Fulchino President and Chief Operating Officer
/s/ Thomas P. McCaffrey Senior Vice President of Administration,
Chief Financial Officer and Assistant
Secretary (principal financial
and accounting officer)
/s/ Jim C. Cowart Director
/s/ Richard G. Hamermesh Director
/s/ Brian H. Rowe Director
/s/ Hansjoerg Wyss Director
42
ITEM 8. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE.
Page
Independent Auditors' Report F-2
Financial Statements:
Consolidated Balance Sheets, February 22, 1997 and February 24, 1996. F-3
Consolidated Statements of Operations for the Years Ended
February 22, 1997, February 24, 1996 and February 25, 1995. F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended February 22, 1997, February 24, 1996, and
February 25, 1995. F-5
Consolidated Statements of Cash Flows for the Years Ended
February 22, 1997, February 24, 1996 and February 25, 1995. F-6
Notes to Consolidated Financial Statements for the Years Ended
February 22, 1997, February 24, 1996 and February 25, 1995.
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for the Years
Ended February 22, 1997, February 24, 1996 and
February 25, 1995. F-21
[Remainder of page intentionally left blank]
43
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
B/E Aerospace, Inc.
Wellington, Florida
We have audited the accompanying consolidated balance sheets of B/E
Aerospace, Inc. and subsidiaries as of February 22, 1997 and February 24,
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended
February 22, 1997. Our audits also included the financial statement schedule
on page F-21. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of B/E Aerospace, Inc. and
subsidiaries as of February 22, 1997 and February 24, 1996 and the results of
their operations and their cash flows for each of the three years in the
period ended February 22, 1997, in conformity with generally accepted
accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set
forth therein.
As discussed in Note 2 to the consolidated financial statements, in the
year ended February 24, 1996, the Company changed its method of accounting
for engineering expenditures.
DELOITTE & TOUCHE LLP
Costa Mesa, California
April 10, 1997
44
CONSOLIDATED BALANCE SHEETS, FEBRUARY 22, 1997 AND FEBRUARY 24, 1996 (Dollars
in thousands, except share data)
ASSETS 1997 1996
---- ----
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 44,149 $ 15,376
Accounts receivable - trade, less allowance for doubtful
accounts of $4,864 (1997) and $4,973 (1996) ............ 73,489 54,242
Inventories, net ....................................... 92,900 72,569
Other current assets ................................... 2,781 7,621
--------- ---------
Total current assets ................................... 213,319 149,808
--------- ---------
PROPERTY AND EQUIPMENT, net .................................... 87,888 86,357
INTANGIBLES AND OTHER ASSETS, net .............................. 189,882 197,421
--------- ---------
$ 491,089 $ 433,586
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ....................................... $ 42,889 $ 45,102
Accrued liabilities .................................... 43,837 56,400
Current portion of long-term debt and borrowings ....... 4,419 6,482
--------- ---------
Total current liabilities .............................. 91,145 107,984
--------- ---------
LONG-TERM DEBT ................................................. 225,402 273,192
DEFERRED INCOME TAXES .......................................... 1,667 1,257
OTHER LIABILITIES .............................................. 7,114 6,996
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 1,000,000
shares authorized; no shares outstanding
Common stock, $.01 par value; 30,000,000 shares
authorized; 21,893,392 (1997) and 16,392,994 (1996)
shares issued and outstanding .......................... 219 164
Additional paid-in capital ............................. 228,710 121,366
Accumulated deficit .................................... (62,286) (75,995)
Cumulative foreign exchange translation adjustment ..... (882) (1,378)
-------- ---------
Total stockholders' equity ............................. 165,761 44,157
--------- ---------
$ 491,089 $ 433,586
========= =========
See notes to consolidated financial statements.
45
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED FEBRUARY 22, 1997, FEBRUARY 24, 1996,
AND FEBRUARY 25, 1995
(Dollars in thousands, except per share data)
Year ended
--------------------------------
Feb. 22, Feb.24, Feb.25,
1997 1996 1995
NET SALES ...................................... $ 412,379 $ 232,582 $ 229,347
COST OF SALES .................................. 270,557 160,031 154,863
--------- --------- ---------
GROSS PROFIT ................................... 141,822 72,551 74,484
OPERATING EXPENSES:
Selling, general and administrative .... 51,734 42,000 31,787
Research, development and engineering .. 37,083 58,327 12,860
Amortization of intangible assets ...... 10,607 9,499 9,954
Other expenses ......................... -- 4,170 23,736
-------- -------- --------
Total operating expenses ............... 99,424 113,99 78,337
-------- -------- --------
OPERATING EARNINGS (LOSS) ...................... 42,398 (41,445) (3,853)
INTEREST EXPENSE, net ......................... 27,167 18,636 15,019
EARNINGS (LOSS) BEFORE INCOME TAXES
(BENEFIT) AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE ...... 15,231 (60,081) (18,872)
INCOME TAXES (BENEFIT) ......................... 1,522 -- (6,806)
-------- -------- ---------
EARNINGS (LOSS) BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING ......... 13,709 (60,081) (12,066)
PRINCIPLE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE ................... -- (23,332) --
NET EARNINGS (LOSS) ............................ $ 13,709 $ (83,413) $ (12,066)
========= ========= =========
EARNINGS (LOSS) PER COMMON SHARE:
Earnings (loss) before cumulative effect
of change in accounting principle ...... $ .72 $ (3.71) $ (0.75)
Cumulative effect of change in
accounting principle ................... -- (1.44) --
--------- ---------- ---------
Net earnings (loss) .................... $ .72 $ (5.15) $ (0.75)
========= ========= =========
See notes to consolidated financial statements.
46
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
FEBRUARY 22, 1997, FEBRUARY 24, 1996 AND FEBRUARY 25, 1995
(in thousands)
Additional Retained Currency Total
Common Stock Paid-in Earnings Translation Stockholders'
Shares Amount Capital (Deficit) Adjustment Equity
------ ------ ------- -------- ----------- ------------
Balance, February 26, 1994 ........... 15,985 $ 159 $ 118,357 $19,484 $(4,007) $ 133,993
Sale of stock under
employee stock purchase plan . 15 -- 132 -- -- 132
Employee benefit plan
matching contribution 96 1 720 -- -- 721
Net loss ..................... -- -- -- (12,066) -- (12,066)
Foreign currency translation
adjustment ................. -- -- -- -- 2,551 2,551
------- ------ -------- --------- --------- ---------
Balance, February 25, 1995 ........... 16,096 160 119,209 7,418 (1,456) 125,331
Sale of stock under
employee stock purchase plan.. 74 1 403 -- -- 404
Exercise of stock options .... 121 2 896 -- -- 898
Employee benefit plan
matching contribution...... 102 1 858 -- -- 859
Net loss ..................... -- -- -- (83,413) -- (83,413)
Foreign currency translation
adjustment ................. -- -- -- -- 78 78
------ ------ -------- --------- ---------- ---------
Balance, February 24, 1996 ........... 16,393 $ 164 $ 121,366 $ (75,995) $ (1,378) $ 44,157
Sale of stock under
employee stock purchase plan . 58 -- 482 -- -- 482
Exercise of stock options .... 1,362 14 11,650 -- -- 11,664
Employee benefit plan
matching contribution...... 75 1 1,316 -- -- 1,317
Sale of common stock
under public offering,
net of expenses ............ 4,005 40 93,896 -- -- 93,936
Net earnings ................. -- -- -- 13,709 -- 13,709
Foreign currency translation
adjustment ................. -- -- -- -- 496 496
------ ------ -------- --------- --------- ---------
Balance, February 22, 1997 ........... 21,893 $ 219 $228,710 $ (62,286) $ (882) 165,761
====== ====== ======== ========= ========= =========
See notes to consolidated financial statements.
47
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 22, 1997, FEBRUARY 24, 1996
AND FEBRUARY 25, 1995
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES: 1997 1996 1995
---- ---- ----
Net earnings (loss) ................................................ $ 13,709 $ (83,413) $ (12,066)
Adjustments to reconcile net earnings (loss) to net cash flows (used in)
provided by operating activities:
Cumulative effect of accounting change ............................. -- 23,332 --
Depreciation and amortization ...................................... 24,147 18,435 16,146
Change in intangible assets ........................................ -- -- 8,588
Deferred income taxes .............................................. 410 (3,453) (6,764)
Non cash employee benefit plan contributions ....................... 1,317 859 721
Changes in operating assets and liabilities, net of effects froms
acquisitions:
Accounts receivable ............................................ (19,366) 6,068 6,226
Inventories .................................................... (19,536) (11,929) (16,863)
Other current assets ........................................... 5,059 (638) (585)
Accounts payable ............................................... (4,767) 3,008 7,295
Other liabilities .............................................. (11,564) 13,169 (642)
-------- -------- --------
Net cash flows (used in) provided by operating activities ............. (10,591) (34,562) 2,056
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of property and equipment...................... (14,471) (13,656) (12,172)
Change in other assets............................................... (1,331) (5,914) (8,610)
Acquisitions ........................................................ -- (42,500) --
-------- --------- ----------
Net cash flows used in investing activities ........................... (15,802) (62,070) (20,782)
-------- -------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving lines of credit ........ (38,882) 2,000 9,080
Proceeds from issuance of stock, net of expenses ................... 106,082 1,302 132
Principal payments on long-term debt ............................... (11,968) (942)
Proceeds from long-term debt ....................................... -- 101,252 3,873
-------- --------- --------
Net cash flows provided by financing activities ...................... 55,232 103,612 13,085
-------- --------- --------
Effect of exchange rate changes on cash flows ..................... (66) 77 222
-------- --------- --------
Net increase (decrease) in cash and
cash equivalents ................................................. 28,773 7,057 (5,419)
Cash and cash equivalents, beginning
of year .......................................................... 15,376 8,319 13,738
-------- --------- ---------
Cash and cash equivalents, end
of year........................................................... $ 44,149 $ 15,376 $ 8,319
======== ========= =========
See notes to consolidated financial statements.
48
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 22, 1997, FEBRUARY 24, 1996
AND FEBRUARY 25, 1995 (Cont'd)
(Dollars in thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
1997 1996 1995
Cash paid (received) during year for:
Interest $ 26,097 $ 16,967 $ 16,664
Income taxes - net 1,209 (3,292) (1,096)
SCHEDULE OF NON-CASH TRANSACTIONS:
Liabilities assumed and accrued acquisition
costs incurred in connection with the
acquisitions (See Note 3) -- 27,532 --
Liabilities incurred in connection with purchase
of land and buildings -- -- 4,000
See notes to consolidated financial statements.
[Remainder of page intentionally left blank]
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED FEBRUARY 22,
1997, FEBRUARY 24, 1996 AND FEBRUARY 25, 1995 (Dollars in thousands, except
share and per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation - B/E Aerospace, Inc. (the
"Company") operates in a single business segment and designs, manufactures,
sells and services a broad line of commercial aircraft cabin interior
products consisting of a broad range of aircraft seating products, passenger
entertainment and service systems, and galley products, including structures
as well as all food and beverage storage and preparation equipment. The
Company's customers are the world's commercial airlines. As a result, the
Company's business is directly dependent upon the conditions in the
commercial airline industry.
CONSOLIDATION - The accompanying financial statements consolidate the
accounts of B/E Aerospace, Inc. and its wholly-owned subsidiaries. All
intercompany transactions and balances have been eliminated in consolidation.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles 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 period. Actual results could differ from those
estimates.
INCOME TAXES - In accordance with Statement of Financial Accounting
Standards (SFAS) No. 109, 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.
WARRANTY COSTS - Estimated costs related to product warranties are
accrued at the time products are sold.
REVENUE RECOGNITION - Sales of assembled products, equipment or services
are recorded on the date of shipment or, if required, upon acceptance by the
customer. 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 potential credit losses. Actual losses have been within management's
expectations.
CASH EQUIVALENTS - The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents.
INTANGIBLE 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. In accordance with SFAS No. 121, long-lived assets to be held are
reviewed for events or changes in circumstances which indicate that their
carrying value may not be recoverable. The Company annually evaluates the
carrying value of the intangible assets versus the cash benefit expected to
be realized and adjusts for any impairment of value. As discussed in Note 15,
the Company introduced a new product to the in-flight entertainment industry,
causing the industry in general to re-evaluate its product offerings and, in
the process, impairing the value of certain assets, including certain earlier
Company technology. Accordingly, intangible assets related to these product
offerings were written down to their estimated realizable value during the
year ended February 25, 1995.
RESEARCH AND DEVELOPMENT - Research and development expenditures are
expensed as incurred.
50
STOCK-BASED COMPENSATION - ( In October 1995, the Financial Accounting
Standards Board (FASB) issued SFAS No. 123, Accounting for Stock-Based
Compensation, which became effective for the Company beginning during fiscal
1997. SFAS No. 123 requires extended disclosures of stock-based compensation
arrangements with employees and encourages (but does not require)
compensation cost to be measured based on the fair value of the equity
instrument awarded. Companies are permitted, however, to continue to apply
Accounting Principles Board (APB) Opinion No. 25, which recognizes
compensation cost based on the intrinsic value of the equity instrument
awarded. The Company continues to apply APB Opinion No. 25 to its stock-based
compensation awards to employees and discloses the required pro forma effect
on net income and earnings per share. See Note 12.
EARNINGS (LOSS) PER COMMON SHARE - Earnings (loss) per common share
amounts are computed using the weighted average number of common and common
equivalent (where not anti-dilutive) shares outstanding during each period.
The number of weighted average shares of common stock outstanding amounted to
19,107,000, 16,185,000, and 16,021,000 for the years ended February 22, 1997,
February 24, 1996 and February 25, 1995, respectively.
In February 1997, the FASB issued SFAS No. 128, Earnings per Share which
is effective for financial statements issued for period ending after December
15, 1997. SFAS No. 128 requires the disclosure of basic and diluted earnings
per share. The amount reported as net income per common and common equivalent
share for the year ended February 22, 1997 would not be materially different
than that which would have been reported for basic and diluted earnings per
share in accordance with SFAS No. 128.
FOREIGN CURRENCY TRANSLATION - In accordance with the provisions of SFAS
No. 52, Foreign Currency Translation, the assets and liabilities located
outside the United States are translated into U.S. dollars at the rates of
exchange in effect at the balance sheet dates. Income 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.
RECLASSIFICATIONS - Certain items in prior years' financial statements
have been reclassified to conform with the presentation used in the year
ended February 22, 1997.
2. ACCOUNTING CHANGE
In fiscal 1996, the Company undertook a comprehensive review of the
engineering capitalization policies followed by its competitors and others in
its industry peer group. The results of this study and an evaluation of the
Company's policy led the Company to conclude that it should adopt the
accounting method that it believes is followed by most of its competitors and
certain members of its industry peer group. Previously, the Company had
51
capitalized precontract engineering costs as a component of inventories,
which were then amortized to earnings as the product was shipped. The Company
now expenses such costs as they are incurred. While the accounting policy for
precontract engineering expenditures previously followed by the Company was
in accordance with generally accepted accounting principles, the changed
policy is preferable.
The effect of this change in accounting for periods through February 25,
1995 was a charge of $23,332 ($1.44 per share); the effect of expensing
engineering costs for the year ended February 24, 1996 was a charge of
$42,114 ($2.60). The following table summarizes the pro forma net earnings
(loss) and per share amounts for each period presented. Primarily as a result
of this accounting change, inventories decreased by $65,446 as of February
24, 1996.
Pro forma amounts assuming the change in application of accounting
principle applied retroactively (unaudited):
Year Ended
-----------------------------------------
February 24, 1996 February 25, 1995
Net loss $ (60,081) $ (35,398)
Net loss per share $ (3.71) $ (2.20)
3. ACQUISITIONS
On January 24, 1996, the Company acquired all of the outstanding capital
stock of Burns Aerospace Corporation, which designs, manufactures, sells and
services aircraft seating products to commercial airlines worldwide. The
aggregate acquisition cost of $70,032 includes the payment $42,500 to the
seller, the assumption of approximately $27,532 of liabilities, including
related acquisition costs, and certain liabilities arising from the
acquisition. Funds for the acquisition were obtained from proceeds of the
long-term debt issuance described in Note 8.
The aggregate purchase price for the Burns acquisition has been
allocated to the net assets acquired based on appraisals and management's
estimates as follows:
Receivables $ 11,396
Inventories 12,624
Other current assets 806
Property and equipment 21,695
Intangible and other assets 23,511
--------
$ 70,032
========
52
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:
1997 1996
---- ----
Raw materials $ 45,947 $ 28,252
Work-in-process 41,399 39,045
Finished goods 7,929 5,272
Less customer advances (2,375) --
--------- --------
$ 92,900 $ 72,569
========= ========
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 (term of lease as to leasehold improvements). Property
and equipment consist of the following:
Years 1997 1996
----- ---- ----
Land, buildings and improvements 10-30 $ 42,966 $ 39,979
Machinery 3-13 45,444 46,374
Tooling 3-10 17,179 14,819
Furniture and equipment 2-10 18,327 12,758
-------- ---------
123,916 113,930
Less accumulated depreciation and amortization (36,028) (27,573)
-------- ---------
$ 87,888 $ 86,357
======== =========
53
6. INTANGIBLES AND OTHER ASSETS
Intangibles and other assets consist of the following:
Straight-line
Amortization
Period (Years) 1997 1996
------------- ---- ----
Covenants not-to-compete 14 $ 10,198 $ 10,198
Product technology, production plans and drawings 7-20 59,484 60,201
Replacement parts annuity 20 29,778 29,416
Product approvals and technical manuals 20 18,331 18,529
Goodwill 30 78,913 77,256
Debt issue costs 10 13,431 12,592
Trademarks and patents 20 10,820 10,470
Other 14,271 11,761
--------- ---------
235,226 230,423
Less accumulated amortization (45,344) (33,002)
--------- ---------
$ 189,882 $ 197,421
========= =========
7. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
1997 1996
---- ----
Accrued product warranties $ 5,231 $ 3,455
Accrued salaries, vacation and related benefits 12,868 10,479
Accrued acquisition expenses 5,488 11,105
Accrued interest 6,585 7,449
Customer advances -- 5,940
Accrued income taxes 6,563 7,315
Other accrued liabilities 7,102 10,657
------- -------
$43,837 $56,400
======= =======
54
8. LONG-TERM DEBT AND BORROWINGS
Long-term debt consists of the following:
1997 1996
---- ----
Senior notes $ 124,411 $ 124,313
Senior subordinated notes 100,000 100,000
Revolving lines of credit 4,419 42,967
Term loan -- 11,968
Other long-term debt 991 696
--------- ---------
229,821 279,674
Less current portion of long-term debt (4,419) (6,482)
--------- ---------
$ 225,402 $ 273,192
========= =========
In January 1996, the Company amended its existing credit facilities by
increasing the aggregate principal amount that may be borrowed thereunder to
$100,000 (the "Bank Credit Facility"). The Bank Credit Facility consists of a
$25,000 Reducing Revolver and a $75,000 Revolving Facility. The amount of the
Reducing Revolver will be reduced automatically by 12.5% on April 19, 1999
and on each of the seven succeeding quarterly anniversaries of such date. The
Reducing Revolver is collateralized by all of the issued and outstanding
capital stock of a wholly owned subsidiary and has a five-year maturity, with
the commitments of the lenders thereunder reducing during such five-year
period. The Revolving Facility is collateralized by all of the Company's
accounts receivable, all of its inventory and substantially all of its other
personal property and has a five-year maturity. The Bank Credit Facility
contains customary affirmative covenants, negative covenants and conditions
of borrowing, all of which were met by the Company as of February 22, 1997.
Borrowings under the Bank Credit Facility currently bear interest at
LIBOR plus 1.75% or prime (as defined) plus .5%. The interest to be charged
on the Bank Credit Facility can increase or decrease based upon specified
operating performance criteria set forth in the Bank Credit Facility
Agreement. Amounts may be borrowed or repaid in $1,000 increments. At
February 22, 1997, approximately $5,100 of letters of credit were
outstanding, reducing the aggregate Bank Credit Facility availability to
approximately $94,900.
55
On January 24, 1996, the Company sold $100,000 of 9 7/8% Senior
Subordinated Notes (the "Senior Subordinated Notes"). The proceeds from the
Senior Subordinated Notes were utilized to acquire Burns and refinance the
Company's then outstanding Bank credit facilities.
The Senior Subordinated Notes are unsecured senior subordinated
obligations of the Company and are subordinated to all senior indebtedness of
the Company and mature on February 1, 2006. Interest on the Senior
Subordinated Notes is payable semi-annually in arrears on February 1 and
August 1 of each year. The Senior Sub-ordinated Notes are redeemable at the
option of the Company, in whole or in part, at any time after February 1,
2001 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 Senior Subordinated Notes may require the
Company to repurchase such holder's Senior Subordinated Notes at 101% of the
principal amount thereof, plus accrued and unpaid interest to the date of
such purchase. The Senior Subordinated Notes contain certain restrictive
covenants, all of which were met by the Company as of February 22, 1997,
including limitations on future indebtedness, restricted payments,
transactions with affiliates, liens, dividends, mergers and transfers of
assets.
On February 24, 1993, the Company sold $125,000 of 9 3/4% Senior Notes
(the "Senior Notes"), which were priced to yield 9 7/8%. The Company received
the proceeds from the Senior Notes on March 3, 1993 and utilized $32,545
thereof to repay the outstanding balance of the Company's then outstanding
bank obligations. The Senior Notes are senior unsecured obligations of the
Company, ranking equally with any future senior obligations of the Company
and mature on March 1, 2003. Interest on the Senior Notes is payable
semi-annually in arrears on March 1 and September 1 of each year. The Senior
Notes are redeemable at the option of the Company, in whole or in part, at
any time on or after March 1, 1998 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 Senior Notes may
require the Company to repurchase such holder's Senior Notes at 101% of the
principal amount thereof, plus accrued and unpaid interest to the date of
such purchase. The Senior Notes contain certain restrictive covenants, all of
which were met by the Company as of February 22, 1997, including limitations
on future indebtedness, restricted payments, transactions with affiliates,
liens, dividends, mergers and transfers of assets.
Terms of the Senior Notes provide that, among other things, the payment
of cash dividends on common stock is limited to a cumulative amount that
equals 50% of the Company's consolidated adjusted net earnings since the date
of the Senior Notes' issuance, plus the sum of $10,000 and other equity
adjustments (as defined therein). The payment of cash dividends may only be
made if the Company is not in default under the terms of the Senior Notes.
The Bank Credit Facility also contains restrictions on the cumulative amount
of dividends that may be paid. As of February 22, 1997, approximately $3,400
of dividends could have been declared by the Company.
56
The Company has a U.K. revolving line of credit agreement for
approximately $4,800 (the FEEL Credit Agreement). The FEEL Credit Agreement
is collateralized by substantially all of the assets of FEEL. Borrowings may
be made under the line of credit, provided FEEL is in compliance with certain
covenants, all of which were met as of February 22, 1997. Aggregate
borrowings outstanding under the FEEL Credit Agreement were approximately
$4,419 as of February 22, 1997. Such borrowings will be repaid in pounds
sterling.
The Company also has a Netherlands revolving line of credit agreement
for approximately $1,000 (the Inventum Credit Agreement). The Inventum Credit
Agreement is collateralized by substantially all of the assets of Inventum.
Borrowings may be made under the line of credit, provided Inventum is in
compliance with certain covenants, all of which were met by Inventum as of
February 22, 1997. There were no borrowings outstanding under the Inventum
Credit Agreement as of February 22, 1997.
Maturities of long-term debt are as follows:
Fiscal year ending February:
1998 $ 4,419
1999 177
2000 138
2001 315
2002 --
Thereafter 224,772
---------
$ 229,821
Interest expense amounted to $28,369, $18,788 and $17,225 for the years
ended February 22, 1997, February 24, 1996 and February 25, 1995,
respectively.
[Remainder of page intentionally left blank]
57
9. INCOME TAXES
Income tax expense (benefit) consists of the following:
1997 1996 1995
---- ---- ----
Current:
Federal $ -- $ 1,972 $ (786)
State -- 818 105
Foreign 1,112 663 639
--------- -------- ---------
1,112 3,453 (42)
========= ======== =========
Deferred:
Federal -- (2,635) (5,146)
State -- (818) (904)
Foreign 410 -- (714)
--------- ------- --------
410 (3,453) (6,764)
--------- -------- --------
$ 1,522 $ -- $ (6,806)
========= ======== =========
The difference between income tax expense (benefit) and the amount
computed by applying the statutory U.S. federal income tax rate (35%) to the
pretax earnings before change in accounting principle consists of the
following:
1997 1996 1995
---- ---- ----
Statutory U.S. federal income tax expense (benefit) $ 5,331 $ (21,028) $ (6,605)
Operating loss (with) without tax benefit (6,164) 14,569 --
Foreign tax rate differential 1,267 3,324 --
Goodwill amortization 566 558 708
Other, net 522 2,577 (909)
-------- --------- --------
$ 1,522 $ -- $ (6,806)
======== ========= =========
58
The tax effects of temporary differences and carryforwards that give
rise to the Company's deferred income tax assets and liabilities consist of
the following:
1997 1996
---- ----
Engineering costs $ -- $ 22,182
Inventory reserves 3,145 5,164
Acquisition reserves (1,740) 991
Inventory costs capitalized for tax purposes 1,236 815
Bad debt reserves 948 658
Warranty reserve 1,452 --
Other 2,840 1,611
--------- --------
Net current deferred income tax assets 7,881 31,421
--------- --------
Intangible assets (13,565) (14,701)
Depreciation (2,074) (1,556)
Net operating loss carryforward 26,309 9,254
Research credit carryforward 2,941 600
Other -- 1,137
-------- --------
Net noncurrent deferred income tax asset (liabilities) 13,611 (5,266)
-------- --------
Valuation allowance (23,159) (27,412)
--------- ---------
Net deferred tax liabilities $ (1,667) $ (1,257)
========= =========
Due to uncertainty surrounding the realization of the benefits of its
net deferred tax asset, the Company has established a valuation allowance of
$23,159 against its otherwise recognizable net deferred tax asset.
As of February 22, 1997, the Company had approximately $63,022 of
federal operating loss carryforwards which expire at various dates through
2011, federal research credit carryforwards of $2,941 which expire at various
dates through 2011, and alternative minimum tax credit carryforwards of $658
which have no expiration date. Approximately $6,000 of the Company's net
operating loss carryforward related to non-qualified stock options will be
credited to paid-in-capital rather than income tax expense.
The Company has not provided for any residual U.S. income taxes on the
approximately $3,651 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.
59
The Internal Revenue Service completed its examination of the Company's
federal tax returns for the years ended February 26, 1994 and February 27,
1993. The resolution of the examination did not have a material adverse
effect on the Company's results of operations or its financial condition.
The Company's federal tax returns for the years ended February 24, 1996
and February 25, 1995 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 the Company's results of operations or its
financial condition.
10. COMMITMENTS AND CONTINGENCIES
LEASES - The Company leases certain of its office, manufacturing and
service facilities under operating leases which expire at various times
through August 2003. Rent expense for fiscal 1997, 1996 and 1995 was
approximately $7,021, $2,943 and $2,276, respectively. Future payments under
leases with terms currently greater than one year are as follows:
Year ending February:
1998 $ 6,075
1999 4,239
2000 3,058
2001 2,306
2002 1,462
Thereafter 702
--------
$ 17,842
========
CONTINGENCIES - B/E has been advised that the U.S. Attorney's Office for
the District of Connecticut, in conjunction with the Department of Commerce
and the U.S. Customs Service, is conducting a grand jury investigation
focused on possible noncompliance by B/E with certain statutory and
regulatory provisions relating to export licensing and controls. The
investigation relates primarily to the sale of passenger seats and related
spare parts for civilian commercial passenger aircraft to Iran Air from 1992
through mid-1995. B/E has been advised that it is a target of the
investigation. An employee of a foreign based subsidiary of B/E has been
charged with offenses relating to the investigation. The investigation is
continuing, while the Company intends to defend itself vigorously, the
ultimate outcome of the investigation cannot presently be determined. An
adverse outcome could have a material adverse effect upon the operations
and/or financial condition of the Company.
The Company is also a defendant in various other legal actions arising
in the normal course of business, the outcome 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.
60
EMPLOYMENT AGREEMENTS - The Company has employment and compensation
agreements with two key officers of the Company. One of the agreements
provides for an officer to earn a minimum of $450 adjusted annually for
changes in the consumer price index (as defined) per year through 2002, as
well as a deferred compensation benefit equal to the aggregate annual
compensation earned through termination and payable thereafter. Such deferred
compensation will be payable in equal monthly installments over the same
number of years it was earned. The other agreement provides for an officer to
receive annual minimum compensation of $450, and an incentive bonus not to
exceed 100% of the officer's then-current salary through 2001. In addition,
if the officer terminates his employment after April 28, 1996, the Company is
obligated to pay the officer annually, as deferred compensation, an amount
equal to 100% of the officer's annual salary (as defined) for a period of ten
years from the date of termination. Such deferred compensation has been
accrued at the present value of the obligation at February 22, 1997.
The Company has other employment agreements with certain key members of
management that provide for aggregate minimum annual base compensation of
$1,825 expiring on various dates through 1999.
Supply Agreement ( The Company has entered into a supply agreement with
Applied Extrusion Technologies, Inc. ("AET"), a related party by way of
common management. Under this agreement, the Company has agreed to purchase
its requirements for certain component parts through March 1998 at a price
that results in a 33-1/3% gross margin to AET. The Company's purchases under
this contract for the years ended February 22, 1997, February 24, 1996, and
February 25, 1995, were $1,642, $1,301 and $984, respectively.
11. EMPLOYEE RETIREMENT PLAN
In August 1988, the Company established a non-qualified contributory
profit-sharing plan. Effective August 1, 1989, this plan was amended to
incorporate a 401(k) Plan which permits the Company to match a portion of
employee contributions [and to make profit-sharing contributions to all
participants (as defined)]. Commencing in 1995, the Company's 401(k) Plan was
amended to permit the Company's matching contribution to be made in common
stock of the Company. The Company recognized expenses of $1,317, $859 and
$721 related to this plan for the years ended February 22, 1997, February 24,
1996 and February 25, 1995, respectively.
12. STOCKHOLDERS' EQUITY
On December 18, 1996, the Company issued approximateley 4,005,000 shares
of common stock to the public at a price of $25.00 per share. The net
proceeds of the offering were $93,936. The Company used approximately $57,600
of the net proceeds to repay outstanding balances under various credit
facilities.
Had this sale and the corresponding repayment of the credit facilities
taken place on February 26, 1995, earnings per common and common equivalent
shares would have been $.87 and $(4.24), respectively, for the years ended
February 22, 1997 and February 24, 1996.
As required by APB 15, the supplemental earnings (loss) per common share
data give effect to: (i) the assumed issuance of 2,566,559 shares of Common
Stock by the Company which would be necessary to generate proceeds (using an
assumed share price of $25), net of estimated offering costs, sufficient to
61
repay $57.6 million of indebtedness; and (ii) the elimination of interest
expense related to such borrowings for each period, net of tax. The
supplemental data do not give effect to the issuance of an additional
1,433,441 shares of Common Stock sold by the Company.
STOCK OPTION PLANS - The Company has various stock option plans,
including the 1989 Stock Option Plan, the 1991 Directors Stock Option Plan,
the 1992 Share Option Scheme and the 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 compensation and stock
option committee of the Board of Directors. Options granted generally vest at
the rate of 25% per year from the date of grant and are exercisable to the
extent vested and the option term cannot exceed ten years.
62
The following table sets forth options granted, canceled, forfeited and
outstanding:
FEBRUARY 22, 1997 FEBRUARY 26, 1996 FEBRUARY 25, 1995
----------------- ----------------- -----------------
Option Price Option Price Option Price
Options Per Share Options Per Share Options Per Share
------- ------------ ------- ------------ ------- ------------
Outstanding
beginning of period 2,720,350 $0.81 - $13.00 2,871,287 $0.81 - $13.00 2,493,162 $0.81 - $13.00
Options granted 1,313,500 $10.25 - $24.94 731,925 $7.37 - $10.37 484,500 $7.44 - $8.75
Options exercised (1,361,925) $0.81 - $16.125 (139,750) $0.81 - $8.75 (375) $ .81
Options forfeited (224,500) $7.38 - $16.13 (743,112) $7.00 - $13.00 (106,000) $8.25 - $11.75
--------- --------- ---------
Outstanding, end
of period 2,447,425 $0.81 - $24.93 2,720,350 $0.81 - $13.00 2,871,287 $0.81 - $13.00
========= ===== ====== ========= ===== ====== ========= ===== ======
Exercisable at end
of year 1,374,927 $0.81 - $24.93 2,223,225 $0.81 - $13.00 694,737 $0.81 - $13.00
========= =============== ========= ============== ======= ==============
At February 22, 1997 options were available for grant under each of the
Company's option plans.
OPTIONS OUTSTANDING AT FEBRUARY 22, 1997
-------------------------------------------------------------------------------------------------------------------
Weighted Weighted Average Options
Range of Options Average Remaining Exercisable Weighted Average
Exercise Price Outstanding Exercise Price Contractual Life at February 22, 1997 Exercise Price
-------------- ----------- -------------- ---------------- -------------------- ----------------
(years)
$ .81 - $ 8.50 641,625 $ 7.84 6.51 513,000 $ 7.75
$ 8.63 - $ 8.75 637,750 $ 8.72 5.87 566,500 $ 8.74
$ 8.88 - $ 16.13 373,050 $ 12.05 8.65 101,675 $ 12.19
$ 19.00 - $ 24.94 795,000 $ 20.06 9.68 193,752 $ 19.94
63
The estimated fair value of options granted during 1997 was $ 16.60 per
share. The estimated fair value of options granted during 1996 was $7.69 per
share. The Company applies APB 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 its
stock purchase plan other than that described above. Had compensation cost
for the Company's stock option plans and its stock purchase plans been
determined consistent with SFAS No. 123, the Company's net earnings (loss)
and net earnings (loss) per share for the year ended February 22, 1997 and
February 24, 1996 would have been reduced to the pro forma amounts indicated
in the following table:
1997 1996
- ------------------------------------------------------------------
Net earnings (loss) - as reported $ 13,709 $(83,413)
Net earnings (loss) - pro forma $ 10,709 $(84,932)
Net earnings (loss) per share - as reported $ .72 $ (5.15)
Net earnings (loss) per share - pro forma $ .56 $ (5.24)
Weighted average and pro forma
weighted average common shares 19,107 16,185
===================================================================
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 1997 and 1996; risk-free
interest rates of 6.4%; expected dividend yields of 0.0%; expected lives of 4
years; and expected volatility of 43%.
The impact of outstanding non-vested stock options granted prior to
fiscal 1996 has been excluded from the pro forma calculation; accordingly,
the 1997 and 1996 pro forma adjustments are not indicative of future period
pro forma adjustments, when the calculation will apply to all applicable
stock options.
13. 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 58,490 and 73,544
shares of stock during fiscal 1997 and 1996 pursuant to this plan at an
average price per share of $9.70 and $5.50, respectively.
64
14. EXPORT SALES AND MAJOR CUSTOMERS
Export sales from the United States to customers in foreign countries
amounted to approximately $153,423 $61,717, and $61,645 in fiscal 1997, 1996,
and 1995, respectively. Total sales to all customers in foreign countries
amounted to approximately $203,388, $124,469 and $114,511 in fiscal 1997,
1996 and 1995, respectively. Total sales to Europe amounted to 29%, 18% and
22% in fiscal 1997, 1996 and 1995, respectively. Total sales to Asia amounted
to 16%, 20% and 19% in fiscal 1997, 1996 and 1995, respectively. Major
customers (i.e., customers representing more than 10% of total 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 1997, 1996 or 1995.
15. OTHER EXPENSES
Other expenses for the year ended February 24, 1996 relate to costs
associated with the integration and consolidation of the Company's European
seating business. Other expenses for the year ended February 25, 1995
consisted of a charge related primarily to intangible assets ($10,835) and
inventories ($11,216) associated with the Company's passenger entertainment
systems. The introduction of the Company's MDDS interactive video system,
which the Company expects to become the industry's standard for in-flight
passenger and service entertainment, has captured the dominant market share
with contract awards from the major airlines totaling more than $150,000
during the year ended February 24, 1996. The MDDS system also has recently
caused major carriers to convert programs for earlier products to the
Company's MDDS system and has caused two of the Company's principal
competitors to offer to develop systems for the airlines similar to the
Company's MDDS system. These events have caused the in-flight entertainment
industry to re-evaluate its product offerings and, in the process, have
impaired the value of certain of its assets. As a result, the Company has
written down certain of its assets, including certain customer-specific
inventories and other assets.
16. FOREIGN OPERATIONS
Geographic Area - The Company operated principally in two geographic
areas, the United States and Europe during the years ended February 22, 1997,
February 24, 1996 and February 25, 1995. 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.
65
The following table presents net sales and operating income for the
years ended February 22, 1997, February 24, 1996, and February 25, 1995 and
identifiable assets as of February 22, 1997, February 24, 1996 and February
25, 1995 by geographic area.
1997 1996 1995
---- ---- ----
Net Sales:
United States $ 312,497 $ 169,830 $ 170,542
Europe 99,882 62,752 58,805
---------- --------- ---------
Total: $ 412,379 $ 232,582 $ 229,347
========== ========= =========
Operating Income:
United States $ 33,834 $ (35,822) $ (9,457)
Europe 8,564 (5,623) 5,604
---------- --------- ----------
Total: $ 42,398 $ (41,445) $ (3,853)
========== ========= =========
Identifiable Assets:
United States $ 380,273 $ 332,832 $ 279,402
Europe 110,816 100,754 100,552
--------- --------- ---------
Total: $ 491,089 $ 433,586 $ 379,954
========= ========= =========
17. FAIR VALUE INFORMATION
The following disclosure of the estimated fair value of financial
instruments at February 22, 1997 and February 24, 1996 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 22, 1997, the Company's Senior Notes have a carrying
66
value of $124,411 and fair value of 131,250, while the Company's Senior
Subordinated Notes have a carrying value of $100,000 and fair value of
$104,500. The carrying amounts of other long-term debts approximates fair
value because the obligations either bear interest at floating rates or
compare favorably with fixed rate obligations that would be available to the
Company.
The fair value information presented herein is based on pertinent
information available to management as of February 22, 1997. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
re-valued for purposes of these consolidated financial statements since that
date, and current estimates of fair value may differ significantly from the
amounts presented herein.
18. SELECTED QUARTERLY DATA (Unaudited)
Summarized quarterly financial data for fiscal 1997 is as follows:
Year Ended February 22, 1997
------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Sales $ 97,302 $103,026 $107,823 $104,228
Gross profit 32,547 34,439 36,510 38,326
Net earnings 1,433 1,863 4,131 6,282
Net earnings per share .08 .11 .23 .29
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67
Summarized quarterly financial data for fiscal 1996 is as follows:
Year Ended February 24, 1996
----------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------ -------
Sales $ 55,594 $ 57,451 $ 55,188 $ 64,349
Gross profit 8,442 18,719 17,726 17,664
Net (loss) before cumulative
effect of accounting change (9,682) (7,514) (14,021) (28,864)
Cumulative effect of accounting change (23,332) -- -- --
Net loss (33,014) (7,514) (14,021) (28,864)
Net loss per share:
Before cumulative effect of accounting
change $ (0.60) $ (0.45) $ (0.74) $ (1.92)
Cumulative effect of accounting change (1.44) -- -- --
--------- ------- --------- --------
Net loss per share $ (2.04) $ (0.45) $ (0.74) $ (1.92)
========= ========= ========= ========
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68
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED FEBRUARY 22,1997, FEBRUARY 24, 1996 AND FEBRUARY 25, 1995
(Dollars in thousands)
BALANCE BALANCE
AT BEGINNING AT END
OF YEAR EXPENSES OTHER DEDUCTIONS OF YEAR
------------ -------- ----- ---------- -------
DEDUCTED FROM ASSETS:
Allowance for
doubtful accounts:
1997 $ 4,973 $ 2,144 $ (69) $ 2,184 $ 4,864
1996 4,034 162 1,449 (1) 672 4,973
1995 2,208 3,119 -- 1,293 4,034
Reserve for
obsolete inventories:
1997 $19,785 $ 4,583 $ 596 $17,844 (2) $ 8,282
1996 10,664 6,022 5,840 (1) 2,741 19,785
1995 7,557 2,787 2,754 (2) 2,434 10,664
INCLUDED IN LIABILITIES:
Accrued product
warranties:
1997 $ 3,455 $ 6,325 $ 156 $ 4,393 $ 5,231
1996 2,969 2,758 936 (1) 3,208 3,455
1995 2,388 2,544 666 (2) 2,629 2,969
(1) Balances associated with the Burns acquisition.
(2) During fiscal 1997, the Company disposed of substantially all of the
inventories which were fully reserved in fiscal years 1995 and 1996.
[Remainder of page intentionally left blank]
69
EXHIBIT 99
RISK FACTORS
DEPENDENCE UPON CONDITIONS IN THE AIRLINE INDUSTRY
The Company's customers are the world's commercial airlines. As a
result, the Company's business is directly dependent upon the financial
condition of the world's commercial airlines. In the late 1980s and early
1990s, the world airline industry suffered a severe downturn, which resulted
in record losses and several air carriers seeking protection under bankruptcy
laws. As a consequence, during such period, airlines sought to conserve cash
by reducing or deferring scheduled cabin interior refurbishment and upgrade
programs and delaying purchases of new aircraft. This led to a significant
contraction in the commercial aircraft cabin interior products industry, and
a decline in the Company's business and profitability. The airline industry
has experienced an economic turnaround and the levels of airline spending on
refurbishment and new aircraft purchases have expanded. However, there can be
no assurance that the current financial strength of the airline industry will
continue or that the airlines will maintain or increase expenditures on cabin
interior products for refurbishments or new aircraft.
NEW PRODUCT INTRODUCTIONS AND TECHNOLOGICAL CHANGE
Airlines currently are taking delivery of a new generation of aircraft
and demanding increasingly sophisticated cabin interior products. As a
result, the cabin interior configurations of commercial aircraft are becoming
more complex and will require more technologically advanced and integrated
products. For example, airlines increasingly are seeking sophisticated
in-flight entertainment systems, such as the MDDS interactive individual
passenger in-fight entertainment system developed by B/E which the Company
expects will provide a significant percentage of its future revenues.
Development of the MDDS required substantial investment by the Company and
third parties in research, development and engineering. While commercial
deliveries of MDDS have not yet commenced, and are not expected to contribute
materially to the Company's net earnings in the near term, MDDS is expected
to provide substantial earnings in the ensuing years. This expected increase
in earnings contributions from this product will depend, to a significant
extent, on the Company's ability to manufacture successfully and deliver, on
a timely basis, its MDDS product and to have the MDDS perform at the level
expected by B/E's customers and their passengers, as well as the Company's
ability to continue to develop, profitability manufacture and deliver, on a
timely basis, other technologically advanced, reliable high-quality products
which can be readily integrated into complex cabin interior configurations.
COMPETITION
The Company competes with a number of established companies that have
significantly greater financial, technological and marketing resources than
the Company. Although the Company has achieved a significant share of the
market for a number of its cabin interior products, there can be no assurance
that the Company will be able to maintain this market share. The ability of
the Company to maintain its market share will depend not only on its ability
to remain the supplier of retrofit and refurbishment products and spare parts
70
on the commercial fleets on which its products are currently in service, but
also on its success in causing its products to be selected for installation
in new aircraft, including next generation aircraft, expected to be purchased
by the airlines over the next decade, and in avoiding product obsolescence.
In addition, the Companys's primary competitor in the market for new passenger
entertainment products, including individual seat video and in-flight
entertainment and cabin management systems, Matsushita Electronics, has
significantly greater technological capabilities and financial and marketing
resources than the Company.
ADVERSE CONSEQUENCES OF FINANCIAL LEVERAGE
The Company has substantial indebtedness and, as a result, significant
debt service obligations. As of February 22, 1997 the Company had
approximately $__________ million aggregate amount of indebtedness
outstanding, representing _____% of total capitalization.
The degree of the Company's leverage could have important consequences
to purchasers or holders of its shares of Common Stock, including: (i)
limiting the Company's ability to obtain additional financing to fund future
working capital requirements, capital expenditures, acquisitions or other
general corporate requirements; (ii) requiring a substantial portion of the
Company's cash flow from operations to be dedicated to debt service
requirements, thereby reducing the funds available for operations and further
business opportunities; and (iii) increasing the Company's vulnerability to
adverse economic and industry conditions. In addition, since any borrowings
under the Company's bank credit facilities will be at variable rates of
interest, the Company will be vulnerable to increases in interest rates. The
Company may incur additional indebtedness in the future, although its ability
to do so will be restricted by the indenture governing the Company's Senior
Subordinated Notes due 2006 (the "Senior Subordinated Notes"), the indenture
governing the Company's Senior Notes due 2003 (the "Senior Notes") and the
Company's bank credit facilities. The ability of the Company to make
scheduled payments under its present and future indebtedness will depend on,
among other things, the future operating performance of the Company and the
Company's ability to refinance its indebtedness when necessary. Each of these
factors is to a large extent subject to economic, financial, competitive and
other factors beyond the Company's control.
The Company's bank credit facilities and the indentures governing the
Senior Notes and the Senior Subordinated Notes contain numerous financial and
operating covenants that will limit the discretion of the Company's
management with respect to certain business matters. These covenants will
place significant restrictions on, among other things, the ability of the
Company to incur additional indebtedness, to create liens or other
encumbrances, to make certain payments and investments, and to sell or
otherwise dispose of assets and merge or consolidate with other entities. The
Company's bank credit facilities also require the Company to meet certain
financial ratios and tests. A failure to comply with the obligations
contained in the Company's bank credit facilities, or the indentures
governing the Senior Notes and the Senior Subordinated Notes, could result in
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an event of default under the Company's bank credit facilities, or the
aforementioned 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.
CUSTOMER DELIVERY REQUIREMENTS
The commercial aircraft cabin interior products industry is currently
experiencing a period of rapid growth. Since February 1995, the Company has
experienced a 72% increase in its backlog. The ability of the Company to
receive new contract awards and to deliver its existing backlog is dependent
upon its (and its suppliers') ability to ramp-up deliveries to meet the
recent surge in demand. Although the Company believes it has sufficient
manufacturing capacity to meet customer demand, and each of its acquired
businesses have previously delivered products at a significantly higher
level, there can be no assurance that the Company, or its suppliers, will be
able to meet the increased product delivery requirements.
CERTAIN LEGAL PROCEEDING
In July 1995, B/E became aware that the U.S. Attorney's Office for the
District of Connecticut, in conjunction with the Department of Commerce and
the U.S. Customs Service, is conducting a grand jury investigation focused on
possible non-compliance by B/E with certain statutory and regulatory
provisions relating to export licensing and controls. The investigation
relates primarily to the sale of passenger seats and related spare parts for
civilian commercial passenger aircraft to Iran Air from 1992 through
mid-1995. B/E has been advised that it is a target of the investigation. An
employee of a foreign based subsidiary of B/E has been charged with offenses
relating to the investigation. The investigation is continuing, and the
Company intends to defend itself vigorously, nevertheless, the ultimate
outcome of the investigation cannot presently be determined. An adverse
outcome could have a material adverse effect upon the operations and/or
financial condition of the Company.
ABILITY TO INTEGRATE ACQUIRED BUSINESSES
Since 1992, B/E has acquired nine companies. The Company intends to
consider future strategic acquisitions in the commercial airline cabin
interior industry, some of which could be material to the Company. The
ability of the Company to continue to achieve its goals will depend upon its
ability to integrate effectively any future acquisition, and to achieve cost
efficiencies. Although B/E has been successful in the past in doing so, there
can be no assurance that will continue to be successful.
REGULATION
The Federal Aviation Administration (the "FAA") prescribes standards and
licensing requirements for aircraft components, including virtually all
commercial airline cabin interior products, and licenses component repair
stations within the United States. Comparable agencies regulate these matters
in other countries. If the Company fails to obtain a required license for one
of its products or services or loses 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 FAA requirements and retrofitting installed products to comply with
new FAA requirements can be both expensive and time-consuming.