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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 0-22371
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DECRANE HOLDINGS CO.
(Exact name of registrant as specified in its charter)
DELAWARE 13-4019703
(State or Other Jurisdiction (I.R.S. Employer
of Identification No.)
Incorporation or Organization)
C/O DLJ MERCHANT BANKING PARTNERS II, L.P.
277 PARK AVENUE, NEW YORK, NY 10172
(212) 892-3000
(Address of Principal Executive Offices)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The number of shares of Common Stock outstanding on March 30, 2000 was
3,571,827.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
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DECRANE HOLDINGS CO.
TABLE OF CONTENTS
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
PAGE(S) IN
FORM
10-K
----------
PART I
Item 1. Description of Business......................... 1
Item 2. Properties...................................... 14
Item 3. Legal Proceedings............................... 15
Item 4. Submission Of Matters To A Vote Of Security
Holders................................................... 15
PART II
Item 5. Market For Registrant's Common Equity and
Related Stockholder Matters............................... 15
Item 6. Selected Financial Data......................... 16
Item 7. Management's Discussion And Analysis Of
Financial Condition And Results Of Operation.... 18
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk............................................... 28
Item 8. Financial Statements And Financial Statement
Schedules................................................. 29
Item 9. Changes In And Disagreements With Accountants On
Accounting And Financial Disclosure............. 74
PART III
Item 10. Directors And Executive Officers Of The
Registrant................................................ 75
Item 11. Executive Compensation.......................... 77
Item 12. Security Ownership Of Certain Beneficial Owners
And Management............................................ 81
Item 13. Certain Relationships And Related
Transactions.............................................. 83
PART IV
Item 14. Exhibits, Financial Statement Schedules, And
Reports On Form 8-K....................................... 85
Signatures.................................................. 88
i
PART I
DECRANE HOLDINGS CO. IS A HOLDING COMPANY AND DOES NOT HAVE ANY MATERIAL
OPERATIONS OR ASSETS OTHER THAN ITS OWNERSHIP OF THE CAPITAL STOCK OF DECRANE
AIRCRAFT HOLDINGS, INC. DECRANE HOLDINGS CO. AND DLJ MERCHANT BANKING PARTNERS
II, L.P. AND ITS AFFILIATES ACQUIRED DECRANE AIRCRAFT IN AUGUST 1998. DECRANE
AIRCRAFT IS THE PREDECESSOR OF DECRANE HOLDINGS.
AS USED IN THIS REPORT, UNLESS THE CONTEXT INDICATES OTHERWISE, "DECRANE
HOLDINGS" AND "WE," "US," "OUR," AND SIMILAR TERMS REFER TO THE COMBINED
BUSINESS OF DECRANE HOLDINGS CO. (AND DECRANE AIRCRAFT, OUR PREDECESSOR) AND ALL
OF ITS SUBSIDIARIES, COLLECTIVELY. EXCEPT WHERE WE INDICATE OTHERWISE, THIS
REPORT PRESENTS ALL INFORMATION ON A "PRO FORMA" BASIS, GIVING EFFECT TO ALL OF
THE TRANSACTIONS REFERRED TO IN NOTES 2, 3 AND 4 OF OUR FINANCIAL STATEMENTS,
INCLUDING THE ACQUISITION OF DECRANE AIRCRAFT BY DECRANE HOLDINGS AND DLJ AND
DECRANE AIRCRAFT'S ACQUISITIONS DESCRIBED IN OUR FINANCIAL STATEMENTS.
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
Since our founding in 1989, through acquisitions and internal growth, we
have become one of the premier suppliers to the general aviation market. We
offer a complete line of interior cabin furniture, galleys, seating, and
entertainment systems for corporate aircraft. In addition, we manufacture
aviation electronic components, referred to as avionics, and provide systems
integration services. We sell our products in the corporate, commercial
(including regional), retrofit, aftermarket and military aircraft markets.
Within these markets, our customers include original manufacturers of aircraft
and related avionics equipment, commonly referred to as OEM's, major components
suppliers, aircraft repair and modification centers and commercial airlines. For
the year ended December 31, 1999, we generated revenues and EBITDA (as defined)
of $244.0 million and $56.5 million, respectively.
During 1998 and 1999, we completed and integrated eight acquisitions,
increasing our diversification within the aircraft industry and reducing our
reliance on the commercial aircraft market. We have built a leading position in
a number of niche markets in the aircraft industry. The substantial majority of
our revenue is generated by businesses in which we have a leading market share.
In order to take advantage of the complementary nature of our various product
offerings, to rationalize and consolidate the operations of each of our separate
companies and to provide even higher levels of customer service, in 1999 we
reorganized our related businesses into three separate operating groups: Cabin
Management, Specialty Avionics and Systems Integration.
THE CABIN MANAGEMENT GROUP. We are the leading independent provider of
cabin management products for the corporate aircraft market, serving major
manufacturers such as Boeing Business Jet, Bombardier, Cessna, Dassault,
Gulfstream and Raytheon. We provide a full line of interior cabin components,
including seats, furniture, cabinetry, galleys, in-flight entertainment systems,
sidewalls and headliners, which are either sold separately or as a
pre-engineered, pre-fabricated set. Our "cabinet-in-a-box" product offers
customized, pre-engineered, pre-fit interior cabinetry and galley kits to
corporate jet OEM's and independent completion centers. We also have developed
and are currently marketing our "cabin-in-a-box" product, which is comprised of
a customized, pre-engineered, pre-fit cabin interior system, including
furniture, galleys, seats, audio-visual entertainment systems, lighting,
sidewalls, headliners and electrical control units. Our cabin-in-a-box product
will enable our customers to rely on us as the single source for cabin-related
products. We estimate that this product could decrease cycle times by 15% to
20%, offering significant cost reduction opportunities to our customers, and
could increase the dollar content per plane for us. The Cabin Management Group
contributed approximately 42% of our pro forma revenue for the twelve months
ended December 31, 1999.
THE SPECIALTY AVIONICS GROUP. This group designs, engineers and
manufactures electronic components, electronic display devices and interconnect
components and assemblies. Among the products offered by this group are flight
deck communications and audio power control equipment, harness assemblies and
connectors, power and signal contact products and liquid crystal display
devices, commonly referred to as LCD's. Customers of this group include Airbus,
Boeing, Honeywell, Matsushita, and Rockwell Collins. The Specialty Avionics
Group contributed approximately 38% of our pro forma revenue for the twelve
months ended December 31, 1999.
1
THE SYSTEMS INTEGRATION GROUP. This group provides auxiliary fuel tanks,
auxiliary power units and system integration services, including engineering,
kit manufacturing, installation and certification. Customers of this group
include Boeing Business Jet, Bombardier, Cessna, Gulfstream, Raytheon and
Rockwell Collins. The Systems Integration Group contributed approximately 20% of
our pro forma revenue for the twelve months ended December 31, 1999.
INDUSTRY OVERVIEW AND TRENDS
We sell our products in the corporate, commercial, retrofit, aftermarket and
military aircraft markets. Within these markets, our customers include original
manufacturers of aircraft and related avionics equipment, major component
suppliers, aircraft repair and modification centers and commercial airlines.
The leading manufacturers of corporate aircraft include Airbus, Boeing
Business Jet, Cessna, Dassault, Gulfstream and Raytheon, while the leading
manufacturers of regional aircraft include Bombardier, Embraer and Fairchild
Dornier. Airbus and Boeing are the primary manufacturers of commercial aircraft
designed to carry 100 or more passengers. The major systems installed on new
aircraft, such as flight deck avionics systems, are produced by a limited number
of manufacturers, including Honeywell, Rockwell Collins and Sextant Avionique.
The integration of new systems into existing aircraft, referred to as the
retrofit market, and the manufacture and sale of replacement products for
existing aircraft, referred to as the aftermarket, are served by a highly
fragmented group of companies, including many of the foregoing manufacturers and
a number of smaller, specialized companies. We market our commercial aircraft
products directly to the aircraft manufacturers as well as to the manufacturers
of major aircraft sub-systems. In some cases, we sell our products to competing
manufacturers.
We believe the following characteristics of our markets have contributed to
our growth and profitability and should provide further opportunities for our
success:
- INCREASED DEMAND FOR NEW CORPORATE AIRCRAFT. The Teal Group Corporation,
an industry-recognized aerospace research group, projects delivery of
5,067 corporate aircraft between 1999 and 2008, representing an increase
of approximately a 52% over the 3,326 aircraft that were delivered between
1989 and 1998. We believe that the following factors have driven increased
demand for new corporate aircraft:
- the growing popularity of fractional aircraft ownership in the United
States and the expansion of this form of ownership to Europe and the
Far East;
- the introduction of new, larger and more efficient aircraft, including:
- several new middle-to high-end corporate aircraft, such as the
Airbus CJ, Boeing Business Jet, and Bombardier Global Express; and
- additional new model aircraft, such as the Bombardier Continental,
Cessna Sovereign, and Raytheon Horizon, which are expected to be
introduced in the next few years;
- the need for long range flights to expanding international markets;
- the increased demand for more expedient travel;
- the worldwide threat of terrorism; and
- the perceived decline in the level of service afforded commercial
airline passengers.
- INCREASED LONG-TERM DEMAND FOR NEW COMMERCIAL AIRCRAFT. The 1999 CURRENT
MARKET OUTLOOK, released by The Boeing Company in June 1999, projects that
the world jetliner fleet will grow from 12,600 aircraft at the end of 1998
to 19,100 aircraft by 2008, and to 28,400 aircraft by 2018. The report
also projects that, between 1999 and 2008, the commercial aircraft
industry will require 8,900 new commercial aircraft, and between 2009 and
2018, it will require an additional 11,250 aircraft, both to support the
projected world fleet expansion and to replace capacity lost as aircraft
are removed from commercial airline service. Despite the increases
projected for the commercial aircraft industry generally, Boeing has
announced production cutbacks in several of its lines for 2000 and 2001,
and our sales to Boeing have decreased. For example, Boeing deliveries of
its 747, 767 and 777 airplanes have declined due to the recent financial
difficulties of many Asian carriers.
2
- INCREASED DEMAND FOR NEW REGIONAL AIRCRAFT. As part of the total projected
increase for the commercial aircraft fleet, Boeing's 1999 CURRENT MARKET
OUTLOOK projects a compounded annual growth rate of 9.4% for the regional
aircraft fleet from 1999 to 2008. We believe that the projected increase
in the regional aircraft fleet is driven by the following factors:
- the introduction of new regional aircraft with state-of-the-art
cockpits and the same safety equipment as larger commercial aircraft;
- continued integration of the services of regional carriers with major
carriers;
- newer longer-range turboprop and jet aircraft that allow regional
carriers to consider new "point-to-point" routes, which would permit
passengers to bypass hubs; and
- upgraded airport facilities for regional passengers.
- INCREASED DEMAND FOR CABIN MANAGEMENT SYSTEMS. As businesses become
increasingly dependent on new technology, passengers are demanding more
advanced in-flight services, particularly in the corporate aircraft
market. These services include in-flight passenger telecommunications
systems and in-flight entertainment systems, such as video,
video-on-demand and other interactive systems. We believe that demand for
systems in the passenger cabin, as well as avionics systems on the flight
deck, is increasing as a result of:
- a desire by airlines for additional revenue-producing services;
- longer flights combined with a demand by passengers for more
sophisticated forms of in-flight services and entertainment; and
- the advent of new technologies and Federal Aviation Administration
mandates related to aircraft safety and navigation.
In corporate aircraft for example, Honeywell's AIS-1000 OneView-TM-
Airborne Information System delivers more than 40 channels of live
television programming and Internet and e-mail access to corporate
aircraft via direct broadcast satellite service providers.
- SIGNIFICANT BARRIERS TO ENTRY. We believe that there are many barriers to
entry that limit access to the aircraft industry, including:
- the reluctance of aircraft manufacturers to include new companies as
additional approved vendors on their engineering drawings, a favored
status often called "print position";
- the general FAA certification requirements necessary to perform
aircraft modifications or maintenance;
- the required compliance with FAA aircraft manufacturing and aircraft
modification design and installation standards;
- the required compliance with specifications for some products sold to
commercial and military markets;
- the required compliance with qualification and approval standards
imposed by aircraft and electronic systems manufacturers; and
- the initial capital investment and tooling requirements necessary for
the manufacture of some aircraft components and systems.
- REDUCTION IN NUMBER OF APPROVED SUPPLIERS AND VENDORS. Commercial airlines
have come under increasing pressure to reduce the operating and capital
costs associated with providing services. As a result, many OEM's are
initiating proactive programs to reduce cycle times, decrease inventory
and reduce costs. Boeing, for example, has announced that it intends to
reduce its number of suppliers by 19%, from 31,000 to 25,000, by the end
of 2000 and by 42% over the long term. Manufacturers can realize
efficiencies by purchasing a higher number of assemblies from a smaller
number of suppliers, each of whom has multiple related product capability.
- NEW SAFETY MANDATES. New technologies and FAA mandates are driving a
proliferation of new safety systems for airplanes. The world's airlines
and aircraft and electronic systems manufacturers have cooperated with
regulatory agencies in the development of industry standards, regulations
and system
3
requirements for future air navigation systems. We expect that this
initiative will drive a complete modernization of both airborne and
ground-based air traffic management systems. As navigation technology
becomes more accurate, new navigation systems such as global positioning
systems may become federally required. Other new technologies, which have
already been mandated, include traffic collision avoidance systems, cargo
hold fire detection and suppression systems, and windshear detection
systems. In anticipation of new FAA recommendations and mandates, many
airlines have already begun to install enhanced ground proximity warning
systems, predictive windshear detection systems and enhanced digital
flight data recorders. These safety mandates should provide significant
retrofit opportunities for the commercial fleet, which today exceeds
12,000 aircraft.
ACQUISITION HISTORY
DeCrane Aircraft was formed in 1989 to capitalize on emerging trends in the
aircraft market through acquisitions. Since our formation, we have completed
seventeen acquisitions, summarized as follows:
PRINCIPAL PRODUCTS AND SERVICES
ACQUIRED ENTITY OR ASSET AT THE TIME OF THE TRANSACTION
- ----------------------------------------------- -----------------------------------------------
1990
1 Hollingsead International Avionics support structures
1991
2 Tri-Star Electronics International Contacts and connectors
3 Tri-Star Europe Contact blanks
4 Tri-Star Technologies Wire marking equipment
5 Cory Components Connectors & harness assemblies
1996
6 Aerospace Display Systems Dichroic liquid crystal displays
7 Elsinore Engineering Engineering services
8 AMP manufacturing facility Contact blanks
1997
9 Audio International Cabin management & entertainment products
1998
10 Avtech Cockpit audio, lighting, power & control
11 Dettmers Industries Corporate aircraft seats
1999
12 PATS Auxiliary fuel & power systems
13 PPI Aircraft furniture components
14 Custom Woodwork and Plastics Aircraft furniture components
15 PCI NewCo Composite material components
16 International Custom Interiors Aircraft furniture components
17 Infinity Partners Aircraft furniture components
COMPETITIVE STRENGTHS
We have used our strong market positions to compete more effectively, to
capitalize on industry consolidation trends and to cross-sell products to our
existing customer base. We believe that we are well-positioned to take advantage
of the foregoing trends and expected growth in the aircraft industry as a result
of the following competitive strengths:
- LEADING POSITIONS IN NICHE MARKETS. We are a leading provider of
components within a number of the niche markets we serve. Our strategy has
been to combine complementary businesses in markets in which we have a
leading position, thereby increasing sales volume with our customers and
strengthening our competitive position. The substantial majority of our
revenue is generated by businesses in which we have a leading market
share. We believe our combination of component manufacturing and
integration and installation capabilities provides us with competitive
advantages. The combination of product lines we offer provides
opportunities for our customers to deal with a reduced number of vendors
and suppliers, to reduce the number of component parts through the
purchase of sub-assemblies and to reduce cycle times, all of which help to
reduce costs and simplify the production process.
4
- STRONG CUSTOMER RELATIONSHIPS. Through our acquisitions and as a result of
our performance, we have enjoyed long-term relationships with leaders in
our primary markets, including Boeing and Boeing Business Jet, Bombardier,
Cessna, Gulfstream, Honeywell, Matsushita, Raytheon, and Rockwell Collins.
We believe we have been able to develop and solidify these relationships
by combining production and engineering capabilities, providing
engineering support services and enhancing our customers' in-house
production processes.
- DIVERSIFIED REVENUE BASE. We sell our products in the corporate,
commercial, retrofit, aftermarket and military aircraft markets. Within
these markets, our customers include original manufacturers of aircraft
and related avionics equipment, aircraft repair and modification centers,
and airlines. Each of these markets has different demand drivers and
operates on different production cycles. Accordingly, our involvement in
these multiple markets reduces our exposure to cyclical product demand in
any one segment of the aircraft industry. Demand for new products in the
commercial aircraft market, for example, is driven largely by the age of
the existing commercial fleet, the growth in revenue passenger miles and
industry load factors, whereas demand in the corporate aircraft market is
driven largely by the growth in fractional ownership, competition from
commercial airlines and the growth in the global economy. Our aftermarket
sales are dependent in part upon the growing number of aircraft in the
existing fleet while technology advances and safety updates help drive
demand in the retrofit market.
- COMPLEMENTARY AND STRATEGICALLY INTEGRATED BUSINESS LINES. Since 1989, we
have completed seventeen acquisitions of businesses and assets. We believe
that our acquisitions complement each other and create a core of
interrelated products and services, which increases our cross-selling
opportunities to existing and new customers. The complementary nature of
our business lines should allow us to help our customers reduce their
production costs. For example, our acquisitions of PPI, Custom Woodwork,
International Custom Interiors and Infinity, corporate aircraft
furnishings manufacturers; Dettmers, a corporate aircraft seat
manufacturer; and Audio International, a corporate aircraft entertainment
and cabin management product manufacturer; should enable us to offer a
more integrated set of products and services to the middle and high-end
corporate aircraft market.
- LOW-COST, HIGH-QUALITY OPERATIONS. We have established low-cost operations
through cost reduction programs, technological development and, where
appropriate, the use of vertical integration. For example, our low-cost
production capabilities, coupled with our focus on delivering high-quality
products, has enabled us to grow the number of programs under which we
supply electrical contacts to many of our competitors.
We use sophisticated processes to ensure that our products meet or exceed
industry and customer quality requirements. Many customers formally have
recognized the effectiveness of our quality programs by issuing quality
approval letters, awarding quality compliance certificates and authorizing
our inspection personnel to act as their authorized quality certification
representatives. For example, four of our facilities have received a
quality award from Boeing, and nine of our facilities are currently
certified according to the International Standards Organization
specifications ISO-9001 or ISO-9002.
- REGULATORY CERTIFICATIONS. We believe our FAA-certified airframe and
power-plant mechanics who are authorized to perform specified aircraft
modification functions provide us with a significant competitive
advantage. As of December 31, 1999, our subsidiaries include one of only
31 currently active FAA Designated Alteration Stations worldwide, hold
nine FAA domestic repair station certificates and hold numerous Parts
Manufacturer Approval authorizations from the FAA. These certifications
make us one of a few companies with the in-house capability to design,
engineer, produce, install and certify a part, which together help reduce
cycle times.
GROWTH STRATEGY
Our principal strategy is to establish and expand leading positions in
high-margin, niche markets within the corporate, commercial, retrofit,
aftermarket and military aircraft markets. We focus on the manufacture of
corporate aircraft interiors and avionics equipment and the integration of
avionics systems. We also seek to maintain a balance of revenues among the
equipment manufacturer market, the retrofit market and the aftermarket. We
believe that this strategy positions us for future success by:
- BROADENING SALES TO EXISTING CUSTOMER BASE. We have relationships with
virtually every major OEM and with fractional ownership programs, such as
Executive Jet. We plan to continue cross-selling our
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portfolio of products to our existing customer base in order to increase
our dollar content per plane. For example, we originally entered the
corporate aircraft market by offering cabin management systems and
entertainment systems. We then expanded our product offering to include
seating and in 1999, through four separate acquisitions, we added
cabinetry and galley products, which we sell to OEM's. Finally, we
developed pre-fabricated interior kits, cabinet-in-a-box and
cabin-in-a-box, to facilitate cross-selling and further encourage OEM's to
outsource their cabin engineering requirements to us. We believe these
products should reduce cycle times and costs for manufacturers and
increase our dollar content per plane. We currently provide
cabinet-in-a-box kits to several of our customers and are in discussions
with a number of corporate jet manufacturers regarding our cabin-in-a-box
product.
- STRENGTHENING POSITION IN NICHE MARKETS. We plan to continue to strengthen
our position in niche markets by providing engineering and customer
service support to our existing customer base through the integration of
our engineering services with the OEM's engineering capabilities. We also
plan to continue to examine new market niches and consolidate the
fragmented sectors in our markets to further service our customers. We
target for acquisition aircraft component manufacturers and systems
integration and installation providers that meet the following criteria:
- are complementary to our existing businesses;
- have a leading market share in their own niches;
- leverage our existing strengths;
- add new expertise; and/or
- increase cross-selling opportunities.
In analyzing a potential acquisition's value, we focus on economies of
scale, product line extensions, new customer relationships, increased
manufacturing capacity and opportunities for increased cost reductions.
- CONTINUING OPERATIONAL EFFICIENCY IMPROVEMENTS. We are taking advantage of
areas of synergies across and within our three business segments by making
operational efficiency improvements in human resources, support,
procurement and cross-selling. For example, we recently formed the Systems
Integration Group to leverage the engineering capabilities of our
Hollingsead subsidiary with the manufacturing and systems integration and
installation capabilities of our PATS subsidiary. In addition, as part of
the Systems Integration Group's strategy, we are consolidating facilities,
reducing headcount and replacing relatively expensive manufacturing at
Hollingsead with more economical outsourced products. This will allow
Hollingsead to focus on its core engineering and systems integration
competencies. We are also standardizing processes and centralizing
procurement at our four recently acquired cabin furniture companies, and
we continue to evaluate our operations to streamline or increase
efficiencies.
- EXPANDING PRODUCT DEVELOPMENT. Development of advanced cabin features
increases demand for many of our products and provides attractive
cross-selling opportunities. For example, our newly introduced e-CABIN, an
"office in the sky," provides leading-edge business and entertainment
services for the corporate jet cabin and its passengers. Our e-CABIN
provides each passenger with on-demand audio and video entertainment,
including live television and Internet and e-mail access via Honeywell's
OneView system. We will continue considering strategic partnerships with
leading technology companies to keep our product offerings on the cutting
edge, as we have done with Honeywell and its OneView system.
6
PRODUCTS AND SERVICES
Our principal products and services, on a pro forma basis, are:
YEAR ENDED
DECEMBER 31, 1999
PRO FORMA
PRINCIPAL PRODUCTS AND SERVICES REVENUES
- ------------------------------------------------------------ ------------------
CABIN MANAGEMENT GROUP
Interior furnishings, seating, composite components, and
entertainment and cabin control systems................... 42.4%
SPECIALTY AVIONICS GROUP
Cockpit audio, communication, lighting and power and control
devices, electrical contacts, connectors and harness
assemblies, liquid crystal display devices, and wire
marking and crimping equipment............................ 37.7
SYSTEMS INTEGRATION GROUP
Auxiliary fuel systems and power units, and integration of
cabin and fight deck systems.............................. 19.9
--------------
Consolidated pro forma revenues......................... 100.0%
==============
We believe historical data about our products and services is not meaningful
because it is not reflective of the companies we have recently acquired and the
products and services they provide. Historical data is presented in Note 19 of
our financial statements.
CABIN MANAGEMENT GROUP. This group provides a full line of interior cabin
components and services for the middle- to high-end corporate aircraft market.
- INTERIOR FURNISHINGS, SEATING AND COMPOSITE COMPONENTS. We design,
engineer and manufacture customized, pre-fit products and provide services
including:
INTERIOR FURNISHINGS
- entertainment and refreshment centers;
- conference tables;
- hi-low dining/coffee tables;
- end tables;
- cabinets;
- arm and side ledges;
- galleys;
- lavatories;
- vanities;
- room enclosures;
- cabinetry refurbishment services;
SEATING
- - executive track and swivel seats;
- - jump-seats;
- - divans, including models that convert to beds or contain storable tables;
- - upholstery services;
COMPOSITE COMPONENTS
- - sound-damping side walls and headliners;
- - passenger service units;
- - environmental (HVAC) ducting; and
- - closets.
Many of our products are made with what we believe to be high quality
veneers, leathers and fabrics and lightweight structural aluminum
honeycomb or foam- or balsa-core composites reinforced with Kevlar-TM-,
Nomex-TM-, graphite or fiberglass.
- ENTERTAINMENT AND CABIN CONTROL SYSTEMS. We design to customer
specifications, engineer and manufacture fully-integrated in-flight
entertainment and cabin management systems, including audio-video
entertainment systems, cabin lighting, passenger switching and control
modules, chimes and paging systems and headphone systems. Our
entertainment systems include video on demand, and our cabin lighting
products include both halogen and flat-candle fluorescent illumination.
The fully-integrated systems are operated with our passenger switching and
control modules, which includes membrane-type and touch-screen models. We
recently introduced a new fiber-optic based technology for our systems
that replaces traditional wire harnesses with lightweight fiber-optic
cable.
SPECIALTY AVIONICS GROUP. This group designs, engineers and manufactures
electronic components and display devices, interconnect components and
assemblies.
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- COCKPIT AUDIO, COMMUNICATION, LIGHTING AND POWER AND CONTROL DEVICES. We
are a leading manufacturer of cockpit audio, lighting and power and
control devices used in commercial, regional and corporate aircraft. We
also manufacture a variety of other commercial aircraft safety system
components, including warning tone generators, temperature and de-icing
monitoring systems, steep approach monitors and low voltage power supplies
for traffic collision avoidance systems.
- ELECTRICAL CONTACTS. Contacts conduct electronic signals or electricity
and are installed at the terminus of a wire or an electronic or electrical
device. We supply precision-machined contacts for use in connectors found
in virtually every electronic and electrical system on a commercial
aircraft. We sell contacts directly to aircraft and related electronics
manufacturers and, through our private labeling programs, to several major
connector manufacturers who sell connectors to the same markets under
their brand name.
- CONNECTORS AND HARNESS ASSEMBLIES. Electronic and electrical connectors
link wires and devices in avionics systems, and permit their assembly,
installation, repair and removal. Our connectors are specially
manufactured to meet the critical performance requirements demanded by
manufacturers and required in the harsh environment of an operating
aircraft. We produce connectors that are used in aircraft galleys, flight
decks and control panels in the passenger cabin. We also produce wire
harness assemblies for use in cabin avionics systems, from wire,
connectors, contacts and hardware. We typically sell our harness
assemblies to manufacturers of aircraft electronic systems. In addition,
we incorporate and sell our harness assemblies as part of our systems
integration services.
- LIQUID CRYSTAL DISPLAY DEVICES. We manufacturer dichroic liquid crystal
displays, also known as LCD's, and modules used in commercial and military
aircraft. Modules are liquid crystal displays packaged with a backlight
source and additional on-board electronic components. Our products are
used in a variety of flight deck applications, such as flight control
systems, fuel quantity indicators, airborne communications and safety
systems. Dichroic liquid crystal display products are widely used in the
aircraft industry because they are easily adapted to custom design, and
they possess high performance characteristics, which include high
readability in sunlight and darkness, readability from extreme viewing
angles, and the ability to withstand wide temperature fluctuations. We
also manufacture electronic clocks, capable of serving all types of
aircraft, that use our liquid crystal display devices.
- WIRE MARKING AND CRIMPING EQUIPMENT. Wires running between the individual
contacts that comprise a connector are marked according to their function
and, in some applications, the contacts are crimped onto the wire. We
design and manufacture high-speed wire marking systems and portable
crimping machines used by harness manufacturers, wire mills, aircraft
manufacturers and the U.S. military.
SYSTEMS INTEGRATION GROUP. This group provides auxiliary fuel tank,
auxiliary power units and systems integration products and services, including
engineering, kit manufacturing, installation and certification.
- AUXILIARY FUEL SYSTEMS AND AUXILIARY POWER UNITS. We manufacture and
install auxiliary fuel tanks for commercial and corporate aircraft. Our
unique design and tank construction has made us a leader in the auxiliary
fuel tank market. We also manufacture auxiliary power units which provide
ground power to corporate jets made by Cessna, Gulfstream, Learjet and
Raytheon.
- INTEGRATION OF CABIN AND FLIGHT DECK SYSTEMS. We have designed and
patented a wide range of avionics support structures. These structures are
used to support and environmentally cool avionics equipment, including
navigation, communication and flight control equipment. We sell our
avionics support structures under the Box-Mount-TM- name. We sell these
support structures to aircraft and related electronics manufacturers,
airlines and major modification centers. In addition, these products are
essential components of the installation kits used in our systems
integration operations. We also perform all of the functions, including
design, engineering, certification, manufacturing and installation,
necessary to retrofit an aircraft with a new or upgraded avionics system.
INDUSTRY REGULATION
The aviation industry is highly regulated in the United States by the
Federal Aviation Administration and in other countries by similar agencies to
ensure that aviation products and services meet stringent safety and performance
standards. We and our customers are subject to these regulations. In addition,
many customers impose their own compliance and quality requirements on their
suppliers. The FAA prescribes
8
standards and licensing requirements for aircraft components, issues Designated
Alteration Station authorizations, and licenses private repair stations. Our
subsidiaries hold various FAA approvals, which may only be used by the
subsidiary obtaining such approval.
The FAA can authorize or deny authorization of many of the services and
products we provide. Any such denial would preclude our ability to provide the
pertinent service or product. If we failed to comply with applicable FAA
standards or regulations, the FAA could exercise a wide range of remedies,
including a warning letter, a letter of correction, a civil penalty action, and
emergency or non-emergency suspension or revocation of a certificate or
approval.
In July of 1997, the FAA notified us that our FAA-approved repair station
which holds Designated Alteration Station authorization did not fully comply
with some of the requirements for some of the FAA ratings that it held. The FAA
granted us until September 10, 1997 to bring the facility into full compliance,
and curtailed several operations of the repair station, including prohibiting
initiation of new projects under that authorization, until it achieved full
compliance. On August 28, 1997 the FAA inspected the repair station and
determined that it was in full compliance with all FAA requirements applicable
to Class III and Class IV Airframe ratings. The FAA issued a revised Air Agency
Certificate including those ratings, and removed the operating restrictions, as
of September 5, 1997.
The FAA also has the power to issue cease and desist orders and orders of
compliance and to initiate court action for injunctive relief. If the FAA were
to suspend or revoke our certificates or approvals on a nonemergency basis, we
would be permitted to continue making the products and delivering the goods
pending any available appeals, but would be required to stop if the FAA
eventually prevailed on appeal. If the FAA did so on an emergency basis, we
would be obliged to stop immediately the manufacturing of products and
delivering of services that require such certificate or approval. If the FAA
were to determine that noncompliance with its standards creates a safety hazard,
it also could order that the pertinent component or aircraft immediately cease
to be operated until the condition is corrected. This could require that
customers ground aircraft or remove affected components from aircraft currently
in service, both of which are expensive actions.
Each type of aircraft operated by airlines in the United States must possess
an FAA type certificate, generally held by the aircraft manufacturer, indicating
that the type design meets applicable airworthiness standards. When someone else
develops a major modification to an aircraft already type-certificated, that
person must obtain an FAA-issued Supplemental Type Certificate for the
modification. Historically, we have obtained several hundred of these
Supplemental Type Certificates, most of which we obtained on behalf of our
customers as part of our systems integration services. Some of these
certificates we obtain are or will eventually be transferred to our customers.
As of January 1, 2000, we own and/or manage 235 Supplemental Type Certificates.
Many are multi-aircraft certificates which apply to all of the aircraft of a
single type. We foresee the need to obtain additional Supplemental Type
Certificates so that we can expand the services we provide and the customers we
serve.
Supplemental Type Certificates can be issued for proposed aircraft
modifications directly by the FAA, or on behalf of the FAA by one of the 31
holders of currently active Designated Alteration Station authorizations as of
January 1, 2000. The FAA designates what types of Supplemental Type Certificates
can be issued by each Designated Alteration Station. Our subsidiary Hollingsead,
as one of the 31, can directly issue many of the Supplemental Type Certificates
we and our customers require for our systems integration operations. In many
cases, this has increased the speed with which we can obtain such certificates
and help bring our customers' systems to market.
After obtaining a Supplemental Type Certificate, a manufacturer must apply
for a Parts Manufacturer Approval from the FAA, or a supplement to an existing
Parts Manufacturer Approval, which permits the holder to manufacture and sell
installation kits according to the approved design and data package. We have
nine Parts Manufacturer Approvals and over 200 supplements to those approvals.
In general, each initial Parts Manufacturer Approval is an approval of a
manufacturing or modification facility's production quality control system. Each
Parts Manufacturer Approval supplement authorizes the manufacture of a
particular part in accordance with the requirements of the corresponding
Supplemental Type Certificate. We routinely apply for and receive such Parts
Manufacturer Approval supplements. In order to perform the actual installations
of a modification, we are also required to have FAA approval. This authority is
contained either in our Parts Manufacturer Approvals and related supplements, or
in our repair station certificates. In order for a company to perform most kinds
of repair, engineering, installation or other services on aircraft, its facility
9
must be designated as an FAA-authorized repair station. As of January 1, 2000,
we had nine authorized repair stations.
In addition to its approval of design, production, and installation, the FAA
certifies personnel. Several of our engineering personnel have been certified by
the FAA to perform specific tasks related to the design, production, and
performance of aircraft modifications. Such certified personnel include
mechanics and repairmen. The FAA also delegates some of its oversight
responsibilities, such as testing and inspection responsibilities, to
FAA-certified Designated Engineering Representatives. We employ or contract for
several of such designated representatives who evaluate engineering design data
packages, ensure compliance with applicable FAA regulations, oversee product
testing to ensure airworthiness, and work with the FAA to obtain approvals of
those data packages.
U. S. military specification standards are frequently used by both military
and commercial customers in the aircraft industry to define and control
characteristics of a product. Through the use of a government Qualified Parts
List and Qualified Vendor's List, a customer may be assured that a product or
service has met all of the requirements set forth in the military specification.
Parts listed with a Qualified Parts List allow others to reliably design parts
to interface with such parts as a result of the military specification standards
used. We believe that we hold more Qualified Parts Lists for our contact product
line than any other manufacturer.
SALES AND MARKETING
Product line managers and our product engineering staff provide technical
sales support for our direct sales personnel and agents. We may also assign
responsibility for marketing, sales and/or services for key customers to one of
our senior executives. We have nine authorized distributors who purchase, stock
and resell several of our product lines.
Our systems integration services are sold by sales managers on our staff who
are assigned to geographic territories. Because of the significant amount of
technical engineering work required in the sales process, our sales managers are
generally assisted by a support team of program management, installation and
engineering personnel. Each support team specializes in safety systems,
in-flight entertainment, or navigation systems. These support teams continue to
manage the project throughout the entire integration process.
CUSTOMERS
We estimate that in 1999, we sold our products and services to about 1,300
customers on a pro forma basis. Our primary customers include manufacturers of
aircraft and related avionics equipment, airlines, aircraft component
manufacturers and distributors, and aircraft repair and modification companies.
The following customers accounted for 10.0% or more of our consolidated pro
forma revenues:
YEAR ENDED
DECEMBER 31, 1999
PRO FORMA
SIGNIFICANT CUSTOMER(A) REVENUES(B)
- ------------------------------------------------------------ ------------------
Boeing(c)................................................... 16.0%
Textron(d).................................................. 15.6%
Bombardier.................................................. 12.7%
-------------
Total pro forma revenues.................................. 44.3%
=============
-------------------------------
(a) All of our operating groups derive revenues from each of the
customers.
(b) Historical data is not deemed to be meaningful because it is not
reflective of the companies we have recently acquired. Historical
data is presented in Note 6 of our financial statements.
(c) Reflects only our direct revenues from Boeing. Excludes revenues from
components we provide indirectly to Boeing through our sales to other
Boeing suppliers.
(d) Includes Cessna.
Most of our sales to Boeing are pursuant to contracts which may be
terminated by Boeing at any time and include various terms favorable to the
buyer. For example, one provides that we must extend to Boeing any reductions in
prices or lead times that we provide to other customers and that we must match
other suppliers' price reductions of more than five percent, or delete the
affected products from the contract. Another contract relieves Boeing from any
obligation to order products covered by the contract if Boeing's
10
customers request an alternate supplier, or our product is not technologically
competitive in Boeing's judgment, or Boeing changes the design of an aircraft so
that our products are no longer needed, or Boeing reasonably determines that we
cannot meet its requirements in the amounts and within the schedules it
requires. Our contracts with Boeing also generally grant Boeing an irrevocable
non-exclusive worldwide license to use our designs, tooling and other
intellectual property rights related to products sold to Boeing, if we default,
or suffer a bankruptcy filing, or transfer our manufacturing rights to a third
party.
MANUFACTURING AND QUALITY CONTROL
Many of our product lines use process-specific equipment and procedures that
have been custom-designed or fabricated to provide high-quality products at
relatively low cost. Some of our key product lines are vertically integrated,
which we believe improves our product performance, customer service and
competitive pricing.
We have conducted programs to reduce costs including overhead expenses. In
some cases, these programs have involved the use of proprietary equipment or
processes which have enabled us to reduce costs without reducing quality levels.
Several of our key customers have developed their own design, product
performance, manufacturing process and quality system standards and require
their suppliers to comply with such standards. As a result, we have developed
and conducted comprehensive quality policies and procedures which meet or exceed
our customers' requirements. Many of our customers have recognized formally the
effectiveness of our quality programs by issuing quality approval letters and
awarding quality compliance certificates. In addition, some of our customers
have authorized our inspection personnel also to act as their authorized quality
representatives. That authorization enables us to ship directly into the
inventory stockrooms of these customers, eliminating the need for inspection at
the receiving end.
We use sophisticated equipment and procedures to ensure the quality of our
products and to comply with United States military specifications and FAA
certification requirements. We perform a variety of testing procedures,
including environmental testing under different temperature, humidity and
altitude levels, shock and vibration testing and X-ray fluorescent measurement.
These procedures, together with other customer approved techniques for document,
process and quality control, are used throughout our manufacturing facilities.
RAW MATERIALS AND COMPONENT PARTS
The components we manufacture require the use of various raw materials
including gold, aluminum, copper, rhodium, plating chemicals, hardwoods and
plastics. The availability and prices of these materials may fluctuate. Their
price is a significant component in, and part of, the sales price of many of our
products. Although some of our contracts have prices tied to raw materials
prices, we cannot always recover increases in raw materials prices in our
product sale prices. We also purchase a variety of manufactured component parts
from various suppliers. Raw materials and component parts are generally
available from multiple suppliers at competitive prices. However, any delay in
our ability to obtain necessary raw materials and component parts may affect our
ability to meet customer production needs.
INTELLECTUAL PROPERTY AND PROPRIETARY INFORMATION
We have various trade secrets, proprietary information, trademarks, trade
names, patents, copyrights and other intellectual property rights which we
believe are important to our business in the aggregate, but not individually.
COMPETITION
We operate in a highly competitive industry and compete with a number of
companies, many of whom have significantly greater financial, technological,
manufacturing and marketing resources than we do. We believe that our ability to
compete depends on high product performance, short lead-time and timely
delivery, competitive price and superior customer service and support.
The niche markets within the aircraft industry that we serve are relatively
fragmented, with several competitors offering the same products and services we
provide. Due to the global nature of the aircraft industry, competition comes
from both U.S. and foreign companies.
11
Our principal competitors in contacts and connectors are large and
diversified corporations which produce a broad range of products. In other areas
we generally face a group of smaller companies and enterprises, except for the
corporate aircraft manufacturers, which are generally part of large and
diversified companies.
GROUP -- PRINCIPAL PRODUCTS AND SERVICES -- PRINCIPAL COMPETITORS
- -----------------------------------------------------------------
CABIN MANAGEMENT GROUP
INTERIOR FURNISHINGS
- Aviart
- Custom Aircraft Cabinets
- Hiller
- Corporate aircraft manufacturers and independent completion
and modification companies
SEATING
- Aircraft Modular Products, a division of BE Aerospace
- ERDA
COMPOSITE COMPONENTS
- AAR
- Burnham
- Fibre Art
- Plastic Fab
- Sealed Composites Works
- The Nordam Group
ENTERTAINMENT AND CABIN CONTROL SYSTEMS
- Aerospace Lighting
- Baker Electronics
- DPI Labs
- Grimes Aerospace
- Nellcor Puritan Bennett
- Air Show / Pacific Systems
SPECIALTY AVIONICS GROUP
COCKPIT AUDIO, COMMUNICATION, LIGHTING AND POWER AND CONTROL
DEVICES
- Becker Avionics
- Crane ELDEC
- Diehl GmbH
- Gables Engineering
- Page Aerospace
ELECTRICAL CONTACTS
- Amphenol
- Deutsch Engineered Connecting Devices, a division of
Deutsch
CONNECTORS AND HARNESS ASSEMBLIES
- AMP (connectors)
- Electronic Cable Specialists (harness assemblies)
- ITT Cannon (connectors)
- Radiall S.A. (connectors)
LIQUID CRYSTAL DISPLAY DEVICES
- Cristalloid
SYSTEMS INTEGRATION GROUP
AUXILIARY FUEL SYSTEMS AND AUXILIARY POWER UNITS
- Allied Signal (power units)
- Marshall Engineering (fuel systems)
INTEGRATION OF CABIN AND FIGHT DECK SYSTEMS
- Electronic Cable Specialists (avionics support structures)
- Engineering departments of airlines
- Numerous independent airframe maintenance and modification
companies
BACKLOG
As of December 31, 1999, we had an aggregate sales order backlog of
$156.1 million compared to $143.9 million as of December 31, 1998, all on a pro
forma basis. Orders are generally filled within twelve months; however, our
orders are generally subject to cancellation by the customer prior to shipment.
The level of unfilled orders at any given date will be materially affected by
when we receive orders and how fast we fill them. Period-to-period comparisons
of backlog figures may not be meaningful. For that reason, our backlogs do not
necessarily accurately predict actual shipments or sales for any future period.
12
EMPLOYEES
As of December 31, 1999, we had 2,536 employees, of whom 1,997 were in
manufacturing operations, 261 were in engineering, 183 were in finance and
administration and 95 were in sales. The foregoing numbers include 83 temporary
employees but do not reflect the anticipated employee reductions resulting from
the Hollingsead and Elsinore Engineering restructuring. None of our employees is
subject to a collective bargaining agreement, and we have not experienced any
material business interruption as a result of labor disputes since DeCrane
Aircraft was formed. We believe that we generally have a good relationship with
our employees.
ENVIRONMENTAL MATTERS
Our facilities and operations are subject to various federal, state, local,
and foreign environmental laws and regulations, including those relating to
discharges to air, water, and land, the handling and disposal of solid and
hazardous waste, and the cleanup of properties affected by hazardous substances.
In addition, some environmental laws, such as the federal Comprehensive
Environmental Response, Compensation and Liability Act, as amended (CERCLA) and
similar state laws, impose strict liability upon persons responsible for
releases or potential releases of hazardous substances. That liability generally
is retroactive, and may create "joint and several" liability among multiple
parties who have some relationship to a site or a source of waste. We have sent
waste to treatment, storage, or disposal facilities that have been designated as
National Priority List sites under CERCLA or equivalent listings under state
laws. We have received CERCLA requests for information or allegations of
potential responsibility from the Environmental Protection Agency regarding our
use of several of those sites. In addition, some of our operations are located
on properties which are contaminated to varying degrees.
We have not incurred, nor do we expect to incur, liabilities in any
significant amount as a result of the foregoing matters, because in these cases
other entities have been held primarily responsible, the levels of contamination
are sufficiently low so as not to require remediation, or we are indemnified
against such costs. In most cases, we do not believe that we have any material
liability for past waste disposal. However, in a few cases, we do not have
sufficient information to assess our potential liability, if any. It is
possible, given the potentially retroactive nature of environmental liability,
that we will receive additional notices of potential liability relating to
current or former activities.
Some of our manufacturing processes create wastewater which requires
chemical treatment, and one of our facilities was cited for excessive quantity
and strength of its wastewater. The costs associated with remedying that failure
have not been material. In addition, volatile organic compounds were discovered
at a different facility of ours during groundwater sampling in 1998. We have
completed a voluntary cleanup program there and have received a "no further
action" letter.
We believe that we have been and are in substantial compliance with
environmental laws and regulations and that we have no liabilities under
environmental laws and regulations, except for liabilities which we do not
expect would likely have a material adverse effect on our business, financial
position, results of operations or cash flows. However, some risk of
environmental liability is inherent in the nature of our business, and we might
in the future incur material costs to meet current or more stringent compliance,
cleanup, or other obligations pursuant to environmental laws and regulations.
NEW PRODUCT DEVELOPMENT
We continually evaluate opportunities to improve and expand our product
offerings and during 1999 invested $4.3 million to develop new products that
incorporate new technologies to meet the demands of our customers while meeting
the various requirements of the airline industry.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
You may reference Note 19 in the Notes to Consolidated Financial Statements
for a summary of our revenue and assets broken down by geographic area.
AVAILABLE INFORMATION
You may read and copy any materials we have filed with the SEC at the SEC's
Public Reference Room located at 450 Fifth Street, NW, Washington, DC 20549. You
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. You may also access our SEC filings on line at the
SEC home page (http://www.sec.gov).
REPORTS TO SECURITY HOLDERS
We will provide annual reports and quarterly reports to our security
holders. The annual reports we provide will contain financial information that
has been reviewed and audited by a certified public accountant. The quarterly
financial information will have been prepared and reviewed by management.
13
ITEM 2. PROPERTIES
Our principal facilities are described in the following table. We believe
that our facilities are in good condition and are adequate to support our
operations for the foreseeable future.
APPROXIMATE LEASE
LOCATION FACILITY DESCRIPTION SQ. FT. EXPIRATION
- -------------------------------------------------- --------------------------------------------- ------------ ----------
LEASED FACILITIES
Wichita, KS (two buildings)....................... Manufacturing, engineering and administration 156,500 2007
Georgetown, DE (a)................................ Manufacturing and aircraft modifications 110,000 2041
El Segundo, CA.................................... Manufacturing, engineering and administration 81,300 2010
Columbia, MD...................................... Manufacturing, engineering and administration 65,923 2007
Garden Grove, CA (b).............................. Manufacturing, engineering and administration 58,303 2007
Denton, TX (three buildings)...................... Manufacturing, engineering and administration 47,905 2015
Goleta, CA........................................ Engineering 33,200 2010
Wichita, KS....................................... Manufacturing and administration 33,000 2009
Stuart, FL........................................ Manufacturing, engineering and administration 29,700 2008
Orlando, FL....................................... Manufacturing and administration 28,500 2010
Hatfield, PA...................................... Manufacturing, engineering and administration 27,500 2002
Bioggio, Switzerland.............................. Manufacturing 21,915 2004
Denton, TX (d).................................... Manufacturing and administration 20,000 2015
Orlando, FL (c)................................... Manufacturing 20,000 2000
Mezzovico, Switzerland............................ Manufacturing 18,046 2001
Lewisville, TX (d)................................ Manufacturing 13,000 2004
Garden Grove, CA (b).............................. Warehouse 10,000 2003
Seattle, WA....................................... Warehouse 10,000 2001
North Little Rock, AR (three buildings) (e)....... Engineering 8,828 2000
Santa Ana, CA..................................... Engineering and aircraft hanger 8,816 2000
El Segundo, CA.................................... Corporate administration 7,853 2007
Anaheim, CA....................................... Manufacturing 6,036 2004
Goleta, CA (b).................................... Engineering 5,816 2000
Hutchinson, KS.................................... Manufacturing 5,300 2000
Bioggio, Switzerland (two buildings).............. Administration 4,660 2000
Tucson, AZ........................................ Field service office 580 2000
Quebec, Canada.................................... Field service office 380 2000
Wichita, KS....................................... Field service office 350 2000
Cedex, France..................................... Field service office 210 2000
OWNED FACILITIES
Seattle, WA (six buildings)....................... Manufacturing, engineering and administration 87,382
Pooler, GA........................................ Manufacturing and administration 24,000
North Little Rock, AR (e)......................... Manufacturing and engineering 20,000
North Little Rock, AR............................. Manufacturing, engineering and administration 18,000
OWNED AND LEASED FACILITIES -- SUBLEASED TO OTHERS
Seattle, WA (owned)............................... Office space 34,229
Santa Fe Springs, CA (leased)..................... Manufacturing and office space 24,000 2000
Santa Fe Springs, CA (leased)..................... Manufacturing and office space 17,600 2000
Wiltshire, United Kingdom (leased)................ Manufacturing and office space 4,823 2013
- ------------------------------
(a) Includes a 25,000 square foot expansion under construction and expected to
be ready for occupancy in 2000.
(b) Will be vacated in 2000 and subleased in conjunction with the Hollingsead
and Elsinore Engineering restructuring.
(c) Will be replaced with a 33,000 square foot building under construction and
expected to be ready for occupancy in 2000; the new lease will expire in
2010.
(d) During 2000, the Lewisville, TX facility will be vacated and subleased for
the remaining lease term upon occupancy of the Denton, TX facility.
(e) A new, owned 20,000 square foot facility is under construction and expected
to be ready for occupancy in 2000; upon occupancy, the three leased
buildings will be vacated and subleased for the remainder of their lease
terms, if any.
Additionally, the Company owns an 18,000 square foot manufacturing and
engineering facility in North Little Rock, Arkansas. The Company believes its
properties are in good condition and are adequate to support its operations for
the foreseeable future.
14
ITEM 3. LEGAL PROCEEDINGS
As part of its investigation of the crash off the Canadian coast on
September 2, 1998 of Swissair Flight 111, the Canadian Transportation Safety
Board (TSB) notified us that they recovered burned wire which was attached to
the in-flight entertainment system installed on some of Swissair's aircraft by
one of our subsidiaries. We are fully cooperating with the on-going TSB
investigation. Although the TSB has not issued a final report, it has advised us
that it has no evidence to date that the system we installed malfunctioned or
failed during the flight. Families of the 229 persons who died aboard the flight
have filed actions in federal and state courts against us, and many other
parties unaffiliated with us, including Swissair and Boeing. The actions claim
negligence, strict liability and breach of warranty relating to the installation
and testing of the in-flight entertainment system. The actions seek compensatory
and punitive damages and costs in an unstated amount. We intend to defend the
claims vigorously.
We are a party to a license agreement with McDonnell Douglas (now a part of
Boeing) pursuant to which we may request specified data in order to design and
market modifications to aircraft manufactured by McDonnell Douglas. Under the
agreement, we are to pay McDonnell Douglas a royalty of five percent of the net
sales price of all modifications sold by us for which we have requested data
from McDonnell Douglas. We requested data for a single modification, which we
believe is exempt from the agreement's provision requiring royalties. In 1996,
McDonnell Douglas made a demand for $650,000 for royalties. We do not believe
that we are obligated to McDonnell Douglas in any amount. However, if the claim
is asserted, and if we are unsuccessful in defending it, we may be required to
pay royalties to McDonnell Douglas.
We are party to other litigation incident to the normal course of business.
We do not believe that the outcome of any of such other matters in which we are
currently involved will have a material adverse effect on our financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
There is no established public trading market for our shares. We do have
publicly traded warrants, but we are not aware of a market for them.
HOLDERS
As of March 30, 2000 there are 33 holders of common stock of the Company.
DIVIDENDS
We have not paid dividends to date on our stock and do not anticipate paying
any cash dividends on our stock in the foreseeable future. We are a holding
company that is dependent on distributions from our subsidiaries to meet our
cash requirements. The terms of the bank credit facility and senior subordinated
note indenture restrict the ability of DeCrane Aircraft to make distributions to
us and, consequently, will restrict our ability to pay dividends on the stock.
Also, holders of the warrants will not have the right to receive any dividends
so long as their warrants are unexercised.
RECENT SALE OF UNREGISTERED SECURITIES
You may reference Note 13 in the Notes to Consolidated Financial Statements
for a description of all unregistered securities sold by us in 1999.
15
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,(1)
--------------------------------------------------------------------------
EIGHT MONTHS FOUR MONTHS
ENDED ENDED
AUGUST 31, DECEMBER 31,
1995 1996 1997 1998 1998 1999
-------- -------- -------- ------------- ------------- ---------
(PREDECESSOR)(2)
STATEMENT OF OPERATIONS DATA:
Revenues............................................. $55,839 $ 65,099 $108,903 $ 90,077 $ 60,356 $ 244,048
Cost of sales(3)..................................... 43,463 49,392 80,247 60,101 42,739 165,871
------- -------- -------- -------- --------- ---------
Gross profit......................................... 12,376 15,707 28,656 29,976 17,617 78,177
Selling, general and administrative expenses(4)...... 9,426 10,747 15,756 19,351 10,274 40,803
Amortization of intangible assets.................... 1,115 709 905 1,347 3,148 13,073
------- -------- -------- -------- --------- ---------
Operating income..................................... 1,835 4,251 11,995 9,278 4,195 24,301
Interest expense..................................... 3,821 4,248 3,154 2,350 6,867 27,903
Terminated debt offering expenses.................... -- -- -- 600 -- --
Other expenses (income), net......................... 382 108 243 247 335 (199)
------- -------- -------- -------- --------- ---------
Income (loss) before provision for income taxes and
extraordinary item................................. (2,368) (105) 8,598 6,081 (3,007) (3,403)
Provision for income taxes (benefit)(5).............. 1,078 712 3,344 2,892 (2,668) 952
------- -------- -------- -------- --------- ---------
Income (loss) before extraordinary item.............. (3,446) (817) 5,254 3,189 (339) (4,355)
Extraordinary loss from debt refinancing(6).......... -- -- (2,078) -- (2,229) --
------- -------- -------- -------- --------- ---------
Net income (loss).................................... $(3,446) $ (817) $ 3,176 $ 3,189 $ (2,568) $ (4,355)
======= ======== ======== ======== ========= =========
OTHER FINANCIAL DATA:
Cash flows from operating activities................. $ 1,457 $ 2,958 $ 4,641 $ 3,014 $ 1,008 $ 15,200
Cash flows from investing activities................. (1,462) (24,016) (27,809) (87,378) (186,939) (152,774)
Cash flows from financing activities................. 41 21,051 22,957 89,871 189,268 142,052
EBITDA(7)............................................ 5,471 7,602 16,915 13,743 13,476 56,526
EBITDA margin(8)..................................... 9.8% 11.7% 15.5% 15.3% 22.3% 23.2%
Depreciation and amortization(9)..................... $ 3,636 $ 3,351 $ 4,920 $ 4,358 $ 4,604 $ 19,186
Capital expenditures:
Paid in cash(10)................................... 1,203 5,821 3,842 1,745 1,813 7,262
Financed with capital lease obligations............ 33 414 182 116 48 1,711
Ratio of earnings to fixed charges(11)............... -- 1.0x 3.3x 3.0x -- --
OTHER OPERATING DATA:
Bookings(12)......................................... $50,785 $ 81,914 $112,082 $ 94,439 $ 54,021 $ 252,100
Backlog at end of period(13)......................... 19,761 44,433 49,005 84,184 75,388 156,100
AS OF DECEMBER 31,(1)
-----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- ---------
(PREDECESSOR)(2)
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 305 $ 320 $ 206 $ 3,518 $ 7,918
Working capital............................................. 12,583 10,486 24,772 46,227 29,249
Total assets................................................ 36,329 69,266 99,137 330,575 525,736
Total debt(14).............................................. 24,672 42,250 38,838 186,765 315,651
Mandatorily redeemable preferred stock and common stock
warrants.................................................. 1,633 6,879 -- 35,884 41,178
Stockholders' equity (deficit).............................. (1,697) 1,236 39,527 61,879 65,063
See accompanying Notes to Selected Consolidated Financial Data.
16
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
(1) Reflects the results of operations and financial position of companies we
acquired for all periods subsequent to their respective acquisition dates
as follows:
- -the remaining 25% minority interest in Cory
Components--February 20, 1996;
- -Aerospace Display Systems--September 18,
1996;
- -Elsinore Engineering--December 5, 1996;
- -Audio International--November 14, 1997;
- -Avtech--June 26, 1998;
- -Dettmers--June 30, 1998;
- -PATS--January 22, 1999;
- -PPI--April 23, 1999;
- -Custom Woodwork--August 5, 1999;
- -PCI NewCo--October 6, 1999;
- -International Custom Interiors--October 8,
1999; and
- -Infinity--December 17, 1999.
(2) Reflects DeCrane Aircraft's results of operations and financial position
prior to (predecessor) the DLJ acquisition.
(3) Includes non-cash charges to reflect:
- cost of sales based on the fair value of inventory acquired of
$4.4 million for the four months ended December 31, 1998 in connection
with the DLJ acquisition and $1.6 million for the twelve months ended
December 31, 1999 in connection with the PPI and Custom Woodworks
acquisitions, collectively referred to as non-cash acquisition charges;
and
- an inventory write-down of $6.0 million for the twelve months ended
December 31, 1999 related to restructuring the operations of two of our
subsidiaries.
(4) Reflects $3.6 million of non-capitalized transaction costs associated with
the DLJ acquisition in August 1998 and a $3.9 million charge related to
restructuring the operations of two of subsidiaries, $1.3 million of which
was a non-cash asset impairment write-down.
(5) Prior to the acquisition of the remaining 25% minority interest in Cory
Components in 1996, DeCrane Aircraft did not consolidate the earnings of
Cory Components for tax purposes. As such, despite a consolidated pre-tax
loss in each of the years, DeCrane Aircraft recorded a provision for income
taxes from 1993 up to the date of the acquisition in 1996 which primarily
relates to Cory Components. For the four months ended December 31, 1998,
includes a $2.6 million benefit from the reduction of the deferred tax
valuation allowance.
(6) Represents:
- the write-offs, net of an income tax benefit, of deferred financing
costs, unamortized original issue discounts, a prepayment penalty and
other related expenses incurred as a result of the repayment of debt by
DeCrane Aircraft with the net proceeds from its initial public offering
in April 1997; and
- the write-offs, net of an income tax benefit, of deferred financing
costs as a result of the repayment of DeCrane Aircraft's existing
indebtedness in connection with the DLJ acquisition and the refinancing
of the bridge notes during the four months ended December 31, 1998.
(7) EBITDA equals operating income plus depreciation, amortization, the 1999
restructuring charge, DLJ advisory fees, non-cash acquisition related
charges described in Note 3 above and other non-operating costs. EBITDA is
not a measure of performance or financial condition under generally
accepted accounting principles. EBITDA is not intended to represent cash
flow from operations and should not be considered as an alternative to
income from operations or net income computed in accordance with generally
accepted accounting principles, as an indicator of our operating
performance, as an alternative to cash flow from operating activities or as
a measure of liquidity. The funds depicted by EBITDA are not available for
our discretionary use due to funding requirements for working capital,
capital expenditures, debt service, income taxes and other commitments and
contingencies. We believe that EBITDA is a standard measure of liquidity
commonly reported and widely used by analysts, investors and other
interested parties in the financial markets. However, not all companies
calculate EBITDA using the same method, and the EBITDA numbers set forth
above may not be comparable to EBITDA reported by other companies.
(8) EBITDA margin is computed by dividing EBITDA by revenues.
(9) Reflects depreciation and amortization of plant and equipment and goodwill
and other intangible assets. Excludes amortization of deferred financing
costs and debt discounts that are classified as a component of interest
expense.
(10) Includes $4.4 million for the year ended December 31, 1996 related to our
acquisition of a manufacturing facility.
(11) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent net income before income taxes, minority interests in
the income of majority-owned subsidiaries, cumulative effect of an
accounting change, extraordinary items and fixed charges. Fixed charges
consist of:
- interest, whether expensed or capitalized;
- amortization of debt expense and discount or premium relating to any
indebtedness, whether expensed or capitalized; and
- one-third of rental expenses under operating leases which is considered
to be a reasonable approximation of the interest portion of such
expense.
There were deficiencies of earnings to cover fixed charges for the year
ended December 31, 1995, the four months ended December 31, 1998 and the
year ended December 31, 1999 of $2.3 million, $2.9 million and
$3.2 million, respectively.
(12) Bookings represent the total invoice value of purchase orders received
during the period.
(13) Orders are generally subject to cancellation by the customer prior to
shipment. The level of unfilled orders at any given date during the year
will be materially affected by the timing of DeCrane Aircraft's receipt of
orders and the speed with which those orders are filled.
(14) Total debt is defined as long-term debt, including current portion, and
short-term borrowings.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
THE FOLLOWING DISCUSSIONS SHOULD BE READ IN CONJUNCTION WITH OUR
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS
REPORT.
DeCrane Holdings is a holding company and does not have any material
operations other than its ownership of all of the capital stock of DeCrane
Aircraft. As described in Note 2 of our financial statements included in this
report, DeCrane Aircraft is the predecessor of DeCrane Holdings, and the
financial information presented for periods prior to the DLJ acquisition is for
DeCrane Aircraft.
OVERVIEW
Our financial position and results of operations have been affected by our
history of acquisitions. Since our formation in 1989, we have completed
seventeen acquisitions of businesses or assets. As a result, our historical
financial statements do not reflect the financial position and results of
operations of our current businesses. Our most recent acquisitions, which affect
the comparability of the historical financial statements included herein,
consist of:
CABIN MANAGEMENT GROUP
- Audio International, acquired on November 14, 1997;
- Dettmers, acquired on June 30, 1998;
- PPI, acquired on April 23, 1999;
- Custom Woodwork, acquired on August 5, 1999;
- PCI NewCo, acquired on October 6, 1999;
- International Custom Interiors, acquired on October 8, 1999; and
- The Infinity Partners, acquired on December 17, 1999.
SPECIALTY AVIONICS GROUP
- Avtech, acquired on June 26, 1998;
SYSTEMS INTEGRATION GROUP
- PATS, acquired on January 22, 1999;
Our historical financial statements reflect the financial position and
results of operations of the acquired businesses subsequent to their respective
acquisition dates. Additionally, our capital structure was significantly altered
in August 1998 by the financing obtained to fund the tender offer for our stock
in conjunction with our acquisition by DLJ.
THE DLJ ACQUISITION AND FINANCING
In August 1998, DeCrane Holdings and its two subsidiaries, an acquisition
subsidiary and a financing subsidiary, completed a successful $186.3 million
cash tender offer for all of the shares of DeCrane Aircraft. DeCrane Holdings
was organized by DLJ Merchant Banking II, L.P. and several of its affiliates.
The funds for the tender offer and the refinancing of DeCrane Aircraft's
existing debt were obtained from the sale of equity by DeCrane Holdings and the
issuance of debt by its finance subsidiary. DeCrane Holdings received an initial
capital contribution of approximately $99.0 million from the sale of its
preferred and common stock and warrants to DLJ Merchant Banking. DeCrane
Holdings used these funds to capitalize its finance subsidiary. The finance
subsidiary then entered into a $130.0 million syndicated bank credit facility
with a group of lenders led by DLJ Capital Funding, Inc. and issued $100.0
million of senior subordinated increasing rate bridge notes to DLJ Bridge
Finance Inc. The finance subsidiary capitalized the acquisition subsidiary with
the funds necessary to complete the tender offer.
Upon completion of the tender offer, the acquisition and finance
subsidiaries were merged into DeCrane Aircraft, and DeCrane Aircraft's existing
debt was repaid. As a result of the mergers, DeCrane Aircraft became a
wholly-owned subsidiary of DeCrane Holdings, and the bank credit facility and
bridge
18
notes became obligations of DeCrane Aircraft. In October 1998, DeCrane Aircraft
refinanced the bridge notes with the proceeds from the sale of 12% senior
subordinated notes.
The gross purchase price for DeCrane Aircraft's shares and options was
$186.3 million. Assets acquired and liabilities assumed have been recorded at
their estimated fair values based on an independent appraisal and, accordingly,
historical values were increased as follows: $4.4 million for inventory; $2.6
million for fixed assets; and $50.0 million to certain identifiable intangible
assets. The excess of the purchase price over the fair value of the net assets
acquired totaling $70.0 million was allocated to goodwill. The increase in
inventory value was expensed as the inventory was sold during the four months
ended December 31, 1998. The intangible assets, other than goodwill, are being
amortized on a straight-line basis over periods between five and fifteen years.
Goodwill is being amortized on a straight-line basis over a period of thirty
years.
In connection with the DLJ acquisition, DeCrane Holdings raised
approximately $99.0 million through its sale of common stock, preferred stock,
and warrants. The proceeds of those sales were contributed to the paid-in
capital of DeCrane Aircraft. The DeCrane Holdings preferred stock provides for
cumulative dividends that do not require payment in cash through 2003, but will
be payable in cash thereafter and will be mandatorily redeemable in 2009. The
DeCrane Holdings preferred stock is exchangeable into debentures that will
contain customary covenants and events of default, including covenants that
limit the ability of DeCrane Holdings and its subsidiaries to incur debt, pay
dividends and acquire or make equity investments in other companies.
INDUSTRY OUTLOOK AND TRENDS
We sell our products to the corporate, commercial, retrofit, aftermarket and
military aircraft markets. Within these markets, our customers include original
manufacturers of aircraft and related electronic equipment, aircraft repair and
modification centers and commercial airlines.
The Teal Group Corporation, an industry-recognized aerospace research group,
projects delivery of 5,067 corporate aircraft between 1999 and 2008,
representing an increase of approximately 52% over the 3,326 corporate aircraft
that were delivered between 1989 and 1998. Similarly, the 1999 CURRENT MARKET
OUTLOOK, released by The Boeing Company in June 1999, projects that the world
jetliner fleet will grow from 12,600 aircraft at the end of 1998 to 19,100
aircraft by 2008, and to 28,400 aircraft by 2018. The Boeing report also
projects that, between 1999 and 2008, the commercial aircraft industry will
require 8,900 new commercial aircraft, and between 2009 and 2018, it will
require an additional 11,250 new aircraft, both to support the projected world
fleet expansion and to replace capacity lost as aircraft are removed from
commercial airline service.
Boeing has, however, announced production cutbacks in several of its lines
for 2000 and 2001. Our sales to Boeing, our largest customer, have decreased due
to a number of factors at the manufacturer and the overall commercial aircraft
industry. For example, Boeing deliveries of its 747, 767 and 777 airplanes have
declined due to the recent financial difficulties of many Asian carriers. We
believe that over the next two years, Boeing's commercial aircraft deliveries
will stabilize at about 490 aircraft, a decline from the record level of 620
aircraft in 1999. As a result, we expect short-term demand for our commercial
aircraft products to be lower than in previous years, with recovery in the
longer term.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
THE RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 REFLECTS THE
COMBINED HISTORICAL RESULTS FOR THE EIGHT MONTHS ENDED AUGUST 31, 1998
(PREDECESSOR) AND THE FOUR MONTHS ENDED DECEMBER 31, 1998.
19
REVENUES. Revenues increased $93.6 million, or 62.2%, to $244.0 million for
the year ended December 31, 1999 from $150.4 million for the year ended
December 31, 1998 as follows:
INCREASE (DECREASE)
FROM 1998
------------------------
AMOUNT PERCENT
------------- --------
(IN MILLIONS)
Cabin Management............................................ $50.7 33.7%
Specialty Avionics.......................................... 7.5 5.0
Systems Integration......................................... 35.9 23.9
Inter-group eliminations.................................... (0.5) (0.4)
----- ----
Total................................................... $93.6 62.2%
===== ====
CABIN MANAGEMENT. Revenues increased by $50.7 million, or 215.7% over the
prior year, due to:
- the inclusion of $42.8 million of revenues resulting from our acquisitions
of Dettmers, PPI Holdings, Custom Woodwork, PCI NewCo and International
Custom Interiors; and
- a $7.9 million increase in entertainment and cabin management product
revenues primarily related to volume growth.
SPECIALTY AVIONICS. Revenues increased by $7.5 million, or 7.2% over the
prior year, due to:
- the inclusion of $15.2 million of revenues resulting from our acquisition
of Avtech; offset by
- a $7.7 million decrease in revenues due to weak demand for our commercial
aircraft products.
SYSTEMS INTEGRATION. Revenues increased by $35.9 million, or 158.8% over
the prior year, due to:
- the inclusion of $41.3 million of revenues resulting from our acquisition
of PATS; offset by
- a $5.4 million decrease in revenues due to a decline in revenues from our
other products and services.
GROSS PROFIT. Gross profit increased $30.6 million, or 64.0%, to
$78.2 million for the year ended December 31, 1999. Gross profit as a percent of
revenues increased to 32.0% for the year ended December 31, 1999 from 31.6% for
the same period last year. The groups contributed to the increase in gross
profit as follows:
INCREASE (DECREASE)
FROM 1998
------------------------
AMOUNT PERCENT
------------- --------
(IN MILLIONS)
Cabin Management............................................ $18.8 39.5%
Specialty Avionics.......................................... 5.0 10.5
Systems Integration......................................... 6.8 14.0
----- ----
Total................................................... $30.6 64.0%
===== ====
CABIN MANAGEMENT. Gross profit increased by $18.8 million, or 163.5% over
the prior year, due to:
- the inclusion of $15.1 million of gross profit resulting from our
acquisitions of Dettmers, PPI Holdings, Custom Woodwork, PCI NewCo and
International Custom Interiors; and
- a $3.7 million increase related to revenue growth in our entertainment and
cabin management product revenues.
SPECIALTY AVIONICS. Gross profit increased by $5.0 million, or 15.7% over
the prior year, due to:
- the inclusion of $9.5 million of gross profit resulting from our
acquisition of Avtech; offset by
- a $4.5 million decrease in gross profit due to weak demand for our
commercial aircraft products.
SYSTEMS INTEGRATION. Gross profit increased by $6.8 million, or 161.9% over
the prior year, due to:
- the inclusion of $14.2 million of gross profit resulting from our
acquisition of PATS; offset by
20
- a $6.0 million decrease related to the write down of inventories resulting
from the restructuring; and
- a $1.4 million decrease in gross profit due to a decline in revenues from
our other products and services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $11.2 million, or 37.8%, to $40.8 million for
the year ended December 31, 1999, from $29.6 million for the same period last
year. SG&A expenses as a percent of revenues decreased to 16.7% for the year
ended December 31, 1999 compared to 19.7% for the same period last year. The
groups contributed to the increase in SG&A as follows:
INCREASE (DECREASE)
FROM 1998
------------------------
AMOUNT PERCENT
------------- --------
(IN MILLIONS)
Cabin Management............................................ $ 2.5 8.4%
Specialty Avionics.......................................... 3.1 10.5
Systems Integration......................................... 7.5 25.3
Corporate................................................... (1.9) (6.4)
----- ----
Total................................................... $11.2 37.8%
===== ====
CABIN MANAGEMENT. SG&A expenses increased by $2.5 million, or 41.7% over
the prior year, due to our acquisitions of Dettmers, PPI Holdings, Custom
Woodwork, PCI NewCo and International Custom Interiors.
SPECIALTY AVIONICS. SG&A expenses increased by $3.1 million, or 31.0% over
the prior year, due to our acquisition of Avtech.
SYSTEMS INTEGRATION. SG&A expenses increased by $7.5 million, or 174.4%
over the prior year, due to:
- the inclusion of $4.8 million of SG&A expenses resulting from our
acquisition of PATS; and
- a $3.9 million restructuring charge; offset by
- a $1.2 million decrease in other selling, general and administrative
expenses.
CORPORATE. SG&A expenses decreased by $1.9 million, or 20.4% over the prior
year, due to:
- non-capitalizable tender offer expenses resulting from our acquisition by
DLJ of $3.6 million recorded in 1998; partially offset by
- a $1.7 million increase in other corporate expenses including
$0.7 million for marketing and $0.6 million for non-capitalized
acquisition costs.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased $10.2 million, or 114.1%, for the year ended December 31,
1999. The groups contributed to the increase in depreciation and amortization
expense as follows:
INCREASE (DECREASE)
FROM 1998
------------------------
AMOUNT PERCENT
------------- --------
(IN MILLIONS)
Cabin Management............................................ $ 2.3 26.2%
Specialty Avionics.......................................... 4.2 46.8
Systems Integration......................................... 3.5 39.0
Corporate................................................... 0.2 2.1
----- -----
Total................................................... $10.2 114.1%
===== =====
CABIN MANAGEMENT. Depreciation and amortization expense increased by
$2.3 million, or 195.7% over the prior year, due to our acquisitions of
Dettmers, PPI Holdings, Custom Woodwork, PCI NewCo and International Custom
Interiors.
21
SPECIALTY AVIONICS. Depreciation and amortization expense increased by
$4.2 million, or 62.8% over the prior year, due to our acquisition of Avtech.
SYSTEMS INTEGRATION. Depreciation and amortization expense increased by
$3.5 million, or 356.4% over the prior year, due to our acquisition of PATS.
CORPORATE. Depreciation and amortization expense increased by
$0.2 million, or 185.4% over the prior year, due to goodwill recorded from the
DLJ acquisition.
OPERATING INCOME (LOSS). Operating income increased $10.8 million to
$24.3 million, or 80.0%, for the year ended December 31, 1999, from
$13.5 million for the same period last year. Operating income as a percent of
revenues increased to 10.0% for the year ended December 31, 1999, from 9.0% for
the same period last year. The groups contributed to the increase in operating
income as follows:
INCREASE (DECREASE)
FROM 1998
------------------------
AMOUNT PERCENT
------------- --------
(IN MILLIONS)
Cabin Management............................................ $14.4 106.7%
Specialty Avionics.......................................... (2.5) (18.5)
Systems Integration......................................... (3.2) (23.7)
Corporate................................................... 2.1 15.5
----- -----
Total................................................... $10.8 80.0%
===== =====
CABIN MANAGEMENT. Operating income increased by $14.4 million, or 313.0%
over the prior year, due to:
- the inclusion of $11.4 million of operating income resulting from our
acquisitions of Dettmers, PPI Holdings, Custom Woodwork, PCI NewCo and
International Custom Interiors; and
- a $3.0 million increase related to higher unit sales for entertainment and
cabin management products.
SPECIALTY AVIONICS. Operating income decreased by $2.5 million, or 13.3%
over the prior year, due to:
- a $5.4 million decrease in operating income related to weakened demand for
our commercial aircraft products; offset by
- the inclusion of $2.9 million of operating income resulting from our
acquisition of Avtech.
SYSTEMS INTEGRATION. Operating income decreased by $3.2 million, or 533.3%
over the prior year, due to:
- a $10.5 million decrease in operating income related to existing systems
integration products including a restructuring charge of $9.9 million;
offset by
- the inclusion of $7.3 million of operating income resulting from our
acquisition of PATS.
CORPORATE. Operating loss decreased by $2.1 million, or 22.6% over the
prior year, primarily due to a charge in 1998 related to non-capitalizable
tender offer expenses resulting from our acquisition by DLJ.
INTEREST EXPENSE. Interest expense increased $18.7 million to
$27.9 million for the year ended December 31, 1999, from $9.2 million for the
same period last year. Interest expense increased:
- $16.1 million due to higher debt levels associated with the DLJ
acquisition and our acquisition of companies during 1999; and
- $2.6 million due to higher average interest rates incurred during 1999
primarily due to higher margins charged by our lenders on our debt.
PROVISION FOR INCOME TAXES. The provision for income taxes differs from the
amount determined by applying the applicable U.S. statutory federal rate to the
income (loss) before income taxes primarily due to the effects of state and
foreign income taxes and non-deductible expenses, principally goodwill
amortization. The difference in the effective tax rates between periods is
mostly a result of higher goodwill amortization.
22
NET INCOME. Net income decreased $5.0 million to a net loss of
$4.4 million for the year ended December 31, 1999 compared to net income of
$.6 million for the same period in 1998.
BOOKINGS AND BACKLOG. Bookings increased $103.6 million, or 69.8%, to
$252.1 million for the year ended December 31, 1999 compared to $148.5 million
for the same period in 1998. The increase in bookings for 1999 were primarily
due to:
- $94.5 million associated with companies we acquired in 1999; and
- $9.1 million related to other businesses.
Backlog increased $80.7 million to $156.1 million as of December 31, 1999
compared to $75.4 million as of December 31, 1998. The increase in backlog for
1999 includes:
- $72.6 million attributable to existing order backlog for companies we
acquired during 1999; and
- a net $8.1 million increase occurring during 1999 representing an increase
in demand for our products.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
THE RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 REFLECTS THE
COMBINED HISTORICAL RESULTS FOR THE EIGHT MONTHS ENDED AUGUST 31, 1998
(PREDECESSOR) AND THE FOUR MONTHS ENDED DECEMBER 31, 1998.
REVENUES. Revenues increased $41.5 million, or 38.1%, to $150.4 million for
the year ended December 31, 1998 from $108.9 million for the year ended
December 31, 1997 as follows:
INCREASE (DECREASE)
FROM 1997
------------------------
AMOUNT PERCENT
------------- --------
(IN MILLIONS)
Cabin Management............................................ $22.2 20.4%
Specialty Avionics.......................................... 19.3 17.8
Systems Integration......................................... (0.4) (0.6)
Inter-group eliminations.................................... 0.4 0.5
----- ----
Total................................................... $41.5 38.1%
===== ====
CABIN MANAGEMENT. Revenues increased by $22.2 million, or 1,707.7% over the
prior year, due to the inclusion of revenues resulting from our acquisition of
Audio, which was acquired in November 1997, and Dettmers, which was acquired in
June 1998.
SPECIALTY AVIONICS. Revenues increased by $19.3 million, or 22.5% over the
prior year, due to:
- the inclusion of $25.2 million of revenues resulting from our acquisition
of Avtech; offset by
- a decrease in revenues of $5.9 million due to lower unit sales for
electrical contacts compared to the prior year.
SYSTEM INTEGRATION. Revenues decreased by $0.4 million, or 1.7% over the
prior year, due to lower unit sales for our products.
GROSS PROFIT. Gross profit increased $18.9 million, or 65.9%, to $47.6
million for the year ended December 31, 1998 from $28.7 million for the year
ended December 31, 1997. Gross profit as a percent of
23
revenues increased to 31.6% for the year ended December 31, 1998 from 26.4% for
the year ended December 31, 1997. The groups contributed to the increase in
gross profit as follows:
INCREASE (DECREASE)
FROM 1997
------------------------
AMOUNT PERCENT
------------- --------
(IN MILLIONS)
Cabin Management............................................ $10.9 38.0%
Specialty Avionics.......................................... 7.6 26.5
Systems Integration......................................... 0.4 1.4
----- ----
Total................................................... $18.9 65.9%
===== ====
CABIN MANAGEMENT. Gross profit increased by $10.9 million, or 1,816.7% over
the prior year, due to:
- the inclusion of $10.3 million of gross profit resulting from our
acquisitions of Audio and Dettmers; and
- a $.6 million increase related to revenue for entertainment and cabin
management products.
SPECIALTY AVIONICS. Gross profit increased by $7.6 million, or 31.3% over
the prior year, due to:
- the inclusion of $9.6 million of gross profit resulting from our
acquisition of Avtech; offset by
- a $2.0 million decrease in gross profit related to lower commercial
aircraft product revenues.
SYSTEMS INTEGRATION. Gross profit increased by $0.4 million, or 10.5% over
the prior year, related to lower unit cost for our products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $13.8 million, or 87.3%, to $29.6 million for
the year ended December 31, 1998 from $15.8 million for the year ended
December 31, 1997. SG&A expenses as a percent of revenues increased to 19.7% for
the year ended December 31, 1998 from 14.5% for the year ended December 31,
1997. The groups contributed to the increase in SG&A as follows:
INCREASE (DECREASE)
FROM 1997
------------------------
AMOUNT PERCENT
------------- --------
(IN MILLIONS)
Cabin Management............................................ $ 5.5 34.8%
Specialty Avionics.......................................... 2.0 12.6
Systems Integration......................................... 0.5 3.2
Corporate................................................... 5.8 36.7
----- ----
Total................................................... $13.8 87.3%
===== ====
CABIN MANAGEMENT. SG&A expenses increased by $5.5 million, or 1,100.0% over
the prior year, due to our acquisitions of Audio and Dettmers.
SPECIALTY AVIONICS. SG&A expenses increased by $2.0 million, or 25.0% over
the prior year, due to:
- the inclusion of $4.3 million of expenses resulting from our acquisition
of Avtech, which was acquired in June 1998; offset by
- a decrease in expenses of $2.3 million related to our specialty avionics
business.
SYSTEM INTEGRATION. SG&A expenses increased $.5 million, or 13.2% over the
prior year, primarily due to facility relocation costs.
CORPORATE. SG&A expenses increased $5.8 million, or 165.7% over the prior
year, as follows:
- $3.6 million of terminated debt costs,
- $2.2 million of other administrative costs.
24
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased $4.0 million, or 82.1% for the year ended December 31, 1998.
The groups contributed to the increase in depreciation and amortization expense
as follows:
INCREASE (DECREASE)
FROM 1997
------------------------
AMOUNT PERCENT
------------- --------
(IN MILLIONS)
Cabin Management............................................ $1.1 22.1%
Specialty Avionics.......................................... 2.6 53.2
Systems Integration......................................... .3 6.3
Corporate................................................... 0.0 0.5
---- ----
Total................................................... $4.0 82.1%
==== ====
CABIN MANAGEMENT. Depreciation and amortization expense increased by
$1.1 million, or 981.1% over the prior year, due to our acquisitions of Audio
and Dettmers.
SPECIALTY AVIONICS. Depreciation and amortization expense increased by
$2.6 million, or 64.5% over the prior year, due to our acquisitions of Avtech.
SYSTEM INTEGRATION. Depreciation and amortization expense increased
$0.3 million, or 46.1% over the prior year, primarily due to goodwill recorded
from the DLJ acquisition.
OPERATING INCOME. Operating income increased $1.5 million, or 12.5%, to
$13.5 million for the year ended December 31, 1998 from $12.0 million for the
year ended December 31, 1997. Operating income as a percent of revenues
decreased to 9.0% for the year ended December 31, 1998 from 11.0% for the year
ended December 31, 1997. The groups contributed to the increase in operating
income as follows:
INCREASE (DECREASE)
FROM 1997
------------------------
AMOUNT PERCENT
------------- --------
(IN MILLIONS)
Cabin Management............................................ $ 4.7 39.2%
Specialty Avionics.......................................... 2.6 21.7
Systems Integration......................................... (0.5) (4.2)
Corporate................................................... (5.3) (44.2)
----- -----
Total................................................... $ 1.5 12.5%
===== =====
The $1.5 million increase included:
- an overall $13.0 million increase in operating income, including
$12.0 million from our acquisitions of Audio International, Avtech and
Dettmers; offset by
- a $4.3 million charge for the portion of the DLJ purchase price allocated
to inventory and charged to cost of sales;
- a $3.6 million increase in amortization expense associated with
acquisitions, including the DLJ acquisition; and
- a $3.6 million charge for non-capitalizable costs associated with the DLJ
acquisition.
INTEREST EXPENSE. Interest expense increased $6.0 million, or 187.5%, to
$9.2 million for the year ended December 31, 1998 from $3.2 million for the year
ended December 31, 1997. This increase resulted primarily from the higher debt
levels associated with the DLJ acquisition.
PROVISION FOR INCOME TAXES. During the year ended December 31, 1998, we
decreased our provision for income taxes by $3.2 million to $0.2 million from
$3.4 million for the year ended December 31, 1997, as a result of lower income
before taxes and the reduction of our deferred tax asset valuation allowance by
$2.6 million. This decrease was significantly offset by an increase in
non-deductible expenses, particularly the amortization of intangible assets,
during the same period. We have approximately $17.4 million and $0.6 million in
loss carry forwards available at December 31, 1998 for federal and state income
tax purposes.
25
EXTRAORDINARY LOSS FROM DEBT REFINANCING. During the year ended
December 31, 1998, we incurred a $2.2 million extraordinary charge, net of an
estimated $1.5 million income tax benefit, as a result of the refinancing of the
bridge notes with a units offering consisting of notes and warrants. During the
year ended December 31, 1997, we incurred a $2.1 million extraordinary charge,
net of an estimated $1.4 million income tax benefit, as a result of a debt
refinancing with the proceeds from our initial public offering.
NET INCOME. Net income decreased $2.6 million to $0.6 million for the year
ended December 31, 1998 compared to $3.2 million for the same period in 1997
primarily due to the higher amortization, interest and other expenses associated
with the DLJ acquisition.
BOOKINGS AND BACKLOG. Bookings increased $36.4 million, or 32.5%, to $148.5
million for the year ended December 31, 1998 compared to $112.1 million for the
same period in 1997. The increase in bookings for 1998 includes:
- $23.9 million attributable to Cabin Management; and
- $15.4 million attributable to Specialty Avionics.
As of December 31, 1998, we had a sales order backlog of $75.4 million
compared to $49.0 million as of December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
We have required cash primarily to fund acquisitions and, to a lesser
extent, to fund capital expenditures and for working capital. Our principal
sources of liquidity have been cash flow from operations and third party
borrowings.
For the year ended December 31, 1999, we generated $15.2 million of cash
from operating activities, which is the net of $23.4 million of cash generated
from operations after adding back depreciation, amortization and other noncash
items, and $6.5 million used for working capital and $1.7 million resulting from
a decrease in other liabilities. The following factors contributed to the
$6.5 million working capital increase:
- a net $15.4 million increase in inventory due to longer lead times
involved with production at acquired companies, and increases to meet
revenue growth; and
- the payment of $3.0 million of accrued contingent consideration incurred
in 1998.
The working capital increases were offset by:
- a $6.1 million accounts receivable decrease due to timing differences
relating to completing of projects and the associated collection;
- a net $4.9 million increase in accounts payable and accrued expenses due
to timing differences between when liabilities are incurred and when they
are paid; and
- a $0.9 million increase in income taxes payable due to higher current
taxable income.
Cash used for investing activities during the year ended December 31, 1999
consisted of $145.7 million for the PATS, PPI, Custom Woodwork, PCI NewCo,
International Custom Interiors, and Infinity acquisitions, including
$3.0 million of contingent consideration paid during 1999, and $7.2 million for
capital expenditures. We anticipate spending $11.4 million for capital
expenditures in 2000.
Net cash provided by financing activities was $142.1 million for the year
ended December 31, 1999 and was primarily used to fund our acquisitions. We
obtained these funds primarily by borrowing $135.0 million of term debt under
our senior credit facility. We also received $14.5 million in net proceeds from
the sale of additional common stock and a $5.0 million customer advance. With
these funds we purchased PATS, PPI, Custom Woodwork, PCI NewCo, International
Custom Interiors and Infinity Partners. Additionally, we used $34.7 million to
repay our revolving credit facility borrowings and to make senior term debt
principal payments.
At December 31, 1999, senior credit facility borrowings totaling
$213.2 million are at variable interest rates based on defined margins over the
current prime or Euro-Dollar rates. At December 31, 1999 we had $29.2 million of
working capital, $25.0 million of borrowings available under our working capital
senior credit facility and $25.0 million available under our acquisition senior
credit facility. We believe that the current
26
levels of working capital and amounts available under our senior credit
facilities will enable us to meet our liquidity requirements for the next twelve
months.
The DLJ acquisition and our 1999 acquisitions created substantial debt for
us, resulting in significant debt service obligations. Although we cannot be
certain, we anticipate that operating cash flow, together with borrowings under
our bank credit facility, will be sufficient to meet our future short- and
long-term operating expenses, working capital requirements, capital expenditures
and debt service obligations for the foreseeable future. However, our ability to
pay principal or interest, to refinance our debt and to satisfy our other debt
obligations will depend on our future operating performance. We will be affected
by economic, financial, competitive, legislative, regulatory, business and other
factors beyond our control. In addition, we are continually considering
acquisitions that complement or expand our existing businesses or that may
enable us to expand into new markets. Future acquisitions may require additional
debt, equity financing or both. We may not be able to obtain any additional
financing on acceptable terms.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 requires companies to record derivatives
on the balance sheet as assets or liabilities, measured at fair value. It also
requires that gains or losses resulting from changes in the values of those
derivatives be accounted for depending on the use of the derivative and whether
it qualifies for hedge accounting. Adoption of SFAS No. 133, as amended by SFAS
No. 137 in June 1999, is required for the fiscal year beginning January 1, 2001.
Management believes the adoption of SFAS No. 133 will not have a material impact
on the Company's consolidated financial position or results of operations.
SWISS FRANC FORWARD EXCHANGE CONTRACTS
Some of the contact blanks we use in the production of our contacts are
manufactured at our Swiss facility and shipped to our El Segundo, California
facility for plating and assembly. In 1997 and 1998, solely in an effort to
mitigate the effects of currency fluctuations between the U.S. Dollar and the
Swiss Franc, we entered into forward exchange contracts at fixed rates. We plan
to continue efforts to mitigate this risk in the future. We do not engage in any
currency exchange transactions for trading or speculative purposes. Realized and
unrealized gains and losses on foreign exchange contracts are recognized
currently in the consolidated statements of operations.
COMPLIANCE OF KEY SYSTEMS WITH YEAR 2000 PERFORMANCE STANDARDS
We modified our systems to be Year 2000 compliant, and as a result, we have
not experienced significant Year 2000 related problems. Our computer software
and hardware was modified or replaced to ensure Year 2000 readiness. We believe
that our significant vendors and service providers are Year 2000 compliant and
we have not, to date, been made aware that any significant vendors or service
providers have experienced Year 2000 disruptions in their systems. Accordingly,
we do not anticipate additional material expenses or operational disruptions as
a result of any Year 2000 issues.
As of January 1, 2000, costs associated with addressing the Year 2000 issued
have not been significant. The cost related primarily to the use of internal
staff to modify programs in order to achieve Year 2000 compliance. All cost were
funded from operating cash flow and, for the most part, were expensed as
incurred.
Although we have not experienced any Year 2000 problems to date, there can
be no certainty that any future unforeseen Year 2000 problem will not adversely
affect our results of operations, liquidity or financial position or adversely
affect our relationships with our customers, suppliers, vendors or others.
COMMON EUROPEAN CURRENCY
The Treaty on European Economic and Monetary Union provides for the
introduction of a single European currency, the Euro, in substitution for the
national currencies of the member states of the European Union that adopt the
Euro. In May 1998, the European Council determined the 11 member states that met
the requirement for the Monetary Union and the currency exchange rates among the
currencies for the member states joining the Monetary Union. The transitory
period for the Monetary Union started on
27
January 1, 1999. According to the European Council Resolution of July 7, 1997,
the transition will be made in three steps, beginning with a transition period
from January 1, 1999 to December 31, 2001, in which currency accounts may be
opened and financial statements may be drawn in Euros, and local currencies and
Euros will coexist. From January 1, 2002 to June 30, 2002, local currencies will
be exchanged for Euros. On July 1, 2002, local currencies are scheduled to
disappear. We could incur transitional costs as we redesign our software systems
to reflect the adoption of the new currency, but we do not expect such costs to
be material.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including interest rates and changes
in foreign currency exchange rates. Market risk is the potential loss arising
from adverse changes in market rates and prices, such as interest rates and
foreign currency exchange rates. From time to time we use derivative financial
instruments to manage and reduce risks associated with these factors. We do not
enter into derivatives or other financial instruments for trading or speculative
purposes.
INTEREST RATE RISK. A significant portion of our capital structure is
comprised of long-term variable- and fixed-rate debt.
Market risk related to our variable-rate debt is estimated as the potential
decrease in pre-tax earnings resulting from an increase in interest rates. The
interest rates applicable to variable-rate debt are, at our option, based on
defined margins over the current prime or Euro-Dollar rates. At December 31,
1999, the current prime rate was 8.25% and the current Euro-Dollar rate was
6.49%. Based on $213.2 million of variable-rate debt outstanding as of December
31, 1999, a hypothetical one percent rise in interest rates, to 9.25% for prime
rate borrowings and 7.49% for Euro-Dollar borrowings, would reduce our pre-tax
earnings by $2.1 million annually. Prior to December 31, 1997, we purchased
interest rate cap contracts to limit our exposure related to rising interest
rates on our variable-rate debt. While we have not entered into similar
contracts since that date, we may do so in the future depending on our
assessment of future interest rate trends.
The estimated fair value of our $100.0 million fixed-rate long-term debt is
approximately $92,000,000 at December 31, 1999. Market risk related to our
fixed-rate debt is deemed to be the potential increase in fair value resulting
from a decrease in interest rates. For example, a hypothetical ten percent
decrease in the interest rates, from 12.0% to 10.8%, would increase the fair
value of our fixed-rate debt by approximately $7.0 million.
FOREIGN CURRENCY EXCHANGE RATE RISK. Our foreign customers are located in
various parts of the world, primarily Western Europe, the Far East and Canada,
and two of our subsidiaries operate in Western Europe. To limit our foreign
currency exchange rate risk related to sales to our customers, orders are
primarily valued and sold in U.S. dollars. From time to time we have entered
into forward foreign exchange contracts to limit our exposure related to foreign
inventory procurement and operating costs. However, while we have not entered
into any such contracts during the twelve months ended December 31, 1999 and no
such contracts are open as of that date, we may do so in the future depending on
our assessment of future foreign exchange rate trends.
28
ITEM 8. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE
--------
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants........................... 30
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... 32
Consolidated Statements of Operations for the year ended
December 31, 1997 (predecessor), the eight months ended
August 31, 1998 (predecessor), the four months ended
December 31, 1998 and the year ended December 31, 1999.... 33
Consolidated Statements of Stockholders' Equity for the year
ended December 31, 1997 (predecessor), the eight months
ended August 31, 1998 (predecessor), the four months ended
December 31, 1998 and the year ended December 31, 1999.... 34
Consolidated Statements of Cash Flows for the year ended
December 31, 1997 (predecessor), the eight months ended
August 31, 1998 (predecessor), the four months ended
December 31, 1998 and the year ended December 31, 1999.... 36
Notes to Consolidated Financial Statements.................. 37
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
For the year ended December 31, 1997 (predecessor), the
eight months ended August 31, 1998 (predecessor), the
four months ended December 31, 1998 and the year
ended December 31, 1999
II -- Valuation and Qualifying Accounts................. 74
All other schedules are omitted because they are either not applicable or
the required information is shown in the consolidated financial statements or
notes thereto.
29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
DeCrane Holdings Co.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of DeCrane Holdings Co. and its subsidiary at December 31, 1998 and
1999 and the results of their operations and their cash flows for the four
months ended December 31, 1998 and the year ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
In addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. 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 of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audits 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
March 3, 2000
30
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
DeCrane Aircraft Holdings, Inc.
In our opinion, the consolidated statements listed in the accompanying index
present fairly, in all material respects, the results of operations and their
cash flows of DeCrane Aircraft Holdings, Inc. and its subsidiaries for the year
ended December 31, 1997 and the eight months ended August 31, 1998, in
conformity with accounting principles generally accepted in the United States.
In addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. 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 of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audits 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
March 3, 2000
31
DECRANE HOLDINGS CO. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
---------------------
1998 1999
---------- --------
ASSETS
Current assets
Cash and cash equivalents................................. $ 3,518 $ 7,918
Accounts receivable, net.................................. 30,441 39,580
Inventories............................................... 34,281 58,721
Deferred income taxes..................................... 4,300 5,592
Prepaid expenses and other current assests................ 3,897 2,114
-------- --------
Total current assets.................................... 76,437 113,925
Property and equipment, net................................. 28,160 37,700
Other assets, principally intagibles, net................... 225,978 374,111
-------- --------
Total assets.......................................... $330,575 $525,736
======== ========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings..................................... $ 283 $ --
Current portion of long-term debt......................... 1,529 5,070
Accounts payable.......................................... 6,383 14,948
Accrued liabilities....................................... 18,272 61,082
Income taxes payable...................................... 3,743 3,576
-------- --------
Total current liabilities............................... 30,210 84,676
-------- --------
Long-term debt.............................................. 184,953 310,581
Deferred income taxes....................................... 16,990 21,249
Other long-term liabilities................................. 659 2,989
Commitments and contingencies (Note 15)
Mandatorily redeemable preferred stock...................... 35,884 41,178
-------- --------
Stockholders' equity
Undesignated preferred stock, $.01 par value, 1,140,000
shares authorized;
none issued and outstanding as of December 31, 1998 and
1999.................................................... -- --
Common stock, $.01 par value, 4,500,000 shares authorized;
2,846,185 and 3,571,827 shares issued and outstanding as
of December 31, 1998 and 1999, respectively............. 28 36
Additional paid-in capital................................ 64,497 75,944
Notes receivable for shares sold.......................... (352) (2,468)
Accumulated deficit....................................... (2,568) (6,923)
Accumulated other comprehensive income (loss)............. 274 (1,526)
-------- --------
Total stockholders' equity.............................. 61,879 65,063
-------- --------
Total liabilities, mandatorily redeemable preferred
stock and stockholders' equity...................... $330,575 $525,736
======== ========
The accompanying notes are an integral part of the financial statements.
32
DECRANE HOLDINGS CO. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(PREDECESSOR)
---------------------------
EIGHT MONTHS FOUR MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, AUGUST 31, DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999
------------ ------------ ------------ ------------
Revenues......................................... $108,903 $90,077 $60,356 $244,048
Cost of sales.................................... 80,247 60,101 42,739 165,871
-------- ------- ------- --------
Gross profit................................... 28,656 29,976 17,617 78,177
-------- ------- ------- --------
Operating expenses
Selling, general and administrative expenses... 15,756 19,351 10,274 40,803
Amortization of intangible assets.............. 905 1,347 3,148 13,073
-------- ------- ------- --------
Total operating expenses..................... 16,661 20,698 13,422 53,876
-------- ------- ------- --------
Income from operations........................... 11,995 9,278 4,195 24,301
Other expenses
Interest expense............................... 3,154 2,350 6,867 27,903
Terminated debt offering expenses.............. -- 600 -- --
Other expenses................................. 243 247 335 (199)
-------- ------- ------- --------
Income (loss) before provision (benefit) for
income taxes and extraordinary item............ 8,598 6,081 (3,007) (3,403)
Provision (benefit) for income taxes............. 3,344 2,892 (2,668) 952
-------- ------- ------- --------
Income (loss) before extraordinary item.......... 5,254 3,189 (339) (4,355)
Extraordinary loss from debt refinancing, net of
income tax benefit............................. (2,078) -- (2,229) --
-------- ------- ------- --------
Net income (loss)................................ $ 3,176 $ 3,189 $(2,568) $ (4,355)
======== ======= ======= ========
The accompanying notes are an integral part of the financial statements.
33
DECRANE HOLDINGS CO. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
CUMULATIVE OTHER
CONVERTIBLE UNDESIGNATED COMMON STOCK ADDITIONAL COMPREHENSIVE
PREFERRED PREFERRED -------------------- PAID-IN ACCUMULATED INCOME
STOCK STOCK SHARES AMOUNT CAPITAL DEFICIT (LOSS) TOTAL
----------- ------------ --------- -------- ---------- ----------- ------------- --------
PREDECESSOR
Balance, December 31,
1996..................... $ 13,850 $-- 85,593 $ 216 $-- $(12,951) $ 121 $ 1,236
-------
Comprehensive income
Net income............... -- -- -- -- -- 3,176 -- 3,176
Translation adjustment... -- -- -- -- -- -- (260) (260)
-------
2,916
-------
Delaware reorganization.... -- -- -- (215) 215 -- -- --
Adjustment to estimated
redemption value of
mandatorily redeemable
common stock warrants.... -- -- -- -- -- (2,203) -- (2,203)
Recapitalization
Conversion of preferred
stock into common
stock.................. (13,850) -- 1,941,804 19 13,831 -- -- --
Cashless exercise and
conversion of
warrants............... -- -- 524,293 6 6,097 -- -- 6,103
Cancellation of
mandatorily redeemable
common stock
warrants............... -- -- -- -- -- 1,143 -- 1,143
Initial Public Offering
Proceeds from the
offering, net.......... -- -- 2,700,000 27 28,229 -- -- 28,256
Cancellation of
mandatorily redeemable
common stock warrants
upon debt repayment and
reclassification of
warrants no longer
redeemable............. -- -- -- -- 1,836 -- -- 1,836
Common stock issued
pursuant to
anti-dilution
provisions............. -- -- 50,743 -- 609 (609) -- --
Cashless exercise of common
stock warrants........... -- -- 16,130 -- -- -- -- --
Stock option compensation
expense.................. -- -- -- -- 240 -- -- 240
-------- ------- --------- ------- ------- -------- ------- -------
Balance, December 31,
1997..................... -- -- 5,318,563 53 51,057 (11,444) (139) 39,527
Comprehensive income
Net income............... -- -- -- -- -- 3,189 -- 3,189
Translation adjustment... -- -- -- -- -- -- 94 94
-------
3,283
-------
Sale of common stock....... -- -- 2,206,177 22 34,793 -- -- 34,815
Exercise of stock
options.................. -- -- 575,692 6 8,206 -- -- 8,212
-------- ------- --------- ------- ------- -------- ------- -------
Balance, August 31, 1998... $ -- $-- 8,100,432 $ 81 $94,056 $ (8,255) $ (45) $85,837
======== ======= ========= ======= ======= ======== ======= =======
________________________________________________________________________________
The accompanying notes are an integral part of the consolidated financial
statements
34
DECRANE HOLDINGS CO. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
NOTES OTHER
UNDESIGNATED COMMON STOCK ADDITIONAL RECEIVABLE COMPREHENSIVE
PREFERRED -------------------- PAID-IN FOR SHARES ACCUMULATED INCOME
STOCK SHARES AMOUNT CAPITAL SOLD DEFICIT (LOSS) TOTAL
------------ --------- -------- ---------- ---------- ----------- ------------- --------
Initial sale of common
stock..................... $-- 2,826,087 $ 28 $64,477 $ -- $-- -- $64,505
-------
Comprehensive income........
Net income................ -- -- -- -- -- (2,568) -- (2,568)
Translation adjustment.... -- -- -- -- -- -- 274 274
-------
(2,294)
-------
Noncash dividend accretion
on mandatorily redeemable
preferred stock........... -- -- -- (1,642) -- -- -- (1,642)
Sale of preferred and common
stock and related notes
receivable issued in
connection with shares
sold...................... -- 20,098 -- 462 (352) -- -- 110
Value of warrants issued in
connection with debt
offering.................. -- -- -- 1,200 -- -- -- 1,200
------- --------- ---- ------- -------- ------- ------- -------
Balance, December 31,
1998...................... -- 2,846,185 28 64,497 (352) (2,568) 274 61,879
Comprehensive income
Net income................ -- -- -- -- -- (4,355) -- (4,355)
Translation adjustment.... -- -- -- -- -- -- (1,800) (1,800)
-------
(6,155)
-------
Compensatory stock option
expense................... -- -- -- 143 -- -- -- 143
Noncash dividend accretion
on mandatorily redeemable
preferred stock........... -- -- -- (5,294) -- -- -- (5,294)
Sale of common stock and
related notes receivable
issued in connection with
shares sold............... -- 725,642 8 16,598 (2,095) -- -- 14,511
Notes receivable interest... -- -- -- -- (21) -- -- (21)
------- --------- ---- ------- -------- ------- ------- -------
Balance, December 31,
1999...................... $-- 3,571,827 36 $75,944 $ (2,468) $(6,923) $(1,526) $65,063
======= ========= ==== ======= ======== ======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
35
DECRANE HOLDINGS CO. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(PREDECESSOR)
----------------------------
EIGHT MONTHS FOUR MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, AUGUST 31, DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999
------------ ------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)......................................... $ 3,176 $ 3,189 $ (2,568) $ (4,355)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation and amortization........................... 5,372 4,454 4,998 20,802
Noncash portion of restructuring charge................. -- -- -- 7,242
Deferred income taxes................................... (1,281) (2,339) (5,072) (380)
Extraordinary loss from debt refinancing................ 2,078 -- 2,229 --
Other, net.............................................. 654 (360) (97) 132
Changes in assets and liabilities, net of effect from
acquisitions
Accounts receivable................................... (3,159) (3,621) (2,929) 6,141
Inventories........................................... (4,956) (2,017) 4,313 (15,358)
Prepaid expenses and other assets..................... (136) (58) (562) 96
Accounts payable...................................... (361) (1,127) (1,754) 3,754
Accrued liabilities................................... (1,041) 3,524 2,250 (2,059)
Income taxes payable.................................. 4,295 1,374 108 862
Other long-term liabilities........................... -- (5) 92 (1,677)
------- ------- -------- --------
Net cash provided by operating activities........... 4,641 3,014 1,008 15,200
------- ------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisitions, net of cash acquired.......... (23,597) (85,808) (185,126) (145,706)
Capital expenditures...................................... (3,842) (1,745) (1,813) (7,262)
Other, net................................................ (370) 175 -- 194
------- ------- -------- --------
Net cash used for investing activities.............. (27,809) (87,378) (186,939) (152,774)
------- ------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Financing of DeCrane Aircraft acquisition
Proceeds from senior credit facility and bridge notes... -- -- 191,722 --
Proceeds from sale of common and mandatorily redeemable
preferred stock....................................... -- -- 99,000 --
Proceeds from stock options exercised................... -- -- 4,314 --
Repayment of existing credit facility................... -- -- (93,000) --
Financing fees and expenses............................. -- -- (11,171) --
Common stock offerings and application of net proceeds
Net proceeds from the sale of common stock.............. 28,933 34,815 -- --
Borrowings under credit facility........................ 12,312 -- -- --
Repayment of debt....................................... (42,160) (34,815) -- --
Term debt borrowings...................................... -- -- -- 135,000
Proceeds from sale of common stock........................ -- -- -- 14,511
Customer advance.......................................... -- -- -- 5,000
Deferred financing costs.................................. -- -- -- (4,348)
Net borrowings (repayments) under revolving line of credit
agreements.............................................. 26,503 91,261 (1,103) (5,800)
Principal payments on term debt, capitalized leases and
other debt.............................................. (2,770) (1,317) (458) (1,953)
Other, net................................................ 139 (73) (36) (358)
------- ------- -------- --------
Net cash provided by financing activities........... 22,957 89,871 189,268 142,052
------- ------- -------- --------
Effect of foreign currency translation on cash.............. 97 26 181 (78)
------- ------- -------- --------
Net increase (decrease) in cash and cash equivalents........ (114) 5,533 3,518 4,400
Cash and cash equivalents at beginning of period............ 320 206 -- 3,518
------- ------- -------- --------
Cash and cash equivalents at end of period.................. $ 206 $ 5,739 $ 3,518 $ 7,918
======= ======= ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
36
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND DESCRIPTION OF BUSINESS
In July 1998, DeCrane Holdings Co. (the "Company" or "DeCrane Holdings") was
incorporated as a Delaware corporation. As a result of the DLJ acquisition in
August 1998 (Note 2), DeCrane Aircraft Holdings, Inc. ("DeCrane Aircraft")
became a wholly-owned subsidiary of DeCrane Holdings. DeCrane Aircraft is the
predecessor of DeCrane Holdings, and financial information for DeCrane Aircraft
is presented for the year ended December 31, 1997 and the eight months ended
August 31, 1998. From inception through August 27, 1998, DeCrane Holdings had no
operations or cash flows. References to the "Company" include both DeCrane
Holdings and its predecessor, DeCrane Aircraft.
Through its subsidiary, DeCrane Holdings manufactures cabin management
products for the corporate aircraft market and manufactures specialty aviation
electronic components and provides systems integration services for the
corporate, commercial, retrofit, aftermarket and military markets. During 1999,
the Company reorganized its businesses into three separate operating groups:
Cabin Management, Specialty Avionics and Systems Integration.
BASIS OF PRESENTATION
DeCrane Holdings is a holding company, which has no material operations or
assets separate from its investment in DeCrane Aircraft. The consolidated
financial statements as of December 31, 1998 and 1999 and for the four months
ended December 31, 1998 and the year ended December 31, 1999 include the
accounts of DeCrane Holdings and its subsidiary. The consolidated financial
statements of the predecessor include the accounts of DeCrane Aircraft and all
wholly-owned and majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated. Certain reclassifications have
been made to prior years' financial statements to conform to the current year
presentation.
Preparation of these consolidated financial statements in conformity with
generally accepted accounting principles requires the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
INVENTORIES
Inventories are stated at the lower of cost, as determined under the
first-in, first-out ("FIFO") method, or market. Costs include materials, labor
and manufacturing overhead.
PROPERTY AND EQUIPMENT
Property and equipment for companies acquired are stated at fair value as of
the date the acquisition occurred and at cost for all subsequent additions.
Property and equipment are depreciated using the straight-line method over their
estimated useful lives. Useful lives for machinery and equipment range from two
to twenty years. Building and building improvements are depreciated using the
straight-line method over their estimated useful lives of forty years. Leasehold
improvements are amortized using the straight-line method over their estimated
useful lives or remaining lease term, whichever is less. Expenditures for
maintenance and repairs are expensed as incurred. The costs for improvements are
capitalized. Upon retirement or disposal, the cost and accumulated depreciation
of property and equipment are reduced and any gain or loss is recorded in income
or expense.
OTHER ASSETS
Goodwill is amortized on a straight-line basis over thirty years from the
date the acquisition occurred. Additional goodwill resulting from contingent
consideration payments subsequent to the acquisition date is
37
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amortized prospectively over the remaining period of the initial thirty-year
term. Other intangibles are amortized on a straight-line basis over their
estimated useful lives, ranging from five to fifteen years. Deferred financing
costs are amortized using either the straight-line or effective interest method,
over the term of the related debt.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets and certain intangible assets for
impairment when events or changes in circumstances indicate the carrying amount
of an asset may not be recoverable. In the event the sum of the expected
undiscounted future cash flows resulting from the use of the asset is less than
the carrying amount of the asset, an impairment loss equal to the excess of the
asset's carrying value over its fair value is recorded. In 1999, the Company
recorded a $1,259,000 pre-tax charge to reflect the impairment loss resulting
from the closing of a manufacturing facility (Note 5).
ACCRUED WARRANTIES
The Company sells some products to customers with various repair or
replacement warranties. The terms of the warranties vary according to the
customer and/or product involved. The most common warranty period is the earlier
of:
- 12 to 60 months from the date of delivery to the operator; or
- 42 months from the date of manufacture.
Provisions for estimated future warranty costs are made in the period
corresponding to the sale of the product and such costs have been within
management's expectations. Classification between short and long-term warranty
obligations is estimated based on historical trends.
DERIVATIVES
The Company does not use derivative financial instruments for trading
purposes but only to manage well-defined foreign exchange rate risks. Market
value gains and losses on forward foreign exchange contracts are recognized
currently in the consolidated statements of operations.
The Company enters into Swiss franc forward exchange contracts to purchase
Swiss francs as a general economic hedge against foreign inventory procurement
and manufacturing costs. Market value gains and losses on forward foreign
exchange contracts recognized in the consolidated statements of operations
aggregated a realized net gain (loss) of ($487,000), $323,000 and $146,000 for
the year ended December 31, 1997, the eight months ended August 31, 1998 and the
four months ended December 31, 1998, respectively. The Company had no open
forward exchange contracts as of December 31, 1998 and did not enter in any such
contracts during the year ended December 31, 1999.
INCOME TAXES
Deferred income taxes are determined using the liability method. A deferred
tax asset or liability is determined based on the difference between the
financial statement and tax basis of assets and liabilities as measured by the
enacted tax rates which will be in effect when these differences reverse.
Deferred tax expense is the result of changes in the deferred tax asset or
liability. If necessary, valuation allowances are established to reduce deferred
tax assets to the amount expected to be realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
All financial instruments are held for purposes other than trading. The
estimated fair value of the Company's long-term debt is based on either quoted
market prices or current rates for similar issues for debt
38
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of the same remaining maturities. The estimated fair value of the Company's
$100,000,000 senior subordinated debt is approximately $92,000,000 at December
31, 1999. All other non-derivative financial instruments as of December 31, 1999
and all non-derivative instruments as of December 31, 1998, including the senior
subordinated debt, approximate their carrying amounts either because of the
short maturity of the instrument, or based on their effective interest rates
compared to current market rates for similar long-term debt or obligations. The
estimated fair value of foreign currency forward exchange contracts is based on
quotes obtained from various financial institutions that deal in this type of
instrument.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The financial statements of the Company's U.K. and Swiss subsidiaries have
been translated into U.S. dollars from their functional currencies, pounds
sterling and Swiss francs, respectively, in the consolidated financial
statements. Assets and liabilities have been translated at the exchange rate on
the balance sheet date and income statement amounts have been translated at
average exchange rates in effect during the period. The net translation
adjustment is reflected as a component of accumulated comprehensive income or
loss within stockholder's equity.
Realized foreign currency exchange gains (losses) included in other income
or expense in the consolidated statements of operations were ($72,000) for the
year ended December 31, 1997, ($411,000) for the eight months ended August 31,
1998, ($262,000) for the four months ended December 31, 1998 and $530,000 for
the year ended December 31, 1999.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Such costs were
$1,195,000 for the eight months ended August 31, 1998, $832,000 for the four
months ended December 31, 1998 and $4,264,000 for the year ended December 31,
1999. Research and development costs were not significant for the year ended
December 31, 1997.
STOCK OPTION PLAN
As permitted under Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation," the Company measures
compensation expense related to the employee stock option plan utilizing the
intrinsic value method as prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees."
REVENUE RECOGNITION
Revenues from the sale of manufactured products, except for products
manufactured under long-term contracts, are recorded when products are shipped.
Revenues for long-term contracts are recognized under the
percentage-of-completion method using the total contract price, actual costs
incurred to date and an estimate of the completion costs. Any anticipated losses
on contracts are charged to operations when identified.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, cash equivalents include
short-term, highly liquid investments with original maturities of three months
or less.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. It also requires that gains or losses
resulting
39
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
from changes in the values of those derivatives be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting.
Adoption of SFAS No. 133, as amended by SFAS No. 137 in June 1999, is required
for the fiscal year beginning January 1, 2001. Management believes the adoption
of SFAS No. 133 will not have a material impact on the Company's consolidated
financial position, results of operations or cash flows.
NOTE 2 - THE DLJ ACQUISITION
In July 1998, a newly incorporated entity, DeCrane Holdings Co., and two
other holding companies were organized by DLJ Merchant Banking Partners II, L.P.
and affiliated funds and entities to carry out a tender offer for all the shares
of the Company's common stock, including options to purchase shares which became
immediately vested, for $23.00 per share. At the completion of the tender offer
in August 1998, the two other holding companies merged with the Company. All of
the Company's old outstanding shares were canceled and, as a result, the Company
became a wholly-owned subsidiary of DeCrane Holdings. The Company incurred
nonrecurring charges totaling $3.6 million (pre-tax) during the eight months
ended August 31, 1998 in conjunction with the transaction. This transaction,
referred to herein as the DLJ acquisition, results in a predecessor entity and a
successor entity for purposes of reporting the results of operations and cash
flows included in the accompanying financial statements.
The gross purchase price for the Company's shares and options was $186.3
million. Assets acquired and liabilities assumed have been recorded at their
estimated fair values based on an independent appraisal and, accordingly,
historical values were increased as follows:
- $4.4 million to inventory;
- $2.6 million to property and equipment; and
- $50.0 million to certain identifiable intangible assets.
The excess of the purchase price over the fair value of the net assets
acquired totaling $70.0 million was allocated to goodwill. The increase in
inventory value was expensed as the inventory was sold during the four months
ended December 31, 1998. The intangible assets, other than goodwill, are being
amortized on a straight-line basis over periods between five and fifteen years.
Goodwill is being amortized on a straight-line basis over a period of thirty
years. As a result of the tender offer, the Company terminated a debt offering
which was in process at that time and recorded a $0.6 million pre-tax charge for
the eight months ended August 31, 1998 for the estimated costs incurred.
Concurrent with the Company's acquisition by DLJ, the Company was required
to repay all of its borrowings under its then existing credit facility. In order
to fund the purchase of the shares in the tender offer, repay the credit
facility and pay expenses incurred in connection therewith, the Company:
- received a $99.0 million equity contribution from DeCrane Holdings;
- entered into a new syndicated senior secured credit facility; and
- issued $100.0 million of senior subordinated increasing rate notes
(referred to herein as the bridge notes).
In October 1998, subsequent to the Company's acquisition by DLJ and its
related financing, the bridge notes were repaid with the proceeds from the
Company's issuance of $100.0 million of 12% senior subordinated notes which were
paired in units with warrants to purchase 155,000 shares of DeCrane Holdings
common stock. In conjunction with the repayment of the Company's existing credit
facility indebtedness concurrent with the DLJ acquisition and the repayment of
the bridge notes, the Company recorded a $2.2 million extraordinary charge, net
of income tax benefit of $1.5 million, during the four months ended December 31,
1998.
40
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - ACQUISITIONS
During the three years ended December 31, 1999, the Company acquired:
CABIN MANAGEMENT GROUP
- all of the common stock of Audio International, Inc., an Arkansas-based
designer and manufacturer of entertainment and cabin control systems for
corporate aircraft, on November 14, 1997;
- substantially all of the assets of Dettmers Industries, Inc., a
Florida-based designer and manufacturer of seats for corporate aircraft,
on June 30, 1998;
- all of the common stock of PPI Holdings, Inc., a Kansas-based designer and
manufacturer of interior furniture components for corporate aircraft, on
April 23, 1999;
- substantially all of the assets of Custom Woodwork & Plastics, Inc., a
Georgia-based designer and manufacturer of interior furniture components
for corporate aircraft, on August 5, 1999;
- substantially all of the assets of PCI NewCo, Inc., a Kansas-based
manufacturer of composite material and components for corporate aircraft,
on October 6, 1999;
- all of the common stock of International Custom Interiors, Inc., a
Florida-based designer and manufacturer of interior furniture components
and provider of upholstery services for corporate aircraft, on October 8,
1999; and
- substantially all of the assets of The Infinity Partners, Ltd., a
Texas-based designer and manufacturer of interior furniture components for
middle- and high-end corporate aircraft, on December 17, 1999.
SPECIALTY AVIONICS GROUP
- all of the common stock of Avtech Corporation., a Washington-based
designer and manufacturer of avionics components for commercial and
corporate aircraft, on June 26, 1998;
SYSTEMS INTEGRATION GROUP
- all of the common stock of PATS, Inc., a Maryland-based designer,
manufacturer and installer of auxiliary fuel tank systems for corporate
aircraft and a manufacturer of aircraft auxiliary power units, on
January 22, 1999;
The acquisitions were accounted for as purchases and the assets acquired and
liabilities assumed have been recorded at their estimated fair values. The
consolidated financial statements reflect the acquired companies subsequent to
their respective acquisition dates. The acquisitions are summarized in the
following table.
(PREDECESSOR)
---------------------------
EIGHT
YEAR ENDED MONTHS ENDED YEAR
DECEMBER 31, AUGUST 31, DECEMBER 31,
1997 1998 1999
------------ ------------ --------------
(IN THOUSANDS) (IN THOUSANDS)
Paid in cash
Purchase price............................................ $24,000 $85,552 $140,819
Acquisition related costs................................. 726 1,519 4,491
------- ------- --------
Total purchase price.................................... $24,726 $87,071 $145,310
======= ======= ========
Maximum aggregate contingent consideration payable, based on
future attainment of defined performance criteria......... $ 6,000 $ 2,000 $ 48,950
======= ======= ========
Adjustments to reflect assets acquired at fair value
Increase to historical value of inventory acquired........ $-- $-- $ 1,606
Increase to historical value of property and equipment.... -- 6,672 --
Identifiable intangible assets recorded................... -- -- 15,341
Difference between the total purchase price and the fair
value of the net assets acquired recorded as goodwill at
the time of acquisition................................. 20,110 59,979 110,922
41
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - ACQUISITIONS (CONTINUED)
The 1997 and 1998 acquisitions were funded with borrowings under the
Company's then existing credit facility. The 1999 acquisitions were funded with
$135,000,000 of borrowings under the Company's senior credit facility, proceeds
from the sale of common stock described in Note 13 and a $5,000,000 customer
advance to be offset against amounts receivable from future product deliveries.
The increase in inventory value was charged to operations as the inventory
was sold during the periods immediately following acquisition. Identifiable
intangible assets are being amortized on a straight-line basis over their
estimated useful lives, ranging from seven and fifteen years. Goodwill is being
amortized on a straight-line basis over thirty years. The amount of contingent
consideration paid in the future, if any, will increase goodwill and will be
amortized prospectively over the remaining period of the initial thirty-year
term.
Based upon the acquired companies level of attainment of their defined
performance criteria for the years ended December 31, 1998 and 1999, the Company
recorded contingent consideration payable of $3,000,000 in 1998 and $29,825,000
in 1999, resulting in a corresponding increase in goodwill. The contingent
consideration is included in accrued liabilities in the consolidated financial
statements. The Company's maximum contingent consideration payment obligations
remaining as of December 31, 1999 are described in Note 15.
NOTE 4 - UNAUDITED PRO FORMA RESULTS OF OPERATIONS FOR THE DLJ AND OTHER
ACQUISITIONS
Unaudited pro forma consolidated results of operations are presented in the
table below for the twelve months ended December 31, 1998 and 1999. The results
of operations reflect the Company's 1998 acquisition by DLJ and the Company's
1998 and 1999 acquisitions as if all of these transactions were consummated as
of January 1, 1998.
PRO FORMA FOR THE YEAR
ENDED DECEMBER 31,
-----------------------
1998 1999
---------- ----------
(IN THOUSANDS)
Revenues.................................................... $268,470 $296,581
Loss before extraordinary item.............................. (5,313) (323)
The pro forma results of operations do not purport to represent what actual
results would have been if the transactions described above occurred on such
dates or to project the results of operations for any future period. The above
information reflects adjustments for inventory, depreciation, amortization,
general and administrative expenses and interest expense based on the new cost
basis and debt structure of the Company following the acquisitions. In 1998,
income excludes the effect of a $2,229,000 extraordinary loss incurred in
connection with debt refinancings.
42
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - RESTRUCTURING, ASSET IMPAIRMENT AND OTHER NONRECURRING CHARGES
In December 1999, the Company announced a plan to reorganize and restructure
the operations of two of its subsidiaries within the Systems Integration Group.
The restructuring is a result of a management decision to exit the manufacturing
business at these subsidiaries and consolidate and relocate operations into one
facility to more efficiently and effectively manage the business and be more
competitive.
In connection with the restructuring plan, the Company recorded nonrecurring
pre-tax charges to operations of $9,935,000 for restructuring costs including
severance and other exit costs, asset impairments and inventory reserves. Of
this amount, $5,983,000 is included in cost of goods sold for inventory
write-downs as a consequence of exiting the manufacturing business. The
remaining $3,952,000 is included in selling, general and administration expenses
related to all other restructuring costs, as described below:
- The Company's restructuring plan resulted in the impairment of certain
property and equipment related to the closing of the manufacturing
facility. As a result, these plant assets were written down to their net
realizable value.
- Lease termination and other related costs includes primarily the net loss
expected to be incurred on the remaining existing lease under a long-term
rental agreement at the facility being vacated following the
restructuring. The loss has been reduced by the expected sublease income.
- Severance and other compensation costs relate to the termination of
approximately forty employees. The majority of these employees are hourly
workers located in the manufacturing facility, which is expected to cease
operations in April 2000. The remainder of the work force reduction
consists of the elimination of duplicate administrative personnel
following the consolidation of the operations.
The Company commenced the restructuring during 1999 and expects to complete
the plan in the third quarter of fiscal 2000. Accruals for restructuring costs
and asset impairments were made when the Company's Board of Directors approved
the restructuring plan. Of the total charge, $7,242,000 represents a noncash
write-down of assets. Components of the restructuring, asset impairment and
other nonrecurring charges are as follows:
BALANCE AT
TOTAL AMOUNTS DECEMBER 31,
CHARGES INCURRED 1999
-------- -------- ------------
(IN THOUSANDS)
Write-down of inventory..................................... $5,983 $(5,983) $--
Write-down of property and equipment........................ 1,259 (1,259) --
Severance and other compensation............................ 1,077 (293) 784
Lease termination and other related costs................... 752 (31) 721
Other exit costs............................................ 864 (188) 676
------ ------- ------
Total restructuring, asset impairments and other
nonrecurring charges.................................... $9,935 $(7,754) $2,181
====== ======= ======
The total restructuring, asset impairment and other nonrecurring charges
above include costs totaling $787,000 that were incurred during the first three
quarters of 1999 and related primarily to downsizing activities within the
Systems Integration Group prior to the adoption of the formal restructuring
plan.
During the eight months ended August 31, 1998, the Company recorded a
$3,632,000 pre-tax nonrecurring charge in connection with its acquisition by
DLJ. This amount is included in selling, general and administrative expenses.
43
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - ACCOUNTS RECEIVABLE AND SIGNIFICANT CUSTOMERS
ACCOUNTS RECEIVABLE
Accounts receivable is net of an allowance for doubtful accounts of $581,000
and $1,966,000 at December 31, 1998 and 1999, respectively. Included in accounts
receivable are unbilled receivables under long-term contracts totaling
$4,156,000 at December 31, 1998 (none at December 31, 1999).
The Company is potentially subject to concentrations of credit risk as the
Company relies heavily on customers operating in the domestic and foreign
corporate and commercial aircraft industries. Generally, the Company does not
require collateral or other security to support accounts receivable subject to
credit risk. Under certain circumstances, deposits or cash-on-delivery terms are
required. The Company maintains reserves for potential credit losses and
generally, such losses have been within management's expectations.
SIGNIFICANT CUSTOMERS
Three customers each accounted for more than 10% of the Company's
consolidated revenues. The Company's operating groups who derive revenue from
each such customer are parenthetically noted.
(PREDECESSOR)
---------------------------
EIGHT MONTHS FOUR MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, AUGUST 31, DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999
------------ ------------ ------------ ------------
Boeing (all groups).............................. 19.0% 17.3% 20.1% 19.0%
Textron (all groups)............................. -- -- -- 12.8%
Matsushita (Specialty Avionics).................. 11.2% 7.6% 5.6% 4.8%
If the Company had completed its 1998 and 1999 acquisitions at the beginning
of 1998, three customers would have accounted for 10% or more of the Company's
consolidated pro forma revenues. The Company's operating groups who derive
revenue from each customer are parenthetically noted.
PRO FORMA
FOR THE
TWELVE MONTHS
ENDED
DECEMBER 31,
----------------------
1998 1999
-------- --------
(UNAUDITED)
Boeing (all groups)......................................... 23.2% 16.0%
Textron (all groups)........................................ 12.9% 15.6%
Bombardier (all groups)..................................... 7.4% 12.7%
Complete loss of any of these customers could have a significant adverse impact
on the results of operations expected in future periods.
NOTE 7 - INVENTORIES
Inventories are comprised of the following as of December 31, 1998 and 1999:
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
Raw materials............................................... $19,221 $28,249
Work-in process............................................. 7,231 20,520
Finished goods.............................................. 7,829 9,952
------- -------
Total inventories....................................... $34,281 $58,721
======= =======
44
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - INVENTORIES (CONTINUED)
Inventoried costs are not in excess of estimated realizable value and
include direct engineering, production and tooling costs, and applicable
manufacturing overhead. In accordance with industry practice, inventoried costs
include amounts relating to programs and contracts with long production cycles.
Included above are engineering costs related to long-term contracts that will be
recoverable based on future sales in the amount of $897,000 and $5,720,000 at
December 31, 1998 and 1999, respectively. Periodic assessments are performed to
ensure recoverability of engineering costs and adjustments are made, if
necessary, to reduce inventoried costs to estimated realizable value. No
adjustments were required in 1998 and 1999.
NOTE 8 - PROPERTY AND EQUIPMENT
Property and equipment includes the following as of December 31, 1998 and
1999:
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
Machinery and equipment..................................... $12,576 $17,938
Land, buildings and leasehold improvements.................. 11,967 17,704
Computer equipment and software, furniture and fixtures..... 3,230 8,563
Tooling..................................................... 2,162 2,476
------- -------
Total cost.............................................. 29,935 46,681
Accumulated depreciation and amortization............... (1,775) (8,981)
------- -------
Net property and equipment.......................... $28,160 $37,700
======= =======
Property and equipment under capital leases included above consist of the
following as of December 31, 1998 and 1999:
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
Machinery and equipment..................................... $ 693 $ 781
Computer equipment and software, furniture and fixtures..... 243 2,220
----- ------
Total cost.............................................. 936 3,001
Accumulated depreciation and amortization............... (204) (280)
----- ------
Net property and equipment.......................... $ 732 $2,721
===== ======
Depreciation of property and equipment under capital leases is included in
depreciation expense in the consolidated financial statements.
45
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - OTHER ASSETS
Other assets includes the following as of December 31, 1998 and 1999 and is
net of accumulated amortization for the respective periods as parenthetically
noted:
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
Goodwill (net of $1,839 and $9,371)......................... $167,836 $302,733
Identifiable intangibles
FAA certifications (net of $675 and $2,824)............... 29,716 29,567
Other identifiable intangibles (net of $642 and $3,999)... 18,992 28,932
Deferred financing costs (net of $343 and $1,973)........... 8,787 12,054
Other non-amortizable assets................................ 999 825
-------- --------
Other assets, net....................................... $226,330 $374,111
======== ========
NOTE 10 - ACCRUED LIABILITIES
Accrued liabilities are comprised of the following as of December 31, 1998
and 1999:
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
Acquisition related contingent consideration................ $ 3,000 $29,825
Salaries, wages, compensated absences and payroll related
taxes..................................................... 6,147 8,673
Customer deposits........................................... -- 8,072
Accrued interest............................................ 2,946 3,228
Other accrued liabilities................................... 6,373 11,284
------- -------
Total accrued liabilities............................... $18,466 $61,082
======= =======
NOTE 11 - BORROWINGS
SHORT-TERM BORROWINGS
The Company's Swiss subsidiary had a short-term revolving credit facility
with a Swiss bank under which Swiss franc denominated borrowings of $283,000
were outstanding at December 31, 1998. The borrowings were repaid during 1999
and the credit facility was terminated.
46
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - BORROWINGS (CONTINUED)
LONG-TERM DEBT
Long-term debt includes the following amounts as of December 31, 1998 and
1999:
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
Senior credit facility
$25 million working capital revolving line of credit.... $ 5,800 $ --
$25 million acquisition revolving line of credit........ -- --
Term loans.............................................. 79,888 213,213
12% senior subordinated notes............................... 100,000 100,000
Capital lease obligations and equipment term financing, with
interest at 6.5% to 21.0%, secured by equipment........... 367 2,411
Other....................................................... 427 27
-------- --------
Total long-term debt.................................... 186,482 315,651
Less current portion.................................... (1,529) (5,070)
-------- --------
Long-term debt, less current portion................ $184,953 $310,581
======== ========
During 1999, the Company amended its senior credit facility and borrowed
$135,000,000 to finance its 1999 acquisitions.
SENIOR CREDIT FACILITY
The senior credit facility provides for term loan borrowings in the
aggregate principal amount of $215,000,000 and revolving lines of credit for
borrowings up to an aggregate principal amount of $25,000,000 each for working
capital and to finance acquisitions. Principal payments for term loan borrowings
are due in increasing amounts over the next seven years and all borrowings under
the revolving loan facility must be repaid by September 30, 2004. Loans under
the senior credit facility generally bear interest based on a margin over, at
the Company's option, the prime rate or the Euro-Dollar rate. The margins
applicable to certain portions of amounts borrowed may vary depending upon the
Company's consolidated debt leverage ratio. Currently, the applicable margins
are 1.25% to 2.50% for prime rate borrowings and 2.50% to 3.75% for Euro-Dollar
borrowings. The weighted-average interest rate on all senior credit facility
borrowings outstanding was 9.56% as of December 31, 1999. Borrowings under the
senior credit facility are secured by substantially all of the assets of the
Company. The Company is subject to certain commitment fees under the facility as
well as the maintenance of certain financial ratios, cash flow results and other
restrictive covenants, including the payment of dividends in cash.
12% SENIOR SUBORDINATED NOTES
In October 1998, the bridge notes issued in connection with the DLJ
acquisition were repaid with the net proceeds from the Company's issuance of
$100,000,000 of 12% senior subordinated notes, which were paired in units with
warrants to purchase 155,000 shares of DeCrane Holdings common stock. The senior
subordinated notes will mature on September 30, 2008; interest is payable
semi-annually on March 30 and September 30 of each year, commencing on March 30,
1999. The senior subordinated notes are unsecured general obligations of the
Company and are subordinated in right of payment to substantially all existing
and future senior indebtedness of the Company, including senior credit facility
indebtedness. Prior to maturity, the Company may redeem all or some of the
senior subordinated notes at defined redemption prices, which may include a
premium. In the event of a change in control, the holders may require the
Company to repurchase the senior subordinated notes for a redemption price that
may also include a premium.
47
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - BORROWINGS (CONTINUED)
AGGREGATE MATURITIES
The total annual maturities of long-term debt outstanding as of December 31,
1999 are as follows:
(IN THOUSANDS)
--------------
Year ending December 31,
2000.................................................... $ 5,070
2001.................................................... 7,348
2002.................................................... 11,072
2003.................................................... 13,405
2004.................................................... 28,918
2005 and thereafter..................................... 249,838
--------
Total long-term debt................................ $315,651
========
48
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 - INCOME TAXES
Income (loss) before income taxes and extraordinary item was taxed under the
following jurisdictions:
(PREDECESSOR)
---------------------------
EIGHT MONTHS FOUR MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, AUGUST 31, DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999
------------ ------------ ------------ ------------
(IN THOUSANDS) (IN THOUSANDS)
Domestic......................................... $7,509 $5,637 $(3,345) $(3,517)
Foreign.......................................... 1,089 444 353 114
------ ------ ------- -------
Total.......................................... $8,598 $6,081 $(2,992) $(3,403)
====== ====== ======= =======
The provisions for income taxes (benefit) are as follows:
(PREDECESSOR)
---------------------------
EIGHT MONTHS FOUR MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, AUGUST 31, DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999
------------ ------------ ------------ ------------
(IN THOUSANDS) (IN THOUSANDS)
Current
U.S. federal................................... $ 3,231 $ 3,835 $ 1,560 $ 89
State and local................................ 968 1,275 699 1,140
Foreign........................................ 426 121 145 103
------- ------- ------- ------
Total current................................ 4,625 5,231 2,404 1,332
------- ------- ------- ------
Deferred
U.S. federal................................... (1,021) (1,932) (4,150) (76)
State and local................................ (279) (435) (816) (284)
Foreign........................................ 19 28 (106) (20)
------- ------- ------- ------
Total deferred............................... (1,281) (2,339) (5,072) (380)
------- ------- ------- ------
Total provision
U.S. federal................................... 2,210 1,903 (2,590) 13
State and local................................ 689 840 (117) 856
Foreign........................................ 445 149 39 83
------- ------- ------- ------
Total provision.............................. $ 3,344 $ 2,892 $(2,668) $ 952
======= ======= ======= ======
49
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 - INCOME TAXES (CONTINUED)
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal rate to the income
(loss) before income taxes and extraordinary item as a result of the following
differences:
(PREDECESSOR)
---------------------------
EIGHT MONTHS FOUR MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, AUGUST 31, DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999
------------ ------------ ------------ ------------
(IN THOUSANDS) (IN THOUSANDS)
Income tax (benefit) at U.S. statutory rates.......... $2,923 $2,068 $(1,017) $(1,157)
Increase (decrease) resulting from
Amortization of assets and other expenses not
deductible for income tax purposes................ 441 594 782 2,025
Decrease in deferred tax asset valuation
allowance......................................... (488) -- (2,575) --
State income taxes, net of federal benefit.......... 482 550 (25) 106
Lower tax rates on earnings of foreign subsidiaries
and foreign sales corporation..................... (116) (50) (36) (48)
Other, net.......................................... 102 (270) 203 26
------ ------ ------- -------
Income tax (benefit) at effective rates........... $3,344 $2,892 $(2,668) $ 952
====== ====== ======= =======
Deferred tax liabilities (assets) are comprised of the following as of
December 31, 1998 and 1999:
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
Gross deferred tax liabilities
Intangible assets......................................... $ 18,320 $ 23,608
Property and equipment.................................... 4,531 4,069
Other..................................................... 416 290
-------- --------
Gross deferred tax liabilities.......................... 23,267 27,967
-------- --------
Gross deferred tax (assets)
Loss carryforwards........................................ (6,183) (5,690)
Accrued liabilities....................................... (1,657) (3,786)
Inventory................................................. (2,396) (2,340)
Other..................................................... (341) (494)
-------- --------
Gross deferred tax (assets)............................. (10,577) (12,310)
-------- --------
Net deferred tax liability............................ $ 12,690 $ 15,657
======== ========
Balance sheet classification
Noncurrent deferred tax liability......................... $ 16,990 $ 21,249
Current deferred tax asset................................ (4,300) (5,592)
-------- --------
Net deferred tax liability.............................. $ 12,690 $ 15,657
======== ========
Prior to 1997, the Company incurred losses and accordingly provided a
valuation allowance for its domestic deferred net tax assets. The deferred tax
asset valuation allowance was reduced in 1997 by $488,000 to reflect the amount
of federal and state tax loss carryforwards utilized to reduce 1997 current
income taxes.
Management believes that it is more likely than not that the Company will
generate taxable income sufficient to realize the tax benefit associated with
the future deductible deferred tax assets and loss carryforwards prior to their
expiration. As a result, the Company reduced the valuation allowance by
$2,575,000 during the four months ended December 31, 1998.
The Company has approximately $15,700,000 and $1,400,000 of total loss
carryforwards for federal and state income tax purposes, respectively, which
includes federal loss carryforwards acquired in the Avtech acquisition. The
Avtech federal loss carryforwards of $13,600,000 are subject to a limitation on
its annual utilization ("Section 382 limitation"), and expire in 2018. The
remaining federal and state carryforwards expire in varying amounts through 2010
and 2019, respectively. The amount of federal loss carryforwards that may be
utilized in the future are subject to limitations because of the occurrence of
changes in control, as defined in the Internal Revenue Code. Undistributed
earnings of foreign subsidiaries are not material to the consolidated financial
statements. As such, foreign taxes that may be due, net of U.S. foreign tax
credits, have not been provided.
50
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 - DECRANE HOLDINGS CAPITAL STRUCTURE
MANDATORILY REDEEMABLE PREFERRED STOCK
The Company is authorized to issue a total of 2,500,000 shares of preferred
stock ($.01 par value) of which 1,360,000 shares have been designated as 14%
mandatorily redeemable preferred stock due 2009. Holders of the preferred stock
are entitled to receive, when, as and if declared, dividends at a rate equal to
14% per annum, subject to 0.25% increases for each quarter that no dividend is
paid (up to a maximum of an additional 5%). Prior to September 30, 2003,
dividends are not paid in cash but instead accrete to the liquidation value of
the preferred stock, which, in turn increases the redemption obligation. The
preferred stock had an initial $100.00 per share liquidation preference, subject
to increases through non-cash dividend accretion, plus accrued and unpaid cash
dividends. The preferred stock is mandatorily redeemable on August 28, 2009.
Upon the occurrence of a change in control, as defined, each holder has the
right to require the Company to redeem all or part of such holder's shares at a
price equal to 101% of the liquidation preference plus accrued and unpaid cash
dividends. The preferred stock is non-voting.
The table below summarizes mandatorily redeemable preferred stock issued
from inception through December 31, 1999:
SHARES AMOUNT
-------- --------------
(IN THOUSANDS)
Initial capitalization.................................... $340,000 $34,000
Shares sold to related party investors.................... 2,417 242
Noncash dividend accretion................................ -- 1,642
-------- -------
Balance, December 31, 1998............................ 342,417 35,884
Noncash dividend accretion................................ -- 5,294
-------- -------
Balance, December 31, 1999............................ $342,417 $41,178
======== =======
In 1998, the Company sold:
- 340,000 shares of the preferred stock and warrants to purchase 150,000
shares of common stock to DLJ and its affiliates for $34,000,000 as part
of its initial capitalization; and
- in December 1998, 2,417 shares to a group of related party investors for
$242,000 (Note 18); one-half of the purchase price was loaned to the
investors as described below.
COMMON STOCK
Upon completion of the DLJ tender offer, all of DeCrane Aircraft's then
existing shares were canceled. DeCrane Holdings is authorized to issue 4,500,000
common shares ($.01 par value) of which 2,846,185 and 3,571,827 are issued and
outstanding at December 31, 1998 and 1999, respectively. As of December 31,
1999, a total of 705,869 shares of common stock were reserved for issuance upon
exercise of all warrants and stock options.
During 1998 and 1999, the Company sold:
- 2,826,087 shares to DLJ and its affiliates for $65,000,000 as part of its
initial capitalization;
- in December 1998, 20,098 shares to the same group of investors for
$462,000 (Note 18); one-half of the purchase price was loaned to the
investors as described below;
- in April 1999, 543,478 shares to DLJ and its affiliates for $12,500,000
and used the proceeds to fund a portion of the PPI Holdings acquisition;
- in October 1999, 10,869 shares to the same group of investors for
$250,000; one-half of the purchase price was loaned to the investors as
described below; and
51
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 - DECRANE HOLDINGS CAPITAL STRUCTURE (CONTINUED)
- in December 1999, 171,295 shares to DeCrane Aircraft management for
$3,940,000; one-half of the purchase price was loaned to management as
described below.
Expenses related to the transactions total $523,000 in 1998 and $84,000 in
1999 and were charged to additional paid-in capital.
NOTES RECEIVABLE FOR SHARES SOLD
During 1998 and 1999, the Company sold mandatorily redeemable preferred and
common stock in three transactions in which one-half of the purchase price was
paid in cash and one-half was loaned to the purchasers by with interest at the
then applicable federal rates. The loans bear interest at rates ranging between
4.33% and 5.74%. The loans, plus accrued interest, are payable upon the sale of
the stock and are collaterialized by such stock. The resulting notes receivable,
plus accrued interest, are classified as a reduction of equity in the
consolidated statement of financial position. The three transactions, which
resulted in loans for one-half of the total purchase price, are as follows:
- in December 1998, a group of investors, who are related parties (Note 18),
purchased mandatorily redeemable preferred and common stock for $704,000;
- in October 1999, the same group of investors purchased an additional
shares of common stock for $250,000; and
- in December 1999, DeCrane Aircraft's management purchased common stock for
$3,940,000.
COMMON STOCK OPTIONS
In July 1999, the group of related party investors (Note 18), including
certain directors, were granted options for their consulting services. The group
was granted options to purchase 44,612 shares of the Company's common stock at
$23.00 per share. The per share exercise price of the options granted was equal
to the fair market value of the common stock on the grant date. The options vest
over a three-year period, subject to acceleration if DLJ and its affiliates sell
any of their shares of common stock.
During 1999, management was also issued options to purchase common stock
pursuant to the Stock Based Incentive Plan described in Note 17. The following
table summarizes the status of all stock options at December 31, 1999 and for
the year then ended. No options were exercised or canceled during the year.
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
-------- --------
Options granted during the year and outstanding at
December 31, 1999.................................... 327,534 $23.00
Options exercisable at December 31, 1999............... 57,936 $23.00
For the compensatory stock options granted to non-directors, the Company
recognized compensation expense of $143,000 for the year ended December 31,
1999. The fair value of the compensatory options granted was estimated on the
date of grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: risk-free interest rate of 6.8%; expected dividend
yield of 0%; expected life of 10 years; and expected stock price volatility of
67.0%. The fair value of the options granted to employees and directors was
estimated on the dates of grant using the minimum value method, assuming risk
free interest rates of 5.76% to 6.54% with no projected dividend yields. Unlike
other permitted option pricing models, the minimum value method excludes stock
price volatility, which could not be reasonably estimated for the Company.
For the non-compensatory stock option, the Company uses APB Opinion No. 25
to account for stock-based compensation and accordingly, no compensation expense
was recognized during the year ended
52
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 - DECRANE HOLDINGS CAPITAL STRUCTURE (CONTINUED)
December 31, 1999. The Company adopted the disclosure-only provisions of SFAS
No. 123. The effect of applying the fair value method of SFAS No. 123 to the
options granted to employees and directors in 1999 did not result in pro forma
net income or loss that was materially different from the historical amounts
presented.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models, as well as the minimum value method, do not
necessarily provide a reliable single measure of its employee stock options.
COMMON STOCK WARRANTS
In conjunction with the sale of the units in October 1998, the Company
issued warrants to purchase 155,000 shares of common stock. A portion of the
proceeds from the units offering totaling $1,200,000 were allocated to the
warrants and credited to additional paid-in capital.
As of December 31, 1998 and 1999, warrants to purchase a total of 305,000
shares of common stock are issued and outstanding and an equivalent number of
shares of common stock are reserved for issuance upon exercise of the warrants.
All warrants are exercisable at any time up to their expiration date. Warrants
to purchase 155,000 shares are exercisable at $23.00 per share and expire on
September 30, 2008 and the remaining warrants are exercisable at $0.01 per share
and expire on August 28, 2009.
NOTE 14 - PREDECESSOR CAPITAL STRUCTURE AND TRANSACTIONS
All of events and transactions described below occurred prior to the
Company's acquisition by DLJ. The debt and equity securities are no longer
issued or outstanding.
REORGANIZATION AND REVERSE STOCK SPLIT
On February 19, 1997, the Company reorganized as a Delaware corporation. In
conjunction with the reorganization, the Company established a $.01 par value
for its cumulative convertible preferred stock and common stock and increased
the number of common shares and preferred shares authorized to 9,924,950 and
18,314,018 shares (which includes 10,000,000 shares of a newly designated series
of preferred stock), respectively.
Effective March 25, 1997, the Company effected a 3.53-for-1 reverse stock
split. All common share information set forth in the consolidated financial
statements and notes thereto has been restated to reflect the reverse stock
split.
RECAPITALIZATION AND CONSUMMATION OF INITIAL PUBLIC OFFERING
In January and March 1997, the holders of certain securities agreed to a
plan for the recapitalization of the Company. Completion of the recapitalization
was a condition to the consummation of the Company's initial public offering
and, was effective concurrent therewith. The initial public offering, commonly
referred to as an IPO, was consummated on April 16, 1997.
The recapitalization provided for:
- the conversion of all 6,847,705 shares of issued and outstanding
cumulative convertible preferred stock into 1,941,804 shares of common
stock;
- the cashless exercise and conversion of all 52,784 and 9,355 issued and
outstanding preferred stock warrants and common stock warrants,
respectively, into a total of 16,585 shares of common stock;
53
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - PREDECESSOR CAPITAL STRUCTURE AND TRANSACTIONS (CONTINUED)
- the cashless exercise of 508,497 mandatorily redeemable common stock
warrants (referred to herein as the redeemable warrants into a total of
507,708 shares of common stock; and
- the cancellation of 95,368 redeemable warrants.
Redeemable warrants exercisable into 208,968 common shares remained after
the recapitalization. Of this amount, 138,075 redeemable warrants were canceled
upon the consummation of the IPO and repayment of the Company's then existing
senior subordinated debt and convertible notes in accordance with the terms of
the respective warrant agreements. Redeemable warrants exercisable into 70,893
common shares remained after the recapitalization and the IPO and application of
the net proceeds therefrom. Concurrent with the consummation of the IPO, the
mandatory redemption feature of these warrants was terminated and, as a result,
the value ascribed thereto was reclassified to stockholders' equity as
additional paid-in capital.
On April 16, 1997, the Company completed the IPO and sold 2,700,000 shares
of common stock for $12.00 per share. Proceeds from the IPO of $30,132,000, net
of $2,268,000 for underwriting discounts and commissions, together with the
proceeds from borrowings under a new credit facility were used to repay amounts
due under the Company's then existing senior revolving line of credit, senior
term notes, senior subordinated notes and convertible notes.
DEBT REPAID WITH IPO PROCEEDS
The Company used the net proceeds from the IPO, together with approximately
$12,775,000 of proceeds from borrowings under a credit facility, to repay the
following:
- senior revolving line of credit borrowings of $15,356,000;
- senior term notes aggregating $16,531,000;
- senior subordinated notes payable to related parties aggregating
$7,000,000; and
- convertible notes payable to related parties aggregating $3,000,000.
In conjunction with the debt repayment, the Company incurred a $3,436,000
extraordinary charge, before an income tax benefit of $1,358,000, which is
comprised of:
- a $1,943,000 write-off of deferred financing costs;
- a $1,149,000 write-off of unamortized original issued discounts; and
- a $344,000 charge for a prepayment penalty and other related expenses.
FOLLOW-ON EQUITY OFFERING
In April 1998, the Company sold 2,206,177 shares of common stock for $17.00
per share. Net proceeds from the offering of $34,815,000 were used to partially
repay borrowings outstanding under the Company's senior credit facility.
54
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - PREDECESSOR CAPITAL STRUCTURE AND TRANSACTIONS (CONTINUED)
MANDATORILY REDEEMABLE COMMON STOCK WARRANTS
The table below summarizes redeemable warrant transactions during the years
ended December 31, 1997.
(PREDECESSOR)
--------------------------
NUMBER OF
COMMON
AMOUNT SHARES
-------------- ---------
(IN THOUSANDS)
Balance, December 31, 1996............................... $ 6,879 $ 812,833
Adjustment to redemption value to reflect the IPO per
share price............................................ 2,203 --
Cashless exercise and conversion pursuant to the
recapitalization....................................... (6,103) (508,497)
Canceled pursuant to the Recapitalization................ (1,143) (95,368)
Canceled upon debt repayment with IPO proceeds........... (1,657) (138,075)
Reclassification of warrants no longer mandatorily
redeemable to additional paid-in capital............... (179) (70,893)
------- ---------
Balance, December 31, 1997............................... $-- --
======= =========
Prior to the IPO, the warrant holders had the right, after various dates and
contingent upon certain events, to require the Company to redeem the warrants
and, in certain instances, to purchase the common stock issued upon exercise of
the warrants. In all instances, the redemption or purchase price, was equal to
the greater of either fair market value, book value, or a value based upon a
defined formula which included, in part, an earnings multiple. The redeemable
warrants' value was subsequently adjusted to reflect estimated redemption value.
Concurrent with the consummation of the recapitalization and IPO, the Company
increased the redemption value by $2,203,000 to reflect the $12.00 per share IPO
price. The adjustments to redemption value were charged (credited) to
accumulated deficit.
CUMULATIVE CONVERTIBLE PREFERRED STOCK
On February 19, 1997, the Company reorganized as a Delaware corporation. In
conjunction with the reorganization, the Company established a $.01 par value
for its preferred stock and increased the number of preferred shares authorized
to 18,314,018 shares, which includes 10,000,000 shares of a newly designated
series of preferred stock. As part of the recapitalization, which occurred
concurrent with the IPO, all issued and outstanding shares of preferred stock
were converted into .28357 of a share of common stock. The recapitalization also
provided for the cashless exercise and conversion of all preferred stock
warrants into 10,206 common shares. There were no shares of preferred stock or
warrants to purchase preferred stock outstanding as of December 31, 1997.
COMMON STOCK
On February 19, 1997, in conjunction with reorganizing as a Delaware
corporation, the Company established a $.01 par value for its common stock and
increased to 9,924,950 the number of common shares authorized. As of
December 31, 1997, a total of 527,156 common shares were reserved for issuance
upon exercise of stock options outstanding under the Company's stock option
plan.
As part of the recapitalization, the holders of the non-redeemable warrants
agreed to the cashless exercise and conversion of all warrants outstanding into
6,379 common shares. redeemable warrants to purchase 70,893 common shares at an
exercise price of $14.11 per share remained after the recapitalization.
Concurrent with the consummation of the IPO, the mandatory redemption feature of
these warrants was terminated and, consequently, became non-redeemable warrants.
In December 1997, the holders of these
55
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - PREDECESSOR CAPITAL STRUCTURE AND TRANSACTIONS (CONTINUED)
warrants elected to exercise all of the warrants on a cashless basis and convert
the warrants into 16,130 common shares. No non-redeemable warrants were
outstanding as of December 31, 1997.
In connection with the DLJ acquisition in August 1998, all stock options
vested and were either exercised or canceled as of August 31, 1998. The
following table summarizes the status of the Company's stock option plan at
December 31, 1997 and 1998 and the activity for the year ended December 31, 1997
and the eight months ended August 31, 1998 preceding the DLJ acquisition:
(PREDECESSOR)
-------------------------------------------
1997 1998
-------------------- --------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
-------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Options outstanding at beginning of year................... 355,001 $ 1.724 501,260 $6.089
Granted.................................................... 163,662 15.574 75,000 16.85
Exercised.................................................. -- -- (575,692) 7.496
Canceled................................................... (17,403) 6.228 (568) 1.234
------- --------
Options outstanding at end of year......................... 501,260 6.089 -- --
======= ========
Options exercisable at end of year......................... 200,444 0.921 -- --
======= ========
The Company believes the per share exercise price of options granted through
February 1996 and subsequent to January 1997 (through August 31, 1998)
approximated the fair market value of the underlying common stock on the grant
date. The exercise price of certain options granted from February 1996 to
January 1997 were deemed to be below the fair market value of the underlying
common stock on the grant date and such difference is being recognized as
additional compensation expense in the consolidated financial statements on a
straight line basis over the vesting period of the underlying options.
Compensation expense recognized was $240,000 and $332,000 for the year ended
December 31, 1997 and the eight months ended August 31, 1998, respectively.
The Company measures compensation expense related to its employee stock
option plan using the intrinsic value method as prescribed by APB Opinion No.
25. Had compensation cost for the Company's stock option plan been determined
based on the fair value of the options at the grant dates consistent with the
method of SFAS No. 123, the Company's net income (loss) would have been as
follows:
(PREDECESSOR)
---------------------------
EIGHT MONTHS
YEAR ENDED ENDED
DECEMBER 31, AUGUST 31,
1997 1998
------------ ------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Net income
As reported.......................................... $3,176 $3,189
Pro forma............................................ 3,129 2,699
Weighted-average fair value of options granted
Compensatory stock options........................... 5.70 5.70
Non-compensatory stock options................... 5.08 5.08
For purposes of the pro forma presentation, the fair value for options
granted subsequent to the IPO (April 16, 1997) was estimated on the dates of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions: risk-free interest rate of 5.8%; expected dividend
yield of 0%;
56
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - PREDECESSOR CAPITAL STRUCTURE AND TRANSACTIONS (CONTINUED)
expected life of 2.5 years; and expected stock price volatility of 39.9%. The
fair value for options granted prior to the IPO was estimated on the dates of
grant using a minimum value method, assuming a risk-free interest rate of 5.5%
to 5.7% with no projected dividend yields. Unlike other permitted option pricing
models, the minimum value method excludes stock price volatility, which could
not be reasonably estimated for the Company prior to the IPO.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models, as well as the minimum value method, do not
necessarily provide a reliable single measure of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of options
granted in fiscal years after December 31, 1994 is amortized to expense over the
options' vesting period. The effects of applying SFAS No. 123 in providing the
pro forma disclosures are not likely to be representative of the effects on the
reported consolidated financial statements in future years.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
LITIGATION
As part of its investigation of the crash Swissair Flight 111 off the
Canadian coast on September 2, 1998, the Canadian Transportation Safety Board
("TSB") notified the Company that they recovered burned wire which was attached
to the in-flight entertainment system installed on some of Swissair's aircraft
by one of the Company's subsidiaries. The Company is fully cooperating with the
on-going TSB investigation. Although the TSB has not issued a final report, it
has advised the Company that it has no evidence to date that the system the
Company's subsidiary installed malfunctioned or failed during the flight.
Families of the 229 persons who died aboard the flight have filed actions in
federal and state courts against the Company, and many other unaffiliated
parties, including Swissair and Boeing. The actions claim negligence, strict
liability and breach of warranty relating to the installation and testing of the
in-flight entertainment system. The actions seek compensatory and punitive
damages and costs in an unstated amount. The Company intends to defend the
claims vigorously.
The Company is a party to a license agreement with McDonnell Douglas (now a
part of Boeing) pursuant to which the Company may request specified data in
order to design and market modifications to aircraft manufactured by McDonnell
Douglas. Under the agreement, the Company is to pay McDonnell Douglas a royalty
of five percent of the net sales price of all modifications sold by the Company
for which it has requested data from McDonnell Douglas. The Company requested
data for a single modification, which the Company believes is exempt from the
agreement's provision requiring royalties. In 1996, McDonnell Douglas made a
demand for $650,000 for royalties. The Company believes that it is not obligated
to McDonnell Douglas in any amount. However, if the claim is asserted, and if
the Company is unsuccessful in defending it, the Company may be required to pay
royalties to McDonnell Douglas.
The Company and its subsidiaries are also involved in other routine legal
and administrative proceedings incident to the normal conduct of business.
Management believes the ultimate disposition of all of the foregoing matters
will not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
57
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASE COMMITMENTS
The Company leases certain facilities and equipment under various capital
and operating leases. Certain leases require payment of property taxes and
include escalation clauses. Future minimum capital and operating lease
commitments under non-cancelable leases are as follows as of December 31, 1999:
CAPITAL OPERATING
LEASES LEASES
-------- ---------
(IN THOUSANDS)
Year ending December 31,
2000.................................................... $ 882 $ 3,199
2001.................................................... 853 3,070
2002.................................................... 822 3,007
2003.................................................... 155 2,714
2004.................................................... 43 2,386
2005 and thereafter..................................... -- 4,587
------ -------
Total minimum payments required..................... 2,755 $18,963
=======
Less amount representing future interest cost....... (344)
------
Recorded obligation under capital leases............ $2,411
======
Total rental expense charged to operations for the year ended December 31,
1997, the eight months ended August 31, 1998, the four months ended
December 31, 1998 and the year ended December 31, 1999 was $2,065,000,
$2,303,000, $1,095,000 and $3,620,000, respectively.
CONTINGENT ACQUISITION CONSIDERATION
The maximum contingent consideration payment obligations, resulting from the
acquisitions described in Note 3, are as follows as of December 31, 1999:
(IN THOUSANDS)
--------------
Based on future attainment of defined performance criteria
for the year ending December 31,
2000.................................................... $20,875
2001.................................................... 1,250
2002.................................................... 1,250
2003.................................................... 750
-------
Total maximum obligation............................ $24,125
=======
Contingent consideration payable, if any, is payable during the first
quarter of the following year.
58
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 - CONSOLIDATED STATEMENTS OF CASH FLOWS
The following information supplements the Company's consolidated statements
of cash flows.
(PREDECESSOR)
---------------------------
EIGHT MONTHS FOUR MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, AUGUST 31, DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999
------------ ------------ ------------ ------------
(IN THOUSANDS) (IN THOUSANDS)
Components of cash paid for acquisitions
Fair value of assets acquired.................. $26,178 $91,640 $ 310,450 $165,628
Liabilities assumed............................ (1,452) (4,569) (119,585) (20,318)
------- ------- --------- --------
Cash paid.................................... 24,726 87,071 190,865 145,310
Less cash acquired........................... (1,129) (1,263) (5,739) (2,604)
------- ------- --------- --------
Net cash paid for acquisitions............. 23,597 85,808 185,126 142,706
Contingent consideration paid in cash...... -- -- -- 3,000
------- ------- --------- --------
Total cash paid for acquisitions......... $23,597 $85,808 $ 185,126 $145,706
======= ======= ========= ========
Paid in cash
Interest....................................... $ 2,842 $ 2,227 $ 3,706 $ 26,005
Income taxes paid, net of refunds received..... 300 4,825 1,328 470
Noncash investing and financing transactions
Refinancing of bridge notes with senior
subordinated notes........................... $-- $-- $ 100,000 $ --
Additional acquisition contingent consideration
recorded..................................... -- -- 3,000 29,825
Noncash dividend accretion..................... -- -- 1,642 5,294
Loans to stockholders to purchase DeCrane
Holdings capital stock, plus accrued
interest..................................... -- -- 352 2,116
Capital expenditures financed with capital
lease obligations............................ 182 116 48 1,711
NOTE 17 - EMPLOYEE BENEFIT PLANS
401(K) RETIREMENT PLAN
Substantially all the Company's domestic employees are eligible to
participate in one of six 401(k) retirement plans, which are defined
contribution plans satisfying the requirements of the Employee Retirement Income
Security Act of 1974. The Company's expense related to its matching
contributions to these plans totaled $41,000, $128,000, $95,000 and $1,272,000
during the year ended December 31, 1997, the eight months ended August 31, 1998,
the four months ended December 31, 1998 and the year ended December 31, 1999,
respectively.
STOCK BASED INCENTIVE PLAN
In December 1999, DeCrane Holding's Board of Directors approved a management
incentive plan which provides for the issuance of options to purchase the common
stock of DeCrane Holdings as incentive compensation to designated executive
personnel and other key employees of the Company and its subsidiaries. The
plan's committee, appointed by the Board of Directors of DeCrane Holdings to
administer the plan, will determine the amount of options granted from time to
time. The plan provides for the granting of options to purchase 356,257 common
shares and expires in 2009. The options are granted at fair market value at the
date of grant. Substantially all of the options awarded become fully vested and
exercisable eight years from the date of grant but vesting and exercise can be
accelerated based upon future attainment of defined performance criteria. In
addition, the plan's committee may authorize alternate vesting schedules.
59
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17 - EMPLOYEE BENEFIT PLANS (CONTINUED)
The plan also provides for the acceleration of vesting upon the occurrence of
certain events, including a change of control.
During 1999, options to purchase 282,922 shares at $23.00 per share were
granted under the management incentive plan, of which 27,994 shares vested
immediately and options to purchase an additional 29,942 shares vested based on
the attainment of the 1999 performance criteria. The per share exercise price of
the options granted was equal to the fair market value of the common stock on
the grant date, and accordingly, no compensation expense was recognized during
the year ended December 31, 1999. The effect of applying the fair value method
of SFAS No. 123 to the options granted to employees in 1999 did not result in
pro forma net income or loss that was materially different from the historical
amounts presented.
STOCK PURCHASE PLAN
In December 1999, DeCrane Holding's Board of Directors approved a stock
purchase plan which provides for the purchase of shares of common stock of
DeCrane Holdings by designated executive personnel and other key employees of
DeCrane Aircraft and its subsidiaries, with a portion of the purchase price to
be loaned to the participants by DeCrane Aircraft. In December 1999, management
purchased 171,295 shares of DeCrane Holdings' common stock for $23.00 per share.
The total purchase price was approximately $3,900,000, of which one-half was
paid in cash and one-half was loaned to management by DeCrane Aircraft as
described in Note 13.
NOTE 18 - RELATED PARTY TRANSACTIONS
The Company's transactions with related parties included in the consolidated
financial statements are summarized in the table below.
(PREDECESSOR)
---------------------------
EIGHT MONTHS FOUR MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, AUGUST 31, DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999
------------ ------------ ------------ ------------
(IN THOUSANDS) (IN THOUSANDS)
DLJ
Transaction financing fees....................... $-- $-- $ 12,000 $ 4,048
Bridge notes interest expense.................... -- -- 1,041 --
Management fees
Charged to operations during the period........ -- -- 100 302
Payable as of period end....................... -- -- 100 75
GLOBAL TECHNOLOGY PARTNERS, LLC
Promissory notes
Receivable as of period end, including accrued
interest..................................... -- -- 352 477
Interest income recorded during the period..... -- -- -- 18
FORMER LENDER
Debt repaid with IPO proceeds
Senior subordinated debt....................... 7,000 -- -- --
Convertible notes.............................. 1,000 -- -- --
FORMER INVESTOR
Repaid with IPO proceeds......................... 2,000 -- -- --
Each related party is described below.
DLJ -- DLJ and its affiliates own 83.7% and 99.3% of DeCrane Holdings common
stock and preferred stock, respectively, on a fully diluted basis and is
represented on the Company's Board of Directors. DeCrane Aircraft is a
wholly-owned subsidiary of DeCrane Holdings. In addition, DLJ is involved in
market-making activities for the Company's senior subordinated notes and may
hold such notes from time to time. DLJ is also paid fees for arranging the
syndicate of lenders providing the Company's senior credit facility.
60
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18 - RELATED PARTY TRANSACTIONS (CONTINUED)
GLOBAL TECHNOLOGY PARTNERS, LLC -- Members of Global Technology own 0.7% of
each of DeCrane Holdings common and preferred stock on a fully diluted basis and
have two members on the Company's Board of Directors. DeCrane Aircraft is a
wholly-owned subsidiary of DeCrane Holdings. DeCrane Aircraft loaned one-half of
the purchase price for such shares to the members at rates ranging between 4.33%
and 5.44%. The loans, plus accrued interest, are payable from the proceeds from
the sale of the stock and are collaterialized by such stock.
FORMER LENDER -- Owned 8.9% of the Company's issued and outstanding common
stock at December 31, 1997, was represented on the Company's Board of Directors,
and provided a portion of the Company's then existing debt financing.
FORMER INVESTOR -- Owned 16.4% of the Company's issued and outstanding
common stock at December 31, 1997, was represented on the Company's Board of
Directors, and provided a portion of the Company's then existing debt and
preferred stock financing.
NOTE 19 - BUSINESS SEGMENT INFORMATION
During 1999, the Company reorganized its businesses into three separate
groups: Cabin Management, Specialty Avionics and Systems Integration. As
prescribed by SFAS No. 131, "Disclosure About Segments of an Enterprise and
Related Information," the Company has restated disclosure information for
earlier periods to reflect its three separate operating groups.
The Company supplies products and services to the general aviation industry.
The Company's subsidiaries are organized into three groups, each of which are
strategic businesses that are managed separately because each business develops,
manufactures and sells distinct products and services. The groups and a
description of their businesses are as follows:
- Cabin Management -- provides interior cabin components for the corporate
aircraft market, including furniture, cabinetry, seats and in-flight
entertainment systems;
- Specialty Avionics -- designs, engineers and manufactures electronic
components, display devices and interconnect components and assemblies;
and
- Systems Integration -- provides auxiliary fuel tanks, auxiliary power
units and system integration services.
Management utilizes more than one measurement to evaluate group performance
and allocate resources, however, management considers the primary measure to be
earnings before interest, income taxes, depreciation and amortization, and other
restructuring and non-operating items (referred to herein as EBITDA) as a
measurement of their overall economic returns and cash flows. This is consistent
with the manner in which the Company's overall performance is measured by its
ultimate investors.
61
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19 - BUSINESS SEGMENT INFORMATION (CONTINUED)
The accounting policies of the groups are substantially the same as those
described in the summary of significant accounting policies (Note 1). Some items
are maintained at the Company's corporate headquarters and are not allocated to
the groups. They include most of the Company's debt, cash and cash equivalents
and related net interest expense, corporate headquarters costs and income taxes.
(PREDECESSOR)
---------------------------
EIGHT MONTHS FOUR MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, AUGUST 31, DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999
------------ ------------ ------------ ------------
(IN THOUSANDS) (IN THOUSANDS)
BUSINESS SEGMENT INFORMATION
Revenues
Cabin Management.................................... $ 1,263 $ 13,449 $ 10,059 $ 74,244
Specialty Avionics.................................. 85,614 62,559 42,411 112,501
Systems Integration................................. 22,962 14,276 8,331 58,483
Inter-group elimination (1)......................... (936) (207) (445) (1,180)
-------- -------- -------- --------
Consolidated totals............................... $108,903 $ 90,077 $ 60,356 $244,048
======== ======== ======== ========
EBITDA (2)
Cabin Management.................................... $ 56 $ 3,051 $ 3,100 $ 24,153
Specialty Avionics.................................. 20,201 17,401 11,833 27,240
Systems Integration................................. 555 702 (16) 10,569
Corporate (3)....................................... (3,897) (7,411) (1,441) (5,436)
-------- -------- -------- --------
Consolidated EBITDA............................... $ 16,915 $ 13,743 $ 13,476 $ 56,526
======== ======== ======== ========
Depreciation and amortization (4)
Cabin Management.................................... $ 111 $ 670 $ 530 $ 3,548
Specialty Avionics.................................. 4,061 3,079 3,600 10,871
Systems Integration................................. 671 560 420 4,473
Corporate........................................... 77 49 54 294
-------- -------- -------- --------
Consolidated totals............................... $ 4,920 $ 4,358 $ 4,604 $ 19,186
======== ======== ======== ========
Total assets
Cabin Management.................................... $ 25,580 $ 30,822 $ 36,469 $181,780
Specialty Avionics.................................. 53,310 139,382 232,959 224,218
Systems Integration................................. 19,944 22,308 38,299 87,711
Corporate........................................... 303 13,117 23,200 32,027
-------- -------- -------- --------
Consolidated totals............................... $ 99,137 $205,629 $330,927 $525,736
======== ======== ======== ========
Capital expenditures (5)
Cabin Management.................................... $ 24 $ 644 $ 468 $ 2,355
Specialty Avionics.................................. 1,586 964 1,209 3,217
Systems Integration................................. 2,049 94 136 1,534
Corporate........................................... 183 43 -- 156
-------- -------- -------- --------
Consolidated totals............................... $ 3,842 $ 1,745 $ 1,813 $ 7,262
======== ======== ======== ========
GEOGRAPHICAL AREA INFORMATION
Consolidated net revenues to unaffiliated customers
(6)
United States....................................... $106,869 $ 87,696 $ 59,341 $241,905
Western Europe...................................... 2,034 2,381 1,015 2,143
-------- -------- -------- --------
Consolidated totals............................... $108,903 $ 90,077 $ 60,356 $244,048
======== ======== ======== ========
Consolidated long-lived assets (7)
United States....................................... $ 13,230 $ 24,693 $ 26,455 $ 35,465
Western Europe...................................... 824 543 1,705 2,235
-------- -------- -------- --------
Consolidated totals............................... $ 14,054 $ 25,236 $ 28,160 $ 37,700
======== ======== ======== ========
- ------------------------
The notes appear on the next page.
62
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19 - BUSINESS SEGMENT INFORMATION (CONTINUED)
NOTES TO BUSINESS SEGMENT INFORMATION
(1) Inter-group sales are accounted for at prices comparable to sales to
unaffiliated customers, and are eliminated in consolidation.
(2) A reconciliation of EBITDA to consolidated income (loss) before income taxes
and extraordinary item is as follows:
(PREDECESSOR)
---------------------------
EIGHT MONTHS FOUR MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, AUGUST 31, DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999
------------ ------------ ------------ ------------
(IN THOUSANDS) (IN THOUSANDS)
Consolidated EBITDA.......................... $16,915 $13,743 $13,476 $ 56,526
Restructuring and asset impairment charges... -- -- -- (9,935)
Depreciation and amortization................ (4,920) (4,358) (4,604) (19,186)
Noncash acquisition related charges.......... -- -- (4,448) (1,606)
DLJ advisory fees and other non-operating
costs...................................... -- (107) (229) (1,498)
Interest expense............................. (3,154) (2,350) (6,867) (27,903)
Terminated debt offering expenses............ -- (600) -- --
Other (expenses) income...................... (243) (247) (335) 199
------- ------- ------- --------
Consolidated income (loss) before income
taxes and extraordinary item............. $ 8,598 $ 6,081 $(3,007) $ (3,403)
======= ======= ======= ========
(3) Reflects the Company's corporate headquarters costs and expenses not
allocated to the groups.
(4) Reflects depreciation and amortization of long-lived assets, goodwill and
other intangible assets. Excludes amortization of deferred financing costs,
which are classified as a component of interest expense, of $452,000,
$96,000, $394,000 and $1,616,000 for the year ended December 31, 1997, the
eight months ended August 31, 1998, the four months ended December 31, 1998
and the year ended December 31, 1999, respectively.
(5) Reflects capital expenditures paid in cash. Excludes capital expenditures
financed with capital lease obligations of $182,000, $116,000, $48,000 and
$1,711,000 for the year ended December 31, 1997, the eight months ended
August 31, 1998, the four months ended December 31, 1998 and the year ended
December 31, 1999, respectively.
(6) Allocated on the basis of the location of the subsidiary originating the
sale.
(7) Allocated on the basis of the location of the subsidiary and consists of the
Company's property and equipment. Corporate long-lived assets are included
with the United States assets.
63
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
In conjunction with the senior credit facility and 12% senior subordinated
notes described in Note 11, the following condensed consolidating financial
information is presented for the Company, segregating guarantor and
non-guarantor subsidiaries. The accompanying financial information in the
Guarantor Subsidiaries column reflects the financial position, results of
operations and cash flows for those subsidiaries guaranteeing the senior credit
facility and the notes. The guarantor subsidiaries are wholly-owned subsidiaries
of the Company and their guarantees are full and unconditional on a joint and
several basis. There are no restrictions on the ability of the guarantor
subsidiaries to transfer funds to the issuer in the form of cash dividends,
loans or advances. Separate financial statements of the guarantor subsidiaries
are not presented because management believes that such financial statements
would not be material to investors. Investments in subsidiaries in the following
condensed consolidating financial information are accounted for under the equity
method of accounting. Consolidating adjustments include the following:
(1) Elimination of investments in subsidiaries.
(2) Elimination of intercompany accounts.
(3) Elimination of intercompany sales between guarantor and non-guarantor
subsidiaries.
(4) Elimination of equity in earnings of subsidiaries.
64
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
BALANCE SHEETS
DECEMBER 31, 1998
----------------------------------------------------------------------
DECRANE GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
-------- ------------ ------------- ------------- ------------
(IN THOUSANDS)
ASSETS
Current assets
Cash and cash equivalents.................... $ 2,458 $ 762 $ 298 $ -- $ 3,518
Accounts receivable, net..................... -- 28,917 1,524 -- 30,441
Inventories.................................. -- 32,624 1,657 -- 34,281
Other current assets......................... 7,066 894 237 -- 8,197
-------- -------- ------- --------- --------
Total current assets..................... 9,524 63,197 3,716 -- 76,437
Property and equipment, net...................... 272 26,170 1,718 -- 28,160
Other assets, principally intangibles, net....... 11,753 200,383 13,842 -- 225,978
Investments in subsidiaries...................... 250,366 20,114 -- (270,480)(1) --
Intercompany receivables......................... 39,012 2,091 3,622 (44,725)(2) --
-------- -------- ------- --------- --------
Total assets............................. $310,927 $311,955 $22,898 $(315,205) $330,575
======== ======== ======= ========= ========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings........................ $ 892 $ 628 $ 292 $ -- $ 1,812
Other current liabilities.................... 10,573 16,651 1,174 -- 28,398
-------- -------- ------- --------- --------
Total current liabilities................ 11,465 17,279 1,466 -- 30,210
-------- -------- ------- --------- --------
Long-term debt................................... 184,822 131 -- -- 184,953
Intercompany payables............................ 873 43,521 331 (44,725)(2) --
Other long-term liabilities...................... 16,278 658 713 -- 17,649
Mandatorily redeemable preferred stock........... 35,884 -- -- -- 35,884
-------- -------- ------- --------- --------
Stockholders' equity
Paid-in capital.............................. 64,173 210,787 15,440 (226,227)(1) 64,173
Retained earnings (deficit).................. (2,568) 39,579 4,674 (44,253)(1) (2,568)
Accumulated other comprehensive income....... -- -- 274 -- 274
-------- -------- ------- --------- --------
Total stockholders' equity............... 61,605 250,366 20,388 (270,480) 61,879
-------- -------- ------- --------- --------
Total liabilities, mandatorily
redeemable preferred stock and
stockholders' equity............... $310,927 $311,955 $22,898 $(315,205) $330,575
======== ======== ======= ========= ========
65
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1999
----------------------------------------------------------------------
DECRANE GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
-------- ------------ ------------- ------------- ------------
(IN THOUSANDS)
ASSETS
Current assets
Cash and cash equivalents.................... $ 7,839 $ (323) $ 402 $ -- $ 7,918
Accounts receivable, net..................... -- 38,201 1,379 -- 39,580
Inventories.................................. -- 57,072 1,649 -- 58,721
Other current assets......................... 6,645 938 123 -- 7,706
-------- -------- ------- --------- --------
Total current assets..................... 14,484 95,888 3,553 -- 113,925
Property and equipment, net...................... 1,282 34,174 2,244 -- 37,700
Other assets, principally intangibles, net....... 17,065 344,986 12,060 -- 374,111
Investments in subsidiaries...................... 360,515 20,305 -- (380,820)(1) --
Intercompany receivables......................... 77,566 17,334 2,612 (97,512)(2) --
-------- -------- ------- --------- --------
Total assets......................... $470,912 $512,687 $20,469 $(478,332) $525,736
======== ======== ======= ========= ========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings........................ $ 4,640 $ 404 $ 26 $ -- $ 5,070
Other current liabilities.................... 10,237 68,691 678 -- 79,606
-------- -------- ------- --------- --------
Total current liabilities................ 14,877 69,095 704 -- 84,676
-------- -------- ------- --------- --------
Long-term debt................................... 309,836 712 33 -- 310,581
Intercompany payables............................ 17,797 79,384 331 (97,512)(2) --
Other long-term liabilities...................... 20,635 2,981 622 -- 24,238
Mandatorily redeemable preferred stock........... 41,178 -- -- -- 41,178
-------- -------- ------- --------- --------
Stockholders' equity
Paid-in capital.............................. 73,512 289,415 15,440 (304,855)(1) 73,512
Retained earnings (deficit).................. (6,923) 71,100 4,865 (75,965)(1) (6,923)
Accumulated other comprehensive income
(loss)..................................... -- -- (1,526) -- (1,526)
-------- -------- ------- --------- --------
Total stockholders' equity............... 66,589 360,515 18,779 (380,820) 65,063
-------- -------- ------- --------- --------
Total liabilities, mandatorily
redeemable preferred stock and
stockholders' equity............... $470,912 $512,687 $20,469 $(478,332) $525,736
======== ======== ======= ========= ========
66
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 (PREDECESSOR)
----------------------------------------------------------------------
DECRANE GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
AIRCRAFT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
-------- ------------ ------------- ------------- ------------
(IN THOUSANDS)
Revenues.......................................... $ -- $106,154 $13,128 $(10,379)(3) $108,903
Cost of sales..................................... -- 81,115 9,511 (10,379)(3) 80,247
------- -------- ------- -------- --------
Gross profit...................................... -- 25,039 3,617 -- 28,656
Selling, general and administrative expenses...... 3,646 10,720 1,390 -- 15,756
Amortization of intangible assets................. -- 892 13 -- 905
Interest expense.................................. 2,888 220 46 -- 3,154
Intercompany charges.............................. (4,617) 4,432 185 -- --
Equity in earnings of subsidiaries................ (6,392) (999) -- 7,391(4) --
Other expenses.................................... -- 161 82 -- 243
Provision (benefit) for income taxes.............. (779) 3,678 445 -- 3,344
Extraordinary charge, net of tax.................. 2,078 -- -- -- 2,078
------- -------- ------- -------- --------
Net income........................................ $ 3,176 $ 5,935 $ 1,456 $ (7,391) $ 3,176
======= ======== ======= ======== ========
EIGHT MONTHS ENDED AUGUST 31, 1998 (PREDECESSOR)
----------------------------------------------------------------------
DECRANE GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
AIRCRAFT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
-------- ------------ ------------- ------------- ------------
(IN THOUSANDS)
Revenues.......................................... $ -- $87,312 $8,503 $(5,738)(3) $90,077
Cost of sales..................................... -- 59,252 6,587 (5,738)(3) 60,101
------- ------- ------ ------- -------
Gross profit...................................... -- 28,060 1,916 -- 29,976
Selling, general and administrative expenses...... 3,949 11,041 729 -- 15,719
Nonrecurring charges.............................. 3,632 -- -- -- 3,632
Amortization of intangible assets................. -- 1,337 10 -- 1,347
Interest expense.................................. 2,343 7 -- -- 2,350
Intercompany charges.............................. (4,357) 4,229 128 -- --
Equity in earnings of subsidiaries................ (6,824) (489) -- 7,313(4) --
Other expenses (income)........................... 600 (164) 411 -- 847
Provision (benefit) for income taxes.............. (2,532) 5,275 149 -- 2,892
------- ------- ------ ------- -------
Net income........................................ $ 3,189 $ 6,824 $ 489 $(7,313) $ 3,189
======= ======= ====== ======= =======
67
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
FOUR MONTHS ENDED DECEMBER 31, 1998
----------------------------------------------------------------------
DECRANE GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
-------- ------------ ------------- ------------- ------------
(IN THOUSANDS)
Revenues.......................................... $ -- $58,904 $5,041 $(3,589)(3) $60,356
Cost of sales..................................... -- 42,691 3,637 (3,589)(3) 42,739
------- ------- ------ ------- -------
Gross profit...................................... -- 16,213 1,404 -- 17,617
Selling, general and administrative expenses...... 1,741 8,124 409 -- 10,274
Amortization of intangible assets................. 102 2,868 178 -- 3,148
Interest expense.................................. 6,769 92 6 -- 6,867
Intercompany charges.............................. (3,088) 3,025 63 -- --
Equity in earnings of subsidiaries................ (7,753) (506) -- 8,259(4) --
Other expenses.................................... -- 132 203 -- 335
Provision for income taxes (benefit).............. 2,568 (5,275) 39 -- (2,668)
Extraordinary charge, net of tax.................. 2,229 -- -- -- 2,229
------- ------- ------ ------- -------
Net income (loss)................................. $(2,568) $ 7,753 $ 506 $(8,259) $(2,568)
======= ======= ====== ======= =======
YEAR ENDED DECEMBER 31, 1999
----------------------------------------------------------------------
DECRANE GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
-------- ------------ ------------- ------------- ------------
(IN THOUSANDS)
Revenues.......................................... $ -- $237,837 $11,549 $ (5,338)(3) $244,048
Cost of sales..................................... -- 161,770 9,439 (5,338)(3) 165,871
------- -------- ------- -------- --------
Gross profit...................................... -- 76,067 2,110 -- 78,177
Selling, general and administrative expenses...... 7,065 32,232 1,506 -- 40,803
Amortization of intangible assets................. 161 12,417 495 -- 13,073
Interest expense.................................. 23,547 4,317 39 -- 27,903
Intercompany charges.............................. (4,957) 4,957 -- -- --
Equity in earnings of subsidiaries................ (12,611) (406) -- 13,017(4) --
Other expenses (income)........................... -- 219 (418) -- (199)
Provision for income taxes (benefit).............. (8,850) 9,720 82 -- 952
Extraordinary charge, net of tax.................. -- -- -- --
------- -------- ------- -------- --------
Net income (loss)................................. $(4,355) $ 12,611 $ 406 $(13,017) $ (4,355)
======= ======== ======= ======== ========
68
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997 (PREDECESSOR)
----------------------------------------------------------------------
DECRANE GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
AIRCRAFT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
-------- ------------ ------------- ------------- ------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................... $ 3,176 $ 5,935 $ 1,456 $(7,391)(4) $ 3,176
Adjustments to net income
Noncash adjustments to net
income........................... 1,307 4,687 829 -- 6,823
Equity in earnings of
subsidiaries..................... (6,392) (999) -- 7,391(4) --
Changes in working capital......... 2,503 (5,659) (2,202) -- (5,358)
-------- ------- ------- ------- --------
Net cash provided by operating
activities..................... 594 3,964 83 -- 4,641
-------- ------- ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of companies, net of cash
acquired........................... (24,726) 1,129 -- -- (23,597)
Capital expenditures and other....... (244) (3,823) (145) -- (4,212)
-------- ------- ------- ------- --------
Net cash used for investing
activities..................... (24,970) (2,694) (145) -- (27,809)
-------- ------- ------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of equity..... 28,933 -- -- -- 28,933
Net debt repaid with equity offering
proceeds........................... (29,848) -- -- -- (29,848)
Debt financing for acquisitions...... 23,597 -- -- -- 23,597
Principal payments on long-term debt
and leases......................... (474) (1,147) (54) -- (1,675)
Line of credit borrowings
(repayments)....................... 1,907 -- (96) -- 1,811
Other, net........................... 240 (101) -- -- 139
-------- ------- ------- ------- --------
Net cash provided by (used for)
financing activities........... 24,355 (1,248) (150) -- 22,957
-------- ------- ------- ------- --------
Effect of foreign currency translation
on cash.............................. -- -- 97 -- 97
-------- ------- ------- ------- --------
Net increase (decrease) in cash and
equivalents.......................... (21) 22 (115) -- (114)
-------- ------- ------- ------- --------
Cash and equivalents at beginning of
period............................... 37 87 196 -- 320
-------- ------- ------- ------- --------
Cash and equivalents at end of
period............................... $ 16 $ 109 $ 81 $-- $ 206
======== ======= ======= ======= ========
69
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS (CONTINUED)
EIGHT MONTHS ENDED AUGUST 31, 1998 (PREDECESSOR)
----------------------------------------------------------------------
DECRANE GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
AIRCRAFT SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
-------- ------------ ------------- ------------- ------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................... $ 3,189 $ 6,824 $ 489 $(7,313)(4) $ 3,189
Adjustments to net income
Noncash net income adjustments..... (2,222) 3,420 557 -- 1,755
Equity in earnings of
subsidiaries..................... (6,824) (489) -- 7,313(4) --
Changes in working capital......... 5,492 (7,393) (29) -- (1,930)
-------- ------- ------ ------- --------
Net cash provided by (used for)
operating activities........... (365) 2,362 1,017 -- 3,014
-------- ------- ------ ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisitions, net of
cash acquired...................... (87,071) 1,263 -- -- (85,808)
Capital expenditures and other....... (44) (1,306) (220) -- (1,570)
-------- ------- ------ ------- --------
Net cash used for investing
activities..................... (87,115) (43) (220) -- (87,378)
-------- ------- ------ ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net revolving line of credit
borrowings......................... 57,000 -- (554) -- 56,446
Net proceeds from sale of common
stock.............................. 34,815 -- -- -- 34,815
Principal payments on long-term debt
and leases......................... (3) (1,280) (34) -- (1,317)
Other, net........................... 23 (96) -- -- (73)
-------- ------- ------ ------- --------
Net cash provided by (used for)
financing activities........... 91,835 (1,376) (588) -- 89,871
-------- ------- ------ ------- --------
Effect of foreign currency translation
on cash.............................. -- -- 26 -- 26
-------- ------- ------ ------- --------
Net increase in cash and equivalents... 4,355 943 235 -- 5,533
Cash and equivalents at beginning of
period............................... 16 109 81 -- 206
-------- ------- ------ ------- --------
Cash and equivalents at end of
period............................... $ 4,371 $ 1,052 $ 316 $-- $ 5,739
======== ======= ====== ======= ========
70
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS (CONTINUED)
FOUR MONTHS ENDED DECEMBER 31, 1998
-----------------------------------------------------------------------
DECRANE GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
--------- ------------ ------------- ------------- ------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................... $ (2,568) $ 7,753 $ 506 $(8,259)(4) $ (2,568)
Adjustments to net income
Noncash adjustments to net
income.......................... (2,632) 4,964 (274) -- 2,058
Equity in earnings of
subsidiaries.................... (7,753) (506) -- 8,259(4) --
Changes in working capital........ 12,408 (10,272) (618) -- 1,518
--------- -------- ----- ------- ---------
Net cash provided by (used for)
operating activities.......... (545) 1,939 (386) -- 1,008
--------- -------- ----- ------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisitions, net of
cash acquired..................... (186,494) 1,052 316 -- (185,126)
Capital expenditures and other...... -- (1,746) (67) -- (1,813)
--------- -------- ----- ------- ---------
Net cash provided by (used for)
investing activities.......... (186,494) (694) 249 -- (186,939)
--------- -------- ----- ------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Financing of DeCrane Aircraft
acquisition....................... 190,865 -- -- -- 190,865
Line of credit borrowings
(repayments)...................... (1,367) -- 264 -- (1,103)
Principal payments on long-term debt
and leases........................ (1) (447) (10) -- (458)
Other, net.......................... -- (36) -- -- (36)
--------- -------- ----- ------- ---------
Net cash provided by (used for)
financing activities.......... 189,497 (483) 254 -- 189,268
--------- -------- ----- ------- ---------
Effect of foreign currency translation
on cash............................. -- -- 181 -- 181
--------- -------- ----- ------- ---------
Net increase in cash and
equivalents......................... 2,458 762 298 -- 3,518
Cash and equivalents at beginning of
period.............................. -- -- -- -- --
--------- -------- ----- ------- ---------
Cash and equivalents at end of
period.............................. $ 2,458 $ 762 $ 298 $-- $ 3,518
========= ======== ===== ======= =========
71
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------------------------------
DECRANE GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
--------- ------------ ------------- ------------- ------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................... $ (4,355) $ 12,611 $ 406 $ (13,017)(4) $ (4,355)
Adjustments to net income (loss)
Noncash net income adjustments.... 1,772 25,188 836 -- 27,796
Equity in earnings of
subsidiaries.................... (12,611) (406) -- 13,017(4) --
Changes in working capital........ 30,867 (38,903) (205) -- (8,241)
--------- -------- ------ --------- ---------
Net cash provided by (used for)
operating activities.......... 15,673 (1,510) 1,037 -- 15,200
--------- -------- ------ --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisitions, net of
cash acquired..................... (148,310) 2,604 -- -- (145,706)
Capital expenditures and other...... (156) (6,289) (623) -- (7,068)
--------- -------- ------ --------- ---------
Net cash used for investing
activities.................... (148,466) (3,685) (623) -- (152,774)
--------- -------- ------ --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Debt financing for acquisitions..... 135,000 -- -- -- 135,000
Proceeds from sale of common
stock............................. 14,511 -- -- -- 14,511
Customer advance.................... -- 5,000 -- -- 5,000
Net revolving line of credit
borrowings........................ (5,800) -- -- (5,800)
Principal payments on long-term debt
and leases........................ (1,046) (675) (232) -- (1,953)
Other, net.......................... (4,491) (215) -- -- (4,706)
--------- -------- ------ --------- ---------
Net cash provided by (used for)
financing activities.......... 138,174 4,110 (232) -- 142,052
--------- -------- ------ --------- ---------
Effect of foreign currency translation
on cash............................. -- -- (78) -- (78)
--------- -------- ------ --------- ---------
Net increase (decrease) in cash and
equivalents......................... 5,381 (1,085) 104 -- 4,400
Cash and equivalents at beginning of
period.............................. 2,458 762 298 -- 3,518
--------- -------- ------ --------- ---------
Cash and equivalents at end of
period.............................. $ 7,839 $ (323) $ 402 $ -- $ 7,918
========= ======== ====== ========= =========
72
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21 - CONDENSED QUARTERLY DATA FOR 1998 AND 1999 (UNAUDITED)
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------------------
PREDECESSOR
--------------------------------
TWO MONTHS ONE MONTH
AUGUST 31, SEPTEMBER 30,
1998 1998
1ST 2ND 3RD 3RD 4TH
-------- -------- ---------- ------------- --------
Revenues...................................... $29,128 $29,854 $31,095 $16,012 $44,344
Gross profit.................................. 8,987 9,720 11,269 4,932 12,685
Income (loss) before extraordinary item....... 1,688 1,672 (171) (484) 145
Extraordinary loss from debt refinancing...... -- -- -- (296) (1,933)
Net income (loss)............................. 1,688 1,672 (171) (780) (1,788)
YEAR ENDED DECEMBER 31, 1999
-----------------------------------------
1ST 2ND 3RD 4TH
-------- -------- -------- --------
Revenues.................................................... $49,895 $62,703 $65,238 $66,212
Gross profit................................................ 16,000 20,624 23,131 18,422
Net income (loss)........................................... (275) 92 683 (4,855)
During the fourth quarter of 1999 the Company announced a plan to reorganize
and restructure the operations of two of its subsidiaries within the Systems
Integration Group (Note 5). As a result, a restructuring and asset impairment
charge aggregating $9,148,000 was recorded in the fourth quarter. In addition,
charges aggregating $787,000 related to this restructuring were charged to
operations during the first three quarters of 1999, for a total restructuring
and impairment charge of $9,935,000 for the year.
73
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COST AND CHARGED TO END OF
CLASSIFICATION PERIOD EXPENSE OTHER ACCOUNTS DEDUCTIONS PERIOD
- -------------- ------------ ---------- -------------- ---------- ----------
(PREDECESSOR)
YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful accounts........... $ 379 $ 111 $ 174(A) $ 177 $ 487
Reserve for excess, slow moving and
potentially obsolete material........... 2,093 1,374 59(A) 162 3,364
EIGHT MONTHS ENDED AUGUST 31, 1998
Allowance for doubtful accounts........... $ 487 $ 384 $ 32(A) $ 376 $ 527
Reserve for excess, slow moving and
potentially obsolete material........... 3,364 760 2,056(A) 311 5,869
FOUR MONTHS ENDED DECEMBER 31, 1998
Allowance for doubtful accounts........... $ 527(A) $ 243 $ -- $ 189 $ 581
Reserve for excess, slow moving and
potentially obsolete material........... 5,869(A) 285 -- 452 5,702
YEAR ENDED DECEMBER 31, 1999
Allowance for doubtful accounts........... $ 581 $1,252 $1,407(A) $1,274 $1,966
Reserve for excess, slow moving and
potentially obsolete material (B)....... 5,702 1,373 2,567(A) 2,676 6,966
- ------------------------
(A) Attributable to companies acquired. Reflects historical amounts used to
determine the fair value of assets acquired.
(B) Excludes $5,983,000 of inventory write-downs resulting from the plan to
reorganize and restructure the operations of two subsidiaries.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
74
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning each person
who is currently a director or executive officer of DeCrane Holdings. Each
director also serves as a director of DeCrane Aircraft.
NAME AGE POSITION
- ---- -------------------- --------
Thompson Dean............................. 41 Chairman of the Board of Directors and President of DeCrane
Holdings
R. Jack DeCrane........................... 53 Director of DeCrane Holdings and Chief Executive Officer of
DeCrane Aircraft
Charles H. Becker......................... 54 Senior Vice President and Group President of DeCrane
Aircraft
Richard J. Kaplan......................... 57 Assistant Secretary and Assistant Treasurer (chief
accounting officer) of DeCrane Holdings and Senior Vice
President, Chief Financial Officer, Secretary and Treasurer
of DeCrane Aircraft
Robert G. Martin.......................... 62 Senior Vice President and Group President of DeCrane
Aircraft
Jeffrey A. Nerland........................ 42 Vice President, Business Development of DeCrane Aircraft
Jeffrey F. Smith.......................... 39 Senior Vice President and Group President of DeCrane
Aircraft
John F. Fort, III......................... 58 Director
Dr. Robert J. Hermann..................... 66 Director
Dr. Paul G. Kaminski...................... 57 Director
Douglas L. Meltzer........................ 32 Director
Susan C. Schnabel......................... 38 Director
THOMPSON DEAN has been the Managing Partner of DLJ Merchant Banking, Inc.
since November 1996. Previously, Mr. Dean was a Managing Director of DLJ
Merchant Banking, Inc. and its predecessor. Mr. Dean serves as a director of
Commvault Inc., Von Hoffman Press, Inc., Manufacturer's Services Limited, Phase
Metrics, Inc., AKI Holding Corp. and Insilco Holding Corporation. He became a
director in 1998.
R. JACK DECRANE is the founder of DeCrane Aircraft. Mr. DeCrane served as
President of DeCrane Aircraft since it was founded in December 1989 until April
1993 when he was elected to the newly-created office of Chief Executive Officer.
Prior to founding our company, Mr. DeCrane held various positions at the
aerospace division of B.F. Goodrich. Mr. DeCrane was a Group Vice President at
the aerospace division of B.F. Goodrich with management responsibility for three
business units from 1986 to 1989. He has served on our board of directors since
its inception.
CHARLES H. BECKER has been DeCrane Aircraft's Senior Vice President and
President of the Cabin Management Group since October 1999. Mr. Becker
previously served as President and Chief Operating Officer of DeCrane Aircraft
from April 1998 to October 1999, Group Vice President of Components of DeCrane
Aircraft from December 1996 to April 1998, and President of Tri-Star from
December 1994 to April 1998. Prior to joining us, Mr. Becker was President of
the Interconnect Systems Division of Microdot, Inc., a manufacturer of contacts
and connectors for aerospace applications, from 1984 to 1994.
RICHARD J. KAPLAN has been the Senior Vice President, Chief Financial
Officer, Secretary and Treasurer of DeCrane Aircraft since March 1999. From
April 1998 to March 1999, he served as Executive Vice President and Chief
Operating Officer of Developers Diversified Realty Corporation. From 1977 to
1998, he was a partner with Price Waterhouse LLP, having joined the firm in
1964.
ROBERT G. MARTIN has been DeCrane Aircraft's Senior Vice President and
President of the Systems Integration Group since October 1999 and President of
PATS since we acquired it in January 1999. Mr. Martin also served as President
of Aerospace Display Systems from September 1996 until October 1999. Prior to
our acquisition of Aerospace Display Systems in 1996, Mr. Martin had served as
its President since 1992.
JEFFREY A. NERLAND has been DeCrane Aircraft's Vice President, Business
Development, since January 1999. From July 1994 through December 1998, he was
President of The Nerland Group and a partner with Budetti, Harrison, Nerland and
Associates, a consulting and interim management firm. Previously, Mr. Nerland
was a director with Kibel, Green Inc., a consulting firm.
75
JEFFREY F. SMITH has been DeCrane Aircraft's Senior Vice President and
President of the Specialty Avionics Group since October 1999 and President of
Avtech since we acquired it in June 1998. Previously, he has served in various
capacities with Avtech since 1989.
JOHN F. FORT, III served as Chairman of the Board of Directors of Tyco
International, Inc. from 1982 to December 1992, and as Chief Executive Officer
from 1982 to June 1992. Mr. Fort serves as a director of Tyco International,
Inc., Dover Corporation and Roper Industries. He became a director in 1998.
DR. ROBERT J. HERMANN is a Senior Partner of Global Technology Partners.
Dr. Hermann most recently served as Senior Vice President for Science and
Technology at United Technologies Corporation and served in various other
capacities at United Technologies Corporation since 1982. Prior to joining
United Technologies Corporation, Dr. Hermann spent 20 years with the National
Security Agency. In 1977 he was appointed Principal Deputy Assistant Secretary
of Defense for Communications, Command, Control and Intelligence, and in 1979
was named Assistant Secretary of the Air Force for Research, Development and
Logistics and Director of the National Reconnaissance Office. He became a
director in 1998.
DR. PAUL G. KAMINSKI is a Senior Partner of Global Technology Partners.
Dr. Kaminski currently serves as Chief Executive Officer of Technovation, Inc.,
a consulting firm focusing on business strategy and advanced technology.
Dr. Kaminski served as U.S. Undersecretary of Defense for Acquisition and
Technology from October 1994 to 1997. Prior to that time, he served as Chairman
and Chief Executive Officer of Technology Strategies and Alliances.
Dr. Kaminski is a former Chairman of the Defense Science Board and is currently
a member of the Senate Select Committee on Intelligence-Technical Advisory
Group, the NRO Advisory Council and the National Academy of Engineering.
Dr. Kaminski is a director of General Dynamics Corporation, Dyncorp,
Eagle-Picher Technologies and several privately held information technology
companies. He became a director in 1998.
DOUGLAS L. MELTZER has been a Vice President of DLJ Merchant Banking, Inc.
since January 1999. From August 1995 to January 1999 he was an Associate of
DLJ Merchant Banking, Inc. Previously, he was Director of Strategic Planning
with Recycler Classifieds. Prior to that, he was an Associate and Analyst with
DLJ Merchant Banking, Inc. (and its predecessor) and an analyst with Donaldson,
Lufkin and Jenrette Securities Corporation.
SUSAN C. SCHNABEL has been a Managing Director of DLJ Merchant
Banking, Inc. since January 1998. In 1997, she served as Chief Financial Officer
of PETsMART, a specialty retailer of pet products and supplies. From 1990 to
1996, Ms. Schnabel was with Donaldson, Lufkin & Jenrette Securities Corporation,
where she became a Managing Director in 1996. Ms. Schnabel serves as a director
of Dick's Clothing and Sporting Goods, Environmental Systems Products and
Wavetek Corporation. She became a director in 1998.
An agreement entered into in connection with the DLJ acquisition entitled a
holding company controlled by DLJ Merchant Banking Partners II, L.P. to
designate a number of directors proportionally commensurate with its stock
ownership of DeCrane Aircraft. DeCrane Holdings selected all of the current
members of the Board of Directors of DeCrane Aircraft. DLJ Merchant Banking or
its designate selected all of the members of the Board of Directors of DeCrane
Holdings.
76
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table describes all annual compensation awarded to, earned by
or paid to our Chief Executive Officer and the four most highly compensated
executive officers other than the Chief Executive Officer for the years ended
December 31, 1999, 1998 and 1997.
ALL OTHER
ANNUAL COMPENSATION COMPENSATION
----------------------------------------------- -----------------------------------
OTHER ANNUAL SECURITIES
COMPENSATION UNDERLYING OTHER
YEAR SALARY BONUS (1) OPTIONS(2) (3)
-------- -------- ---------- ------------ ------------------------ --------
R. Jack DeCrane........................... 1999 $334,791 $ 700,000 $30,873 106,877 $ 9,025
Chief Executive Officer 1998 281,761 1,044,000 30,151 50,000 34,064
and Director(4) 1997 244,744 220,000 -- 50,000 29,411
Charles H. Becker......................... 1999 $235,000 $ 210,000 $19,158 26,719 --
Senior Vice President(5) 1998 206,948 160,000 14,678 -- --
1997 174,492 102,000 6,168 15,000 $18,000
Richard J. Kaplan......................... 1999 $158,333 $ 258,000 $13,572 28,669 --
Senior Vice President(6) 1998 -- -- -- -- --
1997 -- -- -- -- --
Robert G. Martin.......................... 1999 $187,500 $ 209,000 $ 1,300 17,813 --
Senior Vice President(7) 1998 172,000 66,000 1,300 -- --
1997 130,000 66,000 1,300 10,000 --
Jeffrey A. Nerland........................ 1999 $160,000 $ 181,000 $ 6,366 10,688 --
Vice President(8) 1998 -- -- -- -- --
1997 -- -- -- -- --
- --------------------------
(1) Amounts paid by us for premiums on health, life and long-term disability
insurance and automobile leases provided by us for the benefit of the named
executive officer.
(2) Number of shares of common stock of DeCrane Holdings issuable upon exercise
of options granted pursuant to our management incentive plan during the last
fiscal year.
(3) Relocation costs.
(4) Mr. DeCrane also served as Chairman of the Board of Directors through August
1998.
(5) Mr. Becker served as Group Vice President of Components, and President of
Tri-Star, through April 1998. Mr. Becker became President and Chief
Operating Officer in April 1998 and Senior Vice President and Group
President of Cabin Management in October, 1999.
(6) Mr. Kaplan joined DeCrane Aircraft as Senior Vice President on March 15,
1999.
(7) Mr. Martin served as President Aerospace Display Systems from September 1996
until October 1999. Mr. Martin has been President of PATS since we acquired
it in January 1999, and became our Senior Vice President and Group President
of Systems Integration in October 1999.
(8) Prior to Mr. Nerland joining DeCrane Aircraft on January 1, 1999, he
provided consulting services to us during 1998 for which either Mr. Nerland
or The Nerland Group, of which Mr. Nerland was a principal, was paid a total
of $127,800 in 1998 and early 1999, which amount has been excluded from the
table above.
77
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth individual grants of options to purchase
shares of DeCrane Holdings common stock granted to the executive officers named
below during the fiscal year ended December 31, 1999, pursuant to the management
incentive plan. See "Employment Agreements and Compensation Arrangements --
INCENTIVE PLANS."
POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED
SECURITIES ANNUAL RATES OF STOCK
UNDERLYING % OF EXERCISE OR PRICE APPRECIATION (1)
OPTIONS OPTIONS BASE PRICE EXPIRATION -----------------------
NAME GRANTED GRANTED PER SHARE DATE 5% 10%
- ---- ---------- -------- ----------- ---------- ---------- ----------
R. Jack DeCrane............................ 106,877 38.2% $23.00 2009 $1,545,931 $3,917,691
Charles H. Becker.......................... 26,719 9.6 23.00 2009 386,479 979,414
Richard J. Kaplan.......................... 28,669 10.3 23.00 2009 414,685 1,050,893
Robert G. Martin........................... 17,813 6.4 23.00 2009 257,657 652,955
Jeffrey A. Nerland......................... 10,688 3.8 23.00 2009 154,597 391,780
- ------------------------
(1) The potential realizable value assumes stock price appreciation rates of 5%
and 10%, compounded annually, from the date the option was granted over the
full option term. These assumed annual compound rates are mandated by the
rules of the Securities and Exchange Commission and do not represent our
estimate or projection of future prices of the stock.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
No stock options were exercised by our executive officers during the year
ended December 31, 1999. The following tables sets forth information about the
stock options held by the executive officers named below as of December 31,
1999.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
NAME OPTIONS AT FISCAL YEAR-END(1)
- ---- ------------------------- -------------------------
EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
R. Jack DeCrane......................................... 22,712/84,165 --/--
Charles H. Becker....................................... 5,678/21,041 --/--
Richard J. Kaplan....................................... 6,092/22,577 --/--
Robert G. Martin........................................ 3,785/14,028 --/--
Jeffrey A. Nerland...................................... 2,271/8,417 --/--
- ------------------------
(1) No options were in-the-money based on the common stock share price of $23.00
per share as of December 31, 1999, the measuring date.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our Board of Directors makes decisions regarding officer compensation as a
committee of the whole. R. Jack DeCrane, chief executive officer of DeCrane
Aircraft, participates in those discussions as a member of the Board of
Directors.
EMPLOYMENT AGREEMENTS AND COMPENSATION ARRANGEMENTS
R. JACK DECRANE
On July 17, 1998, the Compensation Committee of our Board of Directors
approved a three-year employment agreement between DeCrane Aircraft and R. Jack
DeCrane, replacing his prior employment agreement that was to expire on
September 1, 1998. Mr. DeCrane's employment agreement provides for various
benefits, including:
- an initial salary of $310,000, which is subject to annual review and
increase, but not decrease;
78
- an annual bonus, currently determined pursuant to the performance-based
cash incentive bonus plan;
- a $500,000 bonus in recognition of our then-recent acquisition of Avtech
Corporation;
- a $250,000 signing bonus;
- options to purchase 50,000 shares of common stock of DeCrane Aircraft at a
price equal to the fair market value of the shares as of July 16, 1998,
one-half of which were immediately exercisable; the rest became
exercisable upon the completion of the DLJ acquisition; and
- a $150,000 cash continuation bonus payable on January 2, 1999, if employed
by us on January 1, 1999.
Mr. DeCrane's options were cancelled in August 1998 and he received a cash
payout in lieu of the options.
The employment agreement also provides that if specified change-of-control
events occur, and Mr. DeCrane's employment is terminated by us for any reason
other than for cause or as a result of his death or disability, or by
Mr. DeCrane for "good reason," as defined in the agreement, then we will pay
Mr. DeCrane a lump sum in cash within fifteen days. The amount of that payment
will be $1.00 less than three times the sum of Mr. DeCrane's average base salary
plus bonus for the five calendar years preceding his termination date and
accrued but unpaid salary and bonus through the termination date. Mr. DeCrane
will also receive other specified benefits, including continued coverage under
our welfare plans for up to two years; a lump sum payment in cash equal to any
unvested portions of our contributions to him under specified savings plans,
plus two times the amount of our annual contributions on his behalf to those
plans; a lump sum payment in cash equal to our matching contributions under
those savings plans that Mr. DeCrane would have received had he continued
maximum participation in the plans until the earlier of two years following his
termination and December 31 of the year he turns 65, plus the vested and
unvested amounts credited to him under any of our deferred compensation plans
and the amount required to be credited during the year of his termination; and
outplacement consulting services to aid Mr. DeCrane with re-employment. We will
reduce these payments to the extent necessary to ensure deductibility for tax
purposes.
ROBERT G. MARTIN
We entered into an employment agreement with Robert G. Martin, Senior Vice
President of DeCrane Aircraft and President of the Systems Integration Group on
September 10, 1999, amending his prior employment agreement dated September 19,
1996. Mr. Martin's employment agreement provides for an annual salary of
$210,000 and an annual bonus determined pursuant to the performance-based cash
incentive bonus plan. Mr. Martin's employment agreement expires on December 31,
2001, and DeCrane Aircraft may terminate the agreement at any time for cause or
if Mr. Martin otherwise breaches the agreement or in the event of Mr. Martin's
death or disability.
JEFFREY F. SMITH
We entered into an employment agreement with Jeffrey F. Smith, Vice
President and General Manager of our Avtech subsidiary, on June 26, 1998.
Mr. Smith's employment agreement provides for an annual salary, initially in the
amount of $145,000 and an annual bonus currently determined pursuant to the
performance-based cash incentive bonus plan. Mr. Smith's employment agreement
expires on June 30, 2000, and Avtech may terminate the agreement at any time for
cause or in the event of Mr. Smith's death or disability. If Mr. Smith's
employment is terminated without cause, Mr. Smith is entitled to receive
severance compensation in an amount equal to his base salary plus his
anticipated bonus for the year in which he resigns.
401(k) RETIREMENT PLAN
Substantially all of our full-time employees are eligible to participate in
one of six 401(k) retirement plans we sponsor. The 401(k) plans allow employees
as participants to defer, on a pre-tax basis, a portion of their salary and
accumulate tax deferred earnings, as a retirement fund. Currently, the plans
generally provide for us to match 50% of the employee contribution for up to 6%
of the employee's salary. The full amount vested in a participant's account will
be distributed to a participant following termination of employment, normal
retirement or in the event of disability or death.
79
INCENTIVE PLANS
Our management incentive plan provides for the issuance of options to
purchase the common stock of DeCrane Holdings as incentive compensation to
designated executive personnel and other key employees of DeCrane Aircraft and
its subsidiaries, in amounts determined by the plan's committee from time to
time. The management incentive plan is administered by a committee appointed by
the Board of Directors of DeCrane Holdings. The plan provides for the granting
of options to purchase 356,257 common shares and expires in 2009. Generally, ten
percent of the options awarded to each plan participant vest immediately, and
the remaining ninety percent of each participant's options will vest at a later
date. The options generally vest based upon future attainment of defined
performance criteria, although alternate vesting schedules may be authorized by
the committee appointed by the Board of Directors of DeCrane Holdings to
administer the plan. As of March 1, 2000, options to purchase 282,922 shares at
$23.00 per shares have been granted, of which options to purchase approximately
28,000 shares vested immediately and an additional 30,000 shares vested based on
the attainment of the 1999 performance criteria. We believe the per share
exercise price of the options granted approximated the fair market value of the
underlying common stock on the grant date.
Our stock purchase plan provides for the purchase of shares of common stock
of DeCrane Holdings by designated executive personnel and other key employees of
DeCrane Aircraft and its subsidiaries, with a portion of the purchase price to
be loaned to the participants by DeCrane Aircraft. This arrangement was made
available to persons and in amounts determined by the committee appointed by the
Board of Directors of DeCrane Holdings to administer the plan. In December 1999,
management purchased 171,295 shares of DeCrane Holdings common stock for $23.00
per share. The total purchase price was $3.9 million, of which one-half was paid
in cash at closing and one-half was loaned to management by DeCrane Aircraft
with interest at applicable federal rates.
Our cash incentive bonus plan provides for the allocation of a bonus pool
each year for incentive compensation to designated executive personnel and other
key employees of DeCrane Aircraft and its subsidiaries. The bonus pool for
participants will be adjusted upwards or downwards each year based on EBITDA and
cash flow, as defined, generated by the relevant participant's operating unit.
Bonus payments will be made in the quarter following the end of the year or
period to which they relate and have been approved.
DIRECTORS' COMPENSATION
The directors of DeCrane Aircraft generally do not receive annual fees or
fees for attending meetings of the Board of Directors of DeCrane Aircraft or
committees thereof. However, John F. Fort, III, an independent director not
affiliated with any investor in DeCrane Holdings, receives a director's fee of
$5,000 for each meeting attended. In addition, the Board of Directors of DeCrane
Holdings extended the management incentive plan to independent non-management
directors, and issued options to purchase 3,260 shares of DeCrane Holdings
common stock to Mr. Fort under the terms of the management incentive plan. See
"Related Party Transactions." Also, all directors are reimbursed for
out-of-pocket expenses. We expect to continue those policies. DeCrane Holdings
does not compensate or intend to compensate its directors.
80
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the 100 outstanding shares of common stock of DeCrane Aircraft are
owned by DeCrane Holdings. DeCrane Aircraft has no other class of stock
outstanding. DeCrane Holdings has 3,571,827 shares of common stock issued and
outstanding, which are owned by 33 shareholders, and 342,417 shares of 14%
Senior Redeemable Exchangeable Preferred Stock due 2008 issued and outstanding
as of December 31, 1999. The following table sets forth the beneficial ownership
of DeCrane Holdings' voting securities as of December 31, 1999 by its principal
owners and our executive officers and directors.
COMMON STOCK(2) 14% SENIOR REDEEMABLE
------------------------- EXCHANGEABLE PREFERRED
NUMBER OF STOCK DUE 2008
SHARES, -------------------------
PARTIALLY NUMBER OF
NAME OF BENEFICIAL OWNER (1) DILUTED PERCENTAGE SHARES PERCENTAGE
- ---------------------------- --------- ---------- --------- ----------
DLJ Merchant Banking Partners II, L.P., and
affiliates(3)..................................... 3,519,565 94.6% 340,000 99.3%
Thompson Dean(4).................................... -- -- --
DLJ Merchant Banking, Inc.
277 Park Avenue
New York, New York 10172
Douglas L. Meltzer(4)............................... -- -- -- --
DLJ Merchant Banking, Inc.
277 Park Avenue
New York, New York 10172
Susan C. Schnabel(4)................................ -- -- -- --
DLJ Merchant Banking, Inc.
277 Park Avenue New York, New York 10172
Global Technology Partners, LLC(5).................. -- -- -- --
1300 I Street N.W.
Washington, D.C.
Dr. Robert J. Hermann(5)............................ 9,561 * 714 *
c/o Global Technology Partners, LLC
1300 I Street, N.W.
Washington, D.C.
Dr. Paul G. Kaminski(5)............................. 9,561 * 714 *
c/o Global Technology Partners, LLC
1300 I Street, N.W.
Washington, D.C.
John F. Fort, III(6)................................ 1,087 * -- --
R. Jack DeCrane(7).................................. 79,233 2.2% -- --
Charles H. Becker(8)................................ 23,069 * -- --
Richard J. Kaplan(9)................................ 27,831 * -- --
Robert G. Martin(10)................................ 8,132 * -- --
Jeffrey A. Nerland(11).............................. 8,792 * -- --
Jeffrey A. Smith(12)................................ 12,480 * -- --
All directors and named executive officers as a
group
(12 persons)...................................... 179,746 5.0% 1,428 *
- ------------------------
* Less than 1.0%
(1) Each person who has the power to vote and direct the disposition of shares
is deemed to be a beneficial owner of those shares.
(2) The common stock columns reflect the number of shares owned and the total
percentage ownership in the manner required by Securities and Exchange
Commission rules. The entries for each holder assumes, if applicable, that
the particular holder, and no one else, fully exercises all rights under
warrants to purchase common stock and common stock which may be acquired
upon the exercise of stock options which are exercisable or will be
exercisable prior to 60 days from December 31, 1999.
(3) Reflects 3,369,565 shares and warrants for the issuance of an additional
150,000 shares, held directly by DLJ Merchant Banking Partners II, L.P. and
the following related investors: DLJ Merchant Banking
81
Partners II-A, L.P.; DLJ Offshore Partners II, C.V.; DLJ Diversified
Partners, L.P.; DLJ Diversified Partners-A, L.P.; DLJ Millennium Partners,
L.P.; DLJ Millennium Partners-A, L.P.; DLJMB Funding II, Inc.; UK
Investment Plan 1997 Partners, Inc.; DLJ EAB Partners, L.P.; DLJ First ESC
L.P. and DLJ ESC II L.P. See "Related Party Transactions" and "Plan of
Distribution." The address of DLJ Offshore Partners II, C.V. is John B.
Gorsiraweg 14, Willemstad, Curacao, Netherlands Antilles. The address of UK
Investment Plan 1997 Partners, Inc. is 2121 Avenue of the Stars, Fox Plaza,
Suite 3000, Los Angeles, California 90067. The address of each of the other
persons is 277 Park Avenue, New York, New York 10172.
(4) Messrs. Dean and Meltzer and Ms. Schnabel are officers of DLJ Merchant
Banking, Inc., an affiliate of Merchant Banking Partners II, L.P. as well
as Donaldson, Lufkin & Jennette Securities Corporation. The share data
shown for these individuals excludes shares shown as held by the DLJ
affiliates separately listed in this table; Messrs. Dean and Meltzer and
Ms. Schnabel disclaim beneficial ownership of those shares.
(5) Messrs. Hermann and Kaminski are members of Global Technology Partners,
LLC. Six members of Global Technology Partners, including Messrs. Hermann
and Kaminski, acquired 30,967 shares of DeCrane Holdings common stock and
2,417 shares of DeCrane Holdings 14% Senior Redeemable Exchangeable
Preferred Stock due 2008, in transactions negotiated with DeCrane Holdings.
The share data shown for Global Technology Partners and Messrs. Hermann and
Kaminski excludes shares shown as held by the individual members;
Messrs. Hermann and Kaminski disclaim beneficial ownership in any of the
shares held by the other members.
(6) Includes 1,087 shares that may be acquired upon the exercise of stock
options which are exercisable or will become exercisable prior to 60 days
from December 31, 1999.
(7) Includes 22,712 shares that may be acquired upon the exercise of stock
options which are exercisable or will become exercisable prior to 60 days
from December 31, 1999.
(8) Includes 5,678 shares that may be acquired upon the exercise of stock
options which are exercisable or will become exercisable prior to 60 days
from December 31, 1999.
(9) Includes 6,092 shares that may be acquired upon the exercise of stock
options which are exercisable or will become exercisable prior to 60 days
from December 31, 1999.
(10) Includes 3,785 shares that may be acquired upon the exercise of stock
options which are exercisable or will become exercisable prior to 60 days
from December 31, 1999.
(11) Includes 2,271 shares that may be acquired upon the exercise of stock
options which are exercisable or will become exercisable prior to 60 days
from December 31, 1999.
(12) Includes 3,785 shares that may be acquired upon the exercise of stock
options which are exercisable or will become exercisable prior to 60 days
from December 31, 1999.
DeCrane Holdings is authorized to issue an aggregate of 4,500,000 shares of
DeCrane Holdings common stock, par value $.01 per share, of which 3,571,827 are
outstanding, excluding 305,000 reserved for issuance upon exercise of
outstanding warrants and 400,869 reserved for issuance upon exercise of stock
options outstanding. DeCrane Holdings is authorized to issue up to 2,500,000
shares of DeCrane Holdings preferred stock, par value $.01 per share, in one or
more series, of which 342,417 are outstanding. For a full description of DeCrane
Holdings' capital stock, please review DeCrane Holdings' Certificate of
Incorporation and Certificate of Designation for its 14% Senior Redeemable
Exchangeable Preferred Stock due 2008. You can obtain a copy from us or from the
exhibits attached to this report.
82
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In August 1998, DeCrane Holdings, a holding company organized by DLJ
Merchant Banking Partners, II, L.P. and several affiliates acquired all our
then-outstanding common stock. An agreement entered into in connection with the
DLJ acquisition entitled a holding company controlled by DLJ Merchant Banking
Partners II, L.P. to designate a number of directors proportionally commensurate
with its stock ownership of DeCrane Aircraft. DeCrane Holdings selected all of
the current members of the Board of Directors of DeCrane Aircraft. DLJ Merchant
Banking or its designate selected all of the members of the Board of Directors
of DeCrane Holdings.
We also entered into certain financing arrangements in connection with the
DLJ Acquisition. DLJ Capital Funding, Inc., another DLJ affiliate of DLJ
Merchant Banking, received customary fees and reimbursement of expenses in
connection with the arrangement and syndication of our previous bank credit
facility and as a lender thereunder. Donaldson, Lufkin & Jenrette Securities
Corporation, which is also an affiliate of DLJ Merchant Banking, acted as the
initial purchaser of the old notes and is the sole market-maker for the notes.
In addition, DeCrane Aircraft is obligated to pay DLJ Securities Corporation an
annual advisory fee of $300,000 until 2003. We may from time to time enter into
other investment banking relationships with DLJ Securities Corporation or one of
its affiliates pursuant to which DLJ Securities Corporation or its affiliate
will receive customary fees and will be entitled to reimbursement for all
reasonable disbursements and out-of-pocket expenses incurred in connection
therewith. We expect that any such arrangement will include provisions for the
indemnification of DLJ Securities Corporation against liabilities, including
liabilities under the federal securities laws.
In connection with the DLJ acquisition, an Investors' Agreement dated as of
August 28, 1998, and amended as of October 2, 1998, was entered into among
DeCrane Holdings, DLJ Merchant Banking and its affiliates which hold DeCrane
Holdings stock. It provides that:
- Any person acquiring shares of common stock or preferred stock of DeCrane
Holdings who is required by the terms of the Investors' Agreement or any
employment agreement or stock purchase, option, stock option or other
compensation plan of DeCrane Holdings to become a party thereto shall
execute an agreement to become bound by the Investors' Agreement and
thereafter shall be bound by it.
- Transfers of the shares of DeCrane Holdings common stock and preferred
stock by the parties to the agreement are restricted.
- Parties to the agreement may participate in some specific kinds of sales
of shares of DeCrane Holdings' common stock by the DLJ affiliates.
- The DLJ affiliates may require the other parties to the agreement to sell
shares of DeCrane Holdings' common stock in some cases should the DLJ
affiliates choose to sell any such shares owned by them.
- The DLJ affiliates may request six demand registrations with respect to
the warrants for DeCrane Holdings common stock held by DLJ Merchant
Banking and the common stock and preferred stock held by those affiliates,
which are immediately exercisable subject to customary deferral and
cutback provisions.
- The parties to the agreement are entitled to unlimited piggyback
registration rights, subject to customary cutback provisions, and
excluding registrations of shares issuable in connection with any employee
stock options, employee benefit plan or an acquisition.
- DeCrane Holdings will indemnify the shareholders against some liabilities
and expenses, including liabilities under the Securities Act.
- The DLJ affiliates have the right to appoint all of the members of the
Boards of Directors of DeCrane Holdings and DeCrane Aircraft, and at least
one of such directors on each board will be an independent director.
Messrs. Hermann, Kaminski and Fort are independent directors.
Each warrant for DeCrane Holdings common stock held by the DLJ affiliates
entitles the holder thereof to purchase one share of common stock at an exercise
price of not less than $0.01 per share subject to customary antidilution
provisions and other customary terms. Those DLJ warrants are exercisable at any
time prior to 5:00 p.m. New York City time on August 28, 2009, subject to
applicable federal and state securities laws.
83
In connection with the DLJ acquisition, seven members of Global Technology
Partners, LLC, including Messrs. Hermann and Kaminski, were granted options to
purchase 44,612 shares of DeCrane Holdings common stock effective July 30, 1999.
The options vest over a three-year period, subject to acceleration if the
foregoing DLJ affiliates sell any of their shares of common stock. Those options
will be exercisable at an exercise price equal to the price paid for DeCrane
Holdings common stock by DLJ Merchant Banking and its affiliates. In December
1998, six members of Global Technology Partners, including Messrs. Hermann and
Kaminski, purchased for approximately $704,000, newly issued shares of preferred
and common stock of DeCrane Holdings. DeCrane Aircraft loaned one-half of the
purchase price for such shares to those members with interest at applicable
federal rates. The loans are repayable out of the proceeds from the sale of such
stock and are secured by such stock. DeCrane Holdings has indemnified Global
Technology Partners against some claims and liabilities including, liabilities
under the Securities Act.
The Board of Directors of DeCrane Holdings extended the management incentive
plan to independent non-management directors, and issued options to purchase
3,260 shares of DeCrane Holdings common stock to Mr. Fort, the only director
presently qualifying for such plan.
In connection with our acquisition of PPI in April 1999, DLJ Merchant
Banking invested an additional $12.5 million of capital in DeCrane Holdings by
purchasing 543,478 additional shares of its common stock, for $23.00 per share.
DeCrane Holdings, in turn, contributed the proceeds to DeCrane Aircraft. Three
members of Global Technology Partners, including Messrs. Hermann and Kaminski,
also purchased 10,869 newly issued shares of DeCrane Holdings common stock at
$23.00 per share. DeCrane Aircraft loaned one-half of the purchase price for
such shares to those members with interest at applicable federal rates. The
loans are repayable out of the proceeds from the sale of such stock and are
secured by such stock.
In December 1999, management purchased 171,295 shares of DeCrane Holdings
common stock for $23.00 per share. The total purchase price was $3.9 million, of
which one-half was paid in cash at closing and one-half was loaned to management
by DeCrane Aircraft with interest at applicable federal rates. The loans are
repayable out of the proceeds from the sale of such stock and are secured by
such stock.
The following table sets forth all indebtedness owed to us by our executive
officers and directors which individually exceed $60,000 as required by the
rules of the Securities and Exchange Commission. All indebtedness set forth
below results from the above-described purchases of DeCrane Holdings preferred
and common stock and is payable to DeCrane Aircraft. The indebtedness, plus
accrued interest, is payable upon the sale of the DeCrane Holdings stock held as
collateral for each of the loans. See "Management" for information regarding
each individual's relationship with DeCrane Aircraft and DeCrane Holdings.
TOTAL INDEBTEDNESS TO DECRANE AIRCRAFT
NUMBER OF SHARES AS OF DECEMBER 31, 1999
HELD AS COLLATERAL(A) ----------------------------------------
--------------------- INTEREST ACCRUED
NAME PREFERRED COMMON RATE(B) PRINCIPAL(C) INTEREST(D) TOTAL(E)
- ---- --------- --------- -------- ------------ ----------- -----------
R. Jack DeCrane......................... -- 56,521 5.74% $649,991 $1,124 $651,115
Charles H. Becker....................... -- 17,391 5.74 199,996 346 200,342
Richard J. Kaplan....................... -- 21,739 5.74 249,998 432 250,430
Jeffrey A. Nerland...................... -- 6,521 5.74 74,991 130 75,121
Jeffrey F. Smith........................ -- 8,695 5.74 99,992 173 100,165
Dr. Robert J. Hermann................... 714 13,184 (f) 145,664 5,375 151,039
Dr. Paul G. Kaminski.................... 714 13,184 (f) 145,664 5,375 151,039
- ------------------------
(a) Reflects the number of shares of DeCrane Holdings preferred and common stock
held by DeCrane Aircraft as collateral for the loans.
(b) Reflects the applicable federal rate of interest charged on the loans.
Interest is compounded annually.
(c) Reflects the original principal amount of the loans.
(d) Reflects accrued interest payable through December 31, 1999.
(e) Reflects the maximum amount of indebtedness during the year ended
December 31, 1999.
(f) Loans in the principal amount of $104,000 are at 4.33% and loans in the
principal amount of $41,664 are at 5.54%.
84
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. (i) FINANCIAL STATEMENTS
In addition to the Consolidated Financial Statements and Report of
Independent Accountants included at Item 8, the following are included
herein:
All other Schedules have been omitted as inapplicable, or not required,
or because the required information is included in the Consolidated
Financial Statements or the notes thereto.
(ii) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1.1 Bylaws of DeCrane Holdings Co. (formerly Delight Holdings
Co.)*
3.1.2 Certificate of Incorporation of DeCrane Holdings Co.
(formerly Delight Holdings Co.)*
3.2.1 Certificate of Incorporation of DeCrane Aircraft Holdings,
Inc. (successor by merger to Delight Acquisition Co. and
DAHX, Inc.)*
3.2.2 Bylaws of DeCrane Aircraft Holdings, Inc. (successor by
merger to Delight Acquisition Co. and DAHX, Inc.)*
3.3.1 Certificate of Incorporation of Aerospace Display Systems,
Inc. (formerly ADS Acquisition Inc.)*
3.3.2 Bylaws of Aerospace Display Systems, Inc.*
3.4.1 Articles of Incorporation of Audio International, Inc.*
3.4.2 Amended & Restated Bylaws of Audio International, Inc.*
3.5.1 Articles of Incorporation of Avtech Corporation*
3.5.2 Bylaws of Avtech Corporation*
3.6.1 Articles of Incorporation of Cory Components*
3.6.2 Bylaws of Cory Components, Inc.*
3.7.1 Certificate of Incorporation of Dettmers Industries, Inc.
(formerly DAHX Acquisition, Inc.)*
3.7.2 Bylaws of Dettmers Industries, Inc.*
3.8.1 Restated Articles of Incorporation of Elsinore Aerospace
Services, Inc.*
3.8.2 Bylaws of Elsinore Aerospace Services, Inc.*
3.9.1 Certificate of Incorporation of Elsinore Engineering Inc.
(formerly EE Acquisition, Inc.)*
3.9.2 Bylaws of Elsinore Engineering Inc. (formerly EE
Acquisition, Inc.)*
3.10.1 Articles of Incorporation of Hollingsead International,
Inc.*
3.10.2 Bylaws of Hollingsead International, Inc.*
3.11.1 Articles of Incorporation of Tri-Star Electronics
International, Inc.*
3.11.2 Bylaws of Tri-Star Electronics International, Inc.*
3.12.1 Articles of Incorporation of PATS, Inc.*
3.12.2 Bylaws of PATS, Inc.*
3.12.3 Amendment to Articles of PATS, Inc.*
3.12.4 Amendment to Bylaws of PATS, Inc.*
3.13.1 Articles of Incorporation of Flight Refueling, Inc.*
3.13.2 Bylaws of Flight Refueling, Inc.*
3.14.1 Articles of Incorporation of Patrick Aircraft Tank Systems,
Inc.*
3.14.2 Bylaws of Patrick Aircraft Tank Systems, Inc.*
3.15.1 Articles of Incorporation of PATS Aircraft and Engineering
Corporation*
3.15.2 Bylaws of PATS Aircraft and Engineering Corporation*
3.16.1 Articles of Incorporation of PATS Support, Inc.*
85
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.16.2 Bylaws of PATS Support, Inc.*
3.17.1 Articles of Incorporation of PPI Holdings, Inc.*
3.17.2 Bylaws of PPI Holdings, Inc.*
3.18.1 Articles of Incorporation of Precision Pattern, Inc.*
3.18.2 Bylaws of Precision Pattern, Inc.*
3.19.1 Articles of Incorporation of CWP Acquisition, Inc.*
3.19.2 Bylaws of CWP Acquisition, Inc.*
3.20.1 Articles of Incorporation of PCI Acquisition Co., Inc.*
3.20.2 Bylaws of PCI Acquisition Co., Inc.*
3.21.1 Articles of Incorporation of International Custom Interiors,
Inc.*
3.21.2 Bylaws of International Custom Interiors, Inc.*
3.22.1 Articles of Incorporation DAH-IP Holdings, Inc.*
3.22.2 Bylaws of DAH-IP Holdings, Inc.*
3.23.1 Articles of Incorporation of DAH-IP Infinity, Inc.*
3.23.2 By Laws of DAH-IP Infinity, Inc.*
3.24.1 Certificate of Limited Partnership DAH-P Acquisition Co.,
L.P.*
the General Partner, and DeCrane Aircraft Holdings, Inc.,
the Limited Partner*
3.24.2 Limited Partnership Agreement of DAH-IP Acquisition Co.,
L.P. among DAH-IP Holdings, Inc., the General Partner, and
DeCrane Aircraft Holdings, Inc., the Limited Partner*
3.24.3 Assignment of Partnership Interest by DeCrane Aircraft
Holdings, Inc., to DAH-IP Infinity, Inc.*
4.1 Indenture dated October 5, 1998 between DeCrane Aircraft and
State Street Bank and Trust Co. as Trustee*
4.1.1 Supplemental Indenture dated January 22, 1999 among PATS,
Inc. and its subsidiaries, the other guarantors under the
Indenture, and State Street Bank and Trust Co.*
4.1.2 Draft Supplemental Indenture to be dated April 23, 1999
among PPI Holdings, Inc., Precision Pattern, Inc., the other
guarantors under the Indenture, and State Street Bank and
Trust Co.*
4.3 DeCrane Holdings Co., Warrants to Purchase 155,000 Shares of
Common Stock*
4.4 Warrant Registration Rights Agreement--DeCrane Holdings Co.*
4.5 Certificate of Designations, Preferences and Rights of 14%
Senior Redeemable Exchangeable Preferred Stock Due 2008*
10.2 Amended & Restated Investors' Agreement dated as of
October 2, 1998*
10.5 Tax Sharing Agreement dated March 15, 1993 between the
Company and several subsidiaries and Hollingsead
International, Inc.*
10.6 Employment Agreement dated July 17, 1998 between the Company
and R. Jack DeCrane*
10.7 401(k) Salary Reduction Non-Standardized Adoption Agreement
dated April 30, 1992 between the Company and the Lincoln
National Life Insurance Company*
10.8 Form of Subscription Agreement for DeCrane Holdings Co.
common and preferred stock by certain members of Global
Technology Partners LLC*
10.10 Credit Agreement dated August 28, 1998 by and among DeCrane
Aircraft Holdings, Inc. (successor by merger to DeCrane
Finance Co.) and DLJ Capital Funding, Inc.*
10.10.1 First Amendment to Credit Agreement dated January 22, 1999*
10.10.2 Second Amended and Restated Credit Agreement dated December
17, 1999 among DeCrane Aircraft Holdings, Inc., the lenders
listed therein, DLJ Capital Funding, Inc., as syndication
agent, and Bank One NA, as administrative agent
10.11 Lease between Botzler-Emery Associates Guilford Ten Limited
Partnership and PATS, Inc.*
10.12 Lease among Continental Development Corporation, Tri-Star
Electronics International, Inc., and Cory Components, Inc.
for real property in El Segundo, CA*
86
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.13 Lease among Kilroy Realty, L.P., Kilroy Realty Corporation
and Hollingsead International for real property in Garden
Grove, California*
10.14 Lease between Sussex County, MD and PATS, Inc.*
10.15 General Terms Agreement dated July 5, 1995 between the
Boeing Company and Cory Components, Number 6-5752-0002*
10.15.1 Special Business Provisions dated November 30, 1995 between
the Boeing Company and Cory Components, Number 6-5752-0004*
10.15.2 Purchase Agreement 9423JC4548 between Boeing Defense &
Space- Irving Co. and Cory Components, January 1, 1995
through December 31, 1999*
10.16 Purchase Agreement dated as of October 1, 1998 between
Matsushita Electronic Industrial Co., Ltd. and Cory
Components Inc.*
10.17 1998 General Terms Agreement between the Boeing Company and
Tri-Star Electronics International, Inc. dated July 1, 1998,
number BCA-6-5632-0032*
10.17.1 Special business provisions between the Boeing Company and
Tri-Star Electronics International, Inc. dated July 1, 1998,
number STD-6-5632-0097*
10.18 General Terms Agreement between Boeing Company and PATS,
Inc. dated February 17, 1998*
10.18.1 Special business provisions between the Boeing Company and
PATS, Inc. dated February 17, 1998*
10.18.2 Letter Agreement dated January 15, 1999 between The Boeing
Company and DeCrane Aircraft Holdings, Inc.*
10.19 Stock Option Incentive Plan*
10.20 Stock Purchase Plan*
10.21 Cash Incentive Bonus Plan*
12.2 DeCrane Holdings Co. Earnings to Fixed Charges Ratio*
21.1 List of Subsidiaries of Registrant*
27 Financial Data Schedule
- ------------------------
* Previously filed.
b. REPORTS ON FORM 8-K
On October 19, 1999, we filed a Form 8-K Current Report regarding the
acquisition of Custom Woodwork & Plastics, Inc., PCI NewCo, Inc. and
International Custom Interiors, Inc.
On December 14, 1999, we filed a Form 8-KA, updating financial information
regarding the acquisition of PCI Newco, Inc. and International Custom Interiors,
Inc.
On December 30, 1999, we filed a Form 8-K Current Report with respect to the
consummation of the acquisition of Infinity Partners, Ltd.
87
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.
Registrant: DECRANE HOLDINGS CO.
Date: March 30, 2000 By: /s/ THOMPSON DEAN
--------------------------------------------
Thompson Dean
PRESIDENT
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ R. JACK DECRANE
- -------------------------------------- Director March 30, 2000
R. Jack DeCrane
/s/ THOMPSON DEAN
- -------------------------------------- Chairman of the Board and President March 30, 2000
Thompson Dean
/s/ RICHARD J. KAPLAN Assistant Secretary and Assistant
- -------------------------------------- Treasurer (Principal accounting March 30, 2000
Richard J. Kaplan officer)
/s/ JOHN F. FORT III
- -------------------------------------- Director March 30, 2000
John F. Fort III
/s/ DR. ROBERT J. HERMANN
- -------------------------------------- Director March 30, 2000
Dr. Robert J. Hermann
/s/ DR. PAUL G. KAMINSKI
- -------------------------------------- Director March 30, 2000
Dr. Paul G. Kaminski
/s/ DOUGLAS L. MELTZER
- -------------------------------------- Director March 30, 2000
Douglas L. Meltzer
/s/ SUSAN S. SCHNABEL
- -------------------------------------- Director March 30, 2000
Susan S. Schnabel
88