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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, 2000
COMMISSION FILE NUMBER 333-70363
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DECRANE HOLDINGS CO.
(Exact name of registrant as specified in its charter)
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DELAWARE 13-4019703
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
C/O DLJ MERCHANT BANKING PARTNERS II, L.P.
277 PARK AVENUE
NEW YORK, NY 10172
(212) 892-3000
(Address of Principal Executive Offices)
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 26, 2001 was
3,914,274.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
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TABLE OF CONTENTS
PAGE
PART I
Item 1. Description of Business .................................................................... 1
Item 2. Properties ................................................................................. 13
Item 3. Legal Proceedings .......................................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders ........................................ 14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ...................... 14
Item 6. Selected Financial Data .................................................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................................... 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................................. 30
Item 8. Financial Statements and Financial Statement Schedules ..................................... 31
Item 9. Changes In and Disagreements With Accountants On Accounting and
Financial Disclosure ..................................................................... 31
PART III
Item 10. Directors and Executive Officers of the Registrant ......................................... 32
Item 11. Executive Compensation ..................................................................... 34
Item 12. Security Ownership of Certain Beneficial Owners and Management ............................. 39
Item 13. Certain Relationships and Related Transactions ............................................. 43
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ........................... 46
SIGNATURES ............................................................................................... 52
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES .......................................... F-1
ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS
REPORT ARE CONSIDERED FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER
FACTORS, WHICH ARE DIFFICULT TO PREDICT. CHANGES IN SUCH FACTORS COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED IN SUCH
FORWARD-LOOKING STATEMENTS AS WE DESCRIBE IN "ITEM 7. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--SPECIAL NOTE
REGARDING FORWARD-LOOKING STATEMENTS." ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS
REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CAN GIVE NO
ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO BE CORRECT. WE UNDERTAKE NO
OBLIGATION TO RELEASE PUBLICLY ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS
TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
COMPANY OVERVIEW
DeCrane Holdings Co., a Delaware corporation founded in 1998, is a holding
company and does not have any material operations or assets other than its
ownership of all of the common stock of DeCrane Aircraft Holdings, Inc. DeCrane
Holdings Co. and DLJ Merchant Banking Partners II, L.P. and affiliated entities
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" 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.
DeCrane Aircraft Holdings, Inc., a Delaware corporation founded in 1989, is
a leading provider of integrated assemblies, sub-assemblies and component parts
to the aircraft industry. Since our founding in 1989, we have experienced both
internal growth and growth by identifying fragmented, high-growth niche segments
of the industry and acquiring market-leading companies in those niches. Today,
we have assembled product capability within three specific segments of the
aircraft industry: cabin management for corporate, VIP and head-of-state
aircraft; specialty aviation electronic components, commonly referred to as
avionics; and systems integration. We have also focused on diversifying our
revenue stream between the commercial, commercial after- and retrofit markets,
and corporate and regional aircraft markets in order to reduce the impact from
cycles in any single market segment. 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.
We are organized into three operating groups, consistent with the segments
in which we operate: Cabin Management, Specialty Avionics and Systems
Integration. Through our operating groups, we offer a complete line of
cabinetry, galleys, seating and entertainment systems of corporate aircraft, as
well as specialty avionics components and systems integration services.
1
OUR OPERATING GROUPS
Our historical financial position and results of operations have been
affected by our history of acquisitions. As a result, our historical financial
statements do not reflect the financial position and results of operations of
our current businesses and capital structure. In the description of our
businesses that follows, we present some information about our operating groups
on a "pro forma" basis, giving effect to all of our acquisitions described in
Note 3 accompanying our financial statements listed in the index on page F-1 of
this report. The related historical segment information for the three years
ended December 31, 2000 is included in Note 18 accompanying our financial
statements.
CABIN MANAGEMENT GROUP
DeCrane's Cabin Management Group contributed approximately 52% of our pro
forma revenues for the year ended December 31, 2000.
BUSINESS DESCRIPTION
Our Cabin Management Group is a leading independent provider of cabin
products, with a primary focus on serving the corporate aircraft market. Since
1997, our Cabin Management Group has acquired nine companies involved in the
engineering, manufacturing and assembly of the key components for the interior
of a corporate aircraft, including interior furnishings, cabin management
systems, seating and composite components. Our Cabin Management Group serves
major manufacturers of corporate aircraft, including Boeing Business Jet,
Bombardier, Cessna, Dassault, Gulfstream and Raytheon.
The Cabin Management Group has introduced the concept of modularity to the
corporate aircraft market through its "cabinet in a box" product. We believe
this distinctive approach of delivering integrated assemblies and sub-assemblies
that can be quickly incorporated into the aircraft has been well received by the
market. We are currently pioneering the next step in modularity, "cabin in a
box." This new concept is designed to address one of the greatest challenges
facing the industry's aircraft manufacturers: the lead-time necessary to
complete an unfinished "green" aircraft. Through providing entire pre-wired and
pre-plumbed modular cabin interiors that will be delivered "just in time" for
final integration into the aircraft, we believe we will be able to reduce our
customers' lead times, supplier base and overall costs.
The Cabin Management Group is guided by our overall strategy to gain market
leadership positions in high-growth segments of the aircraft industry by
building more related product capabilities than any other company in the
industry. To that end, our Cabin Management Group has focused on pursuing two,
closely related, strategic imperatives:
o BUILDING CRITICAL MASS IN INTERIOR FURNISHINGS, CABIN MANAGEMENT
SYSTEMS AND SEATING FOR THE CORPORATE, VIP, AND HEAD-OF-STATE AIRCRAFT
MARKETS. Our Cabin Management Group is aggressively focused on
broadening and deepening its product offering to the corporate, VIP
and head-of-state aircraft markets. As a result of this strategy, we
have increased revenue content per plane with our existing customer
base and have successfully attracted new customers.
o DEVELOPING CAPABILITIES TO PROVIDE MODULAR "TOTAL CABIN SOLUTIONS" TO
THE CORPORATE AIRCRAFT MARKET. Consistent with our overall corporate
strategy to build integrated system solutions, the Cabin Management
Group is focused on aggregating its capabilities to provide partial or
fully assembled modular corporate aircraft cabin interiors to its
customers.
In order to meet these strategic objectives, we have aggressively pursued
growth in our Cabin Management Group through selective acquisitions.
2
PRODUCTS AND SERVICES
Our Cabin Management Group designs, engineers and manufactures a full
line of customized, pre-fit products and provides related services.
Approximately 55% of our Cabin Management Group's pro forma revenues are from
two customers, Bombardier and Textron. Our products and services are in four
broad categories, as summarized below.
INTERIOR FURNISHINGS
o entertainment and refreshment centers
o conference tables
o hi-low dining and coffee table
o end tables
o cabinets
o arm and side ledges
o galleys
o lavatories
o vanities
o room enclosures
o cabinetry refurbishment services
CABIN MANAGEMENT SYSTEMS
o in-flight entertainment systems
o cabin controls
o switches
o lighting
SEATING
o executive track and swivel seats
o jump-seats
o divans, including models that convert to beds or contain storable
tables
o upholstery services
COMPOSITE COMPONENTS
o sound-dampening side walls and headliners
o passenger service units
o environmental (HVAC) ducting
o closets
Our "cabinet in a box" product consists of interior furnishings. Our "cabin
in a box" product consists of elements from all categories, depending on our
customers' specifications.
COMPETITION
The markets served by our Cabin Management Group are fragmented, with
several competitors offering similar products and services. Due to the global
nature of the aircraft industry, competition comes from both U.S. and foreign
companies. Our Cabin Management Group generally faces competition from a group
of smaller companies and enterprises, except for the corporate aircraft
manufacturers and independent completion centers. Our principal competitors are
summarized below.
INTERIOR FURNISHINGS
o Bomhoff, Inc.
o Custom Aircraft Cabinets
o Hiller
o Independent completion centers
o Corporate aircraft manufacturers completion centers
CABIN MANAGEMENT SYSTEMS
o Air Show / Pacific Systems
o Baker Electronics
o DPI Labs
o IEC, International
SEATING
o BE Aerospace
o Fisher (Germany)
COMPOSITE COMPONENTS
o AAR
o Fibre Art
o Plastic Fab
o Scale Composite Works
o The Nordham Group
3
SPECIALTY AVIONICS GROUP
DeCrane's Specialty Avionics Group contributed approximately 31% of our pro
forma revenues for the year ended December 31, 2000.
BUSINESS DESCRIPTION
Our Specialty Avionics Group supplies aircraft avionics components to the
commercial and military aircraft markets as well as to several avionics systems
suppliers including Honeywell and Rockwell-Collins. We focus on assembling
design, engineering and manufacturing capabilities across several specialty
avionics product categories, including cockpit and cabin audio management
systems, flight deck visual display and communication systems, power and control
devices, and specialty interconnect solutions such as contacts, connectors and
various harness assemblies. Our Specialty Avionics Group is also a leading
manufacturer of high quality electrical contacts for military and aviation
applications.
Through its strong focus on building integrated solutions, we believe our
Specialty Avionics Group has achieved solid positions in many product categories
within the avionics components industry. Today, we believe we are the world's
largest supplier of power and signal contacts to the aircraft market, with
almost twice the number of FAA approved parts as our nearest competitor. In
addition, our dichroic liquid crystal display devices, commonly referred to as
LCD's, are found on every commercial aircraft produced today, making us the
largest supplier of dichroic LCD devices to commercial aircraft OEM's. Our
Specialty Avionics Group has leveraged its reputation as a high quality
manufacturer of avionics products and contacts to build a broader customer base
and to deepen its relationships with existing customers.
The strategic objectives of our Specialty Avionics Group are well aligned
with our overall corporate strategy of capturing and maintaining number 1 or 2
market share in high growth segments of the aircraft industry. In pursuing our
objectives for the group, we have been guided by three strategic principles:
o BROADEN AND DEEPEN RELATIONSHIPS WITH KEY CUSTOMERS BY ASSEMBLING
INTEGRATED CUSTOMER SOLUTIONS. We believe our Specialty Avionics Group
has aggressively pursued opportunities to assemble more integrated
product capabilities in the specialty avionics segment than any
competitor in the aircraft industry, thereby increasing revenue
content per plane and growing profitability.
o IDENTIFY AND EVALUATE OPPORTUNITIES IN HIGH-GROWTH PRODUCT CATEGORIES.
We continue to explore and evaluate growth opportunities in product
categories within the specialty avionics segment of our business.
o MAINTAIN TECHNOLOGICALLY SUPERIOR PRODUCT OFFERINGS. The specialty
avionics industry is a highly specialized and highly technical
business. It is imperative that we remain abreast of technological
innovations and incorporate them into our products and services.
PRODUCTS AND SERVICES
Our Specialty Avionics Group designs, engineers and manufactures electronic
components, electronic display devices and interconnect components and
assemblies. Approximately 20% of our Specialty Avionics Group's pro forma
revenues are from Boeing. The products we offer include:
o COCKPIT AND CABIN AUDIO, COMMUNICATION, LIGHTING AND POWER AND CONTROL
DEVICES. Our Specialty Avionics Group is a leading manufacturer of
cockpit audio, lighting and power and control devices, including
selective calling system decoders, 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,
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steep approach monitors and low voltage power supplies for traffic
collision avoidance systems.
o 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.
o 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, in
addition to producing wire harness assemblies for use in cabin
avionics systems, including wire, connectors, contacts and hardware.
We typically sell our harness assemblies to manufacturers of aircraft
electronic systems but also sell these assemblies as part of our
systems integration services through our Systems Integration Group.
o LIQUID CRYSTAL DISPLAY DEVICES. We manufacture a wide variety of
displays in both dichroic and twisted nematic formats, as well as LCD
modules used in commercial and military aircraft. LCD modules are
liquid crystal displays packaged with a backlight source, and
additional mechanical and electronic components that are plug-and-play
ready for the customers' instrument display application. Dichroic
displays perform best in situations with high ambient lighting and low
backlighting. Twisted nematic displays are suited for situations where
a strong backlight is required. Our LCD products are used in a variety
of flight deck applications such as auto pilot flight control systems,
fuel quantity indicators, exhaust gas temperature indicators, airborne
communications, navigation and safety systems and transportation
signage. Dichroic and twisted nematic liquid crystal display products
are widely used in the aircraft industry because they are easily
adapted to custom design and possess a variety of high performance
characteristics, including wide viewing angles, high readability in
sunlight, and the ability to withstand wide temperature fluctuations.
We also manufacture a variety of electronic clock instruments for
commercial and military aircraft, including fixed wing and rotary
wing, all of which use our LCD devices.
o WIRE MARKING AND CRIMPING EQUIPMENT. 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.
5
COMPETITION
The markets served by our Specialty Avionics Group are fragmented, with
several competitors offering similar products and services. Due to the global
nature of the aircraft industry, competition comes from both U.S. and foreign
companies. Our Specialty Avionics Group generally faces competition from large,
diversified companies that produce a broad range of products. Our principal
competitors are summarized in the table below.
COCKPIT AND CABIN AUDIO, COMMUNICATION, LIGHTING AND POWER AND CONTROL
DEVICES
o Baker Electronics
o Diehl GmbH (Germany)
o Gables Engineering
o Palomar
o Team (France)
ELECTRICAL CONTACTS
o Deutsch
o Lemco
o Several small contact blank suppliers
CONNECTOR AND HARNESS ASSEMBLIES
o AMP (connectors)
o Carlyle (harness assemblies)
o Electronic Cable Specialists (harness assemblies)
o ITT Cannon (connectors)
o Radiall S.A. (France) (connectors)
LIQUID CRYSTAL DISPLAY DEVICES
o Cristalloid
SYSTEMS INTEGRATION GROUP
DeCrane's Systems Integration Group contributed approximately 17% of our
pro forma revenues for the year ended December 31, 2000.
BUSINESS DESCRIPTION
Our Systems Integration Group provides aircraft retrofit and refurbishment
solutions, from design to FAA certification, including engineering,
manufacturing and installation. Our primary focus is on retrofitting new systems
onto existing aircraft. Our largest business is the design, production and
installation of auxiliary fuel tanks, which extend the range of the aircraft.
Our Systems Integration Group has an exclusive long-term contract with Boeing
Business Jet to design, manufacture and install auxiliary fuel tanks. We also
focus on FAA safety mandate "kits" and we believe we are the major supplier of
integration kits for smoke detection and fire suppression in the cargo hold. We
also perform structural modifications and FAA re-certification before placing
aircraft back into service.
There are a limited number of companies that have the necessary
authorization to offer aircraft re-certification on behalf of the FAA. Our
Systems Integration Group is authorized to provide the full spectrum of
services, from design to FAA re-certification, needed for timely retrofitting of
an aircraft, thus providing a significant competitive advantage.
Our Systems Integration Group has adopted a two-pronged strategic approach
to managing its operations:
o DEVELOP THE MOST COMPREHENSIVE INTEGRATED RETROFIT OFFERING. For the
last ten years, our Systems Integration Group has focused on
developing the capabilities necessary to provide a fully integrated
offering with respect to aircraft refurbishing and aircraft
retrofitting with FAA mandated changes and technological innovations.
Through several related acquisitions and aggressive internal product
development, our Systems Integration Group has become one of the few
non-OEM related operations with the authority to provide alteration
services and to offer FAA re-certification of aircraft that undergo
overhaul. This re-certification ability represents a significant
competitive advantage, as we can offer all the products and services
required to re-
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commission an aircraft in a timely and cost efficient manner. We
believe we have developed the most comprehensive offering in
retrofitting aircraft with auxiliary fuel tanks in the industry.
o TARGET DEVELOPMENT OF SPECIALTY PRODUCTS AND SERVICES RELATING TO FAA
MANDATES. Consistent with its first strategic imperative, our Systems
Integration Group is also growing its capabilities in providing
solution "kits" in response to FAA mandated aircraft upgrades. For
example, if the FAA mandates new fire safety measures for all
aircraft, we will develop a stand-alone kit that can be quickly
incorporated into an aircraft to ensure compliance with minimal
downtime. Our Systems Integration Group has demonstrated the ability
to identify and quickly respond to probable new FAA mandates.
PRODUCTS AND SERVICES
Our Systems Integration Group provides auxiliary fuel tanks, auxiliary
power units and system integration services, including engineering, kit
manufacturing, installation and certification. Customers include Boeing Business
Jet, Bombardier, Cessna, Gulfstream, Raytheon and Rockwell Collins.
Approximately 40% of our Systems Integration Group's pro forma revenues are from
Boeing. The products we offer include:
o AUXILIARY FUEL SYSTEMS AND POWER UNITS. We manufacture and install
auxiliary fuel tanks for commercial and corporate aircraft. Our unique
design and tank construction have 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.
o CABIN AND FLIGHT DECK SYSTEMS INTEGRATION. We have designed and
patented a wide range of avionics support structures we sell under the
Box-Mount(TM) name. These structures are used to support and
environmentally cool avionics equipment, including navigation,
communication and flight control equipment. These support structures
are sold 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.
COMPETITION
The markets served by our System Integration Group are fragmented with
several competitors offering similar products and services. Due to the global
nature of the aircraft industry, competition comes from both U.S. and foreign
companies. Our Cabin Management Group generally faces competition from a group
of smaller companies and enterprises, except for the corporate aircraft
manufacturers and independent completion centers. Our principal competitors are
summarized in the table below.
AUXILIARY FUEL SYSTEMS AND POWER UNITS
o Marshall
o Pfalz Flugewerke (Germany)
AUXILIARY POWER UNITS (INTEGRATION ONLY)
o Honeywell
o Sundstrand
CABIN AND FLIGHT DECK SYSTEMS INTEGRATION
o ARINC
o Aviation Sales
o Boeing Aircraft Services
o Flight Structures
o In-house engineering departments of commercial airlines
o Numerous independent airframe maintenance and modification companies
7
OTHER INFORMATION
ACQUISITIONS
COMPANIES ACQUIRED BY DECRANE AIRCRAFT
During the five years ended December 31, 2000, DeCrane Aircraft has
acquired the stock or assets of ten significant businesses, as such term is
defined by Securities and Exchange Commission rules. These acquisitions are
summarized below.
YEAR
ACQUIRED GROUP / COMPANY ACQUIRED PRINCIPAL PRODUCTS AND SERVICES AT ACQUISITION DATE
- ---------- ------------------------------------------ ----------------------------------------------------------
CABIN MANAGEMENT GROUP
1997 Audio International (1) ................. Cabin management and entertainment products
1999 Precision Pattern (1).................... Aircraft furniture components
1999 Custom Woodwork and Plastics (2) ........ Aircraft furniture components
1999 PCI NewCo (2) ........................... Composite material components
1999 Infinity Partners (2) ................... Aircraft furniture components
2000 Carl F. Booth & Co. (2) ................. Wood veneer panels for aircraft interior cabinetry
2000 ERDA (1) ................................ Aircraft seats
SPECIALTY AVIONICS GROUP
1996 Aerospace Display Systems (2)............ Dichroic liquid crystal displays
1998 Avtech (1) .............................. Cockpit audio, lighting, power and control
SYSTEMS INTEGRATION GROUP
1999 PATS (1) ................................ Auxiliary fuel and power systems
- ---------------------------------
(1) Acquired stock.
(2) Acquired assets, subject to liabilities assumed.
Audio International, based in Arkansas, was acquired during 1997 for $24.7
million plus $6.0 million of contingent consideration that was paid during the
two years following its acquisition. The contingent consideration was payable
upon attainment of defined performance criteria. Aerospace Display Systems,
based in Pennsylvania, was acquired during 1996 for $13.4 million. Our 1998
through 2000 acquisitions are described in Note 3 accompanying our financial
statements included in this report.
All of the acquisitions were accounted for as purchases. We intend to use
the acquired assets to manufacture products similar to those previously
manufactured by the companies prior to their acquisition. Our financial
statements reflect the acquired companies subsequent to their respective
acquisition dates.
DECRANE HOLDINGS' ACQUISITION OF DECRANE AIRCRAFT
DeCrane Holdings Co. and DLJ Merchant Banking Partners II, L.P. and
affiliated entities acquired DeCrane Aircraft in August 1998. This acquisition,
referred to in this report as the DLJ acquisition, is described in Note 2
accompanying our financial statements included in this report.
In November 2000, Credit Suisse First Boston, Inc. acquired Donaldson,
Lufkin & Jenrette, Inc. As a result, DLJ Merchant Banking Partners II, L.P. and
other entities affiliated with Donaldson Lufkin & Jenrette, Inc. became indirect
affiliates of Credit Suisse First Boston, Inc and Credit Suisse Group. The
combined operations of the DLJ entities and Credit Suisse First Boston are
commonly referred to
8
collectively as Credit Suisse First Boston. See "Item 12. Certain Relationships
and Related Transactions--Transactions with Management and Others" for
additional information.
CUSTOMERS
We estimate that in 2000, we sold our products and services to
approximately 1,500 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% or more of our
consolidated pro forma revenues for the year ended December 31, 2000:
CABIN SPECIALTY SYSTEMS
MANAGEMENT AVIONICS INTEGRATION CONSOLIDATED
SIGNIFICANT CUSTOMERS GROUP GROUP GROUP TOTAL (1)
- -------------------------------------------------------------- ----------- ----------- ----------- -----------
Percent of consolidated pro forma revenues
Bombardier ................................................ 15.4 % 1.2 % 1.1 % 17.7 %
Boeing (2) ................................................ 0.4 6.8 7.3 14.5
Textron (3) ............................................... 13.6 0.7 0.1 14.4
----------- ----------- ----------- -----------
Consolidated pro forma revenues ......................... 29.4 % 8.7 % 8.5 % 46.6 %
=========== =========== =========== ===========
Percent of group pro forma revenues
Bombardier ................................................ 29.5 % 4.0 % 6.2 %
Boeing (2) ................................................ 0.7 21.9 43.4
Textron (3) ............................................... 26.1 2.2 0.8
----------- ----------- -----------
Consolidated pro forma revenues ......................... 56.3 % 28.1 % 50.4 %
=========== =========== ===========
- ------------------------
(1) 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 18 accompanying our financial statements included in this report.
(2) Reflects only our direct revenues from Boeing. Excludes revenues from
components our Specialty Avionics Group provides indirectly to Boeing
through its sales to other Boeing suppliers. Our Systems Integration
Group's revenues from Boeing result from auxiliary fuel tank systems for
the Boeing Business Jet.
(3) Includes Cessna.
Complete loss of any of the customers identified above could have a
significant adverse impact on the results of operations expected in future
periods.
Significant portions of our revenues from our major customers are pursuant
to contracts that may include a variety of terms favorable to the customer. Such
terms may include our agreement to one or more of the following:
o the customer is not required to make purchases, and may terminate such
contracts at any time;
o we make substantial expenditures to develop products for customers
that we may not recoup if we do not receive sufficient orders;
o on a prospective basis, we must extend to the customers any reductions
in prices or lead times that we provide to other customers;
o we must match other suppliers' price reductions or delete the affected
products from the contract; and
o we must grant irrevocable non-exclusive worldwide licenses to use our
designs, tooling and other intellectual property rights to products
sold to a customer if we default, or suffer a bankruptcy filing, or
transfer our manufacturing rights to a third party.
9
BACKLOG
As of December 31, 2000, we had an aggregate sales order backlog of $178.3
million compared to $163.5 million as of December 31, 1999 (on a pro forma basis
for our 2000 acquisitions), as follows:
DECEMBER 31,
--------------------------
1999 2000
----------- -----------
(IN THOUSANDS)
Cabin Management Group.................................................................. $ 49,542 $ 53,383
Specialty Avionics Group................................................................ 50,231 59,467
Systems Integration Group............................................................... 63,705 65,447
----------- -----------
Consolidated totals ................................................................. $ 163,478 $ 178,297
=========== ===========
Orders are usually filled within twelve months; however, backlog totaling
$19.7 million as of December 31, 2000 is scheduled for delivery in 2002 and
beyond. Orders may be 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.
EMPLOYEES
As of December 31, 2000, we had 2,865 employees: 1,578 in our Cabin
Management Group; 932 in our Specialty Avionics Group; 341 in our Systems
Integration Group; and 14 in our corporate office. 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. We believe that we
generally have a good relationship with our employees.
RESEARCH AND DEVELOPMENT
We continually evaluate opportunities to improve our product offerings and
develop new products that incorporate new technologies to meet the demands of
our customers and the FAA. Total expenditures were $4.6 million during the
twelve months ended December 31, 2000 and $4.3 million during the same period in
1999.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
Financial information about our revenues and assets by geographic area are
included in Note 18 accompanying our financial statements included in this
report.
SEASONALITY
Our businesses are not seasonal in nature.
SALES AND MARKETING
Our Cabin Management Group has designated relationship managers who are
responsible for maintaining and cultivating relationships with customers. In
addition, a dedicated sales force is utilized for some of our products.
Our Specialty Avionics Group has a dedicated sales force, which cooperates
with distributors and independent sales representatives to execute its sales and
marketing strategy. We have distributors that purchase, stock and resell several
of our product lines.
10
Our Systems Integration Group has a dedicated sales force that handles most
of its sales activities.
We are continuously seeking opportunities to combine our sales efforts
across the operating groups in order to ensure that all sales opportunities are
explored and that we maximize our revenue content per plane. We may also assign
marketing and sales responsibilities for key customers to one of our senior
corporate executives.
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.
ELECTRICAL ENERGY
Some of our facilities within our Specialty Avionics and Systems
Integration Groups, as well as our corporate headquarters, are located in
California. These California-based facilities provided approximately 20% of our
consolidated pro forma revenues during 2000. California has recently experienced
ongoing electrical power shortages, which have resulted in "rolling blackouts"
and curtailment of power for some of our facilities with "interruptible" supply
agreements with their providers. To date, power shortages have not caused any
significant disruptions to our operations, however, prolonged or frequent
blackouts could cause disruptions to our operations and the operations of our
suppliers and customers. We are uninsured for losses and interruptions caused by
power outages.
INTELLECTUAL PROPERTY AND PROPRIETARY INFORMATION
We have various trade secrets, proprietary information, trademarks,
tradenames, patents, copyrights and other intellectual property rights we
believe are important to our business in the aggregate, but not individually.
GOVERNMENT REGULATION
FEDERAL AVIATION ADMINISTRATION
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. In addition, many of our customers impose their own compliance and
quality requirements on us. The FAA prescribes standards and licensing
requirements for aircraft components, issues designated alteration station
authorizations, and licenses private repair stations. We hold various FAA
approvals and licenses, which may only be used by our subsidiary obtaining such
approval. If material FAA or customer authorizations or approvals were revoked
or suspended, our operations could be adversely affected.
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.
11
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 December 31, 2000, we own and/or manage approximately 250 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 a Designated
Alteration Station. The FAA designates what types of Supplemental Type
Certificates can be issued by each Designated Alteration Station. A subsidiary
within our Systems Integration Group is an FAA-authorized Designated Alteration
Station and can directly issue many of the Supplemental Type Certificates our
customers and we require for our systems integration operations.
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 ten
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
must be designated as an FAA-authorized repair station. As of December 31, 2000,
we had ten authorized repair stations.
OCCUPATIONAL SAFETY AND HEALTH ADMINISTRATION
Our manufacturing operations in the United States are subject to a variety
of worker and community safety laws. The Occupational Safety and Health Act of
1970 mandate general requirements for safe workplaces for all employees. In
addition, OSHA provides special procedures and measures for the handling of
hazardous and toxic substances. Specific safety standards have been promulgated
for workplaces engaged in the treatment, disposal or storage of hazardous waste.
We believe that our operations are in material compliance with OSHA's health and
safety requirements.
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
12
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 that 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 that 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.
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.
ITEM 2. PROPERTIES
We operate in a number of manufacturing, engineering and office facilities
in the United States and abroad. At December 31, 2000, we utilized approximately
1.2 million square feet of floor space, approximately 96% of which is located in
the United States. We believe that our facilities are in good condition and are
adequate to support our operations for the foreseeable future. A summary of our
facilities at December 31, 2000, by operating group, follows:
LEASED OWNED TOTAL
----------- ----------- -----------
(IN THOUSANDS OF SQUARE FEET)
Cabin Management Group .................................................... 558 231 789
Specialty Avionics Group .................................................. 115 106 221
Systems Integration Group ................................................. 201 -- 201
Corporate ................................................................. 8 -- 8
----------- ----------- -----------
Total in use ........................................................... 882 337 1,219
Not in use, subleased to others ........................................ 58 33 91
----------- ----------- -----------
Total ................................................................ 940 370 1,310
=========== =========== ===========
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 that 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 ongoing 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
13
damages and costs in an unstated amount. All of the actions have been
transferred to the United States District Court for the Eastern District of
Pennsylvania and assigned under MDL Case No. 1269 for coordinated or
consolidated pretrial proceedings. 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. In August
1998, we purchased and canceled all of DeCrane Aircraft's issued and outstanding
shares in connection with the DLJ acquisition described in Note 2 accompanying
our financial statements included in this report.
HOLDERS
As of March 26, 2001, there are 37 holders of record of our common stock.
DIVIDENDS
We have not paid dividends to date on our common stock and do not
anticipate paying any cash dividends in the foreseeable future. The terms of our
senior credit facility and senior subordinated note indenture restrict our
ability to pay dividends if we do not meet certain financial criteria.
RECENT SALE OF UNREGISTERED SECURITIES
Our recent sales of unregistered securities are described in Note 12
accompanying our financial statements included in this report.
14
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, (IN THOUSANDS) (1)
--------------------------------------------------------------------
1998
---------------------------
EIGHT MONTHS FOUR MONTHS
ENDED ENDED
AUGUST 31, DECEMBER 31,
1996 1997 1998 1998 1999 2000
--------- --------- --------- -------- -------- --------
(PREDECESSOR) (2)
STATEMENT OF OPERATIONS DATA:
Revenues.................................. $ 65,099 $ 108,903 $ 90,077 $ 60,356 $244,048 $347,379
Cost of sales (3) ........................ 49,392 80,247 60,101 42,739 165,871 232,048
--------- --------- --------- -------- -------- --------
Gross profit ............................. 15,707 28,656 29,976 17,617 78,177 115,331
Selling, general and administrative
expenses (4) .......................... 10,747 15,756 19,351 10,274 40,157 45,394
Amortization of intangible assets ........ 709 905 1,347 3,148 13,073 17,948
--------- --------- --------- -------- -------- --------
Operating income ......................... 4,251 11,995 9,278 4,195 24,947 51,989
Interest expense ......................... 4,248 3,154 2,350 6,867 27,903 41,623
Minority interest in preferred stock
of subsidiary (5) ..................... -- -- -- -- -- 2,274
Terminated debt offering expenses ........ -- -- 600 -- -- --
Other expenses, net ...................... 108 243 247 335 447 482
--------- --------- --------- -------- -------- --------
Income (loss) before provision for income
taxes and extraordinary item .......... (105) 8,598 6,081 (3,007) (3,403) 7,610
Provision for income taxes (benefit) (6) . 712 3,344 2,892 (2,668) 952 6,282
--------- --------- --------- -------- -------- --------
Income (loss) before extraordinary item .. (817) 5,254 3,189 (339) (4,355) 1,328
Extraordinary loss from debt refinancing (7) -- (2,078) -- (2,229) -- --
--------- --------- -------- -------- -------- ---------
Net income (loss) ........................ $ (817) $ 3,176 $ 3,189 $ (2,568) $ (4,355) $ 1,328
========= ========= ========= ======== ======== ========
Net income (loss) applicable to common
stockholders .......................... $ (6,357) $ 531 $ 3,189 $ (4,210) $ (9,649) $ (4,746)
========= ========= ========= ======== ======== ========
OTHER FINANCIAL DATA:
Cash flows from operating activities ..... $ 2,958 $ 4,641 $ 3,014 $ 1,008 $ 15,200 $ 16,783
Cash flows from investing activities ..... (24,016) (27,809) (87,378) (186,939) (152,774) (112,164)
Cash flows from financing activities ..... 21,051 22,957 89,871 189,268 142,052 95,656
EBITDA (8) ............................... 7,602 16,915 13,743 13,476 56,526 80,992
Depreciation and amortization (9) ........ $ 3,351 $ 4,920 $ 4,358 $ 4,604 $ 19,186 $ 27,187
Capital expenditures:
Paid in cash (10) ..................... 5,821 3,842 1,745 1,813 7,262 22,689
Financed with capital lease obligations 414 182 116 48 1,711 109
OTHER OPERATING DATA:
Bookings (11) ............................ $ 81,914 $ 112,082 $ 94,439 $ 54,021 $252,100 $359,975
Backlog at end of period (12) ............ 44,433 49,005 84,184 75,388 156,100 178,297
AS OF DECEMBER 31, (IN THOUSANDS) (1)
---------------------------------------------------------
1996 1997 1998 1999 2000
--------- --------- -------- -------- --------
(PREDECESSOR) (2)
BALANCE SHEET DATA:
Cash and cash equivalents ........................... $ 320 $ 206 $ 3,518 $ 7,918 $ 8,199
Working capital ..................................... 10,486 24,772 46,277 29,249 57,514
Total assets ........................................ 69,266 99,137 330,575 531,498 666,049
Total debt (13) ..................................... 42,250 38,838 186,765 315,651 383,279
Mandatorily redeemable securities (14) .............. 6,879 -- 35,884 41,178 70,431
Stockholders' equity ................................ 1,236 39,527 61,879 65,063 72,503
See accompanying Notes to Selected Consolidated Financial Data.
15
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:
o the remaining 25% minority interest in Cory Components, acquired on
February 20, 1996;
o Aerospace Display, acquired on September 18, 1996;
o Elsinore Engineering, acquired on December 5, 1996;
o Audio International, acquired on November 14, 1997;
o Avtech, acquired on June 26, 1998;
o Dettmers, acquired on June 30, 1998;
o PATS, acquired on January 22, 1999;
o Precision Pattern, acquired on April 23, 1999;
o Custom Woodwork, acquired on August 5, 1999;
o PCI NewCo, acquired on October 6, 1999;
o International Custom Interiors, acquired on October 8, 1999;
o Infinity, acquired on December 17, 1999;
o Carl F. Booth & Co., acquired on May 11, 2000;
o ERDA, acquired on June 30, 2000; and
o Coltech, acquired on August 31, 2000.
(2) Reflects DeCrane Aircraft's results of operations and financial
position prior to (predecessor) the DLJ acquisition.
(3) Includes noncash charges to reflect:
o 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 Precision Pattern and Custom
Woodworks acquisitions, collectively referred to as noncash
acquisition charges; and
o an inventory write-down of $6.0 million for the twelve months ended
December 31, 1999 related to our Systems Integration Group
restructuring.
(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 our
1999 Systems Integration Group restructuring, $1.3 million of which was a
noncash asset impairment write-down.
(5) Reflects accrued dividends and redemption value accretion on DeCrane
Aircraft's 16% mandatorily redeemable preferred stock.
(6) For the four months ended December 31, 1998, includes a $2.6 million
benefit from the reduction of the deferred tax valuation allowance. The
provision for income taxes differs from the amount determined by applying
the applicable U.S. statutory federal rate to the income before income
taxes primarily due to the effects of state and foreign income taxes and
non-deductible expenses, principally goodwill amortization and minority
interest in preferred stock of subsidiary. The difference in the effective
tax rates between periods is mostly a result of the relationship of
non-deductible expenses to income before income taxes.
16
(7) Reflects:
o 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
o the write-offs, net of an income tax benefit, of deferred financing
costs as a result of the repayment of our then existing indebtedness
in connection with the DLJ acquisition and the refinancing of the
bridge notes during the four months ended December 31, 1998.
(8) EBITDA is defined as earnings before interest, income taxes, depreciation
and amortization, restructuring and asset impairment charges, acquisition
related charges, including the noncash charges described in Note 3 above,
and other noncash and nonoperating charges. EBITDA, as defined, is the
primary measurement we use to evaluate our operating groups' performance
and is consistent with the manner in which our lenders and ultimate
investors measure our overall performance.
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 we
report may not be comparable to EBITDA reported by other companies.
(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 $5.4 million for the year ended December 31, 2000 related to our
acquisition of a manufacturing facility.
(11) Bookings represent the total invoice value of purchase orders received
during the period.
(12) Orders may be 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 our receipt of orders and the speed
with which those orders are filled.
(13) Total debt is defined as long-term debt, including current portion, and
short-term borrowings.
(14) Reflects mandatorily redeemable:
o common stock warrants as of December 31, 1996; the warrants were
either exercised or cancelled in connection with DeCrane Aircraft's
1997 recapitalization and initial public offering of common stock; and
o DeCrane Holdings 14% preferred stock as of December 31, 1998, 1999 and
2000 and, as of December 31, 2000, includes DeCrane Aircraft 16%
preferred stock, which is reflected as minority interest in preferred
stock of subsidiary in our consolidated financial statements.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussions should be read in conjunction with our financial
statements and accompanying notes included in this report.
OVERVIEW
Our financial position and results of operations have been affected by our
history of acquisitions. 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 condition and results of operations described herein,
consist of:
CABIN MANAGEMENT GROUP
o Dettmers, acquired on June 30, 1998;
o Precision Pattern, acquired on April 23, 1999;
o Custom Woodwork, acquired on August 5, 1999;
o PCI NewCo, acquired on October 6, 1999;
o International Custom Interiors, acquired on October 8, 1999;
o The Infinity Partners, acquired on December 17, 1999;
o Carl F. Booth & Co., acquired on May 11, 2000;
o ERDA, acquired on June 30, 2000;
SPECIALTY AVIONICS GROUP
o Avtech, acquired on June 26, 1998;
o Coltech, acquired on August 31, 2000;
SYSTEMS INTEGRATION GROUP
o 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.
INDUSTRY OVERVIEW AND TRENDS
We compete in the products and services market of the aircraft industry, a
market we estimate to be $25 billion annually. The market for our products and
services is largely driven by demand in the three civil aircraft markets:
commercial, regional and corporate aircraft. We have minimal exposure to the
military aircraft market and are therefore relatively immune to defense spending
and other factors affecting that market.
Orders for commercial jets have been expanding year over year since 1996 as
global economies and airline profitability have improved. The market continues
to demonstrate positive fundamentals and the outlook for 2001 and 2002 reflects
increased stability.
We believe the regional aircraft market will remain robust for the
near-term. Conversions from turboprop- to jet-powered aircraft fleets have
driven the increased public acceptance of and the growth in regional aircraft
travel. Longer term, we believe the regional aircraft market outlook is positive
as major carriers continue to commit relatively high levels of capital
expenditure to build regional presence and as labor union scope clause
negotiations are resolved.
18
The corporate aircraft market has grown in size to approximately $10
billion annually and is more profitable than other civil aircraft segments.
Factors affecting growth of this market are corporate profitability and the
consequent high levels of capital expenditures, introduction of fractional
ownership programs, deteriorating commercial airline service and air traffic
control delays. We believe expansion will remain particularly strong in the
high-end sub-segment of the corporate aircraft market, which will be driven in
part by fractional ownership programs. For then near-term, we believe the
corporate aircraft market will remain strong, based on current levels of OEM
backlogs.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
REVENUES. Revenues increased $103.3 million, or 42.3%, to $347.4 million
for the year ended December 31, 2000 from $244.0 million for the year ended
December 31, 1999. The increase primarily results from the inclusion of revenues
in 2000 from companies we acquired during 1999 and 2000. By segment, revenues
changed as follows:
INCREASE (DECREASE)
FROM 1999
-----------------------------
AMOUNT PERCENT
----------- --------------
(IN MILLIONS)
Cabin Management ................................................................ $ 100.6 135.6%
Specialty Avionics .............................................................. (1.6) (1.4)
Systems Integration ............................................................. 4.4 7.6
Inter-group elimination ......................................................... (0.1)
-----------
Total ......................................................................... $ 103.3
===========
CABIN MANAGEMENT. Revenues increased by $100.6 million, or 135.6% over the
prior year, due to:
o the inclusion of $94.1 million of revenues resulting from our
acquisitions of Precision Pattern, Custom Woodwork, PCI NewCo,
International Custom Interiors and Infinity in 1999 and Carl F. Booth
and ERDA in 2000; and
o a $6.5 million increase in entertainment and cabin management product
revenues reflecting primarily a higher volume of corporate jet
production by the aircraft manufacturers.
SPECIALTY AVIONICS. Revenues decreased by $1.6 million, or 1.4% from the
prior year, due to somewhat lower demand for our commercial aircraft products
during the first two quarters of the year.
SYSTEMS INTEGRATION. Revenues increased by $4.4 million, or 7.6% over the
prior year, due to:
o a $3.3 million revenue increase resulting from the inclusion of PATS
for an entire twelve months during 2000; and
o $1.1 million related to timing differences between when orders are
received versus shipped.
19
GROSS PROFIT. Gross profit increased $37.2 million, or 47.5%, to $115.3
million for the year ended December 31, 2000. The increase primarily results
from the inclusion of gross profit in 2000 from companies we acquired in 1999
and 2000. Gross profit as a percent of revenues increased to 33.2% for the year
ended December 31, 2000 from 32.0% for the same period last year primarily as a
result of improved Systems Integration profit margins. By segment, gross profit
changed as follows:
INCREASE (DECREASE)
-----------------------------
AMOUNT PERCENT
------------- ------------
(IN MILLIONS)
Cabin Management ................................................................ $ 28.4 93.6%
Specialty Avionics .............................................................. (2.7) (8.0)
Systems Integration ............................................................. 11.5 105.8
------------
Total ......................................................................... $ 37.2
===========
CABIN MANAGEMENT. Gross profit increased by $28.4 million, or 93.6% over
the prior year, due to:
o a $31.4 million increase in gross profit resulting from our 1999 and
2000 acquisitions; offset by
o a $1.7 million decrease related to lower margins resulting from higher
engineering costs associated with developing new entertainment system
products;
o a $0.8 million decrease from production startup inefficiencies at a
new manufacturing facility; and
o a $0.5 million decrease related to product mix.
SPECIALTY AVIONICS. Gross profit decreased by $2.7 million, or 8.0% from
the prior year, due to somewhat lower demand for our commercial aircraft
products as a result of lower commercial jet production by Boeing and price
reductions to several large customers.
SYSTEMS INTEGRATION. Gross profit increased by $11.5 million, or 105.8%
over the prior year, due to:
o a $5.9 million increase due to recording a one time restructuring
charge to cost of sales in 1999,
o a $2.8 million increase in gross profit resulting from favorable
auxiliary fuel tank manufacturing and installation efficiencies
achieved;
o a $2.1 million increase resulting, in part, from improved operating
results subsequent to our 1999 restructuring, which included our exit
from the manufacturing business at two of our subsidiaries; and
o a $0.7 million reduction in engineering costs attributable to project
development incurred in 1999 but not in 2000.
20
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $5.2 million, or 12.9%, to $45.4 million for
the year ended December 31, 2000, from $40.2 million for the same period last
year. The increase primarily results from the inclusion of $7.7 million of SG&A
expenses in 2000 from companies we acquired in 1999 and 2000. SG&A expenses as a
percent of revenues decreased to 13.1% for the year ended December 31, 2000
compared to 16.5% for the same period last year. By segment, SG&A expenses
changed as follows:
INCREASE (DECREASE)
FROM 1999
---------------------------
AMOUNT PERCENT
------------ ------------
(IN MILLIONS)
Cabin Management ................................................................ $ 7.4 86.5%
Specialty Avionics .............................................................. (1.1) (8.3)
Systems Integration ............................................................. (3.1) (25.9)
Corporate ....................................................................... 2.0 29.7
-----------
Total ......................................................................... $ 5.2
===========
CABIN MANAGEMENT. SG&A expenses increased by $7.4 million, or 86.5% over
the prior year, due to:
o the inclusion of $7.5 million related to our 1999 and 2000
acquisitions; and
o manufacturing facility startup costs of $0.7 million in 2000; offset
by
o a $0.8 million decrease in expenses resulting from the consolidation
of administrative activities during 2000 of companies we acquired
during 1999 and 2000.
SPECIALTY AVIONICS. SG&A expenses decreased by $1.1 million, or 8.3% from
the prior year, due to reduced selling costs related to lower sales.
SYSTEMS INTEGRATION. SG&A expenses decreased by $3.1 million, or 25.9% over
the prior year, due to:
o a $3.9 million decrease related to the one time 1999 restructuring
charge; offset by
o a $0.6 million increase in expenses resulting from an increase in
engineering project management, and
o the inclusion of $0.2 million related to our 1999 acquisition.
CORPORATE. SG&A expenses increased by $2.0 million, or 29.7% over the prior
year due to increased incentive compensation and spending for sales and
marketing programs.
DEPRECIATION AND AMORTIZATION OF INTANGIBLES. Depreciation and amortization
expense, which includes amortization of goodwill and identifiable intangible
assets, increased $8.0 million, or 41.7%, for the year ended December 31, 2000.
The increase results from the inclusion of $4.9 million of depreciation and
amortization expense in 2000 from companies we acquired during 1999 and 2000 and
additional depreciation reflecting our capital expenditures during the period.
21
EBITDA AND OPERATING INCOME. EBITDA increased $24.5 million to $81.0
million, or 43.3%, for the year ended December 31, 2000, from $56.5 million for
the same period last year. The increase primarily results from the contribution
to year 2000 results from companies we acquired during 1999 and 2000. EBITDA as
a percent of revenues increased to 23.3% for the year ended December 31, 2000,
from 23.2% for the same period last year. Operating income increased $27.0
million to $51.9 million, or 108.4%, for the year ended December 31, 2000, from
$24.9 million for the same period last year. By segment, EBITDA changed as
follows:
INCREASE (DECREASE)
FROM 1999
----------------------------
AMOUNT PERCENT
------------- -------------
(IN MILLIONS)
EBITDA
Cabin Management .............................................................. $ 21.7 89.8%
Specialty Avionics ............................................................ (0.5) (2.0)
Systems Integration ........................................................... 4.5 42.2
Corporate ..................................................................... (1.2) (21.1)
-----------
Total EBITDA ................................................................ 24.5
Depreciation and amortization ................................................... (8.0)
Restructuring and asset impairment charges ...................................... 9.9
Acquisition related charges ..................................................... 1.8
Nonrecurring manufacturing facility startup costs ............................... (0.7)
Other noncash and acquisition related charges ................................... (0.5)
-----------
Total operating income ...................................................... $ 27.0
==============
CABIN MANAGEMENT. EBITDA increased by $21.7 million, or 89.9% over the
prior year, due to acquisitions and increased volume to support higher
production levels of corporate jets.
SPECIALTY AVIONICS. EBITDA decreased by $0.5 million, or 2.0% from the
prior year, due to somewhat lower demand for our commercial aircraft products as
a result of lower commercial jet production by Boeing.
SYSTEMS INTEGRATION. EBITDA increased by $4.5 million, or 42.2% from the
prior year, due to:
o a $2.2 million increase resulting primarily from favorable auxiliary
fuel tank and power unit manufacturing efficiencies; and
o a $2.3 million increase resulting, in part, from improved operating
results subsequent to our 1999 restructuring, which included our exit
from the manufacturing business at two of our subsidiaries.
CORPORATE. EBITDA decreased by $1.2 million, or 21.1% over the prior year,
due to increased incentive compensation and spending for sales and marketing
programs.
INTEREST EXPENSE. Interest expense increased $13.7 million to $41.6 million
for the year ended December 31, 2000, from $27.9 million for the same period
last year, due to:
o a $13.3 million increase resulting from higher debt levels associated
with our acquisition of companies during 1999 and 2000; and
o a $0.4 million increase resulting from higher average interest rates
charged by our lenders during 2000.
22
MINORITY INTEREST IN PREFERRED STOCK OF SUBSIDIARY. Minority interest was
$2.3 million for the year ended December 31, 2000 and reflects the accrued
dividends and redemption value accretion during the period on DeCrane Aircrafts'
16% preferred stock issued on June 30, 2000.
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 before income taxes primarily due to the effects of state and foreign
income taxes and non-deductible expenses, principally goodwill amortization and
minority interest in preferred stock of subsidiary. The difference in the
effective tax rates between periods is mostly a result of the relationship of
non-deductible expenses to income before income taxes.
NET INCOME (LOSS). Net income increased $5.7 million to $1.3 million for
the year ended December 31, 2000 compared to net loss of $4.4 million for the
same period in 1999.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. Net loss applicable to common
stockholders decreased $4.9 million to a net loss of $4.7 million for the year
ended December 31, 2000 compared to a net loss of $9.6 million for the same
period in 1999. The net loss decrease resulted from:
o a $5.7 increase in net income, which includes a $2.3 million charge
for minority interest in preferred stock of subsidiary; offset by
o a $0.8 million increase in noncash preferred stock dividend accretion
on our 14% mandatorily redeemable preferred stock.
BOOKINGS. Bookings increased $107.9 million, or 42.8%, to $360.0 million
for the year ended December 31, 2000 compared to $252.1 million for the same
period in 1999. The increase in bookings for 2000 results from:
o a $91.8 million increase associated with companies we acquired in 1999
and 2000; and
o a $16.1 million increase related to business growth, principally
related to our Cabin Management and Specialty Avionics group's product
lines.
BACKLOG AT END OF PERIOD. Backlog increased $22.2 million to $178.3 million
as of December 31, 2000 compared to $156.1 million as of December 31, 1999. The
increase in backlog for 2000 includes:
o $9.6 million attributable to existing order backlog for companies we
acquired during 2000; and
o a net $12.6 million increase primarily related to our Specialty
Avionics and Systems Integration groups.
23
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
AS A RESULT OF THE DLJ ACQUISITION DESCRIBED IN NOTE 2 ACCOMPANYING OUR
FINANCIAL STATEMENTS INCLUDED IN THIS REPORT, RESULTS OF OPERATIONS, CHANGES IN
STOCKHOLDERS' EQUITY AND CASH FLOWS ARE PRESENTED FOR DECRANE AIRCRAFT, OUR
PREDECESSOR. THE RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998
DESCRIBED BELOW REFLECTS THE COMBINED HISTORICAL RESULTS OF DECRANE AIRCRAFT FOR
THE EIGHT MONTHS ENDED AUGUST 31, 1998 (PREDECESSOR) AND OUR HISTORICAL RESULTS
FOR THE FOUR MONTHS ENDED DECEMBER 31, 1998.
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 ................................................................ $ 50.7 215.7%
Specialty Avionics .............................................................. 7.5 7.2
Systems Integration ............................................................. 35.9 158.8
Inter-group eliminations ........................................................ (0.5)
-----------
Total ......................................................................... $ 93.6
===========
CABIN MANAGEMENT. Revenues increased by $50.7 million, or 215.7% over the
prior year, due to:
o the inclusion of $42.8 million of revenues resulting from our
acquisitions of Dettmers, Precision Pattern, Custom Woodwork, PCI
NewCo and International Custom Interiors; and
o 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:
o the inclusion of $15.2 million of revenues resulting from our
acquisition of Avtech; offset by
o 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:
o the inclusion of $41.3 million of revenues resulting from our
acquisition of PATS; offset by
o 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 ................................................................ $ 18.8 163.5%
Specialty Avionics .............................................................. 5.0 15.7
Systems Integration ............................................................. 6.8 161.9
-----------
Total ......................................................................... $ 30.6
==============
CABIN MANAGEMENT. Gross profit increased by $18.8 million, or 163.5% over
the prior year, due to:
24
o the inclusion of $15.1 million of gross profit resulting from our 1999
acquisitions; and
o 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:
o the inclusion of $9.5 million of gross profit resulting from our
acquisition of Avtech; offset by
o 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:
o the inclusion of $14.2 million of gross profit resulting from our
acquisition of PATS; offset by
o a $6.0 million decrease related to the write down of inventories
resulting from the restructuring; and
o 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 $10.6 million, or 35.8%, to $40.2 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 16.5% 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 41.7%
Specialty Avionics .............................................................. 3.1 31.0
Systems Integration ............................................................. 7.5 174.4
Corporate ....................................................................... (2.5) (27.2)
-----------
Total ......................................................................... $ 10.6
===========
CABIN MANAGEMENT. SG&A expenses increased by $2.5 million, or 41.7% over
the prior year, due to our 1999 acquisitions.
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:
o the inclusion of $4.8 million of SG&A expenses resulting from our
acquisition of PATS; and
o a $3.9 million restructuring charge; offset by
o a $1.2 million decrease in other selling, general and administrative
expenses.
CORPORATE. SG&A expenses decreased by $2.5 million, or 27.2% over the prior
year, due to:
o non-capitalizable tender offer expenses resulting from our acquisition
by DLJ of $3.6 million recorded in 1998; partially offset by
o a $1.1 million increase in other corporate expenses including $0.5
million for marketing and $0.6 million for non-capitalized acquisition
costs.
25
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 ................................................................ $ 2.3 195.7%
Specialty Avionics .............................................................. 4.2 62.8
Systems Integration ............................................................. 3.5 356.4
Corporate ....................................................................... 0.2 185.4
-----------
Total ......................................................................... $ 10.2
===========
CABIN MANAGEMENT. Depreciation and amortization expense increased by $2.3
million, or 195.7% over the prior year, due to our 1999 acquisitions.
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.
EBITDA AND OPERATING INCOME. EBITDA increased $29.3 million to $56.5
million, or 107.7%, for the year ended December 31, 1999, from $27.2 million for
the same period last year. The increase primarily results from the contribution
to 1999 results by companies we acquired during 1998 and 1999. EBITDA as a
percent of revenues increased to 23.2% for the year ended December 31, 1999,
from 18.1% for the same period last year. Operating income increased $11.5
million to $24.9 million, or 85.8%, for the year ended December 31, 1999, from
$13.4 million for the same period last year. By group, EBITDA changed as
follows:
INCREASE (DECREASE)
FROM 1998
--------------------
AMOUNT PERCENT
------ -------
(IN MILLIONS)
EBITDA
Cabin Management .............................................................. $ 18.0 290.3
Specialty Avionics ............................................................ (2.0) (0.7)
Systems Integration ........................................................... 9.9 1,414.3
Corporate ..................................................................... 3.4 38.2
Total EBITDA ................................................................ 29.3
-----------
Depreciation and amortization ................................................... (10.2)
Restructuring and asset impairment charges ...................................... (9.9)
Noncash acquisition related charges ............................................. 2.5
Other noncash and acquisition related charges ................................... (0.2)
-----------
Total operating income ...................................................... $ 11.5
============
CABIN MANAGEMENT. EBITDA increased by $18.0 million, or 290.3% over the
prior year, due to our 1999 acquisitions and higher unit sales of entertainment
and cabin management products.
26
SPECIALTY AVIONICS. EBITDA decreased by $2.0 million, or 0.7% over the
prior year, due to:
o a decrease in operating income related to weakened demand for our
commercial aircraft products; offset by inclusion of EBITDA from our
acquisition of Avtech.
SYSTEMS INTEGRATION. EBITDA increased by $9.9 million, or 1,414.3% over the
prior year, due to the inclusion of EBITDA resulting from our acquisition of
PATS.
CORPORATE. EBITDA increased by $3.4 million, or 38.2% 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:
o $16.1 million due to higher debt levels associated with the DLJ
acquisition and our acquisition of companies during 1999; and
o $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 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 the
relationship of non-deductible expenses to income before income taxes.
NET INCOME (LOSS). 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 $0.6
million for the same period in 1998.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. Net loss applicable to common
stockholders increased $8.6 million to a net loss of $9.6 million for the year
ended December 31, 1999 compared to a net loss of $1.0 million for the same
period in 1999. The net loss increase resulted from:
o a $5.0 net loss increase, which is net of a $2.2 million debt
refinancing extraordinary charge in 1999; and
o a $3.6 million increase in noncash preferred stock dividend accretion
on our 14% mandatorily redeemable preferred stock.
BOOKINGS. 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:
o $94.5 million associated with companies we acquired in 1999; and
o $9.1 million related to other businesses.
BACKLOG AT END OF PERIOD. 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:
o $72.6 million attributable to existing order backlog for companies we
acquired during 1999; and
o a net $8.1 million increase occurring during 1999 representing an
increase in demand for our products.
27
SYSTEMS INTEGRATION GROUP RESTRUCTURING
During 2000, we increased our restructuring reserves by $0.6 million
resulting from higher than anticipated costs to complete certain actions
compared to previous estimates. Also, in connection with the restructuring, we
were able to sell property and equipment previously written down and recognized
a gain of approximately $0.6 million upon disposal. We also paid $2.1 million of
restructuring related costs during the year. Our restructuring reserves total
$0.7 million at December 31, 2000. Future cash payments will be funded from
existing cash balances and internally generated cash from operations. We do not
anticipate recording any material additional charges relating to our
restructuring efforts in 2001.
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, third party borrowings
and the issuance of common and preferred stock.
Cash provided by operating activities was $16.8 million for the year
ended December 31, 2000, which is the net of $38.9 million of cash provided by
operations after adding back depreciation, amortization and other noncash items,
$21.3 million used for working capital and $0.8 million resulting from a
decrease in other liabilities. The following factors contributed to the $21.3
million working capital increase:
o an $11.3 million inventory increase resulting from longer production
lead times and inventory level increases to meet current and projected
revenue growth;
o an $4.2 million accounts receivable increase resulting from higher
revenues, timing differences relating to completing of projects and
the associated collection;
o a $8.4 million net decrease in current liabilities; offset by
o a $2.0 million decrease in prepaid and other assets; and
o an $0.6 million increase in income taxes payable due to higher current
taxable income.
Cash used for investing activities was $112.2 million for the year ended
December 31, 2000, and consisted of:
o $59.1 million for our acquisitions during the year;
o $30.5 million for contingent acquisition consideration paid during
2000; and
o $22.6 million for capital expenditures, including $5.4 million for the
purchase of a furniture manufacturing facility forour Cabin Management
Group.
We anticipate spending approximately $15.0 million for capital
expenditures in 2001.
Cash provided by financing activities was $95.7 million for the year
ended December 31, 2000 and was primarily used to fund our acquisitions.
We used $5.8 million to make principal payments on our senior term debt,
capitalized leases and other debt, and paid $1.9 million of financing costs. We
obtained these funds by borrowing $67.4 million under our senior credit
facility, selling $25.0 million of DeCrane Aircraft 16% mandatorily redeemable
preferred stock and $7.9 million of common stock.
At December 31, 2000, senior credit facility borrowings totaling $275.8
million are at variable interest rates based on defined margins over the current
prime or Eurodollar rates. At December 31, 2000 we had $57.5 million of working
capital and had $25.0 million of borrowings available under our working capital
credit facility and $12.6 million available under our acquisition credit
facility. Although
28
we cannot be certain, we believe 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 next
twelve months. 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. We adopted SFAS No. 133 effective January 1, 2001;
the adoption did not have a material impact on the Company's consolidated
financial position, results of operations or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. SAB
No. 101 summarizes the Staff's views in applying generally accepted accounting
principles to revenue recognition in the financial statements. The bulletin was
effective in the fourth quarter of 2000. We were in compliance with these
standards; accordingly, the adoption of SAB No. 101 did not have an impact on
our consolidated financial position, results of operations or cash flows.
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 may
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 experienced no material disruption in customer or supplier
relationships, revenue patterns or customer buying patterns as a result of the
year 2000 problem. There have been no losses of revenue and we do not believe
that any future contingencies related to year 2000 would have a material impact
on our business.
COMMON EUROPEAN CURRENCY
We have evaluated, and will continue to evaluate, the effects on our
operations of the European Economic Monetary Union conversion to the Euro. The
costs to prepare for this conversion, including the costs to adapt information
systems, have not been and are not expected to be material to our results of
operations, financial position or cash flows. We do currently expect the
introduction and use of the Euro
29
to have a material effect on our foreign exchange and hedging activities, or on
our use of derivative financial instruments.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this report discuss future expectations,
beliefs or strategies, projections or other "forward-looking" information. These
statements are subject to known and unknown risks. Many factors could cause
actual company results, performance or achievements, or industry results, to be
materially different from the projections expressed or implied by this report.
We are vulnerable to a variety of risks that affect many businesses, such as:
o fuel prices and general economic conditions that affect demand for
aircraft and air travel, which in turn affect demand for our products
and services;
o our reliance on key customers and the adverse effect a significant
decline in business from any one of them would have on our business;
o changes in prevailing interest rates and the availability of financing
to fund our plans for continued growth;
o competition from larger companies;
o Federal Aviation Administration prescribed standards and licensing
requirements, which apply many of the products and services we
provide;
o inflation, and other general changes in costs of goods and services;
o liability and other claims asserted against us that exceeds our
insurance coverage;
o the ability to attract and retain qualified personnel;
o labor disturbances; and
o changes in operating strategy, or our acquisition and capital
expenditure plans.
We cannot predict any of the foregoing with certainty, so our
forward-looking statements are not necessarily accurate predictions. Also, we
are not obligated to update any of these statements, to reflect actual results
or report later developments. You should not rely on our forward-looking
statements as if they were certainties.
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 Eurodollar rates. At December
31, 2000, the current prime rate was 9.5% and the current Eurodollar rate was
6.64%. Based on $275.8 million of variable-rate debt outstanding as of December
31, 2000, a hypothetical one percent rise in interest rates, to 10.5% for prime
rate borrowings and 7.64% for Eurodollar borrowings, would reduce our pre-tax
earnings by $2.8 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
30
entered into similarcontracts 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 $91.0 million at December 31, 2000. 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 one of our subsidiaries operates in Western Europe and one has a
manufacturing facility in Mexico. 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
since 1998 and no such contracts are open as of December 31, 2000, we may do so
in the future depending on our assessment of future foreign exchange rate
trends.
ITEM 8. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Our consolidated financial statements and financial statement schedules
are included in a separate section at the end of this report. Our consolidated
financial statements and financial statement schedules are listed in the index
on page F-1 of this report and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning each person
who is currently a director or executive officer of DeCrane Holdings and its
wholly-owned subsidiary, DeCrane Aircraft.
NAME AGE DECRANE HOLDINGS DECRANE AIRCRAFT
- ---------------------------- --------- -------------------------------------
Thompson Dean ............ 42 Chairman of the Board of Directors Chairman of the Board of Directors
and President
R. Jack DeCrane *......... 54 Vice Chairman of the Board of Director and Chief Executive Officer
Directors
Richard J. Kaplan ........ 58 Assistant Secretary and Assistant Director and Senior Vice President,
Treasurer (chief accounting Chief Financial Officer, Secretary
officer) and Treasurer
John F. Fort, III *....... 59 Director Director
Susan C. Schnabel *....... 39 Director Director
Charles H. Becker ........ 55 -- Senior Vice President and
Group President
Robert G. Martin ........ 63 -- Senior Vice President and
Group President
Jeffrey A. Nerland ....... 43 -- Senior Vice President,
Business Development
Jeffrey F. Smith ......... 40 -- Senior Vice President and
Group President
- ----------
* Member of DeCrane Holding's Compensation Committee.
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. In November 2000, Credit Suisse
First Boston, Inc. acquired Donaldson, Lufkin & Jenrette, Inc. As a result, DLJ
Merchant Banking, Inc. became an indirect affiliate of Credit Suisse First
Boston, Inc. and Credit Suisse Group. Mr. Dean serves as a director of AKI
Holding Corp., Arcade Holding Corporation, Charles River Laboratories Holdings,
Inc., Formica Corporation, Insilco Holdings Co., Manufacturers' Services
Limited, Mueller Holdings, Inc., and Von Hoffman Press, Inc. He became a
director in 1998.
R. JACK DECRANE is the founder of DeCrane Aircraft. Mr. DeCrane served as
President from the time DeCrane Aircraft 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.
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.
32
From 1977 to 1998, he was a partner with Price Waterhouse LLP, having joined the
firm in 1964. He became a director in 2000.
JOHN F. FORT, III serves as a director of Insilco Holdings Co.,
Manufacturers' Services Limited, Roper Industries, Inc., Thermadyne Holdings
Corporation and Tyco International Ltd. He became a director in 1998.
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. In November 2000, Credit Suisse First
Boston, Inc. acquired Donaldson, Lufkin & Jenrette, Inc. As a result, DLJ
Merchant Banking, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation
became indirect affiliates of Credit Suisse First Boston, Inc. and Credit Suisse
Group. Ms. Schnabel serves as a director of Environmental Systems Products
Holdings, Inc. and PMD Group, Inc. She became a director in 1998.
CHARLES H. BECKER has been our 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.
ROBERT G. MARTIN has been our 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 our Vice President, Business Development,
since January 1999 and was appointed Senior Vice President in March 2001.
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.
JEFFREY F. SMITH has been our 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 served as General Manager and in other
various capacities with Avtech since 1989.
SELECTION OF DIRECTORS AND TERM OF OFFICE
DLJ Merchant Banking Partners II, L.P. is entitled to select all members of
the Board of Directors of DeCrane Holdings and DeCrane Aircraft as described in
"Item 13. Certain Relationships and Related Transactions--Investors' Agreement."
At least one of such directors selected by DLJ Merchant Banking on each board
must be an independent director. Mr. Fort is an independent director. All
directors hold office until their successor is designated and qualified.
33
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, 2000, 1999 and 1998.
ANNUAL COMPENSATION ALL OTHER COMPENSATION
------------------- ----------------------
SECURITIES
UNDERLYING
NAME YEAR SALARY BONUS OPTIONS (1) OTHER (2)
---- ---- ------ ----- ----------- ---------
R. Jack DeCrane (3)..................... 2000 $ 341,381 $ 1,100,000 2,981 $ 48,979
CHIEF EXECUTIVE OFFICER AND DIRECTOR 1999 334,791 700,000 106,877 25,570
1998 281,761 1,044,000 50,000 49,864
Charles H. Becker (4) .................. 2000 243,521 265,000 917 5,048
SENIOR VICE PRESIDENT 1999 235,000 210,000 26,719 4,800
1998 206,948 160,000 -- 4,800
Richard J. Kaplan (5) .................. 2000 207,293 400,000 4,093 25,721
SENIOR VICE PRESIDENT AND DIRECTOR 1999 158,333 258,000 28,669 4,556
1998 -- -- -- --
Robert G. Martin (6) ................... 2000 216,300 384,000 3,229 5,100
SENIOR VICE PRESIDENT 1999 187,500 209,000 17,813 --
1998 172,000 66,000 -- --
Jeffrey A. Nerland (7) ................. 2000 185,338 250,000 5,344 5,024
SENIOR VICE PRESIDENT 1999 160,000 181,000 10,688 2,217
1998 -- -- -- --
- ----------
(1) 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.
(2) Comprised of relocation costs, term life insurance premiums and matching
contributions to the 401(k) Retirement Plan.
(3) Mr. DeCrane also served as Chairman of the Board of Directors through
August 1998.
(4) 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.
(5) Mr. Kaplan joined DeCrane Aircraft as Senior Vice President on March 15,
1999.
(6) 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.
(7) 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
34
principal, was paid a total of $127,800 in 1998 and early 1999, which
amount has been excluded from the table above.
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, 2000, 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 ........ 2,981 3.8% $ 23.00 2010 $ 43,119 $ 109,272
Charles H. Becker ...... 917 1.2 23.00 2010 13,264 33,614
Richard J. Kaplan
$23.00 options ...... 1,147 1.5 23.00 2010 16,591 42,045
$35.00 options ...... 2,946 3.8 35.00 2010 64,845 164,331
Robert G. Martin
$23.00 options ...... 229 0.3 23.00 2010 3,312 8,394
$35.00 options ...... 3,000 3.9 35.00 2010 66,034 167,343
Jeffrey A. Nerland
$23.00 options ...... 344 0.4 23.00 2010 4,976 12,610
$35.00 options ...... 5,000 6.4 35.00 2010 110,057 278,905
- ------------------------
(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 Securities and Exchange Commission rules 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, 2000. The following tables sets forth information about the
stock options held by the executive officers named below as of December 31,
2000.
NUMBER OF VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY OPTIONS
UNEXERCISED OPTIONS AT FISCAL YEAR END (1)
NAME EXERCISABLE / UNEXERCISABLE EXERCISABLE / UNEXERCISABLE
- ---------------------------------------------------------- ---------------------------- ----------------------------
R. Jack DeCrane ......................................... 36,253/ 73,605 $ 435,036 / 883,260
Charles H. Becker ....................................... 9,120/ 18,516 109,440 / 222,192
Richard J. Kaplan ....................................... 10,812/ 21,950 118,080 / 239,712
Robert G. Martin ........................................ 6,944/ 14,098 71,448 / 145,056
Jeffrey A. Nerland ...................................... 5,291/ 10,741 43,692 / 88,692
- ------------------------
(1) Computed based on a common stock share price of $35.00 per share as of
December 31, 2000, the measuring date.
35
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of our Board of Directors makes decisions
regarding officer compensation. Jack DeCrane, chief executive officer of DeCrane
Aircraft, participates in those discussions as a member of the Committee.
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 was amended on May 5, 2000
to provide for a term through June 30, 2001, which term shall automatically
extend for additional one year periods unless terminated by either party giving
the other party notice of termination prior to April 1st of the year prior to
the year in which the agreement would otherwise terminate. Mr. DeCrane's
employment agreement provides for various benefits, including:
o an initial salary of $310,000, which is subject to annual review and
increase, but not decrease;
o an annual bonus, currently determined pursuant to the
performance-based cash incentive bonus plan;
o a $500,000 bonus in recognition of our then-recent acquisition of
Avtech Corporation (paid in 1998);
o a $250,000 signing bonus (paid in 1998);
o 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
o a $150,000 cash continuation bonus payable on January 2, 1999, if
employed by us on January 1, 1999 (paid in 1999).
Mr. DeCrane's options for 50,000 shares granted in July 1998 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.
36
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 provided 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
expired on June 30, 2000 and has not been replaced.
CHANGE OF CONTROL AGREEMENTS
In September 2000, we entered into change of control agreements with each
of our executive officers, other than Mr. DeCrane, whose above described
employment agreement contains provisions concerning change of control. The
agreements provide that, for a term of two years from the effective date, should
a change of control, as defined, occur during the term of the agreement and the
executive officer's employment shall be involuntarily terminated for any reason
on a date which is less than two years after the date of the change of control,
other than for cause, death or disability, DeCrane Aircraft is required to pay
such executive his then salary plus average annual bonus over the last five
years, equal to twenty four months compensation less the number of months
elapsed from the date of the change of control to the employment termination
date.
401(K) RETIREMENT PLAN
Substantially all of our full-time employees are eligible to participate
in one of eight 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. The plans
generally provide for us to match a percentage of the employee contribution up
to a specified percentage 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.
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. The Compensation Committee of the Board of Directors
administers the management incentive plan. The plan provides for the granting of
options to purchase 356,257 common shares and expires in 2009. 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. At December 31, 2000, 33% of most of
the options granted are vested and exercisable. We believe the per share
exercise price of the options granted approximated the fair market value of the
underlying common stock on each of the grant dates.
37
Beginning in 1999, we have permitted, from time-to-time, designated
executive personnel and other key employees to purchase shares of common stock
of DeCrane Holdings, 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 Compensation Committee of the Board of
Directors. 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 and one-half was loaned to
management by DeCrane Aircraft with interest at applicable federal rates. During
2000, an additional 19,707 shares of DeCrane Holdings common stock was purchased
by employees at $23.00 per share, which was paid in cash.
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.
DEFERRED COMPENSATION PLAN
In December 1999, we established a deferred compensation plan in which
certain designated executive officers and key employees are permitted to defer a
portion of their compensation earned. The Company invests amounts deferred and
participants are fully vested in the amounts representing the fair market value
of their investment accounts. We make no contributions on behalf of the
participants and the invested assets are subject to the claims of our general
creditors.
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 6,260 shares of DeCrane Holdings
common stock to Mr. Fort under the terms of the management incentive plan. See
"Related Party Transactions." Also, Mr. Fort is reimbursed for out-of-pocket
expenses. We expect to continue those policies.
38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
DECRANE HOLDINGS
As of December 31, 2000, DeCrane Holdings has the following securities
issued and outstanding:
o 3,914,274 shares of common stock, which is owned by 37 stockholders;
and
o 342,417 shares of non-voting 14% Senior Redeemable Exchangeable
Preferred Stock Due 2009, which is owned by 18 stockholders.
The following table sets forth the beneficial ownership of DeCrane
Holdings' voting and non-voting securities as of December 31, 2000 by its
principal owners and its executive officers and directors.
14% SENIOR REDEEMABLE
COMMON STOCK (2) PREFERRED STOCK
-------------------------- ---------------------------
NUMBER
OF SHARES, NUMBER
PARTIALLY OF
NAME OF BENEFICIAL OWNER (1) DILUTED PERCENTAGE SHARES PERCENTAGE
- ------------------------------------------------------------- ------------- ----------- -------------- ------------
DLJ Merchant Banking Partners II, L.P.
and affiliates (3) ...................................... 3,906,032 94.7% 340,000 99.3%
277 Park Avenue, New York, NY 10172
Thompson Dean (4) .......................................... -- -- -- --
c/o Credit Suisse First Boston
277 Park Avenue, New York, New York 10172
Susan C. Schnabel (4) ...................................... -- -- -- --
c/o Credit Suisse First Boston
277 Park Avenue, New York, New York 10172
Putnam Investment Management, Inc.
and affiliates (5) ...................................... 13.936 * -- --
One Post Office Square, Boston, MA 02109
John F. Fort, III (6) ...................................... 3,841 * -- --
R. Jack DeCrane (7) ........................................ 95,755 2.4% -- --
Charles H. Becker (8) ...................................... 27,428 * -- --
Richard J. Kaplan (9) ...................................... 33,698 * -- --
Robert G. Martin (10) ...................................... 11,520 * -- --
Jeffrey A. Nerland (11) .................................... 12,156 * -- --
Jeffrey A. Smith (12) ...................................... 16,173 * -- --
All directors and named executive officers as a group (nine
persons) ................................................... 200,571 5.0% -- --
- ------------------------
* 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
39
stock options and which are exercisable or will be exercisable prior to
60 days from December 31, 2000.
(3) Reflects 3,695,652 shares of common stock, warrants to purchase an
additional 210,380 shares of common stock and preferred stock held
directly by DLJ Merchant Banking Partners II, L.P. and the following
affiliated investors:
o DLJ Diversified Partners, L.P. o DLJ Investment Partners II, L.P.
o DLJ Diversified Partners-A, L.P. o DLJ Merchant Banking Partners II-A, L.P.
o DLJ EAB Partners, L.P. o DLJ Millennium Partners, L.P.
o DLJ First ESC L.P. o DLJ Millennium Partners-A, L.P.
o DLJ ESC II, L.P. o DLJ Offshore Partners II, C.V.
o DLJ Investment Funding II, Inc. o DLJMB Funding II, Inc.
o DLJ Investment Partners, L.P. o UK Investment Plan 1997 Partners, Inc.
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
investors is 277 Park Avenue, New York, New York 10172.
(4) Mr. Dean and Ms. Schnabel are officers of DLJ Merchant Banking, Inc., an
affiliate of DLJ Merchant Banking Partners II, L.P and directors of
DeCrane Aircraft. The DLJ entities are affiliates of, and commonly
referred to as, Credit Suisse First Boston. See "Item 12. Certain
Relationships and Related Transactions--Transactions with Management and
Others" for additional information. The share data shown for these
individuals excludes shares shown as held by the DLJ affiliates
separately listed in this table; Mr. Dean and Ms. Schnabel disclaim
beneficial ownership of those shares.
(5) Reflects warrants to purchase shares of common stock held by the
following investors related to Putnam Investment Management, Inc.:
o Putnam Diversified Income Trust o Putnam High Yield Trust
o Putnam Fund Trust - Putnam High Yield o Putnam Strategic Income Fund
Trust II o Putnam Variable Trust - Putnam VT High
o Putnam High Yield Advantage Fund Yield Fund
The address of each of the investors is One Post Office Square, Boston,
MA 02109.
(6) Includes 2,841 shares that may be acquired upon the exercise of stock
options that are exercisable or will become exercisable prior to 60 days
from December 31, 2000.
(7) Includes 36,253 shares that may be acquired upon the exercise of stock
options that are exercisable or will become exercisable prior to 60 days
from December 31, 2000.
(8) Includes 9,120 shares that may be acquired upon the exercise of stock
options that are exercisable or will become exercisable prior to 60 days
from December 31, 2000.
(9) Includes 10,812 shares that may be acquired upon the exercise of stock
options that are exercisable or will become exercisable prior to 60 days
from December 31, 2000.
(10) Includes 6,944 shares that may be acquired upon the exercise of stock
options that are exercisable or will become exercisable prior to 60 days
from December 31, 2000.
(11) Includes 5,291 shares that may be acquired upon the exercise of stock
options that are exercisable or will become exercisable prior to 60 days
from December 31, 2000.
(12) Includes 7,019 shares that may be acquired upon the exercise of stock
options that are exercisable or will become exercisable prior to 60 days
from December 31, 2000.
40
DECRANE AIRCRAFT
As of December 31, 2000, DeCrane Aircraft has the following securities
issued and outstanding:
o 100 shares of common stock, which are owned by one stockholder; and
o 250,000 shares of non-voting 16% Senior Redeemable Exchangeable
Preferred Stock Due 2009, which are owned by 10 stockholders.
The following table sets forth the beneficial ownership of DeCrane
Aircraft's voting and non-voting securities as of December 31, 2000 by its
principal owners and its executive officers and directors.
16% SENIOR REDEEMABLE
COMMON STOCK (2) PREFERRED STOCK
-------------------------- ---------------------------
NUMBER
OF SHARES, NUMBER
PARTIALLY OF
NAME OF BENEFICIAL OWNER (1) DILUTED PERCENTAGE SHARES PERCENTAGE
- ------------------------------------------------------------- ------------- ----------- -------------- ------------
DeCrane Holdings Co. ....................................... 100 100.0% -- --
c/o DLJ Merchant Banking Partners II, L.P.
277 Park Avenue, New York, NY 10172
DLJ Merchant Banking Partners II, L.P. affiliates (3) ......
277 Park Avenue, New York, NY 10172 -- -- 200,000 80.0%
Thompson Dean (4) .......................................... -- -- -- --
c/o Credit Suisse First Boston
277 Park Avenue, New York, New York 10172
Susan C. Schnabel (4) ...................................... -- -- -- --
c/o Credit Suisse First Boston
277 Park Avenue, New York, New York 10172
Putnam Investment Management, Inc.
and affiliates (5) ...................................... -- -- 50,000 20.0%
One Post Office Square, Boston, MA 02109
John F. Fort, III .......................................... -- -- -- --
R. Jack DeCrane ............................................ -- -- -- --
Charles H. Becker .......................................... -- -- -- --
Richard J. Kaplan .......................................... -- -- -- --
Robert G. Martin ........................................... -- -- -- --
Jeffrey A. Nerland ......................................... -- -- -- --
Jeffrey A. Smith ........................................... -- -- -- --
All directors and named executive officers as a group (nine
persons) ................................................... -- -- -- --
- ------------------------
(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 and which are exercisable or
will be exercisable prior to 60 days from December 31, 2000.
41
(3) Reflects preferred stock held by the following investors affiliated with
DLJ Merchant Banking Partners II, L.P.:
o DLJ ESC II, L.P. o DLJ Investment Partners, L.P.
o DLJ Investment Funding II, Inc. o DLJ Investment Partners II, L.P.
The address of each of the investors is 277 Park Avenue, New York, New
York 10172.
(4) Mr. Dean and Ms. Schnabel are officers of DLJ Merchant Banking, Inc., an
affiliate of DLJ Merchant Banking Partners II, L.P and directors of
DeCrane Holdings Co. The DLJ entities are affiliates of, and commonly
referred to as, Credit Suisse First Boston. See "Item 12. Certain
Relationships and Related Transactions--Transactions with Management and
Others" for additional information. The share data shown for these
individuals excludes shares shown as held by the DLJ affiliates and
DeCrane Holdings Co. separately listed in this table; Mr. Dean and Ms.
Schnabel disclaim beneficial ownership of those shares.
(5) Reflects preferred stock held by the following investors related to
Putnam Investment Management, Inc.:
o Putnam Diversified Income Trust o Putnam High Yield Trust
o Putnam Fund Trust - Putnam High Yield o Putnam Strategic Income Fund
Trust II o Putnam Variable Trust - Putnam VT High
o Putnam High Yield Advantage Fund Yield Fund
The address of each of the investors is One Post Office Square, Boston,
MA 02109.
42
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND OTHERS
ACQUISITION OF DONALDSON, LUFKIN & JENRETTE, INC. BY CREDIT SUISSE GROUP
DLJ Merchant Banking Partners, II, L.P. is an affiliate of Donaldson,
Lufkin & Jenrette, Inc. In November 2000, Credit Suisse Group and its Credit
Suisse First Boston, Inc. subsidiary acquired Donaldson, Lufkin & Jenrette, Inc.
Upon completion of the acquisition, Donaldson, Lufkin & Jenrette, Inc. was
renamed Credit Suisse First Boston (USA), Inc. The combined operations are
commonly referred to collectively as Credit Suisse First Boston.
ARRANGEMENTS WITH OTHER CSFB/DLJ AFFILIATES
DLJ Capital Funding, Inc., receives customary fees and reimbursement of
expenses in connection with the arrangement and syndication of our senior bank
credit facility. Credit Suisse First Boston Corporation, referred to herein as
CSFB Corporation and formerly known as Donaldson, Lufkin & Jenrette Securities
Corporation, is the sole market-maker for our senior subordinated notes. In
addition, DeCrane Aircraft is obligated to pay CSFB Corporation an annual
advisory fee of $300,000 until 2003. We may from time to time enter into other
investment banking relationships with CSFB Corporation or one of its affiliates
pursuant to which they 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 CSFB Corporation against
liabilities, including liabilities under the federal securities laws.
INVESTORS' AGREEMENT
Investors owing 96.6% of DeCrane Holdings' issued and outstanding common
stock and common stock warrants and options, all of DeCrane Holdings' preferred
stock and all of DeCrane Aircraft's preferred and common stock, have entered
into an Amended and Restated Investors' Agreement, dated October 6, 2000. The
investors who own DeCrane Holdings' Class A warrants to purchase 159,794 shares
of common stock are not parties to the Investors' Agreement. The agreement
provides that:
o The parties to the agreement shall vote their shares to cause DLJ
Merchant Banking Partners, II, L.P. to select all members of the
Board of Directors of DeCrane Holdings and DeCrane Aircraft and at
least one of such directors on each board shall be an independent
director.
o Transfers of the shares of by the parties to the agreement are
restricted.
o Parties to the agreement may participate in some specific kinds of
sales of shares by DLJ affiliates.
o 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.
o The DLJ affiliates may request six demand registrations with respect
to all or any of the DeCrane Holdings common stock and preferred
stock and warrants to purchase 154,637 common shares held by those
affiliates (referred to herein as the Initial Capitalization
Warrants), which are immediately exercisable subject to customary
deferral and cutback provisions.
o The holders of Class B warrants to purchase 139,357 shares of DeCrane
Holdings common stock may request two demand registrations together
with all or any common stock held by them, which are immediately
exercisable subject to customary deferral and cutback provisions.
43
o 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.
o DeCrane Holdings will indemnify the stockholders against some
liabilities and expenses, including liabilities under the Securities
Act.
o Any person acquiring shares of common stock or preferred stock who is
required by the terms of the Investors' Agreement or any employment
agreement or stock purchase, option, stock option or other
compensation plan to become a party thereto shall execute an
agreement to become bound by the Investors' Agreement.
Each DeCrane Holdings' Initial Capitalization Warrant entitles the holder
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. The 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.
Each DeCrane Holdings' Class B Warrant entitles the holder 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. The
warrants are exercisable at any time prior to 5:00 p.m. New York City time on
June 30, 2010, subject to applicable federal and state securities laws.
TRANSACTIONS DURING 2000
Briefly described below are transactions, or series of similar
transactions, which occurred during the year ended December 31, 2000 that
individually exceeds $60,000 as required by Securities and Exchange Commission
rules. These transactions are also described in the notes accompanying our
financial statements included in this report.
In connection with financing our acquisitions of companies during 2000:
o DLJ Merchant Banking and affiliates purchased 326,087 shares of
DeCrane Holdings common stock for $7.5 million ($23.00 per share) and
DeCrane Holdings, in turn, contributed the proceeds to DeCrane
Aircraft;
o Affiliates of DLJ Merchant Banking purchased 250,000 shares of
DeCrane Aircraft 16% preferred stock and warrants to purchase 139,357
shares of DeCrane Holdings common stock for $25.0 million; subsequent
to their initial purchase, the DLJ Merchant Banking affiliates sold
20% of the preferred stock and common stock warrants to Putnam
Investment Management, Inc. and affiliates in a private transaction;
and
o DeCrane Aircraft amended it senior credit facility and borrowed an
additional $55.0 million of term debt. DLJ Capital Funding, Inc.,
received customary fees and reimbursement of expenses in connection
with the transaction.
DeCrane Aircraft executive officers and management purchased 19,707
shares of DeCrane Holdings common stock for $23.00 per share. In addition, Mr.
Fort purchased 1,000 shares of DeCrane Holdings common stock for $23.00 per
share and was granted options to purchase 1,000 common shares at $23.00 per
share and 2,000 common shares at $35.00 per share pursuant to the management
incentive plan, which also pertains to independent non-management directors. Mr.
Fort is presently the only director qualifying for the plan.
44
INDEBTEDNESS OF EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth all indebtedness owed to us by our
executive officers and directors that individually exceeds $60,000 as required
by Securities and Exchange Commission rules. All indebtedness set forth below
results from purchases of DeCrane Holdings 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
Item 10, "Directors and Executive Officers of the Registrant" for information
regarding each individual's relationship with DeCrane Aircraft and DeCrane
Holdings.
TOTAL INDEBTEDNESS TO DECRANE AIRCRAFT
AS OF DECEMBER 31, 2000
-------------------------------------------
NUMBER
OF SHARES
HELD AS INTEREST ACCRUED
NAME COLLATERAL(1) RATE (2) PRINCIPAL(3) INTEREST (4) TOTAL (5)
- ------------------------------------------- ------------- ------------- ------------- ------------- --------------
R. Jack DeCrane .......................... 56,521 5.74% $ 649,991 $ 38,498 $ 688,489
Charles H. Becker ........................ 17,391 5.74 199,996 11,846 211,842
Richard J. Kaplan ........................ 21,739 5.74 249,998 14,807 264,805
Jeffrey A. Nerland ....................... 6,521 5.74 74,991 4,442 79,433
Jeffrey F. Smith ......................... 8,695 5.74 99,992 5,922 105,914
- ------------------------
(1) Reflects the number of shares of DeCrane Holdings common stock held by
DeCrane Aircraft as collateral for the loans.
(2) Reflects the applicable federal rate of interest charged on the loans.
Interest is compounded annually.
(3) Reflects the original principal amount of the loans.
(4) Reflects accrued interest payable through December 31, 2000.
(5) Reflects the maximum amount of indebtedness during the year ended
December 31, 2000.
45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
1. FINANCIAL STATEMENTS
Our consolidated financial statements filed with this report are included
in a separate section and the end of this report and are listed in an index on
page F-1.
2. FINANCIAL STATEMENT SCHEDULES
Our consolidated financial statement schedules filed with this report are
included in a separate section and the end of this report and are listed in an
index on page F-1.
3. EXHIBITS
The following exhibits are filed as part of this report.
EXHIBIT FILING
NUMBER REFERENCE EXHIBIT DESCRIPTION
------------- --------- -----------------------------------------------------------------------------------
3.1.1 (1) Bylaws of DeCrane Holdings Co.
3.1.2 (1) Certificate of Incorporation of DeCrane Holdings Co.
3.1.2.1 (11) Certificate of Amendment of Certificate of Incorporation of DeCrane Holdings Co.
dated May 8, 2000
3.2.1 (1) Certificate of Incorporation of DeCrane Aircraft Holdings, Inc.
3.2.2 (1) Bylaws of DeCrane Aircraft Holdings, Inc.
3.3.1 (10) Certificate of Formation and Certificate of Merger of Aerospace Display Systems,
LLC
3.3.2 (10) Limited Liability Company Operating Agreement for Aerospace Display Systems, LLC
3.4.1 (1) Articles of Incorporation of Audio International, Inc.
3.4.2 (1) Amended & Restated Bylaws of Audio International, Inc.
3.5.1 (1) Articles of Incorporation of Avtech Corporation
3.5.2 (1) Bylaws of Avtech Corporation
3.7.1 (1) Certificate of Incorporation of Dettmers Industries, Inc. (formerly DAHX
Acquisition, Inc.)
3.7.2 (1) Bylaws of Dettmers Industries, Inc.
3.10.1 (1) Articles of Incorporation of Hollingsead International, Inc.
3.10.2 (1) Bylaws of Hollingsead International Inc.
3.11.1 (1) Articles of Incorporation of Tri-Star Electronics International, Inc.
3.11.2 (1) Bylaws of Tri-Star Electronics International, Inc.
3.12.1 (1) Articles of Incorporation of PATS, Inc.
3.12.2 (1) Bylaws of PATS, Inc.
46
EXHIBIT FILING
NUMBER REFERENCE EXHIBIT DESCRIPTION
------------- --------- -----------------------------------------------------------------------------------
3.12.3 (1) Amendment to Articles of PATS, Inc.
3.12.4 (1) Amendment to Bylaws of PATS, Inc.
3.13.1 (1) Articles of Incorporation of Flight Refueling, Inc.
3.13.2 (1) Bylaws of Flight Refueling, Inc.
3.14.1 (1) Articles of Incorporation of Patrick Aircraft Tank Systems, Inc.
3.14.2 (1) Bylaws of Patrick Aircraft Tank Systems, Inc.
3.15.1 (1) Articles of Incorporation of PATS Aircraft and Engineering Corporation
3.15.2 (1) Bylaws of PATS Aircraft and Engineering Corporation
3.16.1 (1) Articles of Incorporation of PATS Support, Inc.
3.16.2 (1) Bylaws of PATS Support, Inc.
3.17.1 (3) Articles of Incorporation of PPI Holdings, Inc.
3.17.2 (3) Bylaws of PPI Holdings, Inc.
3.18.1 (3) Articles of Incorporation of Precision Pattern, Inc.
3.18.2 (3) Bylaws of Precision Pattern, Inc.
3.19.1 (10) Certificate of Formation and Certificate of Merger for Custom Woodwork &
Plastics, LLC
3.19.2 (10) Limited Liability Company Operating Agreement for Custom Woodwork & Plastics, LLC
3.20.1 (4) Articles of Incorporation of PCI Acquisition Co., Inc.
3.20.2 (4) Bylaws of PCI Acquisition Co., Inc.
3.21.1 (4) Articles of Incorporation of International Custom Interiors, Inc.
3.21.2 (4) Bylaws of International Custom Interiors, Inc.
3.22.1 (5) Articles of Incorporation DAH-IP Holdings, Inc.
3.22.2 (5) Bylaws of DAH-IP Holdings, Inc.
3.23.1 (5) Articles of Incorporation of DAH-IP Infinity, Inc.
3.23.2 (5) Bylaws of DAH-IP Infinity, Inc.
3.24.1 (5) Certificate of Limited Partnership DAH-IP Acquisition Co., L.P. the General
Partner, and DeCrane Aircraft Holdings, Inc., the Limited Partner
3.24.2 (5) 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 (5) Assignment of Partnership Interest by DeCrane Aircraft Holdings, Inc. to DAH-IP
Infinity, Inc.
3.25.1 (8) Certificate of Formation and Certificate of Amendment of Carl F. Booth & Co., LLC
3.25.2 (8) Limited Liability Company Agreement of Carl F. Booth & Co., LLC
3.26.1 (10) Restated Articles of Incorporation of ERDA, Inc.
3.26.2 (10) Bylaws of ERDA, Inc. (formerly ERDA Acquisition Co., Inc.)
3.27.1 (12) Articles of Incorporation of Coltech, Inc.
3.27.2 (12) Bylaws of Coltech, Inc.
3.28.1 * Articles of Incorporation of DeCrane International Sales, Inc.
47
EXHIBIT FILING
NUMBER REFERENCE EXHIBIT DESCRIPTION
------------- --------- -----------------------------------------------------------------------------------
3.28.2 * Bylaws (No. 1) of DeCrane International Sales, Inc.
3.29.1 * Certificate of Limited Partnership of DeCrane Aircraft Furniture Co., LP
3.29.2 * Limited Partnership Agreement of DeCrane Aircraft Furniture Co., LP
4.1 (1) Indenture dated October 5, 1998 between DeCrane Aircraft and State Street Bank
and Trust Company
4.1.1 (1) Supplemental Indenture dated January 22, 1999 among PATS, Inc. and its
subsidiaries, the other guarantors under the Indenture, DeCrane Aircraft and
State Street Bank and Trust Company
4.1.2 (2) Supplemental Indenture to be dated April 23, 1999 among PPI Holdings, Inc.,
Precision Pattern, Inc., the other guarantors under the Indenture, DeCrane
Aircraft and State Street Bank and Trust Company
4.1.3 (12) Supplemental Indenture to be dated August 5, 1999 among CWP Acquisition, Inc.
d/b/a Custom Woodwork & Plastics, Inc., the other guarantors under the Indenture,
DeCrane Aircraft and State Street Bank and Trust Company
4.1.4 (12) Supplemental Indenture to be dated October 6, 1999 among PCI Acquisition Co.,
Inc. d/b/a PCI Newco, Inc., the other guarantors under the Indenture, DeCrane
Aircraft and State Street Bank and Trust Company
4.1.5 (12) Supplemental Indenture to be dated October 8, 1999 among International Custom
Interiors, Inc., the other guarantors under the Indenture, DeCrane Aircraft and
State Street Bank and Trust Company
4.1.6 (12) Supplemental Indenture to be dated December 17, 1999 among DAH-IP Acquisition,
L.P. d/b/a Infinity Partners, L.P., DAH-IP Holdings, Inc., DAH-IP Infinity, Inc.,
the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank
and Trust Company
4.1.7 (12) Supplemental Indenture to be dated May 11, 2000 among Booth Acquisition, LLC, the
other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and
Trust Company
4.1.8 (12) Supplemental Indenture to be dated June 16, 2000 among DeCrane Aircraft Furniture
Co., L.P., the other guarantors under the Indenture, DeCrane Aircraft and State
Street Bank and Trust Company
4.1.9 (12) Supplemental Indenture to be dated June 30, 2000 among ERDA, Inc., the other
guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust
Company
4.1.10 (12) Supplemental Indenture to be dated August 31, 2000 among Coltech, Inc., the other
guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust
Company
4.3 (1) DeCrane Holdings Co. Warrants to Purchase 155,000 Shares of Common Stock
4.3.1 (10) Form of Class B Warrant for the Purchase of Shares of Common Stock of DeCrane
Holdings Co.
4.4 (1) Warrant Registration Rights Agreement - DeCrane Holdings Co.
4.5 (1) Certificate of Designations, Preferences and Rights of 14% Senior Redeemable
Exchangeable Preferred Stock Due 2008
48
EXHIBIT FILING
NUMBER REFERENCE EXHIBIT DESCRIPTION
------------- --------- -----------------------------------------------------------------------------------
4.5.1 (10) Amendment No. 1 to the Certificate of Designations, Preferences and Rights of 14%
Senior Redeemable Exchangeable Preferred Stock Due 2008, effective June 29, 2000
10.1 (10) Securities Purchase Agreement dated as of June 30, 2000 among DeCrane Aircraft
Holdings, Inc., DeCrane Holdings Co. and the purchasers named therein
10.2 (12) Amended and Restated Investors' Agreement dated as of October 6, 2000 by and
among DeCrane Holdings Co., DeCrane Aircraft Holdings, Inc. and the stockholders
named therein
10.5 (1) Tax Sharing Agreement dated March 15, 1993 between DeCrane Aircraft and several
subsidiaries
10.6 ** (1) Employment Agreement dated July 17, 1998 between DeCrane Aircraft Holdings, Inc.
and R. Jack DeCrane
10.6.1 ** * First Amendment to Employment Agreement dated May 5, 2000 between DeCrane
Aircraft Holdings, Inc. and R. Jack DeCrane
10.7 ** (1) 401(K) Salary Reduction Non-Standardized Adoption Agreement dated April 30, 1992
between the Company and The Lincoln National Life Insurance Company
10.8 (1) Form of Subscription Agreement for DeCrane Holdings Co. common and preferred
stock by certain members of Global Technology Partners LLC
10.10 (1) 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 (1) First Amendment to Credit Agreement dated January 22, 1999
10.10.2 (6) Second Amended and Restated Credit Agreement dated as of December 17, 1999 among
DeCrane Aircraft, the lenders listed therein, DLJ Capital Funding, Inc., as
syndication agent, and Bank One NA, as administrative agent
10.10.3 (9) Third Amended and Restated Credit Agreement dated as of May 11, 2000 among
DeCrane Aircraft, the lenders listed therein, DLJ Capital Funding, Inc., as
syndication agent, and Bank One NA, as administrative agent
10.10.3.1 (12) First Amendment to the Third Amended and Restated Credit Agreement dated as of
May 11, 2000 among DeCrane Aircraft, the lenders listed therein, DLJ Capital
Funding, Inc., as syndication agent, and Bank One NA, as administrative agent
10.19 ** (5) Amended Management Incentive Stock Option Plan
10.20 ** (5) Amended Stock Subscription Agreement
10.21 ** (5) Amended Incentive Bonus Plan
10.22 ** (7) Executive Deferred Compensation Plan
10.23.1 ** * Change of Control Agreement between DeCrane Aircraft Holdings, Inc. and Michael
S. Abeles
10.23.2 ** * Change of Control Agreement between DeCrane Aircraft Holdings, Inc. and Charles
H. Becker
49
EXHIBIT FILING
NUMBER REFERENCE EXHIBIT DESCRIPTION
------------- --------- -----------------------------------------------------------------------------------
10.23.3 ** * Change of Control Agreement between DeCrane Aircraft Holdings, Inc. and Richard
J. Kaplan
10.23.4 ** * Change of Control Agreement between DeCrane Aircraft Holdings, Inc. and James E.
Mann
10.23.5 ** * Change of Control Agreement between DeCrane Aircraft Holdings, Inc. and Robert G.
Martin
10.23.6 ** * Change of Control Agreement between DeCrane Aircraft Holdings, Inc. and Brian K.
Moody
10.23.7 ** * Change of Control Agreement between DeCrane Aircraft Holdings, Inc. and Jeffrey
A. Nerland
10.23.8 ** * Change of Control Agreement between DeCrane Aircraft Holdings, Inc. and Jeffrey
F. Smith
10.23.9 ** * Change of Control Agreement between DeCrane Aircraft Holdings, Inc. and Eric D.
Steidl
21.1 * List of Subsidiaries of Registrant
23.1 * Consent of PricewaterhouseCoopers LLP
99.1 * Unaudited Pro Forma Financial Data for the year ended December 31, 2000
- ------------------------
* Filed herewith.
** Denotes management contracts and compensatory plans and arrangements
required to be filed as exhibits to this report.
(1) Filed as an exhibit to our Registration Statement (Registration No.
333-70363) on Form S-1 (Amendment No. 1) filed with the Commission on
March 3, 1999.
(2) Filed as an exhibit to our Registration Statement (Registration No.
333-70363) on Form S-1 (Amendment No. 2) filed with the Commission on
April 23, 1999.
(3) Filed as an exhibit to our Registration Statement (Registration No.
333-70363) on Form S-1 (Amendment No. 3) filed with the Commission on May
6, 1999.
(4) Filed as an exhibit to our Form 8-K dated August 5, 1999 filed with the
Commission on October 19, 1999.
(5) Filed as an exhibit to our Form 8-K dated December 17, 1999 filed with
the Commission on December 31, 1999.
(6) Filed as an exhibit to our Form 10-K dated December 31, 1999 filed with
the Commission on March 30, 2000.
(7) Filed as an exhibit to our Form 10-Q dated March 31, 2000 filed with the
Commission on May 9, 2000.
(8) Filed as an exhibit to our Form 8-K dated May 11, 2000 filed with the
Commission on May 25, 2000.
(9) Filed as an exhibit to our Form 8-K (Amendment No. 1) dated May 11, 2000
filed with the Commission on June 16, 2000.
(10) Filed as an exhibit to our Form 8-K (Amendment No. 1) dated June 30, 2000
filed with the Commission on August 2, 2000.
50
(11) Filed as an exhibit to our Form 10-Q dated June 30, 2000 filed with the
Commission on August 14, 2000.
(12) Filed as an exhibit to our Form 10-Q dated September 30, 2000 filed with
the Commission on November 14, 2000.
REPORTS OF FORM 8-K FILED DURING THE QUARTER ENDED DECEMBER 31, 2000
None.
51
SIGNATURES
Pursuant to the requirements of Section 13 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.
DECRANE HOLDINGS CO. (REGISTRANT)
By: /s/ Thompson Dean By: /s/ Richard J. Kaplan
----------------------------------- -----------------------------------
Thompson Dean Richard J. Kaplan
President Assistant Secretary and Assistant
Treasurer (chief accounting officer)
Date: March 29, 2001
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.
By: /s/ Thompson Dean By: /s/ R. Jack Decrane
---------------------------------- -----------------------------------
Thompson Dean R. Jack DeCrane
Chairman of the Board of Directors Vice Chairman of Board of Directors
By: /s/ John F. Fort, III By: /s/ Susan C. Schnabel
---------------------------------- -----------------------------------
John F. Fort, III Susan C. Schnabel
Director Director
Date: March 29, 2001
52
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE
-----
CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Accountants ....................................................................... F-2
Consolidated Balance Sheets as of December 31, 1999 and 2000 ............................................. F-4
Consolidated Statements of Operations for the eight months ended August 31, 1998 (predecessor),
the four months ended December 31, 1998 and the years ended December 31, 1999 and 2000 ................ F-5
Consolidated Statements of Stockholders' Equity for the eight months ended August 31, 1998
(predecessor), the four months ended December 31, 1998 and the years ended
December 31, 1999 and 2000 ............................................................................ F-6
Consolidated Statements of Cash Flows for the eight months ended August 31, 1998 (predecessor),
the four months ended December 31, 1998 and the years ended December 31, 1999 and 2000 ................ F-7
Notes to Consolidated Financial Statements ............................................................... F-8
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
For the eight months ended August 31, 1998 (predecessor), the four months ended
December 31, 1998 and the years ended December 31, 1999 and 2000:
II - Valuation and Qualifying Accounts .............................................................. F-51
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.
F-1
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, 1999 and
2000, and the results of their operations and their cash flows for the four
months ended December 31, 1998 and the years ended December 31, 1999 and 2000,
in conformity with accounting principles generally accepted in the United States
of America. 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 of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, 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 our opinion.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
March 9, 2001
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
DeCrane Aircraft Holdings, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the results of
operations and cash flows of DeCrane Aircraft Holdings, Inc. and its
subsidiaries for the eight months ended August 31, 1998, in conformity with
accounting principles generally accepted in the United States of America. 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 of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, 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 our opinion.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
March 9, 2001
F-3
DECRANE HOLDINGS CO. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
-------------------------
1999 2000
----------- ------------
ASSETS
Current assets
Cash and cash equivalents ........................................................... $ 7,918 $ 8,199
Accounts receivable, net ............................................................ 45,342 59,023
Inventories ......................................................................... 58,721 83,677
Deferred income taxes ............................................................... 5,592 15,090
Prepaid expenses and other current assets ........................................... 2,114 987
----------- -----------
Total current assets .............................................................. 119,687 166,976
Property and equipment, net ............................................................ 37,700 59,491
Other assets, principally intangibles, net ............................................. 374,111 439,582
----------- -----------
Total assets .................................................................. $ 531,498 $ 666,049
=========== ===========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt ................................................... $ 5,070 $ 9,289
Accounts payable .................................................................... 14,948 20,304
Accrued liabilities ................................................................. 66,844 76,364
Income taxes payable ................................................................ 3,576 3,505
----------- -----------
Total current liabilities ......................................................... 90,438 109,462
Long-term debt ......................................................................... 310,581 373,990
Deferred income taxes .................................................................. 21,249 37,013
Other long-term liabilities ............................................................ 2,989 2,650
Commitments and contingencies (Note 14)
Minority interest in preferred stock of subsidiary ..................................... -- 23,179
Mandatorily redeemable preferred stock ................................................. 41,178 47,252
----------- -----------
Stockholders' equity
Undesignated preferred stock, $.01 par value, 1,140,000 shares authorized;
none issued and outstanding as of December 31, 1999 and 2000....................... -- --
Common stock, $.01 par value, 4,500,000 and 10,000,000 shares
authorized as of December 31, 1999 and 2000, respectively;
3,571,827 and 3,914,274 shares issued and outstanding as of
December 31, 1999 and 2000, respectively........................................... 36 39
Additional paid-in capital .......................................................... 75,944 82,298
Notes receivable for shares sold .................................................... (2,468) (2,552)
Accumulated deficit ................................................................. (6,923) (5,595)
Accumulated other comprehensive loss ................................................ (1,526) (1,687)
----------- -----------
Total stockholders' equity ........................................................ 65,063 72,503
----------- -----------
Total liabilities and stockholders' equity ...................................... $ 531,498 $ 666,049
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
DECRANE HOLDINGS CO. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(PREDECESSOR)
------------
EIGHT MONTHS FOUR MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED
AUGUST 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1998 1999 2000
----------- ----------- ----------- -----------
Revenues ................................................. $ 90,077 $ 60,356 $ 244,048 $ 347,379
Cost of sales ............................................ 60,101 42,739 165,871 232,048
----------- ----------- ----------- -----------
Gross profit ...................................... 29,976 17,617 78,177 115,331
----------- ----------- ----------- -----------
Operating expenses
Selling, general and administrative expenses .......... 19,351 10,274 40,157 45,394
Amortization of intangible assets ..................... 1,347 3,148 13,073 17,948
----------- ----------- ----------- -----------
Total operating expenses .......................... 20,698 13,422 53,230 63,342
----------- ----------- ----------- -----------
Income from operations ............................ 9,278 4,195 24,947 51,989
Other expenses
Interest expense ...................................... 2,350 6,867 27,903 41,623
Minority interest in preferred stock of subsidiary .... -- -- -- 2,274
Terminated debt offering expenses ..................... 600 -- -- --
Other expenses, net ................................... 247 335 447 482
----------- ----------- ----------- -----------
Income (loss) before provision (benefit) for income
taxes and extraordinary item .......................... 6,081 (3,007) (3,403) 7,610
Provision (benefit) for income taxes ..................... 2,892 (2,668) 952 6,282
----------- ----------- ----------- -----------
Income (loss) before extraordinary item .................. 3,189 (339) (4,355) 1,328
Extraordinary loss from debt refinancing, net of
income tax benefit .................................... -- (2,229) -- --
----------- ------------ ----------- -----------
Net income (loss) ........................................ 3,189 (2,568) (4,355) 1,328
Noncash preferred stock dividend accretion ............... -- (1,642) (5,294) (6,074)
----------- ----------- ----------- -----------
Net income (loss) applicable to
common stockholder .................................... $ 3,189 $ (4,210) $ (9,649) $ (4,746)
=========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
DECRANE HOLDINGS CO. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTES ACCUMULATED
COMMON STOCK ADDITIONAL RECEIVABLE OTHER
-------------------- PAID-IN FOR SHARES ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL SOLD DEFICIT LOSS TOTAL
--------- --------- --------- --------- --------- --------- ---------
PREDECESSOR
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
========= ========= ========= ========= ========= ========= =========
Sale of common stock ................. 2,826,087 $ 28 $ 64,477 $ -- $ -- $ -- $ 64,505
Comprehensive income
Net loss .......................... -- -- -- -- (2,568) -- (2,568)
Translation adjustment ............ -- -- -- -- -- 274 274
---------
(2,294)
---------
Sale of preferred and common stock and
related notes receivable issued in
connection with share sold ........ 20,098 -- 462 (352) -- -- 110
Value of warrants issued with debt
offering -- -- 1,200 -- -- -- 1,200
Noncash dividend accretion on
preferred stock ................... -- -- (1,642) -- -- -- (1,642)
--------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 1998 ........... 2,846,185 28 64,497 (352) (2,568) 274 61,879
Comprehensive income
Net loss .......................... -- -- -- -- (4,355) -- (4,355)
Translation adjustment ............ -- -- -- -- -- (1,800) (1,800)
---------
(6,155)
---------
Sale of common stock and related notes
receivable issued in connection
with shares sold .................. 725,642 8 16,598 (2,095) -- -- 14,511
Noncash dividend accretion on
preferred stock ................... -- -- (5,294) -- -- -- (5,294)
Compensatory stock option expense .... -- -- 143 -- -- -- 143
Notes receivable interest accrued .... -- -- -- (21) -- -- (21)
--------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 1999 ........... 3,571,827 36 75,944 (2,468) (6,923) (1,526) 65,063
Comprehensive income
Net income ........................ -- -- -- -- 1,328 -- 1,328
Translation adjustment ............ -- -- -- -- -- (161) (161)
---------
1,167
---------
Sale of common stock, net of stock
repurchased and canceled .......... 342,447 3 7,848 51 -- -- 7,902
Value of warrants issued with sale of
preferred stock by subsidiary ..... -- -- 4,019 -- -- -- 4,019
Noncash dividend accretion on
preferred stock ................... -- -- (6,074) -- -- -- (6,074)
Compensatory stock option expense .... -- -- 561 -- -- -- 561
Notes receivable interest accrued .... -- -- -- (135) -- -- (135)
--------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 2000 ........... 3,914,274 $ 39 $ 82,298 $ (2,552) $ (5,595) $ (1,687) $ 72,503
========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
DECRANE HOLDINGS CO. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(PREDECESSOR)
-------------
EIGHT MONTHS FOUR MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED
AUGUST 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1998 1999 2000
----------- ----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ..................................... $ 3,189 $ (2,568) $ (4,355) $ 1,328
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation and amortization ..................... 4,454 4,998 20,802 29,445
Minority interest in preferred stock of subsidiary -- -- -- 2,274
Noncash portion of restructuring charge ........... -- -- 7,242 --
Deferred income taxes ............................. (2,339) (5,072) (380) 5,121
Extraordinary loss from debt refinancing .......... -- 2,229 -- --
Other, net ........................................ (360) (97) 132 773
Changes in assets and liabilities, net of effect
from acquisitions
Accounts receivable ............................... (3,621) (2,929) 379 (4,157)
Inventories ....................................... (2,017) 4,313 (15,358) (11,302)
Prepaid expenses and other assets ................. (58) (562) 96 2,048
Accounts payable .................................. (1,127) (1,754) 3,754 2,259
Accrued liabilities ............................... 3,524 2,250 3,703 (10,799)
Income taxes payable .............................. 1,374 108 862 583
Other long-term liabilities........................ (5) 92 (1,677) (790)
----------- ----------- ----------- -----------
Net cash provided by operating activities ....... 3,014 1,008 15,200 16,783
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisitions, net of cash acquired ...... (85,808) (185,126) (145,706) (89,546)
Capital expenditures .................................. (1,745) (1,813) (7,262) (22,689)
Other, net ............................................ 175 -- 194 71
----------- ----------- ----------- -----------
Net cash used for investing activities .......... (87,378) (186,939) (152,774) (112,164)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Financing of DeCrane Aircraft acquisition, net ........ -- 190,865 -- --
Term debt borrowings .................................. -- -- 135,000 55,000
Net proceeds from sale of preferred stock
and warrants ........................................ -- -- -- 24,924
Net borrowings (repayments) under revolving
line of credit agreements ........................... 91,261 (1,103) (5,800) 12,400
Proceeds from sale of common stock .................... -- -- 14,511 7,902
Customer advance and other borrowings ................. -- -- 5,000 3,451
Principal payments on term debt, capitalized
leases and other debt ............................... (1,317) (458) (1,953) (5,824)
Deferred financing costs .............................. -- -- (4,348) (1,900)
Other, net ............................................ (73) (36) (358) (297)
----------- ----------- ----------- -----------
Net cash provided by financing activities ....... 89,871 189,268 142,052 95,656
----------- ----------- ----------- -----------
Effect of foreign currency translation on cash ........... 26 181 (78) 6
----------- ----------- ----------- -----------
Net increase in cash and cash equivalents ................ 5,533 3,518 4,400 281
Cash and cash equivalents at beginning of period ......... 206 -- 3,518 7,918
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period ............... $ 5,739 $ 3,518 $ 7,918 $ 8,199
=========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
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 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 DeCrane Aircraft.
Through its subsidiary, DeCrane Holdings is a leading provider of
integrated assemblies, sub-assemblies and component parts to the aircraft
industry. 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, 1999 and 2000 and for the four months
ended December 31, 1998 and the years ended December 31, 1999 and 2000 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 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.
F-8
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 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 4).
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 periods are either
the earlier of twelve to sixty months from the date of delivery to the operator
or forty-two 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.
F-9
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 $323,000 for the eight months ended
August 31, 1998 and $146,000 for the four months ended December 31, 1998. The
Company had no open forward exchange contracts as of December 31, 1998 and did
not enter in any such contracts during the years ended December 31, 1999 and
2000.
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 that 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 their expected realizable values.
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 of the same remaining
maturities. The estimated fair value of the Company's $100,000,000 senior
subordinated debt was approximately $92,000,000 at December 31, 1999 and
$91,000,000 at December 31, 2000. All other non-derivative financial instruments
as of December 31, 1999 and 2000 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.
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 stockholders' equity.
Realized foreign currency exchange gains (losses) included in other income
or expense in the consolidated statements of operations were ($411,000) for the
eight months ended August 31, 1998, ($262,000) for the four months ended
December 31, 1998, $530,000 for the year ended December 31, 1999 and $351,000
for the year ended December 31, 2000.
F-10
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, $4,264,000 for the year ended December 31, 1999
and $4,630,000 for the year ended December 31, 2000.
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 from 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 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. The Company adopted
SFAS No. 133 effective January 1, 2001; the adoption did not have a material
impact on the Company's consolidated financial position, results of operations
or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. SAB
No. 101 summarizes the Staff's views in applying generally accepted accounting
principles to revenue recognition in the financial statements. The bulletin was
effective in the fourth quarter of 2000. The Company was in compliance with
these standards; accordingly, the adoption of SAB No. 101 did not have an impact
on its consolidated financial position, results of operations or cash flows.
F-11
NOTE 2. THE DLJ ACQUISITION
In July 1998, DeCrane Holdings Co., a newly incorporated entity, 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 DeCrane Aircraft'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
DeCrane Aircraft. All of DeCrane Aircraft's previously outstanding shares were
canceled and, as a result, DeCrane Aircraft became a wholly-owned subsidiary of
DeCrane Holdings. DeCrane Aircraft incurred nonrecurring charges totaling $3.6
million (pre-tax) during the eight months ended August 31, 1998 in conjunction
with the transaction. This transaction is referred to herein as the DLJ
acquisition.
The gross purchase price for the 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:
o $4.4 million to inventory;
o $2.6 million to property and equipment; and
o $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 ranging from five to 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 DLJ acquisition, DeCrane Aircraft 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, DeCrane Aircraft:
o received a $99.0 million equity contribution from DeCrane Holdings of
its proceeds from the sale of preferred and common stock to DLJ
Merchant Banking Partners II, L.P. and affiliated funds and entities;
o entered into a new syndicated senior secured credit facility; and
o issued $100.0 million of senior subordinated increasing rate notes
(referred to herein as the bridge notes).
In October 1998, subsequent to DeCrane Aircraft's acquisition by DeCrane
Holdings and its related financing, the bridge notes were repaid with the
proceeds from DeCrane Aircraft's issuance of $100.0 million of 12% senior
subordinated notes, which were paired with warrants to purchase 155,000 shares
of DeCrane Holdings common stock. In conjunction with the repayment of the
DeCrane Aircraft's existing credit facility indebtedness concurrent with the DLJ
acquisition and the repayment of the bridge notes, DeCrane Aircraft recorded a
$2.2 million extraordinary charge, net of income tax benefit of $1.5 million,
during the four months ended December 31, 1998.
F-12
NOTE 3. ACQUISITIONS
During the three years ended December 31, 2000, the Company acquired:
CABIN MANAGEMENT GROUP
o substantially all of the assets of Dettmers Industries, Inc., a
Florida-based designer and manufacturer of seats for corporate
aircraft, on June 30, 1998;
o all of the common stock of Precision Pattern, Inc., a Kansas-based
designer and manufacturer of interior furniture components for
corporate aircraft, on April 23, 1999;
o 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;
o 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;
o 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;
o 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;
o substantially all of the assets of Carl F. Booth & Co., an
Indiana-based manufacturer of wood veneer panels primarily used in
aircraft interior cabinetry, on May 11, 2000;
o all of the common stock of ERDA, Inc., a Wisconsin-based designer and
manufacturer of aircraft seating, on June 30, 2000;
SPECIALTY AVIONICS GROUP
o 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;
o all of the common stock of Coltech, Inc., an Arizona-based designer
and manufacturer of audio components for commercial and corporate
aircraft, on August 31, 2000; and
SYSTEMS INTEGRATION GROUP
o 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.
F-13
(PREDECESSOR)
EIGHT MONTHS YEAR YEAR
ENDED ENDED ENDED
AUGUST 31, DECEMBER 31, DECEMBER 31,
1998 1999 2000
----------- ----------- -----------
(IN THOUSANDS) (IN THOUSANDS)
Paid in cash
Purchase price ..................................................... $ 85,552 $ 140,819 $ 55,852
Acquisition related costs .......................................... 1,519 4,491 3,511
----------- ----------- -----------
Total purchase price ............................................. $ 87,071 $ 145,310 $ 59,363
=========== =========== ===========
Maximum determinable contingent consideration payable,
based on future attainment of defined performance criteria ......... $ 2,000 $ 48,950 $ 2,000
=========== =========== ===========
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 18,936
Difference between the total purchase price and fair value
of the net assets acquired recorded as goodwill at the
time of acquisition .............................................. 59,979 110,922 41,622
The 1998 acquisitions were funded with borrowings under the Company's then
existing credit facility. The 1999 and 2000 acquisitions were funded with
borrowings under the Company's senior credit facility, proceeds from the sale of
common and preferred stock as described in Note 12, 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 to 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 during the three years ended December 31, 2000, the Company
recorded contingent consideration payable of $3,000,000 in 1998, $29,825,000 in
1999 and $20,154,000 in 2000, resulting in a corresponding increase in goodwill.
The contingent consideration is included in accrued liabilities in the
consolidated financial statements. The Company's maximum determinable contingent
consideration payment obligations remaining as of December 31, 2000 are
described in Note 14.
F-14
Unaudited pro forma consolidated results of operations are presented in the
table below for the years ended December 31, 1999 and 2000. The results of
operations reflect the Company's acquisitions as if all of these transactions
were consummated as of January 1, 1999.
PRO FORMA FOR THE
YEAR ENDED DECEMBER 31,
-------------------------
1999 2000
----------- -----------
(UNAUDITED, IN THOUSANDS)
Revenues ............................................................................... $ 335,542 $ 371,584
EBITDA, as defined (Note 18) ........................................................... 78,455 89,160
Net loss ............................................................................... (6,735) (79)
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 and capital structure of the Company following the acquisitions.
During 2000, three customers accounted for more than 10% of the Company's
consolidated revenues (Note 18). If the Company had completed its 1999 and 2000
acquisitions at the beginning of 1999, revenues from these customers would have
been as follows:
PRO FORMA FOR THE
YEAR ENDED DECEMBER 31,
--------------------------
1999 2000
------------ ------------
(UNAUDITED, IN THOUSANDS)
Bombardier ............................................................................. $ 42,391 $ 65,746
Boeing ................................................................................. 47,366 53,735
Textron ................................................................................ 47,654 53,669
----------- -----------
Total ............................................................................... $ 137,411 $ 173,150
=========== ===========
Complete loss of any of the customers identified above could have a
significant adverse impact on the results of operations expected in future
periods.
F-15
NOTE 4. 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 was 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 in 1999 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:
o 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 assets were written down to their net
realizable value.
o Lease termination and other related costs include 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.
o Severance and other compensation costs relate to the termination of
approximately fifty employees. The majority of these employees are
hourly workers located in the manufacturing facility, which ceased
operations in June 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 completed the plan
in the third quarter of 2000. Of the total charge, $7,242,000 represents a
noncash write-down of assets. Components of the restructuring, asset impairment
and other nonrecurring charges incurred through December 31, 2000 are as
follows:
NONCASH WRITE-DOWN OF
--------------------- LEASE
PROPERTY SEVERANCE TERMINATION OTHER
AND AND OTHER AND OTHER EXIT
INVENTORY EQUIPMENT COMPENSATION RELATED COSTS COSTS TOTAL
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
Pre-tax restructuring charge ....... $ 5,983 $ 1,259 $ 1,077 $ 752 $ 864 $ 9,935
Noncash write-downs ................ (5,983) (1,259) -- -- -- (7,242)
Cash paid during the period ........ -- -- (293) (31) (188) (512)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 ...... -- -- 784 721 676 2,181
Adjustments ........................ -- -- -- 641 -- 641
Cash paid during the period ........ -- -- (784) (775) (558) (2,117)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2000 ...... $ -- $ -- $ -- $ 587 $ 118 $ 705
=========== =========== =========== =========== =========== ===========
F-16
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.
The adjustments made in 2000 reflect the increase to the restructuring
reserves as a result of higher than anticipated costs to complete certain
actions compared to previous estimates. Additionally, during 2000 the Company
was able to sell property and equipment previously written down and recognized a
gain on disposal of approximately $600,000.
The remaining balance of restructuring costs includes lease termination and
other exit costs. The restructuring plan was completed in the third quarter of
2000, however, future cash payments will extend beyond this date due to future
lease payments on the vacated facility and the incurrence of other exit costs.
The cash payments will be funded from existing cash balances and internally
generated cash from operations.
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.
NOTE 5. ACCOUNTS RECEIVABLE
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.
Accounts receivable is net of an allowance for doubtful accounts of
$1,966,000 at December 31, 1999 and $1,902,000 at December 31, 2000. Included in
accounts receivable are unbilled receivables under long-term contracts totaling
$5,354,000 at December 31, 2000 (none at December 31, 1999).
F-17
NOTE 6. INVENTORIES
Inventories are comprised of the following as of December 31, 1999 and
2000:
DECEMBER 31,
------------------------
1999 2000
----------- ----------
(IN THOUSANDS)
Raw materials .......................................................................... $ 28,249 $ 49,235
Work-in process ........................................................................ 20,520 26,749
Finished goods ......................................................................... 9,952 7,693
----------- -----------
Total inventories ................................................................... $ 58,721 $ 83,677
=========== ===========
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 of $5,720,000 at December 31, 1999 and
$8,603,000 at December 31, 2000 related to long-term contracts that will be
recoverable based on future sales. 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 1999 and 2000.
NOTE 7. PROPERTY AND EQUIPMENT
Property and equipment includes the following as of December 31, 1999 and
2000:
DECEMBER 31,
------------------------
1999 2000
----------- ----------
(IN THOUSANDS)
Machinery and equipment ................................................................ $ 17,938 $ 27,393
Land, buildings and leasehold improvements ............................................. 17,704 30,841
Computer equipment and software, furniture and fixtures ................................ 8,563 13,985
Tooling ................................................................................ 2,476 2,594
----------- -----------
Total cost .......................................................................... 46,681 74,813
Accumulated depreciation and amortization ........................................... (8,981) (15,322)
----------- -----------
Net property and equipment ........................................................ $ 37,700 $ 59,491
=========== ===========
F-18
Property and equipment under capital leases included above consist of the
following as of December 31, 1999 and 2000:
DECEMBER 31,
--------------------------
1999 2000
----------- ------------
(IN THOUSANDS)
Machinery and equipment ................................................................ $ 781 $ 1,283
Computer equipment and software, furniture and fixtures ................................ 2,220 2,113
----------- -----------
Total cost .......................................................................... 3,001 3,396
Accumulated depreciation and amortization ........................................... (280) (954)
----------- -----------
Net property and equipment ........................................................ $ 2,721 $ 2,442
=========== ===========
Depreciation of property and equipment under capital leases is included in
depreciation expense in the consolidated financial statements.
NOTE 8. OTHER ASSETS
Other assets includes the following as of December 31, 1999 and 2000:
DECEMBER 31, 1999 DECEMBER 31, 2000
------------------------------------- --------------------------------------
ACCUMULATED ACCUMULATED
COST AMORTIZATION NET COST AMORTIZATION NET
----------- ------------ ----------- ----------- ------------ -----------
(IN THOUSANDS)
Goodwill ........................... $ 312,104 $ (9,371) $ 302,733 $ 377,167 $ (20,811) $ 356,356
Identifiable intangibles
FAA certifications .............. 32,391 (2,824) 29,567 45,816 (5,431) 40,385
Other identifiable
intangibles ................... 32,931 (3,999) 28,932 38,421 (7,906) 30,515
Deferred financing costs ........... 14,027 (1,973) 12,054 15,927 (4,231) 11,696
Other non-amortizable assets ....... 825 -- 825 630 -- 630
----------- ----------- ----------- ----------- ----------- -----------
Total other assets .......... $ 392,278 $ (18,167) $ 374,111 $ 477,961 $ (38,379) $ 439,582
=========== =========== =========== =========== =========== ===========
NOTE 9. ACCRUED LIABILITIES
Accrued liabilities are comprised of the following as of December 31, 1999
and 2000:
DECEMBER 31,
--------------------------
1999 2000
------------ -----------
(IN THOUSANDS)
Acquisition related contingent consideration ........................................... $ 29,825 $ 20,154
Customer advances and deposits ......................................................... 13,834 19,974
Salaries, wages, compensated absences and payroll related taxes ........................ 8,673 15,337
Accrued interest ....................................................................... 3,228 3,730
Other accrued liabilities .............................................................. 11,284 17,169
----------- -----------
Total accrued liabilities ........................................................... $ 66,844 $ 76,364
=========== ===========
F-19
NOTE 10. LONG-TERM DEBT
Long-term debt includes the following amounts as of December 31, 1999 and
2000:
DECEMBER 31,
-------------------------
1999 2000
----------- ------------
(IN THOUSANDS)
Senior credit facility
$25 million working capital revolving line of credit ................................ $ -- $ --
$25 million acquisition revolving line of credit .................................... -- 12,400
Term loans .......................................................................... 213,213 263,443
12% senior subordinated notes .......................................................... 100,000 100,000
Capital lease obligations and equipment term debt financing,
secured by equipment ................................................................ 2,411 5,231
Other indebtedness ..................................................................... 27 2,205
----------- -----------
Total long-term debt ................................................................ 315,651 383,279
Less current portion ................................................................ (5,070) (9,289)
----------- -----------
Long-term debt, less current portion .............................................. $ 310,581 $ 373,990
=========== ===========
During 1999 and 2000, the Company amended its senior credit facility and
borrowed $190,000,000 to finance, in part, acquisitions.
SENIOR CREDIT FACILITY
The senior credit facility provides for term loan borrowings in the
aggregate principal amount of $270,000,000 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 six 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 Eurodollar 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 1.50% to 2.75% for prime rate borrowings and 2.75% to 4.00% for Eurodollar
borrowings. The weighted-average interest rate on all senior credit facility
borrowings outstanding was 10.13% as of December 31, 2000. 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.
F-20
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. 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.
OTHER INDEBTEDNESS
As of December 31, 2000, other indebtedness reflects acquisition financing
payable to sellers in connection with their respective acquisitions. The debt is
non-interest bearing; original issue discounts ranging between 10.5% and 12.5%
are being amortized over the term.
AGGREGATE MATURITIES
The total annual maturities of long-term debt outstanding as of December
31, 2000 are as follows:
(IN THOUSANDS)
Year ending December 31,
2001 ............................................................................................. $ 9,325
2002 ............................................................................................. 13,533
2003 ............................................................................................. 16,213
2004 ............................................................................................. 47,189
2005 ............................................................................................. 97,034
2006 and thereafter .............................................................................. 200,373
-----------
Total aggregate maturities ..................................................................... 383,667
Less unamortized debt discounts ................................................................ (388)
-----------
Total long-term debt ......................................................................... $ 383,279
===========
F-21
\
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. INCOME TAXES
Income (loss) before income taxes and extraordinary item was taxed under
the following jurisdictions:
(PREDECESSOR)
-------------
EIGHT MONTHS FOUR MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED
AUGUST 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1998 1999 2000
----------- ----------- ----------- -----------
(IN THOUSANDS) (IN THOUSANDS)
Domestic ................................................. $ 5,637 $ (3,360) $ (3,517) $ 7,775
Foreign .................................................. 444 353 114 (165)
----------- ----------- ----------- -----------
Total .................................................... $ 6,081 $ (3,007) $ (3,403) $ 7,610
=========== =========== =========== ===========
The provisions for income taxes (benefit) are as follows:
(PREDECESSOR)
-------------
EIGHT MONTHS FOUR MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED
AUGUST 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1998 1999 2000
----------- ----------- ----------- -----------
(IN THOUSANDS) (IN THOUSANDS)
Current
U.S. federal .......................................... $ 3,835 $ 1,560 $ 89 $ 370
State and local ....................................... 1,275 699 1,140 671
Foreign................................................ 121 145 103 120
----------- ----------- ----------- -----------
Total current ....................................... 5,231 2,404 1,332 1,161
----------- ----------- ----------- -----------
Deferred
U.S. federal .......................................... (1,932) (4,150) (76) 4,599
State and local ....................................... (435) (816) (284) 557
Foreign ............................................... 28 (106) (20) (35)
----------- ----------- ----------- -----------
Total deferred ...................................... (2,339) (5,072) (380) 5,121
----------- ----------- ----------- -----------
Total provision
U.S. federal .......................................... 1,903 (2,590) 13 4,969
State and local ....................................... 840 (117) 856 1,228
Foreign ............................................... 149 39 83 85
----------- ----------- ----------- -----------
Total provision ..................................... $ 2,892 $ (2,668) $ 952 $ 6,282
=========== =========== =========== ===========
F-22
NOTE 11. 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 YEAR
ENDED ENDED ENDED ENDED
AUGUST 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1998 1999 2000
----------- ----------- ----------- -----------
(IN THOUSANDS) (IN THOUSANDS)
Income tax (benefit) at U.S. statutory rates ............. $ 2,068 $ (1,022) $ (1,157) $ 2,664
Increase (decrease) resulting from
Amortization of assets and other expenses not
deductible for income tax purposes .................. 594 782 2,025 2,247
State income taxes, net of federal benefit ............ 550 (25) 111 798
Minority interest in preferred stock of subsidiary
not deductible for income tax purposes .............. -- -- -- 796
Decrease in deferred tax asset valuation allowance .... -- (2,575) -- --
Lower tax rates on earnings of foreign subsidiaries
and foreign sales corporation ....................... (50) (36) (48) (214)
Other, net ............................................ (270) 208 21 (9)
----------- ----------- ----------- -----------
Income tax (benefit) at effective rates ........... $ 2,892 $ (2,668) $ 952 $ 6,282
=========== =========== =========== ===========
Deferred tax liabilities (assets) are comprised of the following as of
December 31, 1999 and 2000:
DECEMBER 31,
-------------------------
1999 2000
----------- -----------
(IN THOUSANDS)
Gross deferred tax liabilities
Intangible assets ................................................................... $ 23,608 $ 33,229
Property and equipment .............................................................. 4,069 3,784
Other ............................................................................... 290 --
----------- -----------
Gross deferred tax liabilities..................................................... 27,967 37,013
----------- -----------
Gross deferred tax (assets)
Loss carryforwards .................................................................. (5,690) (3,710)
Accrued liabilities ................................................................. (3,786) (7,598)
Inventory ........................................................................... (2,340) (2,772)
Other ............................................................................... (494) (1,010)
----------- -----------
Gross deferred tax (assets) ....................................................... (12,310) (15,090)
----------- -----------
Net deferred tax liability ...................................................... $ 15,657 $ 21,923
=========== ===========
Balance sheet classification
Noncurrent deferred tax liability ................................................... $ 21,249 $ 37,013
Current deferred tax asset .......................................................... (5,592) (15,090)
----------- -----------
Net deferred tax liability ........................................................ $ 15,657 $ 21,923
=========== ===========
F-23
NOTE 11. INCOME TAXES (CONTINUED)
Prior to 1997, the Company incurred losses and accordingly provided a
valuation allowance for its domestic deferred net tax assets. 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.
As of December 31, 2000, the Company has total loss carryforwards of
approximately $10,342,000 for federal income tax purposes and $2,009,000 for
state income tax purposes, which includes federal loss carryforwards acquired in
the Avtech and ERDA acquisitions. The loss carryforwards are not subject to
limitations on their annual utilization ("Section 382 limitation," as defined in
the Internal Revenue Code) and therefore are available for utilization in 2001.
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.
NOTE 12. CAPITAL STRUCTURE
Upon completion of the DLJ tender offer in August 1998, all of DeCrane
Aircraft's then existing predecessor capital structure was canceled. DeCrane
Aircraft's predecessor capital structure and transactions are described in Note
13. The capital structure and transactions described herein pertain to DeCrane
Holdings and DeCrane Aircraft from DeCrane Holdings' inception in 1998 to
December 31, 2000. DeCrane Aircraft is a wholly-owned subsidiary of DeCrane
Holdings.
F-24
NOTE 12. CAPITAL STRUCTURE (CONTINUED)
MANDATORILY REDEEMABLE PREFERRED STOCK
The table below summarizes mandatorily redeemable preferred stock issued
from inception through December 31, 2000.
DECRANE AIRCRAFT DECRANE HOLDINGS
16% PREFERRED STOCK 14% PREFERRED STOCK
------------------------------------------------ ----------------------
NUMBER MANDATORY UNAMORTIZED NET NUMBER MANDATORY
OF REDEMPTION ISSUANCE BOOK OF REDEMPTION
SHARES VALUE DISCOUNT VALUE SHARES VALUE
--------- ----------- ----------- ---------- -------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Initial DLJ capitalization ............. -- $ -- $ -- $ -- 340,000 $ 34,000
Shares sold to other 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
Sale of preferred stock ................ 250,000 25,000 (4,019) 20,981 -- --
Issuance costs ......................... -- -- (76) (76) -- --
Accrued dividends and redemption
value accretion ..................... 20,400 2,040 234 2,274 -- --
Noncash dividend accretion ............. -- -- -- -- -- 6,074
--------- ----------- ----------- ---------- -------- -----------
Balance, December 31, 2000 .......... 270,400 $ 27,040 $ (3,861) $ 23,179 342,417 $ 47,252
======= =========== =========== ========== ======= ===========
Per share liquidation value as of
December 31, 2000 ................... $ 100.00 $ 138.00
=========== ===========
DeCrane Aircraft's 16% preferred stock is reflected as minority interest
in preferred stock of subsidiary in the consolidated financial statements.
During 1998, DeCrane Holdings sold 14% preferred stock to DLJ and its
affiliates as part of its initial capitalization and additional shares to a
group of investors; one-half of the purchase price was loaned to the investors
as described below. DLJ and its affiliates and the investors are related parties
(Note 17).
On June 30, 2000, 250,000 shares of DeCrane Aircraft 16% preferred stock
and warrants to purchase 139,357 shares of DeCrane Holdings common stock were
sold for $25,000,000 to DLJ affiliates. The proceeds from the sale were used to
fund, in part, the ERDA acquisition. A portion of the proceeds from the sale
totaling $4,019,000 was ascribed to the common stock warrants and was credited
to additional paid-in capital. The corresponding reduction in redemption value
of the preferred stock, and related issuance costs, are recorded as an issuance
discount and are being amortized using the effective interest method through the
preferred stock mandatory redemption date.
Additional terms of the preferred stock and common stock warrants are
described below.
F-25
NOTE 12. CAPITAL STRUCTURE (CONTINUED)
DECRANE AIRCRAFT 16% MANDATORILY REDEEMABLE PREFERRED STOCK
DeCrane Aircraft is authorized to issue 10,000,000 shares of $.01 par
value preferred stock. On June 30, 2000, 700,000 of those shares were designated
to be 16% Senior Redeemable Exchangeable Preferred Stock Due 2009. The preferred
stock has a $100.00 per share liquidation preference, plus accrued and unpaid
cash dividends, and is non-voting.
Holders of the preferred stock are entitled to receive, when, as and if
declared, dividends at a rate equal to 16% per annum. Prior to June 30, 2005,
DeCrane Aircraft may, at its option, pay dividends either in cash or by the
issuance of additional shares of preferred stock. For the six months ended
December 31, 2000, DeCrane Aircraft elected to issue 20,400 additional shares in
lieu of cash dividend payments; such shares have been reflected as a component
of minority interest in preferred stock of subsidiary. The preferred stock is
mandatorily redeemable on March 31, 2009. Upon the occurrence of a change in
control, as defined, each holder has the right to require DeCrane Aircraft to
redeem all or part of such holder's shares at a price equal to 101% of the
liquidation preference (116% if prior to July 1, 2001), plus accrued and unpaid
cash dividends.
DECRANE HOLDINGS 14% MANDATORILY REDEEMABLE PREFERRED STOCK
DeCrane Holdings is authorized to issue 1,360,000 shares of 14% Senior
Redeemable Exchangeable Preferred Stock Due 2009, $.01 par value. The preferred
stock had an initial $100.00 per share liquidation preference, subject to
increases through noncash dividend accretion, plus accrued and unpaid cash
dividends, and is non-voting.
Holders of the preferred stock are entitled to receive, when, as and if
declared, dividends at a rate equal to 14% per annum. Prior to September 30,
2005, 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 is mandatorily redeemable on August 28, 2009.
Upon the occurrence of a change in control, as defined, each holder has the
right to require DeCrane Holdings 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.
UNDESIGNATED PREFERRED STOCK
The Company is authorized to issue 2,500,000 shares of $.01 par value
preferred stock of which 1,360,000 are designated 14% Senior Redeemable
Exchangeable Preferred Stock Due 2009; 1,140,000 shares remain undesignated as
of December 31, 2000.
COMMON STOCK
DeCrane Holdings is authorized to issue 10,000,000 shares of $.01 par
value common stock (4,500,000 shares authorized as of December 31, 1999), of
which 3,571,827 are issued and outstanding at December 31, 1999 and 3,914,274 at
December 31, 2000. As of December 31, 2000, a total of 854,657 shares of common
stock were reserved for issuance upon exercise of all warrants and stock
options.
F-26
NOTE 12. CAPITAL STRUCTURE (CONTINUED)
From inception through December 31, 2000, DeCrane Holdings sold:
o 2,826,087 shares to DLJ and its affiliates for $65,000,000 as part of
its initial capitalization in August 1998;
o 20,098 shares to the same group of investors for $462,000 in December
1998; one-half of the purchase price was loaned to the investors as
described below;
o 543,478 shares to DLJ and its affiliates for $12,500,000 in April
1999 and used the proceeds to fund a portion of the Precision Pattern
acquisition;
o 10,869 shares to the same group of investors for $250,000 in October
1999; one-half of the purchase price was loaned to the investors as
described below;
o 171,295 shares to DeCrane Aircraft management for $3,940,000 in
December 1999; one-half of the purchase price was loaned to
management as described below;
o 326,087 shares to DLJ and its affiliates for $7,500,000 in May 2000
and used the proceeds to fund a portion of the Carl F. Booth
acquisition; and
o 20,707 shares to DeCrane Aircraft management for $476,000 during
2000.
During 2000, DeCrane Holdings also repurchased and canceled 4,347 shares
from a former member of DeCrane Aircraft management for its original $23.00 per
share issuance price.
Expenses related to common stock transactions total $523,000 in 1998,
$84,000 in 1999 and $24,000 in 2000 and were charged to additional paid-in
capital.
NOTES RECEIVABLE FOR SHARES SOLD
During 1998 and 1999, DeCrane Holdings 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
DeCrane Aircraft, 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, were as follows:
o in December 1998, a group of related party investors purchased
mandatorily redeemable preferred and common stock for $704,000;
o in October 1999, the same group of investors purchased additional
shares of common stock for $250,000; and
o in December 1999, DeCrane Aircraft's management purchased common
stock for $3,940,000.
During 2000, a note receivable totaling $51,000, including accrued
interest, was canceled in conjunction with the repurchase of the common stock
that collaterialized the note.
F-27
NOTE 12. CAPITAL STRUCTURE (CONTINUED)
COMMON STOCK WARRANTS
Common stock warrants were issued in connection with several debt and
equity transactions during the period from inception to December 31, 2000. The
common stock warrants are summarized in the table below.
INITIAL
CAPITALIZATION CLASS A CLASS B
WARRANTS WARRANTS WARRANTS TOTAL
----------- ----------- ----------- -----------
(NUMBER OF SHARES, EXCEPT PER SHARE DATA)
Initial capitalization ....................................... 150,000 -- -- 150,000
Issued with sale of DeCrane Aircraft senior
subordinated debt ......................................... -- 155,000 -- 155,000
----------- ----------- ----------- -----------
Balance, December 31, 1998 and 1999 ..................... 150,000 155,000 -- 305,000
Issued with sale of DeCrane Aircraft 16% preferred stock
Issued with the sale of preferred stock ................... -- -- 139,357 139,357
Issued pursuant to anti-dilution provisions ............... 4,637 4,794 -- 9,431
----------- ----------- ----------- -----------
Balance, December 31, 2000 .............................. 154,637 159,794 139,357 453,788
=========== =========== =========== ===========
Warrants subject to cancellation at
December 31, 1998 and 1999................................. -- -- -- --
December 31, 2000.......................................... -- -- 69,678 69,678
Warrants exercisable at
December 31, 1998 and 1999................................. 150,000 155,000 -- 305,000
December 31, 2000.......................................... 154,637 159,794 69,679 384,110
Other information
Exercise price per share .................................. $0.01 $22.310 $0.01
Expiration date ........................................... Aug. 28, Sept. 30, Jun. 30,
2009 2008 2010
All common stock warrants are subject to adjustment for anti-dilution and
have demand registrations rights.
The issuance of the Class B warrants resulted in the exercise price and
number of shares of common stock represented by the initial capitalization and
Class A warrants to be adjusted pursuant to their anti-dilution provisions.
INITIAL CAPITALIZATION WARRANTS
During 1998, the initial capitalization warrants were issued to DLJ and
its affiliates.
F-28
NOTE 12. CAPITAL STRUCTURE (CONTINUED)
CLASS A WARRANTS
The Class A warrants were sold in October 1998 in connection with DeCrane
Aircrafts' sale of senior subordinated debt. A portion of the proceeds from the
sale totaling $1,200,000 were allocated to the warrants and credited to
additional paid-in capital.
CLASS B WARRANTS
The Class B warrants were sold in June 2000 in connection with DeCrane
Aircraft's sale of 16% preferred stock. A portion of the proceeds from the sale
totaling $4,019,000 were allocated to the warrants and credited to additional
paid-in capital. Prior to July 1, 2001, warrants to purchase 69,678 shares of
common stock are cancelable upon redemption of the preferred stock and as a
result, are not exercisable until on or after that date.
NOTE 13. PREDECESSOR CAPITAL STRUCTURE AND TRANSACTIONS
All of events and transactions described below occurred prior to the DLJ
acquisition. The debt and equity securities described are no longer issued or
outstanding.
COMMON STOCK
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 then existing senior
credit facility.
COMMON STOCK OPTIONS
In connection with the DLJ acquisition in August 1998, all stock options
vested and were either exercised or canceled as of August 31, 1998.
F-29
NOTE 14. 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 that 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. All of the actions have been
transferred to the United States District Court for the Eastern District of
Pennsylvania and assigned under MDL Case No. 1269 for coordinated or
consolidated pretrial proceedings. 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.
F-30
NOTE 14. 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, 2000:
CAPITAL OPERATING
LEASES LEASES
------ ------
(IN THOUSANDS)
Year ending December 31,
2001 ................................................................................ $ 1,206 $ 4,179
2002 ................................................................................ 783 3,994
2003 ................................................................................ 223 3,787
2004 ................................................................................ 87 3,769
2005 ................................................................................ 24 3,666
2006 and thereafter ................................................................. -- 15,375
----------- -----------
Total minimum payments required ................................................... 2,323 $ 34,770
===========
Less amount representing future interest cost ..................................... (174)
-----------
Recorded obligation under capital leases ........................................ $ 2,149
===========
Total rental expense charged to operations was $2,303,000 for the eight
months ended August 31, 1998, $1,095,000 for the four months ended December 31,
1998, $3,620,000 for the year ended December 31, 1999 and $3,903,000 for the
year ended December 31, 2000.
CONTINGENT ACQUISITION CONSIDERATION
The maximum determinable amounts of the Company's remaining contingent
consideration payment obligations, as of December 31, 2000, are summarized
below. The contingent consideration is payable based upon the acquired
companies level of attainment of their defined performance criteria in future
periods and excludes amounts earned and recorded through December 31, 2000
(Notes 3, 9 and 15). Provided the defined performance criteria is attained
for the future years ending December 31st as indicated below, the Company's
maximum determinable contingent consideration payment obligation will be:
(IN THOUSANDS)
For the year ending December 31,
2001 ........................................................................................... $ 1,450
2002 ........................................................................................... 1,350
2003 ........................................................................................... 750
-----------
Total maximum determinable obligation ........................................................ $ 3,550
===========
Contingent consideration payable, if any, is payable during the first
quarter of the following year.
F-31
NOTE 15. CONSOLIDATED STATEMENTS OF CASH FLOWS
The following information supplements the Company's consolidated
statements of cash flows.
(PREDECESSOR)
-------------
EIGHT MONTHS FOUR MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED
AUGUST 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1998 1999 2000
----------- ----------- ----------- -----------
(IN THOUSANDS) (IN THOUSANDS)
Components of cash paid for acquisitions
Fair value of assets acquired ......................... $ 91,640 $ 310,450 $ 165,628 $ 94,155
Liabilities assumed ................................... (4,569) (119,585) (20,318) (34,792)
----------- ----------- ----------- -----------
Cash paid ........................................... 87,071 190,865 145,310 59,363
Less cash acquired .................................. (1,263) (5,739) (2,604) (292)
----------- ----------- ----------- -----------
Net cash paid for acquisitions .................... 85,808 185,126 142,706 59,071
Paid in connection with previous acquisitions
Contingent consideration paid in cash ............... -- -- 3,000 29,825
Additional acquisition related expenses ............. -- -- -- 650
----------- ----------- ----------- -----------
Total cash paid for acquisitions .................. $ 85,808 $ 185,126 $ 145,706 $ 89,546
=========== =========== =========== ===========
Additional financing activities, net
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) -- --
Transaction fees and expenses ....................... -- (11,171) -- --
Common stock offering and use of proceeds
Net proceeds from the sale .......................... 34,815 -- -- --
Repayment of debt ................................... (34,815) -- -- --
----------- ----------- ----------- -----------
Additional financing activities, net .............. $ -- $ 190,865 $ -- $ --
=========== =========== =========== ===========
Paid in cash
Interest .............................................. $ 2,227 $ 3,706 $ 26,005 $ 39,160
Income taxes paid, net of refunds received ............ 4,825 1,328 470 578
Noncash investing and financing transactions
Refinancing of bridge notes with senior
subordinated notes .................................. $ -- $ 100,000 $ -- $ --
Additional acquisition contingent consideration
recorded ............................................ -- 3,000 29,825 20,154
Loans to stockholders to purchase DeCrane
Holdings capital stock, plus accrued interest ....... -- 352 2,116 84
Capital expenditures financed with capital lease
obligations ......................................... 116 48 1,711 109
F-32
NOTE 16. EMPLOYEE BENEFIT PLANS
STOCK BASED INCENTIVE COMPENSATION
MANAGEMENT INCENTIVE STOCK OPTION 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 Compensation Committee of the Board of Directors of DeCrane Holdings
administers the plan and determines 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. The
plan also provides for the acceleration of vesting upon the occurrence of
certain events, including, under certain circumstances, a change of control.
During 1999, options to purchase 282,922 shares were granted under the
plan, of which 27,994 shares vested immediately and options to purchase an
additional 29,942 shares vested based on the attainment of year 1999 performance
criteria. During 2000, options to purchase 80,623 shares were granted under the
plan, of which 15,828 shares vested immediately. An additional 36,832 shares
from the 1999 and 2000 grants vested based on the attainment of year 2000
performance criteria.
The per share exercise price of the options granted was equal to the fair
market value of the common stock on each of the grant dates, and accordingly, no
compensation expense was recognized during the years ended December 31, 1999 and
2000.
INCENTIVE STOCK OPTIONS GRANTED TO OTHERS
In July 1999, a group of related party investors, including two
individuals who were then serving as directors, were granted options as
compensation for consulting services. Options were granted to purchase 44,612
shares of DeCrane Holdings common stock at $23.00 per share and the per share
exercise price was equal to the fair market value of the common stock on the
grant date. The options vest over a three-year period, are subject to
acceleration if DLJ and its affiliates sell any of their shares of common stock,
and expire in 2009.
F-33
NOTE 16. EMPLOYEE BENEFIT PLANS (CONTINUED)
SUMMARY OF ALL STOCK OPTIONS
The following table summarizes the status of all stock options at
December 31, 1999 and 2000 and the activity for the two years ended December 31,
2000.
YEAR ENDED DECEMBER 31,
-----------------------
1999 2000
------------------------ -------------------------
WEIGHTED- WEIGHTED-
NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE
----------- ----------- ----------- -----------
Options outstanding, beginning of year ....................... -- $ -- 327,534 $ 23.00
Granted ...................................................... 327,534 23.00 80,623 31.94
Canceled ..................................................... -- -- (21,288) 23.00
----------- -----------
Options outstanding, end of year ............................. 327,534 23.00 386,869 24.86
=========== ===========
Options exercisable, end of year ............................. 57,936 23.00 124,395 24.07
=========== ===========
The following table summarizes information about stock options
outstanding and stock options exercisable at December 31, 2000.
OPTIONS OUTSTANDING NUMBER
-------------------
NUMBER OF SHARES
OF SHARES EXERCISABLE
AS OF WEIGHTED-AVERAGE AS OF
DECEMBER 31, REMAINING DECEMBER 31,
2000 CONTRACTUAL LIFE 2000
---- ---------------- ----
Per share exercise price
$23.00 ............................................................. 326,823 8.95 years 113,295
$35.00 ............................................................. 60,046 9.93 years 11,100
For compensatory stock options granted to non-employees, the Company
recognized compensation expense of $143,000 for the year ended December 31, 1999
and $561,000 for the year ended December 31, 2000. For non-compensatory stock
options, the Company uses APB Opinion No. 25 to account for stock-based
compensation and, accordingly, no compensation expense was recognized during the
year ended December 31, 1999 and 2000. The Company has adopted the
disclosure-only provisions of SFAS No. 123. For the year ended December 31,
1999, 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 amount
reported. For the year ended December 31, 2000, net income, pro forma for the
effect of applying the fair value method to the options granted in 1999 and
2000, would have been as follows:
Net income (in thousands)
As reported ...................................................................................... $ 1,328
Pro forma ........................................................................................ 889
Weighted-average fair value of options granted (per share) .......................................... 9.48
F-34
NOTE 16. EMPLOYEE BENEFIT PLANS (CONTINUED)
For the purposes of the pro forma disclosure, the estimated fair value of
the options is amortized over the options' vesting period. The effect of
applying SFAS No. 123 may not be representative of the pro forma effect in
future years since additional options may be granted during those future years.
The fair value of the options was determined using the following
assumptions:
1999 2000
------------- --------------
Compensatory options, using the Black Scholes option valuation model
Risk free interest rates ........................................................ 6.8% 5.23%
Expected dividend yield ......................................................... -- --
Expected life ................................................................... 10 years 10 years
Expected stock price volatility ................................................. 67.0% 65.0%
Employee and director options, using the minimum value method
Risk free interest rates ........................................................ 5.8%-6.5% 5.5%-6.7%
Expected dividend yield ......................................................... -- --
Expected life ................................................................... 8 years 8 years
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.
The minimum value method, which is an acceptable method for non-public
companies, excludes stock price volatility.
MANAGEMENT STOCK PURCHASES
Beginning in December 1999, the Company has permitted designated
executive personnel and other key employees of DeCrane Aircraft and its
subsidiaries to purchase shares of common stock, 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 12. In 2000, management purchased an additional
20,707 shares for $23.00 per share in cash pursuant to the plan's antidilution
provisions. Dilution resulted from the issuance of the DeCrane Holdings common
stock warrants in connection with the sale of DeCrane Aircraft's 16% preferred
stock.
F-35
NOTE 16. EMPLOYEE BENEFIT PLANS (CONTINUED)
401(K) RETIREMENT PLAN
Substantially all the Company's domestic employees are eligible to
participate in one of eight 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 $128,000 during the eight months ended
August 31, 1998, $95,000 during the four months ended December 31, 1998,
$1,272,000 during the year ended December 31, 1999 and $2,203,000 during the
year ended December 31, 2000.
NOTE 17. 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 YEAR
ENDED ENDED ENDED ENDED
AUGUST 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1998 1999 2000
----------- ----------- ----------- -----------
(IN THOUSANDS) (IN THOUSANDS)
DLJ
Transaction financing fees and expenses ............... $ -- $ 12,000 $ 4,048 $ $1,703
Bridge notes interest expense ......................... -- 1,041 -- --
Management fees
Charged to operations during the period ............. -- 100 302 300
Payable as of period end ............................ -- 100 75 75
GLOBAL TECHNOLOGY PARTNERS, LLC
Promissory notes
Receivable as of period end, including interest ..... -- 352 495 518
Interest income recorded during the period........... -- -- 18 23
Each related party is described below.
DLJ
DLJ Merchant Banking Partners II, L.P. and affiliated funds own 83.3% of
DeCrane Holdings common stock and 99.3% of its preferred stock, and 80% of
DeCrane Aircraft's preferred stock, all on a fully diluted basis. DeCrane
Aircraft is a wholly-owned subsidiary of DeCrane Holdings. In November 2000, DLJ
Merchant Banking Partners II, L.P. and affiliated funds became indirect
affiliates of Credit Suisse Group and Credit Suisse First Boston, Inc.
DLJ affiliated funds were the initial purchasers of all of DeCrane
Aircraft's 16% preferred stock and DeCrane Holdings common stock warrants sold
during 2000. Subsequent to the initial purchase, the DLJ affiliated funds sold
20% of the preferred stock and common stock warrants to unaffiliated parties in
a private transaction.
F-36
NOTE 17. RELATED PARTY TRANSACTIONS (CONTINUED)
DLJ is represented on the Board of Directors of both DeCrane Holdings and
DeCrane Aircraft. In addition, Credit Suisse First Boston Corporation (formerly
Donaldson, Lufkin & Jenrette Securities Corporation) is involved in
market-making activities for DeCrane Holding's Class A common stock warrants and
DeCrane Aircraft's senior subordinated notes and may hold such securities from
time to time. DLJ is also paid fees for arranging the syndicate of lenders
providing the DeCrane Aircraft's senior credit facility.
GLOBAL TECHNOLOGY PARTNERS, LLC
Members of Global Technology own 1.6% of DeCrane Holdings common stock
and 0.7% of its preferred stock, all on a fully diluted basis, and had two
members on the Company's Board of Directors from August 1998 through July 2000.
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.
NOTE 18. BUSINESS SEGMENT INFORMATION
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:
o CABIN MANAGEMENT - provides interior cabin components for the
corporate aircraft market, including furniture, cabinetry, seats and
in-flight entertainment systems;
o SPECIALTY AVIONICS - designs, engineers and manufactures electronic
components, display devices and interconnect components and
assemblies; and
o 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 EBITDA to be
the primary measurement of their overall economic returns and cash flows.
Management defines EBITDA as earnings before interest, income taxes,
depreciation and amortization, restructuring and asset impairment charges,
acquisition related charges and other noncash and nonoperating charges. This is
consistent with the manner in which the Company's lenders and ultimate investors
measure its overall performance.
The accounting policies of the groups are substantially the same as those
described in the summary of significant accounting policies (Note 1). Some
transactions are recorded at the Company's corporate headquarters and are not
allocated to the groups such as, most of the Company's cash and cash
equivalents, debt and related net interest expense, corporate headquarters costs
and income taxes.
F-37
NOTE 18. BUSINESS SEGMENT INFORMATION (CONTINUED)
(PREDECESSOR)
-------------
EIGHT MONTHS FOUR MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED
AUGUST 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1998 1999 2000
----------- ----------- ----------- -----------
(IN THOUSANDS) (IN THOUSANDS)
BUSINESS SEGMENT INFORMATION
Revenues
Cabin Management ...................................... $ 13,449 $ 10,059 $ 74,244 $ 174,796
Specialty Avionics .................................... 62,559 42,411 112,501 110,878
Systems Integration ................................... 14,276 8,331 58,483 62,965
Inter-group elimination (1) ........................... (207) (445) (1,180) (1,260)
----------- ----------- ----------- -----------
Consolidated totals ................................. $ 90,077 $ 60,356 $ 244,048 $ 347,379
=========== =========== =========== ===========
Revenues from Significant Customers (2)
Cabin Management ...................................... $ 2,269 $ 1,134 $ 39,737 $ 107,194
Specialty Avionics .................................... 15,975 12,328 31,425 30,542
Systems Integration ................................... 1,477 739 22,774 31,750
----------- ----------- ----------- -----------
Consolidated totals ................................. $ 19,721 $ 14,201 $ 93,936 $ 169,486
=========== =========== =========== ===========
EBITDA (3)
Cabin Management ...................................... $ 3,051 $ 3,100 $ 24,153 $ 45,853
Specialty Avionics .................................... 17,401 11,833 27,240 26,696
Systems Integration ................................... 702 (16) 10,569 15,026
Corporate (4) ......................................... (7,411) (1,441) (5,436) (6,583)
----------- ----------- ----------- -----------
Consolidated EBITDA ................................. $ 13,743 $ 13,476 $ 56,526 $ 80,992
=========== =========== =========== ===========
Depreciation and amortization (5)
Cabin Management ...................................... $ 670 $ 530 $ 3,548 $ 9,477
Specialty Avionics .................................... 3,079 3,600 10,871 12,101
Systems Integration ................................... 560 420 4,473 4,682
Corporate ............................................. 49 54 294 927
----------- ----------- ----------- -----------
Consolidated totals ................................. $ 4,358 $ 4,604 $ 19,186 $ 27,187
=========== =========== =========== ===========
Total assets
Cabin Management ...................................... $ 30,822 $ 36,469 $ 181,780 $ 309,415
Specialty Avionics .................................... 139,382 232,959 224,218 227,061
Systems Integration ................................... 22,308 38,299 93,473 86,602
Corporate ............................................. 13,117 22,848 32,027 42,971
----------- ----------- ----------- -----------
Consolidated totals ................................. $ 205,629 $ 330,575 $ 531,498 $ 666,049
=========== =========== =========== ===========
Capital expenditures (6)
Cabin Management ...................................... $ 644 $ 468 $ 2,355 $ 14,896
Specialty Avionics .................................... 964 1,209 3,217 2,496
Systems Integration ................................... 94 136 1,534 1,612
Corporate ............................................. 43 -- 156 3,685
----------- ----------- ----------- -----------
Consolidated totals ................................. $ 1,745 $ 1,813 $ 7,262 $ 22,689
=========== =========== =========== ===========
- ---------------
The notes appear on the next page.
F-38
NOTE 18. BUSINESS SEGMENT INFORMATION (CONTINUED)
(PREDECESSOR)
-------------
EIGHT MONTHS FOUR MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED
AUGUST 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1998 1999 2000
----------- ----------- ----------- -----------
(IN THOUSANDS) (IN THOUSANDS)
GEOGRAPHICAL AREA INFORMATION
Consolidated net revenues to unaffiliated customers (7)
United States ......................................... $ 87,696 $ 59,341 $ 241,905 $ 345,783
Western Europe ........................................ 2,381 1,015 2,143 1,596
----------- ----------- ----------- -----------
Consolidated totals ................................. $ 90,077 $ 60,356 $ 244,048 $ 347,379
=========== =========== =========== ===========
Consolidated long-lived assets (8)
United States ......................................... $ 24,693 $ 26,455 $ 35,465 $ 54,566
Western Europe ........................................ 543 1,705 2,235 2,758
Mexico ................................................ -- -- -- 2,167
----------- ----------- ----------- -----------
Consolidated totals ................................. $ 25,236 $ 28,160 $ 37,700 $ 59,491
=========== =========== =========== ===========
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) Three customers each accounted for more than 10% of the Company's
consolidated revenues in 2000, two in 1999 and one in 1998 as shown in
the table below. Customer data for periods prior to reaching the 10%
threshold is included for comparability.
(PREDECESSOR)
-------------
EIGHT MONTHS FOUR MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED
AUGUST 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1998 1999 2000
----------- ----------- ----------- -----------
(IN THOUSANDS) (IN THOUSANDS)
Bombardier (exceeds 10% for 2000).................. $ 3,222 $ 1,611 $ 16,308 $ 64,131
Boeing (exceeds 10% for all periods) .............. 15,583 12,132 46,436 52,735
Textron (exceeds 10% for 1999 and 2000)............ 916 458 31,192 52,620
----------- ----------- ----------- -----------
Consolidated totals ............................. $ 19,721 $ 14,201 $ 93,936 $ 169,486
=========== =========== =========== ===========
All of the Company's operating groups derive revenues for each of the
customers. Complete loss of any of the customers identified above could
have a significant adverse impact on the results of operations expected
in future periods.
F-39
NOTE 18. BUSINESS SEGMENT INFORMATION (CONTINUED)
(3) A reconciliation of EBITDA to consolidated income (loss) before income
taxes and extraordinary item is as follows:
(PREDECESSOR)
-------------
EIGHT MONTHS FOUR MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED
AUGUST 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1998 1999 2000
----------- ----------- ----------- -----------
(IN THOUSANDS) (IN THOUSANDS)
Consolidated EBITDA ............................... $ 13,743 $ 13,476 $ 56,526 $ 80,992
Restructuring and asset impairment charges ........ -- -- (9,935) --
Depreciation and amortization ..................... (4,358) (4,604) (19,186) (27,187)
Acquisition related charges
Noncash inventory related charges ............... -- (4,448) (1,606) --
Acquisition related charges not capitalized ..... (107) (229) (709) (538)
Nonrecurring manufacturing facility
startup costs ................................. -- -- -- (717)
Other noncash charges ............................. -- -- (143) (561)
----------- ----------- ----------- -----------
Consolidated income from operations ........... 9,278 4,195 24,947 51,989
Interest expense .................................. (2,350) (6,867) (27,903) (41,623)
Minority interest in preferred stock
of subsidiary ................................... -- -- -- (2,274)
Terminated debt offering expenses ................. (600) -- -- --
Other expenses, net ............................... (247) (335) (447) (482)
----------- ----------- ----------- -----------
Consolidated income (loss) before
income taxes and extraordinary item ........ $ 6,081 $ (3,007) $ (3,403) $ 7,610
=========== =========== =========== ===========
(4) Reflects the Company's corporate headquarters costs and expenses not
allocated to the groups.
(5) 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
$96,000 for the eight months ended August 31, 1998, $394,000 for the four
months ended December 31, 1998, $1,616,000 for the year ended December
31, 1999 and $2,258,000 for the year ended December 31, 2000.
(6) Reflects capital expenditures paid in cash. Excludes capital expenditures
financed with capital lease obligations of $116,000 for the eight months
ended August 31, 1998, $48,000 for the four months ended December 31,
1998, $1,711,000 for the year ended December 31, 1999 and $109,000 for
the year ended December 31, 2000.
(7) Allocated on the basis of the location of the subsidiary originating the
sale.
(8) 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.
F-40
NOTE 19. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
In conjunction with the senior credit facility and 12% senior
subordinated notes described in Note 10, the following condensed consolidating
financial information is presented segregating DeCrane Aircraft, as the issuer,
and 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. DeCrane Holdings in not a
guarantor of either the senior credit facility or the notes and is therefore
reflected in the non-guarantor subsidiary column.
The guarantor subsidiaries are wholly-owned subsidiaries of the DeCrane
Aircraft 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.
F-41
NOTE 19. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(CONTINUED)
BALANCE SHEETS
DECEMBER 31, 1999
-----------------
GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
ISSUER SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
------ ------------ ------------ ------------ -----
(IN THOUSANDS)
ASSETS
Current assets
Cash and cash equivalents ............... $ 7,839 $ (323) $ 402 $ -- $ 7,918
Accounts receivable, net ................ -- 43,963 1,379 -- 45,342
Inventories ............................. -- 57,072 1,649 -- 58,721
Other current assets .................... 6,645 938 123 -- 7,706
----------- ----------- ----------- ----------- --------------
Total current assets .................. 14,484 101,650 3,553 -- 119,687
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 20,305 110,235 (491,055)(1) --
Intercompany receivables ................... 77,566 17,334 2,612 (97,512)(2) --
----------- ----------- ----------- ----------- -----------
Total assets ...................... $ 470,912 $ 518,449 $ 130,704 $ (588,567) $ 531,498
=========== =========== =========== =========== ===========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings ................... $ 4,640 $ 404 $ 26 $ -- $ 5,070
Other current liabilities ............... 10,237 74,453 678 -- 85,368
----------- ----------- ----------- ----------- -----------
Total current liabilities ............. 14,877 74,857 704 -- 90,438
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 ......................... 114,690 289,415 91,420 (422,013)(1) 73,512
Retained earnings (deficit) ............. (6,923) 71,100 (2,058) (69,042)(1) (6,923)
Accumulated other
comprehensive loss .................... -- -- (1,526) -- (1,526)
----------- ----------- ----------- ----------- -----------
Total stockholders' equity .......... 107,767 360,515 87,836 (491,055) 65,063
----------- ----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity ............ $ 470,912 $ 518,449 $ 130,704 $ (588,567) $ 531,498
=========== =========== =========== =========== ===========
F-42
NOTE 19. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(CONTINUED)
BALANCE SHEETS (CONTINUED)
DECEMBER 31, 2000
-----------------
GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
ISSUER SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
------ ------------ ------------ ---------- -----
(IN THOUSANDS)
ASSETS
Current assets
Cash and cash equivalents ............... $ 7,553 $ 233 $ 413 $ -- $ 8,199
Accounts receivable, net ................ -- 57,288 1,735 -- 59,023
Inventories ............................. -- 82,013 1,664 -- 83,677
Other current assets .................... 14,814 1,118 145 -- 16,077
----------- ----------- ----------- ----------- --------------
Total current assets .................. 22,367 140,652 3,957 -- 166,976
Property and equipment, net ................ 4,423 52,303 2,765 -- 59,491
Other assets, principally
intangibles, net......................... 36,869 392,375 10,338 -- 439,582
Investments in subsidiaries ................ 374,439 20,739 123,994 (519,172)(1) --
Intercompany receivables ................... 251,725 92,991 3,863 (348,579)(2) --
----------- ----------- ----------- ----------- -----------
Total assets ...................... $ 689,823 $ 699,060 $ 144,917 $ (867,751) $ 666,049
=========== =========== =========== =========== ===========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings ................... $ 7,997 $ 1,266 $ 26 $ -- $ 9,289
Other current liabilities ............... 38,635 60,276 1,262 -- 100,173
----------- ----------- ----------- ----------- -----------
Total current liabilities ............. 46,632 61,542 1,288 -- 109,462
Long-term debt ............................. 368,837 5,147 6 -- 373,990
Intercompany payables ...................... 92,991 255,588 -- (348,579)(2) --
Other long-term liabilities ................ 36,742 2,344 577 -- 39,663
Minority interest in preferred stock
of subsidiary ........................... 23,179 -- -- -- 23,179
Mandatorily redeemable
preferred stock ......................... -- -- 47,252 -- 47,252
----------- ----------- ----------- ----------- -----------
Stockholders' equity
Paid-in capital ......................... 124,763 318,374 97,777 (461,129)(1) 79,785
Retained earnings (deficit) ............. (3,321) 56,065 (296) (58,043)(1) (5,595)
Accumulated other
comprehensive loss .................... -- -- (1,687) -- (1,687)
----------- ----------- ----------- ----------- -----------
Total stockholders' equity .......... 121,442 374,439 95,794 (519,172) 72,503
----------- ----------- ----------- ----------- -----------
Total liabilities, mandatorily
redeemable preferred stock
and stockholders' equity ........ $ 689,823 $ 699,060 $ 144,917 $ (867,751) $ 666,049
=========== =========== =========== =========== ===========
F-43
NOTE 19. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(CONTINUED)
STATEMENTS OF OPERATIONS
EIGHT MONTHS ENDED AUGUST 31, 1998 (PREDECESSOR)
------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
ISSUER 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), net ............... 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
=========== =========== =========== =========== ===========
FOUR MONTHS ENDED DECEMBER 31, 1998
-----------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
ISSUER 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 ........................... 6,754 92 21 -- 6,867
Intercompany charges ....................... (3,088) 3,025 63 -- --
Equity in earnings of subsidiaries ......... (7,753) (506) 2,553 5,706 (4) --
Other expenses, net ........................ -- 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) ..................... $ (2,553) $ 7,753 $ (2,062) $ (5,706) $ (2,568)
=========== =========== =========== =========== ===========
F-44
NOTE 19. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
----------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
ISSUER 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 ................. 6,419 32,232 1,506 -- 40,157
Amortization of intangible assets .......... 161 12,417 495 -- 13,073
Interest expense ........................... 27,493 386 24 -- 27,903
Intercompany charges ....................... (8,888) 8,888 -- -- --
Equity in earnings of subsidiaries ......... (12,611) (406) 4,370 8,647 (4) --
Other expenses (income), net ............... 646 219 (418) -- 447
Provision for income taxes (benefit) ....... (8,850) 9,720 82 -- 952
----------- ----------- ----------- ----------- -----------
Net income (loss) ..................... $ (4,370) $ 12,611 $ (3,949) $ (8,647) $ (4,355)
=========== ============ =========== =========== ===========
YEAR ENDED DECEMBER 31, 2000
----------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
ISSUER SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
------ ------------ ------------ ----------- -----
(IN THOUSANDS)
Revenues ................................... $ -- $ 342,400 $ 11,873 $ (6,894)(3) $ 347,379
Cost of sales .............................. -- 229,554 9,388 (6,894)(3) 232,048
----------- ----------- ----------- ----------- -----------
Gross profit ............................ -- 112,846 2,485 -- 115,331
Selling, general and
administrative expenses ................. 8,720 35,359 1,315 -- 45,394
Amortization of intangible assets .......... 276 17,263 409 -- 17,948
Interest expense ........................... 40,864 752 7 -- 41,623
Minority interest in preferred stock
of subsidiary ........................... -- -- 2,274 -- 2,274
Intercompany charges ....................... (20,214) 20,214 -- -- --
Equity in earnings of subsidiaries ......... (15,668) (681) (3,602) 19,951 (4) --
Other expenses (income), net ............... 336 158 (12) -- 482
Provision for income taxes (benefit) ....... (17,916) 24,113 85 -- 6,282
------------ ----------- ----------- ----------- -----------
Net income ............................ $ 3,602 $ 15,668 $ 2,009 $ (19,951) $ 1,328
======================== =========== =========== ===========
F-45
NOTE 19. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(CONTINUED)
STATEMENTS OF CASH FLOWS
EIGHT MONTHS ENDED AUGUST 31, 1998 (PREDECESSOR)
------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
ISSUER SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
------ ------------ ------------ ----------- -----
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................. $ 3,189 $ 6,824 $ 489 $ (7,313)(4) $ 3,189
Noncash adjustments
Equity in earnings of subsidiaries ...... (6,824) (489) -- 7,313 (4) --
Other noncash adjustments ............... (2,222) 3,420 557 -- 1,755
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
=========== =========== =========== =========== ==============
F-46
NOTE 19. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(CONTINUED)
STATEMENTS OF CASH FLOWS (CONTINUED)
FOUR MONTHS ENDED DECEMBER 31, 1998
-----------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
ISSUER SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
------ ------------ ------------ ----------- -----
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) .......................... $ (2,553) $ 7,753 $ (2,062) $ (5,706)(4) $ (2,568)
Noncash adjustments
Equity in earnings of subsidiaries ...... (7,753) (506) 2,553 5,706 (4) --
Other noncash adjustments ............... (2,647) 4,964 (259) -- 2,058
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 ........................ 4,371 1,052 (190,549) -- (185,126)
Capital expenditures and other ............. -- (1,746) (67) -- (1,813)
----------- ----------- ----------- ----------- -----------
Net cash used for
investing activities ................ 4,371 (694) (190,616) -- (186,939)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Financing of DeCrane Aircraft
Acquisition, net ........................ -- -- 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 ................ (1,368) (483) 191,119 -- 189,268
----------- ----------- ----------- ----------- -----------
Effect of foreign currency
translation on cash ..................... -- -- 181 -- 181
----------- ----------- ----------- ----------- -----------
Net decrease 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
=========== =========== =========== =========== ===========
F-47
NOTE 19. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(CONTINUED)
STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
----------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
ISSUER SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
------ ------------ ------------ ----------- -----
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) .......................... $ (4,370) $ 12,611 $ (3,949) $ (8,647)(4) $ (4,355)
Noncash adjustments
Equity in earnings of subsidiaries ...... (12,611) (406) 4,370 8,647 (4) --
Other noncash adjustments ............... 1,787 25,188 821 -- 27,796
Changes in working capital ................. 30,867 (38,903) (62) (143) (8,241)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used for)
operating activities ................ 15,673 (1,510) 1,180 (143) 15,200
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisitions, net
of cash acquired ........................ (148,310) 2,604 -- -- (145,706)
Investment in subsidiary ................... -- -- (14,511) 14,511 --
Capital expenditures and other ............. (156) (6,289) (623) -- (7,068)
----------- ----------- ----------- ----------- -----------
Net cash used for
investing activities ................ (148,466) (3,685) (15,134) 14,511 (152,774)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Debt financing for acquisitions ............ 135,000 -- -- -- 135,000
Capital contribution to subsidiary of
proceeds from sale of common stock....... 14,368 -- 14,511 (14,368) 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 ................................. (4,348) (215) (143) -- (4,706)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used for)
financing activities ................ 138,174 4,110 14,136 (14,368) 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
=========== =========== ============ =========== ===========
F-48
NOTE 19. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(CONTINUED)
STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31, 2000
----------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
ISSUER SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
------ ------------ ------------ ----------- -----
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................. $ 3,602 $ 15,668 $ 2,009 $ (19,951)(4) $ 1,328
Noncash adjustments
Equity in earnings of subsidiaries ...... (15,668) (681) (3,602) 19,951 (4) --
Other noncash adjustments ............... 9,092 25,293 3,228 -- 37,613
Changes in working capital ................. 1,283 (22,458) (983) -- (22,158)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used for)
operating activities ................ (1,691) 17,822 652 -- 16,783
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisitions, net
of cash acquired ........................ (89,838) 292 (7,902) 7,902 (89,546)
Capital expenditures and other ............. (3,614) (18,370) (634) -- (22,618)
----------- ----------- ----------- ----------- -----------
Net cash used for
investing activities ................ (93,452) (18,078) (8,536) 7,902 (112,164)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Debt financing for acquisitions ............ 55,000 -- -- -- 55,000
Proceeds from sale of preferred stock
and warrants ............................ 24,924 -- -- -- 24,924
Net revolving line of credit
borrowings .............................. 12,400 -- -- -- 12,400
Capital contribution to subsidiary of
proceeds from sale of common stock....... 7,902 -- 7,902 (7,902) 7,902
Other borrowings ........................... -- 3,451 -- -- 3,451
Principal payments on long-term
debt and leases ......................... (3,419) (2,392) (13) -- (5,824)
Other, net ................................. (1,950) (247) -- -- (2,197)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used for)
financing activities ................ 94,857 812 7,889 (7,902) 95,656
----------- ----------- ----------- ----------- -----------
Effect of foreign currency
translation on cash ..................... -- -- 6 -- 6
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and
equivalents ............................. (286) 556 11 -- 281
Cash and equivalents at beginning
of period ............................... 7,839 (323) 402 -- 7,918
----------- ----------- ----------- ----------- --------------
Cash and equivalents at end of period ...... $ 7,553 $ 233 $ 413 $ -- $ 8,199
=========== =========== =========== =========== ===========
F-49
NOTE 20. CONDENSED QUARTERLY DATA FOR 1999 AND 2000 (UNAUDITED)
Unaudited condensed quarterly data for the years ended December 31, 1999
and 2000 are summarized in the tables below.
YEAR ENDED DECEMBER 31, 1999
----------------------------
1ST 2ND 3RD 4TH
--- --- --- ---
(IN THOUSANDS)
Revenues ..................................................... $ 49,895 $ 62,703 $ 65,238 $ 66,212
Gross profit ................................................. 16,000 20,624 23,131 18,422
EBITDA, as defined (Note 18) ................................. 8,965 14,167 15,689 17,705
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 4). 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.
YEAR ENDED DECEMBER 31, 2000
----------------------------
1ST 2ND 3RD 4TH
--- --- --- ---
(IN THOUSANDS)
Revenues ..................................................... $ 79,178 $ 82,094 $ 93,149 $ 92,958
Gross profit ................................................. 26,152 27,611 31,131 30,437
EBITDA, as defined (Note 18) ................................. 17,182 19,941 22,159 21,710
Net income (loss)............................................. 755 1,987 (110) (1,304)
F-50
DECRANE HOLDINGS CO. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COST AND OTHER END OF
PERIOD EXPENSE ACCOUNTS DEDUCTIONS PERIOD
---------------- ----------- --------------- -------------- --------------
PREDECESSOR
EIGHT MONTHS ENDED AUGUST 31, 1998
Allowance for doubtful accounts ........ $ 487 $ 384 $ 32 (1) $ 376 $ 527
Reserve for excess, slow moving
and potentially obsolete
material ............................ 3,364 760 2,056 (1) 311 5,869
=============================================================================================================================
FOUR MONTHS ENDED DECEMBER 31, 1998
Allowance for doubtful accounts ........ $ 527 (1) $ 243 $ -- $ 189 $ 581
Reserve for excess, slow moving
and potentially obsolete
material ............................ 5,869 (1) 285 -- 452 5,702
YEAR ENDED DECEMBER 31, 1999
Allowance for doubtful accounts ........ $ 581 $ 1,252 $ 1,407 (1) $ 1,274 $ 1,966
Reserve for excess, slow moving
and potentially obsolete
material (2) ........................ 5,702 1,373 2,567 (1) 2,676 6,966
YEAR ENDED DECEMBER 31, 2000
Allowance for doubtful accounts ........ $ 1,966 $ 120 $ 223 (1) $ 407 $ 1,902
Reserve for excess, slow moving
and potentially obsolete
material ............................ 6,966 1,261 215 (1) 2,862 5,580
- ---------------
(1) Attributable to companies acquired. Reflects historical amounts used to
determine the fair value of assets acquired.
(2) Excludes $5,983,000 of inventory write-downs resulting from the plan to
reorganize and restructure the operations of two subsidiaries.
F-51