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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-18348
BE AEROSPACE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1209796
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1400 CORPORATE CENTER WAY, WELLINGTON, FLORIDA 33414
(Address of principal executive offices) (Zip Code)
(561) 791-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes[X] No[ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates was approximately $696,357,028 on May 20, 1998 based on the
closing sales price of the registrant's Common Stock as reported on the Nasdaq
National Market as of such date.
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of May 20, 1998 was 23,192,600 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Those sections of the Registrant's Proxy Statement to be filed with the
Commission in connection with its 1998 Annual Meeting of Stockholders to be held
on August 5, 1998, described in Part III hereof, are incorporated by reference
in this report.
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INDEX
PART I
ITEM 1. Business..........................................................................................3
ITEM 2. Properties.......................................................................................15
ITEM 3. Legal Proceedings................................................................................17
ITEM 4. Submission of Matters to a Vote of Security Holders..............................................17
Executive Officers of the Registrant.............................................................18
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters..........................................................................................21
ITEM 6. Selected Financial Data..........................................................................22
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................................24
ITEM 8. Financial Statements and Supplementary Data......................................................29
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................................................29
PART III
ITEM 10. Directors and Executive Officers of the Registrant...............................................30
ITEM 11. Executive Compensation...........................................................................30
ITEM 12. Security Ownership of Certain Beneficial Owners and Management...................................30
ITEM 13. Certain Relationships and Related Transactions...................................................30
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................30
Index to Consolidated Financial Statements and Schedule.........................................F-1
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PART I
This Item 1 "Business" includes forward-looking statements which involve risks
and uncertainties. The Company's actual experience may differ materially from
that discussed in such statements. Factors that might cause such a difference
include, but are not limited to, those discussed in "Risk Factors" contained in
Exhibit 99.1 hereto, as well as future events that have the effect of reducing
the Company's operating income and available cash balances, such as unexpected
operating losses or delays in the integration of the Company's acquired
businesses, the delivery of the Company's MDDS interactive video system,
customer delivery requirements, new or expected refurbishments, or cash
expenditures related to possible future acquisitions.
ITEM 1. BUSINESS
INTRODUCTION
B/E Aerospace, Inc. ("B/E" or the "Company") is the world's largest
manufacturer of interior products for commercial and general aviation aircraft
cabins, serving virtually all major airlines and commercial and general aviation
original equipment manufacturers with a broad line of products, including a full
range of aircraft seating products, a full line of food and beverage preparation
and storage equipment, cabin interior structures, oxygen delivery systems, and
in-flight entertainment systems. In addition, B/E provides upgrade, maintenance
and repair services for the products that it manufactures as well as for those
supplied by other manufacturers.
On April 13, 1998, the Company acquired Puritan Bennett Aero Systems Co.
("PBASCO"). PBASCO is the leading manufacturer of commercial aircraft oxygen
delivery systems and a leading manufacturer of passenger service unit components
and systems, and is a major supplier of air valves, overhead lights and
switches, crew masks and protective breathing devices for both commercial and
general aviation aircraft.
On April 21, 1998, the Company acquired substantially all of the assets
and assumed certain liabilities of Aircraft Modular Products ("AMP"). AMP is the
leading manufacturer of cabin interior products for general aviation (business
jet) and commercial type VIP aircraft, providing a broad line of products,
including seating, side walls, bulkheads, credenzas, closets, galley structures,
lavatories, tables, and sofas, along with related spare parts.
Management believes that the Company has leading global market positions
in each of its major product categories. B/E is the largest manufacturer of
aircraft seating products in the world, offering an extensive line of commercial
aircraft first class, business class, tourist class and commuter seats and a
complete line of general aviation seating products. The Company is also the
world's largest manufacturer of equipment for the preparation and preservation
of food and beverages on aircraft, including a wide selection of coffee and
beverage makers, water boilers, liquid containers, ovens, and refrigeration
equipment. In addition, the Company manufacturers a broad range of interior
structures, including galleys, lavatories, sidewalls, credenzas, and closets.
The Company is also a worldwide leader in the manufacturer of oxygen delivery
systems, passenger service units, air valves, lighting and switches, and is a
leading manufacturer of passenger entertainment and service systems, including
passenger control systems and individual-passenger in-flight entertainment
systems.
B/E's substantial installed base provides significant ongoing revenues
from replacements, upgrades, repairs and spare parts. Approximately 61% of B/E's
revenues for the year ended February 28, 1998 were derived from refurbishment,
retrofit and upgrade orders.
In the late 1980s and early 1990s, the airline industry suffered a
significant downturn, which resulted in a deferral of cabin interior maintenance
expenditures. Since early 1994, the airlines have experienced a turnaround in
operating results, leading the domestic airline industry to record operating
earnings during calendar years 1995 through 1997. Deterioration of cabin
interior product functionality and aesthetics occurred within the commercial
airline fleets during the industry downturn because of maintenance deferrals.
Since the turnaround began, the airlines have experienced greater utilization
resulting from higher load factors, which has encouraged airlines to increase
spending on refurbishments and upgrades. The Company believes that it is well
positioned to benefit over the next several years from the airlines'
dramatically improved financial condition and liquidity and the need to
refurbish, retrofit and upgrade cabin interiors. A significant portion of the
Company's recent growth in backlog, revenues and operating earnings has been
from refurbishment, retrofit and upgrade programs, and the Company is currently
experiencing a high level of new order quote activity related to such programs.
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Airlines have recently been purchasing a significant number of new
aircraft in part due to current high load factors and the projected growth in
worldwide air travel. According to the "Current Market Outlook" published by the
Boeing Commercial Airplane Group in 1997 (the "Boeing Report"), worldwide air
travel is projected to increase by 75% by calendar 2006, and the worldwide fleet
of commercial passenger aircraft is projected to expand from approximately
10,300 at the end of 1996 to approximately 15,300 by the end of 2006 and to more
than 21,200 by 2016. In 1997, Boeing shipped 375 aircraft versus 218 in 1996. In
addition, Boeing has stated plans to ship 550 aircraft in each of calendar years
1998 and 1999. Furthermore, according to the July 1997 "Airline Monitor", the
percentage of new Boeing aircraft deliveries projected to be widebody aircraft
for 1997 through 2001 is 39% as compared to 33% for the five year period ended
December 31, 1996. This shift toward widebody aircraft is significant to the
Company since these aircraft require as much as seven times the dollar value of
the type of products manufactured by the Company as those used in narrowbody
aircraft.
INDUSTRY OVERVIEW
The commercial and general aviation aircraft cabin interior products industry
encompasses a broad range of products and services, including not only aircraft
seating products, passenger entertainment and service systems, food and beverage
preparation and storage systems, and oxygen delivery systems, but also
lavatories, side walls, overhead bins, closets, lighting systems and evacuation
equipment. Management estimates that the industry had sales in excess of $1.5
billion during fiscal 1998.
Historically, revenues in the commercial aircraft cabin interior products
industry have been derived from five sources: (i) refurbishment and retrofit
programs in which airlines purchase new components to substantially overhaul the
interiors of aircraft already in service; (ii) refurbishment programs in which
the interior components of the aircraft are substantially overhauled to improve
the appearance and functionality; (iii) new installation programs to outfit
newly delivered aircraft; (iv) spare parts; and (v) equipment to upgrade the
functionality or appearance of the aircraft interior. The retrofit and
refurbishment cycles for commercial aircraft cabin interior products differ by
product category.
Historically, revenues in the general aviation cabin interior products
industry have been derived from four sources: (i) retrofit and refurbishment
programs in which the interior components of the aircraft are substantially
overhauled to improve the appearance and functionality; (ii) new installation
programs to outfit newly delivered aircraft; (iii) spare parts; and (iv)
equipment to upgrade the functionality or appearance of the aircraft interior.
The various product categories currently manufactured by the Company include:
- - Aircraft Seats. This is the largest single product category in the industry
and includes first class, business class, tourist class and commuter seats.
Management estimates that the aggregate size of the worldwide aircraft seat
market (including spare parts) during fiscal 1998 was in excess of $530
million. Approximately ten companies worldwide, including the Company,
supply aircraft seats, although the Company (which has an approximately 50%
market share) and two competitors share approximately 90% of the market.
- - Passenger Entertainment and Service Systems ("PESS"). This product category
includes individual seat video systems, overhead video projection systems,
audio distribution systems, passenger control units ("PCUs") and related
wiring and harness assemblies and sophisticated interactive
telecommunications and entertainment systems. Management estimates that the
aggregate size of the worldwide PESS market was approximately $325 million
during fiscal 1998. Industry sources expect the PESS market to increase
substantially in the near term as individual-passenger entertainment
systems become standard in-flight entertainment equipment in first,
business and tourist classes on widebody aircraft, and with the further
development of LiveTV(TM) on many narrowbody aircraft. PESS products are
currently supplied by approximately five companies worldwide. The Company
has a market share of approximately 30% in individual-passenger in-flight
entertainment systems, determined on the basis of installed units as of
February 28, 1998.
- - Interior Systems Products. This product category includes interior systems
for both narrowbody and widebody commercial aircraft and general aviation /
VIP aircraft, including a wide selection of coffee and beverage
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makers, water boilers, ovens, liquid containers, air chillers, wine coolers
and other refrigeration equipment, oxygen delivery systems, air valves,
lighting and switches, and other interior systems components. The Company
is the only manufacturer with a complete line of interior systems products
and the only supplier with the capability to fully integrate overhead
passenger service units with either chemical or gaseous oxygen equipment.
- - General Aviation and VIP Products. The Company entered this line of
business with its acquisition of AMP in April 1998. By combining AMP's
substantial presence in the general aviation and VIP aircraft cabin
interior products industry with that of PBASCO, B/E has become the
industry's leading manufacturer with a broad product line, including a
complete line of seating products, sidewalls, bulkheads, credenzas,
closets, galley structures, lavatories, tables, sofas, oxygen delivery
systems, air valves and lighting. B/E has the capability to provide
complete interior packages, including all design services, all interior
components and program management services for executive aircraft
interiors. B/E is the preferred supplier of seating products of essentially
every general aviation airframe manufacturer.
Through February 28, 1998, the Company operated primarily in the commercial
aircraft cabin interior products segment of the commercial airlines supplier
industry. Revenues for similar classes of products or services within this
business segment for the fiscal years ended February 1998, 1997 and 1996 are
presented below:
Fiscal Year
(dollars in millions)
1998 1997 1996
---- ---- ----
Seating products .......................... $252 $217 $ 97
Interior systems products ................. 126 101 79
Passenger entertainment and service systems 81 52 33
Services .................................. 29 42 23
---- ---- ----
Total revenues ............................ $488 $412 $232
==== ==== ====
RECENT INDUSTRY CONDITIONS
The Company's principal customers are the world's commercial airlines. The
airlines, particularly the U.S. carriers, incurred record losses during the
three-year period ended December 31, 1993. The losses incurred during the
downturn seriously impaired airline balance sheets and negatively influenced
airline purchasing decisions with respect to both new aircraft and refurbishment
programs. The domestic airlines in large part returned to profitable operations
during calendar year 1994 have achieved record operating earnings during
calendar years 1995 through 1997 and have substantially restored their balance
sheets since then through cash generated from operations and debt and equity
placements. This improvement in the airlines' profitability and liquidity has,
in turn, led to an increase in refurbishment and retrofit programs, which
coupled with spares revenues, generated approximately 61% of the Company's
revenues in fiscal 1998. Further, throughout calendar year 1997, the aircraft
manufacturers continued to experience a significant increase in new aircraft
orders. Among those factors expected to affect the cabin interior products
industry are the following:
- - Large Existing Installed Base. According to the Boeing Report, the world
commercial passenger aircraft fleet, as of the end of 1996, consisted of
approximately 10,300 aircraft, including 3,000 aircraft with fewer than 120
seats, 4,511 aircraft with between 120 and 240 seats and 2,760 aircraft
with more than 240 seats. Based on such fleet numbers, management estimates
that the total worldwide installed base of commercial aircraft cabin
interior products, valued at replacement prices, was approximately $9.5
billion at the end of 1997. This existing installed base will generate
continued retrofit, refurbishment and spare parts revenue, particularly in
light of the deterioration of existing interior cabin functionality and
aesthetics resulting from the airlines' deferral of refurbishment programs
in recent years.
- - Expanding Worldwide Fleet. Worldwide air traffic has grown in every year
since 1946 (except in 1990) and, according to the Boeing Report, is
projected to grow at a compounded average rate of approximately five
percent per year through 2016, increasing annual revenue passenger miles
from approximately 1.7 trillion in 1996 to approximately 4.4 trillion by
2016. According to the Boeing Report, the worldwide fleet of commercial
passenger aircraft is projected to expand from approximately 10,300 at the
end of 1996 to approximately 15,300 by 2006 and 21,200 by 2016. In 1997,
Boeing shipped 375 aircraft versus 218 in 1996. In addition,
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Boeing has stated plans to ship 550 aircraft in each of calendar years 1998
and 1999. According to Airbus Industrie "Global Market Forecast" published
in March 1997 (the "Airbus Industrie Report"), the worldwide installed seat
base, which management considers to be a good indicator for potential
growth in the aircraft cabin interior products industry, is expected to
increase from approximately 1.7 million passenger seats at the end of 1996
to approximately 4.0 million passenger seats at the end of 2016. The
expanding worldwide fleet will generate additional revenues from new
installation programs, and the increase in the size of the installed base
will generate additional and recurring retrofit, refurbishment and spare
parts revenue. According to industry sources, the worldwide fleet of
general aviation and VIP commercial type jets at the end of calendar 1997
consisted of more than 10,000 aircraft, of which approximately two-thirds
were located domestically. The average age of the domestic fleet is
approximately 15 years, which should provide the Company a continuing large
market for its products and services as business jet owners move toward the
lighter weight, more modern, FAA-compliant products offered by the Company.
The general aviation and VIP airframe manufacturers are experiencing a
surge in new aircraft deliveries similar to that occurring in the
commercial aircraft industry. According to industry sources, executive
aircraft deliveries amounted to 222 units in calendar 1994 and were
approximately 348 in calendar 1997, an increase of 57%. Industry sources
indicate that executive aircraft deliveries are expected to be
approximately 450 in calendar 1998 and should reach 550 per year by the
year 2000. The Company believes it is well positioned to meet the cabin
interior product requirements for general aviation and VIP aircraft arising
from both the retrofit and upgrade of cabin interiors of the existing
10,000 general aviation / VIP aircraft fleet and the anticipated increase
in new aircraft deliveries over the next several years.
- - Widebody Aircraft Orders. Orders for widebody, long-haul aircraft
constitute an increasing share of total new airframe orders. According to
the July 1997 "Airline Monitor", the percentage of Boeing aircraft
deliveries projected to be widebody aircraft for 1997 through 2001 is 39%,
as compared to 33% for the three-year period ended December 31, 1995.
Widebody aircraft currently carry up to three times the number of seats as
narrowbody aircraft, and because of multiple classes of service, including
large first class and business class configurations, the Company's average
revenue per seat on widebody aircraft is significantly higher. Aircraft
crews on widebody aircraft may make and serve between 300 and 900 meals and
may brew and serve more than 2,000 cups of coffee on a single flight. As a
result, widebody aircraft may require as much as seven times the dollar
value of cabin interior products as narrowbody aircraft, as well as
products which are technically more sophisticated and typically more
expensive. Further, individual-passenger in-flight entertainment systems
are installed principally on widebody aircraft. Airlines are increasingly
demanding such systems for long-haul flights to attract and retain
customers, especially as the quality of in-flight entertainment has become
a differentiating factor in passengers' airline selection decisions. Such
systems also provide the airlines with the opportunity to increase revenues
per passenger mile, without raising ticket prices, by charging individually
for services used. For these reasons, management believes that in the
future, interactive in-flight entertainment systems will be installed on
essentially all widebody aircraft and, with the further development of live
broadcast in-flight television, many narrowbody planes.
- - New Product Development. The commercial and general aviation aircraft cabin
interior products industries are engaged in intensive development and
marketing efforts for a number of new products, including full electric
"sleeper" seats, convertible seats, interactive individual-passenger
entertainment systems, live broadcast television, advanced
telecommunications equipment, crew masks, protective breathing equipment,
oxygen generating systems, and new galley equipment. Interactive video
technology provides passengers with a wide range of computer capabilities,
which are designed to accept information generated by the passenger and
communicate such information to the cabin crew for assisting passengers and
crew with food service selection, the purchase of duty-free goods,
information in connection with arrival time, connecting flights, gate and
other passenger information, as well as facilitate effective on-board
inventory control and provide individual entertainment. LiveTV(TM), a new
product line being developed by a joint venture between the Company and
Harris Corporation, will provide live broadcast television via satellite to
passenger aircraft, allowing passengers the capability to view up to 48
different channels of television service. New cabin interior products will
generate new installation and retrofit revenues as well as service revenues
from equipment maintenance, inspection and repair.
- - Growing Upgrade, Maintenance, Inspection and Repair Service Markets.
Historically, the airlines have relied on their airframe and engine
mechanics to repair or replace cabin interior products that have become
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damaged or otherwise non-functional. As cabin interior product
configurations have become increasingly sophisticated and the airline
industry increasingly competitive, the airlines have begun to outsource
such services to increase productivity and reduce costs and overhead.
Outsourced services include product upgrades (such as the installation of a
telecommunications module or individual-passenger entertainment unit in an
aircraft seat not originally designed to accommodate such equipment), cabin
interior product maintenance and inspection, as well as other repair
services.
COMPETITIVE STRENGTHS AND BUSINESS STRATEGY
The Company believes that it has a strong competitive position attributable
to a number of factors including the following:
- - Leading Market Share and Significant Installed Base. Management believes
that the Company has achieved a leading global market position in each of
its major product categories with market shares, based upon industry
sources, of approximately 50% in commercial aircraft seats, 90% in coffee
makers, 60% in executive aircraft seats, 90% in refrigeration equipment,
90% in air valves, 50% in oxygen delivery systems, 50% in ovens, and 30% in
individual-passenger in-flight entertainment systems. The Company believes
these market shares provide it with significant competitive advantages in
serving its customers, including economies of scale and the ability to
commit greater product development, global product support and marketing
resources. Furthermore, because of economies of scale, in part attributable
to its large market shares and its approximate $3.7 billion installed base
of commercial aircraft cabin interior equipment (valued at replacement
prices as of February 28, 1998), the Company believes it is among the
lowest-cost producers in the cabin interior products industry. The Company
also believes that its large installed base provides B/E with a significant
advantage over competitors in obtaining orders for retrofit and
refurbishment programs. Finally, B/E is well positioned to obtain ongoing
upgrade, maintenance, inspection and repair service contracts due to the
breadth of its product line and the size of its installed base.
- - Broadest Product Line in the Industry. Management believes the Company
offers the broadest and most technologically advanced line of products for
the cabin interiors of commercial aircraft. With an established reputation
for quality, service and product innovation, the Company enjoys broad
recognition among the world's commercial airlines. The Company maintains a
constant dialogue with a wide array of existing and potential customers,
enabling it to become aware of emerging industry trends and needs and
thereby play a leading role in product development. The Company has
continued to expand its product line, believing that the airline industry
increasingly will seek an integrated approach to the development, testing
and sourcing of the aircraft's cabin interior.
- - Technological Leadership/New Product Development. Management believes that
the Company is a technological leader in its industry, with the largest R&D
organization in the industry, currently comprised of 500 engineers. The
Company believes that its R&D effort and its on-site engineers at both the
airlines and airframe manufacturers enable B/E to consistently introduce
innovative products and thereby gain early entrant advantages and
substantial market shares. Examples of such product development include:
the introduction of several premium and main cabin class seats, which the
Company believes provide greater comfort and are lighter in weight as a
result of their ergonomic design and pre-engineered individual-passenger
comfort features; the Company's family of in-flight entertainment systems,
which it believes to be superior to existing operational systems in terms
of performance, reliability, weight, heat generation and flexibility to
adapt to changing technology; a cappuccino/espresso maker; a quick-chill
wine cooling system; and a constant-pressure, steam cooking oven, which the
Company believes substantially improves the appearance, aroma and taste of
airline food.
- - Proven Track Record of Integration. The Company has demonstrated the
ability to make strategic acquisitions and successfully integrate such
acquired businesses by identifying opportunities to consolidate
engineering, manufacturing and marketing activities, as well as
rationalizing product lines. The Company has purchased 12 businesses over
the last nine years, for an aggregate purchase price of approximately $489
million. Since 1989, the Company has integrated its acquisitions by
reducing the number of operating facilities acquired from 20 to nine and
substantially improving productivity, efficiency and quality at the
acquired businesses.
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GROWTH OPPORTUNITIES
B/E believes that it is benefiting from four major growth trends.
- - Increase in Refurbishment and Upgrade Orders. B/E's substantial installed
base provides significant ongoing revenues from replacements, upgrades,
repairs and spare parts. Approximately 61% of B/E's revenues for the year
ended February 28, 1998 were derived from refurbishment and upgrade orders.
In the late 1980s and early 1990s, the airline industry suffered a
significant downturn, which resulted in a deferral of cabin interior
maintenance expenditures. Since early 1994, the airlines have experienced a
turnaround in operating results, leading the domestic airline industry to
record operating earnings during 1995 and 1997. Deterioration of cabin
interior product functionality and aesthetics occurred within the
commercial airline fleets during the industry downturn because of
maintenance deferrals. Since the turnaround began, the airlines have
experienced greater utilization resulting from higher load factors, which
has encouraged airlines to increase spending on refurbishments and
upgrades. The Company believes that it is well positioned to benefit over
the next several years as a result of the airlines' dramatically improved
financial condition and liquidity and the need to refurbish and upgrade
cabin interiors. The Company's recent growth in backlog, revenues and
operating earnings has been primarily from refurbishment and upgrade
programs, and the Company is currently experiencing a high level of new
order quote activity related to such programs.
- - Expansion of Worldwide Fleet and Shift Toward Widebody Aircraft. Airlines
have recently purchased a significant number of new aircraft due in part to
current high load factors and the projected growth in worldwide air travel.
According to the Boeing Report, worldwide air travel is projected to
increase by 75% by calendar 2006 and the worldwide fleet of commercial
passenger aircraft is projected to expand from approximately 10,300 at the
end of 1996 to approximately 15,300 by the end of 2006 and to more than
21,200 by 2016. Related growth in aircraft interior product shipments
associated with new aircraft deliveries began during calendar 1996. In
1997, Boeing shipped 375 aircraft versus 218 in 1996. In addition, Boeing
has stated plans to ship 550 aircraft in each of calendar years 1998 and
1999. Furthermore, according to the July 1997 "Airline Monitor", the
percentage of new Boeing aircraft deliveries projected to be widebody
aircraft for 1997 through 2001 is 39% as compared to 33% for the five-year
period ended December 31, 1996. This shift toward widebody aircraft is
significant to the Company since these aircraft require as much as seven
times the dollar value of cabin interior products as narrowbody aircraft,
including substantially more seats, galley equipment and in-flight
entertainment products.
- - General Aviation and VIP Aircraft Fleet Expansion and Related Retrofit
Opportunities. General aviation and VIP airframe manufacturers are
experiencing a surge in new aircraft deliveries similar to that occurring
in the commercial aircraft industry. According to industry sources,
executive aircraft deliveries amounted to 222 units in calendar 1994 and
were approximately 348 in calendar 1997, an increase of 57%. Industry
sources indicate that executive aircraft deliveries are expected to be
approximately 450 in calendar 1998 and should reach 550 per year by the
year 2000. Several new aircraft models including the Visionaire Vantage,
Cessna Citation Excel, the Boeing Business Jet, Global Express and Airbus
Business Jet have been, or will be introduced over the next several years.
The overall strength of the global economy, advances in engine and avionics
and emergence of fractional ownership of executive aircraft are all
important growth factors. In addition, the general aviation and VIP
aircraft fleet consists of approximately 10,000 aircraft with an average
age of approximately 15 years. As aircraft age or ownership changes,
operators retrofit and upgrade the cabin interior, including seats, sofas
and tables, sidewalls, headliners, structures such as closets, lavatories
and galleys, and related equipment including lighting and oxygen delivery
systems. The installed value of a new interior can range from $1 million
for smaller models to up to $7 million for a long haul aircraft. In
addition, operators generally reupholster or replace seats every five to
seven years. Management believes the Company is well positioned to benefit
from the retrofit opportunities due to (i) the 15-year average age of the
executive jet fleet; (ii) operators who have historically reupholstered
their seats are now more inclined to replace these seats with lighter
weight, more modern and 16g- compliant seating models; and (iii) the
Company is the only manufacturer with the capability for cabin interior
design services, a broad product line for essentially all cabin interior
products and program management services, for true "one-stop shopping."
- - Emergence of Individual Passenger In-Flight Entertainment Systems. Airlines
increasingly are demanding individual-passenger in-flight entertainment
systems in order to attract and retain customers, as the availability of
such service affects passengers' decisions on airline selection. These
systems also provide the
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airlines with the opportunity to generate increased revenues, without
raising ticket prices, by charging passengers for the services used. In
June 1997, the Company announced a joint venture with Harris Corporation to
develop and deliver live-broadcast television (LiveTV(TM)), to domestic
narrowbody commercial aircraft. The Company expects that in-flight
entertainment systems will be one of the fastest growing, and among the
largest, product categories in the commercial aircraft cabin interior
products industry.
The Company has developed a number of individual in-flight entertainment
systems that are designed to meet the varying technological and price
specifications of the airlines. The Company's three current systems are:
(i) the B/E 2000, with an installed base of approximately 28,000 units,
which is a system that provides non-interactive video programming, (ii) the
B/E 2000M, with an installed base of approximately 6,000 units, which
offers similar functionality to the B/E 2000 but can be upgraded to the
Company's Multimedia Digital Distribution System ("MDDS") product and (iii)
the MDDS product, which is in its final development stage, is an
interactive entertainment system with the capacity to provide movies on
demand, telecommunications, gaming and other services. The Company
completed the initial development and testing of the MDDS product and
delivered the first MDDS system to its launch customer, Japan Airlines
("JAL"), in April 1998. The Company also completed the engineering
necessary to enable installation of the MDDS as a line-fit option on Boeing
aircraft in April 1998.
Business Strategy
The Company's business strategy is to maintain its leadership position and
best serve its customers by: (i) offering the broadest and most integrated
product line in the industry for both new product sales and follow-on products
and services; (ii) pursuing a worldwide marketing approach focused by airline
and encompassing the Company's entire product line; (iii) pursuing the highest
level of quality in every facet of its operations, from the factory floor to
customer support; (iv) remaining the technological leader in its industry; (v)
enhancing its position in the growing upgrade, maintenance, inspection and
repair services market; and; (vi) pursuing selective strategic acquisitions in
the aircraft cabin interior products industry.
PRODUCTS AND SERVICES
Seating Products
The Company is the world's leading manufacturer of aircraft seats, offering a
wide selection of first class, business class, tourist class and commuter seats.
A typical seat manufactured and sold by the Company includes the seat frame,
cushions, armrests and tray table, together with a variety of optional features
such as in-flight entertainment systems, oxygen masks and telephones. Management
estimates that the Company has an aggregate installed base as of February 28,
1998 of aircraft seats, valued at replacement prices, of approximately $2
billion comprised of more than 1,000,000 seats.
- - Tourist Class. The Company is the leading worldwide manufacturer of tourist
class seats. B/E has designed tourist class seats that incorporate features
not previously utilized in that class, such as top-mounted passenger
control units, footrests and improved oxygen systems.
- - First and Business Classes. Based upon major airlines program selection and
orders on hand the Company is the leading worldwide manufacturer of premium
class seats. First class and business class seats are generally larger,
heavier and more complicated in design and are substantially more expensive
than tourist class aircraft seats. The Company's first class seats and
certain of its business class seats are equipped with articulating bottom
cushion suspension systems, sophisticated hydraulic legrests, lumbar
massage devices, adjustable thigh support cushions, reading lights,
adjustable head and neck supports and large tables.
- - Commuter Seats. The Company is the leading manufacturer of commuter seats
in both the U.S. and worldwide markets. The Company's Silhouette(TM)
Composite commuter seats are similar to commercial jet seats in comfort and
performance, but are lightweight and require minimal maintenance.
- - Spares. Aircraft seats are exposed to significant stress in the course of
normal passenger activity, and certain seat parts are particularly
susceptible to damage from continued use. As a result, a significant market
exists for spare parts.
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Passenger Entertainment and Service Systems
Management estimates that the Company has one of the largest installed bases
of PESS products in the world, which, valued at replacement prices, is
approximately $360 million. The Company has the leading share of the market for
PCUs and related wiring and harness assemblies, and has developed products aimed
at other portions of the PESS market, including individual seat video systems,
advanced multiplexer and hard-wired distribution systems and other products. The
Company believes that it is a market leader in individual-passenger in-flight
entertainment systems and that this product category will be the fastest
growing, and among the largest, product categories in the commercial aircraft
cabin interior products industry in the future.
- - Individual Passenger Entertainment. The Company has developed a number of
in-flight entertainment systems designed to meet the technological and
price specifications of the airlines:
B/E 2000. The B/E 2000, introduced in 1992, is one of the Company's
first-generation individual in-flight video systems and offers
centralized electronic distribution of a limited range of programming.
Since its introduction, the Company has installed approximately 28,000
units of the B/E 2000 and earlier generation individual-passenger video
systems for 10 airlines.
MDDS Family. The Company has developed a family of next-generation,
individual-passenger in-flight entertainment products, which includes
the 2000M and the MDDS:
B/E 2000M . The B/E 2000M is an in-flight entertainment system that
offers similar functionality to the B/E 2000 but can be upgraded to
the Company's fully interactive MDDS. Since its introduction in
1995, the Company has installed approximately 6,000 units.
MDDS. B/E's MDDS is a state-of-the-art, fully interactive
individual-passenger in-flight entertainment system which has the
capacity to offer numerous movies on demand, telecommunications,
gaming, Nintendo(TM), Sega(TM) and PC-based games, in-flight
shopping and, in the future, live television, among other services.
The Company has completed the initial development and testing of
the MDDS product and delivered the first MDDS product to its launch
customer, JAL, in April 1998. The Company also completed the
engineering necessary to enable installation of the MDDS as a line
fit option on Boeing aircraft in conjunction with the JAL delivery.
LiveTV(TM). In June 1997, the Company announced a joint venture with
Harris Corporation to develop and market a system that will allow
airline passengers to receive in-flight, live broadcast television
aboard narrowbody commercial aircraft at each individual-passenger seat.
The Company controls a 51 percent voting interest in the joint venture.
B/E will provide its individual-seat video distribution system as its
part of the overall LiveTV(TM) reception system, while Harris
Corporation will provide the specialized aircraft antenna and receiver
system to enable in-the-air reception.
- - PCUs, Wiring and Harness Assemblies. The Company's PCU product line is the
broadest in the industry, including over 300 different designs that are
functionally similar but differ widely due to the style preferences and
technical requirements of the various airlines. Wiring and harness
assemblies (which stabilize installed wiring) are sold as a package with
PCUs and vary as widely as PCU types.
- - Distribution Systems. The Company has manufactured hard-wired audio (since
1963) and video distribution systems (since 1992) and is currently the
principal supplier of such systems to the airline industry. The Company
also offers frequency division multiplex distribution systems, which
deliver substantially improved audio performance compared to competitors'
multiplex systems.
Interior Systems Products
The Company is the world's largest manufacturer of interior systems products
for both narrowbody and widebody aircraft, offering a wide selection of
structures, coffee and beverage makers, water boilers, liquid containers, ovens,
refrigeration equipment, oxygen delivery systems, passenger service units, air
valves, lighting and switches, and a variety of other interior components.
Management estimates that the Company has an aggregate installed base of such
equipment valued at replacement prices, of approximately $1.2 billion.
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- - Coffee Makers. The Company is the leading manufacturer of aircraft coffee
makers, with the Company's equipment currently installed in virtually every
type of aircraft for almost every major airline. The Company manufactures a
broad line of coffee makers, coffee warmers and water boilers including the
Flash Brew Coffee Maker, with the capability to brew 54 ounces of coffee in
one minute, a Combi(TM) unit which will both brew coffee and boil water for
tea while utilizing 25% less electrical power than traditional 5,000 watt
water boilers, and a recently introduced next-generation coffee maker.
- - Ovens. The Company is the leading supplier of a broad line of specialized
ovens, including high-heat efficiency ovens, high-heat convection ovens,
and warming ovens. The Company's newest offering, the DS-2000 Steam Oven,
represents a new method of preparing food in-flight by maintaining constant
temperature and moisture in the food. It addresses the airlines' need to
provide a wider range of foods than can be prepared by convection ovens.
- - Refrigeration Equipment. The Company is the worldwide industry leader in
the design, manufacture, and supply of commercial aircraft refrigeration
equipment. The Company recently introduced a self-contained wine and
beverage chiller, the first unit specifically designed to rapidly chill
wine and beverages on board an aircraft.
- - Galley Structures. Galley structures are generally custom designed to
accommodate the unique specifications and features required by a particular
carrier. Galley structures require intensive design and engineering work
and are among the most sophisticated and expensive of the aircraft's cabin
interior products. The Company provides a variety of galley structures,
closets and class dividers, emphasizing sophisticated and higher
value-added galleys for widebody aircraft.
- - Oxygen Delivery Systems. The Company is a leading manufacturer of oxygen
delivery systems, passenger service units, air valves, lighting and
switches for both commercial and general aviation aircraft. B/E is the only
manufacturer with the capability to fully integrate its own manufactured
components with overhead passenger service units with either chemical or
gaseous oxygen equipment. The Company's oxygen and passenger service unit
equipment has been approved for use on all Boeing and Airbus aircraft and
is also found on essentially all general aviation and VIP aircraft.
General Aviation
- - General Aviation and VIP Products. The Company entered this line of
business with its acquisition of AMP in April 1998. By combining AMP's
substantial presence in the general aviation and VIP aircraft cabin
interior products industry with that of PBASCO, B/E is now the leading
manufacturer of a broad product line including a complete line of seating
products, sidewalls, bulkheads, credenzas, closets, galley structures,
lavatories, tables, sofas, oxygen delivery systems, air valves and
lighting. B/E has the capability to provide complete interior packages,
including all design services, all interior components and program
management services for executive aircraft interiors. B/E is the preferred
supplier of seating products at essentially every general aviation airframe
manufacturer.
Services and Specialty Products
The Company is an active participant in the growing service and custom
products markets. Management believes that the Company's broad and integrated
product line and close relationships with its airline and leasing customers
position the Company to become a leading service provider in this market. Most
participants in this market are small, and management believes that the Company
is the only major product manufacturer in the industry currently participating
in this market.
- - Services. The Company provides a comprehensive complement of services for
cabin interior products on board aircraft either between flights or on an
overnight basis, or at one of eight service centers in the worldwide
service network. The spectrum of services includes systems check and
components repair, parts inventory and management, refurbishment of seating
products, on-board surveys regarding status and product installations, as
well as data support functions such as loading and updating of in-flight
systems entertainment software, direct satellite broadcast systems support
and systems integration.
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- - Specialty Products. The Company manufacturers several specialty products
for the commercial airline industry including flight attendant seats,
observer seats and custom products in the passenger seating area. The
Company maintains a staff of engineers to design and certify various
modules and kits to accommodate individual-passenger video and
telecommunications modules in seat backs and center consoles. The Company
believes it is able to provide such unique custom products more rapidly
than original manufacturers.
RESEARCH, DEVELOPMENT AND ENGINEERING
The Company works closely with commercial airlines to improve existing
products and identify customers' emerging needs. B/E's expenditures in research,
development and engineering totaled $45.7 million, $37.1 million, and $58.3
million for the fiscal years ended February 28, 1998, February 22, 1997 and
February 24, 1996, respectively. The increase in expenses during the current
period is the result of the substantial completion of Boeing line-fit
certification activities for MDDS as well as ongoing product development
activity in the Seating Products Group and Interior Systems Group. B/E employs
approximately 500 professionals in the engineering and product development
areas. The Company believes that it has the largest engineering organization in
the cabin interior products industry, with not only software, electronic,
electrical and mechanical design skills, but also substantial expertise in
materials composition and custom cabin interior layout design.
MARKET AND CUSTOMERS
The Company markets and sells its products directly to virtually all of the
world's major airlines and commercial and general aviation aircraft
manufacturers. The Company markets its general aviation products directly to all
of the world's general aviation airframe manufacturers, modification centers and
operators. B/E has a sales and marketing organization of 110 people, along with
22 independent sales representatives. B/E sales to all customers in foreign
countries were $232.7 million, $203.4 million and $124.5 million for the fiscal
years ended February 28, 1998, February 22, 1997 and February 24, 1996,
respectively, or approximately 43%, 49% and 54%, respectively, of net sales
during such periods.
Airlines select manufacturers of cabin interior products primarily on the
basis of product quality and performance, custom design capabilities, on-time
delivery, after-sales service and price. B/E believes that its large installed
base, its timely responsiveness in connection with the custom design,
manufacture, delivery and after-sales service of its products and its broad
product line and stringent customer and regulatory requirements all present
barriers to entry for potential new competitors in the cabin interior products
market.
The Company believes that its integrated worldwide marketing approach,
focused by airline, modification center and general aviation airframe
manufacturer and encompassing the Company's entire product line, is preferred by
its customers. Led by a B/E senior executive, teams representing each product
line serve designated airlines, which together account for approximately 60% of
the purchases of products manufactured by B/E during fiscal 1998. These customer
teams have developed customer-specific strategies to meet each airline's product
and service needs.
The Company also staffs "on-site" customer engineers at major airlines and
airframe manufacturers to represent its entire product line and work closely
with the customers to develop specifications for each successive generation of
products required by the airlines. These engineers help customers integrate the
wide range of cabin interior products and assist in obtaining the applicable
regulatory certification for each particular product or cabin configuration.
Through its on-site customer engineers, the Company expects to be able to more
efficiently design and integrate products which address the requirements of its
customers. The Company provides program management services, integrating all
on-board cabin interior equipment and systems, including installation and FAA
certification, allowing airlines to substantially reduce costs. The Company
believes that it is the only supplier in the commercial aircraft cabin interior
products industry with the size, resources, breadth of product line and global
product support capability to operate in this manner.
The Company markets its general aviation products directly to all of the
world's general aviation airframe manufacturers, modification centers and
operators.
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During the latter part of fiscal 1997, the Company initiated a program
management discipline under which a program manager is assigned for each
significant contract. The program manager is responsible for all aspects of the
specific contract, including management of change orders and negotiation of
related non-recurring engineering charges, monitoring the progress of the
contract through its scheduled delivery dates, and overall profitability
associated with the contract. The Company believes that it and its customers
derive substantial benefit from its program management approach, including
better on-time delivery and higher service levels. The Company also believes its
program management approach results in better customer satisfaction and higher
profitability over the life of the contract.
During the fiscal year ended February 28, 1998, one customer accounted for
approximately 18% of the Company's total revenues, and no other customer
accounted for more than 10% of such revenues. There were no major customers in
fiscal 1997 or 1996. Because of differing schedules of various airlines for
purchases of new aircraft and for retrofit and refurbishment of existing
aircraft, the portion of the Company's revenues attributable to particular
airlines varies from year to year.
BACKLOG
Management estimates that B/E's backlog at February 28, 1998 was
approximately $560 million, approximately 52% of which management believes to be
deliverable in fiscal 1999, compared with a backlog of $420 million on February
22, 1997 (as adjusted for the debooking of the British Airways MDDS program in
August 1997).
CUSTOMER SERVICE
The Company believes that it provides the highest level of customer
service and product support available in the commercial aircraft cabin interior
products industry and that such service is a critical factor in the Company's
success. The key elements of such service include (i) rapid response to requests
for engineering designs, proposal requests and technical specifications; (ii)
flexibility with respect to customized features; (iii) on-time delivery; (iv)
immediate availability of spare parts for a broad range of products; and (v)
prompt attention to customer problems, including on-site customer training.
Customer service is particularly important to airlines due to the high cost to
the airlines of late delivery, malfunctions and other problems.
WARRANTY AND PRODUCT LIABILITY
The Company warrants its products, or specific components thereof, for
periods ranging from one to ten years, depending upon product type and
component. The Company generally establishes reserves for product warranty
expense on the basis of the ratio of warranty costs incurred by the product over
the warranty period to sales of the product over the warranty period. Actual
warranty costs reduce the warranty reserve as they are incurred. Management
periodically reviews the adequacy of accrued product warranty reserves and
revisions of such reserves are recognized in the period in which such revisions
are determined.
The Company also carries product liability insurance. The Company believes
that its insurance is generally sufficient to cover product liability claims.
COMPETITION
The commercial aircraft cabin interior products market is relatively
fragmented with a number of competitors in each of the individual product
categories. Due to the global nature of the commercial airline industry,
competition in product categories comes from both U.S. and foreign
manufacturers. However, as aircraft cabin interiors have become increasingly
sophisticated and technically complex, airlines have demanded increased levels
of engineering support and customer service than many smaller cabin interior
products suppliers can provide. At the same time, airlines have recognized that
cabin interior product suppliers must be able to integrate a wide range of
products, including sophisticated electronic components, particularly in
widebody aircraft. Management believes that the increasing demands airlines
place upon remaining suppliers will result in a number of suppliers leaving the
cabin interior products industry and a consolidation of those suppliers. The
Company has participated in this consolidation through strategic acquisitions
and internal growth and intends to continue to participate in the consolidation.
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The Company's principal competitors for seating products include Group
Zodiac S.A., Keiper Recaro GmbH, and a limited number of other producers in the
European community and Japan. The Company's principal competitors for PESS
products are MAS and Rockwell Collins. The Company's primary competitors for
interior systems products are JAMCO Limited, Britax PLC, Scott Aviation and
Intertechnique.
MANUFACTURING AND RAW MATERIALS
The Company's manufacturing operations consist of both the in-house
manufacturing of component parts and sub-assemblies and the assembly of Company
specified and designed component parts purchased from outside vendors. The
Company maintains state-of-the-art facilities, and management has an ongoing
strategic manufacturing improvement plan utilizing focused factories and
cellular production technologies. Management expects that continuous improvement
from implementation of this plan for each of its product lines will occur over
the next several years and should lower production costs, cycle times and
inventory requirements and at the same time improve product quality and customer
satisfaction.
GOVERNMENT REGULATION
The FAA prescribes standards and licensing requirements for aircraft
components and licenses component repair stations within the United States.
Comparable agencies regulate such matters in other countries.
The Company holds several FAA component certificates and performs component
repairs at a number of its U.S. facilities under FAA repair station licenses.
The Company also holds an approval issued by the U.K. Civil Aviation Authority
to design, manufacture, inspect and test aircraft seating products in Leighton
Buzzard, England and in Kilkeel, Northern Ireland and the necessary approvals to
design, manufacture, inspect, test and repair its interior systems products in
Nieuwegein, The Netherlands and to inspect, test and repair products at its
eight service centers throughout the world.
In March 1992, the FAA adopted Technical Standard Order C127 requiring that
all seats on certain new generation commercial aircraft installed after such
date be certified to meet a number of new safety requirements, including an
ability to withstand a 16G force. Management understands that the FAA plans to
adopt additional regulations in the near future that will require that within
the next five years all seats, including those on existing older commercial
aircraft that are subject to the FAA's jurisdiction, will have to comply with
similar seat safety requirements. At February 28, 1998, the Company had
developed eleven different seat models meeting these new seat safety
regulations.
PATENTS
B/E currently holds 52 United States patents and 21 international patents,
covering a variety of products. However, the Company believes that the
termination, expiration or infringement of one or more of such patents would not
have a material adverse effect on the Company.
EMPLOYEES
As of February 28, 1998, B/E had approximately 3,600 employees.
Approximately 73% of these employees are engaged in manufacturing, 14% in
research, development and engineering, and 13% in sales, marketing, product
support and general administration. Approximately 13% of the employees are
represented by unions. On April 25, 1997, the Company completed negotiations
with its only domestic union which represents 11% of the Company's employees.
This contract, which covers a period of three years, was ratified by the members
of the union on April 26, 1997. B/E considers its employee relations to be good.
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ITEM 2. PROPERTIES
B/E currently has 21 principal facilities, comprising an aggregate of
approximately 1.4 million square feet of space. The following table describes
the principal facilities and indicates the location, function, approximate size
and ownership status of each:
FACILITY
LOCATION PRODUCTS AND FUNCTION SIZE OWNERSHIP
-------- --------------------- ---- ---------
(SQ. FEET)
CORPORATE:
Wellington, Florida Corporate headquarters, finance, marketing and 17,700 Owned
sales
SEATING PRODUCTS:
Litchfield, Connecticut Manufacturing, service and warehousing 147,700 Owned
Winston-Salem, North Seating Products Group headquarters, research and 264,800 Owned
Carolina development, finance, marketing, sales and
manufacturing
Leighton Buzzard, Manufacturing, service, research and development, 114,000 Owned (a)
England sales support, finance and warehousing
Kilkeel, Northern Ireland Manufacturing, sales support and warehousing 38,500 Owned
INTERIOR SYSTEMS:
Anaheim, Manufacturing, service, research and development, 57,100 Leased
California sales support, finance and warehousing
Fountain Valley, Manufacturing, service, research and 26,000 Owned
California development, sales support, finance and
warehousing
Delray Beach, Florida Manufacturing, service, research and development,
sales support, finance and warehousing; Interior
Systems Group headquarters 52,000 Owned
Jacksonville, Florida Manufacturing, service, engineering, and
warehousing 75,000 Owned
Lenexa, Kansas Manufacturing, service, engineering, and 80,000 Leased
Warehousing
Nieuwegein, The Manufacturing, service, research and development,
Netherlands sales support, finance and warehousing 39,000 Leased
PESS PRODUCTS:
Irvine, California Manufacturing, service, research and development,
sales support, finance and warehousing; In-flight
Entertainment Group headquarters 106,700 Leased
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FACILITY
LOCATION PRODUCTS AND FUNCTION SIZE OWNERSHIP
-------- --------------------- ---------- ---------
(SQ. FEET)
GENERAL AVIATION AND
VIP PRODUCTS:
Miami, Florida Manufacturing, service, research and development, 84,300 Leased
sales support, finance and warehousing; General 71,700 Owned
Aviation Headquarters
SERVICES:
Orange, California Upgrade, maintenance, inspection and repair, 106,300 Leased
finance, sales support and warehousing; Service
Group Headquarters
Longwood, Florida Upgrade, maintenance, inspection and repair 5,300 Leased
Burnsville, Minnesota Upgrade, maintenance, inspection and repair 7,200 Leased
Woodinville, Washington Upgrade, maintenance, inspection and repair 26,800 Leased
Chesham, England Upgrade, maintenance, inspection and repair 34,000 Owned (a)
Toulouse, France Upgrade, maintenance, inspection and repair 400 Leased
Houston, Texas Upgrade, maintenance, inspection and repair 45,000 Owned
Schipol, The Netherlands Upgrade, maintenance, inspection and repair 3,600 Leased
(a) B/E's owned properties in England are mortgaged to Barclays Bank PLC to
collateralize credit facilities of BE Aerospace (U.K.) Ltd. in aggregate amounts
of up to approximately pound sterling 5.0 million.
The Company believes that its facilities are suitable for their present
intended purposes and adequate for the Company's present and anticipated level
of operations. As a result of recent conditions in the airline industry as
described in "Industry Overview-Recent Industry Conditions," B/E's facilities
have been substantially underutilized for the past several years. The Company
believes that its ongoing facility integration program, together with
anticipated continued growth in airline profitability, should result in
significant improvement in the degree of utilization in the Company's
facilities.
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ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to litigation or other legal proceedings which the
Company believes could reasonably be expected to have a material adverse effect
on the Company's business, financial condition and results of operations.
In January 1998, the Company resolved a long-running dispute with the U.S.
Government over export sales between 1992 and 1995 to Iran Air. The dispute
centered on shipments of aircraft seats and related spare parts for five
civilian aircraft operated by Iran Air. Iran Air purchased the seats in 1992 and
arranged for them to be installed by a contractor in France. At the time, Iran
was not the subject of a U.S. trade embargo. In connection with its sale of
seats to Iran Air, B/E applied for and was granted a validated export license by
the U.S. Department of Commerce (the "DOC"). The dispute with the U.S.
Government centered on whether seats were delivered to Iran Air before the
formal license was issued by the DOC, some seven months after B/E first applied
for the license. This action resolved all disputes between B/E Aerospace and the
Department of Justice as well as the DOC's Bureau of Export Enforcement. As part
of the settlement, B/E pleaded guilty to a violation of the International
Economic Emergency Powers Act and was placed on probation for a three-year
period. In addition, B/E entered into a consent order with the DOC under which
the DOC has agreed to suspend the imposition of a three-year export denial order
on PTC Aerospace, a member of B/E's U.S. Seating Products Group, provided no
further violations of the export laws occur. The Company recorded a charge of
approximately $4.7 million in the quarter ended February 28, 1998, related to
fines, civil penalties and associated legal fees arising from the settlement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the last quarter of the fiscal year covered by this report, the
Company did not submit any matters to a vote of security holders, through the
solicitation of proxies or otherwise.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding the directors and
executive officers of the Company. Officers of the Company are elected annually
by the Board of Directors.
NAME AGE POSITION
---- --- --------
Amin J. Khoury 59 Chairman of the Board
Robert J. Khoury 56 Vice Chairman of the Board and Chief Executive Officer and Director
Paul E. Fulchino 51 President, Chief Operating Officer and Director
Marco C. Lanza 41 Executive Vice President, Marketing and Product Development
Thomas P. McCaffrey 44 Corporate Senior Vice President of Administration, Chief Financial Officer and
Assistant Secretary
E. Ernest Schwartz 61 Corporate Senior Vice President, Development and Planning
Edmund J. Moriarty 54 Corporate Vice President-Law, General Counsel and Secretary
Jeffrey P. Holtzman 42 Corporate Vice President, Treasurer and Assistant Secretary
Sam G. Ayoub 55 Group Vice President and General Manager, Services Group
Roman G. Ptakowski 49 Group Vice President and General Manager, Interior Systems Products Group
Scott A. Smith 43 Group Vice President and General Manager, In-flight Entertainment Group
Jim C. Cowart 46 Director**
Richard G. Hamermesh 50 Director*
Brian H. Rowe 66 Director**
Hansjoerg Wyss 62 Director*
* Member, Audit Committee.
** Member, Stock Option and Compensation Committee.
The Company's Restated Certificate of Incorporation provides that the
Board of Directors is classified into three classes, as nearly as equal in
number as possible, so that each director (after a transitional period) will
serve for three years, with one class of directors being elected each year. The
Board is currently comprised of three Class I Directors (Brian H. Rowe, Jim C.
Cowart and Paul E. Fulchino), two Class II Directors (Robert J. Khoury and
Hansjoerg Wyss) and two Class III Directors (Amin J. Khoury and Richard G.
Hamermesh). The terms of the Class I, Class II and Class III Directors expire
upon the election and qualification of successor directors at annual meetings of
stockholders held following the end of fiscal years 1998, 1997 and 1996,
respectively. The executive officers of the Company are elected annually by the
Board of Directors following the annual meeting of stockholders and serve at the
discretion of the Board of Directors.
Amin J. Khoury has been Chairman of the Board of the Company since July
1987 and was Chief Executive Officer until April 1, 1996. Since 1986, Mr. Khoury
has also been the Managing Director of The K.A.D. Companies, Inc., an
investment, venture capital and consulting firm. Mr. Khoury is currently the
Chairman of the Board of Directors of Applied Extrusion Technologies, Inc., a
manufacturer of oriented polypropylene films used in consumer products labeling
and packaging applications, and a member of the Board of Directors of Brooks
Automation, Inc., the leading manufacturer in the U.S. of vacuum central wafer
handling systems for semiconductor manufacturing. Mr. Khoury is employed by the
Company pursuant to an Employment Agreement extending through December 31, 2001.
Mr. Khoury is the brother of Robert J. Khoury.
Robert J. Khoury has been a Director of the Company since July 1987. Mr.
Khoury was elected Vice Chairman and Chief Executive Officer effective April 1,
1996; from July 1987 until that date, Mr. Khoury served as the Company's
President and Chief Operating Officer. From 1986 to 1987, Mr. Khoury was Vice
President of The K.A.D. Companies, Inc. The Company has entered into an
Employment Agreement with Mr. Khoury, extending through February 28, 2001. Mr.
Khoury is the brother of Amin J. Khoury.
Paul E. Fulchino was elected a Director and President and Chief Operating
Officer of the Company effective April 1, 1996. From 1990 to 1996, Mr. Fulchino
served as President and Vice Chairman of Mercer Management Consulting, Inc.
("Mercer"), an international general management consulting firm with over 1,100
employees. In addition to his management responsibilities as President of
Mercer, Mr. Fulchino also had responsibility for advising clients throughout the
world, particularly with respect to the transportation industry, including a
number of
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major airlines. The Company has entered into an Employment Agreement with Mr.
Fulchino extending through March 31, 1999.
Marco C. Lanza has been the Executive Vice President, Marketing and
Product Development since January 1994. From March 1992 through January 1994,
Mr. Lanza was Vice President and General Manager of the In-flight Entertainment
Group of the Company. From 1987 through February 1992, Mr. Lanza was Vice
President, Marketing and Product Development of the Company. The Company has
entered into an Employment Agreement with Mr. Lanza extending through December
31, 1999.
Thomas P. McCaffrey has been Corporate Senior Vice President of
Administration, Chief Financial Officer and Assistant Secretary since May 1993.
From August 1989 through May 1993, Mr. McCaffrey was an Audit Director with
Deloitte & Touche LLP, and from 1976 through 1989 served in several capacities,
including Audit Partner, with Coleman & Grant. The Company has entered into an
Employment Agreement with Mr. McCaffrey extending through December 31, 1999.
E. Ernest Schwartz has been Corporate Senior Vice President, Development
and Planning since December 1997. From March 1992 through November 1997, Mr.
Schwartz was Group Vice President and General Manager of the Interior Systems
Products Group. From 1986 through February 1992, Mr. Schwartz was President of
Aircraft Products Company, which was acquired by the Company in 1992.
Edmund J. Moriarty has been Corporate Vice President, General Counsel and
Secretary since November 1995. From 1991 to 1995, Mr. Moriarty served as Vice
President and General Counsel to Rollins, Inc., a national service company. From
1982 through 1991, Mr. Moriarty served as Vice President and General Counsel to
Old Ben Coal Company, a wholly owned coal subsidiary of The Standard Oil
Company.
Jeffrey P. Holtzman has been Treasurer since September 1993 and Vice
President since November 1996. From June 1986 to July 1993, Mr. Holtzman served
in several capacities at FPL Group, Inc., including Assistant Treasurer and
Manager of Financial Planning. Mr. Holtzman previously worked for Mellon Bank,
Gulf Oil and Arthur Young & Company.
Sam G. Ayoub has been Group Vice President and General Manager of the
Company's Services Group since May 1996 and from November 1994 through April
1996, was Executive President-Services. From 1984 to 1994 Mr. Ayoub served in
several capacities with AAR Corporation including Corporate Vice President
Marketing and President-Technical Services Division. Prior to that Mr. Ayoub was
with United Airlines for 20 years with his last position being General Manager
of their Cargo Division.
Roman G. Ptakowski has been the Group Vice President and General Manager
of the Interior Systems Group since December 1997. From September 1995 through
December 1997, Mr. Ptakowski was Vice President, Sales and Marketing of the
Interior Systems Group of the Company. From January 1995 through August 1995,
Mr. Ptakowski served as Senior Vice President, Marketing for Farrel Corporation.
Prior to that he was with the ABB Power T&D Company Inc. and Westinghouse
Electric Corp. for 25 years with his last position being General Manager of
their Protective Relay Division.
Scott A. Smith has been the Vice President and General Manager of the
In-flight Entertainment Group since April 1998. From December 1995 through March
1998, Mr. Smith was with Toshiba American Information Electronics with his last
position being Senior Vice President, Sales of the Americas. From December 1992
to February 1994, Mr. Smith served as Corporate Vice President of Engineering
and from February 1994 to September 1995 served as the General Manager of the
Desktop and Server Product Division of AST Research. Prior to that, Mr. Smith
was with IBM for 16 years and served in numerous capacities, including Systems
Manager of the engineering team which developed IBM's first PC Server and
advanced desktop, Staff Assistant to the Chairman of the Board and Director of
Visual Subsystems Group.
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Jim C. Cowart has been a Director of the Company since November 1989. Mr.
Cowart is currently an independent investor and has been a principal of Cowart &
Co. LLC and EOS Capital, Inc. private capital firms retained by the Company for
strategic planning, competitive analysis, financial relations and other
services. From January 1993 to November 1997, Mr. Cowart was the Chairman of the
Board and Chief Executive Officer of Aurora Electronics Inc. From 1987 until
1991, Mr. Cowart was a founding General Partner of Capital Resource Partners, a
private investment capital manager. Prior to such time, Mr. Cowart held various
positions in investment banking and venture capital with Lehman Brothers,
Shearson Venture Capital and Kidder, Peabody & Co.
Richard G. Hamermesh has been a Director of the Company since July 1987.
Since August 1987, Dr. Hamermesh has been the Managing Partner of the Center for
Executive Development, an independent management consulting company, and, from
December 1986 to August 1987, Dr. Hamermesh was an independent consultant. Prior
to such time, Dr. Hamermesh was on the faculty at the Harvard Business School.
Dr. Hamermesh is also a Director of Applied Extrusion Technologies, Inc.
Brian H. Rowe has been a Director of the Company since July 1995. Mr. Rowe
is currently Chairman Emeritus of GE Aircraft Engines, a principal business unit
of the General Electric Company, where he also served as Chairman from September
1993 through January 1995 and as President from 1979 through 1993. From March
1994 to November 1995, Mr. Rowe served as a Director of Astrostructures Hamble
Limited, a manufacturer of military and civil aircraft components. Since March
1995, Mr. Rowe has also been a Director of Atlas Air Inc., an air cargo carrier.
Since January 1980, Mr. Rowe has been a Director of Fifth Third Bank, an Ohio
banking corporation. Since October 1995, Mr. Rowe has been a Director of
Cincinnati Bell Inc., a communications services company. Since December 1996,
Mr. Rowe has also been a Director of Stewart & Stevenson Services, Inc., a
custom packager of engine systems, and Textron Inc., a manufacturer of
mechanical devices for aircraft and other applications. Since January 1996, Mr.
Rowe has served as Executive Vice Chairman of American Regional Aircraft
Industries, Inc.
Hansjoerg Wyss has been a Director of the Company since October 1989.
Since 1977, Mr. Wyss has been a Director and the Chairman and Chief Executive
Officer of Synthes (U.S.A.) and Synthes (Canada), Ltd., manufacturers and
distributors of orthopedic implants and instruments.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is quoted on the Nasdaq National Market under
the symbol "BEAV." The following table sets forth, for the periods indicated,
the range of high and low per share closing prices for the Common Stock as
reported by Nasdaq.
HIGH LOW
---- ---
FISCAL YEAR ENDED FEBRUARY 24, 1996
First Quarter 8 5/8 5 1/4
Second Quarter 9 1/4 7 1/4
Third Quarter 9 9/16 7 1/2
Fourth Quarter 13 5/8 8 7/8
FISCAL YEAR ENDED FEBRUARY 22, 1997
First Quarter 16 1/4 9 7/8
Second Quarter 16 3/4 12 3/8
Third Quarter 25 1/8 15 1/2
Fourth Quarter 29 22 3/4
FISCAL YEAR ENDED FEBRUARY 28, 1998
First Quarter 27 1/2 19 1/2
Second Quarter 37 23 5/8
Third Quarter 41 1/2 27 1/8
Fourth Quarter 32 1/4 20 1/2
On May 20, 1998 the closing price of the Common Stock as reported by
Nasdaq was $30.31 per share. As of such date, the Company had 531 shareholders
of record, and management estimates that there are approximately 14,300
beneficial owners of the Company's common stock. The Company has not paid any
cash dividends in the past, and management has no present intention of doing so
in the immediate future. The Company's Board of Directors intends, for the
foreseeable future, to retain any earnings to finance the future growth of the
Company, but expects to review its dividend policy regularly. The Indentures
pursuant to which the Company's 8% and 9 7/8% Senior Subordinated Notes were
issued and the terms of the Company's credit facilities permit the declaration
or payment of cash dividends only in certain circumstances described therein.
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ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data)
During fiscal 1994, B/E completed the following acquisitions: (i) on April 29,
1993, B/E acquired all of the stock of Royal Inventum, B.V. ("Inventum"); (ii)
on August 23, 1993, B/E acquired all of the stock of Nordskog Industries
("Nordskog"); (iii) on August 26, 1993, B/E acquired all of the stock of Acurex
Corporation ("Acurex"); and (iv) on October 13, 1993, B/E acquired substantially
all of the assets of Philips Airvision ("Airvision"). On January 24, 1996, the
Company acquired all of the stock of Burns Aerospace Corporation ("Burns"). The
financial data as of and for the fiscal years ended February 28, 1998, February
22, 1997, February 24, 1996, February 25, 1995 and February 26, 1994 have been
derived from financial statements which have been audited by B/E's independent
auditors. The following financial information is qualified by reference to, and
should be read in conjunction with, the B/E financial statements, including
notes thereto, and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Annual Report.
FISCAL YEAR ENDED
------------------------------------------------------------------------
Feb. 28, Feb. 22, Feb. 24, Feb. 25, Feb. 26,
1998 1997 1996 (c) 1995 1994
---- ---- -------- ---- ----
STATEMENTS OF OPERATIONS DATA:
Net sales ...................................... $ 487,999 $ 412,379 $ 232,582 $ 229,347 $ 203,364
Cost of sales .................................. 309,094 270,557 160,031 154,863 136,307
--------- --------- --------- --------- ---------
Gross profit ................................... 178,905 141,822 72,551 74,484 67,057
Operating expenses:
Selling, general and administrative .......... 58,622 51,734 42,000 31,787 28,164
Research, development and engineering ........ 45,685 37,083 58,327 (d) 12,860 9,876
Amortization ................................. 11,265 10,607 9,499 9,954 7,599
Other expenses ............................... 4,664(a) -- 4,170 (e) 23,736 (e) --
--------- --------- --------- --------- ---------
Operating earnings (loss) ...................... 58,669 42,398 (41,445) (3,853) 21,418
Interest expense, net .......................... 22,765 27,167 18,636 15,019 12,581
--------- --------- --------- --------- ---------
Earnings (loss) before income taxes (benefit),
extraordinary item and cumulative effect of
accounting change .......................... 35,904 15,231 (60,081) (18,872) 8,837
Income taxes (benefit) ......................... 5,386 1,522 -- (6,806) 3,481
--------- --------- --------- --------- ---------
Earnings (loss) before extraordinary item and
cumulative effect of accounting change ..... 30,518 13,709 (60,081) (12,066) 5,356
Extraordinary item ............................. 8,956 (b) -- -- -- --
--------- --------- --------- --------- ---------
Earnings (loss) before cumulative effect of
accounting change ........................... 21,562 13,709 (60,081) (12,066) 5,356
Cumulative effect of accounting change ......... -- -- (23,332) -- --
--------- --------- --------- --------- ---------
Net earnings (loss) ............................ $ 21,562 $ 13,709 $ (83,413) $ (12,066) $ 5,356
========= ========= ========= ========= =========
Basic earnings (loss) per share (f):
Earnings (loss) before extraordinary Item and
cumulative effect of change in accounting
principle ................................... $ 1.36 $ .77 $ (3.71) $ (.75) $ .35
Extraordinary item ............................. (.40) -- -- -- --
Cumulative effect of accounting change ......... -- -- (1.44) (d) -- --
--------- --------- --------- --------- ---------
Net earnings (loss) ............................ $ .96 $ .77 $ (5.15) $ (.75) $ .35
========= ========= ========= ========= =========
Weighted average common shares ................ 22,442 17,692 16,185 16,021 15,438
Diluted earnings (loss) per share (f):
Earnings (loss) before extraordinary Item and
cumulative effect of change in accounting
principle .................................... $ 1.30 $ .72 $ (3.71) $ (.75) $ .34
Extraordinary item ............................. (.38) -- -- -- --
Cumulative effect of accounting change ......... -- -- (1.44) (d) -- --
--------- --------- --------- --------- ---------
Net earnings (loss) ............................ $ .92 $ .72 $ (5.15) $ (.75) $ .34
========= ========= ========= ========= =========
Weighted average common shares ................ 23,430 19,097 16,185 16,021 15,623
BALANCE SHEET DATA (END OF PERIOD):
Working capital ................................ $ 262,504 $ 122,174 $ 41,824 $ 76,563 $ 76,874
Total assets ................................... 681,757 491,089 433,586 379,954 375,009
Long-term debt ................................. 349,557 225,402 273,192 172,693 159,170
Stockholders' equity ........................... 196,775 165,761 44,157 125,331 133,993
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SELECTED FINANCIAL DATA (CONTINUED)
FOOTNOTES TO TABLE
(a) In fiscal 1998, the Company resolved a long-running dispute with the U.S.
Government over export sales between 1992 and 1995 to Iran Air. The
Company recorded a charge of $4,664 in fiscal 1998 related to fines,
civil penalties and associated legal fees arising from the settlement.
(b) The Company incurred an extraordinary charge of $8,956 during fiscal 1998
for unamortized debt issue costs, tender and redemption premiums and fees
and expenses related to the repurchase of its 9 3/4% Senior Notes.
(c) On January 24, 1996, the Company acquired all of the stock of Burns, an
industry leader in commercial aircraft seating. The acquisition of Burns
was accounted for as a purchase, and the results of Burns are included in
B/E's historical financial data from the date of acquisition.
(d) In fiscal 1996, the Company changed its method of accounting relating to
the capitalization of precontract engineering costs that were previously
included as a component of inventories and amortized to earnings as the
product was shipped. Effective February 24, 1995, such costs have been
charged to research, development and engineering and expensed as incurred
and, as a result, periods prior to fiscal 1996 are not comparable. In
connection with such change in accounting, the Company recorded a charge
to earnings of $23,332. See Note 2 of Notes to Consolidated Financial
Statements.
(e) In fiscal 1996, in conjunction with the Company's rationalization of its
seating business and as a result of the Burns acquisition, the Company
recorded a charge to earnings of $4,170 related to costs associated with
the integration and consolidation of the Company's European seating
operations. In fiscal 1995, the Company charged to earnings $23,736 of
expenses primarily related to intangible assets and inventories
associated with the Company's earlier generations of passenger
entertainment systems.
(f) During fiscal year 1998, the Company adopted Statement of Financial
Accounting Standard No. 128, Earnings per Share, and, accordingly, has
restated earnings per share for all periods presented.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations" includes forward-looking statements which involve risks
and uncertainties. The Company's actual experience may differ materially from
that anticipated in such statements. Factors that might cause such a difference
include, but are not limited to, those discussed in "Risk Factors" contained in
Exhibit 99.1 hereto, as well as future events that have the effect of reducing
the Company's operating income and available cash balances, such as unexpected
operating losses or delays in the integration of the Company's seating business,
the delivery of the Company's MDDS interactive video system, customer delivery
requirements, new or expected refurbishments, or cash expenditures related to
possible future acquisitions.
(In thousands, except share and per share data)
INTRODUCTION
B/E is the world's largest manufacturer of interior products for
commercial and general aviation aircraft cabins, serving virtually all major
airlines and general aviation aircraft owners and original equipment
manufacturers with a broad line of products, including aircraft seats, a full
line of food and beverage preparation and storage equipment, Interior Systems
structures, oxygen delivery systems and related products, and in-flight
entertainment systems. In addition, B/E provides upgrade, maintenance and repair
services for the products which it manufactures as well as for those supplied by
other manufacturers.
B/E's revenues are generally derived from two primary sources: refurbishment
or upgrade programs for the existing worldwide fleets of commercial and general
aviation aircraft, and new aircraft deliveries. B/E believes its large installed
base of products, estimated to be approximately $3.7 billion (valued at
replacement prices as of February 28, 1998), gives it a significant advantage
over competitors in obtaining orders for refurbishment programs, principally due
to the airlines' tendency to purchase equipment for such programs from the
original supplier. With the exception of spare parts sales, B/E's revenues are
generated from programs which may vary significantly from year to year in terms
of size, mix of products and length of delivery. As a result, B/E's revenues and
margins may fluctuate from period to period based upon the size and timing of
the programs and the type of products sold. Historically, B/E experienced
certain trends in its two revenue drivers: as the airlines took deliveries of
large numbers of new aircraft, refurbishment programs as a percentage of
revenues declined and, similarly, when new aircraft deliveries declined,
refurbishment programs tended to increase in number and size. During the most
recent airline industry recession, which ended in 1994, the airlines
significantly depleted their cash reserves and incurred record losses. In an
effort to improve their liquidity, the airlines conserved cash by reducing or
deferring cabin interior refurbishment and upgrade programs and purchases of new
aircraft. As a result, in contrast with historical experience, B/E experienced
declines in the number of both new orders and refurbishments.
Since early 1994, the airlines have experienced a significant turnaround in
operating results, with the domestic airline industry achieving record operating
earnings during calendar years 1995 through 1997. Consequently, during fiscal
1998, B/E has experienced significant growth in backlog of seating and interior
systems products, and has experienced significant growth in revenues and
operating earnings. This growth is a reflection of the airlines' need to begin
refurbishing worn fleets and their ability to do so as a result of the
strengthening of the airlines' balance sheets.
B/E has substantially expanded the size, scope and nature of its
business as a result of a number of acquisitions. During the fiscal year ended
February 26, 1994, B/E completed the following acquisitions: (i) on April 29,
1993, the Company acquired, through a Dutch holding company, all of the capital
stock of Inventum, a supplier of galley inserts including ovens, beverage makers
and water boilers to airlines located primarily in Europe and the Pacific Rim;
(ii) on August 23, 1993, the Company acquired all of the capital stock of
Nordskog, an industry pioneer in galley structures and inserts; (iii) on August
26, 1993, the Company acquired all of the capital stock of Acurex, the leading
worldwide supplier of commercial aircraft refrigeration products; and (iv) on
October 13, 1993, the Company acquired substantially all of the assets and
certain of the liabilities of Airvision, a manufacturer of in-flight
entertainment equipment. On January 24, 1996, the Company acquired all of the
stock of Burns, an industry
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leader in commercial aircraft seating. On April 13, 1998, the Company acquired
substantially all of the assets and assumed certain of the liabilities of
Puritan Bennett Aero Systems Co., the leading manufacturer of commercial
aircraft oxygen delivery systems, a leading manufacturer of passenger service
unit components and systems, and a major supplier of air valves, overhead lights
and switches, crew masks and protective breathing devices. On April 21, 1998,
the Company acquired substantially all of the assets and assumed certain of the
liabilities of Aircraft Modular Products, the leading manufacturer of cabin
interior products for general aviation (business jet) and commercial type VIP
aircraft. While the Company will continue to be susceptible to industry-wide
conditions, management believes that the Company's significantly more
diversified product line and revenue base achieved through acquisitions has
reduced its exposure to demand fluctuations in any one product area.
The Burns acquisition has had a significant impact on B/E's results of
operations. Burns, with calendar 1995 revenues of $99,800, was one of the three
leading North American suppliers of commercial aircraft passenger seats and had
a base of airline customers that was largely complementary to that of B/E. B/E's
and Burns' approximate share of the worldwide seating products market at the
time of acquisition were approximately 30% and 20%, respectively, based on
fiscal 1995 unit sales. By consolidating engineering, marketing, administration
and manufacturing operations of the two companies, B/E has been able to reduce
fixed costs, thereby enhancing its low-cost position.
Over the last two fiscal years, the Company's gross margins have improved
substantially, increasing from 31.2% in fiscal 1996 to 34.4% in fiscal 1997 and
to 36.7% in fiscal 1998. The primary reasons for the improvement in gross
margins include: (i) a Company-wide re-engineering program, which has resulted
in higher employee productivity and better manufacturing efficiency; (ii) higher
unit volumes; and (iii) a shift in product mix in all Groups toward higher
margin products and services.
B/E's business strategy is to maintain its market leadership position through
various initiatives, including new product development. In fiscal 1998,
research, development and engineering expenses totaled $45,685, or 9.4% of net
sales, primarily consisting of costs related to the development of the MDDS and
related Boeing line-fit expenditures, with the balance attributable to its
seating and interior systems products businesses.
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RESULTS OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 1998 COMPARED TO YEAR ENDED
FEBRUARY 22, 1997
Sales for the year ended February 28, 1998 were $487,999 or 18% higher than
sales of $412,379 in the prior year and reflected a 24% increase in product
sales, offset by a $13,305 decline in service revenues (attributable to
discontinued service lines of business). The increase in sales is attributable
to substantially higher unit volume shipments of all the Company's products.
Gross profit was $178,905 or 36.7% of sales, for the year ended February
28, 1998 and was $37,083 or 26% greater than the prior year's gross profit of
$141,822 which represented 34.4% of sales. The increase in gross profit, while
primarily the result of the higher sales volume, was also positively impacted by
the 230 basis point improvement in gross margin.
Selling, general and administrative expenses were $58,622 or 12% of sales
for the year ended February 28, 1998. This was $6,888 or 13%, higher than the
selling, general and administrative expenses for the prior year of $51,734
(12.5% of sales) and is primarily due to the higher level of sales and quotation
activity as well as a higher level of customer service, product support and
information technology activities.
Research, development and engineering expenses were $45,685 or 9.4% of
sales, for the fiscal year ended February 28, 1998. For the prior year,
research, development and engineering expenses were $37,083 or 9.0% of sales.
The increase in research, development and engineering was attributable to B/E's
ongoing new product development programs, including costs related to the
development of the MDDS and related Boeing line-fit expenditures.
Amortization expense for the fiscal year ended February 28, 1998 of $11,265
was $658 or 6%, higher than the amount recorded in the prior year.
Other expenses for the fiscal year ended February 28, 1998 consisted of a
non-recurring charge of $4,664 related to the settlement of a dispute with the
U.S. Government over certain export sales between 1992 and 1995. (See Item 3.
"Legal Proceedings")
Net interest expense was $22,765 for the year ended February, 28, 1998, or
$4,402 less than the net interest expense of $27,167 recorded for the prior
year, and is due to the decrease in the Company's long-term debt.
The increase in gross profit offset by somewhat higher operating expenses
and lower interest expenses in the current year resulted in earnings before
income taxes, extraordinary item and cumulative effect of change in accounting
principle of $35,904, an increase of $20,673 over the prior year.
Income taxes for the year ended February 28, 1998 were $5,386 or 15% of
earnings before income taxes as compared to $1,522 or 10% of earnings before
income taxes in the prior year.
Earnings before extraordinary item were $30,518 or $1.30 per share
(diluted), which includes the $4,664 non-recurring charge related to the
settlement of the dispute with the U.S. government, for the year ended February
28, 1998, as compared to $13,709 or $.72 per share (diluted) for the prior year.
The Company incurred an extraordinary charge of $8,956 during fiscal 1998
for unamortized debt issue costs, tender and redemption premiums and fees and
expenses related to the repurchase of its 9 3/4% Senior Notes.
Net earnings were $21,562, or $.96 per share (basic) and $.92 per share
(diluted), for the year ended February 28, 1998 as compared to $13,709, or $.77
per share (basic) and $.72 per share (diluted), for the prior year.
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RESULTS OF OPERATIONS -- YEAR ENDED FEBRUARY 22, 1997 COMPARED TO YEAR ENDED
FEBRUARY 24, 1996
Sales for the year ended February 22, 1997 were $412,379, or 77% higher
than sales of $232,582 for the comparable period in the prior year. The increase
in sales is attributable to substantially higher volume shipments of all the
Company's products and services as a result of improving industry conditions. Of
the $179,797 increase in sales for the year, $103,800 was due to increased
seating and services revenues directly related to the acquisition of Burns.
Excluding the effect of the Burns acquisition, sales increased 33% year over
year.
Gross profit was $141,822, or 34.4% of sales, for the year ended February
22, 1997 and was $69,271 higher than gross profit for the comparable period in
the prior year of $72,551, which represented 31.2% of sales. The increase in
gross profit was primarily the result of the higher sales volumes and the mix of
products and services sold.
Selling, general and administrative expenses were $51,734, or 12.5% of
sales, for the year ended February 22, 1997. This was $9,734 higher than
selling, general and administrative expenses for the prior year of $42,000, or
18.1% of sales, principally due to the substantial increases in revenues and the
acquisition of Burns.
Research, development and engineering expenses were $37,083, or 9.0% of
sales, for the year ended February 22, 1997. For the comparable period in the
prior year, research and development expense was $58,327, or 25.1% of sales. The
decrease in expenses during the current year is the result of a decrease in the
level of activity associated with the MDDS interactive entertainment system,
offset somewhat by an increase in product development activity in the Seating
Products Group.
Amortization expense for the year February 22, 1997 of $10,607 was $1,108
more than the amount recorded in fiscal 1996 as a result of the Burns
acquisition.
Net interest expense was $27,167 for the year ended February 22, 1997, or
$8,531 higher than the net interest expense of $18,636 recorded for the
comparable period in the prior year, and is due to the increase in the Company's
long-term debt outstanding throughout most of fiscal 1997 as a result of the
9 7/8% Senior Subordinated Notes issued at the time of the Burns acquisition.
Earnings before income taxes of $15,231 for the year ended February 22,
1997 were $75,312 more than the loss before income taxes of $60,081 in the prior
year.
Income taxes for the year ended February 22, 1997 were $1,522, or 10% of
earnings before income taxes, as compared to no tax provision in fiscal 1996.
Net earnings were $13,709, or $.77 per share (basic) and $.72 per share
(diluted), for the year ended February 22, 1997 as compared to a net loss of
$(83,413), or $(5.15) per share (basic and diluted) for the comparable period in
the prior year, which included the cumulative effect of an accounting change of
$23,332.
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BOOKINGS AND BACKLOG INFORMATION
On September 15, 1997, British Airways ("BA") notified the Company of its
decision not to conduct a flight trial of B/E's MDDS interactive video system.
BA ultimately selected a competitor's system for their in-flight entertainment
equipment needs.
As a result of BA's decision not to move forward with the interactive program,
as of August 1997, the Company debooked approximately $155,000 of backlog
related to the MDDS program. At February 28, 1998, the Company's backlog, after
debooking the BA backlog, stood at approximately $560,000, which represents a
year-to-year increase of approximately $140,000 or 33% versus the Company's
backlog at the end of fiscal 1997, as similarly adjusted to exclude the amount
then attributable to the BA MDDS backlog.
Although the Company has debooked the BA backlog, the Company is continuing to
complete the initial development and testing of the MDDS product and has
completed line fit certification of its MDDS system on Boeing 747-400 aircraft
and has delivered the first MDDS product to its launch customer, JAL, in April
1998. See "Business -- Products and Services."
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements consist of working capital needs, for
ongoing capital expenditures and scheduled payments of interest on its
indebtedness. B/E's primary requirements for working capital have been directly
related to increased accounts receivable and inventory levels as a result of
revenue growth. B/E's working capital was $262,504 as of February 28,1998
(including approximately $136,000 of cash from the net proceeds from the Senior
Subordinated Notes offering described below), as compared to $122,174 as of
February 22, 1997.
At February 28,1998 the Company's cash and cash equivalents were $164,685, as
compared to $44,149 at February 22, 1997. Cash provided from operating
activities during fiscal 1998 was $9,598 and cash used in operating activities
during fiscal 1997 was $(10,591). The primary source of cash during fiscal 1998
was net earnings of $21,562, the extraordinary item of $8,956, non-cash charges
for depreciation and amortization of $24,160 and increases in accounts payable
of $3,972, offset by a use of cash of $43,262 related to increases in
inventories and receivables and $31,627 related to net increases in other
current and non-current assets and liabilities.
In February 1998, the Company sold $250,000 of 8% Senior Subordinated Notes,
(the "8% Notes"). In conjunction with the sale of the 8% Notes, the Company
initiated a tender offer for the $125,000 of 9 3/4% Senior Notes due 2003 (the
"9 3/4% Notes"). The net proceeds from the offering of approximately $240,419
were used (i) for the tender offer (which expired on February 25, 1998) in which
approximately $101,800 of the 9 3/4% Notes were retired, (ii) to call the
remaining 9 3/4% notes on March 16, 1998, and (iii) together with the proceeds
from the Bank Credit Facility, to fund the acquisitions of AMP and PBASCO. The
Company incurred an extraordinary charge of $8,956 for unamortized debt issue
costs, tender and redemption premiums and fees and expenses related to the
repurchase of the 9 3/4% Notes. Long term debt at February 28, 1998 consists of
the remaining 9 3/4% Notes not retired in the tender offer, the 8% Notes and
9 7/8% Senior Subordinated Notes due 2006.
In April 1998 the Company amended its credit facilities with The Chase
Manhattan Bank by increasing the aggregate principal amount that may be borrowed
thereunder to $200,000 (the "Bank Credit Facility"). The Bank Credit Facility
consists of a $100,000 revolving credit facility and an acquisition facility of
up to $100,000. The acquisition facility is amortizable over five years
beginning in April 1999; the revolving credit facility expires in April 2004.
The Bank Credit Facility is collateralized by the Company's accounts receivable
and inventories and by substantially all of its other personal property. The
Bank Credit Facility contains customary affirmative covenants, negative
covenants and conditions of borrowing. At February 28, 1998, indebtedness under
the then-existing Bank Credit Facility consisted of letters of credit amounting
to approximately $4,500.
The Company's capital expenditures were $28,923 and $14,471 during fiscal 1998
and 1997, respectively. The increase in capital expenditures was primarily
attributable to (i) the development of a new management information system to
replace the Company's existing systems, many of which were inherited in
acquisitions, and (ii) expenditures for plant modernization. The management
information system is expected to be installed over the
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next 18 months and will be year 2000 compliant. The Company anticipates ongoing
annual capital expenditures of approximately $30,000 for the next several years
to be in line with the expanded growth in business and the recent acquisitions.
The Company believes that the cash flow from operations, proceeds from the 8%
Notes and availability under the Bank Credit Facility will provide adequate
funds for its working capital needs, planned capital expenditures and debt
service requirements through the term of the Bank Credit Facility. The Company
believes that it will be able to refinance the Bank Credit Facility prior to its
termination, although there can be no assurance that it will be able to do so.
The Company's ability to fund its operations, make planned capital expenditures,
make scheduled payments and refinance its indebtedness depends on its future
operating performance and cash flow, which, in turn, are subject to prevailing
economic conditions and to financial, business and other factors, some of which
are beyond its control.
YEAR 2000 COSTS
The Company has recognized the need to ensure that its computer systems
will not be adversely affected by the upcoming calendar year 2000. The Company
has assessed how it may be impacted by Year 2000 and has formulated and
commenced implementation of a comprehensive plan to address known issues as they
relate to its information systems. The plan, as it relates to information
systems, involves a combination of software modification, upgrades and
replacement. The Company estimates that the cost of Year 2000 compliance for its
information systems will not have a material adverse effect on the future
consolidated results of operations of the Company. However, the Company cannot
measure the impact that the Year 2000 issue will have on its vendors, suppliers,
customers and other parties with which it conducts its business.
INDUSTRY CONDITIONS
The Company's principal customers are the world's commercial airlines. As a
result, the Company's business is directly dependent upon the conditions in the
commercial airline industry. In the late 1980s and early 1990s the world airline
industry suffered a severe downturn which resulted in record losses and several
air carriers seeking protection under bankruptcy laws. As a consequence, during
such period, airlines sought to conserve cash by reducing or deferring scheduled
cabin interior refurbishment and upgrade programs and delaying purchases of new
aircraft. This led to a significant contraction in the commercial aircraft cabin
interior products industry, and a decline in the Company's business and
profitability. The airline industry has now experienced five consecutive years
of profitability including record profitability in each of the last three
calendar years. This financial turnaround has, in part, been driven by record
load factors, rising fare prices and declining fuel costs. The airlines have
substantially restored their balance sheets through cash generated from
operations and debt and equity placements. As a result, the levels of airline
spending on refurbishment and new aircraft purchases have expanded. However, due
to the volatility of the airline industry there can be no assurance that the
current profitability of the airline industry will continue or that the airlines
will maintain or increase expenditures on cabin interior products for
refurbishments or new aircraft.
In addition, the airline industry is undergoing a process of consolidation and
significantly increased competition. Such consolidation could result in a
reduction in future aircraft orders as overlapping routes are eliminated and
airlines seek greater economics through higher aircraft utilization. Increased
airline competition may also result in airlines seeking to reduce costs by
producing greater price competition from airline cabin interior products
manufacturers, thereby adversely affecting the Company's margins.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This information required by this section is set forth on pages F-1 through F-20
of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
29
30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information set forth under the caption "Election of Directors" in the
Proxy Statement to be filed with the Commission in connection with Company's
1998 Annual Meeting of Stockholders (the "Proxy Statement") is incorporated by
reference herein.
Information relating to the executive officers of the Company is set forth
in Part I of this report under the caption "Executive Officers of the
Registrant."
ITEM 11. EXECUTIVE COMPENSATION
Information set forth under the caption "Executive Compensation" in the
Proxy Statement is incorporated by reference herein. The Compensation Committee
Report and the Performance Graph included in the Proxy Statement are not
incorporated herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information set forth under the caption "Beneficial Ownership of Shares"
in the Proxy Statement is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information set forth under the caption "Certain Transactions" in the
Proxy Statement is incorporated by reference herein.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements (See page F-1).
Consolidated Balance Sheets, February 28, 1998 and February 22, 1997.
Consolidated Statements of Operations for the Years Ended February 28,
1998, February 22, 1997 and February 24, 1996.
Consolidated Statements of Stockholders' Equity for the Years Ended
February 28, 1998, February 22, 1997 and February 24, 1996.
Consolidated Statements of Cash Flows for the Years Ended February 28,
1998, February 22, 1997 and February 24, 1996.
Notes to Consolidated Financial Statements for the Years Ended February
28, 1998, February 22, 1997 and February 24, 1996.
2. Financial Statement Schedules (See page F-20).
Schedule II - Valuation and Qualifying Accounts for the Years Ended
February 28, 1998, February 22, 1997 and February 24, 1996.
30
31
Exhibits - The following is a list of exhibits.
Exhibit Number Description
Exhibit 3 Articles of Incorporation and By-Laws
3.1 Amended and Restated Certificate of Incorporation (1)
3.2 Certificate of Amendment of the Restated Certificate of
Incorporation (2)
3.3 Amended and Restated By-Laws
Exhibit 4 Instruments defining the rights of security holders,
including debentures
4.1 Specimen Common Stock Certificate (1)
4.2 Form of Note for the Registrant's Series B 9-7/8% Senior
Subordinated Notes (3)
4.3 Indenture dated January 24, 1996 between Fleet National
Bank, as trustee, and the Registrant relating to the
Registrant's 9-7/8% Senior Subordinated Notes and Series B
9-7/8% Senior Subordinated Notes (3)
4.4 Indenture dated February 13, 1998 for the Registrant's issue
of 8% Senior Subordinated Notes (4)
4.5 Form of Note for the Registrant's 8% Senior Subordinated
Notes (4)
4.6 Form of Stockholders' Agreement by and among the Registrant,
Summit Ventures II, L.P., Summit Investors II, L.P. and
Wedbush Capital Partners (5)
Exhibit 10(i) Material Contracts
10.1 Supply Agreement dated as of April 17, 1990 between the
Registrant and Applied Extrusion Technologies, Inc. (1)
10.2 Amended and Restated Credit Agreement (the "Chase Credit
Agreement"), dated as of May 18, 1994 among the Registrant,
the banks named therein and The Chase Manhattan Bank, N.A.
as Agent (6)10.3
10.3 Amendment No. 1 dated May 18, 1994 to the Chase Credit
Agreement (7)
10.4 Second Amended and Restated Chase Credit Agreement dated
January 19, 1996 (3)
10.5 Third Amended and Restated Chase Credit Agreement dated May
29, 1997 (4)
10.6 Fourth Amended and Restated Chase Credit Agreement dated
April 3, 1998
31
32
10.7 Receivables Sales Agreement dated January 24, 1996 among the
Registrant, First Trust of Illinois, N.A. and Centrally Held
Eagle Receivables Program, Inc. (3)
10.8 Escrow Agreement dated January 24, 1996 among the
Registrant, Eagle Industrial Product Corporation and First
Trust of Illinois, N.A. as Escrow Agent (3)
10.9 Acquisition Agreement dated as of December 14, 1995 by and
among the Registrant, Eagle Industrial Products Corporation,
Eagle Industries, Inc. and Great American Management and
Investment, Inc. (8)
10.10 Asset Purchase Agreement dated as of April 16, 1998 by and
between Stanford Aerospace Group, Inc. and the Registrant
(9)
10.11 Stock Purchase Agreement dated as March 31, 1998 by and
between the Registrant and Puritan-Bennet Corporation (10)
Exhibit 10(ii) Leases
10.12 Lease dated May 15, 1992 between McDonnell Douglas Company,
as lessor, and the Registrant, as lessee, relating to the
Irvine, California property (2)
10.13 Lease dated September 1, 1992 relating to the Wellington,
Florida property (2)
10.14 Chesham, England Lease dated October 1, 1973 between
Drawheath Limited and The Peninsular and Oriental Steam
Navigation Company (assigned in February 1985)
10.15 Utrecht, The Netherlands Lease dated December 15, 1988
between the Pension Fund Foundation for Food Supply
Commodity Boards and Inventum
10.16 Utrecht, The Netherlands Lease dated January 31, 1992
between G.W. van de Grift Onroerend Goed B.V. and Inventum
10.17 Lease dated October 25, 1993 relating to the property in
Longwood, Florida (6)
Exhibit 10(iii) Executive Compensation Plans and Arrangements
10.18 Amended and Restated 1989 Stock Option Plan (11)
10.19 Directors' 1991 Stock Option Plan (11)
10.20 1990 Stock Option Agreement with Richard G. Hamermesh (11)
32
33
10.21 1990 Stock Option Agreement with B. Martha Cassidy (11)
10.22 1990 Stock Option Agreement with Jim C. Cowart (11)
10.23 1990 Stock Option Agreement with Petros A. Palandjian (11)
10.24 1990 Stock Option Agreement with Hansjorg Wyss (11)
10.25 1991 Stock Option Agreement with Amin J. Khoury (11)
10.26 1991 Stock Option Agreement with Jim C. Cowart (11)
10.27 1992 Stock Option Agreement with Amin J. Khoury (11)
10.28 1992 Stock Option Agreement with Jim C. Cowart (11)
10.29 1992 Stock Option Agreement with Paul W. Marshall (11)
10.30 1992 Stock Option Agreement with David Lahar (11)
10.31 United Kingdom 1992 Employee Share Option Scheme (2)
10.32 1994 Employee Stock Purchase Plan (12)
10.33 Employment Agreement dated as of January 1, 1992 between the
Registrant and Amin J. Khoury (the "A. Khoury Agreement")
10.34 Amendment No. 2 dated as of April 1, 1996 to the A. Khoury
Agreement (13)
10.35 Employment Agreement dated as of March 1, 1992 between the
Registrant and Robert J. Khoury (the "R. Khoury Agreement")
10.36 Amendment No. 2 dated as of January 1, 1996 to the R. Khoury
Agreement (13)
10.37 Employment Agreement dated as of March 1, 1992 between the
Registrant and Marco Lanza (the "Lanza Agreement")
10.38 Amendment No. 1 dated as of January 1, 1996 to the Lanza
Agreement (13)
10.39 Employment Agreement dated as of April 1, 1992 between the
Registrant and G. Bernard Jewell
10.40 Employment Agreement dated as of May 1, 1994 between the
Registrant and Thomas P. McCaffrey (the "McCaffrey
Agreement") (6)
10.41 Amendment No. 1 dated as of January 1, 1996 to the McCaffrey
Agreement (13)
10.42 Employment Agreement dated as of May 1, 1994 between the
Registrant and Paul E. Fulchino (13)
33
34
10.43 BE Aerospace, Inc. Savings and Profit Sharing Plan and Trust
- - Financial Statements for the Ten Months Ended December
31, 1995 and the Year Ended February 28, 1995, Supplemental
Schedules and Independent Auditors' Report
10.44 BE Aerospace, Inc. 1994 Employee Stock Purchase Plan --
Financial Statements as of February 29, 1996 and February
26, 1995; and for the Year Ended February 29, 1996 and the
period from May 15, 1994 (inception) to February 28, 1995
and Independent Auditors' Report
Exhibit 21 Subsidiaries of the Registrant
Exhibit 23 Consent of Deloitte & Touche LLP
Exhibit 27 Financial Data Schedule for the Fiscal Year Ended
February 28, 1998
Exhibit 99.1 Risk Factors
(b) Reports on
Form 8-K None
- ------------------------------
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1, as amended (No. 33-33689), filed with the Commission on March
7, 1990.
(2) Incorporated by reference to the Company's Registrant's Registration
Statement on Form S-1, as amended (No. 33-54146), filed with the
Commission on November 3, 1992.
(3) Incorporated by reference to the Company's Registration Statement on
Form S-4 (No. 333-00433), filed with the Commission on January 26,
1996.
(4) Incorporated by reference to the Company's Registration Statement on
Form S-4 (No. 333-47649) filed with the Commission on March 10, 1998.
(5) Incorporated by reference to the Company's Registration Statement on
Form S-2 (No. 33-66490) filed with the Commission on July 23, 1993.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K
as amended for the Fiscal year ended February 26, 1994, filed with
Commission on May 25, 1994.
(7) Incorporated by reference to the Company's Annual Report on Form 10-K,
for the Fiscal year ended February 25, 1995, filed with the Commission
on May 26, 1995.
(8) Incorporated by reference to the Company's Current Report on Form 8-K
dated December 14, 1995 filed with the Commission on December 28, 1995.
(9) Incorporated by reference to the Company's Current Report on Form 8-K
dated May 8, 1998, filed with the Commission on May 8, 1998.
(10) Incorporated by reference to the Company's Current Report on Form 8-K
dated March 31, 1998, filed with the Commission on April 27, 1998.
(11) Incorporated by reference to the Company's Registration Statement on
Form S-8 (No. 33-48119), filed with the Commission on May 26, 1992.
(12) Incorporated by reference to the Company's Registration Statement on
Form S-8 (No. 33-82894), filed with the Commission on August 16, 1994.
(13) Incorporated by reference to the Company's Current Report on Form 8-K
dated March 26, 1996, filed with the Commission on April 5, 1996.
34
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
B/E AEROSPACE, INC.
By /s/ Robert J. Khoury
-----------------------------------------
Robert J. Khoury
Vice Chairman and Chief Executive Officer
Dated: May 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed on May 27, 1998 by the following persons on behalf of the
registrant in the capacities indicated.
Signature Title
/s/ Amin J. Khoury Chairman
----------------------
Amin J. Khoury
/s/ Robert J. Khoury Vice Chairman and Chief Executive Officer
---------------------- and Director
Robert J. Khoury
/s/ Paul E. Fulchino President and Chief Operating Officer
---------------------- and Director
Paul E. Fulchino
/s/ Thomas P. McCaffrey Corporate Senior Vice President of
---------------------- Administration, Chief Financial Officer and
Thomas P. McCaffrey Assistant Secretary (principal financial and
accounting officer)
/s/ Jim C. Cowart Director
----------------------
Jim C. Cowart
/s/ Richard G. Hamermesh Director
----------------------
Richard G. Hamermesh
/s/ Brian H. Rowe Director
----------------------
Brian H. Rowe
/s/ Hansjorg Wyss Director
----------------------
Hansjorg Wyss
35
36
EXHIBIT INDEX
Exhibit No. Description Page
3.3 Amended and Restated By-Laws
10.6 Fourth Amended and Restated Chase Credit Agreement dated
April 3, 1998
10.14 Chesham, England Lease dated October 1, 1973 between
Drawheath Limited and The Peninsular and Oriental Steam
Navigation Company (assigned in February 1985)
10.15 Utrecht, The Netherlands Lease dated December 15, 1988
between the Pension Fund Foundation for Food Supply
Commodity Boards and Inventum
10.16 Utrecht, The Netherlands Lease dated January 31, 1992
between G.W. van de Grift Onroerend Goed B.V. and Inventum
10.33 Employment Agreement dated as of January 1, 1992 between the
Registrant and Amin J. Khoury (the "A. Khoury Agreement")
10.35 Employment Agreement dated as of March 1, 1992 between the
Registrant and Robert J. Khoury (the "R. Khoury Agreement")
10.37 Employment Agreement dated as of March 1, 1992 between the
Registrant and Marco Lanza (the "Lanza Agreement")
10.39 Employment Agreement dated as of April 1, 1992 between the
Registrant and G. Bernard Jewell
10.43 BE Aerospace, Inc. Savings and Profit Sharing Plan and Trust
-- Financial Statements for the Ten Months Ended December
31, 1995 and the Year Ended February 28, 1995, Supplemental
Schedules and Independent Auditors' Report
10.44 BE Aerospace, Inc. 1994 Employee Stock Purchase Plan --
Financial Statements as of February 29, 1996 and February
26, 1995; and for the Year Ended February 29, 1996 and the
period from May 15, 1994 (inception) to February 28, 1995
and Independent Auditors' Report
Exhibit 21 Subsidiaries of the Registrant
Exhibit 23 Consent of Deloitte & Touche LLP
Exhibit 27 Financial Data Schedule for the Fiscal Year Ended
February 28, 1998
Exhibit 99.1 Risk Factors
37
ITEM 8. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE.
Page
Independent Auditors' Report F-2
Financial Statements:
Consolidated Balance Sheets, February 28, 1998 and
February 22, 1997. F-3
Consolidated Statements of Operations for the
Years Ended February 28, 1998, February 22,
1997 and February 24, 1996. F-4
Consolidated Statements of Stockholders' Equity
for the Years Ended February 28, 1998,
February 22, 1997 and February 24, 1996. F-5
Consolidated Statements of Cash Flows for the
Years Ended February 28, 1998, February 22,
1997 and February 24, 1996. F-6
Notes to Consolidated Financial Statements for the
Years Ended February 28, 1998, February 22,
1997 and February 24, 1996. F-7
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts
for the Years Ended February 28, 1998,
February 22, 1997 and February 24, 1996. F-20
[Remainder of page intentionally left blank]
F-1
38
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
B/E Aerospace, Inc.
Wellington, Florida
We have audited the accompanying consolidated balance sheets of B/E
Aerospace, Inc. and subsidiaries as of February 28, 1998 and February 22, 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended February 28, 1998.
Our audits also included the financial statement schedule on page F-21. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of B/E Aerospace, Inc. and
subsidiaries as of February 28, 1998 and February 22, 1997 and the results of
their operations and their cash flows for each of the three years in the period
ended February 28, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
DELOITTE & TOUCHE LLP
Costa Mesa, California
April 15, 1998
F-2
39
CONSOLIDATED BALANCE SHEETS, FEBRUARY 28, 1998 AND FEBRUARY 22, 1997
(Dollars in thousands, except share data)
ASSETS 1998 1997
- ------ ---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 164,685 $ 44,149
Accounts receivable - trade, less allowance for doubtful
accounts of $2,190 (1998) and $4,864 (1997) 87,931 73,489
Inventories, net 121,728 92,900
Other current assets 7,869 2,781
--------- --------
Total current assets 382,213 213,319
--------- --------
PROPERTY AND EQUIPMENT, net 103,821 87,888
INTANGIBLES AND OTHER ASSETS, net 195,723 189,882
--------- ---------
$ 681,757 $ 491,089
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 47,858 $ 42,889
Accrued liabilities 38,566 43,837
Current portion of long-term debt 33,285 4,419
---------- ---------
Total current liabilities 119,709 91,145
---------- ---------
LONG-TERM DEBT 349,557 225,402
DEFERRED INCOME TAXES 1,207 1,667
OTHER LIABILITIES 14,509 7,114
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; no shares outstanding - -
Common stock, $.01 par value; 50,000,000 shares
authorized; 22,891,918 (1998) and 21,893,392 (1997)
shares issued and outstanding 229 219
Additional paid-in capital 240,289 228,710
Accumulated deficit (40,724) (62,286)
Cumulative foreign exchange translation adjustment (3,019) (882)
----------- ------------
Total stockholders' equity 196,775 165,761
---------- -----------
$ 681,757 $ 491,089
========== ===========
See notes to consolidated financial statements.
F-3
40
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED FEBRUARY 28, 1998, FEBRUARY 22, 1997 AND FEBRUARY 24, 1996
(Dollars in thousands, except per share data)
Year ended
---------------------------------------------
February 28, February 22, February 24,
1998 1997 1996
---- ---- ----
NET SALES $ 487,999 $ 412,379 $ 232,582
COST OF SALES 309,094 270,557 160,031
--------- --------- ---------
GROSS PROFIT 178,905 141,822 72,551
OPERATING EXPENSES:
Selling, general and administrative 58,622 51,734 42,000
Research, development and engineering 45,685 37,083 58,327
Amortization of intangible assets 11,265 10,607 9,499
Other expenses 4,664 -- 4,170
--------- --------- ---------
Total operating expenses 120,236 99,424 113,996
--------- --------- ---------
OPERATING EARNINGS (LOSS) 58,669 42,398 (41,445)
INTEREST EXPENSE, net 22,765 27,167 18,636
--------- --------- ---------
EARNINGS (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY
ITEM AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 35,904 15,231 (60,081)
INCOME TAXES 5,386 1,522 --
--------- --------- ---------
EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE 30,518 13,709 (60,081)
EXTRAORDINARY ITEM 8,956 -- --
--------- --------- ---------
EARNINGS (LOSS) BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 21,562 13,709 (60,081)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE -- -- (23,332)
--------- --------- ---------
NET EARNINGS (LOSS) $ 21,562 $ 13,709 $ (83,413)
========= ========= =========
BASIC EARNINGS (LOSS) PER SHARE:
Earnings (loss) before extraordinary item and
cumulative effect of change in accounting principle $ 1.36 $ .77 $ (3.71)
Extraordinary item (.40) -- --
Cumulative effect of change in accounting principle -- -- (1.44)
--------- --------- ---------
Net earnings (loss) $ .96 $ .77 $ (5.15)
========= ========= =========
Weighted average common shares 22,442 17,692 16,185
========= ========= =========
DILUTED EARNINGS (LOSS) PER SHARE:
Earnings (loss) before extraordinary item and
cumulative effect of change in accounting principle $ 1.30 $ .72 $ (3.71)
Extraordinary item (.38) -- --
Cumulative effect of change in accounting principle -- -- (1.44)
--------- --------- ---------
Net earnings (loss) $ .92 $ .72 $ 5.15)
========= ========= =========
Weighted average common shares 23,430 19,097 16,185
========= ========= =========
See notes to consolidated financial statements.
F-4
41
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED FEBRUARY 28, 1998, FEBRUARY 22, 1997 AND FEBRUARY 24, 1996
(in thousands)
Common Stock Additional Retained Currency Total
------------ Paid-in Earnings Translation Stockholders'
Shares Amount Capital (Deficit) Adjustment Equity
------ ------ ---------- --------- ----------- -------------
Balance, February 25, 1995 16,096 $ 160 $ 119,209 $ 7,418 $ (1,456) $ 125,331
Sale of stock under
employee stock purchase plan 74 1 403 -- -- 404
Exercise of stock options 121 2 896 -- -- 898
Employee benefit plan
matching contribution 102 1 858 -- -- 859
Net loss -- -- -- (83,413) -- (83,413)
Foreign currency translation
adjustment -- -- -- -- 78 78
--------- --------- --------- --------- --------- ---------
Balance, February 24, 1996 16,393 164 121,366 (75,995) (1,378) 44,157
Sale of stock under
employee stock purchase plan 58 -- 482 -- -- 482
Exercise of stock options 1,362 14 11,650 -- -- 11,664
Employee benefit plan
matching contribution 75 1 1,316 -- -- 1,317
Sale of common stock
under public offering 4,005 40 93,896 -- -- 93,936
Net earnings -- -- -- 13,709 -- 13,709
Foreign currency translation
adjustment -- -- -- -- 496 496
--------- --------- --------- --------- --------- ---------
Balance, February 22, 1997 21,893 219 228,710 (62,286) (882) 165,761
Sale of stock under
employee stock purchase plan 88 1 1,796 -- -- 1,797
Exercise of stock options 852 9 8,106 -- -- 8,115
Employee benefit plan
matching contribution 59 -- 1,677 -- -- 1,677
Net earnings -- -- -- 21,562 -- 21,562
Foreign currency translation
adjustment -- -- -- -- (2,137) (2,137)
--------- --------- --------- --------- --------- ---------
Balance, February 28, 1998 22,892 $ 229 $ 240,289 $ (40,724) $ (3,019) $ 196,775
========= ========= ========= ========= ========= =========
See notes to consolidated financial statements.
F-5
42
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 28, 1998, FEBRUARY 22, 1997 AND FEBRUARY 24, 1996
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997 1996
---- ---- ----
Net earnings (loss) $ 21,562 $ 13,709 $ (83,413)
Adjustments to reconcile net earnings (loss) to
net cash flows provided by (used in) operating activities:
Extraordinary item 8,956 -- --
Cumulative effect of accounting change -- -- 23,332
Depreciation and amortization 24,160 24,147 18,435
Deferred income taxes (460) 410 (3,453)
Non cash employee benefit plan contributions 1,677 1,317 859
Changes in operating assets and liabilities, net of effects from
acquisitions:
Accounts receivable (14,665) (19,366) 6,068
Inventories (28,597) (19,536) (11,929)
Other current assets (5,141) 5,059 (638)
Accounts payable 3,972 (4,767) 3,008
Accrued and other liabilities (1,866) (11,564) 13,169
--------- --------- ---------
Net cash flows provided by (used in) operating activities 9,598 (10,591) (34,562)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of property and equipment (28,923) (14,471) (13,656)
Change in intangible and other assets (15,686) (1,331) (5,914)
Acquisitions -- -- (42,500)
--------- --------- ---------
Net cash flows used in investing activities (44,609) (15,802) (62,070)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving lines of credit 5,450 (38,882) 2,000
Proceeds from issuance of stock, net of expenses 11,611 106,082 1,302
Principal payments on long-term debt (101,808) (11,968) (942)
Proceeds from long-term debt 240,419 -- 101,252
--------- --------- ---------
Net cash flows provided by financing activities 155,672 55,232 103,612
--------- --------- ---------
Effect of exchange rate changes on cash flows (125) (66) 77
--------- --------- ---------
Net increase in cash and cash equivalents 120,536 28,773 7,057
Cash and cash equivalents, beginning of year 44,149 15,376 8,319
--------- --------- ---------
Cash and cash equivalents, end of year $ 164,685 $ 44,149 $ 15,376
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid (received) during year for:
Interest, net $ 25,065 $ 26,097 $ 16,967
Income taxes 5,012 1,209 (3,292)
SCHEDULE OF NON-CASH TRANSACTIONS:
Liabilities assumed and accrued acquisition
costs incurred in connection with the
acquisitions -- -- 27,532
See notes to consolidated financial statements.
F-6
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 28, 1998, FEBRUARY 22, 1997 AND FEBRUARY 24, 1996
(Dollars in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation -- B/E Aerospace, Inc. ("B/E" or the
"Company") operates in a single business segment and designs, manufactures,
sells and services a broad line of commercial aircraft cabin interior products
consisting of a broad range of aircraft seating products, passenger
entertainment and service systems, and interior systems products, including
structures as well as all food and beverage storage and preparation equipment.
The Company's customers are the world's commercial airlines. As a result, the
Company's business is directly dependent upon the conditions in the commercial
airline industry.
Consolidation -- The accompany consolidated financial statements include the
accounts of B/E Aerospace, Inc., its wholly owned and majority owned
subsidiaries. All intercompany transactions and balances have been eliminated in
consolidation.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Income Taxes -- In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 109, the Company provides deferred income taxes for
temporary differences between amounts of assets and liabilities recognized for
financial reporting purposes and such amounts recognized for income tax
purposes.
Warranty Costs -- Estimated costs related to product warranties are accrued
at the time products are sold.
Revenue Recognition -- Sales of assembled products, equipment or services are
recorded on the date of shipment or, if required, upon acceptance by the
customer. Revenues and costs under certain long-term contracts are recognized
using contract accounting. The Company sells its products primarily to airlines
worldwide, including occasional sales collateralized by letters of credit. The
Company performs ongoing credit evaluations of its customers and maintains
reserves for potential credit losses. Actual losses have been within
management's expectations.
Cash Equivalents -- The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.
Intangible Assets -- The Company accounts for the impairment and disposition
of long-lived assets in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". In
accordance with SFAS No. 121, long-lived assets to be held are reviewed for
events or changes in circumstances which indicate that their carrying value may
not be recoverable. The Company periodically evaluates the carrying value of the
intangible assets versus the cash benefit expected to be realized and adjusts
for any impairment of value.
Research and Development -- Research and development expenditures are
expensed as incurred.
Stock-Based Compensation -- In October 1995, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 123, "Accounting for Stock-Based
Compensation", which became effective for the Company beginning during fiscal
1997. SFAS No. 123 requires extended disclosures of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
cost to be measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply Accounting Principles
Board ("APB") Opinion No. 25, which recognizes compensation cost based on the
intrinsic value of the equity instrument awarded. The Company continues to apply
APB Opinion No. 25 to its stock-based compensation awards to employees and
discloses the required pro forma effect on net income and earnings per share.
See Note 12.
F-7
44
Earnings (Loss) Per Share -- In fiscal 1998, the Company adopted SFAS No.
128, "Earnings Per Share". Basic earnings per common share calculations are
determined by dividing earnings available to common shareholders by the weighted
average number of shares of common stock. Diluted earnings per share are
determined by dividing earnings available to common shareholders by the weighted
average number of shares of common stock and dilutive common stock equivalents
outstanding (all related to outstanding stock options discussed in Note 12). The
Company's reported primary earnings per share for fiscal 1997 have been restated
to comply with the requirements of SFAS No. 128. The effect on previously
reported earnings per share for fiscal 1997 was as follows:
Primary earnings per share as reported $ .72
Effect of SFAS No. 128 .05
-------
Basic EPS as restated $ .77
======
SFAS No. 128 had no impact on the Company's reported loss per share for fiscal
1996.
Comprehensive Income - During 1997 the FASB issued SFAS No. 130, "Reporting
Comprehensive Income", which established standards for the reporting and
displaying of comprehensive income. Comprehensive income is defined as all
changes in a Company's net assets except changes resulting from transactions
with shareholders. It differs from net income in that certain items currently
recorded to equity would be a part of comprehensive income. Comprehensive income
must be reported in a financial statement with the cumulative total presented as
a component of equity. This statement will be adopted by the Company in its
fiscal 1999 quarterly financial statements.
Segment Information - In June 1997, the FASB issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", which
will be effective for the Company beginning March 1, 1998. SFAS No. 131
redefines how operating segments are determined and requires disclosure of
certain financial and descriptive information about a company's operating
segments. The Company believes the segment information required to be disclosed
under SFAS No. 131 will be more comprehensive than previously provided,
including expanded disclosure of income statement and balance sheet items. The
Company has not yet completed its analysis of which operating segments it will
report on.
Pensions and Other Postretirement Benefits -- In February 1998, FASB issued
SFAS No. 132, "Employers' Disclosure about Pensions and Other Postretirement
Benefits", which is effective for annual and interim periods beginning after
December 15, 1997. This statement standardizes the disclosure requirements for
pensions and other postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis and eliminates certain
disclosures that are no longer as useful as they were under previous statements.
Foreign Currency Translation -- In accordance with the provisions of SFAS No.
52, "Foreign Currency Translation", the assets and liabilities located outside
the United States are translated into U.S. dollars at the rates of exchange in
effect at the balance sheet dates. Income and expense items are translated at
the average exchange rates prevailing during the period. Gains and losses
resulting from foreign currency transactions are recognized currently in income,
and those resulting from translation of financial statements are accumulated as
a separate component of stockholders' equity.
2. ACCOUNTING CHANGE
In fiscal 1996, the Company undertook a comprehensive review of the
engineering capitalization policies followed by its competitors and others in
its industry peer group. The results of this study and an evaluation of the
Company's policy led the Company to conclude that it should adopt the accounting
method that it believes is followed by most of its competitors and certain
members of its industry peer group. Previously, the Company had capitalized
precontract engineering costs as a component of inventories, which were then
amortized to earnings as the product was shipped. The Company now expenses such
costs as they are incurred. While the accounting policy for precontract
engineering expenditures previously followed by the Company was in accordance
with generally accepted accounting principles, the changed policy is preferable.
F-8
45
3. ACQUISITIONS
On January 24, 1996, the Company acquired all of the outstanding capital
stock of Burns Aerospace Corporation, which designs, manufactures, sells and
services aircraft seating products to commercial airlines worldwide. The
aggregate acquisition cost of $70,032 includes the payment of $42,500 to the
seller and the assumption of approximately $27,532 of liabilities, including
related acquisition costs and certain liabilities arising from the acquisition.
Funds for the acquisition were obtained from proceeds of the long-term debt
issuance described in Note 8.
The aggregate purchase price for the Burns acquisition has been allocated to
the net assets acquired based on appraisals and management's estimates as
follows:
Receivables $ 11,396
Inventories 12,624
Other current assets 806
Property and equipment 21,695
Intangible and other assets 23,511
---------
$ 70,032
=========
4. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the weighted average cost method. Finished goods and work in process
inventories include material, labor and manufacturing overhead costs.
Inventories consist of the following:
1998 1997
---- ----
Raw materials $ 56,100 $ 45,947
Work-in-process 59,036 39,024
Finished goods 6,592 7,929
--------- -------
$ 121,728 $ 92,900
========= ========
[Remainder of page intentionally left blank]
F-9
46
5. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated and amortized
generally on the straight-line method over their estimated useful lives of two
to thirty years (term of lease as to leasehold improvements). Property and
equipment consist of the following:
Years 1998 1997
----- ---- ----
Land, buildings and improvements 10-30 $ 45,951 $ 42,966
Machinery 3-13 54,178 45,444
Tooling 3-10 24,771 17,179
Furniture and equipment 2-10 26,815 18,327
---------- ---------
151,715 123,916
Less accumulated depreciation and amortization (47,894) (36,028)
---------- ---------
$ 103,821 $ 87,888
========= =========
6. INTANGIBLES AND OTHER ASSETS
Intangibles and other assets consist of the following:
Straight-line
Amortization
Period (Years) 1998 1997
-------------- ---- ----
Covenants not-to-compete 14 $ 10,195 $ 10,198
Product technology, production plans and drawings 7-20 60,577 59,484
Replacement parts annuity 20 29,652 29,778
Product approvals and technical manuals 20 22,942 18,331
Goodwill 30 77,452 78,913
Debt issue costs 10 16,789 13,431
Trademarks and patents 20 10,491 10,820
Other intangible assets 5-20 16,540 7,527
Other assets 4,277 6,744
------- ---------
248,915 235,226
Less accumulated amortization (53,192) (45,344)
---------- ----------
$ 195,723 $ 189,882
========= =========
7. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
1998 1997
---- ----
Accrued product warranties $ 4,353 $ 5,231
Accrued salaries, vacation and related benefits 17,022 12,868
Accrued acquisition expenses 1,190 5,488
Accrued interest 2,995 6,585
Accrued income taxes 5,373 6,563
Other accrued liabilities 7,633 7,102
----------- ----------
$ 38,566 $ 43,837
========== =========
F-10
47
8. LONG-TERM DEBT
Long-term debt consists of the following:
1998 1997
---- ----
8% Senior Subordinated Notes $ 249,375 $ --
9 7/8% Senior Subordinated Notes 100,000 100,000
9 3/4% Senior Notes 23,192 124,411
Revolving lines of credit 10,093 4,419
Other long-term debt 182 991
---------
382,842 229,821
Less current portion of long-term debt (33,285) (4,419)
--------- ---------
$ 349,557 $ 225,402
========= =========
8% SENIOR SUBORDINATED NOTES
In February 1998, the Company sold $250,000 of 8% Senior Subordinated Notes,
priced to yield 8.02% (the "8% Notes"). In conjunction with the sale of the 8%
Notes, the Company initiated a tender offer for its 9 3/4% Notes. The net
proceeds from the offering of approximately $240,419 were used for the tender
offer (which expired on February 25, 1998) in which approximately $101,808 of
the 9 3/4% Notes were retired; the remaining $23,192 of the 9 3/4% Notes were
called on March 16, 1998. The Company incurred an extraordinary charge of $8,956
for unamortized debt issue costs, tender and redemption premiums and fees and
expenses related to the repurchase of the 9 3/4% Notes.
The 8% Senior Notes are unsecured senior subordinated obligations of the
Company, are subordinated to all senior indebtedness of the Company and mature
on March 1, 2008. Interest on the 8% Notes is payable semi-annually in arrears
on March 1 and September 1 of each year. The 8% Notes are redeemable at the
option of the Company, in whole or in part, on or after March 1, 2003 at
predetermined redemption prices together with accrued and unpaid interest
through the date of redemption. In addition, at any time prior to March 1, 2001,
the Company may, at predetermined prices together with accrued and unpaid
interest through the date of redemption, redeem up to 35% of the aggregate
principal amount of the Notes originally issued with the net proceeds of one or
more equity offerings, provided that at least 65% of the aggregate principal
amount of the 8% Notes originally issued remains outstanding after the
redemption. Upon a change of control (as defined), each holder of the 8% Notes
may require the Company to repurchase such holder's 8% Notes at 101% of the
principal amount thereof, plus accrued interest to the date of such purchase.
The 8% Notes contain certain covenants, all of which were met by the Company as
of February 28, 1998, including limitations on future indebtedness, restricted
payments, transactions with affiliates, liens, dividends, mergers and transfers
of assets.
9 7/8% SENIOR SUBORDINATED NOTES
The 9 7/8% Senior Subordinated Notes (the "9 7/8% Notes") are unsecured
senior subordinated obligations of the Company and are subordinated to all
senior indebtedness of the Company and mature on February 1, 2006. Interest on
the 9 7/8% Notes is payable semi-annually in arrears on February 1 and August 1
of each year. The 9 7/8% Notes are redeemable at the option of the Company, in
whole or in part, at any time after February 1, 2001 at predetermined redemption
prices together with accrued and unpaid interest through the date of redemption.
Upon a change of control (as defined), each holder of the 9 7/8% Notes may
require the Company to repurchase such holder's 9 7/8% Notes at 101% of the
principal amount thereof, plus accrued and unpaid interest to the date of such
purchase. The 9 7/8% Notes contain certain restrictive covenants, all of which
were met by the Company as of February 28, 1998, including limitations on future
indebtedness, restricted payments, transactions with affiliates, liens,
dividends, mergers and transfers of assets.
9 3/4% SENIOR NOTES
The 9 3/4% Senior Notes (the "9 3/4% Notes") are senior unsecured obligations
of the Company, ranking equally with any future senior obligations of the
Company. As described above, at February 28, 1998, $101,808 of the 9 3/4% Notes
had been repurchased; the balance of the 9 3/4% Notes were redeemed in March
1998.
F-11
48
CREDIT FACILITIES
In April 1998, the Company amended its credit facilities with the Chase
Manhattan Bank by increasing the aggregate principal amount that may be borrowed
thereunder to $200,000 (the "Bank Credit Facility"). The Bank Credit Facility
consists of a $100,000 revolving credit facility and an acquisition facility of
up to $100,000. The acquisition facility is amortizable over five years
beginning April 1999; the revolving facility expires in April 2004. The Bank
Credit Facility is collateralized by the Company's accounts receivable and
inventories and by substantially all of its other personal property. The Bank
Credit Facility contains customary affirmative covenants, negative covenants and
conditions of borrowing, all of which were met by the Company as of February 28,
1998. At February 28, 1998, indebtedness under the then-existing Bank Credit
Facility consisted of letters of credit amounting to approximately $4,500.
Borrowings under the Bank Credit Facility currently bear interest at LIBOR
plus 1.25% or prime (as defined). The interest to be charged on the Bank Credit
Facility can increase or decrease based upon specified operating performance
criteria set forth in the Bank Credit Facility Agreement. Amounts may be
borrowed or repaid in $1,000 increments.
FEEL, a subsidiary of the Company, has a short-term revolving line of credit
agreement (the "FEEL Credit Agreement") which is collateralized by substantially
all of the assets of FEEL. Aggregate borrowings outstanding under the FEEL
Credit Agreement were approximately $10,093 as of February 28, 1998. The Company
has guaranteed a portion of the indebtedness outstanding under the FEEL Credit
Agreement.
Inventum, another subsidiary of the Company, has a revolving line of credit
agreement for approximately $1 million (the "Inventum credit agreement"). The
Inventum Credit Agreement is collateralized by substantially all of the assets
of Inventum. There were no borrowings outstanding under the Inventum Credit
Agreement as of February 28, 1998.
Maturities of long-term debt are as follows:
Fiscal year ending February:
1999 $ 33,285
2000 182
2001 -
2002 -
2003 -
Thereafter 349,375
---------
$ 382,842
=========
Interest expense amounted to $25,834, $28,369 and $18,788 for the years ended
February 28, 1998, February 22, 1997 and February 24, 1996, respectively.
9. INCOME TAXES
Income tax expense (benefit) consists of the following:
1998 1997 1996
------- ------- -------
Current:
Federal $ (920) $ -- $ 1,972
State -- -- 818
Foreign 6,766 1,112 663
------- ------- -------
5,846 1,112 3,453
Deferred:
Federal (3,666) 2,703 (2,635)
State (716) 1,550 (818)
Foreign (460) 410 --
------- ------- -------
(4,842) 4,663 (3,453)
Change in Valuation Allowance 4,382 (4,253) --
------- ------- -------
$ 5,386 $ 1,522 $ --
======= ======= =======
F-12
49
The difference between income tax expense (benefit) and the amount computed
by applying the statutory U.S. federal income tax rate (35%) to the pretax
earnings before change in accounting principle consists of the following:
1998 1997 1996
-------- -------- --------
Statutory U.S. federal income tax expense (benefit) $ 9,432 $ 5,331 $(21,028)
Operating loss (with)/without tax benefit (6,114) (6,164) 14,569
Foreign tax rate differential 1,309 1,267 3,324
Goodwill amortization 537 566 558
Penalties 1,050 -- --
Other, net (828) 522 2,577
-------- -------- --------
$ 5,386 $ 1,522 $ --
======== ======== ========
The tax effects of temporary differences and carryforwards that give rise to
the Company's deferred income tax assets and liabilities consist of the
following:
1998 1997
-------- --------
Accrued vacation $ 1,172 $ 1,117
Inventory reserves 3,987 3,145
Acquisition reserves (1,220) (1,740)
Inventory costs capitalized for tax purposes 1,327 1,236
Bad debt reserves 579 948
Warranty reserve 2,440 1,452
Other 1,731 1,723
-------- --------
Net current deferred income tax asset 10,016 7,881
-------- --------
Intangible assets (12,576) (13,565)
Depreciation (1,853) (2,074)
Net operating loss carryforward 27,462 26,309
Research credit carryforward 3,285 2,941
-------- --------
Net noncurrent deferred income tax asset 16,318 13,611
-------- --------
Valuation allowance (27,541) (23,159)
-------- --------
Net deferred tax liabilities $ (1,207) $ (1,667)
======== ========
Due to uncertainty surrounding the realization of the benefits of its net
deferred tax asset, the Company has established a valuation allowance of $27,541
against its otherwise recognizable net deferred tax asset.
As of February 28, 1998, the Company had approximately $66,104 of federal
operating loss carryforwards, which expire at various dates through 2011,
federal research credit carryforwards of $3,285, which expire at various dates
through 2011, and alternative minimum tax credit carryforwards of $410, which
have no expiration date. Approximately $15,000 of the Company's net operating
loss carryforward related to non-qualified stock options will be credited to
additional paid-in-capital rather than income tax expense when utilized.
The Company has not provided for any residual U.S. income taxes on the
approximately $6,005 of earnings from its foreign subsidiaries because such
earnings are intended to be indefinitely reinvested. Such residual U.S. income
taxes, if provided for, would be immaterial.
The Company's federal tax returns for the years ended February 24, 1996 and
February 25, 1995 are currently under examination by the Internal Revenue
Service. Management believes that the resolution of this examination will not
have a material adverse effect on the Company's results of operations or its
financial condition.
F-13
50
10. COMMITMENTS AND CONTINGENCIES
Leases -- The Company leases certain of its office, manufacturing and service
facilities and equipment under operating leases, which expire at various times
through February 2007. Rent expense for fiscal 1998, 1997 and 1996 was
approximately $8,848, $7,021 and $2,943, respectively. Future payments under
operating leases with terms currently greater than one year are as follows:
Year ending February:
1999 $ 7,658
2000 6,398
2001 5,079
2002 2,495
2003 2,041
Thereafter 796
--------
$ 24,467
========
Litigation -- The Company is a defendant in various legal actions arising in
the normal course of business, the outcome of which, in the opinion of
management, neither individually nor in the aggregate are likely to result in a
material adverse effect to the Company's financial statements.
Employment Agreements -- The Company has employment and compensation
agreements with two key officers of the Company. One of the agreements provides
for an officer to earn a minimum of $550 adjusted annually for changes in the
consumer price index (as defined) per year through 2002, as well as a deferred
compensation benefit equal to the aggregate annual compensation earned through
termination and payable thereafter. Such deferred compensation will be payable
in equal monthly installments over the same number of years it was earned. The
other agreement provides for an officer to receive annual minimum compensation
of $550, and an incentive bonus not to exceed 100% of the officer's then-current
salary through 2001. In addition, when the officer terminates his employment,
the Company is obligated to pay the officer annually, as deferred compensation,
an amount equal to 100% of the officer's annual salary (as defined) for a period
of ten years from the date of termination. Such deferred compensation has been
accrued at the present value of the obligation at February 28, 1998.
The Company has other employment agreements with certain key members of
management that provide for aggregate minimum annual base compensation of $1,825
expiring on various dates through 1999.
Supply Agreement -- The Company had a supply agreement with Applied
Extrusion Technologies, Inc. ("AET"), a related party by way of common
management. Under this agreement, which was terminated in September 1997, the
Company agreed to purchase its requirements for certain component parts through
March 1998 at a price that results in a 33 1/3% gross margin to AET. The
Company's purchases under this contract for the years ended February 28, 1998,
February 22, 1997 and February 24, 1996, were $1,743, $1,642 and $1,301,
respectively.
F-14
51
11. EMPLOYEE RETIREMENT PLAN
In August 1988, the Company established a non-qualified contributory
profit-sharing plan. This plan was amended to incorporate a 401(k) Plan which
permits the Company to match a portion of employee contributions. Commencing in
1995, the Company's 401(k) Plan, was amended to permit the Company's matching
contribution to be made in common stock of the Company. The Company recognized
expenses of $1,677, $1,317 and $859 related to this plan for the years ended
February 28, 1998, February 22, 1997 and February 24, 1996, respectively.
12. STOCKHOLDERS' EQUITY
Earnings (Loss) Per Share. The Company adopted No. SFAS No. 128 Earnings Per
Share during fiscal year 1998. SFAS No. 128 establishes standards for computing
and presenting basic and diluted earnings (loss) per share. All prior period
earnings (loss) per share data have been restated to conform with SFAS No. 128.
The following table sets forth the computation of basic and diluted earnings
(loss) per share for the years ended February 28, 1998, February 22, 1997 and
February 26, 996:
1998 1997 1996
======== ======== ========
Numerator - Net earnings (loss) $ 21,562 $ 13,709 $(83,413)
======== ======== ========
Denominator:
Denominator for basic earnings (loss) per share -
Weighted average shares 22,442 17,692 16,185
Effect of dilutive securities -
Employee stock options 988 1,405 -
-------- -------- --------
Denominator for diluted earnings (loss) per share -
Adjusted weighted average shares 23,430 19,097 16,185
======== ======== ========
Basic earnings (loss) per share $ .96 $ .77 $ (5.15)
======== ======== ========
Diluted earnings (loss) per share $ .92 $ .72 $ (5.15)
======== ======== ========
Stock Option Plans. The Company has various stock option plans, including the
1989 Stock Option Plan, the 1991 Directors Stock Option Plan, the 1992 Share
Option Scheme and the 1996 Stock Option Plan (collectively, the "Option Plans"),
under which shares of the Company's Common Stock may be granted to key employees
and directors of the Company. The Option Plans provide for granting key
employees options to purchase the Company's Common Stock. Options are granted at
the discretion of the compensation and stock option committee of the Board of
Directors. Options granted generally vest at the rate of 25% per year from the
date of grant and are exercisable to the extent vested and the option term
cannot exceed ten years.
The following table sets forth options granted, canceled, forfeited and
outstanding:
February 28, 1998 February 22, 1997 February 26, 1996
---------------------------- ----------------------------- ------------------------------
Option Price Option Price Option Price
Per Share Per Share Per Share
Options (in dollars) Options (in dollars) Options (in dollars)
--------- ------------ ---------- ------------ ---------- ------------
Outstanding,
beginning of 2,447,425 .081-24.93 2,720,350 0.81-13.00 2,871,287 0.81-13.00
period
Options granted 1,394,250 21.50-31.50 1,313,500 10.25-24.94 731,925 7.37-10.37
Options exercised (852,174) 0.81-29.875 (1,361,925) 0.81-16.125 (139,750) 0.81-8.75
Options forfeited (58,000) 7.63-29.875 (224,500) 7.38-16.13 (743,112) 7.00-13.00
--------- ---------- --------
Outstanding, end
of period 2,931,501 7.00-31.50 2,447,425 0.81-24.9 2,720,350 0.81-13.00
========= ========== ========= =========== ========= ==========
Exercisable at end
of year 1,317,503 7.00-31.50 1,374,927 0.81-4.9 2,223,225 0.81-13.00
========= ========== ========= =========== ========= ==========
F-15
52
At February 28, 1998, options were available for grant under each of the
Company's option plans.
Options Outstanding
at February 28, 1998
--------------------------------------------------------------------------------------------------------
Weighted Weighted Average Options
Range of Options Average Remaining Exercisable Weighted Average
Exercise Price Outstanding Exercise Price Contractual Life at February 28, 1998 Exercise Price
-------------- ----------- -------------- ---------------- -------------------- --------------
(years)
$ 7.00-$ 8.875 $691,800 $ 8.36 5.82 623,675 $ 8.35
$ 10.00-$19.00 $798,826 $ 17.27 8.45 313,328 $ 18.14
$ 21.50-$25.8125 $511,625 $ 23.02 9.41 149,125 $ 23.38
$ 29.875-$31.50 $929,250 $ 29.89 9.46 231,375 $ 29.89
The estimated fair value of options granted during fiscal 1998 was $13.56 per
share. The estimated fair value of options granted during fiscal 1997 was $16.60
per share. The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option and purchase plans. Accordingly, no compensation
cost has been recognized for its stock option plans and its stock purchase plan
other than that described above. Had compensation cost for the Company's stock
option plans and its stock purchase plans been determined consistent with SFAS
No. 123, the Company's net earnings and net earnings per share for the year
ended February 28, 1998 and February 22, 1997 would have been reduced to the pro
forma amounts indicated in the following table:
1998 1997
---- ----
Net earnings - as reported $21,562 $ 13,709
Net earnings - pro forma $13,232 $ 10,709
Net earnings per share - as reported $ .92 $ .72
Net earnings per share - pro forma $ .56 $ .56
Weighted average and pro forma
weighted average common shares 23,430 19,097
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for options granted in 1998 and 1997: risk-free interest rates
of 7.0% and 6.4%; expected dividend yields of 0.0%; expected lives of 3 years
and 4 years; and expected volatility of 40% and 43%, respectively.
The impact of outstanding non-vested stock options granted prior to fiscal
1997 has been excluded from the pro forma calculation; accordingly, the 1998 and
1997 pro forma adjustments are not indicative of future period pro forma
adjustments, when the calculation will apply to all applicable stock options.
13. EMPLOYEE STOCK PURCHASE PLAN
The Company has established a qualified Employee Stock Purchase Plan, the
terms of which allow for qualified employees (as defined) to participate in the
purchase of designated shares of the Company's Common Stock at a price equal to
the lower of 85% of the closing price at the beginning or end of each
semi-annual stock purchase period. The Company issued 87,561 and 58,490 shares
of common stock during fiscal 1998 and 1997 pursuant to this plan at an average
price per share of $20.52 and $9.70, respectively.
F-16
53
14. EXPORT SALES AND MAJOR CUSTOMERS
Export sales from the United States to customers in foreign countries
amounted to approximately $132,831, $153,423 and $61,717 in fiscal 1998, 1997
and 1996, respectively. Total sales to all customers in foreign countries
amounted to approximately $232,691, $203,388 and $124,469 in fiscal 1998, 1997
and 1996, respectively. Total sales to Europe amounted to 23%, 29% and 18% in
fiscal 1998, 1997 and 1996, respectively. Total sales to Asia amounted to 18%,
16% and 20% in fiscal 1998, 1997 and 1996, respectively. Major customers (i.e.,
customers representing more than 10% of total sales) change from year to year
depending on the level of refurbishment activity and/or the level of new
aircraft purchases by such customers. During the fiscal year ended February 28,
1998, one customer accounted for approximately 18% of the Company's sales. There
were no major customers in fiscal 1997 or 1996.
15. OTHER EXPENSES
In January 1998, the Company resolved a long-running dispute with the U.S.
Government over export sales between 1992 and 1995 to Iran Air. The dispute
centered on shipments of aircraft seats and related spare parts for five
civilian aircraft operated by Iran. Iran Air purchased the seats in 1992 and
arranged for them to be installed by a contractor in France. At the time, Iran
was not the subject of a U.S. trade embargo. In connection with its sale of
seats to Iran Air, B/E applied for and was granted a validated export license by
the U.S. Department of Commerce. Other expenses for the year ended February 28,
1998 relate to fines, civil penalties and associated legal fees arising from the
settlement. Other expenses for the year ended February 24, 1996 relate to costs
associated with the integration and consolidation of the Company's European
seating business.
16. FOREIGN OPERATIONS
Geographic Area -- The Company operated principally in two geographic
areas, the United States and Europe during the years ended February 28, 1998,
February 22, 1997 and February 24, 1996. There were no significant transfers
between geographic areas during the period. Identifiable assets are those assets
of the Company that are identified with the operations in each geographic area.
The following table presents net sales and operating income for the years
ended February 28, 1998, February 22, 1997 and February 24, 1996, and
identifiable assets as of February 28, 1998, February 22, 1997 and February 24,
1996 by geographic area.
1998 1997 1996
---- ---- ----
Net Sales:
United States $ 365,957 $ 312,497 $ 169,830
Europe 122,042 99,882 62,752
--------- --------- ---------
Total: $ 487,999 $ 412,379 $ 232,582
========= ========= =========
OPERATING EARNINGS (LOSS):
United States $ 38,928 $ 33,834 $ (35,822)
Europe 19,741 8,564 (5,623)
--------- --------- ---------
Total: $ 58,669 $42,398 $ (41,445)
========= ========= =========
IDENTIFIABLE ASSETS:
United States $ 541,675 $ 380,273 $ 332,832
Europe 140,082 110,816 100,754
--------- --------- ---------
Total: $ 681,757 $ 491,089 $ 433,586
========= ========= =========
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54
17. FAIR VALUE INFORMATION
The following disclosure of the estimated fair value of financial instruments
at February 28, 1998 and February 22, 1997 is made in accordance with the
requirements of SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments". The estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the Company
could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
The carrying amounts of cash and cash equivalents, accounts receivable-trade,
and accounts payable are a reasonable estimate of their fair values. At February
28, 1998, the Company's 8% Notes have a carrying value of $249,375 and fair
value of $248,750, while the Company's 9 7/8% Notes have a carrying value of
$100,000 and fair value of $107,500. Additionally, at February 28, 1998, the
Company's 9 3/4% Notes have a carrying value of $23,192 and fair value of
$24,410. The carrying amounts of other long-term debts approximate fair value
because the obligations either bear interest at floating rates or compare
favorably with fixed rate obligations that would be available to the Company.
The fair value information presented herein is based on pertinent information
available to management as of February 28, 1998. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these consolidated financial statements since that date, and current estimates
of fair value may differ significantly from the amounts presented herein.
18. SELECTED QUARTERLY DATA (Unaudited)
Summarized quarterly financial data for fiscal 1998 is as follows:
Year Ended February 28, 1998
---------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Sales $ 113,846 $ 119,843 $ 128,998 $ 125,312
Gross profit 41,063 44,149 46,650 47,043
Earnings before extraordinary item 6,943 8,077 9,432 6,066
Extraordinary item -- -- -- (8,956)
----------- --------- --------- ------------
Net earnings (loss) $ 6,943 $ 8,077 $ 9,432 $ (2,890)
=========== ========= ========= ============
Basic net earnings (loss) per share:
Before extraordinary item $ .32 $ .36 $ .41 $ 27
Extraordinary item -- -- (.40)
----------- --------- --------- ------------
Net earnings (loss) per share $ .32 $ .36 $ .41 $ (.13)
=========== ========= ========= ============
Diluted net earnings (loss) per share:
Before extraordinary item $ .30 $ .34 .40 $ .26
Extraordinary item -- -- -- (.38)
----------- --------- --------- ------------
Net earnings (loss) per share $ .30 $ .34 .40 (.12)
=========== ========= ========= ============
Summarized quarterly financial data for fiscal 1997 is as follows:
Year Ended February 22, 1997
----------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Sales $ 97,302 $ 103,026 $ 107,823 $ 104,228
Gross profit 32,547 34,439 36,510 38,326
Net earnings 1,433 1,863 4,131 6,282
Net earnings per share - Basic .09 .11 .24 .30
Net earnings per share - Diluted .08 .10 .22 .29
F-18
55
SUBSEQUENT EVENTS (UNAUDITED)
On April 13, 1998, the Company completed its acquisition of Puritan
Bennett Aero Systems Co. ("PBASCO") for approximately $69,700 in cash and
the assumption of liabilities aggregating approximately $2,810. PBASCO is
the leading manufacturer of commercial aircraft oxygen delivery systems
and passenger service unit components and systems, and is a major
supplier of air valves, overhead lights and switches, crew masks and
protective breathing devices for both commercial and general aviation
aircraft. Based upon management's assumptions, a portion of the purchase
price was allocated to purchased research and development that had not
reached technological feasibility and had no future alternative use.
During the first quarter of fiscal 1999, the Company will record a charge
of approximately $37,000 for the acquisition of in-process research and
development and acquisition related expenses.
On April 21, 1998, the Company acquired substantially all of the
Aircraft Modular Products (AMP) assets for approximately $118,000 in cash
and assumed certain liabilities aggregating approximately $2,840. AMP is
the leading manufacturer of cabin interior products for general aviation
(business jet) and commercial - type VIP aircraft, providing a broad line
of products including seating, sidewalls, bulkheads, credenzas, closets,
galley structures, lavatories, tables and sofas; along with related spare
parts. Based on management's assumptions, a portion of the purchase price
was allocated to purchased research and development that had not reached
technological feasibility and had no future alternative use. During the
first quarter of fiscal 1999, the Company will record a charge of
approximately $61,000 for the acquisition of in-process research and
development and acquisition related expenses.
F-19
56
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED FEBRUARY 28, 1998, FEBRUARY 22, 1997 AND FEBRUARY 24, 1996
(Dollars in thousands)
BALANCE BALANCE
AT BEGINNING AT END
OF YEAR EXPENSES OTHER DEDUCTIONS OF YEAR
DEDUCTED FROM ASSETS:
Allowance for doubtful
accounts:
1998 $ 4,864 $ 481 $ -- $ 3,155 $ 2,190
1997 4,973 2,144 (69) 2,184 4,864
1996 4,034 162 1,449 (1) 672 4,973
Reserve for obsolete
inventories:
1998 $ 8,282 $ 9,973 $ -- $ 7,766 $10,489
1997 19,785 4,583 1,758 17,844(2) 8,282
1996 10,664 6,022 5,840(1) 2,741 19,785
INCLUDED IN LIABILITIES:
Accrued product
warranties:
1998 $ 5,231 $ 3,085 $ -- $ 3,963 $ 4,353
1997 3,455 6,325 (156) 4,393 5,231
1996 2,969 2,758 936 (1) 3,208 3,455
(1) Balances associated with the Burns acquisition.
(2) During fiscal 1997, the Company disposed of substantially all of the
inventories which were fully reserved in fiscal years 1995 and 1996.
F-20