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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

 

COMMISSION FILE NUMBER 333-70365

 


DECRANE AIRCRAFT HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 


Delaware

 

34-1645569

(State or Other Jurisdiction of Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

2361 Rosecrans Avenue, Suite 180

El Segundo, California 90245

(310) 725-9123

(Address of Principal Executive Offices)

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

None

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

 

None

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý YES o NO

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

The number of shares of Common Stock outstanding on March 26, 2002 was 100.

DOCUMENTS INCORPORATED BY REFERENCE:

 

None.

 



Table of Contents

 

 

Part I

 

 

Item 1.

Description of Business

 

Item 2.

Properties

 

Item 3.

Legal Proceedings

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

 

 

 

Part II

 

 

Item 5.

Market for Registrant’s Common Equity and Related Stockholder Matters

 

Item 6.

Selected Financial Data

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

 

Item 8.

Financial Statements and Financial Statement Schedules

 

Item 9.

Changes In and Disagreements With Accountants On Accounting and Financial Disclosure

 

 

 

 

Part III

 

 

Item 10.

Directors and Executive Officers of the Registrant

 

Item 11.

Executive Compensation

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management

 

Item 13.

Certain Relationships and Related Transactions

 

 

 

 

Part IV

 

 

Item 14.

Exhibits, Financial Statement Schedules, and Reports on Form 8-K

 

 

 

 

Signatures

 

 

 

 

Index to Financial Statements, Supplementary Financial Information and Financial Statement Schedules

 

 



All statements other than statements of historical facts included in this report are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors, which are difficult to predict. Changes in such factors could cause actual results to differ materially from those contemplated in such forward-looking statements as we describe in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Special Note Regarding Forward-Looking Statements.” Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. We undertake no obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

PART I

ITEM 1.                                         DESCRIPTION OF BUSINESS

Company Overview

DeCrane Aircraft Holdings, Inc., a Delaware corporation founded in 1989, is a leading provider of integrated assemblies, sub-assemblies and component parts to the aerospace industry. Since our founding in 1989, we have experienced both internal growth and external growth by identifying fragmented, high-growth niche segments within the aerospace industry and acquiring market-leading companies in those niches. Today, we have assembled product capability within three specific segments of the aerospace industry: cabin management for corporate, VIP and head-of-state aircraft; specialty aviation electronic components, commonly referred to as avionics; and systems integration. We have also focused on diversifying our revenue stream between the commercial, commercial after- and retrofit markets, and corporate and regional aircraft markets in order to reduce the impact from cycles in any single market segment. Within these markets, our customers include original manufacturers of aircraft and related avionics equipment, commonly referred to as OEM’s, major components suppliers, aircraft repair and modification centers and commercial airlines.

We are organized into three operating groups, consistent with the segments in which we operate: Cabin Management, Specialty Avionics and Systems Integration. Through our operating groups, we offer a complete line of cabinetry, galleys, seating and cabin management systems for corporate aircraft, as well as specialty avionics components and systems integration services.

Our Operating Groups

Our historical financial position and results of operations have been affected by our history of acquisitions. As a result, our historical financial statements do not reflect the financial position and results of operations of our current businesses and capital structure. Our acquisitions are described in Note 3 accompanying our financial statements listed in the index on page F-1 of this report. Historical segment information for the three years ended December 31, 2001 is included in Note 16 accompanying our financial statements.

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Cabin Management Group

DeCrane’s Cabin Management Group contributed approximately 52% of our revenues for the year ended December 31, 2001.

Business Description

Our Cabin Management Group is a leading independent provider of cabin products, with a primary focus on serving the corporate aircraft market. Since 1997, our Cabin Management Group has acquired nine companies involved in the engineering, manufacturing and assembly of the key components for the interior of a corporate aircraft, including cabin interior furnishings, cabin management systems, seating and composite components. Our Cabin Management Group serves major manufacturers of corporate aircraft, including Boeing Business Jet, Bombardier, Cessna, Dassault, Gulfstream and Raytheon.

The Cabin Management Group introduced the concept of modularity to the corporate aircraft market by offering totally integrated interior products. In our view, one of the greatest challenges facing the industry’s aircraft manufacturers is minimizing the lead-time necessary to complete an unfinished “green” aircraft. We also believe our distinctive approach of delivering integrated assemblies and sub-assemblies addresses this challenge by providing our customers with entire pre-engineered, pre-wired and pre-plumbed modular cabin interiors and management systems ready for final integration into the aircraft. We believe our totally integrated interior products enable our customers to reduce their lead times, supplier base and overall costs.

The Cabin Management Group is guided by our overall strategy to gain market leadership positions in high-growth segments of the aerospace industry by building more related product capabilities than any other company in the industry. To that end, our Cabin Management Group has focused on pursuing two, closely related, strategic imperatives:

                  Building Critical Mass in Cabin Interior Furnishings, Cabin Management Systems and Seating for the Corporate, VIP, and Head-of-State Aircraft Markets.  Our Cabin Management Group is aggressively focused on broadening and deepening its product offerings to the corporate, VIP and head-of-state aircraft markets. As a result of this strategy, we have increased revenue content per plane with our existing customer base and have successfully attracted new customers.

                  Developing Capabilities to Provide Modular “Total Cabin Solutions” to the Corporate Aircraft Market.  Consistent with our overall corporate strategy to build integrated system solutions, the Cabin Management Group is focused on aggregating its capabilities to provide partial or fully assembled modular corporate aircraft cabin interiors to its customers.

In order to meet these strategic objectives, we have aggressively pursued growth in our Cabin Management Group through selective acquisitions.

2



Products and Services

Our Cabin Management Group designs, engineers and manufactures a full line of customized, pre-fit products and provides related services. Approximately 51% of our Cabin Management Group’s revenues in 2001 were from two customers, Textron and Bombardier. Our products and services are in four broad categories, as summarized below.

 

Interior Furnishings

 

Seating

      entertainment and refreshment centers

 

      executive track and swivel seats

      conference tables

 

      jump-seats

      hi-low dining and coffee tables

 

      divans, including models that convert to beds or contain storable tables

      end tables

      cabinets

 

      upholstery services

      arm and side ledges

 

 

      galleys

 

Composite Components

      lavatories

 

      sound-dampening side walls and headliners

      vanities

 

      passenger service units

      room enclosures

 

      environmental (HVAC) ducting

      cabinetry refurbishment services

 

      closets

 

 

 

Cabin Management Systems

 

 

      in-flight entertainment systems

 

 

      in-flight data network and communication systems

 

 

      cabin controls

 

 

      switches

 

 

Competition

The markets served by our Cabin Management Group are fragmented, with several competitors offering similar products and services. Due to the global nature of the aerospace industry, competition comes from both U.S. and foreign companies. Our Cabin Management Group generally faces competition from a group of smaller companies and enterprises, except for the corporate aircraft manufacturers and independent completion centers. Our principal competitors are summarized below.

 

Interior Furnishings

 

Seating

      Bomhoff, Inc.

 

      BE Aerospace

      Custom Aircraft Cabinets

 

      Fisher (Germany)

      Hiller

 

 

      The Nordam Group

 

Composite Components

      Independent completion centers

 

      AAR

      Corporate aircraft manufacturers completion centers

 

      Fibre Art

 

 

      Plastic Fab

Cabin Management Systems

 

      Scale Composite Works

      Air Show / Pacific Systems

      Baker Electronics

 

      The Nordam Group

      DPI Labs

 

 

      IEC, International

 

 

3



Specialty Avionics Group

DeCrane’s Specialty Avionics Group contributed approximately 31% of our revenues for the year ended December 31, 2001.

Business Description

Our Specialty Avionics Group supplies aircraft avionics components to the commercial and military aircraft markets as well as to several avionics systems suppliers including Honeywell and Rockwell-Collins. We focus on assembling design, engineering and manufacturing capabilities across several specialty avionics product categories, including cockpit and cabin audio management systems, flight deck visual display and communication systems, power and control devices, and specialty interconnect solutions such as contacts, connectors and various harness assemblies. Our Specialty Avionics Group is also a leading manufacturer of high quality electrical contacts for military and aviation applications.

Through its strong focus on building integrated solutions, we believe our Specialty Avionics Group has achieved solid positions in many product categories within the avionics components market. Today, we believe we are the world’s largest supplier of power and signal contacts to the aircraft market, with almost twice the number of FAA approved parts as our nearest competitor. In addition, our dichroic liquid crystal display devices, commonly referred to as LCD’s, are found on most, if not all, commercial aircraft produced today, making us the largest supplier of dichroic LCD devices to commercial aircraft OEM’s. Our Specialty Avionics Group has leveraged its reputation as a high quality manufacturer of avionics products and contacts to build a broader customer base and to deepen its relationships with existing customers.

The strategic objectives of our Specialty Avionics Group are well aligned with our overall corporate strategy of capturing and maintaining number 1 or 2 market share in high growth segments of the avionics component market. In pursuing our objectives for the group, we have been guided by three strategic principles:

                  Broaden and Deepen Relationships with Key Customers by Assembling Integrated Customer Solutions.  We believe our Specialty Avionics Group has aggressively pursued opportunities to assemble more integrated product capabilities in the specialty avionics segment than any competitor in the aerospace industry, thereby increasing revenue content per plane and growing profitability.

                  Identify and Evaluate Opportunities in High-Growth Product Categories.  We continue to explore and evaluate growth opportunities in product categories within the specialty avionics segment of our business.

                  Maintain Technologically Superior Product Offerings.  The specialty avionics market is a highly specialized and highly technical business. It is imperative that we remain abreast of technological innovations and incorporate them into our products and services.

Products and Services

Our Specialty Avionics Group designs, engineers and manufactures electronic components, electronic display devices and interconnect components and assemblies. Approximately 22% of our Specialty Avionics Group’s revenues in 2001 were from Boeing. The products we offer are described below.

4



Cockpit and Cabin Audio, Communication, Lighting and Power and Control Devices.  Our Specialty Avionics Group is a leading manufacturer of cockpit audio, lighting and power and control devices, including selective calling system decoders, used in commercial, regional and corporate aircraft. We also manufacture a variety of other commercial aircraft safety system components, including warning tone generators, temperature and de-icing monitoring systems, steep approach monitors and low voltage power supplies for traffic collision avoidance systems.

Electrical Contacts.  Contacts conduct electronic signals or electricity and are installed at the terminus of a wire or an electronic or electrical device. We supply precision-machined contacts for use in connectors found in virtually every electronic and electrical system on a commercial aircraft. We sell contacts directly to aircraft and related electronics manufacturers and through our private labeling programs to several major connector manufacturers who sell connectors to the same markets under their brand name.

Connectors and Harness Assemblies.  Electronic and electrical connectors link wires and devices in avionics systems, and permit their assembly, installation, repair and removal. Our connectors are specially manufactured to meet the critical performance requirements demanded by manufacturers and required in the harsh environment of an operating aircraft. We produce connectors that are used in aircraft galleys, flight decks and control panels in the passenger cabin, in addition to producing wire harness assemblies for use in cabin avionics systems, including wire, connectors, contacts and hardware. We typically sell our harness assemblies to manufacturers of aircraft electronic systems but also sell these assemblies as part of our systems integration services through our Systems Integration Group.

Liquid Crystal Display Devices.  We manufacture a wide variety of displays in both dichroic and twisted nematic formats, as well as LCD modules used in commercial and military aircraft. LCD modules are liquid crystal displays packaged with a backlight source, and additional mechanical and electronic components that are plug-and-play ready for the customers’ instrument display application. Dichroic displays perform best in situations with high ambient lighting and low backlighting. Twisted nematic displays are suited for situations where a strong backlight is required. Our LCD products are used in a variety of flight deck applications such as auto pilot flight control systems, fuel quantity indicators, exhaust gas temperature indicators, airborne communications, navigation and safety systems and transportation signage. Dichroic and twisted nematic liquid crystal display products are widely used in the aerospace industry because they are easily adapted to custom design and possess a variety of high performance characteristics, including wide viewing angles, high readability in sunlight, and the ability to withstand wide temperature fluctuations. We also manufacture a variety of electronic clock instruments for commercial and military aircraft, including fixed wing and rotary wing, all of which use our LCD devices.

Wire Marking and Crimping Equipment.  We design and manufacture high-speed wire marking systems and portable crimping machines used by harness manufacturers, wire mills, aircraft manufacturers and the U.S. military.

5



Competition

The markets served by our Specialty Avionics Group are fragmented, with several competitors offering similar products and services. Due to the global nature of the aerospace industry, competition comes from both U.S. and foreign companies. Our Specialty Avionics Group generally faces competition from large, diversified companies that produce a broad range of products. Our principal competitors are summarized below.

 

Cockpit and Cabin Audio, Communication, Lighting and Power and Control Devices

 

Connector and Harness Assemblies

 

      AMP (connectors)

      Baker Electronics

 

      Carlyle (harness assemblies)

      Diehl GmbH (Germany)

 

      Electronic Cable Specialists (harness assemblies)

      Gables Engineering

 

      ITT Cannon (connectors)

      Korry

 

      Radiall S.A. (France) (connectors)

      Team (France)

 

 

 

 

Liquid Crystal Display Devices

Electrical Contacts

 

      Crystalloid

      Deutsch

 

      DCI

      Lemco

 

      Electronic Martin

      Several small contact blank suppliers

 

      Grayhill

 

 

      LSI

Systems Integration Group

DeCrane’s Systems Integration Group contributed approximately 17% of our revenues for the year ended December 31, 2001.

Business Description

Our Systems Integration Group provides aircraft retrofit and refurbishment solutions, from design to FAA certification, including engineering, manufacturing and installation. Our largest business is the design, production and installation of auxiliary fuel tanks, which extend the range of the aircraft. Our Systems Integration Group has an exclusive long-term contract with Boeing Business Jet to design, manufacture and install auxiliary fuel tanks. We also focus on FAA safety mandate “kits” and we believe we are the major supplier of integration kits for smoke detection and fire suppression in the cargo hold. We also perform structural modifications and FAA re-certification before placing aircraft back into service.

There are a limited number of companies that have the necessary authorization to offer aircraft re-certification on behalf of the FAA. Our Systems Integration Group is authorized to provide the full spectrum of services, from design to FAA re-certification, needed for timely retrofitting of an aircraft, thus providing a significant competitive advantage.

Our Systems Integration Group has adopted a two-pronged strategic approach to managing its operations:

                  Develop the Most Comprehensive Integrated Retrofit Offering.  For the last eleven years, our Systems Integration Group has focused on developing the capabilities necessary to provide a fully integrated offering with respect to aircraft refurbishing and aircraft retrofitting with FAA mandated changes and technological innovations. Through several related acquisitions and aggressive internal product development, our Systems Integration Group has become one of the few non-OEM related operations with the authority to provide alteration services and to offer

6



FAA re-certification of aircraft that undergo overhaul. This re-certification ability represents a significant competitive advantage, as we can offer all the products and services required to re-commission an aircraft in a timely and cost efficient manner. We believe we have developed the most comprehensive offering in retrofitting aircraft with auxiliary fuel tanks in the industry.

                  Target Development of Specialty Products and Services Relating to FAA Mandates.  Consistent with its first strategic imperative, our Systems Integration Group is also growing its capabilities in providing solution “kits” in response to FAA mandated aircraft upgrades. For example, if the FAA mandates new fire safety measures for all aircraft, we will develop a stand-alone kit that can be quickly incorporated into an aircraft to ensure compliance with minimal downtime. Our Systems Integration Group has demonstrated the ability to identify and quickly respond to probable new FAA mandates.

Products and Services

Our Systems Integration Group provides auxiliary fuel tanks, auxiliary power units and system integration services, including engineering, kit manufacturing, installation and certification. Customers include Boeing Business Jet, Bombardier, Cessna, Gulfstream, Raytheon and Rockwell Collins. Approximately 61% of our Systems Integration Group’s revenues in 2001 were from Boeing. The products and services we provide are described below.

Auxiliary Fuel Systems and Power Units.  We design, engineer, manufacture and install auxiliary fuel tanks for corporate and commercial aircraft. Our unique design and tank construction have made us a leader in the auxiliary fuel tank market. We also manufacture auxiliary power units, which provide ground power to corporate jets made by Bombardier, Cessna, Gulfstream, Learjet and Raytheon.

Cabin and Flight Deck Systems Integration.  We have designed and patented avionics support structures we sell under the Box-Mount™ name. These structures are used to support and environmentally cool avionics equipment, including navigation, communication and flight control equipment. These support structures are sold to aircraft and related electronics manufacturers, airlines and major modification centers. In addition, these products are essential components of the installation kits used in our systems integration operations.

Aircraft Modification Services.  Through our Boeing-approved Boeing Business Jet Service Center, we provide extensive modification and integration services to the corporate aircraft market.

Retrofit and Refurbishment Services.  We also provide retrofit and refurbishment services, including engineering, kit manufacturing, installation and certification, to both commercial and corporate aircraft customers.

7



Competition

The markets served by our Systems Integration Group are fragmented with several competitors offering similar products and services. Due to the global nature of the aerospace industry, competition comes from both U.S. and foreign companies. Our Systems Integration Group generally faces competition from a group of smaller companies and enterprises, except for the corporate aircraft manufacturers and independent completion centers. Our principal competitors are summarized below.

 

Auxiliary Fuel Systems and Power Units

 

Cabin and Flight Deck Systems Integration and Retrofit and Refurbishment Services

      Marshalls

      Pfalz Flugewerke (Germany)

 

      ARINC

 

 

      Aviation Sales

Auxiliary Power Units (Integration Only)

 

      Boeing Aircraft Services

      Honeywell

 

      Flight Structures

      Sundstrand

 

      In-house engineering departments of commercial airlines

 

 

      Numerous independent airframe maintenance and modification companies

Aircraft Modification Services

 

      Associated Air Center

 

 

      Jet Aviation

 

 

      Lufthansa

 

 

Other Information

Acquisitions

Companies Acquired by DeCrane Aircraft

During the five years ended December 31, 2001, DeCrane Aircraft has acquired the stock or assets of nine significant businesses, as such term is defined by Securities and Exchange Commission rules. These acquisitions are summarized below.

 

Year Acquired

 

Group / Company Acquired

 

Principal Products and Services at Acquisition Date

Cabin Management Group

 

 

1997

 

Audio International (1)

 

Cabin management and entertainment systems

1999

 

Precision Pattern (1)

 

Aircraft furniture components

1999

 

Custom Woodwork and Plastics (2)

 

Aircraft furniture components

1999

 

PCI NewCo (2)

 

Composite material components

1999

 

The Infinity Partners (2)

 

Aircraft furniture components

2000

 

Carl F. Booth & Co. (2)

 

Wood veneer panels for aircraft interior cabinetry

2000

 

ERDA (1)

 

Aircraft seats

 

 

 

 

 

Specialty Avionics Group

 

 

1998

 

Avtech (1)

 

Cockpit audio, lighting, power and control

 

 

 

 

 

Systems Integration Group

 

 

1999

 

PATS (1)

 

Auxiliary fuel and power systems


(1)                      Acquired stock.

(2)                      Acquired assets, subject to liabilities assumed.

Audio International, based in Arkansas, was acquired during 1997 for $24.7 million plus $6.0 million of contingent consideration that was paid during the two years following its acquisition. The

8



contingent consideration was payable upon attainment of defined performance criteria. Avtech, based in Washington, was acquired during 1998 for $84.7 million. Our 1999 and 2000 acquisitions are described in Note 3 accompanying our financial statements included in this report.

All of the acquisitions were accounted for as purchases. We intend to use the acquired assets to manufacture products similar to those previously manufactured by the companies prior to their acquisition. Our financial statements reflect the acquired companies subsequent to their respective acquisition dates.

DeCrane Holdings’ Acquisition of DeCrane Aircraft

DeCrane Holdings Co. and DLJ Merchant Banking Partners II, L.P. and affiliated entities acquired all of the stock of DeCrane Aircraft in August 1998 for $186.3 million. This acquisition is referred to in this report as the DLJ acquisition. As a result of the DLJ acquisition, the Company presents its financial information on a predecessor/successor basis.

In November 2000, Credit Suisse First Boston, Inc. acquired Donaldson, Lufkin & Jenrette, Inc. As a result, DLJ Merchant Banking Partners II, L.P. and other entities affiliated with Donaldson Lufkin & Jenrette, Inc. became indirect affiliates of Credit Suisse First Boston, Inc and Credit Suisse Group. The combined operations of the DLJ entities and Credit Suisse First Boston are commonly referred to collectively as Credit Suisse First Boston. See “Item 13. Certain Relationships and Related Transactions—Acquisition of Donaldson, Lufkin & Jenrette, Inc. by Credit Suisse Group” for additional information.

Customers

We estimate that in 2001, we sold our products and services to approximately 1,500 customers. Our primary customers include manufacturers of aircraft and related avionics equipment, airlines, aircraft component manufacturers and distributors, and aircraft repair and modification companies. Each of the following customers accounted for 10% or more of our consolidated revenues for the year ended December 31, 2001:

 

Significant Customers

 

Cabin Management
Group

 

Specialty Avionics

Group

 

Systems Integration

Group

 

Consolidated Total (1)

 

Percent of consolidated revenues:

 

 

 

 

 

 

 

 

 

Boeing (2)

 

0.8

%

6.7

%

10.3

%

17.8

%

Bombardier

 

12.7

 

1.5

 

1.4

 

15.6

 

Textron (3)

 

14.0

 

0.7

 

 

14.7

 

Consolidated revenues

 

27.5

%

8.9

%

11.7

%

48.1

%

 

 

 

 

 

 

 

 

 

 

Percent of group revenues (4):

 

 

 

 

 

 

 

 

 

Boeing (2)

 

1.4

%

21.6

%

60.9

%

 

 

Bombardier

 

24.4

 

4.9

 

7.9

 

 

 

Textron (3)

 

27.0

 

2.2

 

 

 

 

Consolidated revenues

 

52.8

%

28.7

%

68.8

%

 

 

 


(1)                      Historical data for the three years ended December 31, 2001 is presented in Note 16 accompanying our financial statements included in this report.

(2)                      Reflects only our direct revenues from Boeing. Excludes revenues from components our Specialty Avionics Group provides indirectly to Boeing through its sales to other Boeing suppliers. Our Systems Integration Group’s revenues from Boeing result from auxiliary fuel tank systems for the Boeing Business Jet.

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(3)                      Includes Cessna.

(4)                      Inter-group revenues are eliminated against the group originating the sale.

Complete loss of any of the customers identified above could have a significant adverse impact on our results of operations expected in future periods.

Significant portions of our revenues from our major customers are pursuant to contracts that may include a variety of terms favorable to the customer. Such terms may include our agreement to one or more of the following:

                  the customer is not required to make purchases, and may terminate such contracts at any time;

                  we make substantial expenditures to develop products for customers that we may not recoup if we do not receive sufficient orders;

                  on a prospective basis, we must extend to the customers any reductions in prices or lead times that we provide to other customers;

                  we must match other suppliers’ price reductions or delete the affected products from the contract; and

                  we must grant irrevocable non-exclusive worldwide licenses to use our designs, tooling and other intellectual property rights to products sold to a customer if we default, or suffer a bankruptcy filing, or transfer our manufacturing rights to a third party.

Backlog

As of December 31, 2001, we had an aggregate sales order backlog of $149.9 million compared to $178.3 million as of December 31, 2000, as follows:

 

 

December 31,

 

 

 

2001

 

2000

 

 

 

(in thousands)

 

Cabin Management Group

 

$

43,653

 

$

53,383

 

Specialty Avionics Group

 

50,410

 

59,467

 

Systems Integration Group

 

55,865

 

65,447

 

Consolidated totals

 

$

149,928

 

$

178,297

 

Orders are usually filled within twelve months; however, backlog totaling $20.7 million as of December 31, 2001 is scheduled for delivery in 2003 and beyond. Orders may be subject to cancellation by the customer prior to shipment. The level of unfilled orders at any given date will be materially affected by when we receive orders and how fast we fill them. Period-to-period comparisons of backlog figures may not be meaningful. For that reason, our backlogs do not necessarily accurately predict actual shipments or sales for any future period.

As described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Industry Overview and Trends,” the September 11th terrorist attack is having an adverse impact on the aerospace industry and, in turn, is having an unfavorable impact on the commercial airline portion of our business. In addition, the weakening of global economic conditions has negatively impacted other portions of our business as well. We are not currently able to determine the continuing impact these events will have on our bookings and resulting backlog for future periods. However, given the magnitude of these events, the impact could be material.

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Employees

As of December 31, 2001, we had 2,647 employees: 1,416 in our Cabin Management Group; 876 in our Specialty Avionics Group; 342 in our Systems Integration Group; and 13 in our corporate office. None of our employees is subject to a collective bargaining agreement, and we have not experienced any material business interruption as a result of labor disputes. We believe that we generally have a good relationship with our employees.

Research and Development

We continually evaluate opportunities to improve our product offerings and develop new products that incorporate new technologies to meet the demands of our customers and the FAA. Total expenditures were $3.7 million for the year ended December 31, 2001, $4.6 million during the year ended December 31, 2000 and $4.3 million during the year ended December 31, 1999.

Financial Information About Geographic Areas

Financial information about our revenues and assets by geographic area are included in Note 16 accompanying our financial statements included in this report.

Seasonality

Our businesses are not seasonal in nature.

Sales and Marketing

Our Cabin Management Group has designated relationship managers who are responsible for maintaining and cultivating relationships with customers. In addition, a dedicated sales force is utilized for some of our products.

Our Specialty Avionics Group has a dedicated sales force, which cooperates with distributors and independent sales representatives to execute its sales and marketing strategy. We have distributors that purchase, stock and resell several of our product lines.

Our Systems Integration Group has a dedicated sales force that handles most of its sales activities.

We are continuously seeking opportunities to combine our sales efforts across the operating groups in order to ensure that all sales opportunities are explored and that we maximize our revenue content per plane. We may also assign marketing and sales responsibilities for key customers to one of our senior corporate executives.

Raw Materials and Component Parts

The components we manufacture require the use of various raw materials including gold, aluminum, copper, rhodium, plating chemicals, LCD glass, hardwoods and plastics. The availability and prices of these materials may fluctuate. The cost of such raw materials is a significant component in, and part of, the sales price of many of our products. Although some of our contracts have prices tied to raw materials prices, we cannot always recover increases in raw materials prices in our product sale prices. We also purchase a variety of manufactured sub-component parts from various suppliers. Raw materials and component parts are generally available from multiple suppliers at competitive prices. However, any delay in our ability to obtain necessary raw materials and component parts may affect our ability to meet customer production needs.

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Electrical Energy

Some of our facilities within our Specialty Avionics and Systems Integration Groups, as well as our corporate headquarters, are located in California. These California-based facilities provided approximately 18% of our consolidated revenues during 2001. During 2000 and 2001, California experienced temporary electrical power shortages, which resulted in “rolling blackouts” and curtailment of power for some of our facilities with “interruptible” supply agreements with their providers. To date, power shortages have not caused any significant disruptions to our operations, however, prolonged or frequent blackouts could cause disruptions to our operations and the operations of our suppliers and customers. We are uninsured for losses and interruptions caused by power outages.

Intellectual Property and Proprietary Information

We have various trade secrets, proprietary information, trademarks, tradenames, patents, copyrights and other intellectual property rights we believe are important to our business in the aggregate, but not individually.

Government Regulation

Federal Aviation Administration

The aerospace industry is highly regulated in the United States by the Federal Aviation Administration and in other countries by similar agencies to ensure that aviation products and services meet stringent safety and performance standards. In addition, many of our customers impose their own compliance and quality requirements on us. The FAA prescribes standards and licensing requirements for aircraft components, issues designated alteration station authorizations, and licenses private repair stations. We hold various FAA approvals and licenses, which may only be used by our subsidiary obtaining such approval. If material FAA or customer authorizations or approvals were revoked or suspended, our operations could be adversely affected.

The FAA can authorize or deny authorization of many of the services and products we provide. Any such denial would preclude our ability to provide the pertinent service or product. If we failed to comply with applicable FAA standards or regulations, the FAA could exercise a wide range of remedies, including a warning letter, a letter of correction, a civil penalty action, and emergency or non-emergency suspension or revocation of a certificate or approval.

Each type of aircraft operated by airlines in the United States must possess an FAA type certificate, generally held by the aircraft manufacturer, indicating that the type design meets applicable airworthiness standards. When someone else develops a major modification to an aircraft already type-certificated, that person must obtain an FAA-issued Supplemental Type Certificate for the modification. Historically, we have obtained several hundred of these Supplemental Type Certificates, most of which we obtained on behalf of our customers as part of our systems integration services. Some of these certificates we obtain were or eventually will be transferred to our customers. As of December 31, 2001, we own and/or manage on behalf of our customers approximately 290 Supplemental Type Certificates. Many are multi-aircraft certificates, which apply to all of the aircraft of a single type. We foresee the need to obtain additional Supplemental Type Certificates so that we can expand the services we provide and the customers we serve.

Supplemental Type Certificates can be issued for proposed aircraft modifications directly by the FAA, or on behalf of the FAA by a Designated Alteration Station. The FAA designates what types of Supplemental Type Certificates can be issued by each Designated Alteration Station. A subsidiary within our Systems Integration Group is an FAA-authorized Designated Alteration Station and can directly issue

12



many of the Supplemental Type Certificates our customers and we require for our systems integration operations.

After obtaining a Supplemental Type Certificate, a manufacturer must apply for a Parts Manufacturer Approval from the FAA, or a supplement to an existing Parts Manufacturer Approval, which permits the holder to manufacture and sell installation kits according to the approved design and data package. We have nine Parts Manufacturer Approvals and over 235 supplements to those approvals. In general, each initial Parts Manufacturer Approval is an approval of a manufacturing or modification facility’s production quality control system. Each Parts Manufacturer Approval supplement authorizes the manufacture of a particular part in accordance with the requirements of the corresponding Supplemental Type Certificate. We routinely apply for and receive such Parts Manufacturer Approval supplements. In order to perform the actual installations of a modification, we are also required to have FAA approval. This authority is contained either in our Parts Manufacturer Approvals and related supplements, or in our repair station certificates. In order for a company to perform most kinds of repair, engineering, installation or other services on aircraft, its facility must be designated as an FAA-authorized repair station. As of December 31, 2001, we had ten authorized repair stations and employ over 125 FAA certified representatives.

Occupational Safety and Health Administration

Our manufacturing operations in the United States are subject to a variety of worker and community safety laws. The Occupational Safety and Health Act of 1970 mandates general requirements for safe workplaces for all employees. In addition, OSHA provides special procedures and measures for the handling of hazardous and toxic substances. Specific safety standards have been promulgated for workplaces engaged in the treatment, disposal or storage of hazardous waste. We believe that our operations are in material compliance with OSHA’s health and safety requirements.

Environmental Matters

Our facilities and operations are subject to various federal, state, local, and foreign environmental laws and regulations, including those relating to discharges to air, water, and land, the handling and disposal of solid and hazardous waste, and the cleanup of properties affected by hazardous substances. In addition, some environmental laws, such as the federal Comprehensive Environmental Response, Compensation and Liability Act, as amended (“CERCLA”) and similar state laws, impose strict liability upon persons responsible for releases or potential releases of hazardous substances. That liability generally is retroactive, and may create “joint and several” liability among multiple parties who have some relationship to a site or a source of waste. We have sent waste to treatment, storage, or disposal facilities that have been designated as National Priority List sites under CERCLA or equivalent listings under state laws. We have received CERCLA requests for information or allegations of potential responsibility from the Environmental Protection Agency regarding our use of several of those sites. In addition, some of our operations are located on properties that are contaminated to varying degrees.

We have not incurred, nor do we expect to incur, liabilities in any significant amount as a result of the foregoing matters, because in these cases other entities have been held primarily responsible, the levels of contamination are sufficiently low so as not to require remediation, or we are indemnified against such costs. In most cases, we do not believe that we have any material liability for past waste disposal. However, in a few cases, we do not have sufficient information to assess our potential liability, if any. It is possible, given the potentially retroactive nature of environmental liability that we will receive additional notices of potential liability relating to current or former activities.

Some of our manufacturing processes create wastewater that requires chemical treatment, and one of our facilities was cited for excessive quantity and strength of its wastewater. The costs associated with remedying that failure have not been material.

13



We believe that we have been and are in substantial compliance with environmental laws and regulations and that we have no liabilities under environmental laws and regulations, except for liabilities which we do not expect would likely have a material adverse effect on our business, financial position, results of operations or cash flows. However, some risk of environmental liability is inherent in the nature of our business, and we might in the future incur material costs to meet current or more stringent compliance, cleanup, or other obligations pursuant to environmental laws and regulations.

ITEM 2.                                         PROPERTIES

We operate in a number of manufacturing, engineering and office facilities in the United States and abroad. At December 31, 2001, we utilized approximately 1.3 million square feet of floor space, approximately 95% of which is located in the United States. We believe that our facilities are in good condition and are adequate to support our operations for the foreseeable future. Our operating groups’ facilities at December 31, 2001 are summarized below.

 

 

Leased

 

Owned

 

Total

 

 

 

(in thousands of square feet)

Cabin Management Group (1)

 

544

 

276

 

820

 

Specialty Avionics Group

 

164

 

80

 

244

 

Systems Integration Group

 

106

 

150

 

256

 

Corporate

 

8

 

 

8

 

Total in use

 

822

 

506

 

1,328

 

 

 

 

 

 

 

 

 

Not in use, subleased to others

 

92

 

38

 

130

 

Total

 

914

 

544

 

1,458

 

 


(1)                      Includes 91,328 square feet pertaining to an owned manufacturing facility we are idling for an indefinite period and 29,700 square feet pertaining to a leased manufacturing facility we are permanently closing in 2002. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Restructuring and Asset Impairment Charges” for additional information.

ITEM 3.                                         LEGAL PROCEEDINGS

As part of its investigation of the crash off the Canadian coast on September 2, 1998 of Swissair Flight 111, the Canadian Transportation Safety Board (“TSB”) notified us that they recovered burned wire that was attached to the in-flight entertainment system installed on some of Swissair’s aircraft by one of our subsidiaries. We are fully cooperating with the ongoing TSB investigation. Although the TSB has not issued a final report, it has advised us that it has no evidence to date that the system we installed malfunctioned or failed during the flight. Families of the 229 persons who died aboard the flight have filed actions in federal and state courts against us, and many other parties unaffiliated with us, including Swissair and Boeing. The actions claim negligence, strict liability and breach of warranty relating to the installation and testing of the in-flight entertainment system. The actions seek compensatory and punitive damages and costs in an unstated amount. All of the actions have been transferred to the United States District Court for the Eastern District of Pennsylvania and assigned under MDL Case No. 1269 for coordinated or consolidated pretrial proceedings. We intend to defend the claims vigorously.

We are party to other litigation incident to the normal course of business. We do not believe that the outcome of any of such other matters in which we are currently involved will have a material adverse effect on our business, financial position, results of operations or cash flows.

14



ITEM 4.                                         SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5.                                         MARKET FOR REGISTRANT’S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS

Market Information

There is no established public trading market for our shares. In August 1998, we sold all of our issued and outstanding shares to DeCrane Holdings, our parent company, in connection with the DLJ acquisition.

Holders

As of March 26, 2002, DeCrane Holdings was our only common stockholder.

Dividends

We have not paid dividends to date on our common stock and do not anticipate paying any cash dividends in the foreseeable future. The terms of our senior credit facility and senior subordinated note indenture restrict our ability to pay dividends if we do not meet certain financial criteria.

Recent Sale of Unregistered Securities

Our recent sales of unregistered securities are described in Note 11 accompanying our financial statements included in this report.

15



ITEM 6.                                         SELECTED FINANCIAL DATA

 

 

 

Year Ended December 31, (in thousands) (1)

 

 

 

 

 

 

 

 

 

1998

 

 

 

 

 

 

 

 

 

 

 

Four Months

Ended

December 31,

 

Eight Months

Ended

August 31,

 

 

 

 

 

 

 

2001

 

2000

 

1999

 

1998

 

1998

 

1997

 

 

 

(Successor) (2)

 

(Predecessor (2 )

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

395,352

 

$

347,379

 

$

244,048

 

$

60,356

 

$

90,077

 

$

108,903

 

Cost of sales (3)

 

279,681

 

232,048

 

165,871

 

42,739

 

60,101

 

80,247

 

Gross profit

 

115,671

 

115,331

 

78,177

 

17,617

 

29,976

 

28,656

 

Selling, general and administrative expenses (4)

 

68,517

 

45,394

 

40,157

 

10,274

 

19,351

 

15,756

 

Amortization of intangible assets

 

19,920

 

17,948

 

13,073

 

3,148

 

1,347

 

905

 

Operating income

 

27,234

 

51,989

 

24,947

 

4,195

 

9,278

 

11,995

 

Interest expense

 

39,001

 

41,623

 

27,918

 

6,852

 

2,350

 

3,154

 

Other expenses, net (5)

 

1,047

 

482

 

447

 

335

 

847

 

243

 

Income (loss) before provision for income

 

 

 

 

 

 

 

 

 

 

 

 

 

taxes and extraordinary item

 

(12,814

)

9,884

 

(3,418

)

(2,992

)

6,081

 

8,598

 

Provision for income taxes (benefit) (6)

 

1,188

 

6,282

 

952

 

(2,668

)

2,892

 

3,344

 

Income (loss) before extraordinary item

 

(14,002

)

3,602

 

(4,370

)

(324

)

3,189

 

5,254

 

Extraordinary loss from debt refinancing (7)

 

 

 

 

(2,229

)

 

(2,078

)

Net income (loss)

 

$

(14,002

)

$

3,602

 

$

(4,370

)

$

(2,553

)

$

3,189

 

$

3,176

 

Net income (loss) applicable to common stockholders

 

$

(19,063

)

$

1,328

 

$

(4,370

)

$

(2,553

)

$

3,189

 

$

531

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Financial Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities

 

$

14,929

 

$

16,783

 

$

15,200

 

$

1,008

 

$

3,014

 

$

4,641

 

Cash flows from investing activities

 

(24,792

)

(112,164

)

(152,774

)

(1,813

)

(87,378

)

(27,809

)

Cash flows from financing activities

 

11,397

 

95,656

 

142,052

 

(1,597

)

89,871

 

22,957

 

EBITDA (8)

 

88,791

 

80,992

 

56,526

 

13,476

 

13,743

 

16,915

 

Depreciation and amortization (9)

 

32,376

 

27,187

 

19,186

 

4,604

 

4,358

 

4,920

 

Capital expenditures:

 

 

 

 

 

 

 

 

 

 

 

 

 

Paid in cash (10)

 

11,899

 

22,689

 

7,262

 

1,813

 

1,745

 

3,842

 

Financed with capital lease obligations

 

4,438

 

109

 

1,711

 

48

 

116

 

182

 

Ratio of earnings to fixed charges (11)

 

 

1.2

 

 

3.0

x

3.3 

x

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Operating Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Bookings (12)

 

$

366,983

 

$

359,975

 

$

252,100

 

$

54,021

 

$

94,439

 

$

112,082

 

Backlog at end of period (13)

 

149,928

 

178,297

 

156,100

 

75,388

 

84,184

 

49,005

 

 

 

 

 

As of December 31, (in thousands) (1)

 

 

 

2001

 

2000

 

1999

 

1998

 

1997

 

 

 

(Successor)(2)

 

(Predecessor)(2)

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

9,794

 

$

8,199

 

$

7,918

 

$

3,518

 

$

206

 

Working capital

 

81,656

 

61,398

 

32,412

 

49,033

 

24,772

 

Total assets

 

645,711

 

664,254

 

531,842

 

330,927

 

99,137

 

Total debt (14)

 

400,250

 

383,279

 

315,651

 

186,765

 

38,838

 

Mandatorily redeemable securities (15)

 

28,240

 

23,179

 

 

 

 

Stockholders’ equity

 

100,376

 

119,755

 

106,241

 

97,921

 

39,527

 

 

See accompanying Notes to Selected Consolidated Financial Data.

 

16



Notes to Selected Consolidated Financial Data:

(1)                      Reflects the results of operations and financial position of companies we acquired for all periods subsequent to their respective acquisition dates as follows:

Company Acquired

 

Date Acquired

              Coltech

 

August 31, 2000

              ERDA

 

June 30, 2000

              Carl F. Booth & Co.

 

May 11, 2000

              Infinity

 

December 17, 1999

              International Custom Interiors

 

October 8, 1999

              PCI NewCo

 

October 6, 1999

              Custom Woodwork

 

August 5, 1999

              Precision Pattern

 

April 23, 1999

              PATS

 

January 22, 1999

              Dettmers

 

June 30, 1998

              Avtech

 

June 26, 1998

              Audio International

 

November 14, 1997

 

(2)                      Reflects our results of operations and financial position prior to (predecessor) and subsequent to (successor) our acquisition by DLJ.

(3)                      Includes charges to reflect:

                  a noncash inventory write-down of $4.2 million, a noncash write-off of $7.9 million of product development costs and charges totaling $3.9 million for the realignment of production programs between facilities during the twelve months ended December 31, 2001 related to our restructuring;

                  a noncash inventory write-down of $6.0 million during the twelve months ended December 31, 1999 related to our Systems Integration Group restructuring; and

                  cost of sales based on the fair value of inventory acquired of $1.6 million during the twelve months ended December 31, 1999 in connection with the Precision Pattern and Custom Woodworks acquisitions and $4.4 million during the four months ended December 31, 1998 in connection with the DLJ acquisition, collectively referred to as noncash acquisition charges.

(4)                      Includes charges of:

                  $12.6 million during the year ended December 31, 2001 related to restructuring and asset impairment charges, $9.9 million of which was a noncash asset impairment write-down;

                  $3.9 million during the year ended December 31, 1999 related to our Systems Integration Group’s restructuring and asset impairment charges, $1.3 million of which was a noncash asset impairment write-down; and

                  $3.6 million during the eight months ended August 31, 1998 for non-capitalized transaction costs associated with the DLJ acquisition.

(5)                      For the eight months ended August 31, 1998, reflects a $0.6 million charge for costs incurred in connection with a debt offering terminated as a result of the DLJ acquisition.

17



(6)                      For the four months ended December 31, 1998, includes a $2.6 million benefit from the reduction of the deferred tax valuation allowance. The provision for income taxes differs from the amount determined by applying the applicable U.S. statutory federal rate to the income before income taxes primarily due to the effects of state and foreign income taxes and non-deductible expenses, principally goodwill amortization. The difference in the effective tax rates between periods is mostly a result of the relationship of non-deductible expenses to income before income taxes.

(7)                      Reflects the write-off, net of an income tax benefit, of:

                  deferred financing costs as a result of the repayment of our then existing indebtedness in connection with the DLJ acquisition and the refinancing of the bridge notes during the four months ended December 31, 1998; and

                  deferred financing costs, unamortized original issue discounts, a prepayment penalty and other related expenses incurred as a result of the repayment of debt by DeCrane Aircraft with the net proceeds from its initial public offering in April 1997.

(8)                      We define EBITDA as earnings before interest, income taxes, depreciation and amortization, restructuring and asset impairment charges, acquisition related charges and other noncash and nonoperating charges. EBITDA, as defined, is the primary measurement we use to evaluate our operating groups’ performance and is consistent with the manner in which our lenders and ultimate investors measure our overall performance. A reconciliation of EBITDA to consolidated operating income is as follows:

 

 

 

Year Ended December 31, (in thousands)

 

 

 

 

 

 

 

 

 

1998

 

 

 

 

 

 

 

 

 

 

 

Four Months

Ended

December 31,

 

Eight Months

Ended

August 31,

 

 

 

 

 

2001

 

2000

 

1999

 

1998

 

1998

 

1997

 

 

 

(Successor)

 

(Predecessor)

 

Consolidated EBITDA

 

$

88,791

 

$

80,992

 

$

56,526

 

$

13,476

 

$

13,743

 

$

16,915

 

Depreciation and amortization

 

(32,376

)

(27,187

)

(19,186

)

(4,604

)

(4,358

)

(4,920

)

Restructuring and asset impairment charges

 

(28,658

)

 

(9,935

)

 

 

 

Acquisition related charges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncash inventory related charges (Note 3)

 

 

 

(1,606

)

(4,448

)

 

 

Acquisition related charges not capitalized

 

(308

)

(538

)

(709

)

(229

)

(107

)

 

Nonrecurring manufacturing facility startup costs

 

 

(717

)

 

 

 

 

Other noncash charges

 

(215

)

(561

)

(143

)

 

 

 

Consolidated operating income

 

$

27,234

 

$

51,989

 

$

24,947

 

$

4,195

 

$

9,278

 

$

11,995

 

EBITDA is not a measure of performance or financial condition under accounting principles generally accepted in the Unites States of America. EBITDA is not intended to represent cash flow from operations and should not be considered as an alternative to income from operations or net income computed in accordance with generally accepted accounting principles, as an indicator of our operating performance, as an alternative to cash flow from operating activities or as a measure of liquidity. The funds depicted by EBITDA are not available for our discretionary use due to funding requirements for working capital, capital expenditures, debt service, income taxes and other commitments and contingencies. We believe that EBITDA is a standard measure of liquidity commonly reported and widely used by analysts, investors and other interested parties in the financial markets. However, not all companies calculate EBITDA using the same method, and the EBITDA numbers we report may not be comparable to EBITDA reported by other companies.

18



(9)                      Reflects depreciation and amortization of plant and equipment, goodwill and other intangible assets. Excludes amortization of deferred financing costs and debt discounts that are classified as a component of interest expense.

(10)                Includes $5.4 million for the year ended December 31, 2000 related to our acquisition of a manufacturing facility.

(11)                For purposes of calculating the ratio of earnings to fixed charges, earnings represent net income before income taxes, minority interests in the income of majority-owned subsidiaries, extraordinary items and fixed charges. Fixed charges consist of:

                  interest, whether expensed or capitalized;

                  amortization of debt expense and discount or premium relating to any indebtedness, whether expensed or capitalized; and

                  one-third of rental expenses under operating leases which is considered to be a reasonable approximation of the interest portion of such expense.

There were deficiencies of earnings to cover fixed charges of $12.7 million for the year ended December 31, 2001, $3.2 million for the year ended December 31, 1999 and $2.9 million for the four months ended December 31, 1998.

(12)                Bookings represent the total invoice value of purchase orders received during the period.

(13)                Backlog represents the total invoice value of unfilled purchase orders at the end of the period. Orders may be subject to cancellation by the customer prior to shipment. The level of unfilled orders at any given date during the year will be materially affected by the timing of our receipt of orders and the speed with which those orders are filled.

(14)                Total debt is defined as long-term debt, including current portion, and short-term borrowings.

(15)                Reflects mandatorily redeemable 16% preferred stock.

19



ITEM 7.                                         MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussions should be read in conjunction with our financial statements and accompanying notes included in this report.

Overview

Our financial position and results of operations have been affected by our history of acquisitions. As a result, our historical financial statements do not reflect the financial position and results of operations of our current businesses. Our most recent acquisitions, which affect the comparability of the historical financial condition and results of operations described herein, are:

Cabin Management Group

                  Precision Pattern, acquired on April 23, 1999;

                  Custom Woodwork, acquired on August 5, 1999;

                  PCI NewCo, acquired on October 6, 1999;

                  International Custom Interiors, acquired on October 8, 1999;

                  The Infinity Partners, acquired on December 17, 1999;

                  Carl F. Booth & Co., acquired on May 11, 2000;

                  ERDA, acquired on June 30, 2000;

Specialty Avionics Group

                  Coltech, acquired on August 31, 2000; and

Systems Integration Group

                  PATS, acquired on January 22, 1999.

Our historical financial statements reflect the financial position and results of operations of the acquired businesses subsequent to their respective acquisition dates.

Industry Overview and Trends

We compete in the aircraft products and services market of the aerospace industry. The market for our products and services is largely driven by demand in the three civil aircraft markets: commercial, regional and corporate aircraft. We provide a minimal amount of products and services to the military aircraft market and are therefore relatively unaffected by defense spending and other factors affecting that market.

The September 11, 2001 terrorist attack on the United States and the further weakening of global economic conditions is adversely impacting the commercial airline industry. As a result of the substantial reduction in airline traffic, the airline industry is expected to report extremely large losses for the year 2001. Accordingly, most major U.S. carriers have implemented substantially reduced flight schedules, resulting in the temporary or permanent retirement of a portion of their fleets and workforce reductions aggregating over 100,000 employees. The airlines also appear to be taking measures to conserve cash by deferring or eliminating the purchase of parts and components for their aircraft and by canceling or deferring the delivery of new aircraft on order with original equipment manufacturers. These actions, in turn, are having an unfavorable impact upon that portion of our business. The commercial and regional original equipment and aftermarket/retrofit portions of our business are currently estimated at approximately 31% of our revenues.

In addition, an estimated 60% of our revenues are currently derived from the corporate aircraft original equipment and aftermarket/retrofit business. The weakening of global economic conditions has

20



negatively impacted this portion of our business as well, although not a severely as the commercial market. The remaining 9% of our revenues are derived from the military aircraft and other markets.

In response to these adverse conditions, we announced and implemented a restructuring plan in December 2001 designed to reduce expenses and conserve working capital. This plan includes permanently closing one manufacturing facility and idling a second facility for an indefinite period, curtailing several product development programs and instituting workforce reductions. In late February 2002, we also announced we would consolidate the production of two Cabin Management manufacturing facilities into a single facility, resulting in the permanent closure of one additional facility. See “—Restructuring and Asset Impairment Charges” below for additional information.

We believe the commercial aircraft portion of our business will experience significant weakness during 2002 and 2003, with potential recovery occurring during 2004 and continuing into 2005. We also believe the corporate aircraft portion of our business will experience slight weakness during 2002 with aircraft deliveries recovering in 2003 and continuing growth thereafter.

Results of Operations

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Revenues.  Revenues increased $48.0 million, or 13.8%, to $395.4 million for the year ended December 31, 2001 from $347.4 million for the year ended December 31, 2000. By segment, revenues changed as follows:

 

 

 

Increase (Decrease) From 2000

 

 

 

Amount

 

Percent

 

 

 

(in millions)

 

 

 

Cabin Management

 

$

31.3

 

17.9

%

Specialty Avionics

 

12.3

 

11.1

 

Systems Integration

 

4.6

 

7.2

 

Inter-group elimination

 

(0.2

)

 

 

Total

 

$

48.0

 

 

 

Cabin Management.  Revenues increased by $31.3 million, or 17.9% over the prior year, due to:

                  the inclusion of $23.8 million of revenues resulting from our acquisitions of Carl F. Booth & Co. and ERDA in 2000; and

                  a $7.5 million increase in cabin furniture and related products revenues.

Specialty Avionics.  Revenues increased by $12.3 million, or 11.1% over the prior year, due to:

                  a $8.5 million increase in cockpit audio, communications, lighting and power and control devices revenues; and

                  a $3.8 million revenue increase resulting from higher volume for our interconnect products.

Systems Integration.  Revenues increased by $4.6 million, or 7.2% over the prior year, due to:

                  a $9.3 million increase in auxiliary fuel tank system and power unit revenues; offset by

                  a $4.7 million decrease in cabin and flight deck systems integration revenues resulting from reducing the number of product offerings to focus on our core product lines.

 

21



Gross profit.  Gross profit increased $0.3 million, or 0.3%, to $115.7 million for the year ended December 31, 2001. Gross profit for the year ended December 31, 2001 is reduced by $16.1 million of restructuring charges, $12.2 million of which are noncash charges, relating to our 2001 restructuring. Excluding these restructuring charges, gross profit increased $16.4 million over the prior year and gross profit as a percent of revenues of 33.3% for the year ended December 31, 2001 is comparable to 33.2% for the same period last year. By segment, gross profit changed as follows:

 

 

 

Increase (Decrease) From 2000

 

 

 

Amount

 

Percent

 

 

 

(in millions)

 

 

 

Cabin Management

 

$

(9.5

)

(15.9%

)

Specialty Avionics

 

6.5

 

19.0

 

Systems Integration

 

3.5

 

15.7

 

Inter-group elimination

 

(0.2

)

 

 

Total

 

$

0.3

 

 

 

Cabin Management.  Gross profit decreased by $9.5 million, or 15.9% compared to prior year, primarily due to:

                  a $13.6 million decrease caused by 2001 restructuring charges relating to the curtailment and resulting write-off of inventoried costs for several product development programs, realignment of production programs between facilities and inventory write-downs, and

                  a $4.3 million decrease in profit margins associated with higher manufacturing costs for corporate aircraft furniture related to large airframe models; offset by

                  a $7.1 million increase in gross profit related to our 2000 acquisitions; and

                  a $1.3 million increase in gross profit related to higher product volume for corporate aircraft furniture.

Specialty Avionics.  Gross profit increased by $6.5 million, or 19.0% over the prior year, due to:

                  a $4.6 million increase related to higher volume for our cockpit audio, communications, lighting and power and control devices products; and

                  a $4.4 million increase related to a shift in product mix to items with higher margins; offset by

                  a $2.5 million decrease caused by 2001 restructuring charges relating to excess inventory write–downs.

Systems Integration.  Gross profit increased by $3.5 million, or 15.7% over the prior year, due to:

                  a $3.1 million increase due to higher auxiliary fuel tank systems volume and favorable manufacturing efficiencies; and

                  a $1.2 million increase resulting, in part, from improved operating results subsequent to our fourth quarter 1999 restructuring; offset by

                  a $0.8 million decrease resulting from lower cabin and flight deck systems integration services volume.

 

22



Selling, general and administrative expenses.  Selling, general and administrative expenses increased $23.1 million, or 50.9%, to $68.5 million for the year ended December 31, 2001, from $45.4 million for the same period last year. SG&A expenses for the year ended December 31, 2001 includes $12.6 million of restructuring and asset impairment charges, $9.9 million of which are noncash charges. Excluding these restructuring and asset impairment charges, SG&A expenses increased $10.5 million over the prior year and SG&A expenses as a percent of revenues increased to 14.1% for the year ended December 31, 2001 compared to 13.1% for the same period last year. By segment, SG&A expenses changed as follows:

 

 

 

Increase (Decrease) From 2000

 

 

 

Amount

 

Percent

 

 

 

(in millions)

 

 

 

Cabin Management

 

$

15.4

 

97.1

%

Specialty Avionics

 

2.5

 

20.4

 

Systems Integration

 

4.6

 

52.4

 

Corporate

 

0.6

 

7.6

 

Total

 

$

23.1

 

 

 

Cabin Management.  SG&A expenses increased by $15.4 million, or 97.1% over the prior year, due to:

                  a $8.7 million increase caused by 2001 restructuring and asset impairment charges relating to the impairment of long–lived assets, severance, lease termination and other related costs;

                  a $3.6 million increase in expenses to support increased production and new programs; and

                  a $3.1 million increase in expenses resulting from our 2000 acquisitions.

Specialty Avionics.  SG&A expenses increased by $2.5 million, or 20.4% over the prior year, due to:

                  a $2.1 million increase in labor and employee benefit costs in support of revenue growth; and

                  a $0.4 million increase caused by 2001 restructuring charges relating to severance and other related compensation costs.

Systems Integration.  SG&A expenses increased by $4.6 million, or 52.4% over the prior year, due to:

                  a $3.5 million increase caused by 2001 charges relating to the impairment of long–lived assets; and

                  a $1.1 million increase in expenses associated with refocusing our cabin and flight deck systems integration services to product offerings requiring higher levels of sales and marketing, program management and customer service support.

Corporate.  SG&A expenses increased by $.6 million, or 7.6% over the prior year, primarily due to increased depreciation expense.

Depreciation and amortization of intangibles.  Depreciation and amortization expense, which includes amortization of goodwill and identifiable intangible assets, increased $5.2 million, or 19.1%, for the year ended December 31, 2001. The increase results from the inclusion of $2.2 million of depreciation and amortization expense in 2001 from companies we acquired during 2000 and additional depreciation resulting from our capital expenditures during the period.

23


 


EBITDA and Operating income.  EBITDA increased $7.8 million to $88.8 million, or 9.6%, for the year ended December 31, 2001, from $81.0 million for the same period last year. EBITDA as a percent of revenues decreased to 22.5% for the year ended December 31, 2001, from 23.3% for the same period last year.

Operating income decreased $24.8 million to $27.2 million for the year ended December 31, 2001, from $52.0 million for the same period last year. Operating income for the year ended December 31, 2001 is reduced by $28.7 million of restructuring and asset impairment charges, $22.1 million of which are noncash charges. Excluding these restructuring and asset impairment charges, operating income increased $3.9 million, or 7.5%, over the prior year.

EBITDA and operating income changed as follows:

 

 

 

Increase (Decrease) From 2000

 

 

 

Amount

 

Percent

 

 

 

(in millions)

 

 

 

EBITDA

 

 

 

 

 

Cabin Management

 

$

(0.5

)

(1.1%

)

Specialty Avionics

 

6.6

 

24.6

 

Systems Integration

 

2.1

 

14.1

 

Corporate

 

(0.2

)

(2.2

)

Inter-group elimination

 

(0.2

)

 

 

Total EBITDA

 

7.8

 

 

 

 

 

 

 

 

 

Restructuring and asset impairment charges

 

(28.7

)

 

 

Depreciation and amortization

 

(5.2

)

 

 

Other noncash and acquisition related charges

 

1.3

 

 

 

Total operating income

 

$

(24.8

)

 

 

Cabin Management.  EBITDA decreased by $0.5 million, or 1.1% compared to the prior year, primarily due to:

                  a $5.5 million decrease primarily resulting from higher manufacturing costs for corporate aircraft furniture related to the large airframe models; offset by

                  a $5.0 million increase resulting from our 2000 acquisitions.

Specialty Avionics.  EBITDA increased by $6.6 million, or 24.6% over the prior year, due to higher demand for our commercial aircraft products prior to the September 11th terrorist attack.

Systems Integration.  EBITDA increased by $2.1 million, or 14.1% over the prior year, due principally to higher auxiliary fuel tank systems revenues and favorable manufacturing efficiencies.

Interest expense.  Interest expense was $39.0 million for the year ended December 31, 2001 compared to $41.6 million for the year ended December 31, 2000, a reduction of $2.6 million due to the following:

                  a $4.4 million decrease resulting from lower average interest rates charged by our lenders during 2001; offset by

                  a $1.8 million increase resulting from higher levels of indebtedness.

 

24


 


Provision for income taxes.  The provision for income taxes differs from the amount determined by applying the applicable U.S. statutory federal rate to the income before income taxes primarily due to the effects of state and foreign income taxes and non-deductible expenses, principally goodwill amortization. The difference in the effective tax rates between periods is mostly a result of the relationship of non-deductible expenses to income before income taxes.

Net income (loss).  Net income decreased $17.6 million to a net loss of $14.0 million for the year ended December 31, 2001 compared to net income of $3.6 million for the same period last year.

Net income (loss) applicable to common stockholder.  Net income applicable to DeCrane Holdings, our common stockholder, decreased $20.4 million to a net loss of $19.1 million for the year ended December 31, 2001 compared to net income of $1.3 million for the same period last year. The increase is attributable to:

                  a $17.6 million net loss increase; and

                  a $2.8 million increase in accrued dividends and redemption value accretion resulting from the issuance of 16% mandatorily redeemable preferred stock on June 30, 2000.

Bookings.  Bookings increased $7.0 million, or 1.9%, to $367.0 million for the year ended December 31, 2001 compared to $360.0 million for the same period last year. The increase in bookings for 2001 results from:

                  a $22.5 million increase associated with companies we acquired during 2000 that are included for a full year in our 2001 results; offset by

                  a $15.5 million decrease resulting from the adverse impact the events of September 11th and its aftermath and the weakening global economic conditions are having on our businesses.

Backlog at end of period.  Backlog decreased $28.4 million to $149.9 million as of December 31, 2001 compared to $178.3 million as of December 31, 2000. The decrease in backlog for 2001 primarily results from the adverse impact the events of September 11th and its aftermath and the weakening global economic conditions are having on our businesses.

As described in “—Industry Overview and Trends,” the September 11th terrorist attack is having an adverse impact on the aerospace industry and, in turn, is having an unfavorable impact on the commercial airline portion of our business. In addition, the weakening of global economic conditions has negatively impacted other portions of our business as well. We are not currently able to determine the continuing impact these events will have on our bookings and resulting backlog for future periods. However, given the magnitude of these events, the impact could be material.

25


 


Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

Revenues.  Revenues increased $103.3 million, or 42.3%, to $347.4 million for the year ended December 31, 2000 from $244.0 million for the year ended December 31, 1999. The increase primarily results from the inclusion of revenues in 2000 from companies we acquired during 1999 and 2000. By segment, revenues changed as follows:

 

 

 

Increase (Decrease) From 1999

 

 

 

Amount

 

Percent

 

 

 

(in millions)

 

 

 

Cabin Management

 

$

100.6

 

135.6

%

Specialty Avionics

 

(1.6

)

(1.4

)

Systems Integration

 

4.4

 

7.6

 

Inter-group elimination

 

(0.1

)

 

 

Total

 

$

103.3

 

 

 

Cabin Management.  Revenues increased by $100.6 million, or 135.6% over the prior year, due to:

                  the inclusion of $94.1 million of revenues resulting from our acquisitions of Precision Pattern, Custom Woodwork, PCI NewCo, International Custom Interiors and Infinity in 1999 and Carl F. Booth and ERDA in 2000; and

                  a $6.5 million increase in entertainment and cabin management product revenues reflecting primarily a higher volume of corporate jet production by the aircraft manufacturers.

Specialty Avionics.  Revenues decreased by $1.6 million, or 1.4% from the prior year, due to somewhat lower demand for our commercial aircraft products during the first two quarters of the year.

Systems Integration.  Revenues increased by $4.4 million, or 7.6% over the prior year, due to:

                  a $3.3 million revenue increase resulting from the inclusion of PATS for an entire twelve months during 2000; and

                  a $1.1 million increase related to timing differences between when orders are received versus shipped.

Gross profit.  Gross profit increased $37.2 million, or 47.5%, to $115.3 million for the year ended December 31, 2000. The increase primarily results from the inclusion of gross profit in 2000 from companies we acquired in 1999 and 2000. Gross profit as a percent of revenues increased to 33.2% for the year ended December 31, 2000 from 32.0% for the same period last year primarily as a result of improved Systems Integration profit margins. By segment, gross profit changed as follows:

 

 

 

Increase (Decrease) From 1999

 

 

 

Amount

 

Percent

 

 

 

(in millions)

 

 

 

Cabin Management

 

$

28.6

 

94.5

%

Specialty Avionics

 

(2.7

)

(7.5

)

Systems Integration

 

11.2

 

101.5

 

Inter-group elimination

 

0.1

 

 

 

Total

 

$

37.2

 

 

 

Cabin Management.  Gross profit increased by $28.6 million, or 94.5% over the prior year, due to:

                  a $31.4 million increase in gross profit resulting from our 1999 and 2000 acquisitions; offset by

 

26



 

                  a $1.7 million decrease related to lower margins resulting from higher engineering costs associated with developing new entertainment system products;

                  a $0.8 million decrease from production startup inefficiencies at a new manufacturing facility; and

                  a $0.3 million decrease related to product mix.

Specialty Avionics.  Gross profit decreased by $2.7 million, or 7.5% from the prior year, due to somewhat lower demand for our commercial aircraft products as a result of lower commercial jet production by Boeing and price reductions to several large customers.

Systems Integration.  Gross profit increased by $11.2 million, or 101.5% over the prior year, due to:

                  a $5.9 million increase due to recording a one time restructuring charge to cost of sales in 1999,

                  a $2.8 million increase in gross profit resulting from favorable auxiliary fuel tank manufacturing and installation efficiencies achieved;

                  a $2.1 million increase resulting, in part, from improved operating results subsequent to our 1999 restructuring, which included our exit from the manufacturing business at two of our subsidiaries; and

                  a $0.4 million reduction in engineering costs attributable to project development incurred in 1999 but not in 2000.

Selling, general and administrative expenses.  Selling, general and administrative expenses increased $5.2 million, or 12.9%, to $45.4 million for the year ended December 31, 2000, from $40.2 million for the same period last year. The increase primarily results from the inclusion of $7.7 million of SG&A expenses in 2000 from companies we acquired in 1999 and 2000. SG&A expenses as a percent of revenues decreased to 13.1% for the year ended December 31, 2000 compared to 16.5% for the same period last year. By segment, SG&A expenses changed as follows:

 

 

 

Increase (Decrease) From 1999

 

 

 

Amount

 

Percent

 

 

 

(in millions)

 

 

 

Cabin Management

 

$

7.4

 

86.5

%

Specialty Avionics

 

(1.1

)

(8.3

)

Systems Integration

 

(3.1

)

(25.9

)

Corporate

 

2.0

 

29.7

 

Total

 

$

5.2

 

 

 

Cabin Management.  SG&A expenses increased by $7.4 million, or 86.5% over the prior year, due to:

                  the inclusion of $7.5 million related to our 1999 and 2000 acquisitions; and

                  manufacturing facility startup costs of $0.7 million in 2000; offset by

                  a $0.8 million decrease in expenses resulting from the consolidation of administrative activities during 2000 of companies we acquired during 1999 and 2000.

Specialty Avionics.  SG&A expenses decreased by $1.1 million, or 8.3% from the prior year, due to reduced selling costs related to lower sales.

27


 


Systems Integration.  SG&A expenses decreased by $3.1 million, or 25.9% over the prior year, due to:

                  a $3.9 million decrease related to 1999 restructuring and asset impairment charges; offset by

                  a $0.6 million increase in expenses resulting from an increase in engineering project management, and

                  the inclusion of $0.2 million related to our 1999 acquisition.

Corporate.  SG&A expenses increased by $2.0 million, or 29.7% over the prior year due to increased incentive compensation and spending for sales and marketing programs.

Depreciation and amortization of intangibles.  Depreciation and amortization expense, which includes amortization of goodwill and identifiable intangible assets, increased $8.0 million, or 41.7%, for the year ended December 31, 2000. The increase results from the inclusion of $4.9 million of depreciation and amortization expense in 2000 from companies we acquired during 1999 and 2000 and additional depreciation resulting from our capital expenditures during the period.

EBITDA and Operating income.  EBITDA increased $24.5 million to $81.0 million, or 43.3%, for the year ended December 31, 2000, from $56.5 million for the same period last year. The increase primarily results from the contribution to year 2000 results from companies we acquired during 1999 and 2000. EBITDA as a percent of revenues increased to 23.3% for the year ended December 31, 2000, from 23.2% for the same period last year. Operating income increased $27.0 million to $51.9 million, or 108.4%, for the year ended December 31, 2000, from $24.9 million for the same period last year. By segment, EBITDA changed as follows:

 

 

 

Increase (Decrease) From 1999

 

 

 

Amount

 

Percent

 

 

 

(in millions)

 

 

 

EBITDA

 

 

 

 

 

Cabin Management

 

$

21.8

 

90.6

%

Specialty Avionics

 

(0.4

)

(1.6

)

Systems Integration

 

4.5

 

42.2

 

Corporate

 

(1.5

)

(28.2

)

Inter-group elimination

 

0.1

 

 

 

Total EBITDA

 

24.5

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

(8.0

)

 

 

Restructuring and asset impairment charges

 

9.9

 

 

 

Acquisition related charges

 

1.8

 

 

 

Nonrecurring manufacturing facility startup costs

 

(0.7

)

 

 

Other noncash and acquisition related charges

 

(0.5

)

 

 

Total operating income

 

$

27.0

 

 

 

Cabin Management.  EBITDA increased by $21.8 million, or 90.6% over the prior year, due to acquisitions and increased volume to support higher production levels of corporate jets.

Specialty Avionics.  EBITDA decreased by $0.4 million, or 1.6% from the prior year, due to somewhat lower demand for our commercial aircraft products as a result of lower commercial jet production by Boeing.

28



Systems Integration.  EBITDA increased by $4.5 million, or 42.2% from the prior year, due to:

                  a $2.2 million increase resulting primarily from favorable auxiliary fuel tank and power unit manufacturing efficiencies; and

                  a $2.3 million increase resulting, in part, from improved operating results subsequent to our 1999 restructuring, which included our exit from the manufacturing business at two of our subsidiaries.

Corporate.  EBITDA decreased by $1.5 million, or 28.2% over the prior year, due to increased incentive compensation and spending for sales and marketing programs.

Interest expense.  Interest expense increased $13.7 million to $41.6 million for the year ended December 31, 2000, from $27.9 million for the same period last year, due to:

                  a $13.3 million increase resulting from higher debt levels associated with our acquisition of companies during 1999 and 2000; and

                  a $0.4 million increase resulting from higher average interest rates charged by our lenders during 2000.

Provision for income taxes.  The provision for income taxes differs from the amount determined by applying the applicable U.S. statutory federal rate to the income before income taxes primarily due to the effects of state and foreign income taxes and non-deductible expenses, principally goodwill amortization. The difference in the effective tax rates between periods is mostly a result of the relationship of non-deductible expenses to income before income taxes.

Net income (loss).  Net income increased $8.0 million to $3.6 million for the year ended December 31, 2000 compared to a net loss of $4.4 million for the same period last year.

Net income (loss) applicable to common stockholder.  Net income applicable to DeCrane Holdings, our common stockholder, increased $5.7 million to $1.3 million for the year ended December 31, 2000 compared to a net loss of $4.4 million for the same period last year. The net increase is attributable to:

                  a $8.0 million increase in net income; offset by

                  a $2.3 million increase in accrued dividends and redemption value accretion resulting from DeCrane Aircraft’s issuance of 16% mandatorily redeemable preferred stock on June 30, 2000.

Bookings.  Bookings increased $107.9 million, or 42.8%, to $360.0 million for the year ended December 31, 2000 compared to $252.1 million for the same period last year. The increase in bookings for 2000 results from:

                  a $91.8 million increase associated with companies we acquired in 1999 and 2000; and

                  a $16.1 million increase related to business growth, principally related to our Cabin Management and Specialty Avionics Group’s product lines.

Backlog at end of period.  Backlog increased $22.2 million to $178.3 million as of December 31, 2000 compared to $156.1 million as of December 31, 1999. The increase in backlog for 2000 includes:

                  $9.6 million attributable to existing order backlog for companies we acquired during 2000; and

                  a net $12.6 million increase primarily related to our Specialty Avionics and Systems Integration Groups.

 

29



 

 

Restructuring and Asset Impairment Charges

The following discussion should be read in conjunction with Note 2 accompanying our financial statements included in this report.

2001 Restructuring and Asset Impairment Charges

During the second quarter of 2001, our Cabin Management Group adopted a restructuring plan to realign production programs between its manufacturing facilities. In response to the adverse impact on the aerospace industry resulting from the September 11th terrorist attack and its aftermath, as well as the weakening of global economic conditions, we announced and implemented a further restructuring plan in December 2001 designed to reduce costs and conserve working capital. This plan includes permanently closing one manufacturing facility and idling a second facility for an indefinite period, curtailing several product development programs and instituting workforce reductions. This plan primarily affects our Cabin Management and Specialty Avionics Groups.

In connection with these restructuring plans, we recorded nonrecurring pre-tax charges to operations of $28.7 million in 2001, of which $22.1 million were noncash charges, for the impairment of long-lived assets and restructuring costs related to write-downs and write-offs of inventoried costs, costs associated with the realignment of production programs between facilities, severance, lease termination and other related costs. Of this amount, $16.1 million is included in cost of sales and the remaining $12.6 million is included in selling, general and administration expenses.

During 2001, we paid $5.0 million of costs related to this restructuring in cash and a $1.6 million restructuring reserve remains at December 31, 2001 solely for severance, lease termination and other related costs. Future cash payments will be funded from existing cash balances and internally generated cash from operations.

2002 Manufacturing Facilities Consolidation

In late February 2002, we announced we would consolidate the production of two Cabin Management manufacturing facilities into a single facility, resulting in the permanent closure of one additional facility. We have evaluated the carrying value of the long-lived assets related to the facility we are closing and do not expect an asset impairment charge.

We estimate that approximately $1.8 million of nonrecurring costs associated with this decision will be recorded during 2002. In addition, capital expenditures of approximately $2.0 million will be required during 2002 for improvements to the manufacturing facility that will house the combined operations.

1999 Restructuring and Asset Impairment Charges

This Systems Integration Group restructuring was completed in the third quarter of 2000, however, future cash payments will extend beyond this date due to future lease payments on the vacated facility. During 2001, we paid $0.3 million of costs related to this restructuring and a $0.4 million restructuring reserve remains at December 31, 2001 solely for lease termination costs through the lease termination date. Future cash payments will be funded from existing cash balances and internally generated cash from operations. We do not anticipate recording any additional charges relating this restructuring effort.

 

30



 

Liquidity and Capital Resources

We have required cash primarily to fund acquisitions, capital expenditures and for working capital. Our principal sources of liquidity have been cash flow from operations, third party borrowings, capital contributions from DeCrane Holdings and the issuance of preferred stock.

Net cash provided by operating activities was $14.9 million for the year ended December 31, 2001 and consisted of $43.3 million of cash provided by operations after adding back depreciation, amortization, the noncash portion of our restructuring and asset impairment charges and other noncash items, $28.2 million used for working capital, and $0.2 million used to reduce other liabilities. The following factors contributed to the $28.2 million working capital increase:

                  a $12.0 million inventory increase resulting from longer production lead times and new product development costs, primarily engineering costs, for new cabin interior products and components;

                    a $5.1 million accounts receivable increase resulting from higher revenues, timing differences relating to progress and final billings on long-term contracts versus the associated collection and the timing of other collections;

                    a $2.3 million increase in prepaid and other assets; and

                    an $8.8 million net decrease in accounts payable and accrued expenses.

Net cash used for investing activities was $24.8 million for the year ended December 31, 2001 and consisted of:

                    $17.1 million of contingent acquisition consideration paid during 2001; and

                    $11.9 million for capital expenditures; offset by

                    $3.6 million of cash purchase price reductions received for previously completed acquisitions; and further offset by

                    $0.6 million of proceeds from the sale of property and equipment, principally an owned manufacturing facility replaced with a larger leased facility.

We anticipate spending approximately $6.0 to $8.0 million for capital expenditures in 2002, which includes approximately $2.0 million for improvements to the manufacturing facility that will house the combined operations of two facilities resulting from the permanent closure of one facility in 2002.

Net cash provided by financing activities was $11.4 million for the year ended December 31, 2001 and, along with cash provided by operations, was used to fund the payment of contingent acquisition consideration and capital expenditures. We obtained these funds by borrowing $19.6 million under our senior credit facility and $2.8 million of other long-term borrowings. We used $10.1 million to make principal payments on our senior term debt, capitalized leases and other debt.

At December 31, 2001, senior credit facility borrowings totaling $287.7 million are at variable interest rates based on defined margins over the current prime or LIBOR rates. At December 31, 2001 we had $81.7 million of working capital and had $25.0 million of borrowings available under our working capital credit facility and $13.0 million available under our acquisition credit facility.

On March 19, 2002, the Company amended certain of the terms of its senior credit facility. The amendment combines the two $25.0 million working capital and acquisitions credit facilities into a single $50.0 million working capital credit facility, increases the prime rate and LIBOR rate margins by 50 basis points, resulting in a range of 2.00% to 3.25% for prime rate borrowings and 3.25% to 4.50% for LIBOR rate borrowings, and amends certain financial covenants, principally through December 31, 2003.

 

31



 

We are being affected by economic, financial, competitive, legislative, regulatory, business and other factors beyond our control. As described in “—Industry Overview and Trends,” the September 11th terrorist attack and its aftermath is having a severe adverse impact on the aerospace industry and, in turn, is having an unfavorable impact on portions of our business. In addition, the weakening of global economic conditions is adversely impacting other portions of our business as well. As described in “—Restructuring and Asset Impairment Charges,” we are taking measures to reduce costs and conserve working capital.

Although we cannot be certain, we believe our operating cash flows, together with borrowings under our bank credit facility, will be sufficient to meet our future short- and long-term operating expenses, working capital requirements, capital expenditures and debt service obligations for the next twelve months. However, our ability to pay principal or interest, to refinance our debt and to satisfy our other debt obligations will depend on our future operating performance.

In addition, we are continually considering acquisitions that complement or expand our existing businesses or that may enable us to expand into new markets. Future acquisitions may require additional debt, equity financing or both. We may not be able to obtain any additional financing on acceptable terms.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America. Our preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

We evaluate our estimates on an on-going basis. We base our estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant estimates and judgments used in the preparation of our financial statements.

Allowance for uncollectible accounts receivable.  Accounts receivable are reduced by an allowance for amounts that are deemed uncollectible. The estimated allowance for uncollectible amounts is based primarily on our evaluation of the financial condition of each of our customers and their payment history. We also provide an allowance based on the age of all receivables for which we have not established a customer-specific allowance. Generally, we do not require collateral or other security to support accounts receivable, however, under certain circumstances, we require deposits or cash-on-delivery terms. While our losses have been within our expectations, a deterioration of our customers’ financial condition may require that we provide additional allowances, reducing our operating income in future periods. Our customers operate in the corporate and commercial aircraft industry throughout the world and are being adversely impacted by the consequences of the September 11th terrorist attack and the further weakening of global economic conditions. Accounts receivable of $61.1 million is reduced by an allowance for uncollectible accounts of $2.6 million as of December 31, 2001.

Work-in-process inventory—deferred program costs.  We incur product development costs, comprised principally of engineering costs, relative to programs and contracts with long production cycles. In accordance with industry practice, we defer these costs in inventory. Program costs are charged to cost of sales over the production cycle of the program. Periodically, we assess the recoverability of the deferred program costs based on existing order backlog and our estimate of future orders. We reduce the deferred program costs to estimated realizable value in the period in which recoverability becomes

 

32



 

uncertain. As of December 31, 2001, we have $11.0 million of deferred program costs included in work-in-process inventory.

Allowance for excess and obsolete inventory.  Inventories are reduced by an allowance for estimated excess and obsolete inventory. The allowance is the difference between the cost of the inventory and its estimated market value. Our market value estimates are based upon existing order backlog, our assumptions about market conditions, including future orders and market pricing. While our products are not subject to rapid technological obsolescence, we also consider this factor in determining our market value estimates. If our customers cancel existing orders or actual market conditions, including future orders, are less favorable than we projected, we may provide additional allowances, reducing our gross profit in future periods. Inventories of $93.1 million were reduced by an allowance for excess and obsolete inventory of $6.6 million as of December 31, 2001.

Valuation of long-lived assets, goodwill and intangible assets.  We review long-lived assets, goodwill and other identifiable intangible assets for impairment when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Factors we consider important, which could trigger an impairment review, include significant:

                    underperformance relative to expected future operating results;

                    changes in the manner of our use of the acquired assets;

                    changes in our business strategy; or

                    negative aerospace industry or global economic conditions.

Our impairment review consists of comparing the sum of the expected undiscounted future cash flows resulting from the use of the asset to the carrying value of the assets. When we determine that the carrying value may not be recoverable, we record an impairment loss equal to the excess of the asset’s carrying value over its fair value. We measure fair value based on a projected discounted cash flow method using a discount rate we believe to be commensurate with the risk inherent in our current business model. Net long-lived assets, goodwill and intangible assets amounted to $462.2 million as of December 31, 2001.

As more fully described in “—Recently Issued Accounting Pronouncements” below, we will adopt the provisions of SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets” for our fiscal year beginning January 1, 2002. As a result, we will cease to amortize approximately $342.2 million of goodwill, including the values ascribed to assembled workforces we acquired which are not recognized as an intangible asset apart from goodwill under SFAS No. 141. In lieu of amortization, we are required to perform a transitional impairment review of our goodwill by June 30, 2002 and an annual impairment review thereafter. The amount of impairment losses recognizable upon adoption, if any, is not known at this time.

Accounting for income taxes.  As part of the process of preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing permanent and temporary differences resulting from differing treatment of items, such as amortization of assets and other nondeductible expenses, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our statement of financial position. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we must establish a valuation allowance which increases our provision for income taxes in our statement of operations.

We have $14.1 million of deferred tax assets as of December 31, 2001, which includes $9.0 million of federal and state loss carryforwards. Based on our estimates of taxable income by jurisdiction and the

 

33



 

periods over which our deferred tax assets will be recoverable, we believe it is more likely than not that we will generate taxable income in future periods sufficient to realize the tax benefit associated with these assets. As a result, we have not established a valuation allowance reducing our deferred tax assets as of December 31, 2001. In the event actual results differ from our estimates or we adjust these estimates in future periods, we would need to establish a valuation allowance in the period such determination is made, which would increase our provision for income taxes.

Revenue and profit recognition under long-term contracts.  Because of relatively long production cycles, a portion of our revenues and profits are recognized under percentage-of-completion method of accounting using total contract price, actual costs incurred to date and an estimate of the completion costs for each contract. We use this method because reasonably accurate estimates of the revenue and costs applicable to the various stages of a contract can be made. Recognized revenues and profits on each contract are subject to revisions as the contract progresses towards completion. Revisions to revenue and profit estimates are made in the period in which the facts that give rise to the revision become known. Provisions for estimated losses on uncompleted contracts are fully recognized in the period in which such losses are determined. Approximately 19.2% of our revenues and 17.9% of our gross profit during the year ended December 31, 2001 was recognized under the percentage-of-completion method of accounting.

Litigation.  We evaluate contingencies in accordance with SFAS No. 5, “Accounting for Contingencies.” We establish reserves for estimated loss contingencies when it is our assessment that a loss is probable and the amount of the loss can be reasonably estimated. Revisions to contingent liabilities are charged against income in the period in which different facts or information becomes known or circumstances change that affect the previous assumptions with respect to the likelihood or amount of loss. Reserves for contingent liabilities are based upon our assumptions and estimates, advice of legal counsel or other third parties regarding the probable outcomes of the matter. Should the outcome differ from the assumptions and estimates, revisions to the estimated reserves for contingent liabilities would be required.

As described in “Item 3. Legal Proceedings” and Note 12 accompanying our financial statements beginning on page F-1 of this report, we are involved in legal proceedings for which no reserves for estimated loss contingencies has been established as of December 31, 2001. Our current evaluation of these matters is that it is probable we will prevail and therefore are not required to accrue estimated losses in accordance with SFAS No. 5. However, there is a possibility that we may ultimately be required to pay all or a portion of the contingent liabilities related to these matters, which may have an adverse impact on our business, financial position, results of operations or cash flows in future periods.

Restructuring of our businesses.  As described in “—Restructuring and Asset Impairment Charges,” we recorded restructuring and asset impairment charges totaling $28.7 million during 2001 in response to the adverse aerospace industry impact the September 11th terrorist attack and its aftermath and weakening global economic conditions are having on our businesses. These charges are based on our present estimates of the impact these events are having on our businesses and the future recovery of the aerospace industry. Actual results and future recovery could differ from these estimates, potentially resulting in further restructuring and asset impairment charges.

Recently Issued Accounting Pronouncements

SFAS Nos. 141 and 142

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.”

 

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SFAS No. 141 establishes accounting and reporting standards for business combinations. SFAS No. 141 requires that all business combinations be accounted for using the purchase method of accounting and provides criteria for the initial recognition and measurement of goodwill and other intangible assets. SFAS No. 141 is effective for all business combinations initiated or completed after June 30, 2001. For business combinations completed prior to July 1, 2001, SFAS No. 141 is effective concurrent with the adoption of SFAS No. 142.

SFAS No. 142 establishes accounting and reporting standards for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 eliminates the current requirement to amortize goodwill and other indefinite-lived intangible assets requiring instead periodic impairment testing with a loss charged to the results of operation in the periods in which impairment occurs. Finite-lived intangible assets are amortized and are also subject to periodic impairment testing. Adoption of SFAS No. 142 is required for our fiscal year beginning January 1, 2002.

We are currently evaluating the impact the new accounting standards will have on our consolidated financial position and results of operations upon adoption on January 1, 2002; there will be no impact on cash flows. While the full, net of tax, impact has yet to be determined, adoption of the new standards will result in the following:

                    Under the criteria established in SFAS No. 141, the values ascribed to the assembled workforces acquired are not recognized as an intangible asset apart from goodwill. As a result, as of December 31, 2001 the $4,803,000 net book value ascribed to the assembled workforces, which is also net of the related deferred income tax liabilities, will be reclassified to goodwill as of January 1, 2002.

                                Adoption of SFAS No. 142 on January 1, 2002 will reduce amortization expense in future periods. If the nonamortization provisions of SFAS No. 142 had been effective as of the beginning of 2001, goodwill and assembled workforces amortization totaling $14,319,000 for the year ended December 31, 2001 would have been eliminated.

We have until June 30, 2002 to complete our transitional impairment testing of goodwill associated with adopting SFAS No. 142 and until March 31, 2002 to complete our transitional impairment testing of other intangible assets. The amount of impairment losses recognizable upon adoption, if any, is not known at this time.

SFAS No. 143

In June 2001, the Financial Accounting Standards Board issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 requires recognition of the fair value of liabilities associated with the retirement of long-lived assets when a legal obligation to incur such costs arises as a result of the acquisition, construction, development and/or the normal operation of a long-lived asset. Adoption of SFAS No. 143 is required for our fiscal year beginning January 1, 2002 although early application is permitted. We do not expect that the adoption of SFAS No. 143 will have an impact on our business, consolidated financial position, results of operations or cash flows.

SFAS No. 144

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets, “ which replaces SFAS No. 121, “Accounting for Impairment of Long-Lived Assets and for Long-Lived to be Disposed Of” and also replaces and broadens the provisions of Accounting Principles Board Opinion No. 30, “Reporting Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.”

 

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SFAS No. 144 establishes one accounting model, based on framework established in SFAS No. 121, for the recognition, measurement and reporting of impairment of long-lived assets to be held and used and measurement of long-lived assets to be disposed of by sale. This aspect of SFAS No. 144 will primarily affect our accounting for intangible assets subject to amortization as well as property and equipment and other long-lived assets.

SFAS No. 144 significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Under the provisions of SFAS No. 144, assets to be disposed of will be stated at the lower of their fair values or carrying amounts and depreciation will no longer be recognized.

SFAS No. 144 also supersedes the provisions of APB Opinion No. 30 with regard to reporting the effects of a disposal of a segment of a business. SFAS No. 144 requires expected future operating losses from discontinued operations to be displayed in discontinued operations in the period(s) in which the losses are incurred, rather than as of the measurement date as presently required.

Adoption of SFAS No. 144 is required for our fiscal year beginning January 1, 2002 although early application is permitted. We are currently evaluating the impact this new standard will have on our business, consolidated financial position, results of operations and cash flows.

Common European Currency

We have evaluated, and will continue to evaluate, the effects on our operations of the European Economic Monetary Union conversion to the Euro. We do not expect the introduction and use of the Euro, including our costs to adapt our information systems for this conversion, to be material to our business, financial position, results of operations or cash flows.

Special Note Regarding Forward-Looking Statements

All statements other than statements of historical facts included in this report are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors, which are difficult to predict. We are vulnerable to a variety of factors that affect many businesses, such as:

                    fuel prices and general economic conditions that affect demand for aircraft and air travel, which in turn affect demand for our products and services;

                    terrorist attacks and military conflicts that affect demand for aircraft and air travel, which in turn affect demand for our products and services;

                    our reliance on key customers and the adverse effect a significant decline in business from any one of them would have on our business;

                    changes in prevailing interest rates and the availability of financing to fund our plans for continued growth;

                    competition from larger companies;

                    Federal Aviation Administration prescribed standards and licensing requirements, which apply to many of the products and services we provide;

                    inflation, and other general changes in costs of goods and services;

                    liability and other claims asserted against us that exceeds our insurance coverage;

                    the ability to attract and retain qualified personnel;

                    labor disturbances; and

 

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                    changes in operating strategy, or our acquisition and capital expenditure plans.

Changes in such factors could cause our actual results to differ materially from those contemplated in such forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. We undertake no obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. You should not rely on our forward-looking statements as if they were certainties.

ITEM 7A.                                QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to various market risks, including interest rates and changes in foreign currency exchange rates. Market risk is the potential loss arising from adverse changes in prevailing market rates and prices. From time to time we use derivative financial instruments to manage and reduce risks associated with these factors. We do not enter into derivatives or other financial instruments for trading or speculative purposes.

Interest Rate Risk.  A significant portion of our capital structure is comprised of long-term variable- and fixed-rate debt.

Market risk related to our variable-rate debt is estimated as the potential decrease in pre-tax earnings resulting from an increase in interest rates. The interest rates applicable to variable-rate debt are, at our option, based on defined margins over the current prime or LIBOR rates. At December 31, 2001, the current prime rate was 4.75% and the current LIBOR rate was 2.10%. Based on $287.7 million of variable-rate debt outstanding as of December 31, 2001, a hypothetical one percent rise in interest rates, to 5.75% for prime rate borrowings and 3.10% for LIBOR borrowings, would reduce our pre-tax earnings by $2.9 million annually.

To limit our exposure related to rising interest rates, we have entered into an interest rate swap contract to effectively convert an additional $4.5 million variable-rate debt to 4.2% fixed-rate debt until maturity in 2008. The contract is considered to be a hedge against changes in the amount of future cash flows associated with interest payments on this portion of our variable-rate debt. Market risk related to this interest rate swap contract is estimated as the potential higher interest expense we will incur if the variable interest rate decreases below the 4.2% fixed rate. Based on the $4.5 million of variable-rate debt converted to fixed-rate debt outstanding as of December 31, 2001, a hypothetical one percent decrease in the variable interest rate to 3.2%, would reduce our pre-tax earnings by less than $0.1 million annually.

The estimated fair value of our $100.0 million fixed-rate long-term debt is approximately $93.5 million at December 31, 2001. Market risk related to our fixed-rate debt is deemed to be the potential increase in fair value resulting from a decrease in interest rates. For example, a hypothetical ten percent decrease in the interest rates, from 12.0% to 10.8%, would increase the fair value of our fixed-rate debt by approximately $7.0 million.

Foreign Currency Exchange Rate Risk.  Our foreign customers are located in various parts of the world, primarily Western Europe, the Far East and Canada, and we have subsidiaries with manufacturing facilities in Switzerland and Mexico. To limit our foreign currency exchange rate risk related to sales to our customers, orders are primarily valued and sold in U.S. dollars. From time to time we have entered into forward foreign exchange contracts to limit our exposure related to foreign inventory procurement and operating costs. While we have not entered into any such contracts since 1998, we may do so in the future depending on our assessment of future foreign exchange rate trends.

 

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ITEM 8.

 

FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

 

 

 

Our consolidated financial statements, supplementary financial information and financial statement schedules are included in a separate section at the end of this report. The financial statements, supplementary information and schedules are listed in the index on page F-1 of this report and are incorporated herein by reference.

 

ITEM 9.

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

PART III

 

 

 

ITEM 10.

 

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors and Executive Officers

The following table sets forth certain information concerning each person who is currently a director or executive officer of DeCrane Aircraft and its parent company, DeCrane Holdings.

 

Name

 

Age

 

DeCrane Aircraft

 

DeCrane Holdings

 

 

 

 

 

 

 

R. Jack DeCrane *

 

55

 

Director and Chief Executive Officer

 

Vice Chairman of the Board of Directors

Richard J. Kaplan

 

59

 

Director and Senior Vice President, Chief Financial Officer, Secretary and Treasurer

 

Assistant Secretary and Assistant Treasurer (chief accounting officer)

Robert G. Martin

 

64

 

Senior Vice President and Group President

 

Jeffrey A. Nerland

 

44

 

Senior Vice President and Group President

 

Jeffrey F. Smith

 

41

 

Senior Vice President and Group President

 

Thompson Dean

 

43

 

Chairman of the Board of Directors

 

Chairman of the Board of Directors and President

John F. Fort, III *

 

60

 

Director

 

Director

Susan C. Schnabel *

 

40

 

Director

 

Director


*                             Member of DeCrane Holding’s Compensation Committee.

R. Jack DeCrane is the founder of DeCrane Aircraft. Mr. DeCrane served as President from the time DeCrane Aircraft was founded in December 1989 until April 1993, when he was elected to the newly created office of Chief Executive Officer. Prior to founding our company, Mr. DeCrane held various positions at the aerospace division of B.F. Goodrich. Mr. DeCrane was a Group Vice President at the aerospace division of B.F. Goodrich with management responsibility for three business units from 1986 to 1989. He has served on our board of directors since its inception.

 

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Richard J. Kaplan has been the Senior Vice President, Chief Financial Officer, Secretary and Treasurer of DeCrane Aircraft since March 1999. From April 1998 to March 1999, he served as Executive Vice President and Chief Operating Officer of Developers Diversified Realty Corporation. From 1977 to 1998, he was a partner with Price Waterhouse LLP, having joined the firm in 1964. He became a director in 2000.

Robert G. Martin has been our Senior Vice President and President of the Systems Integration Group since October 1999 and President of PATS since we acquired it in January 1999. Mr. Martin also served as President of Aerospace Display Systems from September 1996 until October 1999. Prior to our acquisition of Aerospace Display Systems in 1996, Mr. Martin had served as its President since 1992.

Jeffrey A. Nerland has been our Senior Vice President and President of the Cabin Management Group since December 2001. From January 1999 until December 2001, Mr. Nerland served as Vice President, Business Development, and was appointed Senior Vice President in March 2001. From July 1994 through December 1998, he was President of The Nerland Group and a partner with Budetti, Harrison, Nerland and Associates, a consulting and interim management firm. Previously, Mr. Nerland was a director with Kibel, Green Inc., a consulting firm.

Jeffrey F. Smith has been our Senior Vice President and President of the Specialty Avionics Group since October 1999 and President of Avtech since we acquired it in June 1998. Previously, he has served in various capacities with Avtech since 1989.

Thompson Dean has been the Managing Partner of DLJ Merchant Banking, Inc. since November 1995. Previously, Mr. Dean was a Managing Director of DLJ Merchant Banking, Inc. and its predecessor. In November 2000, Credit Suisse First Boston, Inc. acquired Donaldson, Lufkin & Jenrette, Inc. As a result, DLJ Merchant Banking, Inc. became an indirect affiliate of Credit Suisse First Boston, Inc. and Credit Suisse Group. Mr. Dean serves as a director of AKI Holding Corp., Amatek Holdings S.A., Arcade Holding Corporation, Formica Corporation, Insilco Holdings Co., Manufacturers’ Services Limited, Mueller Holdings, Inc., and Von Hoffman Holdings, Inc. He became a director in 1998.

John F. Fort, III serves as a director of Insilco Holdings Co., Manufacturers’ Services Limited, Mueller Holdings, Inc., Roper Industries, Inc., Thermadyne Holdings Corporation and Tyco International Ltd. He became a director in 1998.

Susan C. Schnabel has been a Managing Director of DLJ Merchant Banking, Inc. since January 1998. In 1997, she served as Chief Financial Officer of PETsMART, a specialty retailer of pet products and supplies. From 1990 to 1996, Ms. Schnabel was with Donaldson, Lufkin & Jenrette Securities Corporation, where she became a Managing Director in 1996. In November 2000, Credit Suisse First Boston, Inc. acquired Donaldson, Lufkin & Jenrette, Inc. As a result, DLJ Merchant Banking, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation became indirect affiliates of Credit Suisse First Boston, Inc. and Credit Suisse Group. Ms. Schnabel serves as a director of Environmental Systems Products Holdings, Inc., Shoppers Drug Mart, Inc. and Noveon, Inc. She became a director in 1998.

Selection of Directors and Term of Office

DLJ Merchant Banking Partners II, L.P. is entitled to select all members of the Board of Directors of DeCrane Holdings and DeCrane Aircraft as described in “Item 13. Certain Relationships and Related Transactions—Investors’ Agreement.” At least one of such directors selected by DLJ Merchant Banking on each board must be an independent director. Mr. Fort is an independent director. All directors hold office until their successor is designated and qualified.

 

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ITEM 11.                                  EXECUTIVE COMPENSATION

Summary Compensation Table

The following table describes all annual compensation awarded to, earned by or paid to our Chief Executive Officer and the four most highly compensated executive officers other than the Chief Executive Officer for the years ended December 31, 2001, 2000 and 1999.

 

 

 

 

Annual Compensation

 

All Other Compensation

 

Name

 

Year

 

Salary

 

Bonus

 

Securities Underlying Options (1)

 

Other (2)

 

R. Jack DeCrane (3)

 

2001

 

$

352,906

 

$

1,290,000

 

 

$

15,741

 

Chief Executive Officer and Director

 

2000

 

341,381

 

1,100,000

 

2,981

 

48,979

 

 

 

1999

 

334,791

 

700,000

 

106,877

 

25,570

 

Richard J. Kaplan (4)

 

2001

 

213,531

 

470,000

 

 

5,809

 

Senior Vice President and Director

 

2000

 

207,293

 

400,000

 

4,093

 

25,721

 

 

 

1999

 

158,333

 

258,000

 

28,669

 

4,556

 

Robert G. Martin (5)

 

2001

 

222,789

 

403,639

 

 

6,275

 

Senior Vice President

 

2000

 

216,300

 

384,000

 

3,229

 

5,100

 

 

 

1999

 

187,500

 

209,000

 

17,813

 

 

Jeffrey A. Nerland (6)

 

2001

 

191,794

 

290,000

 

 

5,541

 

Senior Vice President

 

2000

 

185,338

 

250,000

 

5,344

 

5,024

 

 

 

1999

 

160,000

 

181,000

 

10,688

 

2,217

 

Jeffrey F. Smith (7)

 

2001

 

212,003

 

490,000

 

 

5,250

 

Senior Vice President

 

2000

 

206,063

 

249,000

 

3,000

 

5,250

 

 

 

1999

 

179,347

 

130,000

 

18,272

 

5,080

 

 


(1)                      Number of shares of common stock of DeCrane Holdings issuable upon exercise of options granted pursuant to our management incentive plan during the last fiscal year.

(2)                      Comprised of relocation costs, life insurance premiums and matching contributions to the 401(k) Retirement Plan.

(3)                      Mr. DeCrane also serves as Vice Chairman of the Board of Directors of DeCrane Holdings.

(4)                      Mr. Kaplan joined DeCrane Aircraft as Senior Vice President on March 15, 1999. Mr. Kaplan also serves as Assistant Secretary, Assistant Treasurer and chief accounting officer of DeCrane Holdings.

(5)                      Mr. Martin served as President Aerospace Display Systems from September 1996 through October 1999. Mr. Martin has been President of PATS since we acquired it in January 1999, and became our Senior Vice President and Group President of Systems Integration in October 1999.

(6)                      Mr. Nerland served as Vice President, Business Development, from January 1999 through December 2001 and was appointed Senior Vice President in March 2001. In December 2001, Mr. Nerland became our President of the Cabin Management Group.

(7)                      Mr. Smith has been our Senior Vice President and President of the Specialty Avionics Group since October 1999. Prior to October 1999, Mr. Smith was President of our Avtech subsidiary.

 

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Stock Option Grants in Last Fiscal Year

During the fiscal year ended December 31, 2001, no options to purchase shares of DeCrane Holdings common stock were granted pursuant to the management incentive plan. See “—Employment Agreements and Compensation Arrangements — Incentive Plans.”

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values

No stock options were exercised by our executive officers during the year ended December 31, 2001. The following tables sets forth information about the stock options held by the executive officers named below as of December 31, 2001.

 

Name

 

Number of Securities Underlying Unexercised Options
Exercisable / Unexercisable

 

Value of Unexercised In-the-Money Options at Fiscal Year End (1)
Exercisable / Unexercisable

 

R. Jack DeCrane

 

36,253 / 73,605

 

$

145,012 / 294,420

 

Richard J. Kaplan

 

10,812 / 21,950

 

39,360 / 79,904

 

Robert G. Martin

 

6,944 / 14,098

 

23,816 / 48,352

 

Jeffrey A. Nerland

 

5,291 / 10,741

 

14,564 / 29,564

 

Jeffrey F. Smith

 

7,019 / 14,253

 

24,116 / 48,972

 


(1)                      Computed based on a common stock share price of $27.00 per share as of December 31, 2001, the measuring date.

Compensation Committee Interlocks and Insider Participation

The Compensation Committee of our Board of Directors makes decisions regarding officer compensation. Jack DeCrane, chief executive officer of DeCrane Aircraft, participates in those discussions as a member of the Committee.

Employment Agreements and Compensation Arrangements

R. Jack DeCrane

On July 17, 1998, the Compensation Committee of our Board of Directors approved a three-year employment agreement between DeCrane Aircraft and R. Jack DeCrane, replacing his prior employment agreement that was to expire on September 1, 1998. Mr. DeCrane’s employment agreement was amended on May 5, 2000 to provide for a term through June 30, 2001, which term shall automatically extend for additional one year periods unless terminated by either party giving the other party notice of termination prior to April 1st of the year prior to the year in which the agreement would otherwise terminate. Mr. DeCrane’s employment agreement provides for various benefits, including an initial salary of $310,000, which is subject to annual review and increase, but not a decrease, and an annual bonus, currently determined pursuant to the performance-based cash incentive bonus plan.

The employment agreement also provides that if specified change-of-control events occur, and Mr. DeCrane’s employment is terminated by us for any reason other than for cause or as a result of his death or disability, or by Mr. DeCrane for “good reason,” as defined in the agreement, then we will pay Mr. DeCrane a lump sum in cash within fifteen days. The amount of that payment will be $1.00 less than three times the sum of Mr. DeCrane’s average base salary plus bonus for the five calendar years preceding his termination date and accrued but unpaid salary and bonus through the termination date. Mr. DeCrane will also receive other specified benefits, including continued coverage under our welfare plans for up to two years; a lump sum payment in cash equal to any unvested portions of our contributions to

 

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him under specified savings plans, plus two times the amount of our annual contributions on his behalf to those plans; a lump sum payment in cash equal to our matching contributions under those savings plans that Mr. DeCrane would have received had he continued maximum participation in the plans until the earlier of two years following his termination and December 31 of the year he turns 65, plus the vested and unvested amounts credited to him under any of our deferred compensation plans and the amount required to be credited during the year of his termination; and outplacement consulting services to aid Mr. DeCrane with re-employment. We will reduce these payments to the extent necessary to ensure deductibility for tax purposes.

Robert G. Martin

We entered into an employment agreement with Robert G. Martin, Senior Vice President of DeCrane Aircraft and President of the Systems Integration Group on September 10, 1999, amending his prior employment agreement dated September 19, 1996. Mr. Martin’s employment agreement provides for an annual salary of $210,000 and an annual bonus determined pursuant to the performance-based cash incentive bonus plan. Mr. Martin’s employment agreement expired on December 31, 2001 and has not been replaced.

Jeffrey F. Smith

We entered into an employment agreement with Jeffrey F. Smith, Vice President and General Manager of our Avtech subsidiary, on June 26, 1998. Mr. Smith’s employment agreement provided for an annual salary, initially in the amount of $145,000 and an annual bonus currently determined pursuant to the performance-based cash incentive bonus plan. Mr. Smith’s employment agreement expired on June 30, 2000 and has not been replaced.

Change of Control Agreements

In September 2000, we entered into change of control agreements with each of our executive officers, other than Mr. DeCrane, whose above described employment agreement contains provisions concerning change of control. The agreements provide that, for a term of two years from the effective date, should a change of control, as defined, occur during the term of the agreement and the executive officer’s employment shall be involuntarily terminated for any reason on a date which is less than two years after the date of the change of control, other than for cause, death or disability, DeCrane Aircraft is required to pay such executive his then salary plus average annual bonus over the last five years, equal to twenty four months compensation less the number of months elapsed from the date of the change of control to the employment termination date.

401(k) Retirement Plan

Substantially all of our full-time employees are eligible to participate in one of the 401(k) retirement plans we sponsor. The 401(k) plans allow employees as participants to defer, on a pre-tax basis, a portion of their salary and accumulate tax deferred earnings, as a retirement fund. The plans generally provide for us to match a percentage of the employee contribution up to a specified percentage of the employee’s salary. The full amount vested in a participant’s account will be distributed to a participant following termination of employment, normal retirement or in the event of disability or death.

Incentive Plans

Our management incentive plan provides for the issuance of options to purchase the common stock of DeCrane Holdings as incentive compensation to designated executive personnel and other key employees of DeCrane Aircraft and its subsidiaries. The Compensation Committee of the Board of Directors administers the management incentive plan. The plan provides for the granting of options to

 

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purchase 356,257 common shares and expires in 2009. Substantially all of the options awarded become fully vested and exercisable eight years from the date of grant but vesting and exercise can be accelerated based upon future attainment of defined performance criteria. At December 31, 2001, 33% of most of the options granted are vested and exercisable. We believe the per share exercise price of the options granted approximated the fair market value of the underlying common stock on each of the grant dates.

From time-to-time, we have permitted designated executive personnel and other key employees to purchase shares of common stock of DeCrane Holdings, with a portion of the purchase price to be loaned to the participants by DeCrane Aircraft. This arrangement was made available to persons and in amounts determined by the Compensation Committee of the Board of Directors. In December 1999, management purchased 171,295 shares of DeCrane Holdings common stock for $23.00 per share. The total purchase price was $3.9 million, of which one-half was paid in cash and one-half was loaned to management by DeCrane Aircraft with interest at applicable federal rates. During 2000, an additional 19,707 shares of DeCrane Holdings common stock was purchased by employees at $23.00 per share, which was paid in cash.

Our cash incentive bonus plan provides for the allocation of a bonus pool each year for incentive compensation to designated executive personnel and certain other employees of DeCrane Aircraft and its subsidiaries. The bonus pool for participants will be adjusted upwards or downwards each year based on EBITDA and cash flow, as defined, generated by the relevant participant’s operating unit. Bonus payments will be made in the quarter following the end of the year or period to which they relate.

Deferred Compensation Plan

We have a deferred compensation plan in which certain designated executive officers and key employees are permitted to defer a portion of their compensation earned. The Company invests amounts deferred and participants are fully vested in the amounts representing the fair market value of their investment accounts. We make no contributions on behalf of the participants and the invested assets are subject to the claims of our general creditors.

Directors’ Compensation

The directors of DeCrane Aircraft generally do not receive annual fees or fees for attending meetings of the Board of Directors of DeCrane Aircraft or committees thereof. However, John F. Fort, III, an independent director not affiliated with any investor in DeCrane Holdings, receives a director’s fee of $25,000 per year. In addition, the Board of Directors of DeCrane Holdings authorized the issuance of options to purchase 7,500 shares of DeCrane Holdings common stock to Mr. Fort under the same terms as the management incentive plan. See “Item 13. Certain Relationships and Related Transactions—Transactions with Management and Others — Transactions During 2001 and 2002” for additional information. Also, Mr. Fort is reimbursed for out-of-pocket expenses. We expect to continue these policies.

 

43



 

ITEM 12.                                  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security Ownership of Certain Beneficial Owners and Management

DeCrane Aircraft

As of February 28, 2002, DeCrane Aircraft has the following securities issued and outstanding:

                    100 shares of common stock, which are owned by one stockholder; and

                    250,000 shares of non-voting 16% Senior Redeemable Exchangeable Preferred Stock Due 2009, which are owned by nine stockholders.

The following table sets forth the beneficial ownership of DeCrane Aircraft’s voting and non-voting securities as of February 28, 2002 by its principal owners and its executive officers and directors.

 

 

 

Common Stock (2)

 

16% Senior Redeemable Preferred Stock

 

Name of Beneficial Owner (1)

 

Number of Shares, Partially Diluted

 

Percentage

 

Number of Shares

 

Percentage

 

DeCrane Holdings Co.

 

100

 

100.0

%

 

 

c/o DLJ Merchant Banking Partners II, L.P.

Eleven Madison Avenue, New York, NY 10010

 

 

 

 

 

 

 

 

 

DLJ Merchant Banking Partners II, L.P. affiliates (3)

 

 

 

200,000

 

80.0

%

Eleven Madison Avenue, New York, NY 10010

 

 

 

 

 

 

 

 

 

Thompson Dean (4)

 

 

 

 

 

c/o Credit Suisse First Boston

Eleven Madison Avenue, New York, NY 10010

 

 

 

 

 

 

 

 

 

Susan C. Schnabel (4)

 

 

 

 

 

c/o Credit Suisse First Boston

Eleven Madison Avenue, New York, NY 10010

 

 

 

 

 

 

 

 

 

Putnam Investment Management, Inc. and affiliates (5)

 

 

 

50,000

 

20.0

%

One Post Office Square, Boston, MA 02109

 

 

 

 

 

 

 

 

 

John F. Fort, III

 

 

 

 

 

R. Jack DeCrane

 

 

 

 

 

Richard J. Kaplan

 

 

 

 

 

Robert G. Martin

 

 

 

 

 

Jeffrey A. Nerland

 

 

 

 

 

Jeffrey A. Smith

 

 

 

 

 

All directors and named executive officers as a group (eight persons)

 

 

 

 

 

 


(1)                      Each person who has the power to vote and direct the disposition of shares is deemed to be a beneficial owner of those shares.

(2)                      The common stock columns reflect the number of shares owned and the total percentage ownership in the manner required by Securities and Exchange Commission rules. The entries for each holder

 

44



 

  assumes, if applicable, that the particular holder, and no one else, fully exercises all rights under warrants to purchase common stock and common stock which may be acquired upon the exercise of stock options and which are exercisable, or will be exercisable, prior to 60 days from February 28, 2002.

(3)                      Reflects preferred stock held by the following investors affiliated with DLJ Merchant Banking Partners II, L.P.:

 

      DLJ Investment Partners, L.P.

 

      DLJIP II Holdings, L.P.

      DLJ Investment Partners II, L.P.

 

 

The address of each of the investors is Eleven Madison Avenue, New York, New York 10010.

(4)                      Mr. Dean and Ms. Schnabel are officers of DLJ Merchant Banking, Inc., an affiliate of DLJ Merchant Banking Partners II, L.P and directors of DeCrane Holdings Co. The DLJ entities are affiliates of, and commonly collectively referred to as, Credit Suisse First Boston. See “Item 13. Certain Relationships and Related Transactions—Transactions with Management and Others” for additional information. The share data shown for these individuals excludes shares shown as held by the DLJ affiliates and DeCrane Holdings Co. separately listed in this table; Mr. Dean and Ms. Schnabel disclaim beneficial ownership of those shares.

(5)                      Reflects preferred stock held by the following investors related to Putnam Investment Management, Inc.:

 

      Putnam Diversified Income Trust

 

      Putnam High Yield Trust

      Putnam Fund Trust — Putnam High Yield Trust II

 

      Putnam Strategic Income Fund

      Putnam High Yield Advantage Fund

 

      Putnam Variable Trust — Putnam VT High Yield Fund

The address of each of the investors is One Post Office Square, Boston, MA 02109.

DeCrane Holdings

As of February 28, 2002, DeCrane Holdings has the following securities issued and outstanding:

                    3,895,531 shares of common stock, which is owned by 35 stockholders; and

                    342,417 shares of non-voting 14% Senior Redeemable Exchangeable Preferred Stock Due 2009, which is owned by 18 stockholders.

The following table sets forth the beneficial ownership of DeCrane Holdings’ voting and non-voting securities as of February 28, 2002 by its principal owners and its executive officers and directors.

 

 

 

Common Stock (2)

 

14% Senior Redeemable Preferred Stock

 

Name of Beneficial Owner (1)

 

Number of Shares, Partially Diluted

 

Percentage

 

Number of Shares

 

Percentage

 

DLJ Merchant Banking Partners II, L.P. and affiliates (3)

 

3,962,138

 

94.8

%

340,000

 

99.3

%

Eleven Madison Avenue, New York, NY 10010

 

 

 

 

 

 

 

 

 

Thompson Dean (4)

 

 

 

 

 

c/o Credit Suisse First Boston

Eleven Madison Avenue, New York, NY 10010

 

 

 

 

 

 

 

 

 

Susan C. Schnabel (4)

 

 

 

 

 

c/o Credit Suisse First Boston

Eleven Madison Avenue, New York, NY 10010

 

 

 

 

 

 

 

 

 

Putnam Investment Management, Inc. and affiliates (5)

 

27,871

 

*

 

 

 

One Post Office Square, Boston, MA 02109

 

 

 

 

 

 

 

 

 

John F. Fort, III (6)

 

5,927

 

*

 

 

 

R. Jack DeCrane (7)

 

95,755

 

2.4

%

 

 

Richard J. Kaplan (8)

 

33,698

 

*

 

 

 

Robert G. Martin (9)

 

11,520

 

*

 

 

 

Jeffrey A. Nerland (10)

 

12,156

 

*

 

 

 

Jeffrey A. Smith (11)

 

16,173

 

*

 

 

 

All directors and named executive officers as a group (eight persons)

 

175,229

 

4.4

%

 

 

 


45



 

*                             Less than 1.0%

(1)                      Each person who has the power to vote and direct the disposition of shares is deemed to be a beneficial owner of those shares.

(2)                      The common stock columns reflect the number of shares owned and the total percentage ownership in the manner required by Securities and Exchange Commission rules. The entries for each holder assumes, if applicable, that the particular holder, and no one else, fully exercises all rights under warrants to purchase common stock and common stock which may be acquired upon the exercise of stock options and which are exercisable, or will be exercisable, prior to 60 days from February 28, 2002.

(3)                      Reflects 3,695,652 shares of common stock, warrants to purchase an additional 266,486 shares of common stock and preferred stock held directly by DLJ Merchant Banking Partners II, L.P. and the following affiliated investors:

 

      DLJ Diversified Partners, L.P.

 

      DLJ Merchant Banking Partners II-A, L.P.

      DLJ Diversified Partners-A, L.P.

 

      DLJ Millennium Partners, L.P.

      DLJ EAB Partners, L.P.

 

      DLJ Millennium Partners-A, L.P.

      DLJ ESC II, L.P.

 

      DLJ Offshore Partners II, C.V.

      DLJ First ESC L.P.

 

      DLJIP II Holdings, L.P.

      DLJ Investment Partners, L.P.

 

      DLJMB Funding II, Inc.

      DLJ Investment Partners II, L.P.

 

      UK Investment Plan 1997 Partners, Inc.

The address of each of the investors is Eleven Madison Avenue, New York, New York 10010.

(4)                      Mr. Dean and Ms. Schnabel are officers of DLJ Merchant Banking, Inc., an affiliate of DLJ Merchant Banking Partners II, L.P and directors of DeCrane Aircraft. The DLJ entities are affiliates of, and commonly collectively referred to as, Credit Suisse First Boston. See “Item 13. Certain Relationships and Related Transactions—Transactions with Management and Others” for additional information. The share data shown for these individuals excludes shares shown as held

 

46



 

 by the DLJ affiliates separately listed in this table; Mr. Dean and Ms. Schnabel disclaim beneficial ownership of those shares.

(5)                      Reflects warrants to purchase shares of common stock held by the following investors related to Putnam Investment Management, Inc.:

 

      Putnam Diversified Income Trust

 

      Putnam High Yield Trust

      Putnam Fund Trust — Putnam High Yield Trust II

 

      Putnam Strategic Income Fund

      Putnam High Yield Advantage Fund

 

      Putnam Variable Trust — Putnam VT High Yield Fund

The address of each of the investors is One Post Office Square, Boston, MA 02109.

(6)                      Includes 4,927 shares that may be acquired upon the exercise of stock options that are exercisable or will become exercisable prior to 60 days from February 28, 2002.

(7)                      Includes 36,253 shares that may be acquired upon the exercise of stock options that are exercisable or will become exercisable prior to 60 days from February 28, 2002.

(8)                      Includes 10,812 shares that may be acquired upon the exercise of stock options that are exercisable or will become exercisable prior to 60 days from February 28, 2002.

(9)                      Includes 6,944 shares that may be acquired upon the exercise of stock options that are exercisable or will become exercisable prior to 60 days from February 28, 2002.

(10)                Includes 5,291 shares that may be acquired upon the exercise of stock options that are exercisable or will become exercisable prior to 60 days from February 28, 2002.

(11)                Includes 7,019 shares that may be acquired upon the exercise of stock options that are exercisable or will become exercisable prior to 60 days from February 28, 2002.

Securities Authorized for Issuance Under Equity Compensation Plans

Our Management Incentive Stock Option Plan, which is an equity compensation plan approved by our stockholders, is described in Note 14 accompanying our financial statements included in this report.

ITEM 13.                                  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Transactions with Management and Others

Acquisition of Donaldson, Lufkin & Jenrette, Inc. by Credit Suisse Group

DLJ Merchant Banking Partners, II, L.P. is an affiliate of Donaldson, Lufkin & Jenrette, Inc. In November 2000, Credit Suisse Group and its Credit Suisse First Boston, Inc. subsidiary acquired Donaldson, Lufkin & Jenrette, Inc. Upon completion of the acquisition, Donaldson, Lufkin & Jenrette, Inc. was renamed Credit Suisse First Boston (USA), Inc. The combined operations are commonly referred to collectively as Credit Suisse First Boston.

Arrangements With Other CSFB / DLJ Affiliates

Credit Suisse First Boston, as successor to DLJ Capital Funding, Inc., receives customary fees and reimbursement of expenses in connection with the arrangement and syndication of our senior bank credit facility. Credit Suisse First Boston Corporation, referred to herein as CSFB Corporation and formerly known as Donaldson, Lufkin & Jenrette Securities Corporation, is the sole market-maker for our senior subordinated notes. In addition, DeCrane Aircraft is obligated to pay CSFB Corporation an annual advisory fee of $300,000 until 2003. We may from time to time enter into other investment banking relationships with CSFB Corporation or one of its affiliates pursuant to which they will receive customary

 

47



 

fees and will be entitled to reimbursement for all reasonable disbursements and out-of-pocket expenses incurred in connection therewith. We expect that any such arrangement will include provisions for the indemnification of CSFB Corporation against liabilities, including liabilities under the federal securities laws.

Investors’ Agreement

Investors owing 96.6% of DeCrane Holdings’ issued and outstanding common stock and common stock warrants and options, all of DeCrane Holdings’ preferred stock and all of DeCrane Aircraft’s preferred and common stock, have entered into an Amended and Restated Investors’ Agreement, dated October 6, 2000. The investors who own DeCrane Holdings’ warrants to purchase 159,794 shares of common stock are not parties to the Investors’ Agreement. The agreement provides that:

                  The parties to the agreement shall vote their shares to cause DLJ Merchant Banking Partners, II, L.P. to select all members of the Board of Directors of DeCrane Holdings and DeCrane Aircraft and at least one of such directors on each board shall be an independent director.

                  Transfers of the shares by the parties to the agreement are restricted.

                  Parties to the agreement may participate in some specific kinds of sales of shares by DLJ affiliates.

                  DLJ affiliates may require the other parties to the agreement to sell shares of DeCrane Holdings’ common stock in some cases should the DLJ affiliates choose to sell any such shares owned by them.

                  The DLJ affiliates may request six demand registrations with respect to all or any of the DeCrane Holdings common stock, preferred stock and Class A warrants to purchase 155,000 common shares held by those affiliates, which are immediately exercisable subject to customary deferral and cutback provisions.

                  The holders of Class B warrants to purchase 139,357 shares of DeCrane Holdings common stock may request two demand registrations together with all or any common stock held by them, which are immediately exercisable subject to customary deferral and cutback provisions.

                  The parties to the agreement are entitled to unlimited piggyback registration rights, subject to customary cutback provisions, and excluding registrations of shares issuable in connection with any employee stock options, employee benefit plan or an acquisition.

                  DeCrane Holdings will indemnify the stockholders against some liabilities and expenses, including liabilities under the Securities Act.

                  Any person acquiring shares of common stock or preferred stock who is required by the terms of the Investors’ Agreement or any employment agreement or stock purchase, option, stock option or other compensation plan to become a party thereto shall execute an agreement to become bound by the Investors’ Agreement.

Each DeCrane Holdings’ Class A Warrant entitles the holder to purchase one share of common stock at an exercise price of not less than $0.01 per share subject to customary antidilution provisions and other customary terms. The warrants are exercisable at any time prior to 5:00 p.m. New York City time on August 28, 2009, subject to applicable federal and state securities laws.

Each DeCrane Holdings’ Class B Warrant entitles the holder to purchase one share of common stock at an exercise price of not less than $0.01 per share subject to customary antidilution provisions and other customary terms. The warrants are exercisable at any time prior to 5:00 p.m. New York City time on June 30, 2010, subject to applicable federal and state securities laws.

 

48



 

Transactions During 2001 and 2002

Securities and Exchange Commission rules require we briefly describe transactions, or series of similar transactions, with specified persons (as defined in the rules) and involving amounts exceeding $60,000, which have occurred since January 1, 2001, the beginning of our most recent fiscal year. These transactions are briefly described below and are also described in the notes accompanying our financial statements included in this report.

Credit Suisse First Boston, as successor to DLJ Capital Funding, Inc., received customary fees and reimbursement of expenses in connection with the flowing transactions:

                  During 2001 DeCrane Aircraft amended its senior credit facility and borrowed an additional $20.0 million of term debt; and

                  In March 2002, DeCrane Aircraft further amended the terms of its senior credit facility.

In addition, CSFB Corporation receives a $300,000 annual advisory fee and, in January 2002, Mr. Fort was granted additional options to purchase 7,500 common shares at $27.00 per share under the same terms as the management incentive plan.

Indebtedness of Executive Officers and Directors

The following table sets forth all indebtedness owed to us by our executive officers and directors that individually exceeds $60,000 as required by Securities and Exchange Commission rules. All indebtedness set forth below results from purchases of DeCrane Holdings common stock and is payable to DeCrane Aircraft. The indebtedness, plus accrued interest, is payable upon the sale of the DeCrane Holdings stock held as collateral for each of the loans. See “Item 10. Directors and Executive Officers of the Registrant” for information regarding each individual’s relationship with DeCrane Aircraft and DeCrane Holdings.

 

 

 

Number of Shares Held as Collateral (1)

 

 

 

Total Indebtedness to DeCrane Aircraft as of December 31, 2001

 

Name

 

 

Interest Rate (2)

 

Principal (3)

 

Accrued Interest (4)

 

Total (5)

 

 

 

 

 

 

 

 

 

 

 

 

 

R. Jack DeCrane

 

56,521

 

5.74

%

$

649,991

 

$

78,018

 

$

728,009

 

Richard J. Kaplan

 

21,739

 

5.74

 

249,998

 

30,007

 

280,005

 

Jeffrey A. Nerland

 

6,521

 

5.74

 

74,991

 

9,001

 

83,992

 

Jeffrey F. Smith

 

8,695

 

5.74

 

99,992

 

12,002

 

111,994

 


(1)                      Reflects the number of shares of DeCrane Holdings common stock held by DeCrane Aircraft as collateral for the loans.

(2)                      Reflects the applicable federal rate of interest charged on the loans. Interest is compounded annually.

(3)                      Reflects the original principal amount of the loans.

(4)                      Reflects accrued interest payable through December 31, 2001.

(5)                      Reflects the maximum amount of indebtedness during the year ended December 31, 2001.

 

49



 

PART IV

 

ITEM 14.

 

EXHIBITS FINANCIAL STATEMENT SCHEDULES, AND

 

 

REPORTS ON FORM 8-K

 

List of Documents Filed as Part of this Report

1.         Financial Statements

Our consolidated financial statements filed with this report are included in a separate section at the end of this report and are listed in an index on page F-1.

2.         Financial Statement Schedules

Our consolidated financial statement schedules filed with this report are included in a separate section at the end of this report and are listed in an index on page F-1.

3.         Exhibits

The following exhibits are filed as part of this report.

 

Exhibit
Number

 

Filing Reference

 

Exhibit Description

 

3.2.1

 

(1)

 

Certificate of Incorporation of DeCrane Aircraft Holdings, Inc.

 

 

 

 

 

 

 

3.2.1.1

 

(15)

 

Certificate of Amendment of Certificate of Incorporation of  DeCrane Aircraft Holdings, Inc. dated October 17, 2001

 

 

 

 

 

 

 

3.2.2

 

(1)

 

Bylaws of DeCrane Aircraft Holdings, Inc.

 

 

 

 

 

 

 

3.3.1

 

(10)

 

Certificate of Formation and Certificate of Merger of  Aerospace Display Systems, LLC

 

 

 

 

 

 

 

3.3.2

 

(10)

 

Limited Liability Company Operating Agreement for  Aerospace Display Systems, LLC

 

 

 

 

 

 

 

3.4.1

 

(1)

 

Articles of Incorporation of Audio International, Inc.

 

 

 

 

 

 

 

3.4.2

 

(1)

 

Amended & Restated Bylaws of Audio International, Inc.

 

 

 

 

 

 

 

3.5.1

 

(1)

 

Articles of Incorporation of Avtech Corporation

 

 

 

 

 

 

 

3.5.2

 

(1)

 

Bylaws of Avtech Corporation

 

 

 

 

 

 

 

3.7.1

 

*

 

Certificate of Formation and Certificate of Merger of Dettmers Industries, LLC

 

 

 

 

 

 

 

3.7.2

 

*

 

Limited Liability Company Operating Agreement of Dettmers Industries, LLC

 

 

 

 

 

 

 

3.10.1

 

(1)

 

Articles of Incorporation of Hollingsead International, Inc.

 

 

 

 

 

 

 

3.10.2

 

(1)

 

Bylaws of Hollingsead International Inc.

 

 

 

 

 

 

 

3.11.1

 

(1)

 

Articles of Incorporation of Tri-Star Electronics International, Inc.

 

 

 

 

 

 

 

3.11.2

 

(1)

 

Bylaws of Tri-Star Electronics International, Inc.

 

 

 

 

 

 

 

3.12.1

 

(1)

 

Articles of Incorporation of PATS, Inc.

 

 

 

 

 

 

 

3.12.2

 

(1)

 

Bylaws of PATS, Inc.

 

 

 

 

 

 

 

3.12.3

 

(1)

 

Amendment to Articles of Incorporation of PATS, Inc.

 

 

 

 

 

 

 

3.12.4

 

(1)

 

Amendment to Bylaws of PATS, Inc.

 

 

50



 

Exhibit
Number

 

Filing Reference

 

Exhibit Description

3.17.1

 

(3)

 

Articles of Incorporation of PPI Holdings, Inc.

 

 

 

 

 

 

 

3.17.2

 

(3)

 

Bylaws of PPI Holdings, Inc.

 

 

 

 

 

 

 

3.18.1

 

(3)

 

Articles of Incorporation of Precision Pattern, Inc.

 

 

 

 

 

 

 

3.18.2

 

(3)

 

Bylaws of Precision Pattern, Inc.

 

 

 

 

 

 

 

3.19.1

 

(10)

 

Certificate of Formation and Certificate of Merger for  Custom Woodwork & Plastics, LLC

 

 

 

 

 

 

 

3.19.2

 

(10)

 

Limited Liability Company Operating Agreement for  Custom Woodwork & Plastics, LLC

 

 

 

 

 

 

 

3.20.1

 

(4)

 

Articles of Incorporation of PCI Newco, Inc. (formerly  PCI Acquisition Co., Inc.)

 

 

 

 

 

 

 

3.20.1.1

 

*

 

Certificate of Amendment of Articles of Incorporation of  PCI Acquisition Co., Inc. (changing its name to PCI Newco, Inc.)

 

 

 

 

 

 

 

3.20.2

 

(4)

 

Bylaws of PCI Newco, Inc. (formerly PCI Acquisition Co., Inc.)

 

 

 

 

 

 

 

3.22.1

 

(5)

 

Articles of Incorporation DAH-IP Holdings, Inc.

 

 

 

 

 

 

 

3.22.2

 

(5)

 

Bylaws of DAH-IP Holdings, Inc.

 

 

 

 

 

 

 

3.23.1

 

(5)

 

Articles of Incorporation of DAH-IP Infinity, Inc.

 

 

 

 

 

 

 

3.23.2

 

(5)

 

Bylaws of DAH-IP Infinity, Inc.

 

 

 

 

 

 

 

3.24.1

 

(5)

 

Certificate of Limited Partnership of The Infinity Partners, LTD. (formerly DAH-IP Acquisition Co., L.P.)

 

 

 

 

 

 

 

3.24.1.1

 

*

 

Certificate of Amendment of the Certificate of Limited Partnership of DAH-IP Acquisition Co., L.P. (changing its name to The Infinity Partners, LTD.)

 

 

 

 

 

 

 

3.24.2

 

(5)

 

Limited Partnership Agreement of The Infinity Partners, LTD. (formerly DAH-IP Acquisition Co., L.P.) among DAH-IP Holdings, Inc., the General Partner, and DeCrane Aircraft Holdings, Inc., the Limited Partner

 

 

 

 

 

 

 

3.24.3

 

(5)

 

Assignment of Partnership Interest in The Infinity Partners, LTD. (formerly DAH-IP Acquisition Co., L.P.) by DeCrane Aircraft Holdings, Inc. to DAH-IP Infinity, Inc.

 

 

 

 

 

 

 

3.25.1

 

(8)

 

Certificate of Formation and Certificate of Amendment of  Carl F. Booth & Co., LLC

 

 

 

 

 

 

 

3.25.2

 

(8)

 

Limited Liability Company Agreement of Carl F. Booth & Co., LLC

 

 

 

 

 

 

 

3.26.1

 

(10)

 

Restated Articles of Incorporation of ERDA, Inc.

 

 

 

 

 

 

 

3.26.2

 

(10)

 

Bylaws of ERDA, Inc. (formerly ERDA Acquisition Co., Inc.)

 

 

 

 

 

 

 

3.27.1

 

(12)

 

Articles of Incorporation of Coltech, Inc.

 

 

 

 

 

 

 

3.27.2

 

(12)

 

Bylaws of Coltech, Inc.

 

 

 

 

 

 

 

3.29.1

 

(13)

 

Certificate of Limited Partnership of DeCrane Aircraft Furniture Co., LP

 

 

 

 

 

 

 

3.29.2

 

(13)

 

Limited Partnership Agreement of DeCrane Aircraft Furniture Co., LP

 

 

 

 

 

 

 

4.1

 

(1)

 

Indenture dated October 5, 1998 between DeCrane Aircraft and  State Street Bank and Trust Company

 

 

 

 

 

 

 

4.1.1

 

(1)

 

Supplemental Indenture dated January 22, 1999 among PATS, Inc. and its subsidiaries, the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company

 

 

 

51



 

Exhibit
Number

 

Filing Reference

 

Exhibit Description

4.1.2

 

(2)

 

Supplemental Indenture to be dated April 23, 1999 among PPI Holdings, Inc., Precision Pattern, Inc., the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company

 

 

 

 

 

 

 

4.1.3

 

(12)

 

Supplemental Indenture to be dated August 5, 1999 among CWP Acquisition, Inc. d/b/a Custom Woodwork & Plastics, Inc., the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company

 

 

 

 

 

 

 

4.1.4

 

(12)

 

Supplemental Indenture to be dated October 6, 1999 among PCI Acquisition Co., Inc. d/b/a PCI Newco, Inc., the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company

 

 

 

 

 

 

 

4.1.5

 

(12)

 

Supplemental Indenture to be dated October 8, 1999 among International Custom Interiors, Inc., the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company

 

 

 

 

 

 

 

4.1.6

 

(12)

 

Supplemental Indenture to be dated December 17, 1999 among DAH-IP Acquisition, L.P. d/b/a Infinity Partners, L.P., DAH-IP Holdings, Inc., DAH-IP Infinity, Inc., the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company

 

 

 

 

 

 

 

4.1.7

 

(12)

 

Supplemental Indenture to be dated May 11, 2000 among Booth Acquisition, LLC, the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company

 

 

 

 

 

 

 

4.1.8

 

(12)

 

Supplemental Indenture to be dated June 16, 2000 among DeCrane Aircraft Furniture Co., L.P., the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company

 

 

 

 

 

 

 

4.1.9

 

(12)

 

Supplemental Indenture to be dated June 30, 2000 among ERDA, Inc., the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company

 

 

 

 

 

 

 

4.1.10

 

(12)

 

Supplemental Indenture to be dated August 31, 2000 among Coltech, Inc., the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company

 

 

 

 

 

 

 

4.2

 

(1)

 

A/B Exchange Registration Rights Agreement among DeCrane Aircraft Holdings, Inc., the subsidiary guarantors, and DLJ Securities Corporation

 

 

 

 

 

 

 

4.5

 

(1)

 

Form of DeCrane Aircraft 12% Senior Subordinated Notes due 2008

 

 

 

 

 

 

 

4.6

 

(10)

 

Certificate of Designations, Preferences and Rights of 16% Senior Redeemable Exchangeable Preferred Stock due 2009

 

 

 

 

 

 

 

4.6.1

 

(12)

 

Amendment to the Certificate of Designations, Preferences and Rights of 16% Senior Redeemable Exchangeable Preferred Stock due 2009 dated October 5, 2000

 

 

 

 

 

 

 

4.7

 

(10)

 

Senior Preferred Stock Registration Rights Agreement dated as of June 30, 2000 among DeCrane Aircraft Holdings, Inc. and the Holders of Senior Preferred Stock

 

 

 

 

 

 

 

4.7.1

 

(12)

 

Amendment No. 1 to the Senior Preferred Stock Registration Rights Agreement dated as of June 30, 2000 among DeCrane Aircraft Holdings, Inc. and the Holders of Senior Preferred Stock dated October 6, 2000

 

 

 

52



 

Exhibit
Number

 

Filing Reference

 

Exhibit Description

10.1

 

(10)

 

Securities Purchase Agreement dated as of June 30, 2000 among DeCrane Aircraft Holdings, Inc., DeCrane Holdings Co. and the purchasers named therein

 

 

 

 

 

 

 

10.2

 

(12)

 

Amended and Restated Investors’ Agreement dated as of October 6, 2000 by and among DeCrane Holdings Co., DeCrane Aircraft Holdings, Inc. and the stockholders named therein

 

 

 

 

 

 

 

10.5

 

(1)

 

Tax Sharing Agreement dated March 15, 1993 between DeCrane Aircraft and several subsidiaries

 

 

 

 

 

 

 

10.6 **

 

(1)

 

Employment Agreement dated July 17, 1998 between DeCrane Aircraft Holdings, Inc. and R. Jack DeCrane

 

 

 

 

 

 

 

10.6.1 **

 

(13)

 

First Amendment to Employment Agreement dated May 5, 2000 between DeCrane Aircraft Holdings, Inc. and R. Jack DeCrane

 

 

 

 

 

 

 

10.7 **

 

(1)

 

401(k) Salary Reduction Non-Standardized Adoption Agreement dated April 30, 1992 between the Company and The Lincoln National Life Insurance Company

 

 

 

 

 

 

 

10.8

 

(1)

 

Form of Subscription Agreement for DeCrane Holdings Co. common and preferred stock by certain members of Global Technology Partners LLC

 

 

 

 

 

 

 

10.10

 

(1)

 

Credit Agreement dated August 28, 1998 by and among DeCrane Aircraft Holdings, Inc. (successor by merger to DeCrane Finance Co.) and DLJ Capital Funding, Inc.

 

 

 

 

 

 

 

10.10.1

 

(1)

 

First Amendment to Credit Agreement dated January 22, 1999

 

 

 

 

 

 

 

10.10.2

 

(6)

 

Second Amended and Restated Credit Agreement dated as of December 17, 1999 among DeCrane Aircraft Holdings, Inc., the lenders listed therein, DLJ Capital Funding, Inc., as syndication agent, and Bank One NA, as administrative agent

 

 

 

 

 

 

 

10.10.3

 

(9)

 

Third Amended and Restated Credit Agreement dated as of May 11, 2000 among DeCrane Aircraft Holdings, Inc., the lenders listed therein, DLJ Capital Funding, Inc., as syndication agent, and Bank One NA, as administrative agent

 

 

 

 

 

 

 

10.10.3.1

 

(12)

 

First Amendment to the Third Amended and Restated Credit Agreement dated as of June 30, 2000 among DeCrane Aircraft Holdings, Inc., the lenders listed therein, DLJ Capital Funding, Inc., as syndication agent, and Bank One NA, as administrative agent

 

 

 

 

 

 

 

10.10.4

 

(14)

 

Increased Commitments Agreement, dated as of April 27, 2001, pursuant to Third Amended and Restated Credit Agreement, dated as of May 11, 2000, as amended by the First Amendment to the Third Amended and Restated Credit Agreement, dated as of June 30, 2000

 

 

 

 

 

 

 

10.10.5

 

*

 

Second Amendment to the Third Amended and Restated Credit Agreement dated as of March 19, 2002 among DeCrane Aircraft Holdings, Inc., the lenders listed therein, Credit Suisse First Boston (as successor to DLJ Capital Funding, Inc.) as syndication agent, and Bank One NA, as administrative agent

 

 

 

 

 

 

 

10.19 **

 

(5)

 

Amended Management Incentive Stock Option Plan

 

 

 

 

 

 

 

10.20 **

 

(5)

 

Amended Stock Subscription Agreement

 

 

 

 

 

 

 

10.21 **

 

(5)

 

Amended Incentive Bonus Plan

 

 

53



 

Exhibit
Number

 

Filing Reference

 

Exhibit Description

10.22 **

 

(7)

 

Executive Deferred Compensation Plan

 

 

 

 

 

 

 

10.23.3 **

 

(13)

 

Change of Control Agreement between DeCrane Aircraft Holdings, Inc. and Richard J. Kaplan

 

 

 

 

 

 

 

10.23.5 **

 

(13)

 

Change of Control Agreement between DeCrane Aircraft Holdings, Inc. and Robert G. Martin

 

 

 

 

 

 

 

10.23.7 **

 

(13)

 

Change of Control Agreement between DeCrane Aircraft Holdings, Inc. and Jeffrey A. Nerland

 

 

 

 

 

 

 

10.23.8 **

 

(13)

 

Change of Control Agreement between DeCrane Aircraft Holdings, Inc. and Jeffrey F. Smith

 

 

 

 

 

 

 

12.1

 

*

 

Computation of Earnings to Fixed Charges Ratios

 

 

 

 

 

 

 

21.1

 

*

 

List of Subsidiaries of Registrant

 

 

 

 

 

 

 

23.1

 

*

 

Consent of PricewaterhouseCoopers LLP

 

 

 

 

 

 

 

99.1

 

(13)

 

Unaudited Pro Forma Financial Data for the year ended December 31, 2000

 


*                              Filed herewith.

**                       Denotes management contracts and compensatory plans and arrangements required to be filed as exhibits to this report.

(1)                       Filed as an exhibit to our Registration Statement (Registration No. 333-70365) on Form S-1 (Amendment No. 1) filed with the Commission on March 3, 1999.

(2)                       Filed as an exhibit to our Registration Statement (Registration No. 333-70365) on Form S-1 (Amendment No. 2) filed with the Commission on April 23, 1999.

(3)                       Filed as an exhibit to our Registration Statement (Registration No. 333-70365) on Form S-1 (Amendment No. 3) filed with the Commission on May 6, 1999.

(4)                       Filed as an exhibit to our Form 8-K dated August 5, 1999 filed with the Commission on October 19, 1999.

(5)                       Filed as an exhibit to our Form 8-K dated December 17, 1999 filed with the Commission on December 31, 1999.

(6)                       Filed as an exhibit to our Form 10-K dated December 31, 1999 filed with the Commission on March 30, 2000.

(7)                       Filed as an exhibit to our Form 10-Q dated March 31, 2000 filed with the Commission on May 9, 2000.

(8)                       Filed as an exhibit to our Form 8-K dated May 11, 2000 filed with the Commission on May 25, 2000.

(9)                       Filed as an exhibit to our Form 8-K (Amendment No. 1) dated May 11, 2000 filed with the Commission on June 16, 2000.

(10)                 Filed as an exhibit to our Form 8-K (Amendment No. 1) dated June 30, 2000 filed with the Commission on August 2, 2000.

(11)                 Filed as an exhibit to our Form 10-Q dated June 30, 2000 filed with the Commission on August 14, 2000.

 

54



 

(12)                 Filed as an exhibit to our Form 10-Q dated September 30, 2000 filed with the Commission on November 14, 2000.

(13)                 Filed as an exhibit to our Form 10-K dated December 31, 2000 filed with the Commission on March 30, 2001.

(14)                 Filed as an exhibit to our Form 10-Q dated March 31, 2001 filed with the Commission on May 14, 2001.

(15)                 Filed as an exhibit to our Form 10-Q dated September 30, 2001 filed with the Commission on November 13, 2001.

            Reports of Form 8-K Filed During the Quarter Ended December 31, 2001

None.

 

55



 

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

DECRANE AIRCRAFT HOLDINGS, INC. (Registrant)

 

By:

/s/  R. Jack DeCrane

By:

/s/  Richard J. Kaplan

 

R. Jack DeCrane

 

Richard J. Kaplan

 

Chief Executive Officer

 

Senior Vice President, Chief Financial

 

 

 

Officer, Secretary and Treasurer

 

 

 

 

Date:

March 26, 2002

 

 

 

 

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

By:

/s/  Thompson Dean

By:

/s/  R. Jack DeCrane

 

Thompson Dean

 

R. Jack DeCrane

 

Chairman of the Board of Directors

 

Director

 

 

 

 

 

 

 

 

By:

/s/  John F. Fort, III

By:

/s/  Richard J. Kaplan

 

John F. Fort, III

 

Richard J. Kaplan

 

Director

 

Director

 

 

 

 

 

 

 

 

By:

/s/  Susan C. Schnabel

 

 

 

Susan C. Schnabel

 

 

 

Director

 

 

 

 

 

 

 

 

 

 

Date:

March 26, 2002

 

 

 

 

56



 

 

Index to Consolidated Financial Statements and Financial Statement Schedules

Consolidated Financial Statements

 

Report of Independent Accountants

 

Consolidated Balance Sheets as of December 31, 2001 and 2000

 

Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999

 

Consolidated Statements of Stockholder’s Equity for the years ended December 31, 2001, 2000 and 1999

 

Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999

 

Notes to Consolidated Financial Statements

 

 

 

Consolidated Supplementary Financial Information

 

Selected Quarter Financial Data (Unaudited)

 

 

 

Consolidated Financial Statement Schedules

 

For the years ended December 31, 2001, 2000 and 1999:

 

II — Valuation and Qualifying Accounts

 

All other schedules are omitted because they are either not applicable or the required information is shown in the consolidated financial statements or notes thereto.

 

 

F-1



 

REPORT OF INDEPENDENT ACCOUNTANTS

 

 

To the Board of Directors

and Stockholder of

DeCrane Aircraft Holdings, Inc.

 

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of DeCrane Aircraft Holdings, Inc. and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

 

 

 

PRICEWATERHOUSECOOPERS LLP

Los Angeles, California

March 1, 2002, except for Note 18,

which is as of March 19, 2002

 

 

 

F-2



 

DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share data)

 

 

December 31,

 

 

 

2001

 

2000

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

9,794

 

$

8,199

 

Accounts receivable, net

 

58,451

 

53,830

 

Inventories

 

86,498

 

86,696

 

Deferred income taxes

 

14,063

 

15,090

 

Prepaid expenses and other current assets

 

2,559

 

1,366

 

Total current assets

 

171,365

 

165,181

 

 

 

 

 

 

 

Property and equipment, net

 

61,073

 

59,491

 

Other assets, principally intangibles, net

 

413,273

 

439,582

 

Total assets

 

$

645,711

 

$

664,254

 

 

 

 

 

 

 

Liabilities, Mandatorily Redeemable Preferred Stock and Stockholder’s Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

13,899

 

$

9,289

 

Accounts payable

 

19,051

 

20,304

 

Accrued liabilities

 

56,626

 

74,190

 

Income taxes payable

 

133

 

 

Total current liabilities

 

89,709

 

103,783

 

 

 

 

 

 

 

Long-term debt

 

386,351

 

373,990

 

Deferred income taxes

 

33,597

 

37,013

 

Other long-term liabilities

 

7,438

 

6,534

 

 

 

 

 

 

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

 

 

 

Mandatorily redeemable preferred stock

 

28,240

 

23,179

 

 

 

 

 

 

 

Stockholder’s equity:

 

 

 

 

 

Common stock, $.01 par value, 1,000 and 35,000,000 shares authorized as of December 31, 2001 and 2000, respectively; 100 shares issued and outstanding as of December 31, 2001 and 2000

 

 

 

Additional paid-in capital

 

122,469

 

127,315

 

Notes receivable for shares sold

 

(2,668

)

(2,552

)

Accumulated deficit

 

(17,323

)

(3,321

)

Accumulated other comprehensive loss

 

(2,102

)

(1,687

)

Total stockholder’s equity

 

100,376

 

119,755

 

Total liabilities and stockholder’s equity

 

$

645,711

 

$

664,254

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-3



 

DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands)

 

 

Year Ended December 31,

 

 

 

2001

 

2000

 

1999

 

 

 

 

 

 

 

 

 

Revenues

 

$

395,352

 

$

347,379

 

$

244,048

 

Cost of sales

 

279,681

 

232,048

 

165,871

 

 

 

 

 

 

 

 

 

Gross profit

 

115,671

 

115,331

 

78,177

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

68,517

 

45,394

 

40,157

 

Amortization of intangible assets

 

19,920

 

17,948

 

13,073

 

Total operating expenses

 

88,437

 

63,342

 

53,230

 

 

 

 

 

 

 

 

 

Income from operations

 

27,234

 

51,989

 

24,947

 

 

 

 

 

 

 

 

 

Other expenses:

 

 

 

 

 

 

 

Interest expense

 

39,001

 

41,623

 

27,918

 

Other expenses, net

 

1,047

 

482

 

447

 

 

 

 

 

 

 

 

 

Income (loss) before provision for income taxes

 

(12,814

)

9,884

 

(3,418

)

Provision for income taxes

 

1,188

 

6,282

 

952

 

 

 

 

 

 

 

 

 

Net income (loss)

 

(14,002

)

3,602

 

(4,370

)

 

 

 

 

 

 

 

 

Accrued preferred stock dividends

 

(4,593

)

(2,040

)

 

Preferred stock redemption value accretion

 

(468

)

(234

)

 

 

 

 

 

 

 

 

 

Net income (loss) applicable to common stockholder

 

$

(19,063

)

$

1,328

 

$

(4,370

)

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-4



 

DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholder’s Equity

(In thousands, except share data)

 

 

Common Stock

 

Additional Paid-in

 

Notes Receivable For

 

Accumulated

 

Accumulated Other Comprehensive

 

 

 

 

 

Shares

 

Amount

 

Capital

 

Shares Sold

 

 Deficit

 

 Loss

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 1998

 

100

 

$

 

$

100,200

 

$

 

$

(2,553

)

$

274

 

$

97,921

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

(4,370

)

 

(4,370

)

Translation adjustment

 

 

 

 

 

 

(1,800

)

(1,800

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,170

)

Capital contributions and related notes receivable issued in connection with shares sold

 

 

 

16,815

 

(2,447

)

 

 

14,368

 

Compensatory stock option expense

 

 

 

143

 

 

 

 

143

 

Notes receivable interest accrued

 

 

 

 

(21

)

 

 

(21

)

Balance, December 31, 1999

 

100

 

 

117,158

 

(2,468

)

(6,923

)

(1,526

)

106,241

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

3,602

 

 

3,602

 

Translation adjustment

 

 

 

 

 

 

(161

)

(161

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,441

 

Capital contribution, net of common stock repurchased

 

 

 

7,851

 

51

 

 

 

7,902

 

Value of warrants issued with sale of preferred stock

 

 

 

4,019

 

 

 

 

4,019

 

Accrued preferred stock dividends

 

 

 

(2,040

)

 

 

 

(2,040

)

Preferred stock redemption value accretion

 

 

 

(234

)

 

 

 

(234

)

Compensatory stock option expense

 

 

 

561

 

 

 

 

561

 

Notes receivable interest accrued

 

 

 

 

(135

)

 

 

(135

)

Balance, December 31, 2000

 

100

 

 

127,315

 

(2,552

)

(3,321

)

(1,687

)

119,755

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

(14,002

)

 

(14,002

)

Translation adjustment

 

 

 

 

 

 

(327

)

(327

)

Unrealized loss on interest rate swap contract

 

 

 

 

 

 

(88

)

(88

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14,417

)

Accrued preferred stock dividends

 

 

 

(4,593

)

 

 

 

(4,593

)

Preferred stock redemption value accretion

 

 

 

(468

)

 

 

 

(468

)

Compensatory stock option expense

 

 

 

215

 

 

 

 

215

 

Notes receivable interest accrued

 

 

 

 

(116

)

 

 

(116

)

Balance, December 31, 2001

 

100

 

$

 

$

122,469

 

$

(2,668

)

$

(17,323

)

$

(2,102

)

$

100,376

 

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-5



 

DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

 

 

Year Ended December 31,

 

 

 

2001

 

2000

 

1999

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

 

$

(14,002

)

$

3,602

 

$

(4,370

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

34,594

 

29,445

 

20,817

 

Noncash portion of restructuring and asset impairment charges

 

22,058

 

 

7,242

 

Deferred income taxes

 

(37

)

5,121

 

(380

)

Other, net

 

689

 

773

 

132

 

Changes in assets and liabilities, net of effect from acquisitions:

 

 

 

 

 

 

 

Accounts receivable

 

(5,085

)

1,036

 

(3,736

)

Inventories

 

(11,990

)

(14,321

)

(11,243

)

Prepaid expenses and other assets

 

(2,278

)

2,048

 

96

 

Accounts payable

 

(1,248

)

2,259

 

3,754

 

Accrued liabilities

 

(7,615

)

(12,973

)

3,703

 

Income taxes payable

 

64

 

583

 

862

 

Other long-term liabilities

 

(221

)

(790

)

(1,677

)

Net cash provided by operating activities

 

14,929

 

16,783

 

15,200

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Cash paid for acquisitions, net of cash acquired

 

(13,529

)

(89,546

)

(145,706

)

Capital expenditures

 

(11,899

)

(22,689

)

(7,262

)

Other, net

 

636

 

71

 

194

 

Net cash used for investing activities

 

(24,792

)

(112,164

)

(152,774

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Senior term debt borrowings

 

20,000

 

55,000

 

135,000

 

Senior revolving line of credit borrowings (repayments), net

 

(400

)

12,400

 

(5,800

)

Proceeds from sale of preferred stock and warrants

 

 

24,924

 

 

Capital contribution

 

 

7,902

 

14,368

 

Customer advance and other borrowings

 

2,797

 

3,451

 

5,000

 

Principal payments on term debt, capitalized leases and other debt

 

(10,076

)

(5,824

)

(1,953

)

Deferred financing costs

 

(767

)

(1,900

)

(4,348

)

Other, net

 

(157

)

(297

)

(215

)

Net cash provided by financing activities

 

11,397

 

95,656

 

142,052

 

 

 

 

 

 

 

 

 

Effect of foreign currency translation on cash

 

61

 

6

 

(78

)

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

1,595

 

281

 

4,400

 

Cash and cash equivalents at beginning of period

 

8,199

 

7,918

 

3,518

 

Cash and cash equivalents at end of period

 

$

9,794

 

$

8,199

 

$

7,918

 

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

F-6



 

DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

Note 1.           Summary of Significant Accounting Policies

Description of the Business

DeCrane Aircraft Holdings, Inc. and subsidiaries (the “Company” or “DeCrane Aircraft”) is a leading provider of integrated assemblies, sub-assemblies and component parts to the aerospace industry. The Company’s businesses are organized into three separate operating groups: Cabin Management, Specialty Avionics and Systems Integration. The Company is a wholly-owned subsidiary of DeCrane Holdings Co. (“DeCrane Holdings”).

Basis of Presentation

The consolidated financial statements include the accounts of the Company and all wholly-owned subsidiaries and majority-owned partnership interests. All intercompany accounts and transactions have been eliminated. Certain reclassifications have been made to prior years’ financial statements to conform to the current year presentation.

Preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Inventories

Inventories are stated at the lower of cost, as determined under the first-in, first-out (“FIFO”) method, or market. Costs include materials, labor and manufacturing overhead.

Property and Equipment

Property and equipment for companies acquired are stated at fair value as of the date the acquisition occurred and at cost for all subsequent additions. Property and equipment are depreciated using the straight-line method over their estimated useful lives. Useful lives for machinery and equipment range from three to twenty years. Building and building improvements are depreciated using the straight-line method over their estimated useful lives of forty years. Leasehold improvements are amortized using the straight-line method over their estimated useful lives or remaining lease term, whichever is less. Expenditures for maintenance and repairs are expensed as incurred. The costs for improvements are capitalized. Upon retirement or disposal, the cost and accumulated depreciation of property and equipment are reduced and any gain or loss is recorded in income or expense.

Other Assets

Goodwill is amortized on a straight-line basis over thirty years from the date the acquisition occurred. Additional goodwill resulting from contingent consideration payments subsequent to the acquisition date is amortized prospectively over the remaining period of the initial thirty-year term. Other intangibles are amortized on a straight-line basis over their estimated useful lives, ranging from five to fifteen years. Deferred financing costs are amortized using either the straight-line or effective interest method, over the term of the related debt.

 

F-7



 

Accounting for the Impairment of Long-Lived Assets

The Company reviews long-lived assets and intangible assets for impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. In the event the sum of the expected undiscounted future cash flows resulting from the use of the asset is less than the carrying value of the asset, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded. In 2001, the Company recorded a $9,903,000 pre-tax charge to reflect the impairment loss resulting from a restructuring in the aftermath of the September 11, 2001 terrorist attack on the United States. In 1999, the Company recorded a $1,259,000 pre-tax charge to reflect the impairment loss resulting from the closing of a manufacturing facility. The impairment losses are described in Note 2.

Accrued Warranties

The Company sells some products to customers with various repair or replacement warranties. The terms of the warranties vary according to the customer and/or product involved. The most common warranty periods are either the earlier of twelve to sixty months from the date of delivery to the operator or forty-two months from the date of manufacture.

Provisions for estimated future warranty costs are made in the period corresponding to the sale of the product and such costs have been within management’s expectations. Classification between short and long-term warranty obligations is estimated based on historical trends.

Income Taxes

Deferred income taxes are determined using the liability method. A deferred tax asset or liability is determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. Deferred tax expense is the result of changes in the deferred tax asset or liability. If necessary, valuation allowances are established to reduce deferred tax assets to their expected realizable values.

Derivative Financial Instruments

Effective January 1, 2001, the Company adopted and began accounting for derivative financial instruments in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The adoption did not have a material impact on the Company’s business, consolidated financial position, results of operations or cash flows. SFAS No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. It also requires that gains or losses resulting from changes in the values of those derivatives be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting.

 

F-8



 

The Company does not use derivative financial instruments for trading purposes but only to manage the risk that changes in interest rates would have on future interest payments for a portion of its variable-rate debt. At December 31, 2001, the Company has an interest rate swap contract to effectively convert $4,500,000 of variable-rate debt to 4.2% fixed-rate debt until maturity in 2008. The contract is considered to be a hedge against changes in the amount of future cash flows associated with interest payments on this variable-rate debt. As a result, the interest rate swap contract is reflected at fair value and the related loss of $88,000 on this contract is deferred in stockholder’s equity as a component of comprehensive income (loss). The deferred loss will be recognized in future periods as interest expense as the related fixed-rate interest payments are made. In the unlikely event that the counterparty fails to perform under the contract, the Company bears the credit risk that payments due to the Company may not be collected.

Fair Value of Financial Instruments

All financial instruments are held for purposes other than trading. The estimated fair value of the Company’s long-term debt is based on either quoted market prices or current rates for similar issues for debt of the same remaining maturities. The estimated fair value of the Company’s $100,000,000 senior subordinated debt was approximately $93,500,000 at December 31, 2001 and $91,000,000 at December 31, 2000. All other non-derivative financial instruments as of December 31, 2001 and 2000 approximate their carrying amounts either because of the short maturity of the instrument, or based on their effective interest rates compared to current market rates for similar long-term debt or obligations.

Foreign Currency Translation and Transactions

The financial statements of the Company’s U.K. and Swiss subsidiaries have been translated into U.S. dollars from their functional currencies, pounds sterling and Swiss francs, respectively, in the consolidated financial statements. Assets and liabilities have been translated at the exchange rate on the balance sheet date and income statement amounts have been translated at average exchange rates in effect during the period. The net translation adjustment is reflected as a component of accumulated comprehensive income or loss within stockholder’s equity.

Realized foreign currency exchange gains included in other expenses, net in the consolidated statements of operations were $103,000 for the year ended December 31, 2001, $351,000 for the year ended December 31, 2000 and $530,000 for the year ended December 31, 1999.

Revenue Recognition

Revenues from the sale of manufactured products, except for products manufactured under long-term contracts, are recognized upon shipment of product to the customer provided that the Company has received a signed purchase order, the price is fixed, title has transferred, collection of the resulting receivables is probable, product returns are reasonably estimable and there are no remaining significant obligations. Provision for future returns is recorded based on historical experience at the time revenue is recognized.

 

F-9



 

Revenues for products manufactured under long-term contracts are recognized under the percentage-of-completion method using total contract price, actual costs incurred to date and an estimate of the completion costs for each contract. Costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. Selling, general, and administrative costs are charged to expense as incurred.

Percentage-of-completion is measured using an estimate of direct labor incurred to date to total expected direct labor for each contract. This method is used because management considers expended direct labor to be the best available measure of progress on these contracts. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Management believes that the Company will not incur any losses on uncompleted contracts at December 31, 2001.

Measuring a contract’s percentage-of-completion requires management to make estimates. As a result, it is reasonably possible that factors may cause management to change its revenue and cost estimates, thereby altering estimated profitability. These factors include, but are not limited to, changes in contract scope, material and labor efficiencies, contract penalty provisions, if any, and final contract settlements. Revisions to revenue and profit estimates are made in the period in which the facts that give rise to the revision become known.

The asset “Costs and estimated earnings in excess of billings” represents revenues recognized in excess of amounts billed on uncompleted contracts and is reflected as a component of inventory. Conversely, the liability “Billings in excess of costs and estimated earnings” represents billings in excess of revenues recognized on uncompleted contracts and is reflected as an accrued liability. Unbilled revenues are expected to be billed and collected during the succeeding twelve-month period.

Research and Development Costs

Research and development costs are expensed as incurred. Such costs were $3,697,000 for the year ended December 31, 2001, $4,630,000 for the year ended December 31, 2000 and $4,264,000 for the year ended December 31, 1999.

Stock Option Plan

As permitted under SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company measures compensation expense related to the employee stock option plan utilizing the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.”

Statements of Cash Flows

For purposes of the statements of cash flows, cash equivalents include short-term, highly liquid investments with maturities of three months or less at the time of purchase.

 

F-10



 

Recent Accounting Pronouncements

SFAS Nos. 141 and 142

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.”

SFAS No. 141 establishes accounting and reporting standards for business combinations. SFAS No. 141 requires that all business combinations be accounted for using the purchase method of accounting and provides criteria for the initial recognition and measurement of goodwill and other intangible assets. SFAS No. 141 is effective for all business combinations initiated or completed after June 30, 2001. For business combinations completed prior to July 1, 2001, SFAS No. 141 is effective concurrent with the adoption of SFAS No. 142.

SFAS No. 142 establishes accounting and reporting standards for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 eliminates the current requirement to amortize goodwill and other indefinite-lived intangible assets requiring instead periodic impairment testing with a loss charged to the results of operation in the periods in which impairment occurs. Finite-lived intangible assets are amortized and are also subject to periodic impairment testing. Adoption of SFAS No. 142 is required for the Company’s fiscal year beginning January 1, 2002.

The Company is currently evaluating the impact the new accounting standards will have on its consolidated financial position and results of operations upon adoption on January 1, 2002; there will be no impact on cash flows. While the full, net of tax, impact has yet to be determined, adoption of the new standards will result in the following:

 

Under the criteria established in SFAS No. 141, the values ascribed to the assembled workforces acquired are not recognized as an intangible asset apart from goodwill. As a result, as of December 31, 2001 the $4,803,000 net book value ascribed to the assembled workforces, which is also net of the related deferred income tax liabilities, will be reclassified to goodwill as of January 1, 2002.

 

 

 

 

Adoption of SFAS No. 142 on January 1, 2002 will reduce amortization expense in future periods. If the nonamortization provisions of SFAS No. 142 had been effective as of the beginning of 2001, goodwill and assembled workforces amortization totaling $14,319,000 for the year ended December 31, 2001 would have been eliminated.

The Company has until June 30, 2002 to complete its transitional impairment testing of goodwill associated with adopting SFAS No. 142 and until March 31, 2002 to complete its transitional impairment testing of other intangible assets. The amount of impairment losses recognizable upon adoption, if any, is not known at this time.

 

 

F-11



 

SFAS No. 143

In June 2001, the Financial Accounting Standards Board issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 requires recognition of the fair value of liabilities associated with the retirement of long-lived assets when a legal obligation to incur such costs arises as a result of the acquisition, construction, development and/or the normal operation of a long-lived asset. Adoption of SFAS No. 143 is required for the Company’s fiscal year beginning January 1, 2002 although early application is permitted. The Company does not expect that the adoption of SFAS No. 143 will have an impact on its business, consolidated financial position, results of operations or cash flows.

SFAS No. 144

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets, “ which replaces SFAS No. 121, “Accounting for Impairment of Long-Lived Assets and for Long-Lived to be Disposed Of” and also replaces and broadens the provisions of Accounting Principles Board Opinion No. 30, “Reporting Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.”

SFAS No. 144 establishes one accounting model, based on framework established in SFAS No. 121, for the recognition, measurement and reporting of impairment of long-lived assets to be held and used and measurement of long-lived assets to be disposed of by sale. This aspect of SFAS No. 144 will primarily affect the Company’s accounting for intangible assets subject to amortization as well as property and equipment and other long-lived assets.

SFAS No. 144 significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Under the provisions of SFAS No. 144, assets to be disposed of will be stated at the lower of their fair values or carrying amounts and depreciation will no longer be recognized.

SFAS No. 144 also supersedes the provisions of APB Opinion No. 30 with regard to reporting the effects of a disposal of a segment of a business. SFAS No. 144 requires expected future operating losses from discontinued operations to be displayed in discontinued operations in the period(s) in which the losses are incurred, rather than as of the measurement date as presently required.

Adoption of SFAS No. 144 is required for the Company’s fiscal year beginning January 1, 2002 although early application is permitted. The Company is currently evaluating the impact this new standard will have on its business, consolidated financial position, results of operations and cash flows.

 

F-12



 

Note 2.           Restructuring and Asset Impairment Charges

2001 Restructuring and Asset Impairment Charges

During the second quarter of 2001, the Company’s Cabin Management Group adopted a restructuring plan to realign production programs between its manufacturing facilities. In response to the adverse impact on the aerospace industry resulting from the September 11th terrorist attack and its aftermath, as well as the weakening of global economic conditions, the Company announced and implemented a further restructuring plan in December 2001 designed to reduce costs and conserve working capital. This plan includes permanently closing one manufacturing facility and idling a second facility for an indefinite period, curtailing several product development programs and instituting workforce reductions. This plan primarily affects the Company’s Cabin Management and Specialty Avionics Groups.

In connection with these restructuring plans, the Company recorded nonrecurring pre-tax charges to operations of $28,658,000 in 2001 for restructuring costs and asset impairment charges. Of this amount, $16,057,000 is included in cost of sales and the remaining $12,601,000 is included in selling, general and administration expenses. The restructuring costs and asset impairment charges are comprised of the following:

                  Impairment of Long-Lived Assets.  The restructuring plan resulted in the impairment of property, equipment and goodwill and, accordingly, these assets were written down to their net realizable value.

                  Write-off of Product Development Costs.  The curtailment of several product development programs in 2001 resulting in the write-off of inventoried costs related to these programs.

                  Excess Inventory Write-Downs.  Inventory was written down to net realizable value for quantities on hand exceeding current and forecast order backlog requirements. Inventory at the closed and temporarily idled manufacturing facilities was also written down to net realizable value.

                  Realignment of Production Programs Between Facilities.  Costs associated with this realignment were incurred during the fiscal second quarter of 2001.

                  Severance and Other Compensation Costs.  Since the September 11th terrorist attack, the Company has reduced its total workforce by over 350 employees, or approximately 12%, as of February 2002, of which approximately 260 employees had been terminated as of December 31, 2001.

                  Lease Termination and Other Related Costs. Lease termination and other related costs are comprised of the net losses expected to be incurred under the existing long-term lease agreements for facilities permanently vacated. The losses have been reduced by the expected sublease income. These expected losses were based on estimated current market rates and anticipated dates that these facilities are subleased. If market rates decrease or should it take longer than expected to sublease these facilities, the actual loss could exceed these estimates.

 

 

F-13



 

The Company expects to complete the restructuring plan in the second quarter of fiscal 2002. The components of the restructuring, assets impairment and other nonrecurring charges are as follows:

 

 

 

Total

 

Amounts Incurred

 

Balance at
December 31,

 

 

 

Charges

 

Noncash

 

Cash

2001

 

 

 

 

 

(in thousands)

 

 

 

Impairment of long-lived assets:

 

 

 

 

 

 

 

 

 

Goodwill

 

$

8,583

 

$

(8,583

)

$

 

$

 

Property and equipment

 

1,320

 

(1,320

)

 

 

Product development cost write-offs

 

7,908

 

(7,908

)

 

 

Excess inventory write-downs

 

4,247

 

(4,247

)

 

 

Realignment of production programs between facilities

 

3,902

 

 

(3,902

)

 

Severance and other compensation costs

 

2,024

 

 

(839

)

1,185

 

Lease termination and other related costs

 

674

 

 

(250

)

424

 

Total

 

$

28,658

 

$

(22,058

)

$

(4,991

)

$

1,609

 

Future cash payments will be funded from existing cash balances and internally generated cash from operations.

2002 Manufacturing Facilities Consolidation

In late February 2002, the Company announced it would consolidate the production of two Cabin Management manufacturing facilities into a single facility, resulting in the permanent closure of one additional facility. The Company has evaluated the carrying value of the long-lived assets related to the facility that is closing and does not expect an asset impairment charge. The Company estimates that approximately $1,800,000 of nonrecurring costs associated with this decision will be recorded during 2002.

1999 Restructuring and Asset Impairment Charges

In December 1999, the Company announced a plan to reorganize and restructure the operations of two of its subsidiaries within the Systems Integration Group. The restructuring was a result of a management decision to exit the manufacturing business at these subsidiaries and consolidate and relocate operations into one facility to more efficiently and effectively manage the business and be more competitive.

In connection with the restructuring plan, the Company recorded nonrecurring pre-tax charges to operations of $9,935,000 in 1999 for restructuring costs including severance and other exit costs, asset impairments and inventory reserves. Of this amount, $5,983,000 is included in cost of sales for inventory write-downs as a consequence of exiting the manufacturing business. The remaining $3,952,000 is included in selling, general and administration expenses and relates to asset impairment charges, severance and lease termination costs.

 

F-14



 

The Company commenced the restructuring during 1999 and completed the plan in the third quarter of 2000. Of the total charge, $7,242,000 represents a noncash write-down of assets. Components of the restructuring, asset impairment and other nonrecurring charges incurred through December 31, 2001 are as follows:

 

 

 

Noncash Write-Downs

 

Severance and

 

Lease Termination

 

 

 

 

 

 

 

 

 

Property and

 

Other

 

and Other

 

Other Exit

 

 

 

 

 

Inventory

 

Equipment

 

Compensation

 

Related Costs

 

Costs

 

Total

 

 

 

(in thousands)

 

Pre-tax restructuring and asset impairment charges

 

$

5,983

 

$

1,259

 

$

1,077

 

$

752

 

$

864

 

$

9,935

 

Noncash write-downs

 

(5,983

)

(1,259

)

 

 

 

(7,242

)

Cash paid during the period

 

 

 

(293

)

(31

)

(188

)

(512

)

Balance, December 31, 1999

 

 

 

784

 

721

 

676

 

2,181

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustments

 

 

 

 

641

 

 

641

 

Cash paid during the period

 

 

 

(784

)

(775

)

(558

)

(2,117

)

Balance, December 31, 2000

 

 

 

 

587

 

118

 

705

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid during the period

 

 

 

 

(189

)

(118

)

(307

)

Balance, December 31, 2001

 

$

 

$

 

$

 

$

398

 

$

 

$

398

 

The adjustments made in 2000 reflect the increase to the restructuring reserves as a result of higher than anticipated costs to complete certain actions compared to previous estimates. Additionally, during 2000 the Company was able to sell property and equipment previously written down and recognized a gain on disposal of approximately $600,000.

The remaining balance of restructuring costs includes lease termination costs. The restructuring plan was completed in the third quarter of 2000, however, future cash payments will extend beyond this date due to future lease payments on the vacated facility through the lease termination date. The cash payments will be funded from existing cash balances and internally generated cash from operations.

 

Note 3.           Acquisitions

During the years ended December 31, 1999 and 2000, the Company acquired:

Cabin Management Group

                  all of the common stock of Precision Pattern, Inc., a Kansas-based designer and manufacturer of interior furniture components for corporate aircraft, on April 23, 1999;

                  substantially all of the assets of Custom Woodwork & Plastics, Inc., a Georgia-based designer and manufacturer of interior furniture components for corporate aircraft, on August 5, 1999;

                  substantially all of the assets of PCI NewCo, Inc., a Kansas-based manufacturer of composite material and components for corporate aircraft, on October 6, 1999;

 

F-15



 

                  all of the common stock of International Custom Interiors, Inc., a Florida-based designer and manufacturer of interior furniture components and provider of upholstery services for corporate aircraft, on October 8, 1999;

                  substantially all of the assets of The Infinity Partners, Ltd., a Texas-based designer and manufacturer of interior furniture components for middle- and high-end corporate aircraft, on December 17, 1999;

                  substantially all of the assets of Carl F. Booth & Co., an Indiana-based manufacturer of wood veneer panels primarily used in aircraft interior cabinetry, on May 11, 2000;

                  all of the common stock of ERDA, Inc., a Wisconsin-based designer and manufacturer of aircraft seating, on June 30, 2000;

Specialty Avionics Group

                  all of the common stock of Coltech, Inc., an Arizona-based designer and manufacturer of audio components for commercial and corporate aircraft, on August 31, 2000; and

Systems Integration Group

                  all of the common stock of PATS, Inc., a Maryland-based designer, manufacturer and installer of auxiliary fuel tank systems for corporate aircraft and a manufacturer of aircraft auxiliary power units, on January 22, 1999.

The acquisitions were accounted for as purchases and the assets acquired and liabilities assumed have been recorded at their estimated fair values. The consolidated financial statements reflect the acquired companies subsequent to their respective acquisition dates. The acquisitions are summarized in the following table.

 

 

 

Year Ended December 31,

 

 

 

2000

 

1999

 

 

 

(in thousands)

 

Paid in cash:

 

 

 

 

 

Purchase price

 

$

55,852

 

$

140,819

 

Acquisition related costs

 

3,511

 

4,491

 

Total purchase price

 

$

59,363

 

$

145,310

 

 

 

 

 

 

 

Maximum determinable contingent consideration payable, based on future attainment of defined performance criteria

 

$

2,000

 

$

48,950

 

 

 

 

 

 

 

Adjustments to reflect assets acquired at fair value:

 

 

 

 

 

Increase to historical value of inventory acquired

 

$

 

$

1,606

 

Identifiable intangible assets recorded

 

18,936

 

15,341

 

Difference between the total purchase price and fair value of the net assets acquired; recorded as goodwill as of the acquisition date

 

41,622

 

110,922

 

The acquisitions were funded with borrowings under the Company’s senior credit facility, equity contributions from DeCrane Holdings and the sale of preferred stock as described in Note 11, and a $5,000,000 customer advance to be offset against amounts receivable from future product deliveries.

 

F-16



 

The increase in inventory value was charged to operations as the inventory was sold during the periods immediately following acquisition. Identifiable intangible assets are being amortized on a straight-line basis over their estimated useful lives, ranging from seven to fifteen years. Goodwill is being amortized on a straight-line basis over thirty years. The amount of contingent consideration paid in the future, if any, will increase goodwill.

Based upon the acquired companies level of attainment of their defined performance criteria during the three years ended December 31, 2001, the Company recorded contingent consideration payable of $700,000 in 2001, $20,154,000 in 2000 and $29,825,000 in 1999 resulting in a corresponding increase in goodwill. The Company’s determinable maximum contingent consideration payment obligations remaining as of December 31, 2001 are described in Note 12.

During 2001, the Company settled its asserted claims against the sellers of two companies acquired in 2000 for breach of representation and warranty provisions contained in the purchase agreements. The Company received $3,718,000 from the sellers upon entering into the settlement agreements, which also provided that the Company pay in 2002 a minimum of $3,125,000 of previously contingent consideration for the year ended December 31, 2001 which is reflected as an accrued liability as of December 31, 2001.

Unaudited pro forma consolidated results of operations are presented in the table below for the years ended December 31, 2000 and 1999. The results of operations reflect the Company’s acquisitions as if all of these transactions were consummated as of January 1, 1999.

 

 

 

Pro Forma for the
Year Ended December 31,

 

 

 

2000

 

1999

 

 

 

(Unaudited, in thousands)

 

Revenues

 

$

371,584

 

$

335,542

 

EBITDA, as defined (Note 16)

 

89,160

 

78,455

 

Net income (loss)

 

5,357

 

(2,021

)

The pro forma results of operations do not purport to represent what actual results would have been if the transactions described above occurred on such dates or to project the results of operations for any future period. The above information reflects adjustments for inventory, depreciation, amortization, general and administrative expenses and interest expense based on the new cost basis and debt and capital structure of the Company following the acquisitions.

 

F-17



 

During 2001, three customers accounted for more than 10% of the Company’s consolidated revenues (Note 16). If the Company had completed its 1999 and 2000 acquisitions at the beginning of 1999, revenues from these customers would have been as follows:

 

 

 

Pro Forma for the
Year Ended December 31,

 

 

 

2000

 

1999

 

 

 

(Unaudited, in thousands)

 

Bombardier

 

$

65,746

 

$

42,391

 

Boeing

 

53,735

 

47,366

 

Textron

 

53,669

 

47,654

 

Total

 

$

173,150

 

$

137,411

 

Complete loss of any of the customers identified above could have a significant adverse impact on the results of operations expected in future periods.

 

Note 4.           Accounts Receivable

The Company is potentially subject to concentrations of credit risk as the Company relies heavily on customers operating in the domestic and foreign corporate and commercial aircraft industries. Generally, the Company does not require collateral or other security to support accounts receivable subject to credit risk. Under certain circumstances, deposits or cash-on-delivery terms are required. The Company maintains reserves for potential credit losses and generally, such losses have been within management’s expectations.

Accounts receivable are net of an allowance for doubtful accounts of $2,647,000 at December 31, 2001 and $1,902,000 at December 31, 2000.

 

Note 5.           Inventories

Inventories are comprised of the following as of December 31, 2001 and 2000:

 

 

 

December 31,

 

 

 

2001

 

2000

 

 

 

(in thousands)

 

Raw materials

 

$

50,503

 

$

49,235

 

Work-in-process:

 

 

 

 

 

Direct and indirect manufacturing costs

 

16,260

 

13,772

 

Program costs, principally engineering costs

 

10,974

 

8,603

 

Finished goods

 

3,089

 

7,693

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

5,672

 

7,393

 

Total inventories

 

$

86,498

 

$

86,696

 

 

F-18



 

Inventoried costs are not in excess of estimated realizable value and include direct engineering, production and tooling costs, and applicable manufacturing overhead. In accordance with industry practice, inventoried costs include amounts relating to programs and contracts with long production cycles that will be recovered from future sales. Periodic assessments are performed to ensure recoverability of the program costs and adjustments are made, if necessary, to reduce inventoried costs to estimated realizable value. In connection with the 2001 restructuring, $7,908,000 of previously inventoried program costs were determined to be unrecoverable and were charged to cost of sales.

Total costs and estimated earnings on all uncompleted contracts as of December 31, 2001 and 2000 are comprised of the following:

 

 

 

December 31,

 

 

 

2001

 

2000

 

 

 

(in thousands)

 

Costs incurred on uncompleted contracts

 

$

46,757

 

$

34,438

 

Estimated earnings recognized

 

50,413

 

31,345

 

Total costs and estimated earnings

 

97,170

 

65,783

 

Less billings to date

 

(102,653

)

(70,225

)

Net

 

$

(5,483

)

$

(4,442

)

 

 

 

 

 

 

Balance sheet classification:

 

 

 

 

 

Asset — Costs and estimated earnings in excess of billings

 

$

5,672

 

$

7,393

 

Liability — Billings in excess of costs and estimated earnings (Note 8)

 

(11,155

)

(11,835

)

Net

 

$

(5,483

)

$

(4,442

)

 

Note 6.           Property and Equipment

Property and equipment includes the following as of December 31, 2001 and 2000:

 

 

 

December 31,

 

 

 

2001

 

2000

 

 

 

(in thousands)

 

Land, buildings and leasehold improvements

 

$

34,795

 

$

30,841

 

Machinery and equipment

 

30,311

 

27,393

 

Computer equipment and software, furniture and fixtures

 

17,396

 

13,985

 

Tooling

 

6,052

 

2,594

 

Total cost

 

88,554

 

74,813

 

Accumulated depreciation and amortization

 

(27,481

)

(15,322

)

Net property and equipment

 

$

61,073

 

$

59,491

 

Included above is property and equipment related to a manufacturing facility the Company is idling for an indefinite period. The cost of the property and equipment is $6,441,000 as of December 31, 2001 and $6,979,000 as of December 31, 2000; the corresponding accumulated depreciation and amortization is $549,000 as of December 31, 2001 and $188,000 as of December 31, 2000.

 

F-19



 

Property and equipment under capital leases included above consists of the following as of December 31, 2001 and 2000:

 

 

 

December 31,

 

 

 

2001

 

2000

 

 

 

(in thousands)

 

Land and building

 

$

2,727

 

$

 

Machinery and equipment

 

1,281

 

1,283

 

Computer equipment and software, furniture and fixtures

 

1,849

 

2,113

 

Total cost

 

5,857

 

3,396

 

Accumulated depreciation and amortization

 

(2,193

)

(954

)

Net property and equipment

 

$

3,664

 

$

2,442

 

Depreciation of property and equipment under capital leases is included in depreciation expense in the consolidated financial statements.

 

Note 7.           Other Assets

Other assets includes the following as of December 31, 2001 and 2000:

 

 

 

December 31, 2001

 

December 31, 2000

 

 

 

Cost

 

Accumulated Amortization

 

Net

 

Cost

 

Accumulated Amortization

 

Net

 

 

 

(in thousands)

 

Goodwill

 

$

369,202

 

$

(31,759

)

$

337,443

 

$

377,167

 

$

(20,811

)

$

356,356

 

Identifiable intangibles:

 

 

 

 

 

 

 

 

 

 

 

 

 

FAA certifications

 

45,816

 

(8,485

)

37,331

 

45,816

 

(5,431

)

40,385

 

Other identifiable intangibles

 

38,409

 

(12,092

)

26,317

 

38,421

 

(7,906

)

30,515

 

Deferred financing costs

 

16,653

 

(6,449

)

10,204

 

15,927

 

(4,231

)

11,696

 

Other non-amortizable assets

 

1,978

 

 

1,978

 

630

 

 

630

 

Total other assets

 

$

472,058

 

$

(58,785

)

$

413,273

 

$

477,961

 

$

(38,379

)

$

439,582

 

 

 

F-20



 

Note 8.           Accured Liabilities

 

Accrued liabilities are comprised of the following as of December 31, 2001 and 2000:

 

 

 

December 31,

 

 

 

2001

 

2000

 

 

 

(in thousands)

 

Salaries, wages, compensated absences and payroll related taxes

 

$

17,179

 

$

15,337

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

11,155

 

11,835

 

Acquisition related contingent consideration

 

6,904

 

20,154

 

Accrued interest

 

4,692

 

3,730

 

Customer advances and deposits

 

3,260

 

5,965

 

Other accrued liabilities

 

13,436

 

17,169

 

Total accrued liabilities

 

$

56,626

 

$

74,190

 

 

Note 9.           Long-Term Debt

 

Long-term debt includes the following amounts as of December 31, 2001 and 2000:

 

 

 

December 31,

 

 

 

2001

 

2000

 

 

 

(in thousands)

 

Senior credit facility:

 

 

 

 

 

$25 million working capital revolving line of credit

 

$

 

$

 

$25 million acquisition revolving line of credit

 

12,000

 

12,400

 

Term loans

 

275,706

 

263,443

 

 

 

 

 

 

 

12% senior subordinated notes

 

100,000

 

100,000

 

 

 

 

 

 

 

Capital lease obligations and term debt financing, secured by property and equipment

 

10,745

 

5,231

 

 

 

 

 

 

 

Other indebtedness

 

1,799

 

2,205

 

Total long-term debt

 

400,250

 

383,279

 

Less current portion

 

(13,899

)

(9,289

)

Long-term debt, less current portion

 

$

386,351

 

$

373,990

 

During 2001, the Company borrowed $20,000,000 under its term loan senior credit facility and used the net proceeds to repay amounts then outstanding under the acquisition revolving line of credit. During 2000, the Company borrowed $55,000,000 under its term loan senior credit facility to finance, in part, acquisitions.

 

 

F-21



 

Senior Credit Facility

The senior credit facility provides for term loan borrowings in the initial principal amount of $290,000,000 and revolving lines of credit for borrowings up to an aggregate principal amount of $25,000,000 each for working capital and to finance acquisitions. Principal payments for term loan borrowings are due in increasing amounts over the next five years and all borrowings under the revolving loan facility must be repaid by September 30, 2004. Loans under the senior credit facility generally bear interest based on a margin over, at the Company’s option, the prime rate or the LIBOR rate. The margins applicable to portions of amounts borrowed may vary depending upon the Company’s consolidated debt leverage ratio. Currently, the applicable margins are 1.50% to 2.75% for prime rate borrowings and 2.75% to 4.00% for LIBOR rate borrowings. The weighted-average interest rate on all senior credit facility borrowings outstanding was 5.67% as of December 31, 2001. Borrowings under the senior credit facility are secured by substantially all of the assets of the Company. The Company is subject to certain commitment fees under the facility as well as the maintenance of certain financial ratios, cash flow results and other restrictive covenants, including the payment of dividends in cash.

On March 19, 2002, the Company amended the terms of its senior credit facility (Note 18).

12% Senior Subordinated Notes

The senior subordinated notes mature on September 30, 2008 and interest is payable semi-annually on March 30th and September 30th of each year. The senior subordinated notes are unsecured general obligations of the Company and are subordinated in right of payment to substantially all existing and future senior indebtedness of the Company, including senior credit facility indebtedness. Prior to maturity, the Company may redeem all or some of the senior subordinated notes at defined redemption prices, which may include a premium. In the event of a change in control, the holders may require the Company to repurchase the senior subordinated notes for a redemption price that may also include a premium. The Company is subject to restrictive covenants, including the payment of dividends in cash.

Other Indebtedness

As of December 31, 2001, other indebtedness reflects acquisition financing payable to sellers in connection with their respective acquisitions. The debt is non-interest bearing; original issue discounts ranging between 10.5% and 12.5% are being amortized over the term.

 

F-22



 

Aggregate Maturities

The total annual maturities of long-term debt outstanding as of December 31, 2001 are as follows:

 

Year ending December 31,

 

(in thousands)

 

2002

 

$

13,927

 

2003

 

16,987

 

2004

 

48,015

 

2005

 

97,848

 

2006

 

107,287

 

2007 and thereafter

 

116,387

 

Total aggregate maturities

 

400,451

 

Less unamortized debt discounts

 

(201

)

Total long-term debt

 

$

400,250

 

 

Note 10.         Income Taxes

Income (loss) before income taxes was taxed under the following jurisdictions:

 

 

 

Year Ended December 31,

 

 

 

2001

 

2000

 

1999

 

 

 

(in thousands)

 

Domestic

 

$

(12,236

)

$

10,049

 

$

(3,532

)

Foreign

 

(578

)

(165

)

114

 

Total

 

$

(12,814

)

$

9,884

 

$

(3,418

)

 

F-23



 

The provisions for income taxes (benefit) are as follows:

 

 

 

Year Ended December 31,

 

 

 

2001

 

2000

 

1999

 

 

 

(in thousands)

 

Current:

 

 

 

 

 

 

 

U.S. federal

 

$

62

 

$

370

 

$

89

 

State and local

 

1,133

 

671

 

1,140

 

Foreign

 

30

 

120

 

103

 

Total current

 

1,225

 

1,161

 

1,332

 

 

 

 

 

 

 

 

 

Deferred:

 

 

 

 

 

 

 

U.S. federal

 

545

 

4,599

 

(76

)

State and local

 

(464

)

557

 

(284

)

Foreign

 

(118

)

(35

)

(20

)

Total deferred

 

(37

)

5,121

 

(380

)

 

 

 

 

 

 

 

 

Total provision:

 

 

 

 

 

 

 

U.S. federal

 

607

 

4,969

 

13

 

State and local

 

669

 

1,228

 

856

 

Foreign

 

(88

)

85

 

83

 

Total provision

 

$

1,188

 

$

6,282

 

$

952

 

The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal rate to the income (loss) before income taxes as a result of the following differences:

 

 

 

Year Ended December 31,

 

 

 

2001

 

2000

 

1999

 

 

 

(in thousands)

 

Income tax (benefit) at U.S. statutory rates

 

$

(4,485

)

$

3,459

 

$

(1,162

)

Tax effect of increases (decreases) resulting from:

 

 

 

 

 

 

 

Amortization of assets and other expenses not deductible for income tax purposes

 

5,477

 

2,247

 

2,025

 

State income taxes, net of federal benefit

 

265

 

798

 

111

 

Lower tax rates on earnings of foreign subsidiaries and foreign sales corporation

 

(57

)

(214

)

(48

)

Other, net

 

(12

)

(8

)

26

 

Income tax at effective rates

 

$

1,188

 

$

6,282

 

$

952

 

 

F-24



 

Deferred tax liabilities (assets) are comprised of the following as of December 31, 2001 and 2000:

 

 

 

December 31,

 

 

 

2001

 

2000

 

 

 

(in thousands)

 

Gross deferred tax liabilities:

 

 

 

 

 

Intangible assets

 

$

31,849

 

$

33,229

 

Program costs

 

4,839

 

 

Property and equipment

 

3,461

 

3,784

 

Other

 

322

 

 

Gross deferred tax liabilities

 

40,471

 

37,013

 

 

 

 

 

 

 

Gross deferred tax (assets):

 

 

 

 

 

Loss carryforwards

 

(8,980

)

(3,710

)

Accrued liabilities

 

(7,732

)

(7,598

)

Inventory

 

(3,130

)

(2,772

)

Other

 

(1,095

)

(1,010

)

Gross deferred tax (assets)

 

(20,937

)

(15,090

)

Net deferred tax liability

 

$

19,534

 

$

21,923

 

 

 

 

 

 

 

Balance sheet classification:

 

 

 

 

 

Noncurrent deferred tax liability

 

$

33,597

 

$

37,013

 

Current deferred tax asset

 

(14,063

)

(15,090

)

Net deferred tax liability

 

$

19,534

 

$

21,923

 

As of December 31, 2001, the Company has total loss carryforwards of approximately $22,653,000 for federal income tax purposes and $21,268,000 for state income tax purposes, which includes federal loss carryforwards acquired in acquisitions. The loss carryforwards are not subject to limitations on their annual utilization (“Section 382 limitation,” as defined in the Internal Revenue Code) and therefore are available for utilization in 2002. The federal and state loss carryforwards expire in varying amounts commencing in 2010 and continuing through 2021. Management believes that it is more likely than not that the Company will generate taxable income sufficient to realize the tax benefit associated with the future deductible deferred tax assets and loss carryforwards prior to their expiration.

Undistributed earnings of foreign subsidiaries are not material to the consolidated financial statements. As such, foreign taxes that may be due, net of U.S. foreign tax credits, have not been provided.

 

F-25



 

Note 11.         Capital Structure

Authorized Capital Structure

In October 2001, DeCrane Aircraft amended its articles of incorporation and reduced its authorized capital structure by eliminating all previously authorized but never issued cumulative convertible preferred stock and undesignated preferred stock and reducing the number of common shares authorized for issuance. Subsequent to the amendment, DeCrane Aircraft is authorized to issue 1,000 shares of common stock ($.01 par value) and 700,000 shares of 16% Senior Redeemable Exchangeable Preferred Stock Due 2009 ($.01 par value).

Mandatorily Redeemable Preferred Stock

The table below summarizes mandatorily redeemable preferred stock issued during the two years ended December 31, 2001.

 

 

 

Number

of

Shares

 

Mandatory

Redemption

Value

 

Unamortized

Issuance

Discount

 

Net

Book

Value

 

 

 

(in thousands, except share and per share data)

 

Sale of preferred stock

 

250,000

 

$

25,000

 

$

(4,019

)

$

20,981

 

Issuance costs

 

 

 

(76

)

(76

)

Accrued dividends and redemption value accretion

 

20,400

 

2,040

 

234

 

2,274

 

Balance, December 31, 2000

 

270,400

 

27,040

 

(3,861

)

23,179

 

 

 

 

 

 

 

 

 

 

 

Accrued dividends and redemption value accretion

 

45,930

 

4,593

 

468

 

5,061

 

Balance, December 31, 2001

 

316,330

 

$

31,633

 

$

(3,393

)

$

28,240

 

On June 30, 2000, 250,000 shares of DeCrane Aircraft 16% preferred stock and warrants to purchase 139,357 shares of DeCrane Holdings common stock were sold for $25,000,000 to DLJ affiliates (Note 15). The proceeds from the sale were used to fund, in part, the ERDA acquisition. A portion of the proceeds from the sale totaling $4,019,000 was ascribed to the common stock warrants and was credited to additional paid-in capital. The corresponding reduction in redemption value of the preferred stock, and related issuance costs, are recorded as an issuance discount and are being amortized using the effective interest method through the preferred stock mandatory redemption date.

DeCrane Aircraft is authorized to issue 700,000 shares of 16% Senior Redeemable Exchangeable Preferred Stock Due 2009, $.01 par value. The preferred stock has a $100.00 per share liquidation preference, plus accrued and unpaid cash dividends, and is non-voting.

Holders of the preferred stock are entitled to receive, when, as and if declared, dividends at a rate equal to 16% per annum. Prior to June 30, 2005, DeCrane Aircraft may, at its option, pay dividends either in cash or by the issuance of additional shares of preferred stock. Since the preferred stock issuance date on June 30, 2000, DeCrane Aircraft has elected to issue additional shares in lieu of cash dividend payments. The preferred stock is mandatorily redeemable on March 31, 2009. Upon the occurrence of a change in control, as defined, each holder has the right to require DeCrane Aircraft to redeem all or part of such holder’s shares at a price equal to 101% of the liquidation preference, plus accrued and unpaid cash dividends.

F-26



 

Common Stock

DeCrane Aircraft has 100 shares ($.01 par value) issued and outstanding as of December 31, 2001 and 2000. All of the shares are owned by DeCrane Holdings, DeCrane Aircraft’s parent company. During 1999 and 2000, DeCrane Aircraft received additional cash capital contributions from DeCrane Holdings aggregating $14,368,000 in 1999 and $7,902,000 in 2000 resulting from DeCrane Holdings’ sale of capital stock. The proceeds were used to fund portions of the acquisitions completed during those years.

Notes Receivable for Shares Sold

During 1998 and 1999, DeCrane Holdings sold mandatorily redeemable preferred and common stock in three transactions in which one-half of the purchase price was paid in cash and one-half was loaned to the purchasers by DeCrane Aircraft, with interest at the then applicable federal rates. The loans bear interest at rates ranging between 4.33% and 5.74%. The loans, plus accrued interest, are payable upon the sale of the stock and are collaterialized by such stock. The resulting notes receivable, plus accrued interest, are classified as a reduction of stockholder’s equity in the consolidated statement of financial position. The three transactions, which were based on the fair market value of the underlying securities as determined by the Board of Directors, resulted in loans for one-half of the total purchase price, were as follows:

      in December 1998, a group of related party investors (Note 15) purchased mandatorily redeemable preferred and common stock for $704,000;

      in October 1999, the same group of investors purchased additional shares of common stock for $250,000; and

      in December 1999, DeCrane Aircraft’s management purchased common stock for $3,940,000.

During 2000, a note receivable totaling $51,000, including accrued interest, was canceled in conjunction with the repurchase of the common stock that collaterialized the note for its original $23.00 per share issuance price.

 

F-27



 

Note 12.         Commitments and Contingencies

Litigation

As part of its investigation of the crash Swissair Flight 111 off the Canadian coast on September 2, 1998, the Canadian Transportation Safety Board (the “CTSB”) notified the Company that they recovered burned wire that was attached to the in-flight entertainment system installed on some of Swissair’s aircraft by one of the Company’s subsidiaries. The Company is fully cooperating with the on-going CTSB investigation. Although the CTSB has not issued a final report, it has advised the Company that it has no evidence to date that the system the Company’s subsidiary installed malfunctioned or failed during the flight. Families of the 229 persons who died aboard the flight have filed actions in federal and state courts against the Company, and many other unaffiliated parties, including Swissair and Boeing. The actions claim negligence, strict liability and breach of warranty relating to the installation and testing of the in-flight entertainment system. The actions seek compensatory and punitive damages and costs in an unstated amount. All of the actions have been transferred to the United States District Court for the Eastern District of Pennsylvania and assigned under MDL Case No. 1269 for coordinated or consolidated pretrial proceedings. The Company intends to defend the claims vigorously.

The Company and its subsidiaries are also involved in other routine legal and administrative proceedings incident to the normal conduct of business. Management believes the ultimate disposition of all of the foregoing matters will not have a material adverse effect on the Company’s business, consolidated financial position, results of operations or cash flows.

Lease Commitments

The Company leases some of its facilities and equipment under capital and operating leases. Some of the leases require payment of property taxes and include escalation clauses. Future minimum capital and operating lease commitments under non-cancelable leases are as follows as of December 31, 2001:

 

 

Capital

Leases

 

Operating

Leases

 

 

 

(in thousands)

 

Year ending December 31,

 

 

 

 

 

2002

 

$

1,372

 

$

3,080

 

2003

 

1,004

 

2,729

 

2004

 

876

 

2,444

 

2005

 

746

 

1,723

 

2006

 

568

 

1,523

 

2007 and thereafter

 

2,493

 

10,362

 

Total minimum payments required

 

7,059

 

$

21,861

 

Less amount representing future interest cost

 

(2,106

)

 

 

Recorded obligation under capital leases

 

$

4,953

 

 

 

Total rental expense charged to operations was $4,232,000 for the year ended December 31, 2001, $3,903,000 for the year ended December 31, 2000 and $3,620,000 for the year ended December 31, 1999.

 

F-28



 

Contingent Acquisition Consideration

The Company’s remaining maximum contingent acquisition consideration payment obligation is $600,000 as of December 31, 2001. The contingent consideration is payable based upon an acquired company’s level of attainment of its defined performance criteria for the year ending December 31, 2002 and excludes amounts earned and recorded through December 31, 2001 (Notes 3, 8 and 13). The contingent consideration, if any, is payable during the first quarter of 2003.

Funding of DeCrane Holdings Preferred Stock Obligations

The Company is a wholly owned subsidiary of DeCrane Holdings whose capital structure also includes mandatorily redeemable preferred stock. Since the Company is DeCrane Holdings’ only operating subsidiary and source of cash, the Company may be required to fund DeCrane Holdings’ preferred stock dividend and redemption obligations in the future.

DeCrane Holdings’ preferred stock dividends are payable quarterly at a rate of 14% per annum. Prior to September 30, 2005, dividends are not paid in cash but instead accrete to the liquidation value of the preferred stock, which, in turn, increases the redemption obligation. On or after September 30, 2005, preferred stock dividends are required to be paid in cash, if declared. The DeCrane Holdings preferred stock has a total redemption value of $54,223,000 as of December 31, 2001, including accumulated dividends.

 

Note 13.         Consolidated Statements of Cash Flows

The following information supplements the Company’s consolidated statements of cash flows.

 

 

 

Year Ended December 31,

 

 

 

2001

 

2000

 

1999

 

 

 

(in thousands)

 

Components of cash paid for acquisitions:

 

 

 

 

 

 

 

Fair value of assets acquired

 

$

 

$

94,155

 

$

165,628

 

Liabilities assumed

 

 

(34,792

)

(20,318

)

Cash paid

 

 

59,363

 

145,310

 

Less cash acquired

 

 

(292

)

(2,604

)

Net cash paid for acquisitions

 

 

 

59,071

 

142,706

 

 

 

 

 

 

 

 

 

Contingent consideration paid for previously completed acquisitions

 

17,075

 

29,825

 

3,000

 

Cash purchase price reductions received as a result of settling asserted claims against the sellers (Note 3)

 

(3,718

)

 

 

Additional acquisition related expenses

 

172

 

650

 

 

Total cash paid for acquisitions

 

$

13,529

 

$

89,546

 

$

145,706

 

 

F-29



 

 

 

Year Ended December 31,

 

 

 

2001

 

2000

 

1999

 

 

 

(in thousands)

 

Noncash investing and financing transactions:

 

 

 

 

 

 

 

16% mandatorily redeemable preferred stock dividends paid by the issuance of additional shares

 

$

4,593

 

$

2,040

 

$

 

Capital expenditures financed with capital lease obligations

 

4,438

 

109

 

1,711

 

Additional acquisition contingent consideration recorded

 

3,825

 

20,154

 

29,825

 

Loans to stockholders to purchase DeCrane Holdings capital stock, plus accrued interest

 

116

 

84

 

2,468

 

 

 

 

 

 

 

 

 

Paid in cash:

 

 

 

 

 

 

 

Interest

 

$

35,821

 

$

39,160

 

$

26,005

 

Income taxes paid, net of refunds received

 

1,161

 

578

 

470

 

 

Note 14.         Employee Benefit Plans

Stock Based Incentive Compensation

Management Incentive Stock Option Plan

In December 1999, DeCrane Holding’s Board of Directors approved a management incentive plan which provides for the issuance of options to purchase the common stock of DeCrane Holdings as incentive compensation to designated executive personnel and other key employees of the Company and its subsidiaries. The Compensation Committee of the Board of Directors of DeCrane Holdings administers the plan and makes a determination as to any options to be granted. The plan provides for the granting of options to purchase a maximum of 356,257 common shares prior to expiration in 2009. The options are granted at fair market value at the date of grant. Substantially all of the options awarded become fully vested and exercisable eight years from the date of grant but vesting can be accelerated based upon future attainment of defined performance criteria. In addition, the Compensation Committee may authorize alternate vesting schedules. The plan also provides for the acceleration of vesting upon the occurrence of certain events, including, under certain circumstances, a change of control.

During 1999, options to purchase 282,922 shares were granted under the plan, of which 27,994 shares vested immediately and options to purchase an additional 29,942 shares vested based on the attainment of year 1999 performance criteria. During 2000, options to purchase 80,623 shares were granted under the plan, of which 15,828 shares vested immediately. An additional 36,832 shares from the 1999 and 2000 grants vested based on the attainment of year 2000 performance criteria. During 2001, no options were granted under the plan and no additional shares from the 1999 and 2000 grants vested based on the required year 2001 performance criteria.

 

F-30



 

The per share exercise price of the options granted was equal to the fair market value of the common stock on each of the grant dates and, accordingly, no compensation expense was recognized during the three years ended December 31, 2001.

Incentive Stock Options Granted to Others

In July 1999, a group of related party investors, including two individuals who were then serving as directors, were granted options as compensation for consulting services. Options were granted to purchase 44,612 shares of DeCrane Holdings common stock at an exercise price of $23.00 per share, equal to the fair market value of the common stock on the grant date. The options vest over a three-year period, are subject to acceleration if DLJ and its affiliates sell any of their shares of common stock, and expire in 2009.

Summary of All Stock Options

The following table summarizes all stock option activity.

 

 

Number of Shares

 

Weighted-
Average
Exercise Price

 

Granted

 

327,534

 

$

23.00

 

Options outstanding, December 31, 1999

 

327,534

 

23.00

 

 

 

 

 

 

 

Granted

 

80,623

 

31.94

 

Canceled

 

(21,288

)

23.00

 

Options outstanding, December 31, 2000

 

386,869

 

24.86

 

 

 

 

 

 

 

Canceled

 

(23,516

)

25.55

 

Options outstanding, December 31, 2001

 

363,353

 

24.82

 

 

 

 

 

 

 

Options exercisable, December 31,

 

 

 

 

 

1999

 

57,936

 

$

23.00

 

2000

 

124,395

 

24.07

 

2001

 

139,051

 

23.82

 

 

F-31



 

As of December 31, 2001, options to purchase 37,516 common shares remained available for grant under the Management Incentive Stock Option Plan. The following table summarizes information about stock options outstanding and stock options exercisable at December 31, 2001.

 

 

 

All Options Outstanding

 

 

 

 

 

 

 

Weighted-Average

 

Number of Shares

 

 

 

Number of Shares as of

 

Remaining

 

Exercisable as of

 

 

 

December 31, 2001

 

Contractual Life

 

December 31, 2001

 

Per share exercise price:

 

 

 

 

 

 

 

 

$23.00

 

308,307

 

7.95 years

 

129,584

 

 

$35.00

 

55,046

 

8.93 years

 

9,467

 

Total

 

363,353

 

8.10 years

 

139,051

 

For compensatory stock options granted to non-employees, the Company recognized compensation expense of $215,000 for the year ended December 31, 2001, $561,000 for the year ended December 31, 2000 and $143,000 for the year ended December 31, 1999. For non-compensatory stock options, the Company uses APB Opinion No. 25 to account for stock-based compensation and, accordingly, no compensation expense was recognized during the three years ended December 31, 2001. The Company has adopted the disclosure-only provisions of SFAS No. 123.

For the year ended December 31, 1999, the effect of applying the fair value method of SFAS No. 123 to the options granted to employees and directors in 1999 did not result in pro forma net income or loss that was materially different from the historical amount reported. For the two years ended December 31, 2001, net income (loss), pro forma for the effect of applying the fair value method to the options granted in 1999 and 2000, would have been as follows:

 

 

 

Year Ended December 31,

 

 

 

2001

 

2000

 

 

 

(in thousands)

 

Net income (loss):

 

 

 

 

 

As reported

 

$

(14,002

)

$

3,602

 

Pro forma

 

(14,394

)

3,163

 

 

 

 

 

 

 

Weighted-average fair value of options granted (per share)

 

 

9.48

 

For the purposes of the pro forma disclosure, the estimated fair value of the options is amortized over the options’ vesting period. The effect of applying SFAS No. 123 may not be representative of the pro forma effect in future years since additional options may be granted during those future years.

 

F-32



 

The fair value of the options was determined using the following assumptions:

 

 

 

2001

 

2000

 

1999

 

Compensatory options (1):

 

 

 

 

 

 

 

Risk free interest rates

 

5.35

%

5.23

%

6.8

%

Expected dividend yield

 

 

 

 

Expected life

 

10 years

 

10 years

 

10 years

 

Expected stock price volatility

 

63.0

%

65.0

%

67.0

%

 

 

 

 

 

 

 

 

Employee and director options (2):

 

 

 

 

 

 

 

Risk free interest rates

 

 

5.5-6.7

%

5.8-6.5

%

Expected dividend yield

 

 

 

 

Expected life

 

 

8 years

 

8 years

 


(1)       Using the Black Scholes option valuation model.

(2)       Using the minimum value method.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models, as well as the minimum value method, do not necessarily provide a reliable single measure of its employee stock options.

The minimum value method, which is an acceptable method for non-public companies, excludes stock price volatility.

Management Stock Purchases

Beginning in December 1999, DeCrane Holding’s Board of Directors has permitted designated executive personnel and other key employees to purchase shares of common stock of DeCrane Holdings, with a portion of the purchase price to be loaned to the participants by DeCrane Aircraft. In December 1999, management purchased 171,295 shares of DeCrane Holdings’ common stock for $23.00 per share. The total purchase price was approximately $3,900,000, of which one-half was paid in cash and one-half was loaned to management by DeCrane Aircraft as described in Note 11. In 2000, management purchased an additional 20,707 shares for $23.00 per share in cash pursuant to the plan’s antidilution provisions. Dilution resulted from the issuance of the DeCrane Holdings common stock warrants in connection with the sale of DeCrane Aircraft’s 16% preferred stock.

 

F-33



 

401(k) Retirement Plan

Substantially all domestic employees are eligible to participate in one of the 401(k) retirement plans the Company sponsors, which are defined contribution plans satisfying the requirements of the Employee Retirement Income Security Act of 1974. The Company’s expense related to its matching contributions to these plans totaled $2,272,000 for the year ended December 31, 2001, $2,203,000 for the year ended December 31, 2000 and $1,272,000 for the year ended December 31, 1999.

 

Note 15.         Related Party Transactions

The Company’s transactions with related parties included in the consolidated financial statements are summarized in the table below.

 

 

Year Ended December 31,

 

 

 

2001

 

2000

 

1999

 

 

 

(in thousands)

 

CSFB / DLJ:

 

 

 

 

 

 

 

Transaction financing fees and expenses

 

$

520

 

$

1,703

 

$

4,048

 

Management fees:

 

 

 

 

 

 

 

Charged to operations during the period

 

300

 

300

 

302

 

Payable as of period end

 

375

 

75

 

75

 

 

 

 

 

 

 

 

 

Global Technology Partners, LLC:

 

 

 

 

 

 

 

Promissory notes:

 

 

 

 

 

 

 

Receivable as of period end, including interest

 

542

 

518

 

495

 

Interest income recorded during the period

 

24

 

23

 

18

 

Each related party is described below.

CSFB / DLJ

DLJ Merchant Banking Partners II, L.P. and affiliated funds own 83.3% of DeCrane Holdings common stock and 99.3% of its preferred stock, and 80% of DeCrane Aircraft’s preferred stock, all on a fully diluted basis. In November 2000, DLJ Merchant Banking Partners II, L.P. and affiliated funds became indirect affiliates of Credit Suisse Group and Credit Suisse First Boston, Inc.

DLJ affiliated funds were the initial purchasers of all of DeCrane Aircraft’s 16% preferred stock and DeCrane Holdings common stock warrants sold during 2000. Subsequent to the initial purchase, the DLJ affiliated funds sold 20% of the preferred stock and common stock warrants to unaffiliated parties in a private transaction.

 

F-34



 

DLJ is represented on the Board of Directors of both DeCrane Holdings and DeCrane Aircraft. In addition, Credit Suisse First Boston Corporation (formerly Donaldson, Lufkin & Jenrette Securities Corporation) is involved in market-making activities for DeCrane Holding’s Class A $22.31 common stock warrants and DeCrane Aircraft’s senior subordinated notes and may hold such securities from time to time. A DLJ affiliate is also paid fees for arranging the syndicate of lenders providing DeCrane Aircraft’s senior credit facility.

Global Technology Partners, LLC

Members of Global Technology own 1.6% of DeCrane Holdings common stock and 0.7% of its preferred stock, all on a fully diluted basis, and had two members on the Company’s Board of Directors from August 1998 through July 2000. DeCrane Aircraft loaned one-half of the purchase price for such shares to the members at rates ranging between 4.33% and 5.44%. The loans, plus accrued interest, are payable from the proceeds from the sale of the stock and are collaterialized by such stock.

 

Note 16.         Business Segment Information

The Company supplies products and services to the aerospace industry. The Company’s subsidiaries are organized into three groups, each of which are strategic businesses that develop, manufacture and sell distinct products and services. The groups and a description of their businesses are as follows:

•       Cabin Management — provides interior cabin components for the corporate aircraft market, including cabin interior furnishings, cabin management systems, seating and composite components;

•       Specialty Avionics — designs, engineers and manufactures electronic components, display devices and interconnect components and assemblies; and

•       Systems Integration — provides auxiliary fuel tanks, auxiliary power units and system integration services.

Management utilizes more than one measurement to evaluate group performance and allocate resources, however, management considers EBITDA to be the primary measurement of overall economic returns and cash flows. Management defines EBITDA as earnings before interest, income taxes, depreciation and amortization, restructuring and asset impairment charges, acquisition related charges and other noncash and nonoperating charges. This is consistent with the manner in which the Company’s lenders and ultimate investors measure its overall performance.

The accounting policies of the groups are substantially the same as those described in the summary of significant accounting policies (Note 1). Some transactions are recorded at the Company’s corporate headquarters and are not allocated to the groups, such as most of the Company’s cash and cash equivalents, debt and related net interest expense, corporate headquarters costs and income taxes.

 

F-35



 

Summary of Business by Segment

 

 

 

Year Ended December 31,

 

 

 

2001

 

2000

 

1999

 

 

 

(in thousands)

 

Revenues:

 

 

 

 

 

 

 

Cabin Management

 

$

206,052

 

$

174,796

 

$

74,244

 

Specialty Avionics

 

123,240

 

110,878

 

112,501

 

Systems Integration

 

67,528

 

62,965

 

58,483

 

Inter-group elimination (1)

 

(1,468

)

(1,260

)

(1,180

)

Consolidated totals

 

$

395,352

 

$

347,379

 

$

244,048

 

 

 

 

 

 

 

 

 

Revenues from significant customers (2):

 

 

 

 

 

 

 

Cabin Management

 

$

108,737

 

$

107,194

 

$

39,737

 

Specialty Avionics

 

35,115

 

30,542

 

31,425

 

Systems Integration

 

46,138

 

31,750

 

22,774

 

Consolidated totals

 

$

189,990

 

$

169,486

 

$

93,936

 

 

 

 

 

 

 

 

 

EBITDA:

 

 

 

 

 

 

 

Cabin Management

 

$

45,554

 

$

46,041

 

$

24,153

 

Specialty Avionics

 

33,272

 

26,696

 

27,124

 

Systems Integration

 

17,152

 

15,026

 

10,569

 

Corporate (3)

 

(7,125

)

(6,969

)

(5,436

)

Inter-group elimination (4)

 

(62

)

198

 

116

 

Consolidated totals (5)

 

$

88,791

 

$

80,992

 

$

56,526

 

 

 

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

 

 

Cabin Management

 

$

14,607

 

$

9,477

 

$

3,548

 

Specialty Avionics

 

12,012

 

12,101

 

10,871

 

Systems Integration

 

4,346

 

4,682

 

4,473

 

Corporate

 

1,411

 

927

 

294

 

Consolidated totals (6)

 

$

32,376

 

$

27,187

 

$

19,186

 

 

 

 

 

 

 

 

 

Total assets (as of period end):

 

 

 

 

 

 

 

Cabin Management

 

$

311,476

 

$

307,241

 

$

181,744

 

Specialty Avionics

 

214,569

 

227,093

 

224,305

 

Systems Integration

 

76,312

 

86,602

 

93,473

 

Corporate (7)

 

43,497

 

43,651

 

33,175

 

Inter-group elimination (8)

 

(143

)

(333

)

(855

)

Consolidated totals

 

$

645,711

 

$

664,254

 

$

531,842

 

 

 

 

 

 

 

 

 

Capital expenditures:

 

 

 

 

 

 

 

Cabin Management

 

$

6,579

 

$

14,896

 

$

2,355

 

Specialty Avionics

 

1,708

 

2,496

 

3,217

 

Systems Integration

 

3,371

 

1,612

 

1,534

 

Corporate

 

241

 

3,685

 

156

 

Consolidated totals (9)

 

$

11,899

 

$

22,689

 

$

7,262

 

 


The notes appear on the next page.

F-36



 

Summary of Business by Geographical Area

 

 

 

Year Ended December 31,

 

 

 

2001

 

2000

 

1999

 

 

 

(in thousands)

 

Consolidated net revenues to unaffiliated customers (10):

 

 

 

 

 

 

 

United States

 

$

391,296

 

$

344,150

 

$

240,707

 

Western Europe

 

4,056

 

3,229

 

3,341

 

Consolidated totals

 

$

395,352

 

$

347,379

 

$

244,048

 

 

 

 

 

 

 

 

 

Consolidated long-lived assets (11):

 

 

 

 

 

 

 

United States

 

$

56,218

 

$

54,566

 

$

35,465

 

Western Europe

 

2,564

 

2,758

 

2,235

 

Mexico

 

2,291

 

2,167

 

 

Consolidated totals

 

$

61,073

 

$

59,491

 

$

37,700

 


Notes

(1)       Inter-group sales are accounted for at prices comparable to sales to unaffiliated customers, and are eliminated in consolidation.

(2)       Three customers each accounted for more than 10% of the Company’s consolidated revenues in 2001 and 2000 and two in 1999 as shown in the table below. Customer data for periods prior to reaching the 10% threshold is included for comparability. Complete loss of any of these customers could have a significant adverse impact on the results of operations expected in future periods.

 

 

 

Year Ended December 31,

 

 

 

2001

 

2000

 

1999

 

 

 

(in thousands)

 

Boeing (a)

 

$

70,257

 

$

52,735

 

$

46,436

 

Bombardier (b)

 

61,541

 

64,131

 

16,308

 

Textron (c)

 

58,192

 

52,620

 

31,192

 

Consolidated totals

 

$

189,990

 

$

169,486

 

$

93,936

 


(a)       Exceeds 10% for all periods. All operating groups derived revenues from Boeing during each of the periods.

(b)       Exceeds 10% for 2001 and 2000; 1999 data is included for comparability. All operating groups derived revenues from Bombardier during each of the periods.

(c)       Exceeds 10% for all periods. The Cabin Management and Specialty Avionics Groups derived revenues from Textron during each of the periods. The Systems Integration Group derived revenues from Textron during 2000 and 1999.

(3)       Reflects the Company’s corporate headquarters costs and expenses not allocated to the groups.

(4)       Reflects elimination of the effect of inter-group profits in inventory.

 

F-37



 

(5)      The table below reconciles EBITDA to consolidated income from operations and income (loss) before income taxes.

 

 

 

Year Ended December 31,

 

 

 

2001

 

2000

 

1999

 

 

 

(in thousands)

 

Consolidated EBITDA

 

$

88,791

 

$

80,992

 

$

56,526

 

Depreciation and amortization (6)

 

(32,376

)

(27,187

)

(19,186

)

Restructuring and asset impairment charges

 

(28,658

)

 

(9,935

)

Acquisition related charges:

 

 

 

 

 

 

 

Noncash inventory related charges

 

 

 

(1,606

)

Acquisition related charges not capitalized

 

(308

)

(538

)

(709

)

Nonrecurring manufacturing facility startup costs

 

 

(717

)

 

Other noncash charges

 

(215

)

(561

)

(143

)

Consolidated income from operations

 

27,234

 

51,989

 

24,947

 

 

 

 

 

 

 

 

 

Interest expense

 

(39,001

)

(41,623

)

(27,918

)

Other expenses, net

 

(1,047

)

(482

)

(447

)

Consolidated income (loss) before income taxes

 

$

(12,814

)

$

9,884

 

$

(3,418

)


(6)       Reflects depreciation and amortization of long-lived assets, goodwill and other intangible assets. Excludes amortization of deferred financing costs, which are classified as a component of interest expense. The table below reconciles depreciation and amortization of long-lived assets to consolidated depreciation and amortization.

 

 

 

Year Ended December 31,

 

 

 

2001

 

2000

 

1999

 

 

 

(in thousands)

 

Depreciation and amortization of long-lived assets

 

$

32,376

 

$

27,187

 

$

19,186

 

Amortization of deferred financing costs

 

2,218

 

2,258

 

1,631

 

Consolidated depreciation and amortization

 

$

34,594

 

$

29,445

 

$

20,817

 

 

(7)       Reflects the Company’s corporate headquarters assets, excluding investments in and notes receivable from subsidiaries.

(8)       Reflects elimination of inter-group receivables and profits in inventory as of period end.

(9)       Reflects capital expenditures paid in cash. Excludes capital expenditures financed with capital lease obligations of $4,438,000 for the year ended December 31, 2001, $109,000 for the year ended December 31, 2000 and $1,711,000 for the year ended December 31, 1999.

(10)     Allocated on the basis of the location of the subsidiary originating the sale.

(11)     Allocated on the basis of the location of the subsidiary and consists of the Company’s property and equipment. Corporate long-lived assets are included with the United States assets.

 

F-38



 

Note 17.         Supplemental Condensed Consolidating Financial Information

In conjunction with the senior credit facility and 12% senior subordinated notes described in Note 9, the following condensed consolidating financial information is presented segregating the Company, as the issuer, and guarantor and non-guarantor subsidiaries. The accompanying financial information in the guarantor subsidiaries column reflects the financial position, results of operations and cash flows for those subsidiaries guaranteeing the senior credit facility and the notes.

The guarantor subsidiaries are wholly-owned subsidiaries of the Company and their guarantees are full and unconditional on a joint and several basis. There are no restrictions on the ability of the guarantor subsidiaries to transfer funds to the issuer in the form of cash dividends, loans or advances. Separate financial statements of the guarantor subsidiaries are not presented because management believes that such financial statements would not be material to investors. Investments in subsidiaries in the following condensed consolidating financial information are accounted for under the equity method of accounting. Consolidating adjustments include the following:

(1)       Elimination of investments in subsidiaries.

(2)       Elimination of intercompany accounts.

(3)       Elimination of intercompany sales between guarantor and non-guarantor subsidiaries.

(4)       Elimination of equity in earnings of subsidiaries.

 

F-39



 

Balance Sheets

 

 

December 31, 2001

 

 

 

 

Issuer

 

Guarantor

Subsidiaries

 

Non-Guarantor

Subsidiaries

 

Consolidating

Adjustments

 

Consolidated

Total

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

9,641

 

$

(92

)

$

245

 

$

 

$

9,794

 

 

Accounts receivable, net

 

 

56,973

 

1,478

 

 

58,451

 

 

Inventories

 

 

84,864

 

1,634

 

 

86,498

 

 

Other current assets

 

15,153

 

1,138

 

331

 

 

16,622

 

 

Total current assets

 

24,794

 

142,883

 

3,688

 

 

171,365

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

3,355

 

55,152

 

2,566

 

 

61,073

 

 

Other assets, principally intangibles, net

 

15,348

 

388,269

 

9,656

 

 

413,273

 

 

Investments in subsidiaries

 

403,786

 

20,697

 

 

(424,483

)(1)

 

 

Intercompany receivables

 

256,360

 

121,030

 

4,300

 

(381,690

)(2)

 

 

Total assets

 

$

703,643

 

$

728,031

 

$

20,210

 

$

(806,173

)

$

645,711

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities, Mandatorily Redeemable Preferred Stock and Stockholder’s Equity 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

11,839

 

$

2,054

 

$

6

 

$

 

$

13,899

 

 

Other current liabilities

 

24,849

 

49,854

 

1,107

 

 

75,810

 

 

Total current liabilities

 

36,688

 

51,908

 

1,113

 

 

89,709

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

376,392

 

9,959

 

 

 

386,351

 

 

Intercompany payables

 

120,998

 

260,660

 

32

 

(381,690

)(2)

 

 

Other long-term liabilities

 

38,847

 

1,806

 

382

 

 

41,035

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mandatorily redeemable preferred stock

 

28,240

 

 

 

 

28,240

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholder’s equity:

 

 

 

 

 

 

 

 

 

 

 

 

Paid-in capital

 

119,801

 

336,986

 

15,440

 

(352,426

)(1)

119,801

 

 

Retained earnings (deficit)

 

(17,323

)

66,800

 

5,257

 

(72,057

)(1)

(17,323

)

 

Accumulated other comprehensive loss

 

 

(88

)

(2,014

)

 

(2,102

)

 

Total stockholder’s equity

 

102,478

 

403,698

 

18,683

 

(424,483

)

100,376

 

 

Total liabilities, mandatorily redeemable preferred stock and stockholder’s equity

 

$

703,643

 

$

728,031

 

$

20,210

 

$

(806,173

)

$

645,711

 

 

 

 

F-40



 

 

 

December 31, 2000

 

 

 

Issuer

 

Guarantor

Subsidiaries

 

Non-Guarantor

Subsidiaries

 

Consolidating

Adjustments

 

Consolidated

Total

 

 

 

(in thousands) 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

7,553

 

$

233

 

$

413

 

$

 

$

8,199

 

Accounts receivable, net

 

 

52,095

 

1,735

 

 

53,830

 

Inventories

 

 

85,032

 

1,664

 

 

86,696

 

Other current assets

 

15,161

 

1,118

 

177

 

 

16,456

 

Total current assets

 

22,714

 

138,478

 

3,989

 

 

165,181

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

4,423

 

52,303

 

2,765

 

 

59,491

 

Other assets, principally intangibles, net

 

16,514

 

412,730

 

10,338

 

 

439,582

 

Investments in subsidiaries

 

394,794

 

20,739

 

 

(415,533

)(1)

 

Intercompany receivables

 

251,725

 

92,991

 

3,863

 

(348,579

)(2)

 

Total assets

 

$

690,170

 

$

717,241

 

$

20,955

 

$

(764,112

)

$

664,254

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities, Mandatorily Redeemable Preferred Stock and Stockholder’s Equity

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

7,997

 

$

1,266

 

$

26

 

$

 

$

9,289

 

Other current liabilities

 

35,098

 

58,102

 

1,294

 

 

94,494

 

Total current liabilities

 

43,095

 

59,368

 

1,320

 

 

103,783

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

368,837

 

5,147

 

6

 

 

373,990

 

Intercompany payables

 

92,991

 

255,588

 

 

(348,579

)(2)

 

Other long-term liabilities

 

40,626

 

2,344

 

577

 

 

43,547

 

 

 

 

 

 

 

 

 

 

 

 

 

Mandatorily redeemable preferred stock

 

23,179

 

 

 

 

23,179

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholder’s equity:

 

 

 

 

 

 

 

 

 

 

 

Paid-in capital

 

124,763

 

338,729

 

15,440

 

(354,169

)(1)

124,763

 

Retained earnings (deficit)

 

(3,321

)

56,065

 

5,299

 

(61,364

)(1)

(3,321

)

Accumulated other comprehensive loss

 

 

 

(1,687

)

 

(1,687

)

Total stockholder’s equity

 

121,442

 

394,794

 

19,052

 

(415,533

)

119,755

 

Total liabilities, mandatorily redeemable preferred stockand stockholder’s equity

 

$

690,170

 

$

717,241

 

$

20,955

 

$

(764,112

)

$

664,254

 

 

 

F-41



 

Statements of Operations

 

 

Year Ended December 31, 2001

 

 

 

Issuer

 

Guarantor

Subsidiaries

 

Non-Guarantor

Subsidiaries

 

Consolidating

Adjustments

 

Consolidated

Total

 

 

 

 

(in thousands)

 

Revenues

 

$

 

$

391,677

 

$

11,322

 

$

(7,647

)(3)

$

395,352

 

Cost of sales

 

 

277,414

 

9,914

 

(7,647

)(3)

279,681

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

114,263

 

1,408

 

 

115,671

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

9,390

 

58,347

 

780

 

 

68,517

 

Amortization of intangible assets

 

202

 

19,313

 

405

 

 

19,920

 

Interest expense

 

37,796

 

1,187

 

18

 

 

39,001

 

Intercompany charges

 

(23,815

)

23,815

 

 

 

 

Equity in earnings of subsidiaries

 

(4,894

)

(115

)

 

5,009

(4)

 

Other expenses (income), net

 

361

 

508

 

178

 

 

1,047

 

Provision for income taxes (benefit)

 

(5,038

)

6,314

 

(88

)

 

1,188

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(14,002

)

$

4,894

 

$

115

 

$

(5,009

)

$

(14,002

)

 

 

 

 

 

 

 

Year Ended December 31, 2000

 

 

 

Issuer

 

Guarantor

Subsidiaries

 

Non-Guarantor

Subsidiaries

 

Consolidating

Adjustments

 

Consolidated

Total

 

 

 

(in thousands)

 

Revenues

 

$

 

$

343,710

 

$

11,873

 

$

(8,204

)(3)

$

347,379

 

Cost of sales

 

 

230,864

 

9,388

 

(8,204

)(3)

232,048

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

112,846

 

2,485

 

 

115,331

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

8,720

 

35,359

 

1,315

 

 

45,394

 

Amortization of intangible assets

 

276

 

17,263

 

409

 

 

17,948

 

Interest expense

 

40,864

 

752

 

7

 

 

41,623

 

Intercompany charges

 

(20,214

)

20,214

 

 

 

 

Equity in earnings of subsidiaries

 

(15,668

)

(681

)

 

16,349

 (4)

 

Other expenses (income), net

 

336

 

158

 

(12

)

 

482

 

Provision for income taxes (benefit)

 

(17,916

)

24,113

 

85

 

 

6,282

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

3,602

 

$

15,668

 

$

681

 

$

(16,349

)

$

3,602

 

 

 

F-42



 

 

 

 

Year Ended December 31, 1999

 

 

 

Issuer

 

Guarantor

Subsidiaries

 

Non-Guarantor

Subsidiaries

 

Consolidating

Adjustments

 

Consolidated

Total

 

 

 

(in thousands)

 

Revenues

 

$

 

$

237,837

 

$

11,549

 

$

(5,338

)(3)

$

244,048

 

Cost of sales

 

 

161,770

 

9,439

 

(5,338

)(3)

165,871

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

76,067

 

2,110

 

 

78,177

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

6,419

 

32,232

 

1,506

 

 

40,157

 

Amortization of intangible assets

 

161

 

12,417

 

495

 

 

13,073

 

Interest expense

 

27,493

 

386

 

39

 

 

27,918

 

Intercompany charges

 

(8,888

)

8,888

 

 

 

 

Equity in earnings of subsidiaries

 

(12,611

)

(406

)

 

13,017

 (4)

 

Other expenses (income), net

 

646

 

219

 

(418

)

 

447

 

Provision for income taxes (benefit)

 

(8,850

)

9,720

 

82

 

 

952

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(4,370

)

$

12,611

 

$

406

 

$

(13,017

)

$

(4,370

)

 

 

 

 

 

 

F-43



 

Statements of Cash Flows

 

 

Year Ended December 31, 2001

 

 

 

Issuer

 

Guarantor

Subsidiaries

 

Non-Guarantor

Subsidiaries

 

Consolidating

Adjustments

 

Consolidated

Total

 

 

 

(in thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(14,002

)

$

4,894

 

$

115

 

$

(5,009

)(4)

$

(14,002

)

Noncash adjustments

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of subsidiaries

 

(4,894

)

(115

)

 

5,009

(4)

 

Other noncash adjustments

 

3,950

 

52,467

 

887

 

 

57,304

 

Changes in working capital

 

19,987

 

(47,707

)

(653

)

 

(28,373

)

Net cash provided by
operating activities

 

5,041

 

9,539

 

349

 

 

14,929

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Cash paid for acquisitions, net
of cash acquired

 

(13,529

)

 

 

 

(13,529

)

Capital expenditures and other

 

(241

)

(10,470

)

(552

)

 

(11,263

)

Net cash used for
investing activities

 

(13,770

)

(10,470

)

(552

)

 

(24,792

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Debt financing for acquisitions

 

20,000

 

 

 

 

20,000

 

Net revolving line of credit repayments

 

(400

)

 

 

 

(400

)

Other borrowings

 

 

2,797

 

 

 

2,797

 

Principal payments on long-term debt and leases

 

(8,203

)

(1,847

)

(26

)

 

(10,076

)

Other, net

 

(580

)

(344

)

 

 

(924

)

Net cash provided by (used for) financing activities

 

10,817

 

606

 

(26

)

 

11,397

 

Effect of foreign currency translation on cash

 

 

 

61

 

 

61

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and equivalents

 

2,088

 

(325

)

(168

)

 

1,595

 

Cash and equivalents at beginning of period

 

7,553

 

233

 

413

 

 

8,199

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents at end of period

 

$

9,641

 

$

(92

)

$

245

 

$

 

$

9,794

 

 

 

F-44



 

 

 

Year Ended December 31, 2000

 

 

 

Issuer

 

Guarantor

Subsidiaries

 

Non-Guarantor

Subsidiaries

 

Consolidating

Adjustments

 

Consolidated

Total

 

 

 

(in thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

3,602

 

$

15,668

 

$

681

 

$

(16,349

)(4)

$

3,602

 

Noncash adjustments:

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of subsidiaries

 

(15,668

)

(681

)

 

16,349

(4)

 

Other noncash adjustments

 

9,092

 

25,293

 

954

 

 

35,339

 

Changes in working capital

 

1,283

 

(22,458

)

(983

)

 

(22,158)

 

Net cash provided by (used for) operating activities

 

(1,691

)

17,822

 

652

 

 

16,783

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Cash paid for acquisitions, net of cash acquired

 

(89,838

)

292

 

 

 

(89,546)

 

Capital expenditures and other

 

(3,614

)

(18,370

)

(634

)

 

(22,618)

 

Net cash used for investing activities

 

(93,452

)

(18,078

)

(634

)

 

(112,164)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Debt financing for acquisitions

 

55,000

 

 

 

 

55,000

 

Proceeds from sale of preferred stock and warrants

 

24,924

 

 

 

 

24,924

 

Net revolving line of credit borrowings

 

12,400

 

 

 

 

12,400

 

Capital contribution

 

7,902

 

 

 

 

7,902

 

Other borrowings

 

 

3,451

 

 

 

3,451

 

Principal payments on long-term debt and leases

 

(3,419

)

(2,392

)

(13

)

 

(5,824)

 

Other, net

 

(1,950

)

(247

)

 

 

(2,197)

 

Net cash provided by (used for) financing activities

 

94,857

 

812

 

(13

)

 

95,656

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of foreign currency translation on cash

 

 

 

6

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and equivalents

 

(286

)

556

 

11

 

 

281

 

Cash and equivalents at beginning of period

 

7,839

 

(323

)

402

 

 

7,918

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents at end of period

 

$

7,553

 

$

233

 

$

413

 

$

 

$

8,199

 

 

 

F-45



 

 

 

Year Ended December 31, 1999

 

 

 

Issuer

 

Guarantor

Subsidiaries

 

Non-Guarantor

Subsidiaries

 

Consolidating

Adjustments

 

Consolidated

Total

 

 

 

(in thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(4,370

)

$

12,611

 

$

406

 

$

(13,017

)(4)

$

(4,370

)

Noncash adjustments:

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of subsidiaries

 

(12,611

)

(406

)

 

13,017

(4) 

 —

 

Other noncash adjustments

 

1,787

 

25,188

 

836

 

 

27,811

 

Changes in working capital

 

30,867

 

(38,903

)

(205

)

 

(8,241

)

Net cash provided by (used for) operating activities

 

15,673

 

(1,510

)

1,037

 

 

15,200

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Cash paid for acquisitions, net of cash acquired

 

(148,310

)

2,604

 

 

 

(145,706

)

Capital expenditures and other

 

(156

)

(6,289

)

(623

)

 

(7,068

)

Net cash used for investing activities

 

(148,466

)

(3,685

)

(623

)

 

(152,774

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Debt financing for acquisitions

 

135,000

 

 

 

 

135,000

 

Capital contribution

 

14,368

 

 

 

 

14,368

 

Customer advance

 

 

5,000

 

 

 

5,000

 

Net revolving line of credit borrowings

 

(5,800

)

 

 

 

(5,800

)

Principal payments on long-term debt and leases

 

(1,046

)

(675

)

(232

)

 

(1,953

)

Other, net

 

(4,348

)

(215

)

 

 

(4,563

)

Net cash provided by (used for) financing activities

 

138,174

 

4,110

 

(232

)

 

142,052

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of foreign currency translation on cash

 

 

 

(78

)

 

(78

)

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and equivalents

 

5,381

 

(1,085

)

104

 

 

4,400

 

Cash and equivalents at beginning of period

 

2,458

 

762

 

298

 

 

3,518

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents at end of period

 

$

7,839

 

$

(323

)

$

402

 

$

 

$

7,918

 

 

 

 

F-46



 

Note 18.         Subsequent Event

On March 19, 2002, the Company amended certain of the terms of its senior credit facility. The amendment combines the two $25,000,000 working capital and acquisitions lines of credit into a single $50,000,000 working capital line of credit, increases the prime rate and LIBOR rate margins by 50 basis points, resulting in a range of 2.00% to 3.25% for prime rate borrowings and 3.25% to 4.50% for LIBOR rate borrowings, and amends certain financial covenants, principally through December 31, 2003.

 

F-47



 

DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Supplementary Financial Information

Selected Quarterly Financial Data (Unaudited)

Unaudited condensed quarterly data for the two years ended December 31, 2001 are summarized in the tables below.

 

 

 

Year Ended December 31, 2001

 

 

 

1st

 

2nd

 

3rd

 

4th

 

 

 

(in thousands)

 

Revenues

 

$

99,151

 

$

102,780

 

$

102,928

 

$

90,493

 

Gross profit

 

35,045

 

32,576

 

32,776

 

15,274

 

EBITDA, as defined (Note 16)

 

23,385

 

26,308

 

21,998

 

17,100

 

Net income (loss)

 

2,472

 

2,111

 

862

 

(19,447

)

 

    During the second quarter of 2001, the Company adopted a restructuring plan to realign production programs between its manufacturing facilities and recorded restructuring charges aggregating $3,902,000 related to this restructuring. During the fourth quarter of 2001, the Company announced and implemented a further restructuring plan in response to the adverse impact on the aerospace industry resulting from the September 11th terrorist attack and further weakening of global economic conditions. As a result, additional restructuring and asset impairment charges aggregating $24,756,000 was recorded in the fourth quarter. Restructuring and asset impairment charges totaled $28,658,000 for the year.

 

 

 

Year Ended December 31, 2000

 

 

 

1st

 

2nd

 

3rd

 

4th

 

 

 

(in thousands)

 

Revenues

 

$

79,178

 

$

82,094

 

$

93,149

 

$

92,958

 

Gross profit

 

26,152

 

27,611

 

31,131

 

30,437

 

EBITDA, as defined (Note 16)

 

17,182

 

19,941

 

22,159

 

21,710

 

Net income (loss)

 

755

 

1,987

 

890

 

(30

)

 

 

 

F-48



 

DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES

Schedule II — Valuation And Qualifying Accounts

(In thousands)

 

 

Balance at

Beginning of

Period

 

Charged to

Cost and

Expense

 

Charged to

Other

Accounts

 

Deductions

 

Balance at

End of

Period

 

Year Ended December 31, 2001

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

$

1,902

 

$

2,418

 

$

 

$

1,673

 

$

2,647

 

Reserve for excess, slow moving and potentially obsolete material (1)

 

5,580

 

1,829

 

 

773

 

6,636

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2000

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

$

1,966

 

$

120

 

$

223

(2) 

$

407

 

$

1,902

 

Reserve for excess, slow moving and potentially obsolete material

 

6,966

 

1,261

 

215

(2)

2,862

 

5,580

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 1999

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

$

581

 

$

1,252

 

$

1,407

(2)

$

1,274

 

$

1,966

 

Reserve for excess, slow moving and potentially obsolete material (3)

 

5,702

 

1,373

 

2,567

(2)

2,676

 

6,966

 


(1)       Excludes $12,155,000 of inventory and capitalized program cost write-offs resulting from the 2001 restructuring plan.

(2)       Attributable to companies acquired. Reflects historical amounts used to determine the fair value of assets acquired.

(3)       Excludes $5,983,000 of inventory write-downs resulting from the 1999 restructuring plan.

 

F-49