UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2004

 

Commission File Number 000-22371

 

 

DECRANE AIRCRAFT HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  o Yes    ý No

 

 

The number of shares of Registrant’s Common Stock, $.01 par value, outstanding as of August 9, 2004 was 100 shares.

 

 

Table of Contents

 

Part I – Financial Information
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003
	Consolidated Statements of Operations for the three months and six months ended June 30, 2004 and 2003
	Consolidated Statements of Stockholder’s Equity (Deficit) for the six months ended June 30, 2004
	Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003
	Condensed Notes to Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Results of Operations
	Performance Measures
	Changes in Accounting Principles
	Three months ended June 30 2004
	Six months ended June 30, 2004
	Restructuring, Asset Impairment and Other Related Charges
	Liquidity and Capital Resources
	Disclosure of Contractual Obligations and Commitments
	Disclosure About Off-Balance Sheet Commitments and Indemnities
	Recent Accounting Pronouncements
	Special Note Regarding Forward Looking Statements and Risk Factors
Item 3.	Quantitative and Qualitative Disclosure About Market Risk
Item 4.	Controls and Procedures
Part II – Other Information
Item 1.	Legal Proceedings
Item 6.	Exhibits and Reports on Form 8-K
	Exhibits
	Reports on Form 8-K
Signatures

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1.                             FINANCIAL STATEMENTS

 

DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES

 

Consolidated Balance Sheets

 

(In thousands, except share data)		June 30, 2004			December 31, 2003
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	2,362		$	6,936
Accounts receivable, net		27,322			21,455
Inventories		52,314			42,981
Prepaid expenses and other current assets		1,176			1,082
Total current assets		83,174			72,454
Property and equipment, net		29,798			30,900
Goodwill		162,430			162,430
Other assets, principally intangibles, net		34,764			38,092
Total assets		$	310,166		$	303,876
Liabilities, Mandatorily Redeemable Preferred Stock and Stockholder’s Equity (Deficit)
Current liabilities:
Current portion of long-term debt		$	1,319		$	1,198
Accounts payable		17,377			15,462
Accrued liabilities		23,387			17,890
Income taxes payable		64			—
Total current liabilities		42,147			34,550
Long-term debt		283,821			268,208
Mandatorily redeemable preferred stock		44,602			—
Other long-term liabilities		7,836			5,464
Commitments and contingencies (Note 10)
Mandatorily redeemable preferred stock		—			40,835
Stockholder’s equity (deficit):
Common stock, $.01 par value, 1,000 shares authorized and 100 shares issued and outstanding as of June 30, 2004 and December 31, 2003		—			—
Additional paid-in capital		112,987			112,987
Notes receivable for shares sold		(1,305		)	(1,268		)
Accumulated deficit		(179,654		)	(156,632		)
Accumulated other comprehensive loss		(268		)	(268		)
Total stockholder’s equity (deficit)		(68,240		)	(45,181		)
Total liabilities, mandatorily redeemable preferred stock and stockholder’s equity (deficit)		$	310,166		$	303,876

 

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

 

1

 

DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES

 

Consolidated Statements of Operations

 

		Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)		2004			2003			2004			2003
		(Unaudited)
Revenues		$	54,817		$	44,113		$	103,414		$	86,013
Cost of sales		47,317			38,714			84,156			67,592
Gross profit		7,500			5,399			19,258			18,421
Operating expenses:
Selling, general and administrative expenses		7,788			6,979			15,025			16,909
Research and development expenses		2,001			3,278			4,182			4,851
Impairment of goodwill		—			34,000			—			34,000
Amortization of intangible assets		913			914			1,825			1,826
Total operating expenses		10,702			45,171			21,032			57,586
Loss from operations		(3,202		)	(39,772		)	(1,774		)	(39,165		)
Other expenses:
Interest expense		8,750			6,468			17,452			12,337
Mandatorily redeemable preferred stock dividends		1,801			—			3,533			—
Other expenses, net		91			407			203			746
Loss from continuing operations before provision for income taxes		(13,844		)	(46,647		)	(22,962		)	(52,248		)
Provision for income (taxes) benefit		(30		)	9,365			(60		)	10,630
Loss from continuing operations		(13,874		)	(37,282		)	(23,022		)	(41,618		)
Discontinued operations and change in accounting principle:
Income (loss) from discontinued operations, net of tax		—			747			—			(5,650		)
Cumulative effect of change in accounting principle		—			—			—			(13,764		)
Net loss		(13,874		)	(36,535		)	(23,022		)	(61,032		)
Accrued preferred stock dividends		—			(1,540		)	—			(3,020		)
Preferred stock redemption value accretion		—			(117		)	—			(234		)
Net loss applicable to common stockholder		$	(13,874	)	$	(38,192	)	$	(23,022	)	$	(64,286	)

 

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

 

2

 

DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES

 

Consolidated Statement of Stockholder’s Equity (Deficit)

 

							Additional			Notes Receivable						Accumulated Other
		Common Stock					Paid-in			For Shares			Accumulated			Comprehensive
(In thousands, except share data)		Shares		Amount			Capital			Sold			Deficit			Loss			Total
Balance, December 31, 2003		100		$	—		$	112,987		$	(1,268	)	$	(156,632	)	$	(268	)	$	(45,181	)
Comprehensive loss:
Net loss		—		—			—			—			(23,022		)	—			(23,022		)
Notes receivable interest accrued		—		—			—			(37		)	—			—			(37		)
Balance, June 30, 2004 (Unaudited)		100		$	—		$	112,987		$	(1,305	)	$	(179,654	)	$	(268	)	$	(68,240	)

 

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

 

3

 

DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows

 

		Six Months Ended June 30,
(In thousands)		2004			2003
		(Unaudited)
Cash flows from operating activities:
Net loss		$	(23,022	)	$	(61,032	)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:
Cumulative effect of change in accounting principles		—			13,764
Loss from discontinued operations		—			5,650
Depreciation and amortization		6,184			6,342
Mandatorily redeemable preferred stock dividends		3,533			—
Noncash portion of restructuring, asset impairment and other related charges		2,978			37,664
Interest accretion on second-lien term debt		1,213			—
Preferred stock redemption value accretion		234			—
Deferred income taxes		—			(11,659		)
Other, net		(13		)	295
Changes in assets and liabilities:
Accounts receivable		(5,867		)	4,207
Inventories		(12,144		)	(7,854		)
Prepaid expenses and other assets		(270		)	541
Accounts payable		1,915			(2,251		)
Accrued liabilities		5,432			(10,755		)
Income taxes payable		162			385
Other long-term liabilities		2,372			4,761
Net cash used for operating activities		(17,293		)	(19,942		)
Cash flows from investing activities:
Net proceeds from sale of Specialty Avionics Group		—			132,800
Capital expenditures		(1,767		)	(2,002		)
Cash paid for acquisition contingent consideration		—			(600		)
Net cash provided by (used for) investing activities		(1,767		)	130,198
Cash flows from financing activities:
Debt borrowings:
Revolving line of credit, net		15,050			9,250
Other secured long-term		46			—
Debt repayments:
First-lien term debt		—			(129,275		)
Other secured long-term debt		(610		)	(1,173		)
Net cash provided by (used for) financing activities		14,486			(121,198		)
Net cash provided by discontinued operations		—			2,194
Net decrease in cash and cash equivalents		(4,574		)	(8,748		)
Cash and cash equivalents at beginning of period		6,936			12,421
Cash and cash equivalents at end of period		$	2,362		$	3,673

 

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

 

4

 

DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES

 

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

Note 1.           Summary of Significant Accounting Policies

 

Basis of Presentation

 

These consolidated interim financial statements are unaudited.  The Company believes the interim financial statements are presented on a basis consistent with the audited financial statements and include all adjustments necessary for a fair presentation of the financial condition, results of operations and cash flows for such interim periods.  All of these adjustments are normal recurring adjustments.

 

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.

 

The results of operations for interim periods do not necessarily predict the operating results for any other interim period or for the full year.  The consolidated balance sheet as of December 31, 2003 has been derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America as permitted by interim reporting requirements.  These consolidated interim financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited financial statements and related notes included in the Company’s 2003 Form 10-K.  Reclassifications have been made to the financial statements for prior periods to conform to the current year presentation.

 

Changes in Accounting Principles

 

SFAS No. 150 Adopted January 1, 2004

 

Effective January 1, 2004, the Company adopted SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.”  SFAS No. 150 establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity.  SFAS No. 150 requires classification of financial instruments within its scope as a liability, including financial instruments issued in the form of shares that are mandatorily redeemable, because those financial instruments are deemed to be, in essence, obligations of the issuer.  As a result of adopting SFAS No. 150 on January 1, 2004, the 16% mandatorily redeemable preferred stock was reclassified as a liability and the quarterly dividend and redemption value accretion are reflected as charges against pre-tax income.  In periods prior to January 1, 2004, these charges were deducted in arriving at the net income or loss applicable to the Company’s common stockholder.

 

The following table summarizes the results of operations for the three months and six months ended June 30, 2003 as if SFAS No. 150 had been in effect as of the beginning of 2003.

 

5

 

		Three Months Ended June 30, 2003						Six Months Ended June 30, 2003
(In thousands)		As Reported			Pro Forma			As Reported			Pro Forma
		(Unaudited)
Loss from continuing operations		$	(37,282	)	$	(38,939	)	$	(41,618	)	$	(44,872	)
Net loss		(36,535		)	(38,192		)	(61,032		)	(64,286		)

 

The pro forma data reflects preferred stock dividends and redemption value accretion totaling $1,657,000 for three months ended June 30, 2003 and $3,254,000 for the six months ended June 30, 2003 as charges against income during the periods.

 

Discontinued Use of Program Accounting Commencing January 1, 2003

 

As more fully described in “Note 1—Change in Accounting Principle” to the audited financial statements included in the Company’s 2003 Form 10-K, the Company elected to discontinue the use of program accounting for the costs of products manufactured for delivery under production-type contracts.  As a result, certain deferred program costs are no longer included in inventory commencing January 1, 2003.

 

This change in accounting policy was made after concluding the 2003 fiscal year but was applied retroactively to the beginning of the year, January 1, 2003, as required by generally accepted accounting principles.  As a result of the change, program-related product development costs are now classified as a component of research and development expenses in the consolidated financial statements rather than classified as a component of inventory cost.  The Company has restated its results of operations by charging previously inventoried costs totaling $3,278,000 and $4,851,000 for the three months and six months ended June 30, 2003, respectively, to research and development expense and recording a $13,764,000 charge as of January 1, 2003 to reflect the cumulative effect of the change in accounting principle.

 

Stock Option Plan

 

The Company has one stock-based employee compensation plan, which is more fully described in the notes to its audited financial statements.  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,” and related interpretations.  No stock-based employee compensation cost is reflected in net income (loss), as all options granted under the plan had an exercise price equal to the value of the underlying common stock on the date of grant.

 

The following table illustrates the effect on net income if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.

 

		Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)		2004			2003			2004			2003
		(Unaudited)
Net loss, as reported		$	(13,874	)	$	(36,535	)	$	(23,022	)	$	(61,032	)
Less total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects		(81		)	(94		)	(162		)	(188		)
Pro forma net loss		$	(13,955	)	$	(36,629	)	$	(23,184	)	$	(61,220	)

 

6

 

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.

 

Note 2.           Restructuring, Asset Impairment and Other Related Charges

 

During the three months and six months ended June 30, 2004 and 2003, the Company recorded restructuring, asset impairment and other related charges as follows:

 

		Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)		2004			2003			2004			2003
		(Unaudited)
Nature of charges:
Operational Realignment and Facilities Restructuring		$	6,901		$	—		$	6,901		$	—
Seating Product Line and Furniture Manufacturing Facilities Restructuring		—			7,132			—			7,132
Goodwill impairment charges		—			34,000			—			41,500
Total pre-tax charges		$	6,901		$	41,132		$	6,901		$	48,632
Business segment recording the charges:
Cabin Management		$	1,628		$	41,132		$	1,628		$	41,132
Systems Integration		5,273			—			5,273			—
Total continuing operations		6,901			41,132			6,901			41,132
Discontinued operations (Specialty Avionics)		—			—			—			7,500
Total pre-tax charges		$	6,901		$	41,132		$	6,901		$	48,632
Charged to operations:
Cost of sales		$	6,083		$	6,573		$	6,083		$	6,573
Selling, general and administrative expenses		818			559			818			559
Impairment of goodwill		—			34,000			—			34,000
Discontinued operations (Specialty Avionics)		—			—			—			7,500
Total pre-tax charges		$	6,901		$	41,132		$	6,901		$	48,632
Components of charges:
Continuing operations:
Noncash charges		$	2,978		$	37,664		$	2,978		$	37,664
Cash charges		3,923			3,468			3,923			3,468
Total continuing operations pre-tax charges		6,901			41,132			6,901			41,132
Discontinued operations (noncash charges)		—			—			—			7,500
Total pre-tax charges		$	6,901		$	41,132		$	6,901		$	48,632

 

7

 

Operational Realignment and Facilities Consolidation

 

During the second quarter of fiscal 2004, the Company adopted plans to restructure the operations of its Cabin Management and Systems Integration groups.  The restructuring plan for Cabin Management involves the realignment of production between its manufacturing facilities and the relocation and consolidation of the group’s headquarters to Wichita, Kansas.  The plan for Systems Integration involves combining the manufacturing activities of two facilities into a single facility and eliminating some product offerings and service capabilities resulting in a partial downsizing of certain operations.  These actions are designed to reduce engineering, production and inventory carrying costs by supporting fewer manufacturing locations and product offerings.  In connection with these actions, the Company recorded pre-tax charges to operations totaling $6,901,000, comprised of the following:

 

•                  Lease Termination and Related Charges.  Lease termination and other related charges 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.  Other related charges include the write-off of leasehold improvements related to the vacated facilities.

 

•                  Write-Down of Surplus Inventory.  Inventory was written down to reflect its net realizable value for quantities on hand exceeding current and forecast order backlog requirements related to the curtailed product offerings.

 

•                  Severance and Other Compensation Costs.  The Company’s total workforce will be reduced by 25 employees, or 2% from December 31, 2003 levels, when the restructuring is completed during the third quarter of fiscal 2004.

 

•                  Other Restructuring Charges.  Other charges pertain to legal, travel and relocation costs.

 

The Company expects to incur additional restructuring-related expenses of approximately $1,900,000 during the last half of fiscal 2004 to complete the restructuring plans.  These expenses, which are primarily relocation and travel costs, will be expensed as incurred.

 

The components of the restructuring, asset impairment and other related charges are as follows:

 

		Total Charges			Amounts Incurred						Balance at June 30, 2004
(In thousands)					Noncash			Cash
					(Unaudited)
Lease termination and other related charges		$	2,992		$	(102	)	$	—		$	2,890
Excess inventory write-downs		2,811			(2,811		)	—			—
Severance and other compensation costs		538			—			(20		)	518
Other restructuring charges		560			(65		)	(183		)	312
Total		6,901			$	(2,978	)	$	(203	)	$	3,720
Other restructuring-related charges to be incurred		1,900
Total expected restructuring charges		$	8,801

 

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

 

8

 

Seating Product Line and Furniture Manufacturing Facilities Restructuring

 

During the second quarter of fiscal 2003, the Company consolidated its seating product line offerings and adopted a restructuring plan to down-size a furniture manufacturing facility in response to continuing weakness in the business, VIP and head-of-state aircraft market.  These actions were designed to reduce engineering, production and inventory carrying costs by supporting fewer product offerings and achieve profitability at the furniture manufacturing facility based on its lower production levels.  In connection with these actions, the Company recorded pre-tax charges to operations totaling $7,132,000, comprised of the following:

 

•                  Lease Termination and Related Charges.  Lease termination charges reflect lease cancellation costs for the facilities vacated and possession returned to the lessor in connection with down-sizing a furniture manufacturing facility.  Other related charges include the write-off of leasehold improvements related to the vacated facilities.

 

•                  Excess Inventory Write-Downs.  Inventory was written down by $3,073,000 to reflect its net realizable value for quantities on hand exceeding current and forecast order backlog requirements related to the curtailed seating product offerings.

 

•                  Severance and Other Compensation Costs.  The Company reduced its total workforce at the down-sized facility by 49 employees, or 37%, from December 31, 2002 levels.

 

The components of the restructuring, asset impairment and other related charges are as follows:

 

											Balance at
		Total			Amounts Incurred						December 31,
(In thousands)		Charges			Noncash			Cash			2003
Lease termination and other related charges		$	3,876		$	(591	)	$	(3,285	)	$	—
Excess inventory write-downs		3,073			(3,073		)	—			—
Severance and other compensation costs		183			—			(183		)	—
Total		$	7,132		$	(3,664	)	$	(3,468	)	$	—

 

The restructuring activities were completed during 2003.

 

Goodwill Impairment Charges

 

As a result of the continuing weakness in the business, VIP and head-of-state aircraft market and the decision to down-size a furniture manufacturing facility, the goodwill associated with the furniture manufacturing reporting unit was tested for recoverability in June 2003 and found to be impaired.  As a result, $34,000,000 of goodwill associated with the reporting unit was written off and charged to operations during the three months ended June 30, 2003.

 

As described in Note 3, on March 14, 2003, the Company entered into a definitive agreement to sell its equity interests in the subsidiaries comprising its Specialty Avionics Group for $140,000,000 in cash.  Based upon the fair value of the group implied in the definitive agreement, the Company determined that the carrying value of the group’s net assets was not fully recoverable.  As a result, the Company recorded a goodwill impairment charge of $7,500,000 during the three months ended March 31, 2003 to reduce the carrying value to estimated net realizable value.

 

9

 

Note 3.           Disposition of Specialty Avionics Group

 

On May 23, 2003, the Company consummated the sale of the subsidiaries comprising its Specialty Avionics Group for $140,000,000 in cash.  Based upon the fair value of the group implied in the definitive agreement which was signed during the first quarter of fiscal 2003, the Company determined that the carrying value of the group’s net assets was not fully recoverable.  As required by SFAS No. 142, the Company recorded a goodwill impairment charge of $7,500,000 during the first quarter of fiscal 2003 to reduce the carrying value to the estimated net realizable value established by the definitive agreement.  The Company recorded a modest gain on the sale, based on the actual financial position of the group on the date of sale.  As a result of the sale, the Specialty Avionics Group is presented as a discontinued operation in the accompanying consolidated financial statements.

 

In accordance with the Financial Accounting Standards Board’s Emerging Issues Task Force Issue No. 87-24, “Allocation of Interest to Discontinued Operations,” as amended, interest expense includes interest on debt that is to be assumed by the buyer as well as interest on the $130,723,000 of debt that was required to be repaid as a result of the sale.  Interest expense was based on the historical interest rates charged during each of the periods.  In addition, and also in accordance with EITF 87-24, costs and expenses exclude the allocation of general corporate overhead.

 

The following tables summarize the results operations and cash flows of the Specialty Avionics Group for the two months and five months ended May 23, 2003, the date of sale.

 

		May 23, 2003
(In thousands)		Two Months			Five Months
		(Unaudited)
Revenues		$	13,125		$	36,595
Operating expenses:
Costs and expenses		11,136			30,128
Impairment of goodwill		—			7,500
Amortization of intangible assets		321			878
Total operating expenses		11,457			38,506
Income (loss) from operations		1,668			(1,911		)
Other expenses:
Interest expense:
Debt required to be repaid with proceeds from sale		1,146			2,952
Debt obligations assumed by the buyer		68			270
Other expenses, net		52			153
Pre-tax income (loss)		402			(5,286		)
Provision for income taxes		344			1,053
Income (loss) from operations		58			(6,339		)
Gain on sale, net of tax		689			689
Net income (loss) from discontinued operations		$	747		$	(5,650	)

 

10

 

(In thousands)		Five Months Ended May 23, 2003
		(Unaudited)
Cash Flows Provided By (Used For):
Operating activities		$	3,760
Investing activities		(902		)
Financing activities		(649		)
Net increase in cash and cash equivalents		(13		)
Effect of foreign currency translation on cash		(2		)
Net cash provided by discontinued operations		$	2,194

 

Note 4.           Inventories

 

Inventories are comprised of the following as of June 30, 2004 and December 31, 2003:

 

(In thousands)		June 30, 2004			December 31, 2003
		(Unaudited)
Raw materials		$	28,483		$	30,414
Work-in-process		15,216			6,817
Finished goods		1,860			1,693
Costs and estimated earnings in excess of billings on uncompleted contracts		6,755			4,057
Total inventories		$	52,314		$	42,981

 

Total costs and estimated earnings on all uncompleted contracts as of June 30, 2004 and December 31, 2004 are comprised of the following:

 

(In thousands)		June 30, 2004			December 31, 2003
		(Unaudited)
Costs incurred on uncompleted contracts		$	79,663		$	71,824
Estimated earnings recognized		76,605			77,782
Total costs and estimated earnings		156,268			149,606
Less billings to date		(152,771		)	(145,661		)
Net		$	3,497		$	3,945
Balance sheet classification:
Asset – Costs and estimated earnings in excess of billings		$	6,755		$	4,057
Liability – Billings in excess of costs and estimated earnings (Note 6)		(3,258		)	(112		)
Net		$	3,497		$	3,945

 

11

 

Note 5.   Other Assets, Principally Intangibles

 

Other assets are comprised of the following as of June 30, 2004 and December 31, 2003:

 

(In thousands)		June 30, 2004			December 31, 2003
		(Unaudited)
Identifiable intangible assets with finite useful lives		$	23,630		$	25,455
Deferred financing costs		10,231			11,812
Other non-amortizable assets		903			825
Total other assets		$	34,764		$	38,092

 

Identifiable Intangible Assets with Finite Useful Lives

 

Identifiable intangible assets with finite useful lives are comprised of the following as of June 30, 2004 and December 31, 2003:

 

		June 30, 2004 (Unaudited )									December 31, 2003
(In thousands)		Cost			Accumulated Amortization			Net			Cost			Accumulated Amortization			Net
FAA certifications		$	22,272		$	(6,965	)	$	15,307		$	22,272		$	(6,222	)	$	16,050
Engineering drawings		7,645			(2,540		)	5,105			7,645			(2,286		)	5,359
Other identifiable intangibles		11,345			(8,127		)	3,218			11,345			(7,299		)	4,046
Total identifiable intangibles		$	41,262		$	(17,632	)	$	23,630		$	41,262		$	(15,807	)	$	25,455

 

Estimated annual amortization expense for all identifiable intangible assets with finite useful lives for the five-year period ending December 31, 2008 is as follows: 2004 – $3,644,000; 2005 – $3,477,000; 2006 – $2,275,000; 2007 – $2,175,000; and 2008 – $2,171,000.

 

Note 6.           Accrued Liabilities

 

Accrued liabilities are comprised of the following as of June 30, 2004 and December 31, 2003:

 

(In thousands)		June 30, 2004			December 31, 2003
		(Unaudited)
Salaries, wages, compensated absences and payroll related taxes		$	4,700		$	4,017
Billings in excess of costs and estimated earnings on uncompleted contracts		3,258			112
Accrued interest		6,439			4,969
Customer advances and deposits		2,439			3,147
Current portion of accrued product warranty obligations		2,164			2,064
Other accrued liabilities		4,387			3,581
Total accrued liabilities		$	23,387		$	17,890

 

12

 

Note 7.           Long-Term Debt

 

Long-term debt includes the following amounts as of June 30, 2004 and December 31, 2003:

 

(In thousands)		June 30, 2004			December 31, 2003
		(Unaudited)
First-lien credit facility:
Term debt		$	80,521		$	80,521
Revolving line of credit		15,050			—
Second-lien term debt		81,280			80,067
Capital lease obligations and other debt, secured by property and equipment		8,289			8,818
12% subordinated notes		100,000			100,000
Total long-term debt		285,140			269,406
Less current portion		(1,319		)	(1,198		)
Long-term debt, less current portion		$	283,821		$	268,208

 

A portion of the interest charged on the second-lien term debt is pay-in-kind or “accreted” interest, payable at maturity.  An additional $1,213,000 of pay-in-kind interest accreted to the initial principal balance of the term debt during the six months ended June 30, 2004 and $607,000 during the three months ended June 30, 2004.

 

As of June 30, 2004, the Company had irrevocable standby letters of credit in the amount of $318,000 issued and outstanding under the first-lien credit facility, which reduces borrowings available under the $24,000,000 revolving line of credit.

 

Subsequent to June 30, 2004, some of the holders of the 12% subordinated notes elected to exchange their notes for new 17% senior discount notes (Note 13).

 

Note 8.   Mandatorily Redeemable Preferred Stock

 

As more fully described in “Note 1—Changes in Accounting Principles,” the Company adopted the provisions of SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” as of January 1, 2004.

 

The table below summarizes the increase in mandatorily redeemable preferred stock during the six months ended June 30, 2004.

 

(In thousands, except share and per share data)		Number of Shares		Mandatory Redemption Value			Unamortized Issuance Discount			Net Book Value
Balance, December 31, 2003		432,919		$	43,292		$	(2,457)		$	40,835
Preferred stock dividends		35,326		3,533			—			3,533
Redemption value accretion		—		—			234			234
Balance, June 30, 2004 (Unaudited)		468,245		$	46,825		$	(2,223	)	$	44,602
Per share liquidation value as of June 30, 2004 (Unaudited)				$	100.00

 

13

 

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, the Company 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, the Company has elected to issue additional shares in lieu of cash dividend payments.  The preferred stock is mandatorily redeemable in cash on March 31, 2009.

 

Subsequent to June 30, 2004, the Company amended the terms of the preferred stock to eliminate the dividends unless the Company achieves a defined leverage ratio (Note 13).

 

Note 9.           Income Taxes

 

The components of income (loss) before income taxes and cumulative effect of change in accounting principle and the provisions for income tax benefit are as follows:

 

		Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)		2004			2003			2004			2003
		(Unaudited)
Pre-tax income (loss) reported by:
Continuing operations		$	(13,844	)	$	(46,647	)	$	(22,962	)	$	(52,248	)
Discontinued operations		—			402			—			(5,286		)
Consolidated pre-tax loss		$	(13,844	)	$	(46,245	)	$	(22,962	)	$	(57,534	)
Total provision for income taxes (benefit):
Income tax benefit based on pre-tax loss		$	(4,619	)	$	(22,077	)	$	(7,143	)	$	(22,633	)
Net deferred tax assets valuation allowance		4,649			13,056			7,203			13,056
Net provision for income taxes (benefit)		$	30		$	(9,021	)	$	60		$	(9,577	)
Allocation of total provision:
Continuing operations		$	30		$	(9,365	)	$	60		$	(10,630	)
Discontinued operations		—			344			—			1,053
Net provision for income taxes (benefit)		$	30		$	(9,021	)	$	60		$	(9,577	)

 

For the three months and six months ended June 30, 2004, the provision for income taxes, based on the reported consolidated pre-tax loss, differs from the amount determined by applying the applicable U.S. statutory federal rate to the pre-tax loss primarily due to the effects of state and foreign income taxes and non-deductible expenses, principally mandatorily redeemable preferred stock dividends due to the adoption of SFAS No. 150 effective January 1, 2004 (Note 1).

 

For the three months and six months ended June 30, 2003, the provision for income taxes, based on the reported consolidated pre-tax loss, differs from the amount determined by applying the applicable U.S. statutory federal rate to the pre-tax loss primarily due to the effects of state and foreign income taxes and non-deductible expenses, principally the non-deductible portion of goodwill impairment charges.

 

As of June 30, 2003, the Company had net deferred tax assets of $12,841,000, prior to recording the valuation allowance in June 2003, as opposed to net deferred tax liabilities in prior periods.  The change to a net asset position was primarily caused by the $34,000,000 goodwill impairment charge recorded during the second quarter of fiscal 2003.  SFAS No. 109, “Accounting for Income Taxes,” requires the recognition of a deferred tax asset for the future income tax benefit of the goodwill deductions that will be taken for income tax purposes (i.e. the goodwill that has been written off in the financial statements for book purposes will continue to be amortized and deducted for tax purposes and accordingly represents a new deferred tax asset).

 

14

 

As required by SFAS No. 109, the Company evaluated its deferred tax assets for expected recoverability based on the nature of the item, the associated taxing jurisdictions, the applicable expiration dates and future taxable income forecasts that would impact utilization.  Since there is no loss carry back potential and the Company does not have any tax planning strategies to assure recoverability, the only possibility for recovery of the net deferred assets is future taxable income.  Since there have been prior year losses, the Company believes it was not prudent to rely on future taxable income as the means to support the carrying value of the net deferred tax assets.  As a result of the evaluation, the Company recorded a $13,056,000 valuation allowance, eliminating the net deferred asset, as of June 30, 2003.

 

As more fully described in Note 11 to the audited financial statements included in the Company’s 2003 Form 10-K, the Company had a net deferred tax asset of $19,528,000 fully offset by a valuation allowance of the same amount as of December 31, 2003.  Based upon the results of operations for the six months ended June 30, 2004, the Company determined that an additional $7,203,000 valuation allowance was required as of that date, $4,649,000 of which is applicable to the three-month period.

 

Note 10.         Commitments and Contingencies

 

Litigation

 

Raytheon Aircraft Company (“Raytheon”) has filed a complaint against the Company and one of its subsidiaries in the state court of Kansas with respect to alleged product liability related to certain aircraft seats sold to Raytheon by the Company’s subsidiary.  The complaint does not specify the amount of damages claimed by Raytheon, but the amount could be material.

 

This action has just been served on the Company and no discovery has commenced; accordingly, management has not had an opportunity to determine the likely outcome of this claim.  However, based on the allegations in the complaint and the facts currently available, management does not know of a basis which would result in this action having a material adverse effect on the Company’s business, consolidated financial position, results of operations or cash flows.  Further, the Company’s subsidiary may be indemnified by the entity from which it acquired the seat product line.

 

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 such matters will not have a material adverse effect on the Company’s business, consolidated financial position, results of operations or cash flows.

 

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, and the preferred stock is mandatorily redeemable on September 30, 2009.  The DeCrane Holdings preferred stock has a total redemption value of $76,487,000 as of June 30, 2004, including accumulated dividends.

 

15

 

Subsequent to June 30, 2004, the Company amended the terms of the preferred stock to eliminate the 14% dividends unless it achieves a defined leverage ratio (Note 13).

 

Note 11.         Business Segment Information

 

The Company supplies products and services to the business, VIP and head-of-state aircraft market within the aerospace industry.  The Company’s subsidiaries are organized into two groups, each of which is a strategic business that develops, manufactures and sells distinct products and services.  The groups and a description of their businesses are as follows:

 

•                  Cabin Management – manufactures interior cabin components, including cabin interior furnishings, cabin management systems, seating and composite components;

 

•                  Systems Integration – manufactures auxiliary fuel systems and auxiliary power units, provides system integration services, provides aircraft completion and refurbishment services and is a Boeing Business Jet authorized service center.

 

In prior periods, the Company’s Specialty Avionics Group was a third strategic business for which segment information was provided.  As a result of the sale of the Specialty Avionics Group, this group is reflected as a discontinued operation and segment information for prior periods has been restated.

 

Management utilizes more than one measurement to evaluate group performance and allocate resources; however, management considers Adjusted EBITDA, as defined, to be the primary measurement of a group’s overall core economic performance and return on invested capital.  Management also uses Adjusted EBITDA in the Company’s annual budget and planning process for future periods, as one of the decision-making criteria for funding discretionary capital expenditures and product development programs and as the measure in determining the value of acquisitions and dispositions.  The board of directors uses Adjusted EBITDA as one of the performance metrics for determining the amount of bonuses awarded to pursuant to the Company’s cash incentive bonus plan and as an indicator of enterprise value used in determining the exercise price of stock options granted and the acceleration of stock option vesting pursuant to the Company’s incentive stock option plan.

 

Management defines Adjusted EBITDA as earnings, determined using program accounting for product development costs, before interest, income taxes, depreciation and amortization, restructuring, asset impairment and other related charges, acquisition related charges not capitalized and other noncash and nonoperating charges.  Management believes the presentation of this measure is relevant and useful to investors because it allows investors and analysts to view group performance in a manner similar to the method used by management, helps improve their ability to understand the Company’s core segment performance, adjusted for items management believes are unusual, and makes it easier to compare the Company’s results with other companies that have different financing, capital structures and tax rates.  In addition, management believes these measures are consistent with the manner in which its lenders and investors measure the Company’s overall performance and liquidity, including its ability to service debt and fund discretionary capital expenditure and product development programs.

 

16

 

The financial measure Adjusted EBITDA, as defined, excludes certain charges reflected in the Company’s financial statements which are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  However, the Company’s presentation of Adjusted EBITDA is in accordance with the GAAP requirements of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” which requires the Company to report the primary measure of segment performance used by management to evaluate and manage its businesses.  The Company’s method of calculating Adjusted EBITDA may not be consistent with that of other companies and should be viewed in conjunction with measurements that are computed in accordance GAAP, such as net income (loss), the nearest comparable GAAP financial measure.  A reconciliation of Adjusted EBITDA to net income (loss) is included herein to clarify the differences between these financial measures.

 

The accounting policies of the groups are substantially the same as those described in the summary of significant accounting policies Note 1 to the audited financial statements.  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.

 

The tables below summarize selected financial data by business segment.

 

		Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)		2004			2003			2004			2003
		(Unaudited)
Revenues:
Cabin Management		$	40,990		$	29,635		$	75,328		$	60,255
Systems Integration		15,380			14,718			29,911			26,850
Inter-group elimination (1)		(1,553		)	(240		)	(1,825		)	(1,092		)
Consolidated totals		$	54,817		$	44,113		$	103,414		$	86,013
Adjusted EBITDA (as defined):
Cabin Management		$	6,182		$	4,310		$	9,622		$	8,860
Systems Integration		2,399			4,180			5,428			6,337
Corporate (2)		(1,113		)	(1,395		)	(2,206		)	(3,507		)
Inter-group elimination (3)		(2		)	2			1			112
Consolidated totals		7,466			7,097			12,845			11,802
Reconciling items (4)		(21,340		)	(43,632		)	(35,867		)	(72,834		)
Net loss		$	(13,874	)	$	(36,535	)	$	(23,022	)	$	(61,032	)

 

(In thousands)		June 30, 2004			December 31, 2003
		(Unaudited)
Total assets (as of period end):
Cabin Management		$	241,077		$	224,116
Systems Integration		54,269			58,395
Corporate (5)		14,831			21,456
Inter-group elimination (6)		(11		)	(91		)
Consolidated totals		$	310,166		$	303,876

 

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

 

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

 

17

 

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

 

(4)                      Adjusted EBITDA (as defined) excludes the following charges reflected in the Company’s financial statements which are prepared in accordance with generally accepted accounting principles:

 

		Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)		2004			2003			2004			2003
		(Unaudited)
Depreciation and amortization of long-lived assets (a)		$	(2,277	)	$	(2,451	)	$	(4,603	)	$	(4,967	)
Adjustment to reflect program costs as research and development expenses (b)		(1,481		)	(3,278		)	(3,097		)	(4,851		)
Restructuring, asset impairment and other related charges		(6,901		)	(41,132		)	(6,901		)	(41,132		)
Acquisition related charges not capitalized		(9		)	(8		)	(18		)	(17		)
Interest expense		(8,750		)	(6,468		)	(17,452		)	(12,337		)
Mandatorily redeemable preferred stock dividends		(1,801		)	—			(3,533		)	—
Other expenses, net		(91		)	(407		)	(203		)	(746		)
Provision for income (taxes) benefit		(30		)	9,365			(60		)	10,630
Income (loss) from discontinued operations		—			747			—			(5,650		)
Cumulative effect of change in accounting principle		—			—			—			(13,764		)
Total reconciling items		$	(21,340	)	$	(43,632	)	$	(35,867	)	$	(72,834	)

 

(a)                      Reflects depreciation and amortization of long-lived assets but excludes amortization of deferred financing costs, which are classified as a component of interest expense, as follows:

 

		Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)		2004			2003			2004			2003
		(Unaudited)
Depreciation and amortization of long-lived assets		$	2,277		$	2,451		$	4,603		$	4,967
Amortization of deferred financing costs		791			680			1,581			1,375
Consolidated depreciation and amortization		$	3,068		$	3,131		$	6,184		$	6,342

 

(b)                     Under program accounting, which the Company is required to use for determining covenant compliance under its credit agreements, certain product development costs incurred in connection with specific contracted programs are deferred and charged to cost of sales as revenues related to the program are recognized.  For financial reporting purposes, these costs are charged to research and development expense as incurred.  This adjustment reflects the net difference between these two methods of accounting.

 

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

 

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

 

18

 

Note 12.         Supplemental Condensed Consolidating Financial Information

 

In conjunction with the 12% subordinated notes described in Note 7, the following condensed consolidating financial information is presented segregating the Company, as the issuer, and the 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 notes.  The non-guarantor subsidiaries are companies within the Specialty Avionics Group which was sold in May 2003 and are therefore classified as a component of discontinued operations.

 

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 equity in earnings of subsidiaries.

 

19

 

Balance Sheets

 

		June 30, 2004 (Unaudited)
(In thousands)		Issuer			Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total
Assets
Current assets:
Cash and cash equivalents		$	1,710		$	652		$	—		$	2,362
Accounts receivable, net		—			27,322			—			27,322
Inventories		—			52,314			—			52,314
Other current assets		88			1,088			—			1,176
Total current assets		1,798			81,376			—			83,174
Property and equipment, net		890			28,908			—			29,798
Other assets, principally goodwill		12,143			185,051			—			197,194
Investments in subsidiaries		79,245			—			(79,245		) (1)	—
Intercompany receivables		228,891			56,857			(285,748		) (2)	—
Total assets		$	322,967		$	352,192		$	(364,993	)	$	310,166
Liabilities and Stockholder’s Equity (Deficit)
Current liabilities:
Current portion of long-term debt		$	46		$	1,273		$	—		$	1,319
Other current liabilities		8,852			31,976			—			40,828
Total current liabilities		8,898			33,249			—			42,147
Long-term debt, less current portion		276,921			6,900			—			283,821
Mandatorily redeemable preferred stock		44,602			—			—			44,602
Intercompany payables		56,857			228,891			(285,748		) (2)	—
Other long-term liabilities		3,661			4,175			—			7,836
Stockholder’s equity (deficit):
Paid-in capital		111,682			151,492			(151,492		) (1)	111,682
Retained earnings (deficit)		(179,654		)	(72,247		)	72,247		(1)	(179,654		)
Accumulated other comprehensive loss		—			(268		)	—			(268		)
Total stockholder’s equity (deficit)		(67,972		)	78,977			(79,245		)	(68,240		)
Total liabilities and stockholder’s equity (deficit)		$	322,967		$	352,192		$	(364,993	)	$	310,166

 

20

 

		December 31, 2003
(In thousands)		Issuer			Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total
Assets
Current assets:
Cash and cash equivalents		$	6,540		$	396		$	—		$	6,936
Accounts receivable, net		—			21,455			—			21,455
Inventories		—			42,981			—			42,981
Other current assets		254			828			—			1,082
Total current assets		6,794			65,660			—			72,454
Property and equipment, net		1,047			29,853			—			30,900
Other assets, principally goodwill		13,615			186,907			—			200,522
Investments in subsidiaries		85,668			—			(85,668		) (1)	—
Intercompany receivables		261,631			100,642			(362,273		) (2)	—
Total assets		$	368,755		$	383,062		$	(447,941	)	$	303,876
Liabilities, Mandatorily Redeemable Preferred Stock and Stockholder’s Equity (Deficit)
Current liabilities:
Current portion of long-term debt		$	11		$	1,187		$	—		$	1,198
Other current liabilities		8,532			24,820			—			33,352
Total current liabilities		8,543			26,007			—			34,550
Long-term debt, less current portion		260,654			7,554			—			268,208
Intercompany payables		100,642			261,631			(362,273		) (2)	—
Other long-term liabilities		2,994			2,470			—			5,464
Mandatorily redeemable preferred stock		40,835			—			—			40,835
Stockholder’s equity (deficit):
Paid-in capital		111,719			151,492			(151,492		) (1)	111,719
Retained earnings (deficit)		(156,632		)	(65,824		)	65,824		(1)	(156,632		)
Accumulated other comprehensive loss		—			(268		)	—			(268		)
Total stockholder’s equity (deficit)		(44,913		)	85,400			(85,668		)	(45,181		)
Total liabilities, mandatorily redeemable preferred stock and stockholder’s equity (deficit)		$	368,755		$	383,062		$	(447,941	)	$	303,876

 

21

 

Statements of Operations

 

		Six Months Ended June 30, 2004 (Unaudited)
(In thousands)		Issuer			Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total
Revenues		$	—		$	103,414		$	—		$	103,414
Cost of sales		—			84,156			—			84,156
Gross profit		—			19,258			—			19,258
Operating and other expenses (income):
Selling, general and administrative expenses		2,422			12,603			—			15,025
Research and development expenses		—			4,182			—			4,182
Amortization of intangible assets		—			1,825			—			1,825
Interest expense		17,091			361			—			17,452
Mandatorily redeemable preferred stock dividends		3,533			—			—			3,533
Intercompany charges		(10,879		)	10,879			—			—
Equity in loss of subsidiaries		6,423			—			(6,423		)(3)	—
Other expenses (income), net		214			(11		)	—			203
Provision for income taxes (benefit)		4,218			(4,158		)	—			60
Net loss		$	(23,022	)	$	(6,423	)	$	6,423		$	(23,022	)

 

		Six Months Ended June 30, 2003 (Unaudited)
(In thousands)		Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total
Revenues		$	—		$	86,013		$	—		$	—		$	86,013
Cost of sales		—			67,592			—			—			67,592
Gross profit		—			18,421			—			—			18,421
Operating and other expenses (income):
Selling, general and administrative expenses		4,904			12,005			—			—			16,909
Research and development expenses		—			4,851			—			—			4,851
Impairment of goodwill		—			34,000			—			—			34,000
Amortization of intangible assets		—			1,826			—			—			1,826
Interest expense		12,116			221			—			—			12,337
Intercompany charges		(11,575		)	11,575			—			—			—
Equity in loss of subsidiaries		46,968			218			—			(47,186		)(3)	—
Other expenses, net		586			160			—			—			746
Provision for income taxes (benefit)		8,033			(18,663		)	—			—			(10,630		)
Loss from discontinued operations		—			5,432			218			—			5,650
Cumulative effect of change in accounting principle		—			13,764			—			—			13,764
Net loss		$	(61,032	)	$	(46,968	)	$	(218	)	$	47,186		$	(61,032	)

 

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Statements of Cash Flows

 

		Six Months Ended June 30, 2004 (Unaudited)
(In thousands)		Issuer			Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total
Cash flows from operating activities:
Net loss		$	(23,022	)	$	(6,423	)	$	6,423		$	(23,022	)
Noncash adjustments:
Equity in loss of subsidiaries		6,423			—			(6,423		)(3)	—
Other noncash adjustments		6,717			7,412			—			14,129
Changes in working capital		(9,992		)	1,592			—			(8,400		)
Net cash provided by (used for) operating activities		(19,874		)	2,581			—			(17,293		)
Cash flows from investing activities:
Capital expenditures		—			(1,767		)	—			(1,767		)
Net cash used for investing activities		—			(1,767		)	—			(1,767		)
Cash flows from financing activities:
Net revolving line of credit borrowings		15,050			—			—			15,050
Other secured long-term borrowings		—			46			—			46
Other secured long-term debt repayments		(6		)	(604		)	—			(610		)
Net cash provided by (used for) financing activities		15,044			(558		)	—			14,486
Net increase (decrease) in cash and equivalents		(4,830		)	256			—			(4,574		)
Cash and equivalents at beginning of period		6,540			396			—			6,936
Cash and equivalents at end of period		$	1,710		$	652		$	—		$	2,362

 

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		Six Months Ended June 30, 2003 (Unaudited)
(In thousands)		Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total
Cash flows from operating activities:
Net loss		$	(61,032	)	$	(46,968	)	$	(218	)	$	47,186	(3)	$	(61,032	)
Noncash adjustments:
Cumulative effect of change in accounting principle		—			13,764			—			—			13,764
Loss from discontinued operations		—			5,432			218			—			5,650
Equity in loss of subsidiaries		46,968			218			—			(47,186		)(3)	—
Other noncash adjustments		(21,973		)	54,615			—			—			32,642
Changes in working capital		15,765			(26,731		)	—			—			(10,966		)
Net cash used for operating activities		(20,272		)	330			—			—			(19,942		)
Cash flows from investing activities:
Net proceeds from sale of
Specialty Avionics Group		132,800			—			—			—			132,800
Capital expenditures		(26		)	(1,976		)	—			—			(2,002		)
Cash paid for acquisitions, net of cash acquired		(600		)	—			—			—			(600		)
Net cash provided by (used for) investing activities		132,174			(1,976		)	—			—			130,198
Cash flows from financing activities:
Net revolving line of credit borrowings		9,250			—			—			—			9,250
First-lien term debt repayments		(129,275		)	—			—			—			(129,275		)
Other secured long-term debt repayments		(649		)	(524		)	—			—			(1,173		)
Net cash provided by (used for) financing activities		(120,674		)	(524		)	—			—			(121,198		)
Net cash provided by discontinued operations		—			2,194			—			—			2,194
Net increase (decrease) in cash and equivalents		(8,772		)	24			—			—			(8,748		)
Cash and equivalents at beginning of period		12,343			78			—			—			12,421
Cash and equivalents at end of period		$	3,571		$	102		$	—		$	—		$	3,673

 

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Note 13. Subsequent Event

 

On July 23, 2004, holders of $64,485,000 of the Company’s 12% senior subordinated notes due September 30, 2008 (the “existing notes”) exchanged their notes for new 17% senior discount notes due September 30, 2008 (the “new notes”).  The new notes do not bear cash interest and have an initial accreted value equal to the principal amount of the notes exchanged.  The new notes accrete in value at a 17% annual rate and will have a $127,771,000 aggregate accreted principal value at maturity.  The new notes are senior unsecured obligations of the Company and are guaranteed by its subsidiaries.  Except for the changes in the interest rate and payment and ranking described above, the new notes have terms substantially identical to those contained in the existing notes, although covenants limiting the incurrence of indebtedness, the granting of liens and the making of restricted payments are more restrictive.

 

Concurrent with the note exchange, the Company amended the terms of its 16% senior preferred stock.  DeCrane Holdings, the Company’s parent, also amended the terms of its 14% preferred stock as well.  The amended terms provide that further dividends do not accrue on the preferred stock, except if a leverage ratio (as defined) falls below certain specified levels or if certain triggering events occur, such as failure to discharge any mandatory redemption obligations, and the like.  Depending upon the future leverage ratio achieved, dividends will resume at various dividend rates.  All dividends accrued through the amendment date and future dividends, if any, are not payable until redemption.  The amendment for the 16% preferred stock accelerates the mandatory redemption date from March 31, 2009 to December 31, 2008 while the September 30, 2009 mandatory redemption date for the 14% preferred stock remained unchanged.  The amendment to the 16% preferred stock also adds several restrictive covenants.  The holders of the 16% preferred stock were issued 348,945 shares of DeCrane Holdings common stock in connection with the amendment.

 

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