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, 2004
COMMISSION FILE NUMBER 000-22371
DECRANE AIRCRAFT HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
|
Delaware |
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34-1645569 |
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(State or Other Jurisdiction of |
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(I.R.S. Employer |
8425 Pulsar Place, Suite 340
Columbus, Ohio 43240
(614) 848-7700
(Address and Telephone Number 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
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). o YES ý NO
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: Nil
The number of shares of Common Stock outstanding on March 25, 2005 was 100.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
Table of Contents
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—Forward-Looking Statements and Risk Factors.” 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.
ITEM 1. BUSINESS
Company Overview
DeCrane Aircraft Holdings, Inc., a Delaware Corporation, was founded in 1989, and is a provider of integrated assemblies, sub-assemblies and component parts to the aerospace industry. Since our founding, we have experienced both internal 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 product capability within two specific segments of the aerospace industry: cabin interiors and systems integration services, including auxiliary fuel tank systems, retrofit and aircraft completion services. These segments serve customers which manufacture business, VIP and head-of-state aircraft as well as repair and modification centers. In addition, our customers include suppliers to the defense industry.
Our Operating Groups
We are organized into two operating groups, consistent with the segments in which we operate: Cabin Management and Systems Integration. Through our operating groups, we offer a complete line of cabinetry, galleys, seating and cabin management systems for business, VIP and head-of-state aircraft, as well as systems integration services. Historical financial information for our operating groups is presented in Note 18 accompanying our consolidated financial statements included in this report.
Cabin Management Group
DeCrane’s Cabin Management Group contributed approximately 73% of our revenues during the year ended December 31, 2004.
Business Description
Our Cabin Management Group is a leading independent provider of cabin products, with a primary focus on serving the business, VIP and head-of-state 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 business, VIP and head-of-state aircraft, including cabin interior furnishings, veneer, cabin management systems, seating and composite components. Our Cabin Management Group serves major manufacturers of business, VIP and head-of-state aircraft, including Boeing Business Jet, Bombardier, Cessna, Dassault, Gulfstream and Raytheon.
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The Cabin Management Group introduced the concept of modularity to the business, VIP and head-of-state aircraft market by offering integrated interior products. In our view, one of the greatest challenges facing the industry’s aircraft manufacturers is minimizing the production cycle time necessary to complete an unfinished “green” aircraft. We believe our distinctive approach of delivering assemblies and sub-assemblies addresses this challenge by providing our customers with pre-engineered, pre-wired and pre-plumbed modular cabin interiors and sub-systems ready for final integration into the aircraft. We believe our integrated assemblies and sub-assemblies and 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 Business, VIP and Head-of-State Aircraft Markets. Our Cabin Management Group is aggressively focused on broadening and deepening its product offerings to the business, 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 Business, VIP and Head-of-State 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 business, VIP and head-of-state aircraft cabin interiors to its customers.
Products and Services
Our Cabin Management Group designs, engineers and manufactures a full line of customized, pre-fit products and provides related services. Approximately 53% of our Cabin Management Group’s revenues in 2004 were from two customers, Textron and Bombardier. Our products and services are in four broad categories, as summarized below.
Interior Furnishings
• entertainment and refreshment centers
• conference tables
• hi-low dining and coffee tables
• end tables
• cabinets
• arm and side ledges
• galleys
• lavatories
• vanities
• room enclosures
• cabinetry refurbishment services
• veneers
Seating
• executive track and swivel seats
• jump-seats
• divans, including models that convert to beds or contain storable tables
• upholstery services
Cabin Management Systems
• in-flight entertainment systems
• in-flight data network and communication systems
• cabin controls
• switches, controls and lighting
Composite Components
• sound-dampening side walls and headliners
• passenger service units
• environmental (HVAC) ducting
• closets
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Our interior furnishings products and services provided approximately 45% of our consolidated revenues during 2004, 36% during 2003 and 47% during 2002. Seating provided approximately 11% of our consolidated revenues during 2004, 13% during 2003 and 10% during 2002.
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 business, VIP and head-of-state aircraft manufacturers and independent completion centers. We believe that the principal competitive factors in the markets we serve are quality, price, timely deliveries and overall customer service. Our principal competitors are summarized below.
Interior Furnishings
• BE Aerospace
• C & D Interiors
• Fischer Advanced Composite Components (Austria)
• Global Technology
• Hiller Aircraft
• The Nordam Group
• Independent completion centers
• Business, VIP and head-of-state aircraft manufacturers and completion centers
Seating
• BE Aerospace
• Fisher (Germany)
• IPECO
Cabin Management Systems
• DPI Labs
• Honeywell Cabin Management Systems and Services
• IEC, International
• Rockwell Collins / Airshow
Composite Components
• AAR
• Fibre Art
• Fischer Advanced Composite Components (Austria)
• Plastic Fab
• Scale Composite Works
• The Nordam Group
Systems Integration Group
DeCrane’s Systems Integration Group contributed approximately 27% of our revenues during the year ended December 31, 2004.
Business Description
Our Systems Integration Group provides a range of aircraft retrofit, completion and refurbishment services, from conceptual design to Federal Aviation Administration certification, including engineering, manufacturing and installation. One of our largest businesses in this group is the design, production and installation of auxiliary fuel systems, which extend the range of an aircraft. We are presently the sole-source provider of auxiliary fuel systems to Boeing Business Jet (“BBJ”) for the BBJ, a Boeing 737-700IGW, and the BBJ2, a Boeing 737-800, and are one of only four world-wide approved BBJ/BBJ2 service centers. During 2004, we delivered our third aircraft interior completion on a BBJ aircraft and started our fourth, which we expect to deliver mid-2005.
We also focus on regulatory authority safety mandates and believe we are a major supplier of integration kits for cockpit door video surveillance and terrain awareness warning systems including acquisition of FAA certification of those modifications before returning an aircraft to service.
The aerospace industry is highly regulated in the United States by the FAA and similar regulatory agencies abroad, such as the European Joint Aviation Authorities (commonly referred to as the JAA), to
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ensure that aviation products and services meet stringent safety and performance standards. There are approximately 35 companies world-wide that have the necessary Designated Alteration Station authorization to offer aircraft certification on behalf of the FAA. One company within our Systems Integration Group is authorized to provide the full spectrum of services, from design to FAA certification, needed for timely retrofitting and completion 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 fourteen 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. We believe we have developed the most comprehensive offering in retrofitting aircraft with auxiliary fuel systems in the industry.
• Target Development of Specialty Products and Services Relating to Regulatory Authority Mandates. Consistent with its first strategic imperative, our Systems Integration Group is also growing its capabilities in providing solution “kits” in response to FAA and JAA mandated aircraft upgrades. Our Systems Integration Group has demonstrated the ability to identify and quickly respond to probable new regulatory authority mandates. For example, many domestic commercial airlines believe the FAA will eventually issue a safety mandate requiring cockpit door video surveillance on most commercial aircraft traveling in U.S. domestic airspace. In response, we consulted with commercial airlines and developed what we believe to be a low-cost, high quality cockpit door video surveillance system. Our Sentry One™ system is based on an in-house developed camera control unit with integral power supplies and is combined with state-of-the-art extreme low light cameras and a variety of video monitors. Some airlines are voluntarily electing to install surveillance systems on their aircraft prior to the expected FAA mandate. We have received FAA approval for our Sentry One™ system on Boeing 737-Classics, 737-400, 737-NG, 747, 747-400, 767 and 777 aircraft as well as Embraer 135, 140 and 145 and Airbus 300 aircraft. We also have FAA approvals pending for MD 80 and 90 aircraft as well. We believe we will be successful in obtaining FAA approval for our system on these and other types of aircraft as well.
Products and Services
Our Systems Integration Group provides auxiliary fuel systems, auxiliary power units and system integration services, including engineering, kit manufacturing, installation and certification. Customers include Boeing (Boeing Business Jet, Boeing’s Commercial Airplane Group and Boeing Integrated Defense Systems), Bombardier, Cessna, Gulfstream, Honeywell, Raytheon and Rockwell Collins as well as major airlines including All Nippon Airways, Astar Air Cargo (DHL), FedEx and Japan Airlines. Approximately 32% of our Systems Integration Group’s revenues in 2004 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 systems for business, VIP, head-of-state and commercial aircraft. Our unique design and construction have made us a leader in the auxiliary fuel system market. We also manufacture auxiliary power units, which provide ground power to corporate jets made by Bombardier, Cessna, Gulfstream, Learjet and Raytheon. These products and services provided approximately 16% of our consolidated revenues during 2003 and 15% during 2002.
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
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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 Completion and Modification Services. We are one of only four world-wide approved Boeing Business Jet Service Centers providing extensive completion, modification and integration services to the business, VIP and head-of-state aircraft market.
Retrofit and Refurbishment Services. We also provide retrofit and refurbishment services, including engineering, kit manufacturing, installation and certification, to both commercial and business, VIP and head-of-state aircraft customers.
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 business, VIP and head-of-state aircraft manufacturers and independent completion centers. We believe that the principal competitive factors in the markets we serve are quality, price, timely deliveries and overall customer service. Our principal competitors are summarized below.
Auxiliary Fuel Systems and Power Units
• Marshalls (United Kingdom)
• Pfalz Flugewerke (Germany)
Auxiliary Power Units (Integration Only)
• Honeywell
• Sundstrand
Aircraft Modification Services
• Associated Air Center
• Jet Aviation (United States and Switzerland)
• Lufthansa Technik (Germany)
Cabin and Flight Deck Systems Integration and Retrofit and Refurbishment Services
• ARINC
• Aviation Sales
• Boeing Aircraft Services
• Electronic Cable Systems
• In-house engineering departments of commercial airlines
• Numerous independent airframe maintenance and modification companies
Other Information
Acquisitions and Dispositions
Disposition of the Specialty Avionics Group
In 2003 we also had a third strategic business, our Specialty Avionics Group. On May 23, 2003, we consummated the sale of our equity interests in the companies comprising this business to Wings Holdings, Inc., an affiliate of Odyssey Investment Partners, LLC. for $140.0 million in cash. We used $130.7 million of the proceeds from the sale to repay borrowings under our first-lien credit facility, as amended. The Specialty Avionics Group consisted of Avtech Corporation of Seattle, Washington, Aerospace Display Systems, LLC of Hatfield, Pennsylvania, and Tri-Star Electronics International, Inc. of El Segundo, California.
The sale of the Specialty Avionics Group has not affected the operations of our remaining operating groups and is reflected as a discontinued operation in this report. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information.
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Companies Acquired by DeCrane Aircraft
During the five years ended December 31, 2004, DeCrane Aircraft has acquired the stock or assets of two significant businesses, as such term is defined by Securities and Exchange Commission rules. On May 11, 2002, our Cabin Management Group acquired 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 June 30, 2000, the Cabin Management Group also acquired all of the common stock of ERDA, Inc. (subsequently renamed DeCrane Aircraft Seating Co., Inc.), a Wisconsin-based designer and manufacturer of aircraft seating.
Both acquisitions were accounted for as purchases. We have used 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.
Customers
We estimate that our Cabin Management Group currently sells its products and services to approximately 800 customers and our Systems Integration Group sells its products and services to approximately 200 customers. Our primary customers include manufacturers of business, VIP and head-of-state aircraft, airlines and aircraft repair and modification companies as well as defense contractors.
The following customers accounted for 10% or more of our consolidated revenues during the year ended December 31, 2004. Historical data for the three years ended December 31, 2004 is presented in Note 18 accompanying our consolidated financial statements included in this report.
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Significant Customers |
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Cabin |
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Systems |
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Consolidated |
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Percent of consolidated revenues: |
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Year ended December 31, 2004: |
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|
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Textron (1) |
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20.3 |
% |
0.1 |
% |
20.4 |
% |
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Bombardier |
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18.5 |
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1.3 |
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19.8 |
|
|
Boeing (2) |
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0.7 |
|
8.9 |
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9.6 |
|
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Consolidated revenues |
|
39.5 |
% |
10.3 |
% |
49.8 |
% |
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|
|
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|
|
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|
|
Year ended December 31, 2003: |
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|
|
|
|
|
|
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Textron (1) |
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16.2 |
% |
0.1 |
% |
16.3 |
% |
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Bombardier |
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11.0 |
|
1.6 |
|
12.6 |
|
|
Boeing (2) |
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2.4 |
|
15.1 |
|
17.5 |
|
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Consolidated revenues |
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29.6 |
% |
16.8 |
% |
46.4 |
% |
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|
|
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|
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Percent of group revenues (3): |
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|
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|
|
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Year ended December 31, 2004: |
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|
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|
|
|
|
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Textron (1) |
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27.9 |
% |
0.1 |
% |
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|
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Bombardier |
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25.3 |
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5.0 |
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|
|
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Boeing (2) |
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1.0 |
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32.4 |
|
|
|
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Group revenues |
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54.2 |
% |
37.5 |
% |
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|
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|
|
|
|
|
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Year ended December 31, 2003: |
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|
|
|
|
|
|
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Textron (1) |
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23.2 |
% |
0.1 |
% |
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|
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Bombardier |
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15.7 |
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5.3 |
|
|
|
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Boeing (2) |
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3.4 |
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50.1 |
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|
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Group revenues |
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42.3 |
% |
55.5 |
% |
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|
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(1) Principally Cessna.
(2) Reflects only our direct revenues from Boeing. Our Systems Integration Group’s revenues from Boeing relate to sales of auxiliary fuel systems for the Boeing Business Jet and certain defense programs.
(3) Inter-group revenues are eliminated against the group originating the sale.
Our Systems Integration Group’s revenues from Boeing, as a percentage of total consolidated revenues and group revenues, decreased during the year ended December 31, 2004 compared to our revenues during the prior year. The decrease is caused by lower production of auxiliary fuel systems for the Boeing Business Jet.
Boeing has exercised its option to convert the supply contract to a “requirements” contract, from a guaranteed “take-or-pay” contract, commencing January 1, 2005. Production under the “take-or-pay” portion of the contract was completed during the second quarter of 2004. We have received purchase orders for auxiliary fuel systems under the “requirements” contract to be manufactured and delivered in fiscal 2005. During the year ended December 31, 2004, auxiliary fuel systems revenues were $13.8 million compared to $24.1 million for the same period last year.
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 contract 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, 2004, we had an aggregate sales order backlog of $90.9 million compared to $58.0 million as of December 31, 2003, as follows:
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December 31, |
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(In thousands) |
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2004 |
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2003 |
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Cabin Management |
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$ |
47,462 |
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$ |
33,679 |
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Systems Integration |
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41,388 |
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24,323 |
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Consolidated totals |
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$ |
88,850 |
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$ |
58,002 |
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Orders are usually filled within twelve months; however, backlog totaling $3.8 million as of December 31, 2004 is scheduled for delivery in 2006 and beyond as follows: Cabin Management –$2.2 million; and Systems Integration – $1.6 million. 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.
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As described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Industry Overview and Trends,” ongoing threats of global terrorism, military conflicts, health epidemics and weak global economic conditions have all adversely impacted the aerospace industry.
We believe our backlog increase during 2004 reflects the improvement in the global economy resulting in the strengthening demand for business, VIP, and head-of-state aircraft and the products and services we provide. We also believe this strengthening will continue into 2005 and beyond. However, our beliefs are based on the assumptions that the global economic recovery continues and that there are no negative geo-political developments affecting our industry.
Employees
As of December 31, 2004, we had 1,529 employees: 1,293 in our Cabin Management Group; 226 in our Systems Integration Group; and 10 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 research and development expense was $8.0 million for the year ended December 31, 2004, $10.4 million for the year ended December 31, 2003 and $0.1 million during the year ended December 31, 2002.
Commencing January 1, 2003, we elected to change our accounting policy and discontinued the use of program accounting, which resulted in product development costs now being expensed as incurred and reflected as research and development expense. Prior to January 1, 2003, such costs were deferred and charged to cost of sales over the expected production cycle of the program. If the new accounting policy was in effect during 2002, total research and development expense would have been $5.0 million for the year ended December 31, 2002.
Financial Information About Geographic Areas
Financial information about our revenues and assets by geographic area are included in Note 18 accompanying our financial statements included in this report.
Seasonality
Our businesses generally 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 and services.
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 all of our 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.
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Raw Materials and Component Parts
The components we manufacture require the use of various raw materials including aluminum, 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 raw material price increases in our product sale price. Unrecoverable raw material price increases were not significant during 2004. 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.
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 product or service. 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, 2004, we own and/or manage on behalf of our customers approximately 300 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 and believe we will be able to obtain such certificates as the need arises.
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. One subsidiary within our Systems Integration Group is an FAA-authorized Designated Alteration Stations and can
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directly issue many of the Supplemental Type Certificates our customers and we require for our systems integration operations.
After obtaining a Supplemental Type Certificate, a manufacturer must apply for a Parts Manufacturer Approval from the FAA, or a supplement to an existing Parts Manufacturer Approval, which permits the holder to manufacture and sell installation kits according to the approved design and data package. We have six Parts Manufacturer Approvals and approximately 100 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, 2004, we had six authorized repair stations and employed approximately 100 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 and has established specific safety standards 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, such as a current or former owner or operator of real property or a party who arranges to transport wastes to a third-party site. 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 may be 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 most of 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. However, in a few cases, we do not have sufficient information to assess our potential liability, if any. In addition, 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.
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We believe 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.
In connection with the sale of the Specialty Avionics Group, we have agreed to indemnify the buyer for all pre-closing releases of hazardous materials at any of Avtech’s facilities up to a maximum amount of $5.0 million.
ITEM 2. PROPERTIES
We operate in a number of manufacturing, engineering and office facilities in the United States and abroad. We utilize approximately 900,000 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 are summarized below.
|
(In thousands of square feet) |
|
Leased |
|
Owned |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
Cabin Management |
|
441 |
|
204 |
|
645 |
|
|
Systems Integration |
|
88 |
|
150 |
|
238 |
|
|
Corporate |
|
6 |
|
— |
|
6 |
|
|
Total in use |
|
535 |
|
354 |
|
889 |
|
|
|
|
|
|
|
|
|
|
|
Not in use, available for sublease |
|
83 |
|
— |
|
83 |
|
|
Not in use, subleased to others |
|
96 |
|
— |
|
96 |
|
|
Total |
|
714 |
|
354 |
|
1,068 |
|
ITEM 3. LEGAL PROCEEDINGS
Raytheon Aircraft Company (“Raytheon”) had filed a complaint against us and one of our subsidiaries in the state court of Kansas with respect to alleged product liability related to certain aircraft seats our subsidiary sold to Raytheon. In the fourth quarter of 2004 we entered into a settlement agreement with Raytheon. The settlement did not require a charge to operations and did not have a material adverse effect on our financial position or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
|
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
There is no established public trading market for our shares.
Holders
As of March 25, 2005, DeCrane Holdings is our only common stockholder.
Dividends
We have not paid any dividends to date on our common stock and do not anticipate paying any cash dividends in the foreseeable future. The terms of our first-lien credit facility, second-lien term notes and the senior discount notes and subordinated notes indentures restrict our ability to pay dividends if we do not meet certain financial criteria.
Recent Sale of Unregistered Securities
On March 29, 2005 we sold 26,425 additional shares of our Senior Redeemable Exchangeable Preferred Stock due 2008 to a group of investors for its liquidation value of $189.21 per share. The approximately $5.0 million of cash proceeds from the sale was used to fund working capital needs. Such issuances were made in reliance upon an exemption from the registration provision of the Act set forth in Section 4(2) thereof relative to issuances by an issuer not involving any public offering or the rules and regulations thereunder. The investors, who are listed in the table below, are the principal stockholders of DeCrane Holdings Co., our parent company.
|
|
|
No. of |
|
|
|
|
|
|
|
DLJ Merchant Banking Partners II, L.P. |
|
16,646 |
|
|
MBP II Plan Investors |
|
6,567 |
|
|
DLJ Diversified Partners, L.P. |
|
973 |
|
|
DLJ Offshore Partners II, C.V. |
|
819 |
|
|
DLJ Merchant Banking Partners II-A, L.P. |
|
663 |
|
|
DLJ Diversified Partners-A, L.P. |
|
361 |
|
|
DLJ Millennium Partners, L.P. |
|
269 |
|
|
DLJ EAB Partners, L.P. |
|
75 |
|
|
DLJ Millennium Partners-A, L.P. |
|
52 |
|
|
Total |
|
26,425 |
|
Issuer Purchases of Equity Securities
None.
12
ITEM 6. SELECTED FINANCIAL DATA
|
|
|
Year Ended December 31, (1) |
|
|||||||||||||
|
(In thousands) |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Revenues |
|
$ |
213,686 |
|
$ |
170,109 |
|
$ |
229,841 |
|
$ |
272,112 |
|
$ |
236,501 |
|
|
Cost of sales (2) |
|
169,160 |
|
131,539 |
|
164,175 |
|
196,866 |
|
155,134 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Gross profit |
|
44,526 |
|
38,570 |
|
65,666 |
|
75,246 |
|
81,367 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Selling, general and administrative expenses (3) |
|
29,697 |
|
28,310 |
|
46,572 |
|
44,731 |
|
31,730 |
|
|||||
|
Research and development expenses (4) |
|
8,003 |
|
10,440 |
|
56 |
|
698 |
|
1,615 |
|
|||||
|
Impairment of goodwill (5) |
|
— |
|
34,000 |
|
— |
|
8,583 |
|
— |
|
|||||
|
Amortization of intangible assets (6) |
|
3,650 |
|
3,651 |
|
3,540 |
|
12,436 |
|
10,628 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Operating income (loss) |
|
3,176 |
|
(37,831 |
) |
15,498 |
|
8,798 |
|
37,394 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Interest expense (7) |
|
37,146 |
|
26,219 |
|
25,376 |
|
29,645 |
|
27,181 |
|
|||||
|
Mandatorily redeemable preferred stock dividends (8) |
|
4,011 |
|
— |
|
— |
|
— |
|
— |
|
|||||
|
Loss on debt extinguishments and preferred stock restructuring (9) |
|
3,898 |
|
1,439 |
|
— |
|
— |
|
— |
|
|||||
|
Other expenses, net |
|
544 |
|
945 |
|
505 |
|
634 |
|
277 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Income (loss) from continuing operations before income taxes |
|
(42,423 |
) |
(66,434 |
) |
(10,383 |
) |
(21,481 |
) |
9,936 |
|
|||||
|
Income tax (provision) benefit (10) |
|
(100 |
) |
13,496 |
|
3,621 |
|
3,933 |
|
(4,607 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Income (loss) from continuing operations |
|
(42,523 |
) |
(52,938 |
) |
(6,762 |
) |
(17,548 |
) |
5,329 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Income (loss) from discontinued operations, net of tax (11) |
|
— |
|
(6,621 |
) |
(41,396 |
) |
3,546 |
|
(1,727 |
) |
|||||
|
Cumulative effect of changes in accounting principles (12) |
|
— |
|
(13,764 |
) |
(17,828 |
) |
— |
|
— |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net income (loss) |
|
$ |
(42,523 |
) |
$ |
(73,323 |
) |
$ |
(65,986 |
) |
$ |
(14,002 |
) |
$ |
3,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net income (loss) applicable to common stockholder (8) |
|
$ |
(42,523 |
) |
$ |
(80,077 |
) |
$ |
(71,827 |
) |
$ |
(19,063 |
) |
$ |
1,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Other Financial Data: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Restructuring, asset impairment and other related charges (13) |
|
$ |
8,615 |
|
$ |
41,886 |
|
$ |
17,255 |
|
$ |
25,834 |
|
$ |
— |
|
|
Depreciation and amortization (14) |
|
9,738 |
|
9,781 |
|
10,612 |
|
20,364 |
|
15,086 |
|
|||||
|
Capital expenditures: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Paid in cash |
|
3,252 |
|
4,797 |
|
4,356 |
|
10,191 |
|
20,193 |
|
|||||
|
Financed with capital lease obligations |
|
42 |
|
14 |
|
67 |
|
4,376 |
|
105 |
|
|||||
|
Ratio of earnings to fixed charges (15): |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Ratio |
|
— |
|
— |
|
— |
|
— |
|
1.4 |
x |
|||||
|
Deficiency of earnings to fixed charges |
|
$ |
42,423 |
|
$ |
66,434 |
|
$ |
10,383 |
|
$ |
21,481 |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Other Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Bookings (16) |
|
$ |
244,534 |
|
$ |
161,306 |
|
$ |
197,128 |
|
$ |
252,800 |
|
$ |
238,546 |
|
|
Backlog at end of period (17) |
|
88,850 |
|
58,002 |
|
66,805 |
|
99,518 |
|
118,830 |
|
|||||
|
|
|
As of December 31, (1) |
|
|||||||||||||
|
(In thousands) |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Cash and cash equivalents |
|
$ |
979 |
|
$ |
6,936 |
|
$ |
12,421 |
|
$ |
9,478 |
|
$ |
7,706 |
|
|
Working capital (18) |
|
36,906 |
|
37,904 |
|
196,176 |
|
81,656 |
|
61,398 |
|
|||||
|
Total assets (18) |
|
299,993 |
|
303,876 |
|
548,967 |
|
645,711 |
|
664,254 |
|
|||||
|
Total debt (19) |
|
293,154 |
|
269,406 |
|
381,017 |
|
399,268 |
|
381,513 |
|
|||||
|
Mandatorily redeemable securities (20) |
|
47,303 |
|
40,835 |
|
34,081 |
|
28,240 |
|
23,179 |
|
|||||
|
Stockholder’s equity (deficit) |
|
(87,507 |
) |
(45,181 |
) |
34,951 |
|
102,390 |
|
121,442 |
|
|||||
See accompanying Notes to Selected Financial Data.
13
Notes to Selected Financial Data:
(1) Reflects historical selected consolidated financial data derived from the audited consolidated financial statements and related notes for the periods, reclassified to reflect the Specialty Avionics Group as a discontinued operation.
Also reflects the results of operations and financial position of Carl F. Booth & Co., which we acquired on May 11, 2000, and DeCrane Aircraft Seating Co. (formerly ERDA), which we acquired on June 30, 2000, for all periods subsequent to their respective acquisition dates.
(2) Includes charges to reflect our restructuring activities as follows:
• a $2.8 million noncash inventory write-down, a $3.1 million charge related to lease terminations and related expenses and $1.1 million of other restructuring-related charges during the twelve months ended December 31, 2004;
• a $4.2 million charge related to lease terminations and related expenses and a $3.1 non-cash inventory write-down during the twelve months ended December 31, 2003;
• a $6.9 million noncash inventory write-down, a $2.6 million charge for estimated losses on uncompleted long-term contracts and $1.2 million of other restructuring-related charges during the twelve months ended December 31, 2002; and
• a $1.8 million noncash inventory write-down, a noncash write-off of $7.9 million of curtailed 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.
(3) Includes charges to reflect our restructuring activities as follows:
• $1.6 million during the year ended December 31, 2004, principally for severance and relocation costs;
• $0.6 million during the year ended December 31, 2003;
• $6.5 million during the year ended December 31, 2002, $3.9 million of which was a noncash asset impairment write-down; and
• $3.7 million during the year ended December 31, 2001, $1.3 million of which was a noncash asset impairment write-down.
(4) Reflects research and development expenses and, commencing January 1, 2003, includes product development costs. In 2003, we elected to change our accounting policy and discontinue the use of program accounting, which resulted in product development costs being expensed as incurred. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information.
(5) Reflects noncash goodwill impairment charges, including charges resulting from our restructuring activities.
(6) For the five years ended December 31, 2004, reflects the amortization of identifiable intangible assets. For periods prior to January 1, 2002, also reflects the amortization of goodwill as follows: 2001 – $9.1 million; and 2000 – $7.8 million. Starting January 1, 2002, goodwill is no longer amortized but instead subject to annual impairment testing with a loss charged to operations in the period in which impairment occurs, as required by SFAS No. 142, “Goodwill and Other Intangible Assets.”
(7) Excludes interest expense attributable to the Specialty Avionics Group, which is classified as a component of the income or loss from discontinued operations, as described in Note 11 below.
14
(8) On January 1, 2004 we adopted the provisions of SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” As a result of adopting SFAS No. 150, the quarterly 16% mandatorily redeemable preferred stock dividends (which are paid in-kind) 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 our common stockholder. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information.
(9) Reflects noncash write-offs of:
• $2.2 million of unamortized issuance discounts associated with the restructuring of our 16% preferred stock and $1.7 million of deferred financing costs associated with $65.0 million of senior subordinated notes exchanged for new senior discount notes during 2004; and
• $1.4 million off of deferred financing costs associated with debt repaid during 2003.
(10) Includes a $14.7 million charge in 2004 and a $19.5 million charge in 2003 resulting from establishing a net deferred tax asset valuation allowance. Excluding the effect of the valuation allowances, 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 income taxes and non-deductible expenses, principally preferred stock dividends commencing January 1, 2004, goodwill impairment charges and, for periods prior to January 1, 2002, amortization of goodwill. The difference in the effective tax rates between periods is mostly a result of the relationship of non-deductible expenses to the loss before income taxes.
(11) Reflects the net income or loss of the Specialty Avionics Group, which was sold on May 23, 2003 and therefore classified as a discontinued operation during the periods. Includes charges to reflect:
• a $39.4 million noncash charge during the year ended December 31, 2002 to reflect the cumulative effect of the change in accounting principle for the impairment of goodwill upon adoption of SFAS No. 142 on January 1, 2002; and
• interest expense attributable to the Specialty Avionics Group as follows:
|
|
|
Year Ended December 31, |
|
||||||||||
|
(In thousands) |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Interest expense associated with: |
|
|
|
|
|
|
|
|
|
||||
|
First-lien credit facility debt required to be repaid |
|
$ |
3,297 |
|
$ |
7,720 |
|
$ |
8,439 |
|
$ |
13,337 |
|
|
Debt obligations assumed by the buyer |
|
270 |
|
798 |
|
917 |
|
1,105 |
|
||||
|
Interest expense attributable to discontinued operations |
|
3,567 |
|
$ |
8,518 |
|
$ |
9,356 |
|
$ |
14,442 |
|
|
Interest expense on first-lien credit facility debt required to be repaid reflects allocated interest expense attributable to the debt required to be repaid with the proceeds from the sale. The allocation is based upon $130.7 million of debt repaid and the historical interest rates charged during each of the periods. Interest expense for 2003 is through May 23, 2003, the date of sale.
(12) As more fully described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations–Changes in Accounting Principles,” reflects:
• a $13.8 million noncash charge to reflect the cumulative effect on prior years of changing our accounting policy and discontinuing the use of program accounting; and
• a $17.8 million noncash charge, net of $0.9 million tax benefit, for the impairment of goodwill upon adoption of SFAS No. 142 on January 1, 2002.
15
(13) Reflects the total restructuring, asset impairment and other related charges incurred during the periods related to our restructuring activities.
(14) Reflects depreciation and amortization of plant and equipment, goodwill (for periods prior to the January 1, 2002 adoption of SFAS No. 142) and other intangible assets. Excludes amortization of deferred financing costs, which are classified as a component of interest expense.
(15) For the purposes of calculating the ratio of earning to fixed charges, earnings represent net income or loss from continuing operations before income taxes, extraordinary items and fixed charges. Fixed charges consist of:
• interest;
• amortization of debt expense and discount or premium relating to any indebtedness; and
• one-third of rental expenses under operating leases which is considered to be a reasonable approximation of the interest portion of such expense.
(16) Bookings represent the total invoice value of purchase orders received during the period.
(17) 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.
(18) Includes amounts attributable to the Specialty Avionics Group, which is reflected as a discontinued operation, as follows:
|
|
|
As of December 31, |
|
||||||||||
|
(In thousands) |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Working capital: |
|
|
|
|
|
|
|
|
|
||||
|
Continuing operations |
|
$ |
37,904 |
|
$ |
55,363 |
|
$ |
39,862 |
|
$ |
20,480 |
|
|
Discontinued operations |
|
— |
|
140,813 |
|
41,794 |
|
40,918 |
|
||||
|
Total working capital |
|
$ |
37,904 |
|
$ |
196,176 |
|
$ |
81,656 |
|
$ |
61,398 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Total assets: |
|
|
|
|
|
|
|
|
|
||||
|
Continuing operations |
|
$ |
303,876 |
|
$ |
388,226 |
|
$ |
423,272 |
|
$ |
429,812 |
|
|
Discontinued operations |
|
— |
|
160,741 |
|
222,439 |
|
234,442 |
|
||||
|
Total assets |
|
$ |
303,876 |
|
$ |
548,967 |
|
$ |
645,711 |
|
$ |
664,254 |
|
(19) Total debt is defined as long-term debt, including current portion.
(20) Reflects mandatorily redeemable preferred stock.
16
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion should be read in conjunction with our financial statements and accompanying notes included in this report.
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: (1) business, VIP and head-of-state aircraft and, to a lesser extent, (2) commercial and (3) regional aircraft. In addition, we provide aircraft products for the defense markets, generally as a second tier supplier. Weak global economic conditions, which were exacerbated by the September 11, 2001 terrorist attack on the United States, ongoing concerns about global terrorism and health epidemics, and the current Middle Eastern military conflicts have all adversely impacted the civil aerospace industry which led to a decrease in demand for aircraft and consequently the products and services we provide. These adverse conditions caused us to implement a series of restructuring activities designed to reduce expenses and conserve working capital. See “—Restructuring, Asset Impairment and Other Related Charges” below for additional information.
During 2004 the markets we serve began to reflect the improvement in the general economy as the demand for business, VIP, and head-of-state aircraft began to show increased strength. We believe this strengthening will continue into 2005 and beyond. Our beliefs are based on the assumptions that the global economic recovery continues and that there are no negative geo-political developments affecting our industry.
Results of Operations
Performance Measures
The following discussion of our results of operations includes discussions of financial measures and operating statistics that we use to evaluate the performance of, and trends in, our businesses. We believe the presentation of these measures and statistics are relevant and useful to investors because it allows them to view performance and trends in a manner similar to the methods we use. These measures and statistics, and why they are important to us and could be of interest to you, are described below.
Adjusted EBITDA. Our discussion of the results of operations includes discussions of financial measures determined in accordance with accounting principles generally accepted in the United States of America (“GAAP”) as well as the financial measure Adjusted EBITDA, which excludes certain charges reflected in our GAAP basis financial statements. Our 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 us to report the primary measure of segment performance we use to evaluate and manage our businesses.
We utilize more than one measurement to evaluate segment performance and allocate resources among our operating segments; however, we consider Adjusted EBITDA, as defined below, to be the primary measurement of overall operating segment core economic performance and return on invested capital. We also use Adjusted EBITDA in the annual budgeting and planning for future periods, as one of the decision-making criteria for funding discretionary capital expenditure and product development programs and as the measure for determining the value of acquisitions and dispositions. Our board of directors uses Adjusted EBITDA as one of the performance metrics for determining the amount of bonuses awarded pursuant to the cash incentive bonus plan and as an indicator of enterprise value used in
17
determining the exercise price of stock options granted and the acceleration of stock option vesting pursuant the incentive stock option plan.
We define 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. We believe 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 we use, helps improve their ability to understand our core segment performance, adjusted for items we believe are unusual, and makes it easier to compare our results with other companies that have different financing, capital structures and tax rates. In addition, we believe these measures are consistent with the manner in which our lenders and investors measure our overall performance and liquidity, including our ability to service debt and fund discretionary capital expenditure and product development programs.
Our 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. Adjusted EBITDA should not be viewed as substitutes for or superior to net income (loss), cash flow from operations or other data prepared in accordance with GAAP as a measure of our profitability or liquidity. The notes to our financial statements include information about our operating segments, including Adjusted EBITDA, and should be read in conjunction with the discussions presented herein. The notes to our financial statements also include a reconciliation of Adjusted EBITDA to net income (loss) to clarify the differences between these financial measures.
Bookings and Backlog. Bookings and backlog are operating statistics we use as leading trend indicators of future demand for our products and services. Bookings and backlog are based upon the value of purchase orders received from our customers, which will result in revenues, if and when such orders are filled.
Bookings represent the total invoice value of purchase orders received during the period and backlog represents the total invoice value of unfilled purchase orders as of the end of a period. Orders may be subject to change or 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.
Changes in Accounting Principles
Our results of operations have been affected by the following changes in accounting principles during the three years ended December 31, 2004 which affect the comparability of our reported results of operations between periods.
Adoption of SFAS No. 150 in 2004. Effective January 1, 2004, we 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
18
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 our common stockholder.
The following table summarizes the results of operations for the years ended December 31, 2003 and 2002 as if SFAS No. 150 had been in effect as of the beginning of 2002.
|
|
|
Year Ended December 31, |
|
||||||||||
|
|
|
2003 |
|
2002 |
|
||||||||
|
(In millions) |
|
As Reported |
|
Pro Forma |
|
As Reported |
|
Pro Forma |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Loss from continuing operations |
|
$ |
(52.9 |
) |
$ |
(59.7 |
) |
$ |
(6.8 |
) |
$ |
(12.6 |
) |
|
Net loss |
|
(73.3 |
) |
(80.1 |
) |
(66.0 |
) |
(71.8 |
) |
||||
The pro forma data reflects preferred stock dividends and redemption value accretion totaling $6.8 million for year ended December 31, 2003 and $5.8 million for the year ended December 31, 2002 as charges against income during the periods.
Change in Accounting for Product Development Costs in 2003. Inventories are stated at the lower of cost or market. Costs include materials, labor, including direct engineering labor, tooling costs and manufacturing overhead. As described below, measurement of the costs of inventories associated with products manufactured for delivery under production-type contracts in prior periods was made pursuant to the use of program accounting. As such, the cost of inventories included certain deferred program costs, which were principally comprised of engineering costs.
Because of the changing economic conditions affecting the markets we serve, demand for our products has exhibited an increased degree of volatility. The ability to make reliable estimates of future demand for these products is critical to the use of program accounting and the deferral of engineering and production costs. Under program accounting, certain product development costs incurred in connection with specific contracted programs were deferred and charged to cost of sales when revenues from the sale of products related to the program were recorded. In order to improve the reliability of our financial reporting we decided to discontinue the use of program accounting which requires us to make long-term estimates of future sales for each program. Therefore, product development costs not specifically reimbursable through contractual terms or recoverable through firm orders are no longer deferred and included in inventory.
This change in accounting policy was made after concluding the 2003 fiscal year but has been 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 for 2003 rather than classified as a component of inventory cost. The effect of this accounting change was to increase our 2003 net loss by $17.9 million through a charge for the cumulative effect of a change in accounting principle of $13.8 million and increase by $4.2 million the reported loss from continuing operations.
The following pro forma data summarizes the results of operations for the years ended December 31, 2002 as if the new accounting policy had been in effect during that year.
|
|
|
Year Ended |
|
||||
|
(In millions) |
|
As Reported |
|
Pro Forma |
|
||
|
|
|
|
|
|
|
||
|
Loss from continuing operations |
|
$ |
(6.8 |
) |
$ |
(9.7 |
) |
|
Net loss |
|
(66.0 |
) |
(69.0 |
) |
||
19
Adoption of SFAS No. 142 in 2002. Effective January 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” As required by SFAS No. 142, we conducted transitional impairment testing of the goodwill recorded as of that date and the results indicated that the carrying value was impaired.
In accordance with the transitional provision of SFAS No. 142, we recorded a $17.8 million noncash write-down of goodwill (net of $878,000 income tax benefit) as of January 1, 2002 as a cumulative effect of a change in accounting principle. An additional $39.4 million noncash write-down of goodwill pertained to the Specialty Avionics Group and is included in the loss from discontinued operations.
Restructuring, Asset Impairment and Other Charges
Our results of operations during the three years ended December 31, 2004 have also been affected by restructuring, impairment and other related charges relating to a series of restructuring activities. These charges, which further affect the comparability of our reported results of operations between periods, are more fully described in “—Restructuring, Asset Impairment and Other Related Charges” and “—Goodwill Impairment Charges” below.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Revenues. Revenues increased $43.6 million, or 25.6%, to $213.7 million for the year ended December 31, 2004 from $170.1 million for the year ended December 31, 2003. By segment, revenues changed as follows:
|
|
|
Increase (Decrease) |
|
|||
|
(In millions) |
|
Amount |
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
Cabin Management |
|
$ |
39.6 |
|
33.3 |
% |
|
Systems Integration |
|
6.3 |
|
12.2 |
|
|
|
Increase in inter-group elimination |
|
(2.3 |
) |
|
|
|
|
Total |
|
$ |
43.6 |
|
|
|
Cabin Management. Revenues increased by $39.6 million, or 33.3% compared to the prior year due to a higher volume of business, VIP and head-of-state jet production by aircraft manufacturers. The increase consisted of the following:
• a $33.6 million increase in aircraft furniture and related products revenues;
• a $4.9 million increase in cabin management and entertainment systems revenues; and
• a $3.6 million increase in seating products revenues; offset by
• a $2.5 million decrease in other product and services revenues.
Systems Integration. Revenues increased by $6.3 million, or 12.2% compared to the prior year, due to:
• a $17.0 million increase in completion and service center revenues; and
• a $1.9 million increase in revenues from integration kits and related services for commercial aircraft; offset by
• a $12.6 million decrease resulting from lower production of auxiliary fuel systems pursuant to our supply contract with Boeing Business Jet (“BBJ”).
20
BBJ has exercised its option to convert the supply contract to a “requirements” contract, from a guaranteed “take-or-pay” contract, commencing January 1, 2005. Production under the “take-or-pay” portion of the contract was completed during the second quarter of 2004. We have received purchase orders for auxiliary fuel systems under the “requirements” contract to be manufactured and delivered in fiscal 2005. During the year ended December 31, 2004, auxiliary fuel systems revenues were $13.8 million compared to $24.1 million for the same period last year.
Gross profit. Gross profit increased $5.9 million, or 15.4%, to $44.5 million for the year ended December 31, 2004 from $38.6 million for the same period in the prior year. By segment, gross profit changed as follows:
|
|
|
Increase (Decrease) |
|
|||
|
(In millions) |
|
Amount |
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
Cabin Management |
|
$ |
12.6 |
|
67.9 |
% |
|
Systems Integration |
|
(6.7 |
) |
(33.6 |
) |
|
|
Total |
|
$ |
5.9 |
|
|
|
Cabin Management. Gross profit increased by $12.6 million, or 67.9% compared to the prior year, primarily due to:
• a $5.1 million increase related to higher volume in aircraft furniture and related products revenues;
• a $5.3 million decrease in restructuring charges incurred in 2004 compared to those incurred during the same period in 2003 related to our furniture and seating operations;
• a $3.5 million increase in gross profit related to higher volume for our cabin management and entertainment systems; and
• a $1.4 million increase in gross profit related to other products; offset by
• $2.7 million of start-up and unusual production costs related to a major contract for an integrated interior for a customer’s recently introduced new model aircraft; a portion of these costs is considered nonrecurring.
Systems Integration. Gross profit decreased by $6.7 million, or 33.6% compared to the prior year, primarily due to:
• a $4.9 million increase in restructuring charges incurred in 2004 compared to those incurred during the same period in 2003 related to the reorganization of our manufacturing operations; and
• a $4.9 million decrease resulting from reduced auxiliary fuel system revenues; offset by
• a $1.6 million increase resulting from the increase in revenues from integration kits and related services for commercial aircraft; and
• a $1.5 million increase resulting from increased air center services and other aircraft modification activities.
Selling, general and administrative expenses. Selling, general and administrative expenses increased $1.4 million, or 4.9%, to $29.7 million for the year ended December 31, 2004, from $28.3 million for the same period in the prior year. By segment, SG&A expenses changed as follows:
21
|
|
|
Increase (Decrease) |
|
|||
|
(In millions) |
|
Amount |
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
Cabin Management |
|
$ |
2.7 |
|
20.8 |
% |
|
Systems Integration |
|
(1.1 |
) |
(13.0 |
) |
|
|
Corporate |
|
(0.2 |
) |
|
|
|
|
Total |
|
$ |
1.4 |
|
|
|
Cabin Management. SG&A expenses increased by $2.7 million, or 20.8% compared to the prior year due to:
• a $2.1 million increase in SG&A spending in support of higher production levels and new programs;
• a $0.4 million increase in restructuring charges incurred in 2004 versus the same period last year; and
• a $0.2 million of non-recurring program start-up costs related to the interior of a customer’s recently introduced new model aircraft.
Systems Integration. SG&A expenses decreased by $1.1 million, or 13.0% compared to the prior year, due to lower labor and employee benefit costs resulting from workforce reductions as well as other cost reduction efforts, offset by an increase in sales and marketing activities associated with the aircraft completion portion of our business.
Corporate. SG&A expenses decreased by $0.2 million compared to the prior year due to a $0.9 million decrease resulting from cost reduction measures, offset by $0.7 million of 2004 restructuring charges.
Research and development expenses. Research and development expenses decreased $2.4 million, or 23.3%, to $8.0 million for the year ended December 31, 2004 compared to $10.4 million in the prior year. By segment, research and development expenses changed as follows:
|
|
|
Increase (Decrease) |
|
|||
|
(In millions) |
|
Amount |
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
Cabin Management |
|
$ |
(3.7 |
) |
46.4 |
% |
|
Systems Integration |
|
1.3 |
|
57.6 |
|
|
|
Total |
|
$ |
(2.4 |
) |
|
|
Cabin Management. R&D expenses decreased $3.7 million, or 46.4% compared to the prior year. The decrease is primarily related to the near completed development of our new single-design seat technology and the design and engineering of new interior furnishing components for a customer’s recently introduced new model aircraft.
Systems Integration. R&D expenses increased $1.3 million, or 57.6% compared to the prior year. The increase is principally due to the ongoing development of our cockpit door video surveillance system for different models of commercial aircraft and a design modification to an existing product.
Depreciation and amortization of intangibles. Depreciation and amortization expense decreased $0.1 million to $9.7 million for the year ended December 31, 2004 from $9.8 million for the same period in the prior year. Depreciation and amortization changed as follows:
22
|
|
|
Increase (Decrease) |
|
|||
|
(In millions) |
|
Amount |
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
Depreciation charged to: |
|
|
|
|
|
|
|
Cost of sales |
|
$ |
0.2 |
|
6.0 |
% |
|
Selling, general and administrative expense |
|
(0.3 |
) |
(13.0 |
) |
|
|
Amortization of intangible assets |
|
0.0 |
|
|
|
|
|
Total |
|
$ |
(0.1 |
) |
|
|
Adjusted EBITDA. We define 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. As described above in “—Performance Measures–Adjusted EBITDA,” we use this financial measure to evaluate the core economic performance of our operating segments. The notes to our financial statements include additional information about Adjusted EBITDA, and should be read in conjunction with the discussions presented herein. The notes to our financial statements also include a reconciliation of Adjusted EBITDA to net income (loss), a GAAP financial measure, to clarify the differences between these two measures.
Cabin Management. Adjusted EBITDA increased by $5.3 million, or 31.0%, to $22.4 million for the year ended December 31, 2004 compared to $17.1 million for the same period in the prior year. Adjusted EBITDA as a percent of revenues declined to 14.1 % for the year ended December 31, 2004 compared to 14.4% for the same period last year. The $5.3 million increase is comprised of:
• a $5.7 million increase resulting from a 33.3% revenue increase; offset by
• a $0.4 million decrease resulting from the change in margins between periods.
Our furniture and seating operations contributed $2.4 million of the increase; our cabin management and entertainment systems contributed $1.6 million of the increase and our other products and services contributed $1.3 million of the increase.
Systems Integration. Adjusted EBITDA decreased by $1.0 million, or 7.4%, to $12.3 million for the year ended December 31, 2004 compared to $13.3 million for the same period in the prior year. Adjusted EBITDA as a percent of revenues declined to 21.3 % for the year ended December 31, 2004 compared to 25.8% for the same period last year. The $1.0 million decrease is comprised of:
• a $2.6 million decrease resulting from the change in margin between periods; offset by
• a $1.6 million increase resulting from a 12.2% revenue increase.
The decline in margin is attributable to a change in product delivery mix, principally resulting from auxiliary fuel systems revenues being replaced with revenues from lower margin products and services. A $4.9 million decline in auxiliary fuel tank, service center and aircraft completion margins was partially offset by a $1.7 million increase in the margins for integration kits and related services for commercial aircraft.
Impairment of goodwill. During the year ended December 31, 2003, a $34.0 million charge was recorded to reflect the impairment of goodwill in connection with the impairment testing provision of SFAS No. 142, “Goodwill and Other Intangible Assets.” See “—Restructuring, Asset Impairment and Other Related Charges.”
23
Operating income (loss). Operating income increased $41.0 million, or 108.4%, to income of $3.2 million for the year ended December 31, 2004, compared to a loss of $37.8 million for the same period in the prior year. By segment, the operating loss changed as follows:
|
|
|
Increase (Decrease) |
|
|||
|
(In millions) |
|
Amount |
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
Cabin Management |
|
$ |
47.8 |
|
124.2 |
% |
|
Systems Integration |
|
(7.0 |
) |
(92.8 |
) |
|
|
Corporate |
|
0.2 |
|
|
|
|
|
Total |
|
$ |
41.0 |
|
|
|
Cabin Management. The operating income increased by $47.8 million, or 124.2% compared to the prior year, primarily due to:
• a $34.0 million decrease in goodwill impairment charges;
• a $5.1 million increase in gross profit, primarily due to higher revenues related to our furniture and seating operations;
• a $4.9 million decrease in restructuring charges incurred in 2004 as compared to 2003;
• a $3.7 million decrease in research and development expenses;
• a $3.5 million increase in gross profit related to higher volume for our cabin management and entertainment systems; and
• a $1.4 million increase in gross profit related to other products and services; offset by
• $2.9 million of nonrecurring start-up and unusual production costs related to a major contract for an integrated interior for a customer’s recently introduced new model aircraft;
• a $2.1 million increase in SG&A spending.
Systems Integration. The operating income decreased by $7.0 million, or 92.8% compared to the prior year, primarily due to:
• a $4.9 million increase in restructuring charges incurred in 2004 compared to last year;
• a $3.2 million decrease resulting from reduced gross profit; and
• a $1.3 million increase in research and development expenses; offset by
• a net $1.5 million increase resulting from the conversion of a major customer supply contract to a requirements-only contract; and
• a $1.1 million decrease in SG&A spending.
Interest expense. Interest expense increased $10.9 million, or 41.7%, to $37.1 million for the year ended December 31, 2004 compared to $26.2 million for the same period in the prior year. The increase is attributable to:
• a $11.8 million increase attributable to $80.0 million of second-lien term debt issued in December 2003;
• a $1.3 million net increase in interest expense resulting from the exchange of $65.0 million of 12% senior subordinated notes for 17% senior discount notes;
• a $0.7 million increase in other interest expense; and
• a $0.4 million increase in amortization of deferred financing costs primarily related to our second-lien term debt issued in December 2003; offset by
24
• a $3.3 million decrease in our first-lien interest expense due to lower principal balances outstanding resulting from the repayment with the proceeds from our second-lien debt financing in December 2003, offset, in part, by a 1.5% increase in interest rate margins charged by our lenders based on our consolidated debt leverage ratio.
Mandatorily redeemable preferred stock dividends. Dividends on our 16% mandatorily redeemable preferred stock totaled $4.0 million for the year ended December 31, 2004. As more fully described in “—Changes in Accounting Principles” above, effective January 1, 2004 we adopted SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” As a result of adopting SFAS No. 150, the 16% quarterly preferred stock dividends are reflected as a charge against pre-tax income. In periods prior to January 1, 2004, preferred stock dividends were deducted in arriving at the net income or loss applicable to our common stockholder and amounted to $6.8 million for the year ended December 31, 2003. The $2.8 million decrease in dividends between the periods is a result of an amendment to the terms of the preferred stock.
During the third quarter of fiscal 2004, the terms of the 16% preferred stock were amended to provide that further preferred stock dividends, if any, accrue at rates dependent on a specified financial ratio or if certain triggering events occur. Future preferred stock dividends, if any, are dependent, in part, upon a defined leverage ratio achieved as of each quarterly testing date. Depending on the ratio achieved, and provided certain triggering events have not occurred, dividends for the succeeding quarter accrue at a 0%, 4% or 16% annual rate. If certain triggering events occur, dividends accrue at a 16% annual rate. Based upon the leverage ratio achieved as of September 30 and December 31, 2004, no dividends will accrue on the preferred stock from the amendment date through March 31, 2005, the next quarterly testing date. See “—Liquidity and Capital Resources–Debt and Preferred Stock Restructuring” for additional information.
Loss on debt and preferred stock restructuring. The loss on debt and preferred stock restructuring of $3.9 million for the year ended December 31, 2004 reflects the write-off of deferred financing costs attributable to the $65.0 million of 12% senior subordinated notes exchanged for 17% senior discount notes and the write-off of the remaining unamortized original issuance discount related to our 16% preferred stock. See “—Liquidity and Capital Resources–Debt and Preferred Stock Restructuring” for additional information.
Income tax (provision) benefit. The provision for income taxes is comprised of the following:
|
|
|
Year ended |
|
||||
|
(In millions) |
|
2004 |
|
2003 |
|
||
|
|
|
|
|
|
|
||
|
Income benefit based on reported pre-tax loss |
|
$ |
14.6 |
|
$ |
33.0 |
|
|
Net deferred tax asset valuation allowance |
|
(14.7 |
) |
(19.5 |
) |
||
|
Net provision for income (taxes) benefit |
|
$ |
(0.1 |
) |
$ |
13.5 |
|
For the year ended December 31, 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.
For the year ended December 31, 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, as described above.
25
As of December 31, 2003, there were net deferred tax asset of $19.5 million fully offset by a valuation allowance of the same amount. Based upon the results of operations for the year ended December 31, 2004, we determined that an additional $14.7 million valuation allowance was required as of that date.
Loss from continuing operations. The loss from continuing operations decreased $10.4 million to a loss of $42.5 million for the year ended December 31, 2004 compared to a loss of $52.9 million for the same period in the prior year, primarily due to:
• a $41.0 million operating income increase; offset by
• a $13.6 million decrease in income tax benefit;
• a $10.5 million increase in interest and other expenses (net);
• $4.0 million of preferred stock dividends resulting from the adoption of SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” as described above; and
• a $2.5 million increase in charges recorded in 2004 related to our debt and preferred stock restructuring over the amount incurred in 2003 for our debt restructuring.
Loss from discontinued operations. The loss from discontinued operations was $6.6 million for the year ended December 31, 2003 and reflects the results of operations of our Specialty Avionics Group for the period from January 1, 2003 through May 22, 2003, the date on which it was sold.
Cumulative effect of changes in accounting principles. As more fully described in “—Changes in Accounting Principles” above, the $13.8 million charge in 2003 was to reflect the cumulative effect of the change in accounting for product development costs as of January 1, 2003.
Net loss. Net loss decreased $30.8 million to a net loss of $42.5 million for the year ended December 31, 2004 compared to a net loss of $73.3 million for the same period in the prior year. The decrease is attributable to:
• a $13.8 million decrease in cumulative effect of changes in accounting principle;
• a $10.4 million decrease in the loss from continuing operations; and
• a $6.6 million decrease in the loss from discontinued operations.
Net loss applicable to common stockholder. Net loss applicable to DeCrane Holdings, our common stockholder, decreased $37.6 million to a net loss of $42.5 million for the year ended December 31, 2004 compared to a net loss of $80.1 million for the same period in the prior year. The decrease in the net loss applicable to our common stockholder is attributable to:
• a $30.8 million decrease in our net loss; and
• a $6.8 million decrease in preferred stock dividends and redemption value accretion resulting from the January 1, 2004 adoption of SFAS No. 150 which requires preferred stock dividends be deducted from the net income or loss for the period.
Bookings and Backlog. Bookings increased $83.2 million, or 51.6%, to $244.5 million for the year ended December 31, 2004 compared to $161.3 million for the same period in the prior year. Backlog increased $30.9 million, or 53.2%, to $88.9 million as of December 31, 2004 compared to $58.0 million as of December 31, 2003. By segment, bookings and backlog changed as follows:
26
|
|
|
Increase (Decrease) |
|
|||
|
(In millions) |
|
Amount |
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
Bookings: |
|
|
|
|
|
|
|
Cabin Management |
|
$ |
49.0 |
|
40.7 |
% |
|
Systems Integration |
|
34.2 |
|
83.6 |
|
|
|
Total |
|
$ |
83.2 |
|
|
|
|
|
|
|
|
|
|
|
|
Backlog: |
|
|
|
|
|
|
|
Cabin Management |
|
$ |
13.8 |
|
40.9 |
% |
|
Systems Integration |
|
17.1 |
|
70.2 |
|
|
|
Total |
|
$ |
30.9 |
|
|
|
Cabin Management’s bookings and backlog increase results from the increase in our customers’ aircraft production schedules during the period. Systems Integration’s bookings and backlog increase is a result of booking an order for an aircraft completion as well as an increase in orders for our cockpit door video surveillance system.
We believe these improvements are caused by the overall improvement of general economic conditions during 2004 which resulted in a strengthening of the markets we serve and therefore an increase in demand for our products and services. Although we cannot be certain due to factors beyond our control, we believe this upward trend will continue into 2005 and beyond. See “—Industry Overview and Trends” for additional information.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Revenues. Revenues decreased $59.7 million, or 26.0%, to $170.1 million for the year ended December 31, 2003 from $229.8 million for the year ended December 31, 2002. By segment, revenues changed as follows:
|
|
|
Increase (Decrease) |
|
|||
|
(In millions) |
|
Amount |
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
Cabin Management |
|
$ |
(53.8 |
) |
(31.1 |
)% |
|
Systems Integration |
|
(6.4 |
) |
(11.0 |
) |
|
|
Inter-group elimination |
|
0.5 |
|
|
|
|
|
Total |
|
$ |
(59.7 |
) |
|
|
Cabin Management. Revenues decreased by $53.8 million, or 31.1% compared to the prior year. The decrease, which is across substantially all of our product and services categories, is caused by the ongoing adverse impact of weak global economic conditions which reduces the affordability of business, VIP and head-of-state aircraft and therefore demand for the products and services we provide. As a result, the manufacturers of these aircraft have experienced a decrease in orders for new aircraft which, in turn, reduces the orders our customers place with us. The 2003 decrease consists of:
• a $50.9 million decrease in aircraft furniture and related products revenues;
• a $3.4 million decrease in cabin management and entertainment systems revenues; and
• a $0.5 million decrease in seating products revenues; offset by
• a $1.0 million increase in other product and services revenues.
The revenue decrease was caused by lower order volume (as described above) from our customers as opposed to a loss of customers or price reductions.
27
Revenues from Textron and Bombardier, our principal customers, decreased $44.6 million compared to the prior year as a result of the decrease in orders and resulting lower production of aircraft they are experiencing during the economic downturn. Both companies temporarily suspended production of various aircraft models for several weeks during fiscal 2003 in response to their low order backlog. We also experienced similar volume decreases from our other customers during the period.
Systems Integration. Revenues decreased by $6.4 million, or 11.0% compared to the prior year, due to:
• a $8.6 million decrease resulting from reduced demand for almost all of our products and services as a result of reduced production and delivery of business, VIP and head-of-state aircraft; offset by
• a $0.1 million increase in the commercial aircraft systems integration engineering services; and
• a $2.1 million increase resulting from revenue pursuant to the “take-or-pay” provisions of a major supply contract.
Gross profit. Gross profit decreased $27.1 million, or 41.3%, to $38.6 million for the year ended December 31, 2003 from $65.7 million for the same period in the prior year. By segment, gross profit changed as follows:
|
|
|
Increase (Decrease) |
|
|||
|
(In millions) |
|
Amount |
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
Cabin Management |
|
$ |
(20.2 |
) |
(52.2 |
)% |
|
Systems Integration |
|
(6.9 |
) |
(25.8 |
) |
|
|
Total |
|
$ |
(27.1 |
) |
|
|
Cabin Management. Gross profit decreased by $20.2 million, or 52.2% compared to the prior year, primarily due to:
• a $20.1 million decrease resulting from lower volume for our business, VIP and head-of-state aircraft furniture and seating products; and
• a $1.2 million decrease in gross profit related to lower volume for our cabin management and entertainment systems; offset by
• a $1.1 million increase from our other products and services.
Systems Integration. Gross profit decreased by $6.9 million, or 25.8% compared to the prior year, primarily due to:
• a $9.9 million decrease resulting from lower revenues and unfavorable overhead absorption as a result of lower production and a change in product delivery mix; and
• a $0.3 million decrease in the commercial aircraft systems integration engineering services provided; offset by
• a $3.3 million decrease in restructuring charges incurred in 2003 as compared to those recorded in 2002 for our restructuring activities.
Selling, general and administrative expenses. Selling, general and administrative expenses decreased $18.3 million, or 39.2%, to $28.3 million for the year ended December 31, 2003, from $46.6 million for the same period in the prior year. By segment, SG&A expenses changed as follows:
28
|
|
|
Increase (Decrease) |
|
|||
|
(In millions) |
|
Amount |
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
Cabin Management |
|
$ |
(11.2 |
) |
(46.2 |
)% |
|
Systems Integration |
|
(5.7 |
) |
(40.8 |
) |
|
|
Corporate |
|
(1.4 |
) |
|
|
|
|
Total |
|
$ |
(18.3 |
) |
|
|
Cabin Management. SG&A expenses decreased by $11.2 million, or 46.2% compared to the prior year, due to:
• a $6.0 million decrease in restructuring charges incurred in 2003 as compared to those recorded in 2002 related to our restructuring activities; and
• a $5.2 million decrease in expenses resulting from cost reduction measures implemented in response to lower sales volume resulting from the weak demand for our products and services.
Systems Integration. SG&A expenses decreased by $5.7 million, or 40.8% compared to the prior year, due to one time costs associated with an ERP systems implementation in the prior year as well as labor and workforce reductions.
Research and development expenses. Research and development expenses were $10.4 million for the year ended December 31, 2003 compared to $0.1 million in the prior year. As more fully described in “—Change in Accounting Principle,” we elected to change our accounting policy for product development costs incurred for long-term programs after concluding the 2003 fiscal year but retroactively applied the change to the beginning of the year, January 1, 2003. Commencing January 1, 2003, such costs are classified as a component of research and development expenses. Expenses would have been $5.0 million in 2002 if the new accounting policy had been in effect during that year.
Cabin Management. R&D expenses were $8.1 million for the year ended December 31, 2003, principally incurred for the development of our new single-design seat technology and new interior furnishing components for a major customer’s new model of aircraft they recently introduced.
Systems Integration. R&D expenses were $2.3 million for the year ended December 31, 2003, principally for development of several new products.
Impairment of goodwill. During the year ended December 31, 2003, a $34.0 million charge was recorded to reflect the additional impairment of goodwill in connection with the impairment testing provision of SFAS No. 142, “Goodwill and Other Intangible Assets.” The additional impairment results from continuing weak global economic conditions which reduces the affordability of business, VIP and head-of-state aircraft and therefore demand for the products and services we provide. The impairment charge pertains to our furniture manufacturing reporting unit within our Cabin Management Group. See “—Goodwill Impairment Charges” below for additional information.
Depreciation and amortization of intangibles. Depreciation and amortization expense decreased $0.8 million to $9.8 million for the year ended December 31, 2003 from $10.6 million for the same period in the prior year, primarily resulting from reduced capital expenditures and a lower depreciable base resulting from impairment charges recorded during 2002 as follows.
29
|
|
|
Increase (Decrease) |
|
|||
|
(In millions) |
|
Amount |
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
Depreciation charged to: |
|
|
|
|
|
|
|
Cost of sales |
|
$ |
(0.3 |
) |
(6.6 |
)% |
|
Selling, general and administrative expense |
|
(0.6 |
) |
(26.2 |
) |
|
|
Amortization of intangible assets |
|
0.1 |
|
3.1 |
|
|
|
Total |
|
$ |
(0.8 |
) |
|
|
Adjusted EBITDA. We define 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. As described above in “—Performance Measures–Adjusted EBITDA,” we use this financial measure to evaluate the core economic performance of our operating segments. The notes to our financial statements include additional information about Adjusted EBITDA, and should be read in conjunction with the discussions presented herein. The notes to our financial statements also include a reconciliation of Adjusted EBITDA to net income (loss), a GAAP financial measure, to clarify the differences between these two measures.
Cabin Management. Adjusted EBITDA decreased by $15.5 million, or 47.6%, to $17.1 million for the year ended December 31, 2003 compared to $32.6 million for the same period in the prior year. Adjusted EBITDA as a percent of revenues declined to 14.4 % for the year ended December 31, 2003 compared to 18.9% for the same period last year. The $15.5 million decrease is comprised of:
• a $10.2 million decrease resulting from a 31.1% revenue decline; and
• a $5.3 million decrease resulting from the change in margins between periods.
Systems Integration. Adjusted EBITDA decreased by $4.7 million, or 26.3%, to $13.4 million for the year ended December 31, 2003 compared to $18.1 million for the same period in the prior year. Adjusted EBITDA as a percent of revenues declined to 25.8% for the year ended December 31, 2003 compared to 31.2% for the same period last year. The $4.7 million decrease is comprised of:
• a $2.0 million decrease resulting from a 11.0% revenue decline; and
• a $2.7 million decrease resulting from the change in margins between periods.
The decline in margin is attributable to a change in product delivery mix, principally resulting from auxiliary fuel systems revenues being replaced with revenues from lower margin products and services.
Operating income (loss). Operating income decreased $53.3 million to a loss of $37.8 million for the year ended December 31, 2003, from operating income of $15.5 million for the same period in the prior year. By segment, operating income changed as follows:
|
|
|
Increase (Decrease) |
|
|||
|
(In millions) |
|
Amount |
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
Cabin Management |
|
$ |
(51.2 |
) |
(401.8 |
)% |
|
Systems Integration |
|
(3.6 |
) |
(32.3 |
) |
|
|
Corporate |
|
1.5 |
|
|
|
|
|
Total |
|
$ |
(53.3 |
) |
|
|
Cabin Management. Operating income decreased by $51.2 million, or 401.8% compared to the prior year, due to:
• a $34.0 million goodwill impairment charge in 2003;
30
• a $20.1 million decrease in gross profit, primarily due to lower revenues related to our furniture and seating operations; and
• an $8.1 million increase in research and development expenses; offset by
• a $6.0 million decrease in restructuring charges incurred in 2003 as compared to those recorded in 2002 related to our restructuring activities; and
• a $5.0 million decrease in expenses resulting from cost reduction measures implemented in response to lower sales volume resulting from the weak global economic conditions.
Systems Integration. Operating income decreased by $3.6 million, or 32.3% compared to the prior year, due to:
• a $7.0 million decrease in gross profit resulting from lower revenues and unfavorable overhead absorption as a result of lower production and a change in product delivery mix;
• a $2.3 million increase in research and development expenses; and
• a $0.3 million decrease in gross profit in the commercial aircraft systems integration engineering services provided; offset by
• a $3.0 million decrease in restructuring charges incurred in 2003 as compared to those recorded in 2002 related to our restructuring activities; and
• a $3.0 million decrease in expenses resulting from cost reduction measures implemented in response to lower sales volume resulting from the weak global economic conditions.
Interest expense. Interest expense increased $0.8 million, or 3.3%, to $26.2 million for the year ended December 31, 2003 compared to $25.4 million for the same period in the prior year. The increase is attributable to a 1.5% increase in interest rate margins charged by our lenders pursuant to the March 28, 2003 first-lien bank credit facility amendment, partially offset by lower principal balances outstanding during 2003 compared to the prior year.
Loss on extinguishment of debt. Loss on extinguishment of debt was $1.4 million for the year ended December 31, 2003 and reflects the write-off of deferred financing costs attributable to debt repaid during the year.
Income tax (provision) benefit. The provision for income taxes is comprised of the following:
|
|
|
Year Ended |
|
||||
|
(In millions) |
|
2003 |
|
2002 |
|
||
|
|
|
|
|
|
|
||
|
Income tax benefit based on reported pre-tax loss |
|
$ |
33.0 |
|
$ |
2.9 |
|
|
Net deferred tax asset valuation allowance |
|
(19.5 |
) |
— |
|
||
|
Net income tax benefit |
|
$ |
13.5 |
|
$ |
3.6 |
|
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 December 31, 2003, we had net deferred tax assets of $19.5 million, prior to recording a valuation allowance; net deferred tax liabilities existed in prior periods. The change to a net asset position was primarily caused by the $34.0 million goodwill impairment charge recorded during fiscal 2003. SFAS No. 109, “Accounting for Income Taxes,” requires the recognition of a deferred tax asset for the future income tax benefit of goodwill deductions that will be taken for income tax purposes (i.e. the
31
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).
As required by SFAS No. 109, we evaluated our deferred 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 we do 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, we believe it is not prudent to rely on future income as the means to support the carrying value of the net assets. As a result of our evaluation, we recorded a $19.5 million valuation allowance, eliminating the net deferred asset, as of December 31, 2002.
We had net deferred tax liability of $16.6 million as of December 31, 2002. The full realization of the deferred assets was achieved through the reversal of the deferred tax liabilities in future periods. As a result, a valuation allowance was not required for periods ending on or prior to December 31, 2003.
Loss from continuing operations. The loss from continuing operations increased $46.1 million to a loss of $52.9 million for the year ended December 31, 2003 compared to a loss of $6.8 million for the same period in the prior year, primarily due to:
• a $53.3 million decrease in operating income resulting, in part, from a $34.0 million goodwill impairment charge;
• a $1.4 million increase in loss on extinguishment of debt; and
• a $1.3 million increase in interest and other expenses (net); offset by
• a $9.9 million increase in income tax benefit.
Loss from discontinued operations. Loss from discontinued operations decreased $34.8 million, to a loss of $6.6 million for the year ended December 31, 2003 compared to a loss of $41.4 million for the same period in the prior year. The decrease is primarily due to:
• a $39.4 million charge in 2002 to reflect the cumulative effect on discontinued operations of the change in accounting principle associated with initial adoption of SFAS No. 142, “Goodwill and Other Intangible Assets” as described below; offset by
• the result of operations of the Specialty Avionics Group through May 22, 2003 compared to a full year of operating results included in the prior year.
Cumulative effect of changes in accounting principles. The $13.8 million charge during the year ended December 31, 2003 was to reflect the cumulative effect on continuing operations of the change in accounting for product development costs.
The $17.8 million charge in 2002 to reflect the cumulative effect on continuing operations of the change in accounting principle was a result of transitional goodwill impairment charges recognized upon initial adoption of SFAS No. 142, “Goodwill and Other Intangible Assets.” Including the $39.4 million charged to discontinued operations, the total charge to reflect the cumulative effect of the change in accounting principle was $57.2 million.
See “—Changes in Accounting Principles” for additional information.
32
Net loss. Net loss increased $7.3 million to a net loss of $73.3 million for the year ended December 31, 2003 compared to a net loss of $66.0 million for the same period in the prior year. The decrease is attributable to:
• an increase in loss from continuing operations of $46.1 million; offset by
• a decrease in loss from discontinued operations of $34.8 million; and
• a decrease in cumulative effect of change in accounting principle of $4.0 million.
Net loss applicable to common stockholder. Net loss applicable to DeCrane Holdings, our common stockholder, increased $8.3 million to a net loss of $80.1 million for the year ended December 31, 2003 compared to a net loss of $71.8 million for the same period in the prior year. The increase in the net loss applicable to our common stockholder is attributable to:
• a $7.3 million increase in our net loss; offset by
• a $1.0 million increase in accrued 16% mandatorily redeemable preferred stock dividends resulting from the quarterly compounding of accrued dividends.
Bookings. Bookings decreased $35.8 million, or 18.2%, to $161.3 million for the year ended December 31, 2003 compared to $197.1 million for the same period in the prior year. The decrease in bookings for 2003 is due to decreases in orders for all of our business segments.
Backlog at end of period. Backlog decreased $8.8 million to $58.0 million as of December 31, 2003 compared to $66.8 million as of December 31, 2002.
As described in “—Industry Overview and Trends,” the acts and ongoing threats of global terrorism, the current military conflicts, health epidemics and weak global economic conditions are having an adverse impact on our business, resulting in the decrease in bookings during 2003. In addition, we believe that some of our customers have substantially reduced their order lead times which may have adversely affected bookings during the period.
We are not able to predict the continuing impact these events will have on bookings and backlog in future periods. However, given the magnitude of these events, the adverse impact could be material.
33
Restructuring, Asset Impairment and Other Related Charges
The following discussion should be read in conjunction with Note 2 accompanying our financial statements included in this report.
During the three years ended December 31, 2004, we recorded restructuring, asset impairment and other related pre-tax charges, principally relating to our restructuring activities. These charges are summarized below.
|
|
|
Year Ended December 31, |
|
|||||||
|
(In millions) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Nature of charges: |
|
|
|
|
|
|
|
|||
|
Operational Realignment and Facilities Consolidation |
|
$ |
8.2 |
|
$ |
— |
|
$ |
— |
|
|
Seating Product Line and Furniture Manufacturing Facilities Restructuring |
|
— |
|
7.1 |
|
— |
|
|||
|
Asset Realignment Restructuring |
|
— |
|
— |
|
6.9 |
|
|||
|
Seat Manufacturing Facilities Restructuring |
|
— |
|
— |
|
6.3 |
|
|||
|
Goodwill, asset impairment and other charges |
|
0.4 |
|
42.3 |
|
12.0 |
|
|||
|
Total pre-tax charges |
|
$ |
8.6 |
|
$ |
49.4 |
|
$ |
25.2 |
|
|
|
|
|
|
|
|
|
|
|||
|
Business segment recording the charges: |
|
|
|
|
|
|
|
|||
|
Cabin Management |
|
$ |
2.2 |
|
$ |
41.1 |
|
$ |
13.2 |
|
|
Systems Integration |
|
5.7 |
|
0.8 |
|
4.0 |
|
|||
|
Corporate |
|
0.7 |
|
— |
|
— |
|
|||
|
Total charged to continuing operations |
|
8.6 |
|
41.9 |
|
17.2 |
|
|||
|
Discontinued operations (Specialty Avionics) |
|
— |
|
7.5 |
|
8.0 |
|
|||
|
Total pre-tax charges |
|
$ |
8.6 |
|
$ |
49.4 |
|
$ |
25.2 |
|
|
|
|
|
|
|
|
|
|
|||
|
Charged to operations: |
|
|
|
|
|
|
|
|||
|
Cost of sales |
|
$ |
7.0 |
|
$ |
7.3 |
|
$ |
10.7 |
|
|
Selling, general and administrative expenses |
|
1.6 |
|
0.6 |
|
6.5 |
|
|||
|
Impairment of goodwill |
|
— |
|
34.0 |
|
— |
|
|||
|
Total charged to operations |
|
8.6 |
|
41.9 |
|
17.2 |
|
|||
|
Charged to discontinued operations (Specialty Avionics) |
|
— |
|
7.5 |
|
8.0 |
|
|||
|
Total pre-tax charges |
|
$ |
8.6 |
|
$ |
49.4 |
|
$ |
25.2 |
|
|
|
|
|
|
|
|
|
|
|||
|
Components of charges: |
|
|
|
|
|
|
|
|||
|
Cash charges |
|
$ |
5.6 |
|
$ |
4.2 |
|
$ |
5.8 |
|
|
Noncash charges |
|
3.0 |
|
37.7 |
|
11.4 |
|
|||
|
Total charged to continuing operations |
|
8.6 |
|
41.9 |
|
17.2 |
|
|||
|
Charged to discontinued operations |
|
— |
|
7.5 |
|
8.0 |
|
|||
|
Total pre-tax charges |
|
$ |
8.6 |
|
$ |
49.4 |
|
$ |
25.2 |
|
Operational Realignment and Facilities Consolidation
During the second quarter of fiscal 2004, we adopted plans to restructure the operations of our 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 addition, as a result of the Cabin Management
34
realignment and sale of the Specialty Avionics Group, we also decided to relocate our corporate office to Columbus, Ohio to be in closer proximity to our operating companies and customers.
In connection with these actions, we recorded pre-tax charges to operations totaling $8.2 million through December 31, 2004, of which $3.0 million were noncash charges. The charges are comprised of lease termination and related charges, the write-off of excess and obsolete inventory, severance and other compensation costs and relocation costs. During 2004, we paid $2.5 million of costs related to this restructuring in cash and a $2.8 million restructuring reserve remained as of December 31, 2004 for lease termination, severance and other related costs. In addition, we expect to incur an additional $2.7 million in 2005 to complete the plans. Future cash payments, which will extend to 2013 because of lease termination costs, will be funded from existing cash balances and internally generated cash from operations.
Seating Product Line and Furniture Manufacturing Facilities Restructuring
During the second quarter of fiscal 2003, we consolidated our 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, we recorded pre-tax charges to operations totaling $7.1 million during the second quarter of fiscal 2003, of which $3.7 million were noncash charges. The charges are comprised of the write-off of excess and obsolete inventory costs related to the discontinued product offerings, lease termination and related charges, and severance and other compensation costs. These restructuring activities were completed by the end of fiscal 2003.
Asset Realignment Restructuring
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 restructuring program in December 2001 designed to reduce costs and conserve working capital. This program included permanently closing one manufacturing facility and idling a second facility for an indefinite period, curtailing several product development programs and instituting workforce reductions. Due to the ongoing weakness of the business, VIP and head-of-state aircraft market, we decided during the second quarter of fiscal 2002 to permanently close the temporarily idled manufacturing facility. In connection with this decision, we recorded pre-tax charges to operations totaling $6.9 million during the year ended December 31, 2002, of which $3.8 million were noncash charges, for restructuring, asset impairment charges and other related expenses. This restructuring program was completed during the fourth quarter of fiscal 2002 and the remaining lease termination and other related costs were paid during 2003. There are no remaining future cash payment obligations related to this program. This program primarily affected our Cabin Management group.
Seat Manufacturing Facilities Restructuring
In 2002, we announced we would consolidate the production of four seating and related manufacturing facilities into two, resulting in the permanent closure of two facilities. This program was designed to improve manufacturing efficiencies and to further reduce costs and conserve working capital. In connection with these restructuring activities, we recorded pre-tax charges to operations totaling $6.3 million during the year ended December 31, 2002, of which $3.6 million were noncash charges, for restructuring, asset impairment and other related restructuring charges.
The restructuring, asset impairment and other related expenses are comprised of charges for current asset write-downs, the impairment of long-lived assets, severance and lease termination costs and other
35
restructuring-related expenses pertaining to FAA retesting and recertification, moving, transportation and travel costs and shutdown and startup costs. These restructuring activities were substantially completed during the second quarter of fiscal 2002.
Goodwill, Asset Impairment and Other Charges
Goodwill, asset impairment and other related charges include the following:
|
|
|
Year Ended December 31, |
|
|||||||
|
(In millions) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Goodwill impairment charges |
|
$ |
— |
|
$ |
41.5 |
|
$ |
7.7 |
|
|
Inventory impairment charges |
|
— |
|
— |
|
4.3 |
|
|||
|
Adjustments of previous restructuring charges: |
|
|
|
|
|
|
|
|||
|
Product warranty obligations |
|
0.4 |
|
— |
|
— |
|
|||
|
Lease termination costs |
|
— |
|
0.8 |
|
— |
|
|||
|
Total pre-tax charges |
|
$ |
0.4 |
|
$ |
42.3 |
|
$ |
12.0 |
|
Goodwill and Inventory Impairment Charges. During 2003, we recorded $41.5 million of goodwill impairment charges. Impairment charges totaling $34.0 million pertained to goodwill impairment testing pursuant to SFAS No. 142 and were charged to continuing operations. The remaining $7.5 million pertained to the sale of the Specialty Avionics Group and was charged to discontinued operations.
During 2002, we recorded a pre-tax charge of $12.0 million for additional asset impairments. Of this amount, $7.7 million related to our annual goodwill impairment testing pursuant to SFAS No. 142 and $4.3 million related to inventories and was charged to cost of goods sold. Charges totaling $8.0 million pertained to discontinued operations.
Adjustments of Previous Restructuring Charges. The adjustments consist of the following.
Product Warranty Obligations. As a result of the Seat Manufacturing Facilities and Seating Product Line restructurings, the manufacturing of certain seats was moved to a different facility and seat designs were modified to accommodate the new manufacturing environment. These actions resulted in product warranty costs exceeding typical levels during the transition process. As a result, we recorded an additional $0.4 million charge during 2004 to reflect the additional product warranty obligation related to the seats manufactured during these transition periods.
Lease Termination Costs. In 1999 we initiated a plan to reorganize and restructure the operations of two of our 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 these restructuring activities, we provided for lease termination costs expected to be incurred over the remaining term of the existing long-term lease at the facility being vacated. The expected costs were reduced by estimated sublease income which was based on estimated future market rates and anticipated sublease rental periods.
During 2003, the initial sublease was canceled and we entered into a new sublease agreement. Due to the deterioration in market rates since 1999, the terms of the new sublease were less favorable than the initial lease. As a result, we determined that the remaining accrual for lease termination costs was insufficient to cover the net costs expected to be incurred over the remaining lease term. Consequently, an additional $0.8 million was charged to operations during 2003 for these additional costs. A payment obligation totaling $0.5 million remains as of December 31, 2004. The future cash payments will be funded from internally generated cash for operations.
36
Goodwill Impairment Charges
The following discussion should be read in conjunction with Notes 2 and 7 accompanying our financial statements included in this report.
Our results of operations have been affected by the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets,” and goodwill impairment charges. The table below summarizes the changes in goodwill during the three years ended December 31, 2004.
|
|
|
Continuing Operations |
|
Discontinued |
|
|||||||||||
|
(In millions) |
|
Cabin |
|
Systems |
|
Corporate |
|
Total |
|
Specialty |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Balance, December 31, 2001 |
|
178.7 |
|
28.3 |
|
3.9 |
|
210.9 |
|
126.5 |
|
|||||
|
Adoption of SFAS 141 and 142: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Reclassification of intangible assets (a) |
|
3.1 |
|
0.4 |
|
0.1 |
|
3.6 |
|
1.3 |
|
|||||
|
Transitional impairment charge (b) |
|
(8.5 |
) |
(7.9 |
) |
(2.3 |
) |
(18.7 |
) |
(39.4 |
) |
|||||
|
Contingent consideration earned |
|
0.6 |
|
— |
|
— |
|
0.6 |
|
— |
|
|||||
|
Impairment charge (c) |
|
— |
|
— |
|
— |
|
— |
|
(7.7 |
) |
|||||
|
Balance, December 31, 2002 |
|
173.9 |
|
20.8 |
|
1.7 |
|
196.4 |
|
80.7 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Impairment charge (c) |
|
(34.0 |
) |
— |
|
— |
|
(34.0 |
) |
(7.5 |
) |
|||||
|
Sale of Specialty Avionics Group |
|
— |
|
— |
|
— |
|
— |
|
(73.2 |
) |
|||||
|
Balance, December 31, 2003 and 2004 |
|
$ |
139.9 |
|
$ |
20.8 |
|
$ |
1.7 |
|
$ |
162.4 |
|
$ |
— |
|
(a) Reflects the reclassification of intangible assets relating to acquired assembled workforces not meeting the criteria for recognition apart form goodwill in accordance with SFAS No. 142.
(b) Reflects a goodwill impairment charge recorded (before $0.9 million of income tax benefit) during the year ended December 31, 2002 as the cumulative effect of change in accounting principle in accordance with the transitional provisions of adopting SFAS No. 142, “Goodwill and Other Intangible Assets.”
(c) Reflects goodwill impairment charges to operations and reflected as a component of our restructuring, asset impairment and other related charges. See “—Restructuring, Asset Impairment and Other Related Charges” above.
Effective January 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” As required by SFAS No. 142, during 2002 we completed the transitional impairment testing of goodwill recorded as of January 1, 2002. Fair value of each reporting unit was determined using a discounted cash flow approach taking into consideration projections based on the individual characteristics of the reporting units, historical trends, market multiples for comparable businesses and independent appraisals. Our Cabin Management Group consists of three reporting units, our Systems Integration Group consists of two and the Specialty Avionics consists of three. Unallocated goodwill was allocated to the reporting units for impairment testing purposes. The results indicated that the carrying value of goodwill was impaired at one of the reporting units within each of our operating groups. The resulting impairment was primarily attributable to a change in the evaluation criteria for goodwill utilized under previous accounting guidance to the fair value approach stipulated in SFAS No. 142. In accordance with the transitional provision of SFAS No. 142, we recorded a $17.8 million noncash write-down of goodwill (net of $0.9 million income tax benefit) as of January 1, 2002 as a cumulative effect of a change in accounting principle. An additional $39.4 million noncash write-down of goodwill pertained to the Specialty Avionics Group and is included in the loss from discontinued operations.
37
During the fourth quarter of fiscal 2002, we performed our annual impairment testing and recorded an additional $7.7 million impairment charge related to one of the reporting units within the Specialty Avionics Group. The charge was primarily the result of a decrease in fair value caused by using lower cash flow forecasts for the commercial aircraft portion of our business, which experienced further weakness during 2002. This charge is included as a component of income (loss) from discontinued operations.
In March 2003 we entered into a definitive agreement to sell our equity interests in the subsidiaries comprising the Specialty Avionics Group. Based upon the fair value of the group implied in the definitive agreement, we determined that the carrying value of the group’s net assets was not fully recoverable. As a result, we recorded a goodwill impairment charge of $7.5 million to reduce the carrying value to estimated net realizable value.
As a result of the continuing weakness in the business, VIP and head-of-state aircraft market and our decision to down-size a furniture manufacturing facility in the second quarter of fiscal 2003, we determined that we should reevaluate the carrying value of goodwill prior to the annual October 31st testing date. Accordingly, we performed an impairment test of the goodwill associated with the furniture manufacturing reporting unit for recoverability and found the goodwill to be impaired. As a result, we recorded a pre-tax charge to operations of $34.0 million during the three months ended June 30, 2003. The charge was primarily a result of a decrease in fair value caused by using lower cash flow forecasts based on the most recently reduced industry estimates of aircraft deliveries resulting from overall industry weakness. The annual impairment test on October 31, 2003 and 2004 indicate that no additional impairment has occurred.
Liquidity and Capital Resources
Our principal cash needs are for debt service, working capital, capital expenditures and strategic acquisitions, as well as to provide DeCrane Holdings with cash to finance its needs, which consists primarily of the redemption of its preferred stock in 2009. Our principal sources of liquidity are expected to be cash flow from operations, potential capital market transactions and third party borrowings, principally under our first-lien credit facility.
Cash Flows During the Year Ended December 31, 2004
Net cash used by operating activities was $16.9 million for the year ended December 31, 2004 and consisted of $10.8 million of cash used by operations after adding back noncash charges for depreciation, amortization, long-term debt interest accretion, preferred stock dividend accretion, restructuring and asset impairment charges and other noncash items and $7.2 million used for working capital, offset by a $1.1 million increase in other liabilities. Our cash flows from operations continued in 2004 to be insufficient to cover our expenses. The following factors contributed to the $7.2 million working capital increase:
• a $11.1 million increase in inventories commensurate with higher production levels and order backlog; and
• a $3.9 million increase in accounts receivable commensurate with the higher revenues; offset by
• a $7.2 million increase in accounts payable and accrued expenses commensurate with higher inventories and production levels; and
• a $0.6 million net increase in other working capital items.
Net cash used by investing activities was $3.2 million for the year ended and consisted primarily of capital expenditures. We anticipate spending approximately $4.0 to $6.0 million for capital expenditures in 2005.
38
Net cash provided by financing activities was $14.2 million for the year ended December 31, 2004 and consisted of:
• $12.6 million of net borrowings under our revolving line of credit; and
• $5.0 million of proceeds from the issuance of 13.5% senior unsecured promissory notes; offset by
• $1.2 million of other secured long-term debt repayments; and
• $2.1 million of financing costs paid related to our debt and preferred stock restructuring.
Debt and Preferred Stock Restructuring
During the third quarter of 2004, holders of $65.0 million of our 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 $128.8 million aggregate accreted principal value at maturity. The new notes are senior unsecured obligations and are guaranteed by our subsidiaries. Except for the changes in the interest rate and payment and ranking described above, the new notes have terms substantially similar 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. The exchange will help conserve working capital by reducing our cash interest expense by $7.7 million annually through September 2008.
Concurrent with the note exchange, we amended the terms of our 16% senior preferred stock. DeCrane Holdings, our 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 or comply with certain restrictive covenants. Depending upon the future leverage ratio achieved, and provided that certain triggering events have not occurred, dividends accrue at a 0%, 4% or 16% annual rate on the 16% preferred stock and 0%, 3.5% or 14% on the 14% preferred stock. If certain triggering events occur, dividends accrue at the 16% and 14% annual rates. Based upon the leverage ratio achieved as of September 30, 2004, no dividends will accrue on either the 16% or 14% preferred stock from the amendment dates through December 31, 2004.
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.
Promissory Notes
In September 2004, we received the proceeds from the issuance of 13.5% senior unsecured promissory notes in the aggregate principle amount of $5.0 million to DLJ Merchant Banking Partners II, L.P. and affiliated funds, our principal investors (see Note 17 accompanying our financial statements included in this report for additional information on the related party relationship). We used the proceeds to help fund short-term working capital needs. The notes contain covenants identical to those in the new 17% notes. The notes, which were due on March 17, 2005 plus accrued interest, were extended in March 2005 and are now due on March 31, 2006 with interest payable on December 31, 2005 and at maturity. See “—Recent 2005 Developments” below for additional information.
39
Debt Obligations and Capital Resources as of December 31, 2004
As of December 31, 2004, first-lien credit facility borrowings and second-lien term debt totaling $103.4 million are at variable interest rates based on defined margins over the current prime rate or LIBOR. We also had $72.2 million of 15% second-lien term debt, $69.9 million of 17% senior discount notes, $35.0 million of 12% subordinated notes, $7.7 million of other secured indebtedness, and $5.0 million of 13.5% senior unsecured promissory notes outstanding as of December 31, 2004. The total annual maturities of all of our indebtedness outstanding as of December 31, 2004 are as follows: 2005 – $1.3 million; 2006 – $25.7 million; 2007 – $74.4 million; 2008 – $187.9 million; 2009 – $0.4 million; and 2010 and thereafter – $3.5 million. In addition, our 16% mandatorily redeemable preferred stock, which has characteristics of both a liability and equity and is redeemable in 2009, had a $47.3 million mandatorily redemption value as of December 31, 2004.
As of December 31, 2004, we had $36.9 million of working capital and $11.2 million of borrowings available under our $24.0 million revolving line of credit, which expires in March 2006. We were in compliance with all loan agreement covenants during the year ended December 31, 2004.
Recent 2005 Developments
During March 2005, we completed a series of transactions and amendments to existing agreements with DLJ Merchant Banking Partners II, L.P. and affiliated funds, our principal investors. First, the maturity date of the existing $5.0 million of 13.5% senior unsecured promissory notes was extended. The notes are now due on March 31, 2006 and interest, which has accrued since December 12, 2004, is payable on December 31, 2005 and at maturity. Second, we entered into a loan agreement which provides for up to $5.0 million of additional borrowings at rates and with terms identical to the existing 13.5% senior unsecured promissory notes, as amended. We have borrowed $2.5 million pursuant to this agreement and borrowing of the remainder, if needed, will be subject to customary conditions including absence of a material adverse change in our business. And third, we received approximately $5.0 million of proceeds from the sale of 26,425 additional shares of our Senior Redeemable Exchangeable Preferred Stock due 2008. The $7.5 million of cash received from these transactions will be used to fund working capital needs.
Financial Condition and Liquidity
During 2003, the first-lien credit facility was amended twice and $80.0 million of second-lien debt was issued with the proceeds thereof used to repay first-lien indebtedness. These actions, among other things, resulted in the extension of debt maturities and debt covenants being relaxed. In 2004, $65.0 million of 12% senior subordinated notes, with interest payable semi-annually, were exchanged for 17% senior discount notes, which accrete in value, essentially deferring the payment of interest until the notes mature on September 30, 2008. In 2005, we received an aggregate $7.5 million in proceeds from the sale of preferred stock and from the issuance of promissory notes to our principal investors. We also received commitments from those investors that up to $2.5 million of additional promissory notes may be issued, if needed. All of these events provided us with increased liquidity resources. We were in compliance with all debt financial covenants during 2004 and are in compliance through the date of this report.
On March 31, 2006, our first-lien credit facility will expire and any borrowings outstanding on that date will become due and payable ($12.6 million was borrowed as of December 31, 2004). In addition, on that date we are also required to make principal payments in the amount of $4.3 million on our first-lien term debt and repay $7.5 million of promissory notes to our principal investors, unless further extended by the investors. While we believe the noteholders would further extend the notes beyond the current due date if requested, they are under no obligation to do so. We are exploring various alternatives for the restructuring or replacement of the first-lien credit facility as well as additional debt and/or equity transactions that would further improve liquidity. We have not entered into any commitments to do so and cannot be assure you that we will be successful in our efforts.
40
However, we believe expected operating cash flows, together with borrowings under the first-lien credit facility ($11.2 million of which was available as of December 31, 2004, the commitment for which expires in March 2006), the proceeds from the recent $7.5 million investment made by our principal investors and their commitment to provide an additional $2.5 million of loans, will be sufficient to meet operating expenses, working capital requirements, capital expenditures and debt service obligations up to March 31, 2006. However, our ability to comply with debt financial covenants, pay principal or interest and satisfy or refinance our March 31, 2006 debt obligations will depend on our future operating performance as well as competitive, legislative, regulatory, business and other factors beyond its control. Although we cannot be certain, we expect to be in compliance with the financial covenants through the end of the year based on our current operating plan. See “—Forward-Looking Statements and Risk Factors.”
Disclosure of Contractual Obligations and Commitments
The following table summarizes our known contractual obligations to make future cash payments as of December 31, 2004, as well an estimate of the periods during which these payments are expected to be made.
|
|
|
Years Ending December 31, |
|
|||||||||||||
|
(In millions) |
|
Total |
|
2005 |
|
2006 |
|
2008 |
|
2010 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Long-term debt (a): |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
First-lien credit facility (b): |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Term debt |
|
$ |
80.5 |
|
$ |
— |
|
$ |
80.5 |
|
$ |
— |
|
$ |
— |
|
|
Revolving line of credit |
|
12.6 |
|
— |
|
12.6 |
|
— |
|
— |
|
|||||
|
Second-lien term debt (c) |
|
82.5 |
|
— |
|
— |
|
82.5 |
|
— |
|
|||||
|
17% senior discount notes (d) |
|
69.9 |
|
— |
|
— |
|
69.9 |
|
— |
|
|||||
|
13.5% senior unsecured promissory notes (e) |
|
5.0 |
|
— |
|
5.0 |
|
— |
|
— |
|
|||||
|
12% subordinated notes (f) |
|
35.0 |
|
— |
|
— |
|
35.0 |
|
— |
|
|||||
|
Capital lease obligations (g) |
|
3.0 |
|
0.5 |
|
0.8 |
|
0.4 |
|
1.3 |
|
|||||
|
Other indebtedness (g) |
|
4.7 |
|
0.8 |
|
1.2 |
|
0.5 |
|
2.2 |
|
|||||
|
Total long-term debt |
|
293.2 |
|
1.3 |
|
100.1 |
|
188.3 |
|
3.5 |
|
|||||
|
Other long-term liabilities |
|
6.7 |
|
— |
|
1.8 |
|
4.6 |
|
0.3 |
|
|||||
|
Operating lease obligations |
|
12.0 |
|
2.6 |
|
4.0 |
|
1.9 |
|
3.5 |
|
|||||
|
Mandatorily redeemable preferred stock (h) |
|
47.3 |
|
— |
|
— |
|
47.3 |
|
— |
|
|||||
|
Total obligations as of December 31, 2004 |
|
$ |
359.2 |
|
$ |
3.9 |
|
$ |
105.9 |
|
$ |
242.1 |
|
$ |
7.3 |
|
(a) Generally excludes interest payments, which are described in the following notes.
(b) The first-lien credit facility bears interest at variable rates and therefore the amount of future interest payments are uncertain. The debt bears interest based on a margin over, at our option, the prime rate or LIBOR. As of December 31, 2004, the current prime rate was 5.00% and the current LIBOR was 2.01%. The margins applicable to portions of amounts borrowed vary depending on our consolidated debt leverage ratio. Currently, the applicable margins are 4.00% to 4.75% for prime rate borrowings and 5.25% to 6.00% for LIBOR borrowings. The weighted-average interest rate on all first-lien debt was 7.68% as of December 31, 2004.
(c) The second-lien term debt is comprised of $70.0 million of fixed rate debt and $10.0 million of variable rate debt. The fixed rate debt bears interest at 15%; 12% payable quarterly in cash and 3% pay-in-kind or “accreted” interest, payable at maturity. The variable rate debt bears cash interest, at
41
our option, at the prime rate plus 7.5% or LIBOR plus 8.5%, plus 3% pay-in-kind interest payable at maturity. The weighted-average interest rate on all second-lien debt was 14.82% as of December 31, 2004. All of the second-lien debt matures on June 30, 2008, at which time the cash payment obligation will be $91.7 million, including the 3% pay-in-kind interest obligation.
(d) The 17% senior discount notes do not bear cash interest expense but instead accrete in value at a 17% annual rate until maturity on September 30, 2008. The notes will have a $128.8 million aggregate accreted principal value at maturity.
(e) Excludes interest of $0.9 million payable at maturity.
(f) Interest on the 12% subordinated notes is payable semiannually.
(g) Interest is generally payable monthly.
(h) Dividends do not accrue on the preferred stock unless a defined leverage ratio falls below certain specified levels as of each quarterly testing date or if certain triggering events occur. Depending on the future leverage ratio achieved, and provided certain triggering events have not occurred, dividends accrue at a 0%, 4% or 16% annual rate for the succeeding quarter. If certain triggering events occur, such as failure to discharge any mandatory redemption obligations or comply with certain restrictive covenants and the like, dividends accrue at a 16% annual rate. Based on the leverage ratio achieved as of December 31, 2004, no dividends will accrue on the preferred stock during the three months ending March 31, 2005, the next quarterly testing date. Future dividends, if any, are not payable until redemption. The mandatory redemption date is December 31, 2008. Our debt instruments restrict our ability to make payments on our preferred stock.
Disclosure About Off-Balance Sheet Commitments and Indemnities
We are a wholly-owned subsidiary of DeCrane Holdings, whose capital structure also includes mandatorily redeemable preferred stock. Since we are DeCrane Holdings’ only operating subsidiary and source of cash, we may be required to fund DeCrane Holdings’ dividend and redemption obligations in the future, subject to significant limitations contained in our first-lien credit agreement, second-lien term notes and the senior discount notes and subordinated notes indentures.
Dividends do not accrue on the preferred stock unless a defined leverage ratio falls below certain specified levels as of each quarterly testing date or if certain triggering events occur. Depending on the future leverage ratio achieved, and provided certain triggering events have not occurred, dividends accrue at a 0%, 3.5% or 14% annual rate for the succeeding quarter. If certain triggering events occur, such as failure to discharge any mandatory redemption obligations or comply with certain restrictive covenants and the like, dividends accrue at a 14% annual rate. Based on the leverage ratio achieved as of December 31, 2004, no dividends will accrue on the preferred stock during the three months ending March 31, 2005, the next quarterly testing date. Future dividends, if any, are not payable until redemption. The DeCrane Holdings preferred stock has a total redemption value of $77.2 million as of December 31, 2004 and is mandatorily redeemable on September 30, 2009.
During our normal course of business, we have entered into agreements containing indemnities pursuant to which we may be required to make payments in the future. These indemnities are in connection with facility leases and liabilities for specified claims arising from investment banking services our financial advisors provide to us. The duration of these indemnities, commitments and guarantees varies, and in certain cases, is indefinite. Substantially all of these indemnities provide no limitation on the maximum potential future payments we could be obligated to make and is not quantifiable. We have not recorded any liability for these indemnities since no claims have been asserted to date.
42
In connection with the sale of the Specialty Avionics Group, we made indemnities to the buyer with respect to a number of customary, and certain other specific, representations and warranties. Our indemnities with respect to some of these matters are limited in terms of duration with the maximum of potential future payments capped at $14.0 million and our indemnities with respect to specified environmental matters will expire not later than October 2010 and provides for a maximum liability of $5.0 million, while others will have no limitations.
As of December 31, 2004, we also had irrevocable standby letters of credit in the amount of $0.3 million issued and outstanding under our first-lien credit facility.
Critical Accounting Policies and Estimates
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 business, VIP and head-of-state and commercial aircraft industry throughout the world and are being adversely impacted by the acts and ongoing threats of global terrorism, the current military conflicts, health epidemics and weak global economic conditions. Accounts receivable of $26.0 million is reduced by an allowance for uncollectible accounts of $0.6 million as of December 31, 2004.
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 $58.2 million were reduced by an allowance for excess and obsolete inventory of $6.9 million as of December 31, 2004.
Goodwill impairment. On January 1, 2002, we began accounting for goodwill under Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires an impairment-only approach to accounting for goodwill. Because of our history of acquisitions, goodwill constitutes a significant portion of our long-term assets.
43
The SFAS No. 142 goodwill impairment model is a two-step process. First, it requires a comparison of the book value of net assets to the fair value of the reporting units that have goodwill assigned to them. If the fair value is determined to be less than book value, a second step is performed to compute the amount of the impairment. In this process, a fair value for goodwill is estimated, based in part on the fair value of the reporting unit used in the first step, and is compared to its carrying value. The amount by which carrying value exceeds fair value represents the amount of goodwill impairment. SFAS No. 142 requires goodwill to be tested for impairment annually at the same time every year, and when an event occurs or circumstances change such that it is reasonably possible that impairment may exist. We have selected October 31st as our annual testing date.
We estimate the fair values of our reporting units using a discounted cash flow approach, taking into consideration projections based on the individual characteristics of the reporting units, historical trends, market multiples for comparable businesses and independent appraisals. The forecasts of future cash flows are based on our best estimate of future revenues and operating costs, based primarily on existing backlog, expected future bookings based on our estimate of aircraft deliveries and general market conditions. Changes in these forecasts could cause a particular reporting unit to either pass or fail the first step in the goodwill impairment mode, which could significantly change the amount of impairment recorded. Since we began testing goodwill for impairment in 2002, we have recorded impairment charges totaling $107.3 million, which includes $41.5 million recorded during 2003.
Goodwill with an aggregate book value of $162.4 million remains as of December 31, 2004 and will be subject to impairment testing in October 2005, or sooner, if additional events occur or circumstances change such that it is reasonably possible that further impairment may exist.
Valuation of long-lived assets and other intangible assets. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we review long-lived assets 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 and intangible assets, excluding goodwill, amounted to $53.3 million as of December 31, 2004.
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.
44
We have a $34.2 million net deferred tax asset as of December 31, 2004 compared to a $19.5 million net asset as of the end of the prior year. As required by SFAS No. 109, we evaluate each deferred asset 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 we do 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, we believe it was not prudent to rely on future income as the means to support the carrying value of the net asset. As a result of the evaluation, we recorded a $19.5 million valuation allowance as of December 31, 2003 and increased it by $14.7 million during 2004 to $34.2 million as of December 31, 2004, eliminating the net deferred asset as of the end of each period.
If we create additional deferred taxes in future periods while continuing to incur taxable losses, we would need to establish additional valuation allowances in those future periods, which would increase our provision for income taxes through the non-recognition of the benefit of net operating loss carryforwards which are used to reduce future taxable income.
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 19.7% of our revenues and 31.5% of our gross profit during the year ended December 31, 2004 was recognized under the percentage-of-completion method of accounting.
Restructuring of our businesses. As described in “—Restructuring, Asset Impairment and Other Related Charges,” we have recorded charges totaling $83.2 million during the three years ended December 31, 2004 in response to the adverse aerospace industry impact the acts, and ongoing threats, of global terrorism and the current weak 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, asset impairment and other related charges.
Recently Issued Accounting Pronouncements
SFAS No. 151
In November 2004, the Financial Accounting Standards Board issued SFAS No. 151, “Inventory Costs – an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material, and requires that such items be recognized as current-period charges regardless of whether they meet the “so abnormal” criterion outlined in ARB No. 43. SFAS No. 151 also introduces the concept of “normal capacity” and requires the allocation of fixed production overhead to inventory based on the normal capacity of the production facilities. Unallocated overhead must be recognized as an expense in the period incurred. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. While we are still evaluating the impact of this statement, we do not currently believe it will have a material impact on our financial position or results of operations.
45
SFAS No. 153
In December 2004, the Financial Accounting Standards Board issued SFAS No. 153, “Exchanges of Nonmonetary Assets – an amendment of APB Opinion No. 29.” SFAS No. 153 amends the guidance in APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” which is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged, with certain exceptions. SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS No. 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. While we are still evaluating the impact of this statement, we do not currently believe it will have a material impact on our financial position or results of operations.
SFAS No. 123 (Revised 2004)
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004), “Share-based Payment,” which replaces the prior SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123 (revised 2004) (“SFAS No. 123 (2004)”) requires that compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. When SFAS No. 123 was initially issued in 1995, it permitted entities the option, which the Company elected to follow, of continuing to apply the guidance in APB Opinion No. 25, as long as the notes to the financial statements disclosed what net income would have been had the preferable fair-value-based method been used.
We will be required to apply the provisions of SFAS No. 123 (2004) commencing with the fiscal year beginning January 1, 2006. Adoption of SFAS No. 123 (2004) will result in the recording of compensation expense for stock options or other equity-based grants over the vesting period. We believe this statement will not have a material impact on our financial position or results of operations.
Forward-Looking Statements and Risk Factors
Special Note Regarding Forward-Looking Statements
All statements other than statements of historical facts included in this report, including statements about our future performance and liquidity and future industry performance, are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to known and unknown risks, uncertainties and other factors, which are difficult to predict. Some of those risks are specifically described below, but we are also vulnerable to a variety of elements 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;
• acts, and ongoing threats, of global terrorism, military conflicts and health epidemics that affect demand for aircraft and air travel, which in turn affect demand for our products and services;
• our reliance on large projects, where unanticipated needs to incur development costs and acquire inventory or delays in payment could increase our working capital needs;
• inflation, and other general changes in costs of goods and services;
• price and availability of raw materials, component parts and electrical energy;
46
• liability and other claims asserted against us that exceeds our insurance coverage;
• the ability to attract and retain qualified personnel;
• labor disturbances;
• changes in operating strategy, or our acquisition and capital expenditure plans; and
• the risks described below.
Changes in such factors could cause our actual results to differ materially from those expressed or implied in the forward-looking statements contained in this report. 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.
Risk Factors
Substantial Leverage. Our substantial levels of debt could adversely affect our financial health and prevent us from fulfilling our obligations under the debt agreements.
As of December 31, 2004, we had total consolidated indebtedness of approximately $293.2 million and we had $11.2 million of additional revolving line of credit borrowings available under our first-lien credit facility, subject to customary funding conditions. We also had $47.3 million of mandatorily redeemable preferred stock as of December 31, 2004. The first-lien credit facility, second-lien term debt and the indentures under which our senior discount and senior subordinated notes are issued each also permit us to incur a limited amount of additional debt above our revolving line of credit to finance capital expenditures or to refinance existing debt and to secure that debt with some of our assets.
The amount of debt we carry could have important consequences:
• It limits the cash flow available for general corporate purposes and acquisitions. Interest payments on our debt were $26.5 million for the year ended December 31, 2004. Earnings from continuing operations were insufficient to cover fixed charges by $42.4 million for the year ended December 31, 2004 and we used $10.8 million of cash for operations in 2004.
• It may limit our ability to obtain additional debt financing in the future for working capital, capital expenditures or acquisitions.
• It may limit our flexibility in reacting to competitive and other changes in the industry and economic conditions generally.
• It exposes us to increased interest expenses, when interest rates fluctuate, because some of our borrowing may be, and in recent years most of it has been, at variable “floating” rates.
• It may limit our ability to respond to changes in our markets or exploit business opportunities.
Restrictive Covenants. Our operations and those of our subsidiaries are restricted by the terms of our first-lien credit facility, second-lien term debt and the senior discount and senior subordinated notes indentures.
Our first-lien credit facility and the indentures under which our notes are issued limit our flexibility in operating our businesses, including our ability and the ability of our subsidiaries to:
• incur debt;
• issue preferred stock;
47
• repurchase capital stock or subordinated debt;
• enter into transactions with affiliates;
• enter into sale and leaseback transactions;
• create liens or allow them to exist;
• pay dividends or other distributions;
• make investments;
• sell assets; and
• enter into mergers and consolidations.
In addition, our first-lien credit facility requires that we satisfy several tests of financial condition, including minimum levels of EBITDA and interest and fixed charges coverage and maximum permitted levels of leverage and senior debt. Our ability to do so can be affected by events beyond our control, and we cannot be sure that we will meet those tests. Our failure to do so could result in a default under our loan agreements, which would permit the lenders to terminate their commitments and accelerate all debt including the subordinated notes indenture. Although we were in compliance with these covenants as of December 31, 2004, we have required amendments on several occasions in recent years to avoid potential defaults and we may not be able to comply with these tests in the future.
The first-lien credit facility and second-lien term loans are secured by substantially all our material assets. If we default under our debt agreements, the lenders could choose to declare all outstanding amounts immediately due and payable, and seek foreclosure of the assets we granted to them as collateral.
Potential Inability to Service Debt. We will require a significant amount of cash to service our debt and to fund our operations and planned capital expenditures. Our ability to generate cash depends on cash flows from our subsidiaries and many factors beyond our control.
We will be required to repay $27.1 million of debt through 2006 and substantial amounts thereafter. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources and —Disclosure of Contractual Obligations and Commitments” for additional information. Our ability to satisfy our debt obligations and to fund our operations and planned capital expenditures will depend on our ability to generate cash in the future and access to our revolving credit facility, which will terminate in March 2006. During 2004, we used $16.9 million of cash for operations. Our ability to generate cash in the future will, to an extent, be subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
We cannot assure you that we will generate operating cash flow at all, or that our operating cash flow will be sufficient to meet our anticipated future operating and capital expenditures and debt payments as they become due or that future borrowings will be available to us for such purposes. Our ability to generate operating cash flows is principally dependent upon two factors: (i) our ability to increase revenues at a pace faster than the growth in expenses; and (ii) our ability to manage working capital levels. As our revenues and backlog have increased during the last year, our inventory and accounts receivable have increased, which has increased our working capital needs. Because we rely on large projects for a substantial portion of our revenue, unanticipated needs to incur development costs or acquire inventory, or unexpected delays in payments from customers, could increase our working capital needs. In addition, we are dependent upon several large customers for a substantial portion of our revenues, and any difficulty we have in collecting from such customers could also negatively impact our working capital needs. If our cash flow in future periods is lower than we expect, we might be forced to reduce or delay acquisitions or capital expenditures, sell assets and/or reduce operating expenses in order to make all required debt service payments. A reduction in our operating expenses might reduce important efforts, such as selling and marketing programs, management information system upgrades and new product development. Also, it is likely we will need to refinance all or a portion of our debt on or before maturity. At that time, we may not be able to refinance our debt on commercially reasonable terms or at all.
We reported a net loss of $42.5 million for the year ended December 31, 2004, $73.3 million for the year ended December 31, 2003 and $66.0 million for the same period in 2002. The 2004 loss includes $8.6 million of pre-tax restructuring charges we recorded resulting from our restructuring activities. The 2003 loss includes $13.8 million as a result of a cumulative effect of change in accounting principle, a
48
$6.6 million loss attributable to discontinued operations and $49.4 million of pre-tax restructuring and long-lived asset impairment charges we recorded resulting from our restructuring activities. The 2002 loss includes $17.8 million as a result of a cumulative effect of change in accounting principle, a $41.4 million loss attributable to discontinued operations and $17.2 million of pre-tax restructuring and long-lived asset impairment charges we recorded resulting from our restructuring activities. Our restructuring activities were implemented in response to the adverse impact the events described in “—Aerospace Industry Risks” below are having on our business.
Aerospace Industry Risks. The aerospace industry is cyclical and affected by many factors beyond our control, including geo-political and global economic conditions.
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 civil aircraft markets, principally for business, VIP and head-of-state aircraft and, to a lesser extent, commercial and regional aircraft. The September 11, 2001 terrorist attack on the United States, ongoing concerns about global terrorism, the current Middle-Eastern military conflicts, health epidemics and weak global economic conditions all adversely impact the aerospace industry and our business.
The business, VIP and head-of-state aircraft portion of our business experienced weakness throughout 2003 as evidenced by various manufacturers’ temporarily suspension of production at various times throughout the year in response to the weak demand for new aircraft. During 2004 the markets we serve began to reflect the improvement in the general economy as the demand for business, VIP, and head-of-state aircraft began to show increased strength. While we believe this strengthening may continue into 2005 and beyond, our beliefs are based on the assumptions that the global economic recovery continues and that there are no negative geo-political developments affecting our industry and other factors beyond our control.
Factors causing decreases in demand for new business, VIP and head-of-state and commercial aircraft, as well as related component parts (which occur for a variety of reasons, including those described above), would result in additional decreases in demand for our products and services, and, correspondingly, our revenues, thereby adversely affecting our financial condition. In addition, further deterioration or prolonged decreases in demand could result in further restructurings of our business.
Concentration of Key Customers. We receive a significant portion of our revenues from a small group of key customers, and we are vulnerable to changes in their economic condition and purchasing plans.
A significant decline in business from any one of our key customers could have a material adverse effect on our business. Our three largest customers accounted for 49.8% of our consolidated revenues for the year ended December 31, 2004 as follows: Textron (which includes Cessna) – 20.4%; Bombardier – 19.8%; and Boeing – 9.6%. Some of our customers also have the in-house capabilities to perform the services and provide many of the products we offer and, accordingly, could discontinue outsourcing their business to us.
In addition, 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;
49
• 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.
Intangible Asset Impairment. Our total assets include a substantial amount of intangible assets. The write-off of a significant portion of intangible assets would negatively affect our results of operations.
As of December 31, 2004, goodwill and other intangible assets represented approximately 61.4% of our total assets. Intangible assets consist of goodwill and other identifiable intangible assets associated with our acquisitions, representing the excess of cost over the fair value of tangible assets we have acquired. We may not be able to realize the value of these assets. Since our January 1, 2002 adoption of SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill is not amortized but is instead subject to annual testing for impairment. Identifiable intangible assets with finite lives are amortized over their individual useful lives and are also subject to annual impairment testing. Simply stated, if the carrying value of the asset exceeds the estimated undiscounted future cash flows from the operating activities of the related business, impairment is deemed to have occurred. In this event, the asset is written down accordingly. Under current accounting rules, this would result in a charge against income from operations. Since we began testing goodwill for impairment in 2002, we have recorded impairment charges totaling $107.3 million, which includes $41.5 million recorded during 2003.
Any future impairment testing resulting in the write-off of a significant portion of goodwill or identifiable intangible assets will have an adverse impact on our results of operations and total capitalization, the effect of which could be material.
Competition. We operate in a highly competitive industry and compete against a number of companies, some of which have significantly greater financial, technological and marketing resources than we do.
We operate in highly competitive markets within the aerospace industry. Our competitors include business aircraft manufacturers, independent completion and modification companies and other independent service organizations, including some of our customers, many of whom may have significantly greater financial, technological, manufacturing and marketing resources than we do. The niche markets within the aerospace industry that we serve are relatively fragmented, with several competitors offering the same products and services we provide. Due to the global nature of the aerospace industry, competition comes from both U.S. and foreign companies.
We believe our ability to compete depends on high product performance, short lead-time and timely delivery, competitive pricing, superior customer service and support and continued certification under customer quality requirements and assurance programs. There can be no assurance that we will be able to compete successfully with respect to these factors in the future.
Growth Strategy. Our acquisition of other companies may pose certain risks.
We consider and take advantage of selected opportunities to grow by acquiring other businesses whose operations or product lines complement our existing businesses. Our ability to implement this growth strategy will depend on finding suitable acquisition candidates at acceptable prices and obtaining the required financing. Any acquisition we may make in the future could be subject to a number of risks, including:
50
• our ability to integrate the operations and personnel of the acquired company;
• our failure to identify liabilities of the acquired company for which we may be responsible as a successor owner or operator;
• the loss of key personnel in the acquired company; and
• the impact on our financial position, results of operations and cash flows resulting from additional acquisition indebtedness.
Our inability to adequately manage these or other risks could have an adverse effect on our business.
FAA Regulation. The FAA closely regulates many of our operations. If we fail to comply with its many standards, or if those standards change, we could lose installation or certification capabilities, which are important to our business.
The aerospace industry is highly regulated in the United States by the Federal Aviation Administration to ensure that aviation products and services meet stringent safety and performance standards. The FAA prescribes standards and licensing requirements for aircraft components, issues designated alteration station authorizations, and licenses private repair stations. We hold various FAA authorizations and licenses, including a Designated Alteration Station authorization, which gives one of our subsidiaries the authority to certify some aircraft design modifications on behalf of the FAA. Our business depends on our continuing access to, or use of, these FAA authorizations and licenses, and our employment of, or access to, FAA-certified individual engineering professionals.
We cannot assure you that we will continue to have adequate access to those authorizations, licenses and certified professionals, the loss or unavailability of which could adversely affect our operations. The FAA could also change its policies regarding the delegation of inspection and certification responsibilities to private companies, which could adversely affect our business.
Environmental Risks and Regulation. Some of our operations and facilities generate waste or have done so in the past, which may result in unknown future liabilities for environmental remediation.
Environmental laws, particularly the federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), may impose strict, retroactive and joint and several liability upon persons responsible for releases or potential releases of hazardous substances and other parties who have some relationship to a site or a source of waste, such as a current or former owner or operator of real property or a party who arranges to transport wastes to a third-party site. We have sent waste to treatment, storage or disposal facilities that have been designated as National Priority List (more commonly known as Superfund) sites under CERCLA or equivalent listings under state laws. We have received requests for information or allegations of potential responsibility from the U.S. Environmental Protection Agency regarding our use of several of these sites. Given the potentially retroactive nature of environmental liability, it is possible that we will receive additional notices of potential liability relating to current or former activities. We may incur costs in the future for prior waste disposal by us or former owners of our subsidiaries or our facilities. Some of our operations are also located on properties that may be contaminated to varying degrees. We may incur costs in the future to address existing or future contamination. If we incur significant costs in connection with these or other environmental issues, our business and financial condition could be adversely affected.
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Governance and Disclosure Regulations. Evolving regulation of corporate governance and public disclosure may result in additional expenses.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and new SEC regulations are impacting companies such as ours. The application of these new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation may be harmed.
Excess Loss Risks. We could sustain losses in excess of our insurance for liability claims.
Our business exposes us to possible claims for damages resulting from the manufacture, installation and use of our products. Many factors beyond our control could lead to such claims, such as the failure of an aircraft on which our products have been installed, the reliability and skill of the operators of such aircraft and the maintenance performed on such aircraft. We carry aircraft products and grounding liability insurance for this purpose, but we cannot assure you that our insurance coverage will be adequate to cover claims that may arise or that we will be able to renew our coverage in the future at commercially reasonable rates.
Industry and Market Data. We cannot guarantee the accuracy and completeness of the industry and market data and trends we describe in this report and rely upon in preparing our operating forecasts.
The industry and market data we use in this report is based on the good faith estimates of our management, which estimates are based primarily upon internal management information and, to the extent available, independent industry publications and other publicly available information. However, the nature of the aerospace industry and competition in our markets results in limited availability of reliable, independent data. Although we believe that the sources we have used are reliable, we do not guarantee, and have not independently verified, the accuracy and completeness of the information.
Dependence on Key Personnel. We need to retain the services of our key employees.
Our success and growth depends in large part on the skills and efforts of our management team and on our ability to attract and retain qualified personnel experienced in the various operations of our business. The loss of key personnel, including our founder, R. Jack DeCrane, combined with the failure to attract additional qualified personnel for whatever reason, could delay implementation of our business plan or otherwise adversely affect our operations. We do not have employment contracts with our key personnel, other than Mr. DeCrane. We do not carry key man life insurance on any members of our management team.
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
52
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 rate or LIBOR. As of December 31, 2004, the current prime rate was 5.00% and the current LIBOR was 2.01%. Based on $103.4 million of variable-rate debt outstanding as of December 31, 2004, a hypothetical one percent rise in interest rates, to 6.00% for prime rate borrowings and 3.01% for LIBOR borrowings, would reduce our pre-tax earnings by $1.0 million annually.
The estimated fair value of our recently issued 17% fixed-rate long-term senior discount notes approximates its $69.9 million carrying value as of December 31, 2004. 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 17.0% to 15.3%, would increase the fair value of our 17% fixed-rate debt by approximately $4.0 million.
The estimated fair value of our $35.0 million of 12% fixed-rate long-term senior subordinated notes increased $5.2 million, or 32.9%, to approximately $21.0 million as of December 31, 2004 from $15.8 million as of December 31, 2003. Although we cannot be certain, we believe the increase may be a result of the recovery of the business, VIP and head-of-state aircraft market in 2004 and the exchange of $65.0 million of 12% notes for 17% senior discount notes with interest payable at maturity. 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 12% fixed rate notes by approximately $1.3 million.
Foreign Currency Exchange Rate Risk. Our foreign customers are located in various parts of the world, primarily Canada, the Far and Middle East and Western Europe, and we have a subsidiary with manufacturing facilities in Mexico. To limit our foreign currency exchange rate risk related to sales to our customers, orders are almost always valued and sold in U.S. dollars. We have entered into forward foreign exchange contracts in the past, primarily to limit the Specialty Avionics Group’s exposure related to foreign inventory procurement and operating costs. While we have not recently entered into any such contracts, we may do so in the future depending on the volume of non-U.S. dollar denominated transactions and our assessment of future foreign exchange rate trends.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
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ITEM 9A. CONTROLS AND PROCEDURES
The management of DeCrane Aircraft Holdings, Inc. (the “Company”), under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the Company’s “disclosure controls and procedures” (as defined in Exchange Act Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
There was no change in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
In December 2004 DeCrane Aircraft entered into change of control agreements with two executive officers and a severance agreement with one executive officer. See “Item 11. Executive Compensation—Change of Control Agreements and —Severance Agreement” for additional information.
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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 (1) |
|
58 |
|
Director and Chief Executive Officer |
|
Vice Chairman of the Board of Directors and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
Richard J. Kaplan (2) |
|
62 |
|
Director, Senior Vice President, Chief Financial Officer, Secretary and Treasurer |
|
Director, Chief Financial Officer and Assistant Secretary |
|
|
|
|
|
|
|
|
|
James E. Mann |
|
52 |
|
Vice President, Tax and SEC |
|
— |
|
|
|
|
|
|
|
|
|
Robert G. Martin |
|
67 |
|
Senior Vice President and |
|
— |
|
|
|
|
|
|
|
|
|
Donald G. Zerbe |
|
58 |
|
Senior Vice President and |
|
— |
|
|
|
|
|
|
|
|
|
Thompson Dean |
|
46 |
|
Chairman of the Board of Directors |
|
Chairman of the Board of Directors |
|
|
|
|
|
|
|
|
|
Susan C. Schnabel (1) (2) |
|
43 |
|
Director |
|
Director |
|
|
|
|
|
|
|
|
|
Albert E. Suter (1) (2) |
|
69 |
|
Director |
|
Director |
(1) Member of the Compensation Committee; Ms. Schnabel serves as the committee’s chairperson.
(2) Member of the Audit Committee; Ms. Schnabel serves as the committee’s chairperson.
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. In August 2002, Mr. DeCrane was also appointed Chief Executive Officer of DeCrane Holdings. He has served on the board of directors of DeCrane Aircraft and DeCrane Holdings since their inceptions.
Richard J. Kaplan has been the Senior Vice President, Chief Financial Officer, Secretary and Treasurer of DeCrane Aircraft and Assistant Treasurer and Assistant Secretary (principal accounting officer) of DeCrane Holdings since March 1999. In August 2002, Mr. Kaplan was appointed Chief Financial Officer and Assistant Secretary of DeCrane Holdings. 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 of DeCrane Aircraft and DeCrane Holdings in 2000.
55
James E. Mann has been our Vice President, Tax and SEC Compliance since January 2000. During 1999, Mr. Mann was an independent consultant engaged by DeCrane Aircraft to assist with various tax and SEC compliance matters. From 1992 through 1998, Mr. Mann severed in various capacities with DeCrane Aircraft, most recently as Vice President, Corporate Controller. Mr. Mann is expected to resign from DeCrane Aircraft in April 2005 in connection the relocation of our corporate headquarters.
Robert G. Martin has been our Senior Vice President and President of the Systems Integration Group since October 1999. Mr. Martin also served as President of PATS since we acquired it in January 1999 through December 2002 and as President of Aerospace Display Systems from September 1992 until October 1999.
Donald G. Zerbe has been our Senior Vice President and President of the Cabin Management Group since May 2004. Mr. Zerbe also serves as Chairman of Precision Pattern and has done so since we acquired it in April 1999.
Thompson Dean has been a director of DeCrane Aircraft and DeCrane Holdings since 1998. Mr. Dean also served as President of DeCrane Holdings from its inception in 1998 through August 2002. Mr. Dean has also been the Managing Partner of DLJ Merchant Banking, Inc. since November 1995. 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 American Ref-Fuel Company LLC, Merrill Corporation, Mueller Group, Inc., and Visant Holding Corporation.
Susan C. Schnabel has been a director of DeCrane Aircraft and DeCrane Holdings since 1998. Ms. Schnabel has also been a Managing Director of DLJ Merchant Banking, Inc. since January 1998. In November 2000, Credit Suisse First Boston, Inc. acquired Donaldson, Lufkin & Jenrette, Inc. As a result, DLJ Merchant Banking, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation became indirect affiliates of Credit Suisse First Boston, Inc. and Credit Suisse Group. Ms. Schnabel serves as a director of Environmental Systems Products Holdings, Inc. and Rockwood Holdings, Inc.
Albert E. Suter has been a director of DeCrane Aircraft and DeCrane Holdings since May 2002. Mr. Suter is a Senior Advisor and Retired Vice Chairman and Chief Operating Officer of Emerson Electric Co., a manufacturer of electrical, electromechanical and electronic products and systems. Mr. Suter has served Emerson in various capacities since 1989. Mr. Suter serves as a director of Furniture Brands International, Inc. and TK Aluminum, Ltd.
Audit Committee Financial Expert
Ms. Schnabel, Mr. Suter and Mr. Kaplan have been appointed by the board of directors to serve on the audit committees of both DeCrane Aircraft and DeCrane Holdings. The board of directors has carefully considered the definition of “audit committee financial expert” adopted by the United States Securities and Exchange Commission and has determined that Mr. Kaplan is an audit committee financial expert. Mr. Kaplan is not independent under Rule 10a-3.
Code of Ethics
DeCrane Aircraft and DeCrane Holdings has adopted a Code of Ethics applicable to its Chief Executive Officer, Chief Financial Officer and all employees performing accounting functions. A copy of the Code of Ethics is available, without charge, upon written request to the Chief Financial Officer of DeCrane Aircraft at 8425 Pulsar Place, Suite 340, Columbus, Ohio 43240. Since adopting the code, there have been no amendments or waivers of any provision for the benefit of any individual.
56
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 three years ended December 31, 2004. Columns and tables have been omitted, as permitted by Securities and Exchange Commission rules, because there has been no compensation awarded to, earned by or paid to any of the named executive officers required to be reported in the omitted column or table during any of the years in the three year period ended December 31, 2004.
|
|
|
|
|
|
|
All Other Compensation |
|
|||||||
|
|
|
|
|
|
|
|
|
Securities |
|
|
|
|||
|
|
|
|
|
Annual Compensation |
|
Underlying |
|
|
|
|||||
|
Name |
|
Year |
|
Salary |
|
Bonus |
|
Options (1) |
|
Other (2) |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
R. Jack DeCrane (3) |
|
2004 |
|
$ |
371,406 |
|
$ |
175,000 |
|
— |
|
$ |
18,548 |
|
|
Chief Executive Officer and |
|
2003 |
|
355,144 |
|
— |
|
— |
|
13,533 |
|
|||
|
Director |
|
2002 |
|
355,144 |
|
750,000 |
|
— |
|
19,477 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Richard J. Kaplan (4) |
|
2004 |
|
222,389 |
|
85,000 |
|
— |
|
7,938 |
|
|||
|
Senior Vice President, Chief |
|
2003 |
|
212,200 |
|
— |
|
— |
|
4,649 |
|
|||
|
Financial Officer and Director |
|
2002 |
|
212,200 |
|
330,000 |
|
— |
|
9,029 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
James E. Mann (5) |
|
2004 |
|
154,685 |
|
20,000 |
|
— |
|
3,389 |
|
|||
|
Vice President, Tax and SEC |
|
2003 |
|
146,200 |
|
20,000 |
|
— |
|
671 |
|
|||
|
Compliance |
|
2002 |
|
146,200 |
|
33,000 |
|
— |
|
4,583 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Robert G. Martin (6) |
|
2004 |
|
231,933 |
|
85,000 |
|
— |
|
12,823 |
|
|||
|
Senior Vice President and Group |
|
2003 |
|
222,789 |
|
— |
|
— |
|
9,434 |
|
|||
|
President |
|
2002 |
|
222,789 |
|
300,000 |
|
— |
|
6,500 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Jeffrey A. Nerland (7) |
|
2004 |
|
219,989 |
|
— |
|
— |
|
4,163 |
|
|||
|
Former Senior Vice President and |
|
2003 |
|
210,000 |
|
— |
|
— |
|
1,044 |
|
|||
|
Group President |
|
2002 |
|
210,000 |
|
250,000 |
|
— |
|
6,507 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Donald G. Zerbe (8) |
|
2004 |
|
203,846 |
|
85,000 |
|
— |
|
3,670 |
|
|||
|
Senior Vice President and Group |
|
2003 |
|
191,538 |
|
— |
|
— |
|
612 |
|
|||
|
President |
|
2002 |
|
200,000 |
|
74,000 |
|
— |
|
3,487 |
|
|||
(1) Number of shares of common stock of DeCrane Holdings issuable upon exercise of options granted pursuant to our management incentive plan during the applicable fiscal year.
(2) Comprised of life insurance premiums and matching contributions to the Company’s 401(k) Retirement Plan.
(3) Mr. DeCrane also serves as Vice Chairman of the Board of Directors of DeCrane Holdings and was appointed its Chief Executive Officer in August 2002.
(4) Mr. Kaplan also served as Assistant Treasurer and Assistant Secretary (principal accounting officer) of DeCrane Holdings from March 1999 until August 2002 when he was appointed its Chief Financial Officer and Assistant Secretary.
(5) Mr. Mann has served as our Vice President, Tax and SEC Compliance, since January 1, 2000.
57
(6) Mr. Martin served as President of PATS since we acquired it in January 1999 through December 2002. In December 2001, Mr. Martin was also appointed President of our Systems Integration Group.
(7) Mr. Nerland served as a Senior Vice President and President of our Cabin Management Group until May 2004. Salary and other compensation includes $133,900 of severance compensation paid during 2004. No further severance payment obligation remains as of December 31, 2004.
(8) Mr. Zerbe has served as Chairman of Precision Pattern since we acquired it in April 1999. In May 2004, Mr. Zerbe was also appointed Senior Vice President and President of our Cabin Management Group.
Stock Option Grants in Last Fiscal Year
During the fiscal year ended December 31, 2004, 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, 2004. The following table sets forth information about the stock options held by the executive officers named below as of December 31, 2004.
|
Name |
|
Number of |
|
Value of Unexercised |
|
|
|
|
|
|
|
|
|
|
|
R. Jack
DeCrane |
|
36,253 / 73,605 |
|
$ |
— / — |
|
|
Richard J.
Kaplan |
|
9,840 / 19,976 |
|
— / — |
|
|
|
Exercisable at $35.00 per share |
|
972 / 1,974 |
|
— / — |
|
|
|
James E.
Mann |
|
644 / 1,306 |
|
— / — |
|
|
|
Exercisable at $35.00 per share |
|
330 / 670 |
|
— / — |
|
|
|
Robert G.
Martin |
|
5,954 / 12,088 |
|
— / — |
|
|
|
Exercisable at $35.00 per share |
|
990 / 2,010 |
|
— / — |
|
|
|
Donald G.
Zerbe |
|
9,414 / 9,413 |
|
— / — |
|
|
(1) All unexercised options had an exercise price above fair market value as of December 31, 2004. Since the common stock of DeCrane Holdings is privately-held, there is no established public trading market for its shares. The Board of Directors determines the fair value of stock options granted and the fair value of the common stock as of any given period-end date based on the aggregate enterprise value of DeCrane Holdings. Enterprise value is computed based upon a multiple of Adjusted EBITDA, as reflected in our financial statements, and the multiple is based upon comparable data from other publicly-held companies as well as publicly available information on privately-held companies. The Board of Directors did not determine the specific fair value of the common stock as of December 31, 2004, but did conclude that fair value was below $23.00 per share, the lowest exercise price of any options granted.
58
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 and DeCrane Holdings, 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. 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. As a result, the contract has been extended to June 30, 2006. 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 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.
Change of Control Agreements
In December 2004, we entered into change of control agreements with Mr. Kaplan and Mr. Martin. The agreements, which replaced earlier agreements which expired, 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 or terminated by the officer for good reason, DeCrane Aircraft is required to pay such executive a lump sum equal to 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.
Severance Agreement
During 2004 DeCrane Aircraft decided to relocate its corporate office to Columbus, Ohio. Mr. Mann has elected to not relocate and therefore his employment with DeCrane Aircraft will end on
59
April 15, 2005. On December 8, 2004, Mr. Mann entered into a severance agreement with DeCrane Aircraft. Under the terms of the severance agreement, if Mr. Mann elects to remain employed by DeCrane Aircraft through April 15, 2005, he will be entitled to receive severance compensation ranging between $78,000 and $163,000, provided certain other conditions are met.
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 a discretionary Company match of 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 of DeCrane Holdings administers the management incentive plan. The plan provides for the granting of options to purchase 356,257 common shares and expires in 2009. Substantially all of the options awarded become fully vested and exercisable eight years from the date of grant but vesting and exercise can be accelerated based upon future attainment of defined performance criteria. As of December 31, 2004, 37% of the options granted pursuant to the plan 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. Prior to the July 30, 2002 enactment of the Sarbanes-Oxley Act of 2002, a portion of the purchase price was in certain instances, 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. Subsequent to the July 30, 2002 enactment of the Sarbanes-Oxley Act, we have discontinued making new loans to participants as mandated by the Act. Loans originated prior to and outstanding as of the effective date of the Act will be repaid in accordance with their terms, as permitted by the Act.
Upon termination of employment of any purchaser by us without cause, DeCrane Holdings has the right to purchase, and the purchaser has the right to cause DeCrane Holdings to purchase, such purchased stock at its then fair market value or, if we terminate the purchaser with cause or the purchaser terminates employment, the purchase price is the lower of $23.00 per share or its then fair market value.
During the years ended December 31, 2003 and 2004, several DeCrane Aircraft management employees surrendered 152,882 shares. In accordance with the terms of notes evidencing the loans, DeCrane Aircraft canceled the notes.
60
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, which is approved by the compensation committee, is adjusted each year based on the achievement of certain financial measures, including Adjusted EBITDA, as defined, generated by the company and/or the relevant participant’s operating unit. Bonus are not paid until subsequent to the end of the year or period to which they pertain.
Directors
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 “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 as defined in the agreement. Mr. Suter is an independent director. All directors hold office until their successor is designated and qualified.
Directors’ Compensation
The directors of DeCrane Holdings and DeCrane Aircraft generally do not receive annual fees or fees for attending meetings of the Board of Directors or committees thereof. However, Albert E. Suter, an independent director not affiliated with any investor in DeCrane Holdings, receives a director’s fee of $50,000 per year, plus reimbursement for out-of-pocket expenses. 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. Suter under the same terms as the management incentive plan. See “Certain Relationships and Related Transactions—Transactions with Management and Others–Recent Transactions” for additional information. We expect to continue these policies.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Security Ownership of Certain Beneficial Owners and Management
DeCrane Aircraft
As of March 15, 2005, 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 Senior Redeemable Exchangeable Preferred Stock Due 2008, which are owned by seven stockholders.
The following table sets forth the beneficial ownership of DeCrane Aircraft’s voting and non-voting securities as of March 15, 2005 by its principal owners and its executive officers and directors.
|
|
|
Common Stock (2) |
|
Senior Redeemable Exchangeable |
|
||||
|
|
|
Number |
|
|
|
Preferred Stock Due 2008 |
|
||
|
Name of Beneficial Owner (1) |
|
of Shares, |
|
Percentage |
|
Number |
|
Percentage |
|
|
|
|
|
|
|
|
|
|
|
|
|
DeCrane Holdings Co. |
|
100 |
|
100.0 |
% |
— |
|
— |
|
|
c/o DLJ Merchant Banking Partners II, L.P. |
|
|
|
|
|
|
|
|
|
|
Eleven Madison Avenue, New York, NY 10010 |
|
|
|
|
|
|
|
|
|
61
|
|
|
Common Stock (2) |
|
Senior Redeemable Exchangeable |
|
||||
|
|
|
Number |
|
|
|
Preferred Stock Due 2008 |
|
||
|
Name of Beneficial Owner (1) |
|
of Shares, |
|
Percentage |
|
Number |
|
Percentage |
|
|
|
|
|
|
|
|
|
|
|
|
|
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) |
|
— |
|
— |
|
29,000 |
|
11.6 |
% |
|
One Post Office Square, Boston, MA 02109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neon Capital Limited |
|
— |
|
— |
|
21,000 |
|
8.4 |
% |
|
c/o Deutsche Bank (Cayman) Limited |
|
|
|
|
|
|
|
|
|
|
P.O. Box 1984, George Town |
|
|
|
|
|
|
|
|
|
|
Cayman Islands, British West Indies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Albert E. Suter |
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
R. Jack DeCrane |
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard J. Kaplan |
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
James E. Mann |
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert G. Martin |
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Donald G. Zerbe |
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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 March 15, 2005.
(3) Reflects preferred stock held by the following investors affiliated with DLJ Merchant Banking Partners II, L.P.:
• DLJ Investment Partners, L.P.
• DLJ Investment Partners II, L.P.
• DLJIP II Holdings, L.P.
The address of each of the investors is Eleven Madison Avenue, New York, New York 10010.
62
(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 Fund Trust - Putnam High Yield Trust II |
|
• Putnam High Yield Trust |
|
• 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 March 15, 2005, DeCrane Holdings has the following securities issued and outstanding:
• 4,312,690 shares of common stock, which is owned by 39 stockholders; and
• 342,417 shares of non-voting 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 March 15, 2005 by its principal owners and its executive officers and directors.
|
|
|
Common Stock (2) |
|
Senior Redeemable Exchangeable |
|
||||
|
|
|
Number |
|
|
|
Preferred Stock Due 2009 |
|
||
|
Name of Beneficial Owner (1) |
|
of Shares, |
|
Percentage |
|
Number |
|
Percentage |
|
|
|
|
|
|
|
|
|
|
|
|
|
DLJ Merchant Banking Partners II, L.P. and affiliates (3) |
|
4,458,686 |
|
97.4 |
% |
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) |
|
68,349 |
|
1.6 |
% |
— |
|
— |
|
|
One Post Office Square, Boston, MA 02109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neon Capital Limited |
|
29,311 |
|
|
* |
— |
|
— |
|
|
c/o Deutsche Bank (Cayman) Limited |
|
|
|
|
|
|
|
|
|
|
P.O. Box 1984, George Town |
|
|
|
|
|
|
|
|
|
|
Cayman Islands, British West Indies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Albert E. Suter (6) |
|
11,204 |
|
|
* |
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
R. Jack DeCrane (7) |
|
36,253 |
|
|
* |
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard J. Kaplan (8) |
|
11,959 |
|
|
* |
— |
|
— |
|
63
|
|
|
Common Stock (2) |
|
Senior Redeemable Exchangeable |
|
||||
|
|
|
Number |
|
|
|
Preferred Stock Due 2009 |
|
||
|
Name of Beneficial Owner (1) |
|
of Shares, |
|
Percentage |
|
Number |
|
Percentage |
|
|
|
|
|
|
|
|
|
|
|
|
|
James E. Mann (9) |
|
974 |
|
|
* |
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert G. Martin (10) |
|
7,173 |
|
|
* |
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Donald G. Zerbe (11) |
|
10,217 |
|
|
* |
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
All directors and named executive officers as a group (eight persons) |
|
77,780 |
|
1.8 |
% |
— |
|
— |
|
* 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 March 15, 2005.
(3) Reflects 4,192,200 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 Diversified Partners-A, L.P.
• DLJ EAB Partners, L.P.
• DLJ ESC II, L.P.
• DLJ First ESC L.P.
• DLJ Investment Partners, L.P.
• DLJ Investment Partners II, L.P.
• DLJ Merchant Banking Partners II, L.P.
• DLJ Merchant Banking Partners II-A, L.P.
• DLJ Millennium Partners, L.P.
• DLJ Millennium Partners-A, L.P.
• DLJ Offshore Partners II, C.V.
• DLJIP II Holdings, L.P.
• DLJMB Funding II, Inc.
• MBP II Plan Investors
• 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 by the DLJ affiliates separately listed in this table; Mr. Dean and Ms. Schnabel disclaim beneficial ownership of those shares.
(5) Reflects 40,478 shares of common stock, warrants to purchase an additional 27,871 shares of common stock held directly by the following investors related to Putnam Investment Management, Inc.:
|
• Putnam High Yield Trust |
|
• Putnam Variable Trust – Putnam VT High Yield Fund |
The address of each of the investors is One Post Office Square, Boston, MA 02109.
64
(6) Includes 7,500 shares that may be acquired upon the exercise of stock options that are exercisable or will become exercisable prior to 60 days from March 15, 2005.
(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 March 15, 2005.
(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 March 15, 2005.
(9) Includes 974 shares that may be acquired upon the exercise of stock options that are exercisable or will become exercisable prior to 60 days from March 15, 2005.
(10) Includes 6,944 shares that may be acquired upon the exercise of stock options that are exercisable or will become exercisable prior to 60 days from March 15, 2005.
(11) Includes 9,414 shares that may be acquired upon the exercise of stock options that are exercisable or will become exercisable prior to 60 days from March 15, 2005.
Securities Authorized for Issuance Under Equity Compensation Plans
We have a Management Incentive Stock Option Plan under which shares of DeCrane Holdings common stock are authorized for issuance to employees and directors in exchange for their services. In 1999, we also granted DeCrane Holdings incentive common stock options to non-employees in exchange for consulting and advisory services. Our Management Incentive Stock Option Plan and the stock options awarded to non-employees are approved by our security holders. The following table provides aggregate information regarding the shares of DeCrane Holdings common stock that may be issued upon the exercise of the options as of December 31, 2004.
|
Plan Category |
|
Number of |
|
Weighted-Average |
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans approved by security holders: |
|
|
|
|
|
|
|
|
|
Management Incentive Stock Option Plan |
|
223,483 |
|
$ |
23.97 |
|
123,522 |
|
|
Incentive stock options granted to non-employees |
|
44,612 |
|
23.00 |
|
— |
|
|
|
Equity compensation plans not approved by security holders |
|
— |
|
— |
|
— |
|
|
|
Total |
|
268,095 |
|
23.81 |
|
123,522 |
|
|
The provisions of our Management Incentive Stock Option Plan and the terms of the options granted to non-employees are described in Note 16 accompanying our financial statements included in this report.
65
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Others
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, syndication and administration of our first-lien credit facility, second-lien debt and as lenders thereunder. In addition, DeCrane Aircraft is obligated to pay CSFB LLC an annual advisory fee, currently in the amount of $350,000 per year. We may from time to time enter into other investment banking relationships with CSFB LLC or one of its affiliates pursuant to which they will receive customary fees and will be entitled to reimbursement for all reasonable disbursements and out-of-pocket expenses incurred in connection therewith. We expect that any such arrangement will include provisions for the indemnification of CSFB LLC against liabilities, including liabilities under the federal securities laws.
Investors’ Agreement
Investors owing 96.8% 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, initially dated October 6, 2000 and amended through Amendment No. 2 dated July 23, 2004, among DeCrane Holdings Co., DLJ Merchant Banking Partners II, L.P. and affiliated funds and entities, Putnam Investment Management, Inc. and affiliated funds and entities, Neon Capital Limited and all management investors. 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.
66
• 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.
Transactions During 2004 and 2005
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, 2004, 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.
On September 14, 2004, DeCrane Aircraft received the proceeds from the issuance of 13.5% senior unsecured promissory notes in the aggregate principal amount of $5.0 million to DLJ Merchant Banking Partners II, L.P. and affiliated funds and entities. The noteholders earned and were paid $142,000 of interest on December 14, 2004.
In addition, Credit Suisse First Boston or affiliated entities earned fees in connection the following transactions that occurred during the year ended December 31, 2004:
• DeCrane Aircraft restructured $65 million of its 12% senior subordinated notes and both DeCrane Aircraft and DeCrane Holdings amended the terms of their mandatorily redeemable preferred stock. CSFB LLC served as DeCrane Aircraft’s financial advisors for the restructuring and received customary fees and reimbursement of expenses in connection with the transaction.
• Credit Suisse First Boston was paid an annual fee for serving as administrative agent for the first-lien credit facility and second-lien term debt.
• CSFB LLC earned, but was not paid, an annual advisory fee. The amount earned is payable to CSFB LLC as of the date of filing this report.
CSFB and affiliated funds and entities earned an aggregate of $2.1 million in connection with the above transactions, $1.7 million of which has been paid to date.
Donald G Zerbe, a DeCrane Aircraft Senior Vice President and Group President, and his spouse are 50.25% owners of Maize Avenue, Inc., the remaining interest is owned by another member of Mr. Zerbe’s immediate family. Two of DeCrane Aircraft’s subsidiaries lease real property from Maize Avenue. For the year ended December 31, 2004, these subsidiaries paid a total of $865,196 in lease payments to Maize Avenue.
67
The following transactions occurred during the period from January 1, 2005 to the date of this report:
• DeCrane Aircraft entered into a loan agreement with DLJ Merchant Banking Partners II, L.P. and affiliated funds and entities which provides for up to $5.0 million of additional borrowings at rates and with terms identical to the existing 13.5% senior unsecured promissory notes, as amended, issued during 2004. The Company has borrowed $2.5 million pursuant to this agreement.
• DeCrane Aircraft sold 26,425 additional shares of its Senior Redeemable Exchangeable Preferred Stock due 2008 to a DLJ Merchant Banking Partners II, L.P. and affiliated funds and entities for $189.21 per share.
• CSFB LLC earned, but was not paid, $87,500 of its annual advisory fee. The amount earned is payable to CSFB LLC as of the date of filing this report.
Indebtedness of Executive Officers and Directors
Securities and Exchange Commission rules require we disclose indebtedness owed to us by our executive officers and directors that individually exceeded $60,000 at any time during the year ended December 31, 2004.
All indebtedness set forth below results from purchases of DeCrane Holdings common stock in transactions consummated prior to the July 30, 2002 enactment of the Sarbanes-Oxley Act of 2002 and was payable to DeCrane Aircraft. Beginning July 30, 2002, we no longer provide loans to directors or executive officers as mandated by the Act. The indebtedness, plus accrued interest, is collateralized by shares of DeCrane Holdings stock. On December 23, 2004, the executive officer listed in the table surrendered the shares of stock collateralizing the loan. In accordance with the terms of notes evidencing the loan, DeCrane Aircraft canceled the note. See “Item 10. Directors and Executive Officers of the Registrant” for information regarding each individual’s relationship with DeCrane Aircraft and DeCrane Holdings.
The table sets forth the maximum amount of indebtedness during the year ended December 31, 2004. None of the indebtedness remains as of December 31, 2004.
|
Name |
|
Number |
|
|
|
Maximum Indebtedness to DeCrane Aircraft |
|
|||||||
|
of Shares |
|
|
During the Year Ended December 31, 2004 |
|||||||||||
|
Held as |
Interest |
|
|
|
Accrued |
|
|
|||||||
|
Collateral (1) |
Rate (2) |
|
Principal (3) |
|
Interest (4) |
|
Total |
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Donald G. Zerbe |
|
15,217 |
|
5.74 |
% |
$ |
174,996 |
|
$ |
56,730 |
|
$ |
231,726 |
|
(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 23, 2004, the date the stock was surrendered.
68
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Principal Audit and Non-Audit Fees and Services
The aggregate fees billed by PricewaterhouseCoopers LLP (“PWC”), our independent accountants, in fiscal years 2004 and 2003 were as follows:
|
|
|
Year Ended December 31, |
|
||||
|
(In thousands) |
|
2004 |
|
2003 |
|
||
|
|
|
|
|
|
|
||
|
Audit fees (1) |
|
$ |
333 |
|
$ |
383 |
|
|
Audit related fees (2) |
|
18 |
|
358 |
|
||
|
Tax fees (3) |
|
420 |
|
479 |
|
||
|
All other fees (4) |
|
306 |
|
— |
|
||
|
Consolidated totals |
|
$ |
1,077 |
|
$ |
1,220 |
|
(1) Reflects fees for the audits of the annual financial statements included in our Form 10-K’s and the review of the quarterly financial statements included in our Form 10-Q’s.
(2) Includes fees for due diligence related to acquisitions, stand-alone audits of acquisition targets and companies sold, employee benefit plan audits and consents related to SEC filings.
(3) Reflects fees for federal, state, local and foreign tax compliance, advisory (including due diligence related to acquisitions and matters related to companies sold) and planning services.
(4) Reflects advisory services fees for feasibility studies concerning shared accounting services and information technology enhancements.
The Audit Committee has concluded the provision of the non-audit services is compatible with maintaining the independence of PricewaterhouseCoopers LLP.
Pre-approval Policies and Procedures
The audit committee has adopted policies and procedures for pre-approving all non-audit work performed by PWC. Specifically, the policies and procedures prohibit PWC from performing any services for the Company or its subsidiaries without the prior approval of the audit committee, except that the audit committee pre-approved the use of PWC for tax related matters.
All of the services provided by PWC in 2004 were approved by the audit committee pursuant to the approval policies described above. None of such services were approved pursuant to the procedures described in Rule 2-01(c)(7)(i)(C) of Regulation S-X, which waives the general requirement for pre-approval in certain circumstances.
69
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 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 |
|
Filing |
|
Exhibit Description |
|
|
|
|
|
|
|
3.2.1 |
|
(1) |
|
Certificate of Incorporation of DeCrane Aircraft Holdings, Inc. |
|
|
|
|
|
|
|
3.2.1.1 |
|
(12) |
|
Certificate of Amendment of Certificate of Incorporation of DeCrane Aircraft Holdings, Inc. dated October 17, 2001 |
|
|
|
|
|
|
|
3.2.1.2 |
|
(18) |
|
Certificate of Amendment of Certificate of Incorporation of DeCrane Aircraft Holdings, Inc. dated July 23, 2004 |
|
|
|
|
|
|
|
3.2.2 |
|
(17) |
|
Bylaws of DeCrane Aircraft Holdings, Inc., as amended on February 2, 2004 |
|
|
|
|
|
|
|
3.3.1 |
|
(1) |
|
Articles of Incorporation of Audio International, Inc. |
|
|
|
|
|
|
|
3.3.2 |
|
(1) |
|
Amended & Restated Bylaws of Audio International, Inc. |
|
|
|
|
|
|
|
3.4.1 |
|
(1) |
|
Articles of Incorporation of Hollingsead International, Inc. |
|
|
|
|
|
|
|
3.4.2 |
|
(1) |
|
Bylaws of Hollingsead International Inc. |
|
|
|
|
|
|
|
3.5.1 |
|
(17) |
|
Certificate of Formation and Certificate of Merger for PATS Aircraft, LLC |
|
|
|
|
|
|
|
3.5.2 |
|
(17) |
|
Limited Liability Company Operating Agreement for PATS Aircraft, LLC |
|
|
|
|
|
|
|
3.7.1 |
|
(3) |
|
Articles of Incorporation of Precision Pattern, Inc. |
|
|
|
|
|
|
|
3.7.2 |
|
(3) |
|
Bylaws of Precision Pattern, Inc. |
|
|
|
|
|
|
|
3.9.1 |
|
(4) |
|
Articles of Incorporation of PCI Newco, Inc. (formerly PCI Acquisition Co., Inc.) |
|
|
|
|
|
|
|
3.9.1.1 |
|
(13) |
|
Certificate of Amendment of Articles of Incorporation of PCI Acquisition Co., Inc. (changing its name to PCI Newco, Inc.) |
|
|
|
|
|
|
|
3.9.2 |
|
(4) |
|
Bylaws of PCI Newco, Inc. (formerly PCI Acquisition Co., Inc.) |
|
|
|
|
|
|
|
3.13.1 |
|
(6) |
|
Certificate of Formation and Certificate of Amendment of Carl F. Booth & Co., LLC |
|
|
|
|
|
|
|
3.13.2 |
|
(6) |
|
Limited Liability Company Agreement of Carl F. Booth & Co., LLC |
|
|
|
|
|
|
|
3.14.1 |
|
(8) |
|
Restated Articles of Incorporation of ERDA, Inc. |
70
|
Exhibit |
|
Filing |
|
Exhibit Description |
|
|
|
|
|
|
|
3.14.1.1 |
|
(14) |
|
Articles of Amendment amending the Restated Articles of Incorporation of ERDA, Inc. (changing its name to DeCrane Aircraft Seating Company, Inc.) |
|
|
|
|
|
|
|
3.14.2 |
|
(8) |
|
Bylaws of ERDA, Inc. (formerly ERDA Acquisition Co., Inc.) |
|
|
|
|
|
|
|
3.16.1 |
|
(17) |
|
Certificate of Incorporation of DeCrane Cabin Interiors – Canada, Inc. |
|
|
|
|
|
|
|
3.16.2 |
|
(17) |
|
Bylaws of DeCrane Cabin Interiors – Canada, Inc. |
|
|
|
|
|
|
|
4.1 |
|
(1) |
|
Indenture dated October 5, 1998 between DeCrane Aircraft and State Street Bank and Trust Company |
|
|
|
|
|
|
|
4.1.1 |
|
(17) |
|
Supplemental Indenture dated December 11, 2003 among PATS Aircraft, LLC, the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company |
|
|
|
|
|
|
|
4.1.2 |
|
(2) |
|
Supplemental Indenture 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 |
|
|
|
|
|
|
|
4.1.4 |
|
(9) |
|
Supplemental Indenture 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 |
|
|
|
|
|
|
|
4.1.6 |
|
(9) |
|
Supplemental Indenture dated May 11, 2000 among Booth Acquisition, LLC, the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company |
|
|
|
|
|
|
|
4.1.7 |
|
(9) |
|
Supplemental Indenture dated June 30, 2000 among ERDA, Inc., the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company |
|
|
|
|
|
|
|
4.1.9 |
|
(17) |
|
Supplemental Indenture dated January 1, 2004 among DeCrane Cabin Interiors – Canada, 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 |
|
|
|
|
|
|
|
4.5.1 |
|
(18) |
|
DeCrane Aircraft Holdings, Inc. 17% Senior Discount Notes Due 2008 (Note No. 1 dated July 23, 2004) |
|
|
|
|
|
|
|
4.5.1.1 |
|
(18) |
|
DeCrane Aircraft Holdings, Inc. 17% Senior Discount Notes Due 2008 (Note No. 2 dated September 9, 2004) |
|
|
|
|
|
|
|
4.6 |
|
(8) |
|
Certificate of Designations, Preferences and Rights of 16% Senior Redeemable Exchangeable Preferred Stock due 2009 |
|
|
|
|
|
|
|
4.6.1 |
|
(9) |
|
Amendment to the Certificate of Designations, Preferences and Rights of 16% Senior Redeemable Exchangeable Preferred Stock due 2009 dated October 5, 2000 |
|
|
|
|
|
|
|
4.6.2 |
|
(18) |
|
Certificate of Amendment to Certificate of Designations, Preferences and Rights of 16% Senior Redeemable Exchangeable Preferred Stock Due 2009 (now designated as Senior Redeemable Exchangeable Preferred Stock Due 2008) of DeCrane Aircraft Holdings, Inc. dated July 23, 2004 |
71
|
Exhibit |
|
Filing |
|
Exhibit Description |
|
|
|
|
|
|
|
4.7 |
|
(8) |
|
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 |
|
(9) |
|
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 |
|
|
|
|
|
|
|
4.7.2 |
|
(18) |
|
Amendment No. 2 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 July 23, 2004 |
|
|
|
|
|
|
|
4.8 |
|
(18) |
|
Indenture dated July 23, 2004 between DeCrane Aircraft Holdings, Inc. and U.S. Bank National Association for 17% Senior Discount Notes Due 2008 |
|
|
|
|
|
|
|
4.8.1 |
|
(18) |
|
First Supplemental Indenture dated September 9, 2004 between DeCrane Aircraft Holdings, Inc. and U.S. Bank National Association for 17% Senior Discount Notes Due 2008 |
|
|
|
|
|
|
|
10.1 |
|
(8) |
|
Securities Purchase Agreement dated as of June 30, 2000 among DeCrane Aircraft Holdings, Inc., DeCrane Holdings Co. and the purchasers named therein |
|
|
|
|
|
|
|
10.2 |
|
(9) |
|
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 |
|
|
|
|
|
|
|
10.2.1 |
|
(18) |
|
Amendment No. 1 to the 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 dated December 31, 2001 |
|
|
|
|
|
|
|
10.2.2 |
|
(18) |
|
Amendment No. 2 to the Amended and Restated Investors’ Agreement dated as October 6, 2000 by and among DeCrane Holdings Co., DeCrane Aircraft Holdings, Inc. and the stockholders named therein dated July 23, 2004 |
|
|
|
|
|
|
|
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 ** |
|
(10) |
|
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 |
|
(7) |
|
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 |
72
|
Exhibit |
|
Filing |
|
Exhibit Description |
|
|
|
|
|
|
|
10.10.1 |
|
(9) |
|
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 |
|
|
|
|
|
|
|
10.10.2 |
|
(11) |
|
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 |
|
|
|
|
|
|
|
10.10.3 |
|
(13) |
|
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 |
|
|
|
|
|
|
|
10.10.4 |
|
(15) |
|
Third Amendment to the Third Amended and Restated Credit Agreement dated as of March 31, 2003 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 |
|
|
|
|
|
|
|
10.10.5 |
|
(17) |
|
Fourth Amendment to the Third Amended and Restated Credit Agreement dated as of December 10, 2003 among DeCrane Aircraft Holdings, Inc., the lenders listed therein and Credit Suisse First Boston (as successor to DLJ Capital Funding, Inc.), as syndication and administrative agent for the lenders |
|
|
|
|
|
|
|
10.10.6 |
|
(18) |
|
Fifth Amendment to the Third Amended and Restated Credit Agreement dated as of June 9, 2004 among DeCrane Aircraft Holdings, Inc., the lenders listed therein and Credit Suisse First Boston, acting through its Cayman Islands Branch (successor to DLJ Capital Funding, Inc.), as syndication agent and administrative agent for the lenders |
|
|
|
|
|
|
|
10.10.7 |
|
(18) |
|
Sixth Amendment to the Third Amended and Restated Credit Agreement dated as of July 16, 2004 among DeCrane Aircraft Holdings, Inc., the lenders listed therein and Credit Suisse First Boston, acting through its Cayman Islands Branch (successor to DLJ Capital Funding, Inc.), as syndication agent and administrative agent for the lenders |
|
|
|
|
|
|
|
10.11 |
|
(1) |
|
General Terms Agreement between The Boeing Company and PATS, Inc. dated February 17, 1998 |
|
|
|
|
|
|
|
10.11.1 |
|
(1) |
|
Special Business Provisions between The Boeing Company and PATS, Inc. dated February 17, 1998 |
|
|
|
|
|
|
|
10.11.2 |
|
(1) |
|
Letter Agreement between The Boeing Company and DeCrane Aircraft Holdings, Inc. dated January 15, 1999 |
|
|
|
|
|
|
|
10.11.3 |
|
(16) |
|
Addendum 6-5723-03-064 to the Special Business Provisions between The Boeing Company and PATS, Inc. dated April 16, 2003 |
|
|
|
|
|
|
|
10.12 |
|
(17) |
|
Credit Agreement dated as of December 22, 2003 among DeCrane Aircraft Holdings, Inc., the lenders listed therein and Credit Suisse First Boston (acting through its Cayman Islands Branch), as syndication and administrative agent for the lenders |
73
|
Exhibit |
|
Filing |
|
Exhibit Description |
|
|
|
|
|
|
|
10.12.1 |
|
(18) |
|
First Amendment to the Credit Agreement dated as of December 22, 2003 among DeCrane Aircraft Holdings, Inc., the lenders listed therein and Credit Suisse First Boston, acting through its Cayman Islands Branch (successor to DLJ Capital Funding, Inc.), as syndication agent and administrative agent for the lenders dated June 9, 2004 |
|
|
|
|
|
|
|
10.12.2 |
|
(18) |
|
Second Amendment to the Credit Agreement dated as of December 22, 2003 among DeCrane Aircraft Holdings, Inc., the lenders listed therein and Credit Suisse First Boston, acting through its Cayman Islands Branch (successor to DLJ Capital Funding, Inc.), as syndication agent and administrative agent for the lenders dated July 16, 2004 |
|
|
|
|
|
|
|
10.13 |
|
(18) |
|
Exchange Agreement dated as of July 23, 2004, among DeCrane Aircraft Holdings, Inc., the affiliates of DeCrane Aircraft set forth on the signature pages hereto as Guarantors, and certain holders of DeCrane Aircraft’s 12% Senior Subordinated Notes due 2008 (the “Old Notes”) set forth on the signature pages hereto |
|
|
|
|
|
|
|
10.13.1 |
|
(18) |
|
Exchange Agreement dated as of September 9, 2004, among DeCrane Aircraft Holdings, Inc., the affiliates of DeCrane Aircraft set forth on the signature pages hereto as Guarantors, and certain holders of DeCrane Aircraft’s 12% Senior Subordinated Notes due 2008 (the “Old Notes”) set forth on the signature pages hereto |
|
|
|
|
|
|
|
10.14 |
|
(18) |
|
16% Senior Preferred Stock Amendment Agreement dated as of July 23, 2004, among DeCrane Aircraft Holdings, Inc., DeCrane Holdings Co., and the other persons set forth on the signature pages hereto |
|
|
|
|
|
|
|
10.19 ** |
|
(5) |
|
Amended Management Incentive Stock Option Plan |
|
|
|
|
|
|
|
10.20 ** |
|
(5) |
|
Amended Stock Subscription Agreement |
|
|
|
|
|
|
|
10.21 ** |
|
(5) |
|
Amended Incentive Bonus Plan |
|
|
|
|
|
|
|
10.23 ** |
|
* |
|
Form of Change of Control Agreements between DeCrane Aircraft Holdings, Inc. and certain executives dated December 8, 2004 |
|
|
|
|
|
|
|
12.1 |
|
* |
|
Computation of Earnings to Fixed Charges Ratios |
|
|
|
|
|
|
|
21.1 |
|
(18) |
|
List of Subsidiaries of Registrant |
|
|
|
|
|
|
|
31.1 |
|
* |
|
Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
|
31.2 |
|
* |
|
Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
|
32 |
|
* |
|
Chief Executive Officer and Chief Financial Officer Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* 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.
74
(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 8-K dated May 11, 2000 filed with the Commission on May 25, 2000.
(7) Filed as an exhibit to our Form 8-K (Amendment No. 1) dated May 11, 2000 filed with the Commission on June 16, 2000.
(8) Filed as an exhibit to our Form 8-K (Amendment No. 1) dated June 30, 2000 filed with the Commission on August 2, 2000.
(9) Filed as an exhibit to our Form 10-Q dated September 30, 2000 filed with the Commission on November 14, 2000.
(10) Filed as an exhibit to our Form 10-K dated December 31, 2000 filed with the Commission on March 30, 2001.
(11) Filed as an exhibit to our Form 10-Q dated March 31, 2001 filed with the Commission on May 14, 2001.
(12) Filed as an exhibit to our Form 10-Q dated September 30, 2001 filed with the Commission on November 13, 2001.
(13) Filed as an exhibit to our Form 10-K dated December 31, 2001 filed with the Commission on March 27, 2002.
(14) Filed as an exhibit to our Form 10-Q dated March 31, 2002 filed with the Commission on May 13, 2002.
(15) Filed as an exhibit to our Form 10-K dated December 31, 2002 filed with the Commission on April 15, 2003.
(16) Filed as an exhibit to our Registration Statement (Registration No. 333-106381) on Form S-1 (Amendment No. 1) filed with Commission on August 12, 2003.
(17) Filed as an exhibit to our Form 10-K dated December 31, 2003 filed with the Commission on March 29, 2004.
(18) Filed as an exhibit to our Form 10-Q dated September 30, 2004 filed with the Commission on November 12, 2004.
(b) Item 601 Exhibits
Reference is made to the exhibit index listed at Item 15(a)(3) of this report.
(c) Other Financial Statements
There are no financial statements required to be filed by Regulation S-X which are excluded from this report by Rule 14 a-3(b)(1).
75
Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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 31, 2005
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/ RICHARD J. KAPLAN |
|
By: |
/S/ SUSAN C. SCHNABEL |
|
|
Richard J. Kaplan |
|
|
Susan C. Schnabel |
|
|
Director |
|
|
Director |
|
|
|
|
|
|
|
By: |
/S/ ALBERT E. SUTER |
|
|
|
|
|
Albert E. Suter |
|
|
|
|
|
Director |
|
|
|
Date: March 31, 2005
76
Index to Consolidated Financial Statements and Financial Statement Schedule
|
Consolidated Financial Statements |
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheets as of December 31, 2004 and 2003 |
|
|
|
|
|
Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2004, 2003 and 2002: |
|
|
|
|
|
|
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 REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and 2003, and the results of their operations and cash flows for each of the three years in the period ended December 31, 2004 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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.
As discussed in Note 1, in 2004 the Company adopted Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.”
As discussed in Note 1, the Company discontinued the use of program accounting for the costs of products manufactured for delivery under production-type contracts in 2003.
As discussed in Note 1, in 2002 the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”
The Company’s revolving line of credit and $4.3 million of its long-term debt mature on March 31, 2006. Management’s plans to refinance these debt agreements are described in Note 1.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
March 29, 2005
F-2
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
|
|
|
December 31, |
|
||||
|
(In thousands, except share data) |
|
2004 |
|
2003 |
|
||
|
|
|
|
|
|
|
||
|
Assets |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Current assets: |
|
|
|
|
|
||
|
Cash and cash equivalents |
|
$ |
979 |
|
$ |
6,936 |
|
|
Accounts receivable, net |
|
25,367 |
|
21,455 |
|
||
|
Inventories |
|
51,253 |
|
42,981 |
|
||
|
Prepaid expenses and other current assets |
|
944 |
|
1,082 |
|
||
|
Total current assets |
|
78,543 |
|
72,454 |
|
||
|
|
|
|
|
|
|
||
|
Property and equipment, net |
|
27,565 |
|
30,900 |
|
||
|
Goodwill |
|
162,430 |
|
162,430 |
|
||
|
Other assets, principally intangibles, net |
|
31,455 |
|
38,092 |
|
||
|
Total assets |
|
$ |
299,993 |
|
$ |
303,876 |
|
|
|
|
|
|
|
|
||
|
Liabilities, Mandatorily Redeemable Preferred Stock and Stockholder’s Deficit |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Current liabilities: |
|
|
|
|
|
||
|
Current portion of long-term debt |
|
$ |
1,314 |
|
$ |
1,198 |
|
|
Accounts payable |
|
16,666 |
|
15,462 |
|
||
|
Accrued liabilities |
|
23,657 |
|
17,890 |
|
||
|
Total current liabilities |
|
41,637 |
|
34,550 |
|
||
|
|
|
|
|
|
|
||
|
Long-term debt |
|
291,840 |
|
268,208 |
|
||
|
Mandatorily redeemable preferred stock |
|
47,303 |
|
— |
|
||
|
Other long-term liabilities |
|
6,720 |
|
5,464 |
|
||
|
|
|
|
|
|
|
||
|
Commitments and contingencies (Note 14) |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Mandatorily redeemable preferred stock |
|
— |
|
40,835 |
|
||
|
|
|
|
|
|
|
||
|
Stockholder’s deficit: |
|
|
|
|
|
||
|
Common stock, $.01 par value, 1,000 shares authorized and 100 shares issued and outstanding as of December 31, 2004 and 2003 |
|
— |
|
— |
|
||
|
Additional paid-in capital |
|
112,269 |
|
112,987 |
|
||
|
Notes receivable for shares sold |
|
(621 |
) |
(1,268 |
) |
||
|
Accumulated deficit |
|
(199,155 |
) |
(156,632 |
) |
||
|
Accumulated other comprehensive loss |
|
— |
|
(268 |
) |
||
|
Total stockholder’s deficit |
|
(87,507 |
) |
(45,181 |
) |
||
|
Total liabilities, mandatorily redeemable preferred stock and stockholder’s deficit |
|
$ |
299,993 |
|
$ |
303,876 |
|
The accompanying notes are an integral part of the consolidated financial statements.
F-3
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
|
|
|
Year Ended December 31, |
|
|||||||
|
(In thousands) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Revenues |
|
$ |
213,686 |
|
$ |
170,109 |
|
$ |
229,841 |
|
|
Cost of sales |
|
169,160 |
|
131,539 |
|
164,175 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Gross profit |
|
44,526 |
|
38,570 |
|
65,666 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Operating expenses: |
|
|
|
|
|
|
|
|||
|
Selling, general and administrative expenses |
|
29,697 |
|
28,310 |
|
46,572 |
|
|||
|
Research and development expenses |
|
8,003 |
|
10,440 |
|
56 |
|
|||
|
Impairment of goodwill |
|
— |
|
34,000 |
|
— |
|
|||
|
Amortization of intangible assets |
|
3,650 |
|
3,651 |
|
3,540 |
|
|||
|
Total operating expenses |
|
41,350 |
|
76,401 |
|
50,168 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Income (loss) from operations |
|
3,176 |
|
(37,831 |
) |
15,498 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Other expenses: |
|
|
|
|
|
|
|
|||
|
Interest expense |
|
37,146 |
|
26,219 |
|
25,376 |
|
|||
|
Mandatorily redeemable preferred stock dividends |
|
4,011 |
|
— |
|
— |
|
|||
|
Loss on debt extinguishments and preferred stock restructuring |
|
3,898 |
|
1,439 |
|
— |
|
|||
|
Other expenses, net |
|
544 |
|
945 |
|
505 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Loss from continuing operations before income taxes |
|
(42,423 |
) |
(66,434 |
) |
(10,383 |
) |
|||
|
Income tax (provision) benefit |
|
(100 |
) |
13,496 |
|
3,621 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Loss from continuing operations |
|
(42,523 |
) |
(52,938 |
) |
(6,762 |
) |
|||
|
|
|
|
|
|
|
|
|
|||
|
Loss from discontinued operations, net of tax |
|
— |
|
(6,621 |
) |
(41,396 |
) |
|||
|
Cumulative effect of changes in accounting principles |
|
— |
|
(13,764 |
) |
(17,828 |
) |
|||
|
|
|
|
|
|
|
|
|
|||
|
Net loss |
|
(42,523 |
) |
(73,323 |
) |
(65,986 |
) |
|||
|
|
|
|
|
|
|
|
|
|||
|
Accrued preferred stock dividends |
|
— |
|
(6,286 |
) |
(5,373 |
) |
|||
|
Preferred stock redemption value accretion |
|
— |
|
(468 |
) |
(468 |
) |
|||
|
|
|
|
|
|
|
|
|
|||
|
Net loss applicable to common stockholder |
|
$ |
(42,523 |
) |
$ |
(80,077 |
) |
$ |
(71,827 |
) |
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 (Deficit)
|
|
|
|
|
|
|
|
|
Notes |
|
|
|
Accumulated |
|
|
|
||||||
|
|
|
|
|
|
|
Additional |
|
Receivable |
|
|
|
Other |
|
|
|
||||||
|
|
|
Common Stock |
|
Paid-in |
|
For Shares |
|
Accumulated |
|
Comprehensive |
|
|
|
||||||||
|
(In thousands, except share data) |
|
Shares |
|
Amount |
|
Capital |
|
Sold |
|
Deficit |
|
Loss |
|
Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Balance, December 31, 2001 |
|
100 |
|
$ |
— |
|
$ |
122,469 |
|
$ |
(2,668 |
) |
$ |
(17,323 |
) |
$ |
(88 |
) |
$ |
102,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Net loss |
|
— |
|
— |
|
— |
|
— |
|
(65,986 |
) |
— |
|
(65,986 |
) |
||||||
|
Unrealized loss on interest rate swap contract |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(273 |
) |
(273 |
) |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(66,259 |
) |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Capital contribution |
|
— |
|
— |
|
5,000 |
|
— |
|
— |
|
— |
|
5,000 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Return of capital in connection with the repurchase of common stock, net of related note receivable repaid and tax benefit of options exercised |
|
— |
|
— |
|
(554 |
) |
200 |
|
— |
|
— |
|
(354 |
) |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Accrued preferred stock dividends |
|
— |
|
— |
|
(5,373 |
) |
— |
|
— |
|
— |
|
(5,373 |
) |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Preferred stock redemption value accretion |
|
— |
|
— |
|
(468 |
) |
— |
|
— |
|
— |
|
(468 |
) |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Compensatory stock option expense |
|
— |
|
— |
|
138 |
|
— |
|
— |
|
— |
|
138 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Notes receivable interest accrued |
|
— |
|
— |
|
— |
|
(123 |
) |
— |
|
— |
|
(123 |
) |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Balance, December 31, 2002 |
|
100 |
|
— |
|
121,212 |
|
(2,591 |
) |
(83,309 |
) |
(361 |
) |
34,951 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Net loss |
|
— |
|
— |
|
— |
|
— |
|
(73,323 |
) |
— |
|
(73,323 |
) |
||||||
|
Unrealized gain on interest rate swap contract |
|
— |
|
— |
|
— |
|
— |
|
— |
|
93 |
|
93 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(73,230 |
) |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Common stock (collateral) surrendered and cancellation of the related notes |
|
— |
|
— |
|
(1,471 |
) |
1,471 |
|
— |
|
— |
|
— |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Accrued preferred stock dividends |
|
— |
|
— |
|
(6,286 |
) |
— |
|
— |
|
— |
|
(6,286 |
) |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Preferred stock redemption value accretion |
|
— |
|
— |
|
(468 |
) |
— |
|
— |
|
— |
|
(468 |
) |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Notes receivable interest accrued |
|
— |
|
— |
|
— |
|
(148 |
) |
— |
|
— |
|
(148 |
) |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Balance, December 31, 2003 |
|
100 |
|
— |
|
112,987 |
|
(1,268 |
) |
(156,632 |
) |
(268 |
) |
(45,181 |
) |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Net loss |
|
— |
|
— |
|
— |
|
— |
|
(42,523 |
) |
— |
|
(42,523 |
) |
||||||
|
Unrealized gain on interest rate swap contract |
|
— |
|
— |
|
— |
|
— |
|
— |
|
268 |
|
268 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42,255 |
) |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Common stock (collateral) surrendered and cancellation of the related notes |
|
— |
|
— |
|
(722 |
) |
722 |
|
— |
|
— |
|
— |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Capital contribution |
|
— |
|
— |
|
4 |
|
— |
|
— |
|
— |
|
4 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Notes receivable interest accrued |
|
— |
|
— |
|
— |
|
(75 |
) |
— |
|
— |
|
(75 |
) |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Balance, December 31, 2004 |
|
100 |
|
$ |
— |
|
$ |
112,269 |
|
$ |
(621 |
) |
$ |
(199,155 |
) |
$ |
— |
|
$ |
(87,507 |
) |
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
|
|
|
Year Ended December 31, |
|
|||||||
|
(In thousands) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Cash flows from operating activities of continuing operations: |
|
|
|
|
|
|
|
|||
|
Net loss |
|
$ |
(42,523 |
) |
$ |
(73,323 |
) |
$ |
(65,986 |
) |
|
Adjustments to reconcile net loss to net cash provided by (used for) operating activities: |
|
|
|
|
|
|
|
|||
|
Cumulative effect of changes in accounting principles |
|
— |
|
13,764 |
|
17,828 |
|
|||
|
Net loss from discontinued operations |
|
— |
|
6,621 |
|
41,396 |
|
|||
|
Loss on debt extinguishments and preferred stock restructuring |
|
3,898 |
|
1,439 |
|
— |
|
|||
|
Noncash portion of restructuring, asset impairment and other related charges |
|
2,978 |
|
37,664 |
|
11,456 |
|
|||
|
Depreciation and amortization |
|
12,892 |
|
12,589 |
|
13,304 |
|
|||
|
Mandatorily redeemable preferred stock dividends |
|
4,011 |
|
— |
|
— |
|
|||
|
Preferred stock redemption value accretion |
|
264 |
|
— |
|
— |
|
|||
|
Long-term debt interest accretion |
|
7,354 |
|
67 |
|
— |
|
|||
|
Deferred income taxes |
|
— |
|
(11,461 |
) |
690 |
|
|||
|
Other, net |
|
346 |
|
264 |
|
110 |
|
|||
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|||
|
Accounts receivable |
|
(3,912 |
) |
4,899 |
|
14,969 |
|
|||
|
Inventories |
|
(11,128 |
) |
(518 |
) |
(4,792 |
) |
|||
|
Prepaid expenses and other assets |
|
289 |
|
241 |
|
155 |
|
|||
|
Accounts payable |
|
1,204 |
|
2,407 |
|
(1,458 |
) |
|||
|
Accrued liabilities |
|
6,035 |
|
(13,496 |
) |
(16,418 |
) |
|||
|
Income taxes payable |
|
269 |
|
(1,079 |
) |
438 |
|
|||
|
Other long-term liabilities |
|
1,085 |
|
834 |
|
28 |
|
|||
|
Net cash provided by (used for) operating activities |
|
(16,938 |
) |
(19,088 |
) |
11,720 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Cash flows from investing activities of continuing operations: |
|
|
|
|
|
|
|
|||
|
Net cash proceeds from sale of Specialty Avionics Group |
|
— |
|
132,223 |
|
— |
|
|||
|
Proceeds from sale of property and equipment |
|
18 |
|
3,208 |
|
— |
|
|||
|
Capital expenditures |
|
(3,252 |
) |
(4,797 |
) |
(4,356 |
) |
|||
|
Cash paid for acquisitions |
|
— |
|
(606 |
) |
(5,890 |
) |
|||
|
Net cash provided by (used for) investing activities |
|
(3,234 |
) |
130,028 |
|
(10,246 |
) |
|||
|
|
|
|
|
|
|
|
|
|||
|
Cash flows from financing activities of continuing operations: |
|
|
|
|
|
|
|
|||
|
Debt borrowings: |
|
|
|
|
|
|
|
|||
|
Promissory notes |
|
5,000 |
|
— |
|
— |
|
|||
|
Revolving line of credit, net |
|
12,550 |
|
— |
|
— |
|
|||
|
Second-lien term debt |
|
— |
|
80,000 |
|
— |
|
|||
|
Other secured long-term debt |
|
— |
|
— |
|
1,145 |
|
|||
|
Capital contribution |
|
— |
|
— |
|
5,000 |
|
|||
|
Debt repayments: |
|
|
|
|
|
|
|
|||
|
Revolving line of credit, net |
|
— |
|
(6,000 |
) |
(6,000 |
) |
|||
|
First-lien term debt |
|
— |
|
(183,679 |
) |
(11,506 |
) |
|||
|
Other secured long-term debt |
|
(1,198 |
) |
(1,876 |
) |
(2,028 |
) |
|||
|
Deferred financing costs |
|
(2,137 |
) |
(6,614 |
) |
(1,656 |
) |
|||
|
Return of capital in connection with shares repurchased |
|
— |
|
— |
|
(368 |
) |
|||
|
Net cash provided by (used for) financing activities |
|
14,215 |
|
(118,169 |
) |
(15,413 |
) |
|||
|
|
|
|
|
|
|
|
|
|||
|
Net cash provided by discontinued operations |
|
— |
|
1,744 |
|
16,882 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Net increase (decrease) in cash and cash equivalents |
|
(5,957 |
) |
(5,485 |
) |
2,943 |
|
|||
|
Cash and cash equivalents at beginning of period |
|
6,936 |
|
12,421 |
|
9,478 |
|
|||
|
Cash and cash equivalents at end of period |
|
$ |
979 |
|
$ |
6,936 |
|
$ |
12,421 |
|
The accompanying notes are an integral part of the consolidated financial statements.
F-6
|
|
|
Year Ended December 31, |
|
|||||||
|
(In thousands) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Net cash provided by (used for) discontinued operations: |
|
|
|
|
|
|
|
|||
|
Operating activities |
|
$ |
— |
|
$ |
3,310 |
|
$ |
18,598 |
|
|
Investing activities |
|
— |
|
(902 |
) |
(1,073 |
) |
|||
|
Financing activities |
|
— |
|
(649 |
) |
(815 |
) |
|||
|
Net (increase) decrease in cash and cash equivalents |
|
— |
|
(13 |
) |
125 |
|
|||
|
Effect of foreign currency translation on cash |
|
— |
|
(2 |
) |
47 |
|
|||
|
Net cash provided by discontinued operations |
|
$ |
— |
|
$ |
1,744 |
|
$ |
16,882 |
|
|
|
|
|
|
|
|
|
|
|||
|
Paid in cash: |
|
|
|
|
|
|
|
|||
|
Interest |
|
$ |
26,496 |
|
$ |
25,973 |
|
$ |
27,619 |
|
|
Income taxes paid (refunded), net |
|
(169 |
) |
(225 |
) |
(91 |
) |
|||
The accompanying notes are an integral part of the consolidated financial statements.
F-7
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
Description of the Business
DeCrane Aircraft Holdings, Inc. and subsidiaries (the “Company” or “DeCrane Aircraft”) is a provider of products and services to the business, VIP and head-of-state aircraft market within the aerospace industry. The Company’s businesses are organized into two separate operating groups: Cabin Management and Systems Integration. The Company also had a third strategic business, its Specialty Avionics Group, which it sold in 2003 (Note 3). 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. 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.
Financial Condition and Liquidity
During 2003, the first-lien credit facility was amended twice and $80,000,000 of second-lien debt was issued with the proceeds thereof used to repay first-lien indebtedness. These actions, among other things, resulted in the extension of debt maturities and debt covenants being relaxed. In 2004, $65,000,000 of 12% senior subordinated notes, with interest payable semi-annually, were exchanged for 17% senior discount notes, which accrete in value, essentially deferring the payment of interest until the notes mature on September 30, 2008. In 2005, the Company received an aggregate $7,500,000 in proceeds from the sale of preferred stock and from the issuance of promissory notes to its principal investors (Note 20). The Company also received commitments from those investors that up to $2,500,000 of additional promissory notes may be issued, if needed. These events provided the Company with increased liquidity resources.
On March 31, 2006, the Company’s first-lien credit facility will expire and any borrowings outstanding on that date will become due and payable ($12,550,000 was borrowed as of December 31, 2004). In addition, on that date the Company is also required to make principal payments in the amount of $4,266,000 on its first-lien term debt and repay $7,500,000 of promissory notes to its principal investors, unless further extended by the investors. The Company is exploring various alternatives for the restructuring or replacement of its first-lien credit facility as well as additional debt and/or equity transactions that would further improve liquidity. The Company has not entered into any commitments to do so and cannot be assured that it will be successful in its efforts.
F-8
However, management believes expected operating cash flows, together with borrowings under the first-lien credit facility ($11,187,000 of which was available as of December 31, 2004, the commitment for which expires in March 2006) and the proceeds from the recent investment made by the Company’s principal stockholders, will be sufficient to meet operating expenses, working capital requirements, capital expenditures and debt service obligations up to March 31, 2006. However, the Company’s ability to comply with debt financial covenants, pay principal or interest and satisfy or refinance its March 31, 2006 debt obligations will depend on its future operating performance as well as competitive, legislative, regulatory, business and other factors beyond its control.
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 dividends 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 years ended December 31, 2003 and 2002 as if SFAS No. 150 had been in effect as of the beginning of 2002.
|
|
|
Year Ended December 31, |
|
||||||||||
|
|
|
2003 |
|
2002 |
|
||||||||
|
(In thousands) |
|
As Reported |
|
Pro Forma |
|
As Reported |
|
Pro Forma |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Loss from continuing operations |
|
$ |
(52,938 |
) |
$ |
(59,692 |
) |
$ |
(6,762 |
) |
$ |
(12,603 |
) |
|
Net loss |
|
(73,323 |
) |
(80,077 |
) |
(65,986 |
) |
(71,827 |
) |
||||
The pro forma data reflects preferred stock dividends and redemption value accretion totaling $6,754,000 for year ended December 31, 2003 and $5,841,000 for the year ended December 31, 2002 as charges against income during those periods.
Discontinued Use of Program Accounting Commencing January 1, 2003
Inventories are stated at the lower of cost or market. Costs include materials, labor, including direct engineering labor, tooling costs and manufacturing overhead. As described below, measurement of the costs of inventories associated with products manufactured for delivery under production-type contracts in periods prior to January 1, 2003 was made pursuant to the use of program accounting. As such, the cost of inventories included certain deferred program costs, which were principally comprised of engineering costs.
F-9
Because of the changing economic conditions affecting the Company’s markets, demand for the Company’s products has exhibited an increased degree of volatility. The ability to make reliable estimates of future demand for these products is critical to the use of program accounting and the deferral of engineering and production costs. Under program accounting, certain product development costs incurred in connection with specific contracted programs were deferred and charged to cost of sales when revenues from the sale of products related to the program were recorded. In order to improve the reliability of its financial reporting the Company decided to discontinue the use of program accounting which requires it to make long-term estimates of future sales for each program. Therefore, product development costs not specifically reimbursable through contractual terms or recoverable through firm orders are no longer deferred and included in program inventory commencing January 1, 2003.
As a result of the change, program-related product development costs are classified as a component of research and development expenses in the consolidated financial statements commencing January 1, 2003 rather than classified as a component of inventory cost. A charge of $13,764,000 was recorded in 2003 to reflect the cumulative effect of a change in accounting principle. The following table summarizes the results of operations for the year ended December 31, 2002 as if the new accounting policy had been in effect during that year.
|
|
|
Year Ended |
|
||||
|
|
|
December 31, 2002 |
|
||||
|
(In thousands) |
|
As Reported |
|
Pro Forma |
|
||
|
|
|
|
|
|
|
||
|
Loss from continuing operations |
|
$ |
(6,762 |
) |
$ |
(9,738 |
) |
|
Net loss |
|
(65,986 |
) |
(68,962 |
) |
||
SFAS No. 142 Adopted January 1, 2002
Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” and, as required by SFAS No. 142, conducted transitional impairment testing of goodwill recorded as of that date.
Fair value of each reporting unit was determined using a discounted cash flow approach taking into consideration projections based on the individual characteristics of the reporting units, historical trends, market multiples for comparable businesses and independent appraisals. Unallocated goodwill was allocated to the reporting units for impairment testing purposes. The results indicated that the carrying value of goodwill was impaired. The resulting impairment was primarily attributable to a change in the evaluation criteria for goodwill utilized under previous accounting guidance to the fair value approach stipulated in SFAS No. 142. In accordance with the transitional provision of SFAS No. 142, the Company recorded a $17,828,000 noncash write-down of goodwill (net of $878,000 income tax benefit) as of January 1, 2002 as a cumulative effect of a change in accounting principle. An additional $39,322,000 noncash write-down of goodwill pertained to the Specialty Avionics Group and is included in the loss from discontinued operations.
F-10
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, including direct engineering labor, tooling costs and manufacturing overhead. Costs also include product development costs specifically reimbursable through contractual terms or recoverable through firm orders.
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 primarily range from three to ten 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
Identifiable finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from three to fifteen years. Deferred financing costs are amortized using either the straight-line or effective interest method, over the term of the related debt.
Impairment of Goodwill
The Company tests goodwill for impairment in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” on October 31st of each year, or when events or changes in circumstances indicate the carrying amount may not be recoverable. The goodwill impairment model is a two-step process. First, it requires a comparison of the book value of net assets to the fair value of the related reporting units that have goodwill assigned to them. If the fair value is determined to be less than book value, a second step is performed to compute the amount of the impairment. In this process, a fair value for goodwill is estimated, based in part on the fair value of the operations used in the first step, and is compared to its carrying value. The amount by which carrying value exceeds fair value represents the amount of goodwill impairment. As a result of this impairment testing, the Company recorded pre-tax charges in 2003 of $34,000,000 relating to its Cabin Management Group and $7,500,000 relating to the sale of its Specialty Avionics Group. In 2002, the Company recorded pre-tax charges of $7,672,000 relating to its Specialty Avionics Group.
F-11
Impairment of Long-Lived Assets and Other Intangible Assets
The Company reviews long-lived assets held for use and intangible assets, other than goodwill, 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. Long-lived assets deemed held for sale are stated at the lower of cost or fair value. As a result of a restructuring program conducted during 2002, the Company recorded pre-tax charges of $3,931,000 during 2002 to reflect the impairment of long-lived assets; no impairment charges were recorded during 2003 or 2004. The impairment losses are described in Note 2.
Product Warranty Obligations
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 generally one to five years from the earlier of the date of delivery to the customer or six to twelve 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 are charged to cost of sales. Except for warranty costs associated with product lines discontinued in prior years in connection with restructuring programs, warranty costs have been within management’s expectations. Classification between current 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.
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. While there is no established market for the Company’s $35,000,000 of $12% senior subordinated notes, the Company estimates that their fair value was approximately $21,000,000 as of December 31, 2004. The estimated fair value of the Company’s $100,000,000 subordinated debt was approximately $45,000,000 as of December 31, 2003. All other non-derivative financial instruments as of December 31, 2004 and 2003 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.
F-12
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 reasonably assured and there are no remaining significant obligations.
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. Selling, general, and administrative costs are charged to expense as incurred.
Percentage-of-completion is measured using an estimate of either total costs or labor hours incurred to date to total expected costs or labor hours for each contract. This method is used because management considers total costs expended 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 as of December 31, 2004.
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. Commencing January 1, 2003, the Company changed its accounting policy for product development costs incurred for long-term programs and such costs are also reflected as research and development. See “—Change in Accounting Principle” for additional information.
F-13
Stock Option Plan
The Company has one stock-based employee compensation plan, which is more fully described in Note 16. 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.
|
|
|
Year Ended December 31, |
|
|||||||
|
(In thousands) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Net loss, as reported |
|
$ |
(42,523 |
) |
$ |
(73,323 |
) |
$ |
(65,986 |
) |
|
Less total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects |
|
(306 |
) |
(324 |
) |
(376 |
) |
|||
|
Pro forma net loss |
|
$ |
(42,829 |
) |
$ |
(73,647 |
) |
$ |
(66,362 |
) |
The effect of applying SFAS No. 123 may not be representative of the pro forma effect in future years since additional options may be granted during those future years. The assumptions underlying the computations of the fair value of the options are described in Note 16.
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.
Recent Accounting Pronouncements
SFAS No. 151
In November 2004, the Financial Accounting Standards Board issued SFAS No. 151, “Inventory Costs – an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material, and requires that such items be recognized as current-period charges regardless of whether they meet the “so abnormal” criterion outlined in ARB No. 43. SFAS No. 151 also introduces the concept of “normal capacity” and requires the allocation of fixed production overhead to inventory based on the normal capacity of the production facilities. Unallocated overhead must be recognized as an expense in the period incurred. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. While the Company is still evaluating the impact of this statement, it does not currently believe it will have a material impact on its financial position or results of operations.
F-14
SFAS No. 153
In December 2004, the Financial Accounting Standards Board issued SFAS No. 153, “Exchanges of Nonmonetary Assets – an amendment of APB Opinion No. 29.” SFAS No. 153 amends the guidance in APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” which is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged, with certain exceptions. SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS No. 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. While the Company is still evaluating the impact of this statement, it does not currently believe it will have a material impact on its financial position or results of operations.
SFAS No. 123 (Revised 2004)
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004), “Share-based Payment,” which replaces the prior SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123 (revised 2004) (“SFAS No. 123 (2004)”) requires that compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. When SFAS No. 123 was initially issued in 1995, it permitted entities the option, which the Company elected to follow, of continuing to apply the guidance in APB Opinion No. 25, as long as the notes to the financial statements disclosed what net income would have been had the preferable fair-value-based method been used.
The Company will be required to apply the provisions of SFAS No. 123 (2004) commencing with its fiscal year beginning January 1, 2006. Adoption of SFAS No. 123 (2004) will result in the Company recording compensation expense for stock options or other equity-based grants over the vesting period. The Company believes this statement will not have a material impact on its financial position or results of operations.
F-15
Note 2. Restructuring, Asset Impairment and Other Related Charges
During the three years ended December 31, 2004, the Company recorded restructuring, assets impairment and other related charges as follows:
|
|
|
Year Ended December 31, |
|
|||||||
|
(In thousands) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Nature of charges: |
|
|
|
|
|
|
|
|||
|
Operational Realignment and Facilities Consolidation |
|
$ |
8,215 |
|
$ |
— |
|
$ |
— |
|
|
Seating Product Line and Furniture Manufacturing Facilities Restructuring |
|
— |
|
7,132 |
|
— |
|
|||
|
Asset Realignment Restructuring |
|
— |
|
— |
|
6,901 |
|
|||
|
Seat Manufacturing Facilities Restructuring |
|
— |
|
— |
|
6,294 |
|
|||
|
Goodwill, asset impairment and other charges |
|
400 |
|
42,254 |
|
12,048 |
|
|||
|
Total pre-tax charges |
|
$ |
8,615 |
|
$ |
49,386 |
|
$ |
25,243 |
|
|
|
|
|
|
|
|
|
|
|||
|
Business segment recording the charges: |
|
|
|
|
|
|
|
|||
|
Cabin Management |
|
$ |
2,201 |
|
$ |
41,132 |
|
$ |
13,195 |
|
|
Systems Integration |
|
5,726 |
|
754 |
|
4,060 |
|
|||
|
Corporate |
|
688 |
|
— |
|
— |
|
|||
|
Total continuing operations |
|
8,615 |
|
41,886 |
|
17,255 |
|
|||
|
Discontinued operations (Specialty Avionics) |
|
— |
|
7,500 |
|
7,988 |
|
|||
|
Total pre-tax charges |
|
$ |
8,615 |
|
$ |
49,386 |
|
$ |
25,243 |
|
|
|
|
|
|
|
|
|
|
|||
|
Charged to operations: |
|
|
|
|
|
|
|
|||
|
Cost of sales |
|
$ |
7,007 |
|
$ |
7,327 |
|
$ |
10,676 |
|
|
Selling, general and administrative expenses |
|
1,608 |
|
559 |
|
6,579 |
|
|||
|
Impairment of goodwill |
|
— |
|
34,000 |
|
— |
|
|||
|
Discontinued operations (Specialty Avionics) |
|
— |
|
7,500 |
|
7,988 |
|
|||
|
Total pre-tax charges |
|
$ |
8,615 |
|
$ |
49,386 |
|
$ |
25,243 |
|
|
|
|
|
|
|
|
|
|
|||
|
Components of charges: |
|
|
|
|
|
|
|
|||
|
Continuing operations: |
|
|
|
|
|
|
|
|||
|
Cash charges |
|
$ |
5,637 |
|
$ |
4,222 |
|
$ |
5,799 |
|
|
Noncash charges |
|
2,978 |
|
37,664 |
|
11,456 |
|
|||
|
Total continuing operations |
|
8,615 |
|
41,886 |
|
17,255 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Discontinued operations (Specialty Avionics): |
|
|
|
|
|
|
|
|||
|
Noncash charges |
|
— |
|
7,500 |
|
7,988 |
|
|||
|
Cash charges |
|
— |
|
— |
|
— |
|
|||
|
Total discontinued operations |
|
— |
|
7,500 |
|
7,988 |
|
|||
|
Total pre-tax charges |
|
$ |
8,615 |
|
$ |
49,386 |
|
$ |
25,243 |
|
F-16
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 addition, as a result of the Cabin Management realignment and sale of the Specialty Avionics Group, the Company also decided to relocate its corporate office to Columbus, Ohio to be in closer proximity to its operating companies and customers. In connection with these actions, the Company recorded pre-tax charges to operations totaling $8,215,000 through December 31, 2004 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 was reduced by 25 employees, or 2%, from December 31, 2003 levels.
• Relocation Costs. Relocation costs are comprised of moving and related costs incurred in connection with the relocation of the corporate and group headquarters as well as the manufacturing facility consolidation.
• Other Restructuring Charges. Other charges pertain to legal and travel costs.
The Company expects to incur additional restructuring-related expenses of approximately $2,700,000 during 2005 to complete the restructuring plans. These expenses, which are primarily relocation, severance and travel costs, will be expensed as incurred.
F-17
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 |
|
2004 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Lease termination and other related charges |
|
$ |
3,098 |
|
$ |
(102 |
) |
$ |
(595 |
) |
$ |
2,401 |
|
|
Excess inventory write-downs |
|
2,811 |
|
(2,811 |
) |
— |
|
— |
|
||||
|
Severance and other compensation costs |
|
713 |
|
— |
|
(538 |
) |
175 |
|
||||
|
Relocation costs expensed as incurred |
|
672 |
|
|
|
(672 |
) |
— |
|
||||
|
Other restructuring charges |
|
921 |
|
(65 |
) |
(653 |
) |
203 |
|
||||
|
Total |
|
8,215 |
|
$ |
(2,978 |
) |
$ |
(2,458 |
) |
$ |
2,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Other restructuring-related charges to be incurred |
|
2,700 |
|
|
|
|
|
|
|
||||
|
Total expected restructuring charges |
|
$ |
10,915 |
|
|
|
|
|
|
|
|||
Future cash payments, which will extend to 2013 because of lease termination costs, will be funded from existing cash balances and internally generated cash from operations.
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 and Obsolete 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 and obsolete inventory 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.
F-18
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 and obsolete 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.
Asset Realignment Restructuring
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 restructuring program in December 2001 designed to reduce costs and conserve working capital. This program included permanently closing one manufacturing facility and idling a second facility for an indefinite period, curtailing several product development programs and instituting workforce reductions. Due to the ongoing weakness of the business, VIP and head-of-state aircraft market, the Company decided during the second quarter of fiscal 2002 to permanently close the temporarily idled manufacturing facility. This program primarily affected the Company’s Cabin Management.
The restructuring, asset impairment and other related charges are comprised of the following:
• Severance and Other Compensation Costs. Since the September 11th terrorist attack, the Company reduced its total workforce by approximately 500 employees, or 18.5%, as of December 2002, of which approximately 260 employees had separated as of December 31, 2001.
• Lease Termination and Other Related Costs. Lease termination and other related costs are comprised of the net losses incurred under the existing long-term lease agreements for facilities permanently vacated, reduced by the expected sublease income.
• Impairment of Property and Equipment. The decision in 2002 to permanently close the additional manufacturing facility resulted in an additional impairment of property and equipment and, accordingly, these assets were written down to their estimated net realizable value in 2002.
• Excess Inventory Write-Downs. Inventory was written down to net realizable value for quantities on hand exceeding current and forecast order backlog requirements.
• Other Asset Impairment Related Charges. Other restructuring-related charges pertain to provisions for estimated losses on uncompleted long-term contracts aggregating $2,577,000 and other related charges expensed as incurred.
F-19
The components of the restructuring, assets impairment and other related charges are as follows:
|
|
|
Balance at |
|
|
|
|
|
|
|
Balance at |
|
|||||
|
|
|
December 31, |
|
Total |
|
Amounts Incurred |
|
December 31, |
|
|||||||
|
(In thousands) |
|
2001 |
|
Charges |
|
Noncash |
|
Cash |
|
2002 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Year ended December 31, 2002: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Severance and other compensation costs |
|
$ |
1,185 |
|
$ |
— |
|
$ |
— |
|
$ |
(1,185 |
) |
$ |
— |
|
|
Lease termination and other related costs |
|
424 |
|
— |
|
— |
|
(334 |
) |
90 |
|
|||||
|
Impairment of property and equipment |
|
— |
|
2,557 |
|
(2,557 |
) |
— |
|
— |
|
|||||
|
Excess inventory write-downs |
|
— |
|
1,265 |
|
(1,265 |
) |
— |
|
— |
|
|||||
|
Total |
|
$ |
1,609 |
|
3,822 |
|
$ |
(3,822 |
) |
$ |
(1,519 |
) |
$ |
90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Other restructuring-related charges |
|
|
|
3,079 |
|
|
|
|
|
|
|
|||||
|
Total pre-tax charges |
|
|
|
$ |
6,901 |
|
|
|
|
|
|
|
||||
This restructuring program was completed during the fourth quarter of fiscal 2002 and the remaining $90,000 of lease termination and other related costs were paid during 2003. There are no future cash payment obligations remaining related to this program.
Seat Manufacturing Facilities Restructuring
During the first quarter of fiscal 2002, the Company announced it would consolidate the production of four seating and related manufacturing facilities into two, resulting in the permanent closure of two facilities. This program was designed to improve manufacturing efficiencies and to further reduce costs and conserve working capital. In connection with this restructuring program, the Company recorded pre-tax charges to operations totaling $6,294,000 during 2002 for restructuring, asset impairment and other related charges. The charges are comprised of the following:
• Inventory and Accounts Receivable Write-Downs. In connection with the consolidation of all production, the Company will discontinue manufacturing certain products, principally those which overlap. Inventory and certain receivables related to the discontinued products were written down to net realizable value.
• Impairment of Long-Lived Assets. The restructuring program resulted in the impairment of property and equipment and, accordingly, these assets were written down to their net realizable value.
• Severance and Other Compensation Costs. Approximately 115 employees were terminated in connection with the permanent closure of the manufacturing facilities.
• Lease Termination and Other Related Costs. Lease termination and other related costs are comprised of the net losses expected to be incurred under existing long-term lease agreements for the facilities being 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-20
• Other Asset Impairment Related Expenses. Other restructuring-related expenses pertain to FAA retesting and recertification of products manufactured at a different facility, moving, transportation and travel costs and shutdown / startup costs. Such costs were charged to expense as incurred.
The components of the restructuring, assets impairment and other related charges are as follows:
|
|
|
|
|
|
|
|
|
Balance at |
|
||||
|
|
|
Total |
|
Amounts Incurred |
|
December 31, |
|
||||||
|
(In thousands) |
|
Charges |
|
Noncash |
|
Cash |
|
2002 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Restructuring and assets impairment charges: |
|
|
|
|
|
|
|
|
|
||||
|
Inventory and accounts receivable write-downs |
|
$ |
2,200 |
|
$ |
(2,200 |
) |
$ |
— |
|
$ |
— |
|
|
Impairment of property and equipment |
|
1,374 |
|
(1,374 |
) |
— |
|
— |
|
||||
|
Severance and other compensation costs |
|
450 |
|
— |
|
(450 |
) |
— |
|
||||
|
Lease termination and other related costs |
|
300 |
|
— |
|
(236 |
) |
64 |
|
||||
|
Total restructuring and asset impairment charges |
|
4,324 |
|
$ |
(3,574 |
) |
$ |
(686 |
) |
$ |
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Other restructuring-related expenses |
|
1,970 |
|
|
|
|
|
|
|
||||
|
Total pre-tax charges |
|
$ |
6,294 |
|
|
|
|
|
|
|
|||
This restructuring program was completed during the second quarter of fiscal 2002 and the remaining $64,000 of lease termination and other related costs were paid during 2003. There are no remaining future cash payment obligations related to this program.
Goodwill, Asset Impairment and Other Charges
Goodwill, asset impairment and other related charges include the following:
|
|
|
Year Ended December 31, |
|
|||||||
|
(In thousands) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Goodwill impairment charges |
|
$ |
— |
|
$ |
41,500 |
|
$ |
7,672 |
|
|
Inventory impairment charges |
|
— |
|
— |
|
4,376 |
|
|||
|
Adjustments of previous restructuring charges: |
|
|
|
|
|
|
|
|||
|
Product warranty obligations |
|
400 |
|
— |
|
— |
|
|||
|
Lease termination costs |
|
— |
|
754 |
|
— |
|
|||
|
Total pre-tax charges |
|
$ |
400 |
|
$ |
42,254 |
|
$ |
12,048 |
|
Goodwill and Inventory Impairment Charges
During the year ended December 31, 2003, the Company recorded $41,500,000 of goodwill impairment charges. Impairment charges totaling $34,000,000 pertained to goodwill impairment testing pursuant to SFAS No. 142 and were charged to continuing operations. The remaining $7,500,000 pertained to the sale of the Specialty Avionics Group and was charged to discontinued operations (Notes 3 and 7).
F-21
In the fourth quarter of fiscal 2002 the Company recorded a pre-tax charge of $12,048,000 for additional asset impairments. Of this amount, $7,672,000 related to the Company’s annual goodwill impairment testing pursuant to SFAS No. 142 and $4,376,000 related to inventories and was charged to cost of goods sold. Charges totaling $7,988,000 pertained to discontinued operations.
Adjustments of Previous Restructuring Charges
Product Warranty Obligations. As a result of the Seat Manufacturing Facilities and Seating Product Line restructurings, the manufacturing of certain seats was moved to a different facility and seat designs were modified to accommodate the new manufacturing environment. These actions resulted in product warranty costs exceeding typical levels during the transition process. As a result, the Company recorded an additional $400,000 charge during 2004 to reflect the additional product warranty obligation related to the seats manufactured during these transition periods.
Lease Termination Costs. In 1999 the Company initiated 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 these restructuring activities, the Company provided for lease termination costs expected to be incurred over the remaining term of the existing long-term lease at the facility being vacated. The expected costs were reduced by estimated sublease income which was based on estimated future market rates and anticipated sublease rental periods.
During 2003, the initial sublease was canceled and the Company entered into a new sublease agreement. Due to the deterioration in market rates since 1999, the terms of the new sublease were less favorable than the initial lease. As a result, the Company determined that the remaining accrual for lease termination costs was insufficient to cover the net costs expected to be incurred over the remaining lease term. Consequently, an additional $754,000 was charged to operations during 2003 for these additional costs. A payment obligation totaling $459,000 remains as of December 31, 2004. The future cash payments will be funded from internally generated cash for operations.
F-22
Note 3. Disposition of Specialty Avionics Group
During the fourth quarter of fiscal 2002 the Company assessed its long-term business strategies in light of condition of the aerospace industry at the time. The Company believes that as the aerospace industry recovers, the demand for its Cabin Management and Systems Integration Groups’ products and services for business, VIP and head-of-state aircraft will return to historical levels and, accordingly, the Company decided to focus its resources in these market segments. To accomplish this objective, the Company embarked on a plan to sell its Specialty Avionics Group, which is highly dependent on the commercial airline industry.
On March 14, 2003, the Company entered into a definitive agreement to sell its equity interests in the subsidiaries comprising its Specialty Avionics Group to Wings Holdings, Inc., an affiliate of Odyssey Investment Partners, LLC, for $140,000,000 in cash. The sale was consummated on May 23, 2003. Proceeds from the sale of $130,723,000 were used to repay first-lien credit facility borrowings (Note 10). The sale of the Specialty Avionics Group is not expected to affect the operations of the Company’s remaining operating groups.
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 required by SFAS No. 142, the Company recorded a goodwill impairment charge of $7,500,000 in 2003 to reduce the carrying value to the estimated net realizable value established by the definitive agreement. The Company recorded a modest $72,000 loss 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. The financial statements for prior periods have been reclassified to segregate the group’s assets and liabilities, results of operations and cash flows for all periods.
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 of the Specialty Avionics Group exclude the allocation of general corporate overhead.
F-23
The following tables summarize the results operations of the Specialty Avionics Group.
|
|
|
Year Ended December 31, |
|
||||
|
(In thousands) |
|
2003 (1) |
|
2002 |
|
||
|
|
|
|
|
|
|
||
|
Results of Operations: |
|
|
|
|
|
||
|
Revenues |
|
$ |
36,595 |
|
$ |
95,789 |
|
|
|
|
|
|
|
|
||
|
Operating expenses: |
|
|
|
|
|
||
|
Costs and expenses |
|
30,128 |
|
75,031 |
|
||
|
Impairment of goodwill |
|
7,500 |
|
7,672 |
|
||
|
Amortization of goodwill and other intangible assets |
|
878 |
|
2,228 |
|
||
|
Total operating expenses |
|
38,506 |
|
84,931 |
|
||
|
|
|
|
|
|
|
||
|
Income (loss) from operations |
|
(1,911 |
) |
10,858 |
|
||
|
|
|
|
|
|
|
||
|
Other expenses: |
|
|
|
|
|
||
|
Interest expense: |
|
|
|
|
|
||
|
Debt required to be repaid with proceeds from sale |
|
3,297 |
|
7,720 |
|
||
|
Debt obligations assumed by the buyer |
|
270 |
|
798 |
|
||
|
Other expenses, net |
|
153 |
|
439 |
|
||
|
|
|
|
|
|
|
||
|
Pre-tax income (loss) |
|
(5,631 |
) |
1,901 |
|
||
|
Provision for income taxes |
|
(918 |
) |
(3,975 |
) |
||
|
|
|
|
|
|
|
||
|
Loss before change in accounting principle |
|
(6,549 |
) |
(2,074 |
) |
||
|
Cumulative effect of change in accounting principle |
|
— |
|
(39,322 |
) |
||
|
Loss from operations |
|
(6,549 |
) |
(41,396 |
) |
||
|
Loss on sale, net of tax |
|
(72 |
) |
— |
|
||
|
|
|
|
|
|
|
||
|
Net loss from discontinued operations |
|
$ |
(6,621 |
) |
$ |
(41,396 |
) |
(1) Reflects the results of operations through May 23, 2003, the date of sale.
F-24
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 business, VIP and head-of-state 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 allowances for doubtful accounts and generally, such losses have been within management’s expectations.
Accounts receivable are net of an allowance for doubtful accounts of $608,000 as of December 31, 2004 and $1,268,000 as of December 31, 2003.
Note 5. Inventories
Inventories are comprised of the following as of December 31, 2004 and 2003:
|
|
|
December 31, |
|
||||
|
(In thousands) |
|
2004 |
|
2003 |
|
||
|
|
|
|
|
|
|
||
|
Raw materials |
|
$ |
29,421 |
|
$ |
30,414 |
|
|
Work-in-process |
|
18,345 |
|
6,817 |
|
||
|
Finished goods |
|
1,461 |
|
1,693 |
|
||
|
Costs and estimated earnings in excess of billings on uncompleted contracts |
|
2,026 |
|
4,057 |
|
||
|
Total inventories |
|
$ |
51,253 |
|
$ |
42,981 |
|
Total costs and estimated earnings on all uncompleted contracts as of December 31, 2004 and 2003 are comprised of the following:
|
|
|
December 31, |
|
||||
|
(In thousands) |
|
2004 |
|
2003 |
|
||
|
|
|
|
|
|
|
||
|
Costs incurred on uncompleted contracts |
|
$ |
20,083 |
|
$ |
71,824 |
|
|
Estimated earnings recognized |
|
12,015 |
|
77,782 |
|
||
|
Total costs and estimated earnings |
|
32,098 |
|
149,606 |
|
||
|
Less billings to date |
|
(34,263 |
) |
(145,661 |
) |
||
|
Net |
|
$ |
(2,165 |
) |
$ |
3,945 |
|
|
|
|
|
|
|
|
||
|
Balance sheet classification: |
|
|
|
|
|
||
|
Asset – Costs and estimated earnings in excess of billings |
|
$ |
2,026 |
|
$ |
4,057 |
|
|
Liability – Billings in excess of costs and estimated earnings (Note 9) |
|
(4,191 |
) |
(112 |
) |
||
|
Net |
|
$ |
(2,165 |
) |
$ |
3,945 |
|
F-25
Note 6. Property and Equipment
Property and equipment includes the following as of December 31, 2004 and 2003:
|
|
|
December 31, |
|
||||
|
(In thousands) |
|
2004 |
|
2003 |
|
||
|
|
|
|
|
|
|
||
|
Land, buildings and leasehold improvements |
|
$ |
22,610 |
|
$ |
22,251 |
|
|
Machinery and equipment |
|
16,781 |
|
16,430 |
|
||
|
Computer equipment and software, furniture and fixtures |
|
16,195 |
|
15,700 |
|
||
|
Tooling |
|
1,023 |
|
1,001 |
|
||
|
Total cost |
|
56,609 |
|
55,382 |
|
||
|
Accumulated depreciation and amortization |
|
(29,044 |
) |
(24,482 |
) |
||
|
Net property and equipment |
|
$ |
27,565 |
|
$ |
30,900 |
|
Property and equipment under capital leases included above consists of the following as of December 31, 2004 and 2003:
|
|
|
December 31, |
|
||||
|
(In thousands) |
|
2004 |
|
2003 |
|
||
|
|
|
|
|
|
|
||
|
Land, buildings and leasehold improvements |
|
$ |
4,785 |
|
$ |
4,785 |
|
|
Machinery and equipment |
|
385 |
|
385 |
|
||
|
Computer equipment and software, furniture and fixtures |
|
1,793 |
|
1,756 |
|
||
|
Total cost |
|
6,963 |
|
6,926 |
|
||
|
Accumulated depreciation and amortization |
|
(3,536 |
) |
(3,065 |
) |
||
|
Net property and equipment |
|
$ |
3,427 |
|
$ |
3,861 |
|
Depreciation of property and equipment under capital leases is included in depreciation expense in the consolidated financial statements.
Note 7. Goodwill
The table below summarizes the changes in the carrying amount of goodwill, by business segment (Note 18), during the two years ended December 31, 2004.
|
|
|
Continuing Operations |
|
Discontinued |
|
|||||||||||
|
|
|
Cabin |
|
Systems |
|
|
|
|
|
Specialty |
|
|||||
|
|
|
Management |
|
Integration |
|
|
|
|
|
Avionics |
|
|||||
|
(In thousands) |
|
Group |
|
Group |
|
Corporate |
|
Total |
|
Group |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Balance, December 31, 2002 |
|
$ |
173,934 |
|
$ |
20,782 |
|
$ |
1,714 |
|
$ |
196,430 |
|
$ |
80,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Impairment charge |
|
(34,000 |
) |
— |
|
— |
|
(34,000 |
) |
(7,500 |
) |
|||||
|
Sale of Specialty Avionics Group |
|
— |
|
— |
|
— |
|
— |
|
(73,222 |
) |
|||||
|
Balance, December 31, 2003 and 2004 |
|
$ |
139,934 |
|
$ |
20,782 |
|
$ |
1,714 |
|
$ |
162,430 |
|
$ |
— |
|
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. 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 to reduce the carrying value to estimated net realizable value.
F-26
As a result of weakness in the business, VIP and head-of-state aircraft market and the Company’s decision to down-size a furniture manufacturing facility in the second quarter of fiscal 2003, the Company determined that it should reevaluate the carrying value of its goodwill prior to the annual October 31st testing date. Accordingly, the Company performed an impairment test of the goodwill associated with its furniture manufacturing reporting unit for recoverability and found the goodwill to be impaired. As a result, the Company recorded a pre-tax charge to operations of $34,000,000 during the three months ended June 30, 2003. The charge was primarily a result of a decrease in fair value caused by using lower cash flow forecasts based on the most recently reduced industry estimates of aircraft deliveries resulting from overall industry weakness. The annual impairment test on October 31, 2003 and 2004 indicate that no additional impairment has occurred.
Note 8. Other Assets, Principally Intangibles
Other assets are comprised of the following as of December 31, 2004 and 2003:
|
|
|
December 31, |
|
||||
|
(In thousands) |
|
2004 |
|
2003 |
|
||
|
|
|
|
|
|
|
||
|
Identifiable intangible assets with finite useful lives |
|
$ |
21,805 |
|
$ |
25,455 |
|
|
Deferred financing costs |
|
9,094 |
|
11,812 |
|
||
|
Other non-amortizable assets |
|
556 |
|
825 |
|
||
|
Total other assets |
|
$ |
31,455 |
|
$ |
38,092 |
|
In connection with the exchange of 12% senior subordinated notes for 17% senior discount notes described in Note 10, the Company recorded a noncash charge of $1,705,000 during the year ended December 31, 2004 to write-off deferred financing costs associated with the portion of the notes exchanged.
Identifiable Intangible Assets with Finite Useful Lives
Identifiable intangible assets with finite useful lives are comprised of the following as of December 31, 2004 and 2003:
|
|
|
December 31, 2004 |
|
December 31, 2003 |
|
||||||||||||||
|
|
|
|
|
Accumulated |
|
|
|
|
|
Accumulated |
|
|
|
||||||
|
(In thousands) |
|
Cost |
|
Amortization |
|
Net |
|
Cost |
|
Amortization |
|
Net |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
FAA certifications |
|
$ |
22,272 |
|
$ |
(7,707 |
) |
$ |
14,565 |
|
$ |
22,272 |
|
$ |
(6,222 |
) |
$ |
16,050 |
|
|
Engineering drawings |
|
7,645 |
|
(2,795 |
) |
4,850 |
|
7,645 |
|
(2,286 |
) |
5,359 |
|
||||||
|
Other identifiable intangibles |
|
11,345 |
|
(8,955 |
) |
2,390 |
|
11,345 |
|
(7,299 |
) |
4,046 |
|
||||||
|
Total identifiable intangibles |
|
$ |
41,262 |
|
$ |
(19,457 |
) |
$ |
21,805 |
|
$ |
41,262 |
|
$ |
(15,807 |
) |
$ |
25,455 |
|
Identifiable intangible assets with finite useful lives are amortized on a straight-line basis over their estimated useful lives as follows: FAA certifications – 15 years; engineering drawings – 15 years; and other identifiable intangibles – principally 7 to 12 years. Estimated annual amortization expense for all identifiable intangible assets with finite useful lives for the five-year period ending December 31, 2009 is as follows: 2005 – $3,466,000; 2006 – $2,275,000; 2007 – $2,175,000; 2008 – $2,171,000; and 2009 – $2,164,000.
F-27
Note 9. Accrued Liabilities
Accrued liabilities are comprised of the following as of December 31, 2004 and 2003:
|
|
|
December 31, |
|
||||
|
(In thousands) |
|
2004 |
|
2003 |
|
||
|
|
|
|
|
|
|
||
|
Salaries, wages, compensated absences and payroll related taxes |
|
$ |
5,043 |
|
$ |
4,017 |
|
|
Accrued interest |
|
4,922 |
|
4,969 |
|
||
|
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
4,191 |
|
112 |
|
||
|
Current portion of accrued product warranty obligations |
|
2,445 |
|
2,064 |
|
||
|
Customer advances and deposits |
|
1,992 |
|
3,147 |
|
||
|
Other accrued liabilities |
|
5,064 |
|
3,581 |
|
||
|
Total accrued liabilities |
|
$ |
23,657 |
|
$ |
17,890 |
|
Accrued Product Warranty Obligations
The following table reflects the changes in the accrued product warranty obligation during the three years ended December 31, 2004.
|
|
|
Year Ended December 31, |
|
|||||||
|
(In thousands) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Accrual activity during the year: |
|
|
|
|
|
|
|
|||
|
Accrual at beginning of the year |
|
$ |
3,584 |
|
$ |
3,686 |
|
$ |
2,642 |
|
|
Accruals for warranties issued during the period |
|
2,102 |
|
369 |
|
763 |
|
|||
|
Change in accrual estimate related to pre-existing warranties |
|
(220 |
) |
518 |
|
481 |
|
|||
|
Settlements made (in cash or in-kind) during the period |
|
(1,728 |
) |
(989 |
) |
(200 |
) |
|||
|
Accrual at end of the year |
|
$ |
3,738 |
|
$ |
3,584 |
|
$ |
3,686 |
|
|
|
|
|
|
|
|
|
|
|||
|
Classification at end of the year: |
|
|
|
|
|
|
|
|||
|
Current liability |
|
$ |
2,445 |
|
$ |
2,064 |
|
$ |
2,801 |
|
|
Long-term liability |
|
1,293 |
|
1,520 |
|
885 |
|
|||
|
Total |
|
$ |
3,738 |
|
$ |
3,584 |
|
$ |
3,686 |
|
F-28
Note 10. Long-Term Debt
Long-term debt is comprised of the following amounts as of December 31, 2004 and 2003:
|
|
|
December 31, |
|
||||
|
(In thousands) |
|
2004 |
|
2003 |
|
||
|
First-lien credit facility: |
|
|
|
|
|
||
|
Term debt |
|
$ |
80,521 |
|
$ |
80,521 |
|
|
Revolving line of credit |
|
12,550 |
|
— |
|
||
|
Second-lien term debt |
|
82,526 |
|
80,067 |
|
||
|
17% senior discount notes |
|
69,895 |
|
— |
|
||
|
13.5% senior unsecured promissory notes payable to related parties |
|
5,000 |
|
— |
|
||
|
Capital lease obligations and other debt, secured by property and equipment |
|
7,662 |
|
8,818 |
|
||
|
12% senior subordinated notes |
|
35,000 |
|
100,000 |
|
||
|
Total long-term debt |
|
293,154 |
|
269,406 |
|
||
|
Less current portion of long-term debt |
|
(1,314 |
) |
(1,198 |
) |
||
|
Long-term debt, less current portion |
|
$ |
291,840 |
|
$ |
268,208 |
|
First-Lien Credit Facility
The first-lien credit facility provides, through a syndicate of lenders, for term debt borrowings in the initial principal amount of $290,000,000 and a revolving line of credit for working capital and to finance acquisitions. The revolving line of credit commitment is $24,000,000 as of December 31, 2004 and all borrowings under the revolving facility must be repaid by March 31, 2006. Term debt principal payments are due in increasing amounts commencing January 2006 and continue through December 2007.
Loans under the credit facility generally bear interest based on a margin over, at the Company’s option, prime rate or LIBOR. The margins applicable to portions of amounts borrowed vary depending upon the Company’s consolidated debt leverage ratio. Currently, the applicable margins are 4.00% to 4.75% for prime rate borrowings and 5.25% to 6.00% for LIBOR borrowings. The weighted-average interest rate on all first-lien credit facility borrowings outstanding was 7.68% as of December 31, 2004. Borrowings under this credit facility are secured by a first lien on 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. The Company was in compliance with all covenants during the year ended December 31, 2004.
As of December 31, 2004, the Company had an irrevocable standby letter of credit in the amount of $263,000 issued and outstanding under the credit facility, which reduces borrowings available under the $24,000,000 revolving line credit.
In 2003, as a result of first-lien credit facility debt repayments with the net proceeds from the sale of the Specialty Avionics Group and issuance of second-lien term debt, the Company recorded noncash charges of $3,494,000 to reflect the write-off of deferred financing costs associated with the first-lien debt repaid. In connection with debt repaid with the proceeds from the sale of the Specialty Avionics Group, $2,055,000 of such debt issuance costs were written off and are reflected in the loss from discontinued operations in 2003; the remaining $1,439,000 is reflected as a loss on the extinguishment of debt in 2003.
F-29
Second-Lien Term Debt
The second-lien debt, which is comprised of $70,000,000 of fixed rate debt and $10,000,000 of floating rate debt, matures on June 30, 2008.
The fixed rate debt bears interest at 15%; 12% payable quarterly in cash and 3% pay-in-kind or “accreted” interest, payable at maturity. The variable rate debt bears cash interest, at the Company’s option, at prime rate plus 7.5% or LIBOR plus 8.5%, plus 3% pay-in-kind interest. The second-lien debt has an $82,526,000 accreted principal value and a weighted-average interest rate of 14.82% as of December 31, 2004. The term debt is secured by a second lien on substantially all of the assets of the Company. The Company is subject to customary fees under the agreement as well as the maintenance of certain financial ratios, cash flow results and other covenants which are similar, but somewhat less restrictive than the covenants in the first-lien credit facility. The Company was in compliance with all covenants during the year ended December 31, 2004.
17% Senior Discount Notes
During 2004, holders of $65,000,000 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 have a $69,895,000 accreted principal value as of December 31, 2004. The new notes will have a $128,772,000 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, payment and ranking described above, the new notes have terms substantially similar 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.
13.5% Senior Unsecured Promissory Notes
In September 2004, the Company received the proceeds from the issuance of 13.5% senior unsecured promissory notes in the aggregate principal amount of $5,000,000 to a group of related party investors (Note 17). The notes were amended in March 2005 to extend the maturity date and are now due on March 31, 2006 with interest payable on December 31, 2005 and at maturity (Note 20). The notes contain covenants identical to those in the 17% senior discount notes.
F-30
12% Senior Subordinated Notes
The senior subordinated notes mature on September 30, 2008 and interest is payable semi-annually on March 30, and September 30, of each year. The 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 the first-lien credit facility and second-lien term indebtedness and the 17% senior discount notes. Prior to maturity, the Company may redeem all or some of the 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 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.
Aggregate Maturities
The total annual maturities of long-term debt outstanding as of December 31, 2004 are as follows:
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
Year ending December 31, |
|
|
|
|
|
2005 |
|
$ |
1,314 |
|
|
2006 |
|
25,738 |
|
|
|
2007 |
|
74,370 |
|
|
|
2008 |
|
187,911 |
|
|
|
2009 |
|
344 |
|
|
|
2010 and thereafter |
|
3,477 |
|
|
|
Total aggregate maturities |
|
$ |
293,154 |
|
See “Note 1 - Financial Condition and Liquidity” for information on the Company’s plans for restructuring or replacing its first-lien credit facility.
F-31
Note 11. Mandatorily Redeemable Preferred Stock
As more fully described in “Note 1—Changes in Accounting Principles,” on January 1, 2004 the Company adopted the provisions of SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” As a result of adopting SFAS No. 150, the 16% mandatorily redeemable preferred stock was reclassified as a liability and the quarterly dividends 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 table below summarizes mandatorily redeemable preferred stock issued during the three years ended December 31, 2004.
|
|
|
Number |
|
Mandatory |
|
Unamortized |
|
Net |
|
|||
|
|
|
of |
|
Redemption |
|
Issuance |
|
Book |
|
|||
|
(In thousands, except share data) |
|
Shares |
|
Value |
|
Discount |
|
Value |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|||
|
Balance, December 31, 2001 |
|
250,000 |
|
$ |
31,633 |
|
$ |
(3,393 |
) |
$ |
28,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Accrued dividends and redemption value accretion |
|
— |
|
5,373 |
|
468 |
|
5,841 |
|
|||
|
Balance, December 31, 2002 |
|
250,000 |
|
37,006 |
|
(2,925 |
) |
34,081 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|||
|
Accrued dividends and redemption value accretion |
|
— |
|
6,286 |
|
468 |
|
6,754 |
|
|||
|
Balance, December 31, 2003 |
|
250,000 |
|
43,292 |
|
(2,457 |
) |
40,835 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|||
|
Accrued dividends and redemption value accretion |
|
— |
|
4,011 |
|
264 |
|
4,275 |
|
|||
|
Write-off of unamortized discount |
|
— |
|
— |
|
2,193 |
|
2,193 |
|
|||
|
Balance, December 31, 2004 |
|
250,000 |
|
$ |
47,303 |
|
$ |
— |
|
$ |
47,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Per share liquidation value as of December 31, 2004 |
|
|
|
|
|
|
|
$ |
189.21 |
|
||
Prior to July 23, 2004, the Company was authorized to issue 700,000 shares of 16% Senior Redeemable Exchangeable Preferred Stock Due 2009, $.01 par value. On July 23, 2004, the terms of the preferred stock were amended and the 700,000 shares were re-designated Senior Redeemable Exchangeable Preferred Stock due 2008, $.01 par value. Upon the occurrence of a change in control, as defined, each holder has the right to require the Company to redeem all or part of such holder’s shares at a price equal to 101% of the liquidation preference, plus accrued and unpaid cash dividends. The preferred stock is non-voting.
In periods prior to July 23, 2004, holders of the preferred stock were entitled to receive dividends at a rate equal to 16% per annum. Since the preferred stock issuance date on June 30, 2000, the Company has not declared or paid any preferred stock dividends. As a result, the unpaid dividends accreted to the mandatory redemption value of the preferred stock. On July 23, 2004 the terms of the preferred stock were amended to provide that further preferred stock dividends, if any, accrue at rates dependent on a specified financial ratio or if certain triggering events occur as described in more detail below. All dividends accrued through the amendment date and future dividends, if any, are not payable until redemption. The amendment accelerated the mandatory redemption date from March 31, 2009 to December 31, 2008 and also adds several restrictive covenants.
F-32
The holders of the preferred stock were issued 348,945 shares of DeCrane Holdings common stock in connection with the amendment. The common stock had a nominal fair market value on the issuance date and was therefore recorded at its $0.01 per share par value as a capital contribution from DeCrane Holdings. In connection with preferred stock restructuring, the Company recorded a noncash charge of $2,193,000 in 2004 to write-off the unamortized issuance discount associated with the initial issuance of the preferred stock.
Future preferred stock dividends, if any, are dependent, in part, upon a defined leverage ratio the Company achieves as of each quarterly testing date. Depending on the ratio achieved, and provided certain triggering events have not occurred, dividends for the succeeding quarter accrue at a 0%, 4% or 16% annual rate. If certain triggering events occur, such as failure to discharge any mandatory redemption obligations or comply with certain restrictive covenants, dividends accrue at a 16% annual rate. Based upon the leverage ratios achieved as of the September 30 and December 31, 2004 quarterly testing dates, no dividends have or will accrue on the preferred stock from the amendment date through March 31, 2005, the next quarterly testing date.
In March 2005, the Company sold 26,425 additional shares for its $189.21 per share liquidation value (Note 20).
Note 12. Income Taxes
The components of the loss before income taxes and cumulative effect of change in accounting principle are as follows:
|
|
|
Year Ended December 31, |
|
|||||||
|
(In thousands) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Reported by: |
|
|
|
|
|
|
|
|||
|
Continuing operations |
|
$ |
(42,423 |
) |
$ |
(66,434 |
) |
$ |
(10,383 |
) |
|
Discontinued operations |
|
— |
|
(5,631 |
) |
1,901 |
|
|||
|
Total |
|
$ |
(42,423 |
) |
$ |
(72,065 |
) |
$ |
(8,482 |
) |
|
|
|
|
|
|
|
|
|
|||
|
Taxed under the following jurisdictions: |
|
|
|
|
|
|
|
|||
|
Domestic |
|
$ |
(42,423 |
) |
$ |
(71,657 |
) |
$ |
(7,381 |
) |
|
Foreign |
|
— |
|
(408 |
) |
(1,101 |
) |
|||
|
Total |
|
$ |
(42,423 |
) |
$ |
(72,065 |
) |
$ |
(8,482 |
) |
F-33
The provisions for income taxes (benefit) are as follows:
|
|
|
Year Ended December 31, |
|
|||||||
|
(In thousands) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Current: |
|
|
|
|
|
|
|
|||
|
U.S. federal |
|
$ |
— |
|
$ |
(1,548 |
) |
$ |
— |
|
|
State and local |
|
100 |
|
295 |
|
255 |
|
|||
|
Foreign |
|
— |
|
(82 |
) |
67 |
|
|||
|
Total current |
|
100 |
|
(1,335 |
) |
322 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Deferred: |
|
|
|
|
|
|
|
|||
|
U.S. federal |
|
— |
|
(6,112 |
) |
(144 |
) |
|||
|
State and local |
|
— |
|
(5,131 |
) |
463 |
|
|||
|
Foreign |
|
— |
|
— |
|
(287 |
) |
|||
|
Total deferred |
|
|
|
(11,243 |
) |
32 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Total provision: |
|
|
|
|
|
|
|
|||
|
U.S. federal |
|
— |
|
(7,660 |
) |
(144 |
) |
|||
|
State and local |
|
100 |
|
(4,836 |
) |
718 |
|
|||
|
Foreign |
|
— |
|
(82 |
) |
(220 |
) |
|||
|
Total provision |
|
$ |
100 |
|
$ |
(12,578 |
) |
$ |
354 |
|
|
|
|
|
|
|
|
|
|
|||
|
Allocation of total provision: |
|
|
|
|
|
|
|
|||
|
Continuing operations |
|
$ |
100 |
|
$ |
(13,496 |
) |
$ |
(3,621 |
) |
|
Discontinued operations |
|
— |
|
918 |
|
3,975 |
|
|||
|
Total provision |
|
$ |
100 |
|
$ |
(12,578 |
) |
$ |
354 |
|
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal rate to the income (loss) before income taxes and cumulative effect of change in accounting principle as a result of the following differences:
|
|
|
Year Ended December 31, |
|
|||||||
|
(In thousands) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Income tax (benefit) at U.S. statutory rates |
|
$ |
(14,848 |
) |
$ |
(25,223 |
) |
$ |
(2,969 |
) |
|
Tax effect of increases (decreases) resulting from: |
|
|
|
|
|
|
|
|||
|
Book benefit not provided for operating loss carryforwards |
|
14,701 |
|
12,402 |
|
— |
|
|||
|
Amortization of assets, preferred stock dividends and other expenses not deductible for income tax purposes |
|
1,571 |
|
3,422 |
|
2,927 |
|
|||
|
State income taxes, net of federal benefit |
|
(671 |
) |
(3,143 |
) |
467 |
|
|||
|
Other, net |
|
(653 |
) |
(36 |
) |
(71 |
) |
|||
|
Income tax (benefit) at effective rates |
|
$ |
100 |
|
$ |
(12,578 |
) |
$ |
354 |
|
F-34
Deferred tax assets and (liabilities) are comprised of the following as of December 31, 2004 and 2003:
|
|
|
December 31, |
|
||||
|
(In thousands) |
|
2004 |
|
2003 |
|
||
|
|
|
|
|
|
|
||
|
Gross deferred tax assets: |
|
|
|
|
|
||
|
Loss carryforwards |
|
$ |
38,458 |
|
$ |
23,471 |
|
|
Accrued liabilities |
|
5,448 |
|
3,670 |
|
||
|
Inventory |
|
3,160 |
|
2,920 |
|
||
|
Other |
|
1,065 |
|
1,165 |
|
||
|
Gross deferred tax assets |
|
48,131 |
|
31,226 |
|
||
|
|
|
|
|
|
|
||
|
Gross deferred tax (liabilities): |
|
|
|
|
|
||
|
Intangible assets |
|
(13,598 |
) |
(10,902 |
) |
||
|
Other |
|
(304 |
) |
(796 |
) |
||
|
Gross deferred tax (liabilities) |
|
(13,902 |
) |
(11,698 |
) |
||
|
|
|
|
|
|
|
||
|
Net deferred asset before valuation allowance |
|
34,229 |
|
19,528 |
|
||
|
Net deferred tax asset valuation allowance |
|
(34,229 |
) |
(19,528 |
) |
||
|
Net deferred tax liability |
|
$ |
— |
|
$ |
— |
|
As of December 31, 2004, the Company had a net deferred tax asset of $34,229,000, prior to recording the valuation allowance. As required by SFAS No. 109, the Company evaluated its deferred 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 is not prudent to rely on future income as the means to support the carrying value of the net asset. As a result of the evaluation, the Company increased its valuation allowance by $14,701,000 during the year ended December 31, 2004, eliminating the net deferred asset, as of December 31, 2004.
The Company had a net deferred tax liability of $16,556,000 as of December 31, 2002. The full realization of the deferred tax assets was achieved through the reversal of the deferred tax liabilities in future periods. As a result, a valuation allowance was not required for periods ending on or prior to December 31, 2002.
As of December 31, 2004, the Company has total loss carryforwards of approximately $94,834,000 for federal income tax purposes and $74,653,000 for state income tax purposes. The loss carryforwards are not subject to limitations on their annual utilization (“Section 382 limitation,” as defined in the Internal Revenue Code) and therefore are available for utilization in 2004 and future periods. The federal and state loss carryforwards expire in varying amounts commencing in 2012 and continuing through 2024.
F-35
Note 13. Capital Structure
Common Stock
DeCrane Aircraft has 100 shares ($.01 par value) issued and outstanding as of December 31, 2004 and 2003. All of the shares are owned by DeCrane Holdings, DeCrane Aircraft’s parent company.
During 2002, DeCrane Aircraft received additional cash capital contributions from DeCrane Holdings aggregating $5,000,000 resulting from DeCrane Holdings’ sale of capital stock. The proceeds were used to fund working capital requirements. Also during 2002, DeCrane Holdings repurchased and canceled 18,743 common shares from former members of the Company’s management. The former management members also elected to exercise 9,252 vested stock options on a cashless basis. The $14,000 income tax benefit associated with the stock options exercised was also credited to additional paid-in capital. In connection with the repurchase, a note receivable collateralized by the repurchased common stock was repaid. The Company returned $368,000 of paid-in capital to DeCrane Holdings to fund its cash requirements for these transactions.
In connection with the 2004 DeCrane Aircraft preferred stock amendment (Note 11), DeCrane Holdings issued shares of its common stock to the preferred stockholders. The common stock had a nominal fair market value on the issuance date and was therefore recorded at its $0.01 per share par value by DeCrane Holdings; the issuance is reflected as a capital contribution from DeCrane Holdings.
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 collateralized 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 17) 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 management employees purchased common stock for $3,940,000.
During 2002, a note receivable totaling $200,000, plus accrued interest, was repaid in connection with the repurchase of the common stock collateralizing the note receivable. During 2003 and 2004, several DeCrane Aircraft management employees surrendered 152,882 shares of common stock. In accordance with the terms of the notes evidencing the loans, the Company canceled the notes. The cancellation of the notes, which aggregated $1,471,000 in 2003 and $722,000 in 2004, including accrued interest, was charged to additional paid-in capital.
F-36
Note 14. Commitments and Contingencies
Litigation
The Company and its subsidiaries are involved in 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.
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, 2004:
|
(In thousands) |
|
Capital |
|
Operating |
|
||
|
|
|
|
|
|
|
||
|
Year ending December 31, |
|
|
|
|
|
||
|
2005 |
|
$ |
789 |
|
$ |
2,629 |
|
|
2006 |
|
695 |
|
2,291 |
|
||
|
2007 |
|
531 |
|
1,711 |
|
||
|
2008 |
|
386 |
|
927 |
|
||
|
2009 |
|
311 |
|
948 |
|
||
|
2010 and thereafter |
|
1,311 |
|
3,533 |
|
||
|
Total minimum payments required |
|
4,023 |
|
$ |
12,039 |
|
|
|
Less amount representing future interest cost |
|
(1,072 |
) |
|
|
||
|
Recorded obligation under capital leases |
|
$ |
2,951 |
|
|
|
|
Total rental expense charged to operations was $2,347,000 for the year ended December 31, 2004, $2,911,000 for the year ended December 31, 2003 and $3,083,000 for the year ended December 31, 2002.
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.
Preferred stock dividends, if any, are dependent upon the leverage ratio (as defined) achieved as of each quarterly testing date. Depending on the ratio achieved, dividends for the succeeding quarter accrue at a 0%, 3.5% or 14% annual rate. Based upon the leverage ratio as of December 31, 2004, no dividends will accrue on the preferred stock during the three months ending March 31, 2005, the next quarterly testing date. All future dividends, if any, are not payable until September 30, 2009, the mandatory preferred stock redemption date. The DeCrane Holdings preferred stock has a total redemption value of $77,172,000 as of December 31, 2004, including accumulated dividends.
F-37
Note 15. Consolidated Statements of Cash Flows
The following information supplements the Company’s consolidated statements of cash flows.
|
|
|
Year Ended December 31, |
|
|||||||
|
(In thousands) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Components of cash paid for acquisitions: |
|
|
|
|
|
|
|
|||
|
Contingent consideration paid for previously completed acquisitions |
|
$ |
— |
|
$ |
600 |
|
$ |
5,826 |
|
|
Additional acquisition related expenses |
|
— |
|
6 |
|
64 |
|
|||
|
Total cash paid for acquisitions |
|
$ |
— |
|
$ |
606 |
|
$ |
5,890 |
|
|
|
|
|
|
|
|
|
|
|||
|
Noncash investing and financing transactions: |
|
|
|
|
|
|
|
|||
|
12% senior subordinated notes redeemed by the issuance of 17% senior discount notes |
|
$ |
65,000 |
|
$ |
— |
|
$ |
— |
|
|
Interest accrued during the period: |
|
|
|
|
|
|
|
|||
|
Long-term debt interest accretion |
|
7,354 |
|
67 |
|
— |
|
|||
|
Loans to stockholders for the purchase of capital stock |
|
75 |
|
148 |
|
123 |
|
|||
|
Mandatorily redeemable preferred stock: |
|
|
|
|
|
|
|
|||
|
16% preferred stock dividends accreted to liquidation value |
|
4,011 |
|
6,286 |
|
5,373 |
|
|||
|
Redemption value accretion |
|
264 |
|
468 |
|
468 |
|
|||
|
Capital expenditures financed with capital lease obligations |
|
42 |
|
14 |
|
67 |
|
|||
|
Additional acquisition contingent consideration earned and recorded as a liability |
|
— |
|
— |
|
600 |
|
|||
In years prior to the year ended December 31, 2002, companies were acquired in transactions in which the sellers were entitled to contingent consideration payments based upon their respective levels of attainment of defined performance criteria. Contingent consideration earned, if any, was payable during the first quarter of the following year. Based upon the levels of attainment of the defined performance criteria during the year ended December 31, 2002, the Company recorded contingent consideration payable of $600,000 in 2002 resulting in a corresponding increase in goodwill. There are no further contingent consideration payment obligations remaining.
F-38
Note 16. Employee Benefit Plans
Stock Based Incentive Compensation
Management Incentive Stock Option Plan
DeCrane Holding’s Board of Directors has 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 2002, options to purchase 15,000 shares, with vesting over a three year period from the grant date, were granted under the plan and no additional shares from prior year grants vested based on the required year 2002 performance criteria. During 2003 and 2004, no options were granted under the plan and no additional shares from prior year grants vested based on the required year 2003 and 2004 performance criteria.
The per share exercise price of the options granted was equal to the fair market value of the common stock on each of the grant dates and, accordingly, no compensation expense was recognized during the three years ended December 31, 2004.
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, which vested over a three-year period, are fully vested as of December 31, 2004 and expire in 2009.
F-39
Summary of All Stock Options
The following table summarizes all stock option activity during the three years ended December 31, 2004.
|
|
|
Year Ended December 31, |
|
|||||||||||||
|
|
|
2004 |
|
2003 |
|
2002 |
|
|||||||||
|
|
|
Number |
|
Weighted- |
|
Number |
|
Weighted- |
|
Number |
|
Weighted- |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Options outstanding at beginning of the year |
|
284,127 |
|
$ |
23.97 |
|
338,073 |
|
$ |
24.37 |
|
363,353 |
|
$ |
24.82 |
|
|
Granted |
|
— |
|
|
|
— |
|
— |
|
15,000 |
|
27.00 |
|
|||
|
Exercised |
|
— |
|
|
|
— |
|
— |
|
(9,252 |
) |
23.00 |
|
|||
|
Canceled |
|
(16,032 |
) |
26.74 |
|
(53,946 |
) |
26.45 |
|
(31,028 |
) |
31.32 |
|
|||
|
Options outstanding at end of the year |
|
268,095 |
|
23.81 |
|
284,127 |
|
23.97 |
|
338,073 |
|
24.37 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Options exercisable at end of the year |
|
122,394 |
|
23.50 |
|
125,185 |
|
23.56 |
|
138,546 |
|
23.66 |
|
|||
As of December 31, 2004, options to purchase 123,522 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 as of December 31, 2004.
|
|
|
All Options Outstanding |
|
Number |
|
||
|
|
|
Number |
|
Weighted-Average |
|||
|
|
|
|
|
|
|
|
|
|
Per share exercise price: |
|
|
|
|
|
|
|
|
$23.00 |
|
245,049 |
|
4.93 years |
|
113,989 |
|
|
$27.00 |
|
7,500 |
|
7.34 years |
|
5,000 |
|
|
$35.00 |
|
15,546 |
|
5.93 years |
|
3,405 |
|
|
Total |
|
268,095 |
|
5.05 years |
|
122,394 |
|
For compensatory stock options granted to non-employees, the Company recognized compensation expense of $138,000 for the year ended December 31, 2002.
For non-compensatory stock options granted to employees, 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, 2004. The Company has adopted the disclosure-only provisions of SFAS No. 123, as amended by SFAS No. 148 (Note 1). For the purposes of the pro forma disclosure presented in Note 1, 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-40
The fair value of the options was determined using the following assumptions:
|
|
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Compensatory options (1): |
|
|
|
|
|
|
|
|||
|
Risk free interest rates |
|
— |
|
— |
|
5.13 |
% |
|||
|
Expected dividend yield |
|
— |
|
— |
|
— |
|
|||
|
Expected life |
|
— |
|
— |
|
10 years |
|
|||
|
Expected stock price volatility |
|
— |
|
— |
|
— |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Non-compensatory options granted to employees and directors (2): |
|
|
|
|
|
|
|
|||
|
Risk free interest rates |
|
— |
|
— |
|
— |
|
|||
|
Expected dividend yield |
|
— |
|
— |
|
— |
|
|||
|
Expected life |
|
— |
|
— |
|
— |
|
|||
|
Weighted-average fair value of options granted (per share) |
|
$ |
— |
|
$ |
— |
|
$ |
10.96 |
|
(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 Company determines the fair value of its common shares as of any given period-end date based on the aggregate enterprise value of DeCrane Holdings. Enterprise value is computed based upon a multiple of Adjusted EBITDA, as reflected in its financial statements, and the multiple is based upon comparable data from other publicly-held companies as well as publicly available information on privately-held companies.
The minimum value method, which is an acceptable method for non-public companies, excludes stock price volatility.
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 $492,000 for the year ended December 31, 2004 and $1,007,000 for the year ended December 31, 2002. No matching contributions were made during the year ended December 31, 2003.
F-41
Note 17. Related Party Transactions and Investors’ Agreement
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, |
|
|||||||
|
(In thousands) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
CSFB / DLJ: |
|
|
|
|
|
|
|
|||
|
13.5% senior unsecured promissory notes: |
|
|
|
|
|
|
|
|||
|
Principal amount borrowed and payable at end of period |
|
$ |
5,000 |
|
$ |
— |
|
$ |
— |
|
|
Interest earned during the period |
|
178 |
|
— |
|
— |
|
|||
|
Interest accrued and payable at end of the period |
|
36 |
|
— |
|
— |
|
|||
|
Transaction and advisory fees and expenses |
|
1,738 |
|
9,375 |
|
1,627 |
|
|||
|
Management fees: |
|
|
|
|
|
|
|
|||
|
Charged to operations during the period |
|
350 |
|
350 |
|
350 |
|
|||
|
Payable as of period end |
|
350 |
|
— |
|
125 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Global Technology Partners, LLC: |
|
|
|
|
|
|
|
|||
|
Promissory notes receivable as of period end, including interest |
|
621 |
|
594 |
|
567 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
DeCrane Aircraft Senior Vice President: |
|
|
|
|
|
|
|
|||
|
Lease payments for facilities |
|
865 |
|
859 |
|
842 |
|
|||
|
Each related party is described below |
|
|
|
|
|
|
|
|||
CSFB / DLJ
DLJ Merchant Banking Partners II, L.P. and affiliated funds own 96.8% of DeCrane Holdings common stock and 99.3% of its preferred stock as well as 80.0% of DeCrane Aircraft’s preferred stock, all on a fully diluted basis. DLJ Merchant Banking Partners II, L.P. and affiliated funds are indirect affiliates of Credit Suisse First Boston.
DLJ is represented on the Board of Directors of both DeCrane Holdings and DeCrane Aircraft. CSFB is paid fees for serving as the syndication agent and, commencing in 2003, administrative agent for the lenders providing DeCrane Aircraft’s first-lien credit facility and second-lien term debt. CSFB also received customary fees and reimbursement of expenses for serving as DeCrane Aircraft’s financial advisors for the sale of the Specialty Avionics Group in 2003 and the restructuring of its 12% senior subordinated notes and preferred stock in 2004.
Global Technology Partners, LLC
Members of Global Technology own 0.7% 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 collateralized by such stock.
F-42
DeCrane Aircraft Senior Vice President
Donald G Zerbe, a DeCrane Aircraft Senior Vice President and Group President, and his spouse are 50.25% owners of Maize Avenue, Inc., the remaining interest is owned by another member of Mr. Zerbe’s immediate family. Two of DeCrane Aircraft’s subsidiaries lease real property from Maize Avenue.
Investors’ Agreement
Investors owing 96.8% 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, among DeCrane Holdings Co., DLJ Merchant Banking Partners II, L.P. and affiliated funds and entities, Putnam Investment Management, Inc. and affiliated funds and entities and all management investors. 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, thereby giving them control over the Company’s operations. 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.
F-43
Note 18. 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 completion and 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 to exclude the group.
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 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.
F-44
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). 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.
Summary of Business by Segment
|
|
|
Year Ended December 31, |
|
|||||||
|
(In thousands) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Revenues: |
|
|
|
|
|
|
|
|||
|
Cabin Management |
|
$ |
158,607 |
|
$ |
119,000 |
|
$ |
172,832 |
|
|
Systems Integration |
|
57,997 |
|
51,687 |
|
58,051 |
|
|||
|
Inter-group elimination (1) |
|
(2,918 |
) |
(578 |
) |
(1,042 |
) |
|||
|
Consolidated totals |
|
$ |
213,686 |
|
$ |
170,109 |
|
$ |
229,841 |
|
|
|
|
|
|
|
|
|
|
|||
|
Revenues from significant customers (2): |
|
|
|
|
|
|
|
|||
|
Cabin Management |
|
$ |
84,408 |
|
$ |
50,297 |
|
$ |
94,014 |
|
|
Systems Integration |
|
21,723 |
|
28,508 |
|
35,388 |
|
|||
|
Consolidated totals |
|
$ |
106,131 |
|
$ |
78,805 |
|
$ |
129,402 |
|
|
|
|
|
|
|
|
|
|
|||
|
Adjusted EBITDA (as defined): |
|
|
|
|
|
|
|
|||
|
Cabin Management |
|
$ |
22,412 |
|
$ |
17,102 |
|
$ |
32,644 |
|
|
Systems Integration |
|
12,346 |
|
13,336 |
|
18,084 |
|
|||
|
Corporate (3) |
|
(5,509 |
) |
(5,488 |
) |
(6,072 |
) |
|||
|
Inter-group elimination (4) |
|
3 |
|
110 |
|
9 |
|
|||
|
Consolidated totals |
|
29,252 |
|
25,060 |
|
44,665 |
|
|||
|
Reconciling items (5) |
|
(71,775 |
) |
(98,383 |
) |
(110,651 |
) |
|||
|
Net loss |
|
$ |
(42,523 |
) |
$ |
(73,323 |
) |
$ |
(65,986 |
) |
|
|
|
|
|
|
|
|
|
|||
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|||
|
Cabin Management |
|
$ |
6,466 |
|
$ |
6,335 |
|
$ |
6,695 |
|
|
Systems Integration |
|
2,879 |
|
2,770 |
|
2,956 |
|
|||
|
Corporate |
|
393 |
|
676 |
|
961 |
|
|||
|
Consolidated totals (6) |
|
$ |
9,738 |
|
$ |
9,781 |
|
$ |
10,612 |
|
The notes appear on the next page.
F-45
Summary of Business by Geographical Area
|
|
|
Year Ended December 31, |
|
|||||||
|
(In thousands) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Total assets (as of period end): |
|
|
|
|
|
|
|
|||
|
Cabin Management |
|
$ |
231,822 |
|
$ |
224,116 |
|
$ |
281,655 |
|
|
Systems Integration |
|
56,115 |
|
58,395 |
|
62,437 |
|
|||
|
Corporate (7) |
|
12,095 |
|
21,456 |
|
44,247 |
|
|||
|
Inter-group elimination (8) |
|
(39 |
) |
(91 |
) |
(113 |
) |
|||
|
Continuing operations |
|
299,993 |
|
303,876 |
|
388,226 |
|
|||
|
Discontinued operations (Specialty Avionics) |
|
— |
|
— |
|
160,741 |
|
|||
|
Consolidated totals |
|
$ |
299,993 |
|
$ |
303,876 |
|
$ |
548,967 |
|
|
|
|
|
|
|
|
|
|
|||
|
Capital expenditures: |
|
|
|
|
|
|
|
|||
|
Cabin Management |
|
$ |
2,622 |
|
$ |
4,216 |
|
$ |
3,829 |
|
|
Systems Integration |
|
578 |
|
555 |
|
478 |
|
|||
|
Corporate |
|
52 |
|
26 |
|
49 |
|
|||
|
Consolidated totals (9) |
|
$ |
3,252 |
|
$ |
4,797 |
|
$ |
4,356 |
|
|
|
|
|
|
|
|
|
|
|||
|
Consolidated net revenues to unaffiliated customers (10): |
|
|
|
|
|
|
|
|||
|
United States |
|
$ |
206,183 |
|
$ |
159,052 |
|
$ |
222,401 |
|
|
Mexico |
|
7,503 |
|
11,057 |
|
7,440 |
|
|||
|
Consolidated totals |
|
$ |
213,686 |
|
$ |
170,109 |
|
$ |
229,841 |
|
|
|
|
|
|
|
|
|
|
|||
|
Consolidated long-lived assets (11): |
|
|
|
|
|
|
|
|||
|
United States |
|
$ |
25,920 |
|
$ |
28,786 |
|
$ |
34,420 |
|
|
Mexico |
|
1,645 |
|
2,114 |
|
1,719 |
|
|||
|
Consolidated totals |
|
$ |
27,565 |
|
$ |
30,900 |
|
$ |
36,139 |
|
Notes
(1) Inter-group sales are accounted for at prices comparable to sales to unaffiliated customers, and are eliminated in consolidation.
(2) Two customers each accounted for more than 10% of the Company’s consolidated revenues during 2004 while three customers each accounted for more than 10% during 2003 and 2002 as shown in the table below. 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, |
|
||||||||
|
(In thousands) |
|
2004 |
|
2003 |
|
2002 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Textron |
|
$ |
43,483 |
|
$ |
27,578 |
|
$ |
54,017 |
|
|
|
Bombardier |
|
42,309 |
|
21,412 |
|
39,958 |
|
||||
|
Boeing |
|
20,339 |
|
29,815 |
|
35,427 |
|
||||
|
Consolidated totals |
|
$ |
106,131 |
|
$ |
78,805 |
|
$ |
129,402 |
|
|
All operating groups derived revenues from each of the customers during each of the years in the three years ended December 31. 2003. Boeing exceeds 10% for 2002 and 2003; 2004 data is included for comparability.
(3) Reflects the Company’s corporate headquarters costs and expenses not allocated to the groups.
F-46
(4) Reflects elimination of the effect of inter-group profits in inventory.
(5) 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:
|
|
|
Year Ended December 31, |
|
||||||||
|
(In thousands) |
|
2004 |
|
2003 |
|
2002 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of long-lived assets (6) |
|
$ |
9,738 |
|
$ |
9,781 |
|
$ |
10,612 |
|
|
|
Restructuring, asset impairment and other related charges |
|
8,615 |
|
41,886 |
|
17,255 |
|
||||
|
Adjustment to reflect program costs as research and development expenses and nonrecurring program start-up costs (a) |
|
7,635 |
|
10,440 |
|
— |
|
||||
|
Other cash and noncash charges |
|
88 |
|
784 |
|
1,300 |
|
||||
|
Interest expense |
|
37,146 |
|
26,219 |
|
25,376 |
|
||||
|
Mandatorily redeemable preferred stock dividends |
|
4,011 |
|
— |
|
— |
|
||||
|
Loss on extinguishment of debt |
|
3,898 |
|
1,439 |
|
— |
|
||||
|
Other expenses, net |
|
544 |
|
945 |
|
505 |
|
||||
|
Income tax provision (benefit) |
|
100 |
|
(13,496 |
) |
(3,621 |
) |
||||
|
Loss from discontinued operations, net of tax |
|
— |
|
6,621 |
|
41,396 |
|
||||
|
Cumulative effect of change in accounting principle |
|
— |
|
13,764 |
|
17,828 |
|
||||
|
Total reconciling items |
|
$ |
71,775 |
|
$ |
98,383 |
|
$ |
110,651 |
|
|
(a) Under program accounting, which the Company is required to use for determining covenant compliance under its credit agreements, certain product development and nonrecurring program start-up 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 expense as incurred. This adjustment reflects the net difference between these two methods of accounting.
As more fully described in “Note 1—Changes in Accounting Principles,” the Company elected to discontinue the use of program accounting for financial reporting purpose effective January 1, 2003. Since program accounting was used for financial reporting purposes for the year ended December 31, 2002, no adjustment is required for that year.
(6) Reflects depreciation and amortization of long-lived assets, other intangible assets and deferred financing costs, which are classified as a component of interest expense, as follows:
|
|
|
Year Ended December 31, |
|
||||||||
|
(In thousands) |
|
2004 |
|
2003 |
|
2002 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of long-lived assets |
|
$ |
9,738 |
|
$ |
9,781 |
|
$ |
10,612 |
|
|
|
Amortization of deferred financing costs |
|
3,154 |
|
2,808 |
|
2,692 |
|
||||
|
Consolidated depreciation and amortization |
|
$ |
12,892 |
|
$ |
12,589 |
|
$ |
13,304 |
|
|
(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.
F-47
(9) Reflects capital expenditures paid in cash. Excludes capital expenditures financed with capital lease obligations of $14,000 for the year ended December 31, 2003 and $67,000 for the year ended December 31, 2002; no capital expenditures were financed with capital lease obligations during 2004.
(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.
Note 19. Supplemental Condensed Consolidating Financial Information
In conjunction with the 12% subordinated notes described in Note 10, 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 therefore are 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.
F-48
Balance Sheets
|
|
|
December 31, 2004 |
|
||||||||||
|
(In thousands) |
|
Issuer |
|
Guarantor |
|
Consolidating |
|
Consolidated |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Assets |
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Current assets: |
|
|
|
|
|
|
|
|
|
||||
|
Cash and cash equivalents |
|
$ |
622 |
|
$ |
357 |
|
$ |
— |
|
$ |
979 |
|
|
Accounts receivable, net |
|
— |
|
25,367 |
|
— |
|
25,367 |
|
||||
|
Inventories |
|
— |
|
51,253 |
|
— |
|
51,253 |
|
||||
|
Other current assets |
|
33 |
|
911 |
|
— |
|
944 |
|
||||
|
Total current assets |
|
655 |
|
77,888 |
|
— |
|
78,543 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Property and equipment, net |
|
746 |
|
26,819 |
|
— |
|
27,565 |
|
||||
|
Other assets, principally goodwill |
|
10,694 |
|
183,191 |
|
— |
|
193,885 |
|
||||
|
Investments in subsidiaries |
|
77,758 |
|
— |
|
(77,758 |
)(1) |
— |
|
||||
|
Intercompany receivables |
|
223,068 |
|
55,307 |
|
(278,375 |
)(2) |
— |
|
||||
|
Total assets |
|
$ |
312,921 |
|
$ |
343,205 |
|
$ |
(356,133 |
) |
$ |
299,993 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Liabilities and Stockholder’s Deficit |
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
||||
|
Current portion of long-term debt |
|
$ |
48 |
|
$ |
1,266 |
|
$ |
— |
|
$ |
1,314 |
|
|
Other current liabilities |
|
8,932 |
|
31,391 |
|
— |
|
40,323 |
|
||||
|
Total current liabilities |
|
8,980 |
|
32,657 |
|
— |
|
41,637 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Long-term debt, less current portion |
|
285,538 |
|
6,302 |
|
— |
|
291,840 |
|
||||
|
Mandatorily redeemable preferred stock |
|
47,303 |
|
— |
|
— |
|
47,303 |
|
||||
|
Intercompany payables |
|
55,307 |
|
223,068 |
|
(278,375 |
)(2) |
— |
|
||||
|
Other long-term liabilities |
|
3,300 |
|
3,420 |
|
— |
|
6,720 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Stockholder’s deficit: |
|
|
|
|
|
|
|
|
|
||||
|
Paid-in capital |
|
111,648 |
|
151,492 |
|
(151,492 |
)(1) |
111,648 |
|
||||
|
Accumulated deficit |
|
(199,155 |
) |
(73,734 |
) |
73,734 |
(1) |
(199,155 |
) |
||||
|
Total stockholder’s deficit |
|
(87,507 |
) |
77,758 |
|
(77,758 |
) |
(87,507 |
) |
||||
|
Total liabilities and stockholder’s deficit |
|
$ |
312,921 |
|
$ |
343,205 |
|
$ |
(356,133 |
) |
$ |
299,993 |
|
F-49
|
|
|
December 31, 2003 |
|
||||||||||
|
(In thousands) |
|
Issuer |
|
Guarantor |
|
Consolidated |
|
Consolidating |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
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 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 deficit: |
|
|
|
|
|
|
|
|
|
||||
|
Paid-in capital |
|
111,719 |
|
151,492 |
|
(151,492 |
)(1) |
111,719 |
|
||||
|
Accumulated deficit |
|
(156,632 |
) |
(65,824 |
) |
65,824 |
(1) |
(156,632 |
) |
||||
|
Accumulated other comprehensive loss |
|
— |
|
(268 |
) |
— |
|
(268 |
) |
||||
|
Total stockholder’s deficit |
|
(44,913 |
) |
85,400 |
|
(85,668 |
) |
(45,181 |
) |
||||
|
Total liabilities, mandatorily redeemable preferred stock and stockholder’s deficit |
|
$ |
368,755 |
|
$ |
383,062 |
|
$ |
(447,941 |
) |
$ |
303,876 |
|
F-50
Statements of Operations
|
|
|
Year Ended December 31, 2004 |
|
||||||||||
|
(In thousands) |
|
Issuer |
|
Guarantor |
|
Consolidating |
|
Consolidated |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
— |
|
$ |
213,686 |
|
$ |
— |
|
$ |
213,686 |
|
|
Cost of sales |
|
— |
|
169,160 |
|
— |
|
169,160 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Gross profit |
|
— |
|
44,526 |
|
— |
|
44,526 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Operating and other expenses (income): |
|
|
|
|
|
|
|
|
|
||||
|
Selling, general and administrative expenses |
|
6,678 |
|
23,019 |
|
— |
|
29,697 |
|
||||
|
Research and development expenses |
|
— |
|
8,003 |
|
— |
|
8,003 |
|
||||
|
Amortization of intangible assets |
|
— |
|
3,650 |
|
— |
|
3,650 |
|
||||
|
Interest expense |
|
36,407 |
|
739 |
|
— |
|
37,146 |
|
||||
|
Mandatorily redeemable preferred stock dividends |
|
4,011 |
|
— |
|
— |
|
4,011 |
|
||||
|
Loss on extinguishment of debt |
|
3,898 |
|
— |
|
— |
|
3,898 |
|
||||
|
Intercompany charges |
|
(22,038 |
) |
22,038 |
|
— |
|
— |
|
||||
|
Equity in loss of subsidiaries |
|
7,910 |
|
— |
|
(7,910 |
)(3) |
— |
|
||||
|
Other expenses, net |
|
436 |
|
108 |
|
— |
|
544 |
|
||||
|
Income tax provision (benefit) |
|
5,221 |
|
(5,121 |
) |
— |
|
100 |
|
||||
|
Total operating and other expenses, net |
|
42,523 |
|
52,436 |
|
(7,910 |
) |
87,049 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net loss |
|
$ |
(42,523 |
) |
$ |
(7,910 |
) |
$ |
7,910 |
|
$ |
(42,523 |
) |
F-51
|
|
|
Year Ended December 31, 2003 |
|
|||||||||||||
|
(In thousands) |
|
Issuer |
|
Guarantor |
|
Non-Guarantor |
|
Consolidating |
|
Consolidated |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
— |
|
$ |
170,109 |
|
$ |
— |
|
$ |
— |
|
$ |
170,109 |
|
|
Cost of sales |
|
— |
|
131,539 |
|
— |
|
— |
|
131,539 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Gross profit |
|
— |
|
38,570 |
|
— |
|
— |
|
38,570 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Operating and other expenses (income): |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Selling, general and administrative expenses |
|
6,948 |
|
21,362 |
|
— |
|
— |
|
28,310 |
|
|||||
|
Research and development expenses |
|
— |
|
10,440 |
|
— |
|
— |
|
10,440 |
|
|||||
|
Impairment of goodwill |
|
— |
|
34,000 |
|
— |
|
— |
|
34,000 |
|
|||||
|
Amortization of intangible assets |
|
— |
|
3,651 |
|
— |
|
— |
|
3,651 |
|
|||||
|
Interest expense |
|
25,708 |
|
511 |
|
— |
|
— |
|
26,219 |
|
|||||
|
Loss on extinguishment of debt |
|
1,439 |
|
— |
|
— |
|
— |
|
1,439 |
|
|||||
|
Intercompany charges |
|
(25,819 |
) |
25,819 |
|
— |
|
— |
|
— |
|
|||||
|
Equity in loss of subsidiaries |
|
41,640 |
|
218 |
|
— |
|
(41,858 |
)(3) |
— |
|
|||||
|
Other expenses, net |
|
466 |
|
479 |
|
— |
|
— |
|
945 |
|
|||||
|
Income tax provision (benefit) |
|
9,177 |
|
(22,673 |
) |
— |
|
— |
|
(13,496 |
) |
|||||
|
Loss from discontinued operations |
|
— |
|
6,403 |
|
218 |
|
— |
|
6,621 |
|
|||||
|
Cumulative effect of change in accounting principle |
|
13,764 |
|
13,764 |
|
— |
|
(13,764 |
) |
13,764 |
|
|||||
|
Total operating and other expenses, net |
|
73,323 |
|
93,974 |
|
218 |
|
(55,622 |
) |
111,893 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net loss |
|
$ |
(73,323 |
) |
$ |
(55,404 |
) |
$ |
(218 |
) |
$ |
55,622 |
|
$ |
(73,323 |
) |
F-52
|
|
|
Year Ended December 31, 2002 |
|
|||||||||||||
|
(In thousands) |
|
Issuer |
|
Guarantor |
|
Non-Guarantor |
|
Consolidating |
|
Consolidated |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
— |
|
$ |
229,841 |
|
$ |
— |
|
$ |
— |
|
$ |
229,841 |
|
|
Cost of sales |
|
— |
|
164,175 |
|
— |
|
— |
|
164,175 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Gross profit |
|
— |
|
65,666 |
|
— |
|
— |
|
65,666 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Operating and other expenses (income): |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Selling, general and administrative expenses |
|
11,206 |
|
35,366 |
|
— |
|
— |
|
46,572 |
|
|||||
|
Research and development expenses |
|
— |
|
56 |
|
— |
|
— |
|
56 |
|
|||||
|
Amortization of intangible assets |
|
— |
|
3,540 |
|
— |
|
— |
|
3,540 |
|
|||||
|
Interest expense |
|
20,583 |
|
4,793 |
|
— |
|
— |
|
25,376 |
|
|||||
|
Intercompany charges |
|
(24,309 |
) |
24,309 |
|
— |
|
— |
|
— |
|
|||||
|
Equity in loss of subsidiaries |
|
39,489 |
|
9,535 |
|
— |
|
(49,024 |
)(3) |
— |
|
|||||
|
Other expenses, net |
|
495 |
|
10 |
|
— |
|
— |
|
505 |
|
|||||
|
Income tax provision (benefit) |
|
694 |
|
(4,315 |
) |
— |
|
— |
|
(3,621 |
) |
|||||
|
Loss from discontinued operations |
|
— |
|
31,861 |
|
9,535 |
|
— |
|
41,396 |
|
|||||
|
Cumulative effect of change in accounting principle |
|
17,828 |
|
16,344 |
|
— |
|
(16,344 |
) |
17,828 |
|
|||||
|
Total operating and other expenses, net |
|
65,986 |
|
121,499 |
|
9,535 |
|
(65,368 |
) |
131,652 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net loss |
|
$ |
(65,986 |
) |
$ |
(55,833 |
) |
$ |
(9,535 |
) |
$ |
65,368 |
|
$ |
(65,986 |
) |
F-53
Statements of Cash Flows
|
|
|
Year Ended December 31, 2004 |
|
||||||||||
|
(In thousands) |
|
Issuer |
|
Guarantor |
|
Consolidating |
|
Consolidated |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
||||
|
Net loss |
|
$ |
(42,523 |
) |
$ |
(7,910 |
) |
$ |
7,910 |
(3) |
$ |
(42,523 |
) |
|
Noncash adjustments: |
|
|
|
|
|
|
|
|
|
||||
|
Equity in loss of subsidiaries |
|
7,910 |
|
— |
|
(7,910 |
)(3) |
— |
|
||||
|
Other noncash adjustments |
|
18,990 |
|
12,753 |
|
— |
|
31,743 |
|
||||
|
Changes in working capital |
|
(5,638 |
) |
(520 |
) |
— |
|
(6,158 |
) |
||||
|
Net cash provided by (used for) operating activities |
|
(21,261 |
) |
4,323 |
|
— |
|
(16,938 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
||||
|
Capital expenditures |
|
(52 |
) |
(3,200 |
) |
— |
|
(3,252 |
) |
||||
|
Proceeds from sale of property and equipment |
|
— |
|
18 |
|
— |
|
18 |
|
||||
|
Net cash used for investing activities |
|
(52 |
) |
(3,182 |
) |
— |
|
(3,234 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
||||
|
Debt borrowings: |
|
|
|
|
|
|
|
|
|
||||
|
Promissory notes |
|
5,000 |
|
— |
|
— |
|
5,000 |
|
||||
|
Revolving line of credit, net |
|
12,550 |
|
— |
|
— |
|
12,550 |
|
||||
|
Debt repayments: |
|
|
|
|
|
|
|
|
|
||||
|
Other secured long-term debt |
|
(18 |
) |
(1,180 |
) |
— |
|
(1,198 |
) |
||||
|
Deferred financing costs |
|
(2,137 |
) |
— |
|
— |
|
(2,137 |
) |
||||
|
Net cash provided by (used for) financing activities |
|
15,395 |
|
(1,180 |
) |
— |
|
14,215 |
|
||||
|
Net increase (decrease) in cash and equivalents |
|
(5,918 |
) |
(39 |
) |
— |
|
(5,957 |
) |
||||
|
Cash and equivalents at beginning of period |
|
6,540 |
|
396 |
|
— |
|
6,936 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Cash and equivalents at end of period |
|
$ |
622 |
|
$ |
357 |
|
$ |
— |
|
$ |
979 |
|
F-54
|
|
|
Year Ended December 31, 2003 |
|
|||||||||||||
|
(In thousands) |
|
Issuer |
|
Guarantor |
|
Non-Guarantor |
|
Consolidating |
|
Consolidated |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Cash flows from operating activities of continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net loss |
|
$ |
(73,323 |
) |
$ |
(55,404 |
) |
$ |
(218 |
) |
$ |
55,622 |
(3) |
$ |
(73,323 |
) |
|
Noncash adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Cumulative effect of change in accounting principle |
|
13,764 |
|
13,764 |
|
— |
|
(13,764 |
) |
13,764 |
|
|||||
|
Loss from discontinued operations |
|
— |
|
6,403 |
|
218 |
|
— |
|
6,621 |
|
|||||
|
Equity in loss of subsidiaries |
|
41,640 |
|
218 |
|
— |
|
(41,858 |
)(3) |
— |
|
|||||
|
Other noncash adjustments |
|
(6,835 |
) |
47,397 |
|
— |
|
— |
|
40,562 |
|
|||||
|
Changes in working capital |
|
3,441 |
|
(10,153 |
) |
— |
|
— |
|
(6,712 |
) |
|||||
|
Net cash provided by (used for) operating activities |
|
(21,313 |
) |
2,225 |
|
— |
|
— |
|
(19,088 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Cash flows from investing activities of continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net proceeds from sale of Specialty Avionics Group |
|
132,223 |
|
— |
|
— |
|
— |
|
132,223 |
|
|||||
|
Proceeds from sale of property and equipment |
|
855 |
|
2,353 |
|
— |
|
— |
|
3,208 |
|
|||||
|
Capital expenditures |
|
(26 |
) |
(4,771 |
) |
— |
|
— |
|
(4,797 |
) |
|||||
|
Cash paid for acquisitions |
|
(606 |
) |
— |
|
— |
|
— |
|
(606 |
) |
|||||
|
Net cash provided by (used for) investing activities |
|
132,446 |
|
(2,418 |
) |
— |
|
— |
|
130,028 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Cash flows from financing activities of continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Debt borrowings: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Second-lien term debt |
|
80,000 |
|
— |
|
— |
|
— |
|
80,000 |
|
|||||
|
Debt repayments: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Revolving line of credit, net |
|
(6,000 |
) |
— |
|
— |
|
— |
|
(6,000 |
) |
|||||
|
First-lien debt |
|
(183,679 |
) |
— |
|
— |
|
— |
|
(183,679 |
) |
|||||
|
Other secured long-term debt |
|
(643 |
) |
(1,233 |
) |
— |
|
— |
|
(1,876 |
) |
|||||
|
Deferred financing costs |
|
(6,614 |
) |
— |
|
— |
|
— |
|
(6,614 |
) |
|||||
|
Net cash used for financing activities |
|
(116,936 |
) |
(1,233 |
) |
— |
|
— |
|
(118,169 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net cash provided by discontinued operations |
|
— |
|
1,744 |
|
— |
|
— |
|
1,744 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net increase (decrease) in cash and equivalents |
|
(5,803 |
) |
318 |
|
— |
|
— |
|
(5,485 |
) |
|||||
|
Cash and equivalents at beginning of period |
|
12,343 |
|
78 |
|
— |
|
— |
|
12,421 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Cash and equivalents at end of period |
|
$ |
6,540 |
|
$ |
396 |
|
$ |
— |
|
$ |
— |
|
$ |
6,936 |
|
F-55
|
|
|
Year Ended December 31, 2002 |
|
|||||||||||||
|
(In thousands) |
|
Issuer |
|
Guarantor |
|
Non-Guarantor |
|
Consolidating |
|
Consolidated |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Cash flows from operating activities of continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net loss |
|
$ |
(65,986 |
) |
$ |
(55,833 |
) |
$ |
(9,535 |
) |
$ |
65,368 |
(3) |
$ |
(65,986 |
) |
|
Noncash adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Cumulative effect of change in accounting principle |
|
17,828 |
|
16,344 |
|
— |
|
(16,344 |
) |
17,828 |
|
|||||
|
Loss from discontinued operations |
|
— |
|
31,861 |
|
9,535 |
|
— |
|
41,396 |
|
|||||
|
Equity in loss of subsidiaries |
|
39,489 |
|
9,535 |
|
— |
|
(49,024 |
)(3) |
— |
|
|||||
|
Other noncash adjustments |
|
4,058 |
|
21,502 |
|
— |
|
— |
|
25,560 |
|
|||||
|
Changes in working capital |
|
28,171 |
|
(35,249 |
) |
— |
|
— |
|
(7,078 |
) |
|||||
|
Net cash provided by (used for) operating activities |
|
23,560 |
|
(11,840 |
) |
— |
|
— |
|
11,720 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Cash flows from investing activities of continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Cash paid for acquisitions, net of cash acquired |
|
(5,890 |
) |
— |
|
— |
|
— |
|
(5,890 |
) |
|||||
|
Capital expenditures |
|
(49 |
) |
(4,307 |
) |
— |
|
— |
|
(4,356 |
) |
|||||
|
Net cash used for investing activities |
|
(5,939 |
) |
(4,307 |
) |
— |
|
— |
|
(10,246 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Cash flows from financing activities of continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Capital contribution, net |
|
5,000 |
|
— |
|
— |
|
— |
|
5,000 |
|
|||||
|
Debt borrowings: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Other secured long-term debt |
|
— |
|
1,145 |
|
— |
|
— |
|
1,145 |
|
|||||
|
Debt repayments: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
First-lien debt |
|
(11,506 |
) |
— |
|
— |
|
— |
|
(11,506 |
) |
|||||
|
Revolving line of credit, net |
|
(6,000 |
) |
— |
|
— |
|
— |
|
(6,000 |
) |
|||||
|
Other secured long-term debt |
|
(389 |
) |
(1,639 |
) |
— |
|
— |
|
(2,028 |
) |
|||||
|
Deferred financing costs |
|
(1,656 |
) |
— |
|
— |
|
— |
|
(1,656 |
) |
|||||
|
Return of capital |
|
(368 |
) |
— |
|
— |
|
— |
|
(368 |
) |
|||||
|
Net cash used for financing activities |
|
(14,919 |
) |
(494 |
) |
— |
|
— |
|
(15,413 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net cash provided by discontinued operations |
|
— |
|
16,882 |
|
— |
|
— |
|
16,882 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net increase in cash and equivalents |
|
2,702 |
|
241 |
|
— |
|
— |
|
2,943 |
|
|||||
|
Cash and equivalents at beginning of period |
|
9,641 |
|
(163 |
) |
— |
|
— |
|
9,478 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Cash and equivalents at end of period |
|
$ |
12,343 |
|
$ |
78 |
|
$ |
— |
|
$ |
— |
|
$ |
12,421 |
|
F-56
Note 20. Subsequent Events
During March 2005, the Company completed a series of transactions and amendments to existing agreements with DLJ Merchant Banking Partners II, L.P. and affiliated funds (Note 17).
First, the maturity date of the existing $5,000,000 of 13.5% senior unsecured promissory notes (Note 10) was extended. The notes are now due on March 31, 2006 and interest, which has accrued from December 12, 2004, is payable on December 31, 2005 and at maturity. As a result of the extended maturity date, the notes are classified as long-term liabilities as of December 31, 2004. Second, the Company entered into a loan agreement which provides for up to $5,000,000 of additional borrowings at rates and with terms identical to the existing 13.5% senior unsecured promissory notes, as amended. The Company has borrowed $2,500,000 pursuant to this agreement and borrowing of the remainder, if needed, are subject to customary conditions including absence of a material adverse change in the Company’s business. And third, the Company received approximately $5,000,000 of proceeds from the sale of 26,425 additional shares of its Senior Redeemable Exchangeable Preferred Stock due 2008 (Note 11).
The $7,500,000 of cash received from these transactions will be used to fund working capital needs.
F-57
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Financial Statement Schedules
Schedule II – Valuation and Qualifying Accounts
|
(In thousands) |
|
Balance at |
|
Charged to |
|
Charged to |
|
Deductions |
|
Balance at |
|
|||||
|
Year Ended December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Allowance for doubtful accounts |
|
$ |
1,268 |
|
$ |
227 |
|
$ |
— |
|
$ |
(887 |
) |
$ |
608 |
|
|
Reserve for excess, slow moving and potentially obsolete material (1) |
|
5,214 |
|
2,385 |
|
— |
|
(674 |
) |
6,925 |
|
|||||
|
Deferred tax asset valuation allowance |
|
19,528 |
|
14,701 |
|
— |
|
— |
|
34,229 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Year Ended December 31, 2003 (2) |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Allowance for doubtful accounts |
|
$ |
1,205 |
|
$ |
670 |
|
$ |
— |
|
$ |
(607 |
) |
$ |
1,268 |
|
|
Reserve for excess, slow moving and potentially obsolete material (1) |
|
3,759 |
|
3,199 |
|
— |
|
(1,744 |
) |
5,214 |
|
|||||
|
Deferred tax asset valuation allowance |
|
— |
|
19,528 |
|
— |
|
— |
|
19,528 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Year Ended December 31, 2002 (2) |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Allowance for doubtful accounts |
|
$ |
2,108 |
|
$ |
843 |
|
$ |
— |
|
$ |
(1,746 |
) |
$ |
1,205 |
|
|
Reserve for excess, slow moving and potentially obsolete material (1) |
|
2,986 |
|
3,553 |
|
— |
|
(2,780 |
) |
3,759 |
|
|||||
(1) Excludes asset impairment-related charges resulting from restructuring programs of $2,811,000 in 2004, $3,073,000 in 2003 and $7,241,000 in 2002.
(2) Excludes amounts attributable to the Specialty Avionics Group which is classified as discontinued operation.
F-58