<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
Commission File Number 333-70363
---------------
DECRANE HOLDINGS CO.
(Exact name of registrant as specified in its charter)
DELAWARE 13-4019703
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o DLJ Merchant Banking Partners II, L.P.
277 Park Avenue, New York, NY 10172
(Address, including zip code, of principal executive offices)
(212) 892-3000
(Registrant's telephone number, including area code)
---------------
(NOT APPLICABLE)
(Former address and telephone number of principal executive offices,
if changed since last report)
---------------
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.
[ ] Yes [X] No
The number of shares of Registrant's Common Stock, $.01 par value,
outstanding as of April 30, 1999 was 3,389,663 shares.
<PAGE>
DECRANE HOLDINGS CO.
INDEX
<TABLE>
<CAPTION>
PAGE
----
PART I - FINANCIAL INFORMATION
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998 ..... 1
Consolidated Statements of Operations for the three months
ended March 31, 1999 and March 31, 1998 (predecessor)..................... 2
Consolidated Statements of Stockholders' Equity for the
three months ended March 31, 1999 ........................................ 3
Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and March 31,1998 (predecessor)...................... 4
Condensed Notes to Consolidated Financial Statements ....................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ...................................................... 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK .................. 18
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION .......................................................... 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits ................................................................... 19
Reports on Form 8-K ........................................................ 19
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DECRANE HOLDINGS CO. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ......................................................... $ 2,775 $ 3,518
Accounts receivable, net .......................................................... 36,115 30,441
Inventories ....................................................................... 44,925 34,281
Deferred income taxes ............................................................. 4,428 4,300
Prepaid expenses and other current assets.......................................... 4,426 3,897
----------- -----------
Total current assets ............................................................ 92,669 76,437
Property and equipment, net .......................................................... 34,026 28,160
Other assets, principally intangibles, net ........................................... 258,315 225,978
----------- -----------
Total assets .................................................................. $ 385,010 $ 330,575
----------- -----------
----------- -----------
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings ............................................................. $ 938 $ 283
Current portion of long-term obligations .......................................... 2,010 1,529
Accounts payable .................................................................. 12,506 6,383
Accrued expenses .................................................................. 23,036 18,272
Income taxes payable .............................................................. 3,394 3,743
----------- -----------
Total current liabilities ....................................................... 41,884 30,210
----------- -----------
Long-term liabilities
Long-term obligations ............................................................. 224,437 184,953
Deferred income taxes ............................................................. 17,014 16,990
Other long-term liabilities ....................................................... 4,944 659
----------- -----------
Total long-term liabilities ..................................................... 246,395 202,602
----------- -----------
Commitments and contingencies
Mandatorily redeemable preferred stock ............................................... 37,140 35,884
----------- -----------
Stockholders' equity
Undesignated preferred stock, $.01 par value, 1,140,000 shares authorized;
none issued and outstanding as of March 31, 1999 and December 31, 1998 .......... - -
Common stock, $.01 par value, 3,500,000 shares authorized; 2,846,185 shares
issued and outstanding as of March 31, 1999 and December 31, 1998 ............... 28 28
Additional paid-in capital ........................................................ 63,241 64,497
Notes receivable for shares sold .................................................. (356) (352)
Accumulated deficit ............................................................... (2,843) (2,568)
Accumulated other comprehensive income (loss)...................................... (479) 274
------------ -----------
Total stockholders' equity ...................................................... 59,591 61,879
----------- -----------
Total liabilities, mandatorily redeemable preferred stock and
stockholders' equity ........................................................ $ 385,010 $ 330,575
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
1
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998
1999 (PREDECESSOR)
------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues ........................................................................... $ 49,895 $ 29,128
Cost of sales ...................................................................... 33,895 20,141
----------- -----------
Gross profit .................................................................. 16,000 8,987
----------- -----------
Operating expenses
Selling, general and administrative expenses .................................... 8,171 4,879
Amortization of intangible assets ............................................... 2,564 379
----------- -----------
Total operating expenses ...................................................... 10,735 5,258
----------- -----------
Income from operations ............................................................. 5,265 3,729
Other expenses (income)
Interest expense ................................................................ 5,751 786
Other income..................................................................... (144) (17)
----------- -----------
Income (loss) before provision for income taxes .................................... (342) 2,960
Provision (benefit) for income taxes ............................................... (67) 1,272
----------- -----------
Net income (loss) .................................................................. $ (275) $ 1,688
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
2
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
-------------------- NOTES OTHER
NUMBER ADDITIONAL RECEIVABLE COMPREHENSIVE
OF PAID-IN FOR SHARES ACCUMULATED INCOME
SHARES AMOUNT CAPITAL ISSUED DEFICIT (LOSS) TOTAL
--------- -------- ---------- ---------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 ......... 2,846,185 $ 28 $ 64,497 $ (352) $ (2,568) $ 274 $ 61,879
--------
Comprehensive income (loss)
Net loss ........................ - - - - (275) - (275)
Translation adjustment .......... - - - - - (753) (753)
---------
(1,028)
---------
Dividends on mandatorily redeemable
preferred stock ................. - - (1,256) - - - (1,256)
Notes receivable interest .......... - - - (4) - - (4)
--------- -------- --------- ------- -------- -------- ---------
Balance, March 31, 1999 (Unaudited) 2,846,185 $ 28 $ 63,241 $ (356) $ (2,843) $ (479) $ 59,591
--------- -------- --------- ------- -------- -------- ---------
--------- -------- --------- ------- -------- -------- ---------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998
1999 (PREDECESSOR)
------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ............................................................... $ (275) $ 1,688
Adjustments to reconcile net income (loss) to
net cash used for operating activities
Depreciation and amortization ............................................... 4,032 1,457
Deferred income taxes ....................................................... 53 (46)
Other, net .................................................................. 172 132
Changes in assets and liabilities, net of effect from acquisitions
Accounts receivable ....................................................... (3,951) (1,848)
Inventories ............................................................... 1,213 (2,299)
Prepaid expenses and other assets ......................................... (196) (351)
Accounts payable .......................................................... 3,127 (110)
Accrued expenses .......................................................... (5,180) (672)
Income taxes payable ...................................................... (120) (2,152)
Other long-term liabilities ............................................... 191 -
----------- -----------
Net cash used for operating activities .................................. (934) (4,201)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisition, net of cash acquired ................................. (41,734) -
Capital expenditures ............................................................ (2,093) (297)
----------- -----------
Net cash used for investing activities .................................. (43,827) (297)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Financing of acquisition
Senior credit facility borrowings ............................................. 37,628 -
Customer advance .............................................................. 5,000 -
Deferred financing costs ...................................................... (894) -
Net revolving line of credit agreement borrowings ............................... 2,754 5,883
Principal payments on capitalized lease and other long-term obligations ......... (452) (215)
Other, net ...................................................................... - (392)
----------- -----------
Net cash provided by financing activities ............................... 44,036 5,276
----------- -----------
Effect of foreign currency translation on cash ..................................... (18) 194
----------- -----------
Net increase (decrease) in cash and cash equivalents ............................... (743) 972
Cash and cash equivalents at beginning of period ................................... 3,518 206
----------- -----------
Cash and cash equivalents at end of period ......................................... $ 2,775 $ 1,178
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS
The consolidated interim financial statements included in this report are
unaudited. The Company believes the interim financial statements are presented
on a basis consistent with the audited financial statements. The Company also
believes that the interim financial statements contain all adjustments necessary
for a fair presentation of the results for such interim periods. All of these
adjustments are normal recurring adjustments. The results of operations for
interim periods do not necessarily predict the operating results for the full
year. The consolidated balance sheet as of December 31, 1998 has been derived
from audited financial statements and, accordingly, does not include all
disclosures required by generally accepted accounting principles as permitted by
interim reporting requirements. The information included in this report should
be read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and the 1998 audited financial statements
and related notes included in the Company's prospectus. The prospectus is part
of the Company's Registration Statement No. 333-70363 on Form S-1 filed with the
Securities and Exchange Commission effective May 14, 1999. The Company has made
some reclassifications to prior periods' financial statements to conform to the
1999 presentation.
As described in the 1998 audited financial statements, DeCrane Aircraft
Holdings, Inc. became a wholly-owned subsidiary of DeCrane Holdings Co. in
August 1998 as a result of the acquisition by DLJ Merchant Banking Partners II,
L.P. and affiliated funds and entities. DeCrane Aircraft is the predecessor of
DeCrane Holdings, and the financial information for DeCrane Aircraft is
presented for periods prior to the DLJ acquisition.
NOTE 2 - ACQUISITIONS
PATS
On January 22, 1999 the Company acquired all of the common stock of PATS,
Inc. PATS is a Maryland-based designer, manufacturer and installer of auxiliary
fuel tank systems which significantly extend the flight range of commercial and
corporate aircraft.
The total purchase price was $41,829,000, including an estimated $1,340,000
of acquisition related costs. The total purchase price is subject to future
adjustments for changes in working capital as of the closing date from an agreed
upon amount and certain environmental and other indemnities made by the PATS
stockholders. The acquisition was accounted for as a purchase and the
$34,729,000 difference between the purchase price and the fair value of the net
assets acquired was recorded as goodwill and is being amortized on a
straight-line basis over thirty years. The purchase price allocation is
preliminary and may change upon the completion of the final valuation of the net
assets acquired and final determination of the purchase price adjustments, if
any. The consolidated balance sheet as of March 31, 1999 reflects the financial
position of PATS and the consolidated results of operations for the three months
ended March 31, 1999 include its operating results subsequent to the acquisition
date.
Concurrent with the acquisition, the Company retired $6,860,000 of existing
PATS indebtedness. The acquisition and debt refinancing were funded with
$37,628,000 of borrowings under the Company's senior credit facility as
described in Note 5 and a $5,000,000 customer advance for product to be
delivered by PATS in the future.
5
<PAGE>
NOTE 2 - ACQUISITIONS (CONTINUED)
PPI
On April 23, 1999 the Company acquired all of the common stock of PPI
Holdings, Inc. PPI is a Kansas-based designer and manufacturer of interior
furniture components for middle- and high-end corporate aircraft.
The total purchase price was $63,178,000, plus $19,250,000 of contingent
consideration payable over two years based on future attainment of defined
performance criteria. The total purchase price includes an estimated $1,240,000
of acquisition related costs. The acquisition will be accounted for as a
purchase and the estimated $53,800,000 difference between the purchase price and
the fair value of the net assets acquired will be recorded as goodwill and
amortized on a straight-line basis over thirty years. The amount of contingent
consideration paid in the future, if any, will increase goodwill and will be
amortized prospectively over the remaining period of the initial thirty-year
term. The purchase price allocation is preliminary and may change upon the
completion of the final valuation of the net assets acquired. The Company's
consolidated financial statement will include PPI's financial position and its
results of operations for periods subsequent to the acquisition date.
Concurrent with the acquisition, the Company retired $7,212,000 of existing
PPI indebtedness. The acquisition and debt refinancing were funded with
$50,000,000 of borrowings under the Company's senior credit facility as
described in Note 5 and $12,500,000 of proceeds from the sale of common stock as
described in Note 7.
NOTE 3 - PRO FORMA RESULTS OF OPERATIONS FOR THE DLJ AND OTHER ACQUISITIONS
Unaudited pro forma consolidated results of operations are presented in the
table below for three months ended March 31, 1999 and 1998. The results of
operations are pro forma for the DLJ and other 1998 acquisitions described in
the Company's 1998 audited financial statements, the 1999 PATS acquisition, and
are pro forma as if all of the acquisitions were consummated as of January 1,
1998. The pro forma results exclude the effect of the PPI acquisition, which was
completed subsequent to March 31, 1999.
<TABLE>
<CAPTION>
PRO FORMA FOR THE
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Revenues ......................................... $ 50,346 $ 46,823
Loss before extraordinary item ................... (1,671) (3,491)
</TABLE>
The pro forma results of operations does not purport to represent what
actual results would have been if the transactions described above occurred on
such dates or to project the results of operations for any future period. The
above information reflects adjustments for inventory, depreciation,
amortization, general and administrative expenses and interest expense based on
the new cost basis and debt structure of the Company following the acquisitions.
In 1998, income excludes the effect of a $2,229,000 extraordinary loss incurred
in connection with a debt refinancing.
NOTE 4 - INVENTORIES
Inventories are comprised of the following (amounts in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Raw material ........................................ $ 23,149 $ 19,221
Work-in process ..................................... 12,847 7,231
Finished goods ...................................... 8,929 7,829
----------- -----------
Total inventories ................................ $ 44,925 $ 34,281
----------- -----------
----------- -----------
</TABLE>
6
<PAGE>
NOTE 5 - BORROWINGS
Long-term obligations include the following amounts (amounts in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Senior credit facility
$25 million working capital revolving line of credit ................ $ 7,500 $ 5,800
$25 million acquisition revolving line of credit .................... 18,000 -
Term loans .......................................................... 99,725 79,888
12% senior subordinated notes .......................................... 100,000 100,000
Capital lease obligations and equipment term financing ................. 505 367
Other .................................................................. 717 427
----------- -----------
Total long-term obligations ......................................... 226,447 186,482
Less current portion ................................................ (2,010) (1,529)
----------- -----------
Long-term obligations, less current portion ....................... $ 224,437 $ 184,953
----------- -----------
----------- -----------
</TABLE>
In conjunction with the January 1999 PATS acquisition, the Company borrowed
$18,000,000 under its acquisition revolving credit facility and amended its term
loan facility to provide for an additional $20,000,000 of term loan borrowings.
The interest rate margins, the rates charged above the current prime or
Euro-Dollar rates, were increased by 0.50% for all senior credit facility
borrowings. The amended interest rate margins range between 1.50% to 1.75% for
prime rate borrowings and 2.75% to 3.00% for Euro-Dollar borrowings, depending
on the type of borrowing.
In April 1999, the term loan facility was further amended to provide for an
additional $70,000,000 of term loan borrowings. The Company used $50,000,000 of
the proceeds to fund the PPI acquisition, $18,000,000 to repay acquisition
revolving line of credit borrowings and $2,000,000 to repay working capital
revolving line of credit borrowings. The interest rate margins applicable to the
incremental borrowings are 2.00% for prime rate borrowings or 3.25% for
Euro-Dollar borrowings.
NOTE 6 - INCOME TAXES
The provision for income taxes differs from the amount determined by
applying the applicable U.S. statutory federal rate to the income (loss) before
income taxes primarily due to the effects of state and foreign income taxes and
non-deductible expenses, principally goodwill amortization. The difference in
the effective tax rates between periods is mostly a result of higher goodwill
amortization.
NOTE 7 - CAPITAL STRUCTURE
MANDATORILY REDEEMABLE PREFERRED STOCK
During the three months ended March 31, 1999, the liquidation preference of
the preferred stock increased by $1,256,000 to reflect non-cash dividend
accretion. The dividend accretion was charged to additional paid-in capital. The
preferred stock has a total liquidation value of $37,140,000 as of March 31,
1999.
COMMON STOCK
In April 1999, the Company increased the number of authorized common shares
to 4,500,000 shares. In conjunction with the PPI acquisition financing, the
Company sold 543,478 shares to DLJ and its affiliates at $23.00 per share.
7
<PAGE>
NOTE 8 - CONSOLIDATED STATEMENTS OF CASH FLOWS
Assets acquired and liabilities assumed in connection with acquisitions are
as follows (amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998
1999 (PREDECESSOR)
------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Fair value of assets acquired ....................... $ 53,738 $ -
Liabilities assumed ................................. (11,909) -
----------- -----------
Cash paid ........................................ 41,829 -
Less cash acquired ............................... (95) -
----------- -----------
Net cash paid for acquisitions ................. $ 41,734 $ -
----------- -----------
----------- -----------
</TABLE>
NOTE 9 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
In conjunction with the senior credit facility and 12% senior
subordinated notes described in Note 5, the following condensed consolidating
financial information is presented for the Company, segregating guarantor and
non-guarantor subsidiaries. The accompanying financial information in the
"Guarantor Subsidiaries" column reflects the financial position, results of
operations and cash flows for those subsidiaries guaranteeing the senior
credit facility and the notes. The guarantor subsidiaries are wholly-owned
subsidiaries of the Company and their guarantees are full and unconditional
on a joint and several basis. There are no restrictions on the ability of the
guarantor subsidiaries to transfer funds to the issuer in the form of cash
dividends, loans or advances. Separate financial statements of the guarantor
subsidiaries are not presented because management believes that such
financial statements would not be material to investors.
Investments in subsidiaries in the following condensed consolidating
financial information are accounted for under the equity method of accounting.
Consolidating adjustments include the following:
(1) Elimination of investments in subsidiaries.
(2) Elimination of intercompany accounts.
(3) Elimination of intercompany sales between guarantor and
non-guarantor subsidiaries.
(4) Elimination of equity in earnings of subsidiaries.
8
<PAGE>
NOTE 9 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1999 (UNAUDITED)
------------------------------------------------------------------------
DECRANE GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS CO. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
----------- ----------- ----------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ............. $ 1,269 $ 1,306 $ 200 $ - $ 2,775
Accounts receivable, net .............. - 33,919 2,196 - 36,115
Inventories ........................... - 43,162 1,763 - 44,925
Other current assets .................. 7,622 1,040 192 - 8,854
----------- ----------- ----------- ---------- -----------
Total current assets ................ 8,891 79,427 4,351 - 92,669
Property and equipment, net .............. 265 31,575 2,186 - 34,026
Other assets, principally intangibles, net 12,240 232,895 13,180 - 258,315
Investments in subsidiaries .............. 288,206 20,609 - (308,815)(1) -
Intercompany receivables ................. 36,144 331 3,993 (40,468)(2) -
----------- ----------- ----------- ---------- -----------
$ 345,746 $ 364,837 $ 23,710 $ (349,283) $ 385,010
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
LIABILITIES, MANDATORILY REDEEMABLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term obligations ................ $ 1,530 $ 480 $ 938 $ - $ 2,948
Other current liabilities ............. 6,052 31,227 1,657 - 38,936
----------- ----------- ----------- ---------- -----------
Total current liabilities ........... 7,582 31,707 2,595 - 41,884
----------- ----------- ----------- ---------- -----------
Long-term liabilities
Long-term obligations ................. 223,721 716 - - 224,437
Intercompany payables ................. 873 39,264 331 (40,468)(2) -
Other long-term liabilities ........... 16,360 4,944 654 - 21,958
----------- ----------- ----------- ---------- -----------
Total long-term liabilities ......... 240,954 44,924 985 (40,468) 246,395
----------- ----------- ----------- ---------- -----------
Mandatorily redeemable preferred stock ... 37,140 - - - 37,140
----------- ----------- ----------- ---------- -----------
Stockholders' equity (deficit)
Paid-in capital ....................... 62,913 241,188 15,440 (256,628)(1) 62,913
Retained earnings (deficit) ........... (2,843) 47,018 5,169 (52,187)(1) (2,843)
Accumulated other comprehensive
income (loss) ....................... - - (479) - (479)
----------- ----------- ----------- ---------- -----------
Total stockholders' equity (deficit) 60,070 288,206 20,130 (308,815) 59,591
----------- ----------- ----------- ---------- -----------
$ 345,746 $ 364,837 $ 23,710 $ (349,283) $ 385,010
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
</TABLE>
9
<PAGE>
NOTE 9 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------------------------------------
DECRANE GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS CO. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
----------- ----------- ----------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ............. $ 2,458 $ 762 $ 298 $ - $ 3,518
Accounts receivable, net .............. - 28,917 1,524 - 30,441
Inventories ........................... - 32,624 1,657 - 34,281
Other current assets .................. 7,066 894 237 - 8,197
----------- ----------- ----------- ---------- -----------
Total current assets ................ 9,524 63,197 3,716 - 76,437
Property and equipment, net .............. 272 26,170 1,718 - 28,160
Other assets, principally intangibles, net 11,753 200,383 13,842 - 225,978
Investments in subsidiaries .............. 250,366 20,114 - (270,480)(1) -
Intercompany receivables ................. 39,012 2,091 3,622 (44,725)(2) -
----------- ----------- ----------- ---------- -----------
$ 310,927 $ 311,955 $ 22,898 $ (315,205) $ 330,575
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
LIABILITIES, MANDATORILY REDEEMABLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term obligations ................ $ 892 $ 628 $ 292 $ - $ 1,812
Other current liabilities ............. 10,573 16,651 1,174 - 28,398
----------- ----------- ----------- ---------- -----------
Total current liabilities ........... 11,465 17,279 1,466 - 30,210
----------- ----------- ----------- ---------- -----------
Long-term liabilities
Long-term obligations ................. 184,822 131 - - 184,953
Intercompany payables ................. 873 43,521 331 (44,725)(2) -
Other long-term liabilities ........... 16,278 658 713 - 17,649
----------- ----------- ----------- ---------- -----------
Total long-term liabilities ......... 201,973 44,310 1,044 (44,725) 202,602
----------- ----------- ----------- ---------- -----------
Mandatorily redeemable preferred stock ... 35,884 - - - 35,884
----------- ----------- ----------- ---------- -----------
Stockholders' equity (deficit)
Paid-in capital ....................... 64,173 210,787 15,440 (226,227)(1) 64,173
Retained earnings (deficit) ........... (2,568) 39,579 4,674 (44,253)(1) (2,568)
Accumulated other comprehensive
income (loss) ....................... - - 274 - 274
----------- ----------- ----------- ---------- -----------
Total stockholders' equity (deficit) 61,605 250,366 20,388 (270,480) 61,879
----------- ----------- ----------- ---------- -----------
$ 310,927 $ 311,955 $ 22,898 $ (315,205) $ 330,575
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
</TABLE>
10
<PAGE>
NOTE 9 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
------------------------------------------------------------------------
DECRANE GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS CO. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
----------- ----------- ----------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues ................................. $ - $ 48,508 $ 3,651 $ (2,264)(3) $ 49,895
Cost of sales ............................ - 33,417 2,742 (2,264)(3) 33,895
Gross profit ............................. - 15,091 909 - 16,000
----------- ----------- ----------- ---------- -----------
Selling, general and
administrative expenses ............... 1,781 6,043 347 - 8,171
Amortization of intangible assets ........ 46 2,389 129 - 2,564
Interest expense ......................... 5,668 73 10 - 5,751
Intercompany charges ..................... (1,612) 1,564 48 - -
Equity in earnings of subsidiaries ....... (2,871) (495) - 3,366(4) -
Other expenses (income) .................. - 109 (253) - (144)
Provision (benefit) for income taxes ..... (2,737) 2,537 133 - (67)
----------- ----------- ----------- ---------- -----------
Net income (loss) ........................ $ (275) $ 2,871 $ 495 $ (3,366) $ (275)
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998 (PREDECESSOR - UNAUDITED)
-------------------------------------------------------------------------
DECRANE
AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
----------- ----------- ----------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues ................................. $ - $ 27,724 $ 3,580 $ (2,176)(3) $ 29,128
Cost of sales ............................ - 19,601 2,716 (2,176)(3) 20,141
----------- ----------- ----------- ---------- -----------
Gross profit ............................. - 8,123 864 - 8,987
----------- ----------- ----------- ---------- -----------
Selling, general and
administrative expenses ............... 1,150 3,454 275 - 4,879
Amortization of intangible assets ........ - 377 2 - 379
Interest expense ......................... 731 44 11 - 786
Intercompany charges ..................... (1,630) 1,582 48 - -
Equity in earnings of subsidiaries ....... (1,860) (406) - 2,266 (4) -
Other expenses (income) .................. - 12 (29) - (17)
Provision (benefit) for income taxes ..... (79) 1,200 151 - 1,272
----------- ----------- ----------- ---------- -----------
Net income ............................... $ 1,688 $ 1,860 $ 406 $ (2,266) $ 1,688
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
</TABLE>
11
<PAGE>
NOTE 9 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
-------------------------------------------------------------------------
DECRANE GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS CO. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
----------- ----------- ----------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ..................... $ (275) $ 2,871 $ 495 $ (3,366) $ (275)
Adjustments to net income (loss)
Non-cash net income adjustments ..... 510 3,579 168 - 4,257
Equity in earnings of subsidiaries .. (2,871) (495) - 3,366 (4) -
Changes in working capital ............ 4,647 (8,638) (925) - (4,916)
----------- ----------- ----------- ---------- -----------
Net cash provided by (used for)
operating activities............... 2,011 (2,683) (262) - (934)
----------- ----------- ----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisition, net of
cash acquired ....................... (41,829) 95 - - (41,734)
Capital expenditures .................. (13) (1,589) (491) - (2,093)
----------- ----------- ----------- ---------- -----------
Net cash used for investing
activities ........................ (41,842) (1,494) (491) - (43,827)
----------- ----------- ----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Debt financing for acquisition ........ 36,734 5,000 - - 41,734
Line of credit borrowings ............. 2,072 - 682 - 2,754
Principal payments on long-term
debt and leases ..................... (164) (279) (9) - (452)
----------- ----------- ----------- ---------- -----------
Net cash provided by
financing activities .............. 38,642 4,721 673 - 44,036
----------- ----------- ----------- ---------- -----------
Effect of foreign currency
translation on cash ................... - - (18) - (18)
----------- ----------- ----------- ---------- -----------
Net increase (decrease) in cash
and equivalents ....................... (1,189) 544 (98) - (743)
Cash and equivalents at beginning
of period ............................. 2,458 762 298 - 3,518
----------- ----------- ----------- ---------- -----------
Cash and equivalents at end of period .... $ 1,269 $ 1,306 $ 200 $ - $ 2,775
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
</TABLE>
12
<PAGE>
NOTE 9 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998 (PREDECESSOR - UNAUDITED)
---------------------------------------------------------------------------
DECRANE
AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
----------- ----------- ----------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................ $ 1,688 $ 1,860 $ 406 $ (2,266) $ 1,688
Adjustments to net income
Non-cash net income adjustments ..... (12) 1,350 205 - 1,543
Equity in earnings of subsidiaries .. (1,860) (406) - 2,266 (4) -
Changes in working capital ............ (5,450) (1,547) (435) - (7,432)
----------- ----------- ----------- ---------- -----------
Net cash provided by (used for)
operating activities............... (5,634) 1,257 176 - (4,201)
----------- ----------- ----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures .................. - (170) (127) - (297)
----------- ----------- ----------- ---------- -----------
Net cash used for investing
activities ........................ - (170) (127) - (297)
----------- ----------- ----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Line of credit borrowings (repayments) 6,000 - (117) - 5,883
Principal payments on long-term
debt and leases ..................... (2) (200) (13) - (215)
Other, net ............................ (377) (15) - - (392)
----------- ----------- ----------- ---------- -----------
Net cash provided by (used for)
financing activities .............. 5,621 (215) (130) - 5,276
----------- ----------- ----------- ---------- -----------
Effect of foreign currency
translation on cash ................... - - 194 - 194
----------- ----------- ----------- ---------- -----------
Net increase (decrease) in cash
and equivalents ....................... (13) 872 113 - 972
Cash and equivalents at beginning
of period ............................. 16 109 81 - 206
----------- ----------- ----------- ---------- -----------
Cash and equivalents at end of period .... $ 3 $ 981 $ 194 $ - $ 1,178
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
</TABLE>
NOTE 10 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 requires companies to record derivatives
on the balance sheet as assets or liabilities, measured at fair value. It also
requires that gains or losses resulting from changes in the values of those
derivatives be accounted for depending on the use of the derivative and whether
it qualifies for hedge accounting. Adoption of SFAS No. 133 is likely to be
required for the fiscal year beginning January 1, 2001. Management believes the
adoption of SFAS No. 133 will not have a material impact on the Company's
consolidated financial position or results of operations.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED IN THIS REPORT.
OVERVIEW
DeCrane Holdings is a holding company and does not have any material
operations other than its ownership of all of the capital stock of DeCrane
Aircraft. As described in the notes to the consolidated financial statements
included in this report, DeCrane Aircraft is the predecessor of DeCrane
Holdings, and the financial information presented for periods prior to the DLJ
acquisition is for DeCrane Aircraft.
Our financial position and results of operations have been affected by our
history of acquisitions. Since DeCrane Aircraft's formation in 1989, we have
completed thirteen acquisitions of businesses or assets. As a result, our
historical financial statements do not reflect the financial position and
results of operations of our current businesses. Our most recent acquisitions,
which affect the comparability of the our historical financial statements,
include:
- Avtech, acquired on June 26, 1998;
- Dettmers, acquired on June 30, 1998; and
- PATS, acquired on January 22, 1999.
Our historical financial statements included in this report reflect the
financial position and results of operations of the acquired businesses
subsequent to their respective acquisition dates. Additionally, DeCrane
Aircraft's capital structure was significantly altered in August 1998 by the
financing obtained to fund the tender offer for its stock in conjunction with
the DLJ acquisition.
In April 1999, we purchased all of the common stock of PPI. Our historical
financial statements do not reflect the PPI acquisition since it was acquired
subsequent to March 31, 1999.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
REVENUES. Revenues increased $20.8 million, or 71.3%, to $49.9 million for
the three months ended March 31, 1999 from $29.1 million for the three months
ended March 31, 1998. Revenues increased due to:
- the inclusion of $19.6 million of revenues resulting from the Avtech,
Dettmers and PATS acquisitions; and
- a $1.7 million increase in cabin management product revenues.
The above revenue increases were offset by weakening demand for product to
supply our commercial aircraft customers resulting in a $0.5 million decline in
revenue for the three months ended March 31, 1999 compared with the same period
last year.
GROSS PROFIT. Gross profit increased $7.0 million, or 78.0%, to $16.0
million for the three months ended March 31, 1999. Gross profit as a percent of
revenues increased to 32.1% for the first quarter ended March 31, 1999 from
30.9% for the same period last year. Factors contributing to the gross profit
increase were:
- the contribution from the acquired companies, Avtech, Dettmers, and
PATS, of $7.0 million; and
- a gross profit contribution from cabin management sales growth of
$1.1 million.
Offsetting the above favorable factors was a decline in the contribution
from our commercial aircraft business of $1.1 million due to a decrease in
revenues and lower margins.
14
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $3.3 million, or 67.5%, to $8.2 million for
the three months ended March 31, 1999, from $4.9 million for the same period
last year. SG&A expenses as a percent of revenues decreased to 16.4% for the
first quarter 1999 compared to 16.8% for the same period last year. SG&A
expenses increased primarily as a result of:
- the inclusion of $2.9 million of expenses pertaining to the Avtech,
Dettmers and PATS acquisitions; and
- additional expenses of $0.4 million, principally at the corporate
office, in support of the additional administrative activity of a
larger organization.
OPERATING INCOME. Operating income increased $1.5 million to $5.3 million
for the three months ended March 31, 1999, from $3.7 million for the same period
last year. Operating income as a percent of revenues decreased to 10.6% for the
first quarter of 1999, from 12.8% for the first quarter of 1998. An increase in
operating income of $3.1 million from the acquisitions of Avtech, Dettmers and
PATS was offset by:
- $1.2 million of higher amortization expenses associated with the DLJ
acquisition; and
- $0.4 million of additional SG&A expenses.
INTEREST EXPENSE. Interest expense increased $5.0 million, or 632%, to $5.8
million for the three months ended March 31, 1999, from $0.8 million for the
same period last year. Higher debt levels resulting from the tender offer and
the Avtech, Dettmers and PATS acquisitions caused the increase.
PROVISION FOR INCOME TAXES. The provision for income taxes differs from the
amount determined by applying the applicable U.S. statutory federal rate to the
income (loss) before income taxes primarily due to the effects of state and
foreign income taxes and non-deductible expenses, principally goodwill
amortization. The difference in the effective tax rates between periods is
mostly a result of higher goodwill amortization.
NET INCOME (LOSS). Net income decreased $2.0 million, to a loss of $0.3
million for the three months ended March 31,1999 compared to net income of $1.7
million for the same period in 1998. The decrease was due to the factors
described above.
BOOKINGS AND BACKLOG. Bookings increased $37.8 million or 134.0%, to $66.0
million for the three months ended March 31, 1999 compared to $28.2 million for
the same period in 1998. Companies acquired contributed $34.1 million of the
increase. Backlog increased $44.4 million or 91.5%, to $92.9 million as of March
31, 1999 compared to $48.5 million as of March 31, 1998; $38.7 million of the
increase pertains to the acquired companies.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 1999, the Company used $0.9 million
for operating activities which is the net of $4.0 million of cash generated
from operations after adding back depreciation, amortization and other
non-cash items, $5.1 million used for working capital and $0.2 million
resulting from an increase in other liabilities. The following factors
contributed to the $5.1 million working capital increase:
- accounts receivable increased $4.0 million due to higher sales; and
- accounts payable and accrued expenses decreased by a net $2.1 million
as a result of payment timing patterns; offset by
- inventory decreased by $1.2 million as a result of adjustments to
inventory levels based on production forecasts.
Cash used for investing activities during the three months ended March 31,
1999 consisted of $41.7 million for the PATS acquisition and $2.1 million for
capital expenditures. The Company anticipates $6.6 million of capital
expenditures in 1999.
15
<PAGE>
Net cash provided by financing activities was $44.0 million for the three
months ended March 31, 1999. In January 1999, the term loan facility was amended
to provide for an additional $20.0 million of term loan borrowings. The Company
used the funds obtained from the term loan borrowings, $18.0 million of
borrowings under its acquisition revolving credit facility and a $5.0 million
customer advance to acquire the all of the common stock of PATS. Subsequent to
March 31, 1999, the Company further amended its term loan facility and borrowed
an additional $70 million to finance the acquisition of PPI and future
acquisition transactions.
At March 31, 1999, senior credit facility borrowings totaling $125.2
million are at variable interest rates based on defined margins over the current
prime or Euro-Dollar rates. In April 1999, the senior credit facility was
amended to provide for an additional $70.0 million of term loan borrowings. The
interest rate margins range between 1.50% to 2.00% for prime rate borrowings and
2.75% to 3.25% for Euro-Dollar borrowings.
The Company believes that the current levels of working capital and amounts
available under its credit facilities will enable it to meet its liquidity
requirements for the next several years.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 requires companies to record derivatives
on the balance sheet as assets or liabilities, measured at fair value. It also
requires that gains or losses resulting from changes in the values of those
derivatives be accounted for depending on the use of the derivative and whether
it qualifies for hedge accounting. Adoption of SFAS No. 133 is likely to be
required for the fiscal year beginning January 1, 2001. Management believes the
adoption of SFAS No. 133 will not have a material impact on the Company's
consolidated financial position or results of operations.
COMPLIANCE OF KEY SYSTEMS WITH YEAR 2000 PERFORMANCE STANDARDS
We are dependent in part on computer- and date-controlled systems for some
internal functions, particularly inventory control, purchasing, customer billing
and payroll. Similarly, suppliers of components and services on which we rely,
and our customers, may have Year 2000 compliance risks, which would affect their
operations and their transactions with us. Other parties with whom we have
commercial relationships, including raw materials suppliers and service
providers, such as banking and financial services, data processing services,
telecommunications services and utilities, are highly reliant on computer-based
technology.
The costs we have incurred to remediate and test our systems, and evaluate
and address the risks of our key customers and vendors, have been immaterial to
date and we expect to incur less than $1.0 million of costs in the aggregate.
All of our Year 2000 compliance costs have been or are expected to be funded
from our operating cash flow. We believe the number of products manufactured by
us whose functioning is dependent upon computer-controlled or other
date-controlled systems is not significant. We are not aware of any material
customer- or vendor-related Year 2000 issues. Our manufacturing operations and
our products generally are not based upon date-controlled machinery; our
business operations and systems are not so time-sensitive that brief
interruptions, or a shift to backup paper records, should cause significant
losses.
Our Year 2000 compliance efforts are directed primarily towards ensuring
that we will be able to continue to perform three critical functions:
- - make and sell our products,
- - order and receive raw material and supplies, and
- - pay our employees and vendors.
16
<PAGE>
Our assessment of year 2000 performance standards is 90% complete for our
information technology systems and 100% complete for those systems deemed to be
critical to our operations. Our assessment phase will be completed in the second
quarter of 1999 for both the remaining, non-essential information technology
systems and non-information technology systems. Our review of third-party
compliance risks from our key vendors and customers is not yet complete. We
intend to complete our review of data from all of those vendors and customers
who respond during the second quarter of 1999. However, even assuming that all
of the non-responding parties suffer interruptions to their operations due to
Year 2000 systems failures, our management does not anticipate any resulting
failures in our systems, products or supply chain that would disrupt our
operations to a material degree.
We have completed the renovation, upgrade or replacement of all of our
significant information technology systems for year 2000 performance standards,
except that during the third quarter of 1999 several of our subsidiaries will
complete the installation of an accounting and manufacturing system which
replaces existing systems not compliant with year 2000 performance standards. We
expect to complete this phase in the third quarter of 1999. All of our
significant systems which have been renovated or newly installed have been
tested and are presently operating.
However, the novelty and complexity of the issues presented, and our
dependence on the technical skills of employees and independent contractors and
on the representations and preparedness of third parties, could cause our
efforts to be less than fully effective. Moreover, Year 2000 issues present a
number of risks that are beyond our control, such as the failure of utility
companies to deliver electricity, the failure of telecommunications companies to
provide voice and data services, the failure of financial institutions to
process transactions and transfer funds, the failure of vendors to deliver
materials or perform services required by us and the collateral effects on us of
the effects of Year 2000 issues on the economy in general or on our customers in
particular. Additionally, in view of the mixed results achieved by software
vendors in correcting these problems, we cannot assure you that new systems we
obtain to replace noncompliant systems will themselves prove to be fully
compliant. Although we believe that our compliance efforts are designed to
appropriately identify and address those Year 2000 issues that are subject to
our reasonable control, we cannot assure you that our efforts will be fully
effective, or that Year 2000 issues will not have a material adverse effect on
our business, financial condition or results of operations. In the worst case, a
protracted failure of general business systems among our customers or vendors,
or in our own plant, could cause production delays or canceled orders which
would significantly reduce our revenue for the duration of such a situation. We
have not developed a contingency plan which assumes significant and protracted
Year 2000-related failures of major vendors, customers or systems, and do not
plan to do so.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this report discuss future expectations, beliefs
or strategies, projections or other "forward-looking" information. These
statements are subject to known and unknown risks. Many factors could cause
actual company results, performance or achievements, or industry results, to be
materially different from the projections expressed or implied by this report.
Some of those risks are specifically described in the "Risk Factors" section in
our prospectus dated May 14, 1999, 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;
- - changes in prevailing interest rates and the availability of financing to
fund our plans for continued growth;
- - inflation, and other general changes in costs of goods and services;
- - liability and other claims asserted against us;
- - the ability to attract and retain qualified personnel;
- - labor disturbances; and
- - changes in operating strategy, or our acquisition and capital expenditure
plans.
We cannot predict any of the foregoing with certainty, so our
forward-looking statements are not necessarily accurate predictions. Also, we
are not obligated to update any of these statements, to reflect actual results
or report later developments. You should not rely on our forward-looking
statements as if they were certainties.
17
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
We have filed with the Securities and Exchange Commission, and are
including within this report by referring to it here, our Registration Statement
No. 333-70363 on Form S-1 effective May 14, 1999, and the prospectus it
contains. That prospectus includes audited 1998 financial statements and risk
factors, which we refer to in this report.
You may read and copy any reports, statements or other information we file
at the SEC's reference room in Washington D.C. Please call the SEC at (202)
942-8090 for further information on the operation of the reference rooms. You
can also request copies of these documents, upon payment of a duplicating fee,
by writing to the SEC, or review our SEC filings on the SEC's EDGAR web site,
which can be found at http:\\www.sec.gov. You may also write or call us at our
corporate headquarters located at 2361 Rosecrans Avenue, Suite 180, El Segundo,
California 90245. Our telephone number is (310) 725-9123.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including interest rates and
changes in foreign currency exchange rates. Market risk is the potential loss
arising from adverse changes in market rates and prices, such as interest rates
and foreign currency exchange rates. From time to time we use derivative
financial instruments to manage and reduce risks associated with these factors.
We do not enter into derivatives or other financial instruments for trading or
speculative purposes.
INTEREST RATE RISK. A significant portion of our capital structure is
comprised of long-term variable- and fixed-rate debt.
Market risk related to our variable-rate debt is estimated as the potential
decrease in pre-tax earnings resulting from an increase in interest rates. The
interest rates applicable to variable-rate debt are, at our option, based on
defined margins over the current prime or Euro-Dollar rates. At March 31, 1999,
the current prime rate was 7.75% and the current Euro-Dollar rate was 5.0%.
Based on $125.2 million of variable-rate debt outstanding as of March 31, 1999,
a hypothetical one percent rise in interest rates, to 8.75% for prime rate
borrowings and 6.0% for Euro-Dollar borrowings, would reduce our pre-tax
earnings by $1.3 million annually. Subsequent to March 31, 1999, we increased
our variable-rate debt by $50.0 million. Prior to December 31, 1997, we
purchased interest rate cap contracts to limit our exposure related to rising
interest rates on our variable-rate debt. While we have not entered into similar
contracts since that date, we may do so in the future depending on our
assessment of future interest rate trends.
At March 31, 1999, the carrying value of our fixed-rate long-term debt
approximated its fair value. Market risk related to our fixed-rate debt is
deemed to be the potential increase in fair value resulting from a decrease in
interest rates. For example, a hypothetical ten percent decrease in the interest
rates, from 12.0% to 10.8%, would increase the fair value of our fixed-rate debt
by approximately $7.0 million.
FOREIGN CURRENCY EXCHANGE RATE RISK. Our customers are located in various
parts of the world, primarily Western Europe, the Far East and Canada, and two
of our subsidiaries operate in Western Europe. To limit our foreign currency
exchange rate risk related to sales to our customers, orders are primarily
valued and sold in U.S. dollars. From time to time we have entered into forward
foreign exchange contracts to limit our exposure related to foreign inventory
procurement and operating costs. However, we have not entered into any such
contracts during the three months ended March 31, 1999 and no such contracts are
open as of that date.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
ACQUISITION OF PPI HOLDINGS, INC.
On April 23, 1999 the Company acquired all of the common stock of PPI
Holdings, Inc. PPI is a Kansas-based designer and manufacturer of interior
furniture components for middle- and high-end corporate aircraft.
The acquisition is described in Note 2 to consolidated financial statements
included with this report and the Company's prospectus. The prospectus is part
of the Company's Registration Statement No. 333-70363 on Form S-1 filed with the
Securities and Exchange Commission effective May 14,1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
20.1 Prospectus of DeCrane Holdings Co. dated May 14, 1999
(incorporated by reference to the Company's Registration
Statement No. 333-70363 on Form S-1 effective May 14, 1999) *
27 Financial Data Schedule **
-------
* Previously filed
** Filed herewith
b. Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DECRANE HOLDINGS CO.
(Registrant)
May 28, 1999 By: /s/ THOMPSON DEAN
----------------------------------------------
Name: Thompson Dean
Title: Chairman of the Board of Directors,
President and Treasurer
(principal accounting officer)
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,775
<SECURITIES> 0
<RECEIVABLES> 37,242
<ALLOWANCES> 1,127
<INVENTORY> 44,925
<CURRENT-ASSETS> 92,669
<PP&E> 36,912
<DEPRECIATION> 2,886
<TOTAL-ASSETS> 385,010
<CURRENT-LIABILITIES> 41,884
<BONDS> 224,437
37,140
0
<COMMON> 28
<OTHER-SE> 59,563
<TOTAL-LIABILITY-AND-EQUITY> 385,010
<SALES> 49,895
<TOTAL-REVENUES> 49,895
<CGS> 33,895
<TOTAL-COSTS> 44,630
<OTHER-EXPENSES> (144)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,751
<INCOME-PRETAX> (342)
<INCOME-TAX> (67)
<INCOME-CONTINUING> (275)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (275)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
