<PAGE>
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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 September 30, 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.
/X/ Yes / / No
The number of shares of Registrant's Common Stock, $.01 par value, outstanding
as of November 1, 1999 was 3,389,663 shares.
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<PAGE>
DECRANE HOLDINGS CO.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998 ....................... 1
Consolidated Statements of Operations for the three months and nine months ended
September 30, 1999, one month ended September 30, 1998 and
eight months and two months ended August 31, 1998 (predecessor)............................... 2
Consolidated Statements of Stockholder's Equity for the nine months ended September 30, 1999 ..... 3
Consolidated Statements of Cash Flows for the nine months ended September 30, 1999,
one month ended September 30, 1998 and eight months ended August 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 ............ 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK ........................................ 22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ................................................................................ 24
ITEM 5. OTHER INFORMATION ................................................................................ 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits ......................................................................................... 25
Reports on Form 8-K .............................................................................. 25
</TABLE>
i
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DECRANE HOLDINGS CO. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents .................................................................. $ 3,139 $ 3,518
Accounts receivable, net ................................................................... 40,074 30,441
Inventories ................................................................................ 51,290 34,281
Deferred income taxes ...................................................................... 2,916 4,300
Prepaid expenses and other current assets................................................... 2,847 3,897
----------- -----------
Total current assets ..................................................................... 100,266 76,437
Property and equipment, net ................................................................... 36,531 28,160
Other assets, principally intangibles, net .................................................... 321,602 225,978
----------- -----------
Total assets ........................................................................... $ 458,399 $ 330,575
=========== ===========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings ...................................................................... $ 401 $ 283
Current portion of long-term obligations ................................................... 3,682 1,529
Accounts payable ........................................................................... 8,749 6,383
Accrued expenses ........................................................................... 23,546 18,272
Income taxes payable ....................................................................... 4,638 3,743
----------- -----------
Total current liabilities ................................................................ 41,016 30,210
----------- -----------
Long-term obligations ......................................................................... 281,094 184,953
Deferred income taxes ......................................................................... 21,522 16,990
Other long-term liabilities ................................................................... 4,904 659
Commitments and contingencies (Note 8)
Mandatorily redeemable preferred stock ........................................................ 39,785 35,884
----------- -----------
Stockholders' equity
Undesignated preferred stock, $.01 par value, 1,140,000 shares authorized;
none issued and outstanding as of September 30, 1999 and December 31, 1998 ............... - -
Common stock, $.01 par value, 4,500,000 and 3,500,000 shares authorized as of
September 30, 1999 and December 31, 1998, respectively; 3,389,663 and 2,846,185 shares
issued and outstanding as of September 30, 1999 and December 31, 1998, respectively ...... 34 28
Additional paid-in capital ................................................................. 73,090 64,497
Notes receivable for shares sold ........................................................... (364) (352)
Accumulated deficit ........................................................................ (2,068) (2,568)
Accumulated other comprehensive income (loss)............................................... (614) 274
------------ -----------
Total stockholders' equity ............................................................... 70,078 61,879
----------- -----------
Total liabilities, mandatorily redeemable preferred stock and stockholders' equity ..... $ 458,399 $ 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------- ---------------------------------------
1998 1998
---------------------------- --------------------------
|| TWO MONTHS || EIGHT MONTHS
ONE MONTH || ENDED ONE MONTH || ENDED
ENDED || AUGUST 31 ENDED || AUGUST 31
1999 SEPTEMBER 30 || (PREDECESSOR) 1999 SEPTEMBER 30 || (PREDECESSOR)
----------- ------------ || ------------- ----------- ------------ || -------------
(UNAUDITED) (UNAUDITED) || (UNAUDITED) (UNAUDITED) (UNAUDITED) ||
<S> <C> <C> || <C> <C> <C> || <C>
Revenues ................................... $ 65,238 $ 16,012 || $ 31,095 $ 177,836 $ 16,012 || 90,077
Cost of sales .............................. 42,107 11,080 || 19,826 118,081 11,080 || 60,101
--------- --------- || --------- --------- --------- || ---------
Gross profit .......................... 23,131 4,932 || 11,269 59,755 4,932 || 29,976
--------- --------- || --------- --------- --------- || ---------
|| ||
Operating expenses || ||
Selling, general and administrative || ||
expenses................................. 10,257 3,170 || 5,538 27,507 3,170 || 15,719
Nonrecurring charges .................... - - || 3,632 - - || 3,632
Amortization of intangible assets ....... 4,048 802 || 586 9,506 802 || 1,347
--------- --------- || --------- --------- --------- || ---------
Total operating expenses .............. 14,305 3,972 || 9,756 37,013 3,972 || 20,698
--------- --------- || --------- --------- --------- || ---------
|| ||
Income from operations ..................... 8,826 960 || 1,513 22,742 960 || 9,278
|| ||
Other expenses (income) || ||
Interest expense ........................ 7,155 1,765 || 1,181 19,884 1,765 || 2,350
Terminated debt offering expenses ....... - - || - - - || 600
Other expenses (income) ................. 56 181 || 277 (311) 181 || 247
--------- --------- || --------- --------- --------- || ---------
|| ||
Income (loss) before provision for income || ||
taxes and extraordinary item ............ 1,615 (986) || 55 3,169 (986) || 6,081
Provision (benefit) for income taxes ....... 932 (506) || 226 2,669 (506) || 2,892
--------- --------- || --------- --------- --------- || ---------
|| ||
Income (loss) before extraordinary item .... 683 (480) || (171) 500 (480) || 3,189
Extraordinary loss from debt refinancing, || ||
net of income tax benefit ............... - 296 || - - 296 || -
--------- --------- || --------- --------- --------- || ---------
|| ||
Net income (loss) .......................... $ 683 $ (776) || $ (171) $ 500 $ (776) || $ 3,189
========= ========= || ========= ========= ========= || =======
</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 SOLD 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 income .............................. - - - - 500 - 500
Translation adjustment .................. - - - - - (888) (888)
---------
(388)
---------
Sale of common stock ....................... 543,478 6 12,494 - - - 12,500
Non-cash dividend accretion on mandatorily
redeemable preferred stock .............. - - (3,901) - - - (3,901)
Notes receivable interest .................. - - - (12) - - (12)
-------- -------- -------- -------- --------- --------- ---------
Balance, September 30, 1999 (Unaudited) .... 3,389,663 $ 34 $ 73,090 $ (364) $ (2,068) $ (614) $ 70,078
========= ======== ======== ========= ========== ========== =========
</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>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
1998
-----------------------------
|| EIGHT MONTHS
ONE MONTH || ENDED
ENDED || AUGUST 31
1999 SEPTEMBER 30 || (PREDECESSOR)
----------- ------------ || -------------
(UNAUDITED) (UNAUDITED) ||
<S> <C> <C> || <C>
CASH FLOWS FROM OPERATING ACTIVITIES ||
Net income (loss) ........................................................... $ 500 $ (776) || $ 3,189
Adjustments to reconcile net income (loss) to net cash ||
provided by (used for) operating activities ||
Depreciation and amortization ........................................... 14,875 1,252 || 4,454
Deferred income taxes ................................................... 462 345 || (2,339)
Extraordinary loss from debt refinancing................................. - 296 || -
Other, net .............................................................. 176 (61) || (360)
Changes in assets and liabilities, net of effect from acquisitions ||
Accounts receivable ................................................... (2,598) (975) || (3,621)
Inventories ........................................................... 1,423 1,492 || (2,017)
Prepaid expenses and other assets ..................................... (1,276) (650) || (58)
Accounts payable ...................................................... (1,967) 1,514 || (1,127)
Accrued expenses ...................................................... (3,792) (1,525) || 3,519
Income taxes payable .................................................. 2,342 (2,418) || 1,374
Other long-term liabilities ........................................... 77 - || -
----------- ----------- || -----------
Net cash provided by (used for) operating activities ................ 10,222 (1,506) || 3,014
----------- ----------- || -----------
||
CASH FLOWS FROM INVESTING ACTIVITIES ||
Purchase of DeCrane Aircraft, including $4,555 of acquisition costs ......... - (185,126) || -
Cash paid for acquisition, net of cash acquired ............................. (116,790) - || (85,808)
Capital expenditures ........................................................ (4,752) (307) || (1,745)
Other, net .................................................................. 111 - || 175
----------- ----------- || -----------
Net cash used for investing activities .............................. (121,431) (185,433) || (87,378)
----------- ----------- || -----------
||
CASH FLOWS FROM FINANCING ACTIVITIES ||
Term debt borrowings ........................................................ 90,000 - || -
Net borrowings (repayments) under revolving line of credit agreements ....... 7,700 (1,519) || 56,446
Net proceeds from the sale of common stock .................................. 12,500 - || 34,815
Customer advance ............................................................ 5,000 - || -
Other long-term borrowings .................................................. 636 - || -
Deferred financing costs .................................................... (3,062) - || -
Principal payments on term debt, capitalized leases and other obligations ... (1,824) (129) || (1,317)
Financing of DeCrane Aircraft Acquisition ||
Proceeds from senior credit facility and bridge notes ..................... - 185,400 || -
Proceeds from sale of common equity and mandatorily ||
redeemable preferred stock .............................................. - 99,000 || -
Proceeds from stock options exercised ..................................... - 4,314 || -
Repayment of existing credit facility ..................................... - (93,000) || -
Financing fees and expenses ............................................... - (2,843) || -
Other, net .................................................................. (21) - || (73)
------------ ----------- || ------------
Net cash provided by financing activities ........................... 110,929 191,223 || 89,871
----------- ----------- || -----------
||
Effect of foreign currency translation on cash ................................. (99) (17) || 26
------------ ------------ || -----------
||
Net increase (decrease) in cash and cash equivalents ........................... (379) 4,267 || 5,533
Cash and cash equivalents at beginning of period ............................... 3,518 - || 206
----------- ----------- || -----------
Cash and cash equivalents at end of period ..................................... $ 3,139 $ 4,267 || $ 5,739
=========== =========== || ===========
</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 and the
consolidated statements of operations and cash flows for the eight months ended
August 31, 1998 have been derived from audited financial statements but do 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
ACQUIRED PRIOR TO SEPTEMBER 30, 1999
During the nine months ended September 30, 1999, the Company acquired:
- - all of the common stock of PATS, Inc., a Maryland-based designer,
manufacturer and installer of auxiliary fuel tank systems and a
manufacturer of aircraft auxiliary power units, on January 22, 1999;
- - all of the common stock of PPI Holdings, Inc., a Kansas-based designer and
manufacturer of interior furniture components for middle- and high-end
corporate aircraft, on April 23, 1999; and
- - substantially all of the assets of Custom Woodwork & Plastics, Inc., a
Georgia-based designer and manufacturer of interior furniture components
for middle- and high-end corporate aircraft, on August 5, 1999.
The total purchase price was $116,035,000, plus contingent consideration
totaling a maximum of $19,250,000 payable over two years based on future
attainment of defined performance criteria. The total purchase price includes an
estimated $3,080,000 of acquisition related costs. The acquisitions were
accounted for as purchases and the assets acquired and liabilities assumed have
been recorded at their estimated fair values. As a result:
- - the historical value of inventory acquired was increased by $1,606,000;
- - identifiable intangible assets totaling $15,229,000 were recorded; and
- - the $85,883,000 difference between the total purchase price and the fair
value of the net assets acquired was recorded as goodwill.
The purchase price allocations are preliminary and may change upon the
completion of the final valuations of the net assets acquired. The increase in
inventory value was charged to operations as the inventory was sold during the
nine months ended September 30, 1999. Identifiable intangible assets are being
amortized on a straight-line basis over their estimated useful lives, ranging
from seven and fifteen years. Goodwill is being amortized on a straight-line
basis over thirty years. The amount of contingent consideration paid in the
future, if any, will increase goodwill and will be amortized prospectively over
the remaining period of the initial thirty-year term. The consolidated balance
sheet as of September 30, 1999 reflects the financial position of the companies
acquired and the consolidated statements of operations for the three months and
nine months ended September 30, 1999 includes their operating results subsequent
to their respective acquisition dates.
5
<PAGE>
NOTE 2 - ACQUISITIONS (CONTINUED)
The acquisitions were funded with borrowings under the Company's senior
credit facility as described in Note 5, $12,500,000 of proceeds from the sale of
common stock as described in Note 7 and a $5,000,000 customer advance to be
offset against amounts receivable from future product deliveries.
ACQUIRED SUBSEQUENT TO SEPTEMBER 30, 1999
Subsequent to September 30, 1999, the Company acquired:
- - substantially all of the assets of PCI NewCo, Inc., a Kansas-based
manufacturer of composite material and components for middle- and high-end
corporate aircraft, on October 6, 1999; and
- - all of the common stock of International Custom Interiors, Inc., a
Florida-based provider of upholstery services and manufacturer of furniture
for middle- and high-end corporate aircraft, on October 8, 1999.
The total purchase price was $11,991,000, plus contingent consideration
totaling a maximum of $4,500,000 payable over five years based on future
attainment of defined performance criteria. The total purchase price includes an
estimated $700,000 of acquisition related costs. The acquisitions will be
accounted for as purchases and the assets acquired and liabilities assumed will
be recorded at their estimated fair values. The consolidated financial
statements will reflect the financial position and results of operations of the
companies acquired for periods subsequent to their respective acquisition dates.
The acquisitions were funded with borrowings under the Company's senior
credit facility as described in Note 5.
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 nine months ended September 30, 1999 and 1998. The results of
operations reflect the Company's purchase by DLJ and other 1998 acquisitions
described in the Company's 1998 audited financial statements and the 1999 PATS,
PPI and Custom Woodwork acquisitions as if all of these transactions were
consummated as of January 1, 1998. The pro forma results exclude the effect of
the PCI NewCo and International Custom Interiors acquisitions, which were
completed subsequent to September 30, 1999.
<TABLE>
<CAPTION>
PRO FORMA FOR THE
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 1998
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Revenues ......................................................... $ 196,016 $ 183,214
Income (loss) before extraordinary item .......................... 2,140 (5,618)
</TABLE>
The pro forma results of operations do not purport to represent what actual
results would have been if the transactions described above occurred on such
dates or to project the results of operations for any future period. The above
information reflects adjustments for inventory, depreciation, amortization,
general and administrative expenses and interest expense based on the new cost
basis and debt structure of the Company following the acquisitions. In 1998,
income excludes the effect of a $2,229,000 extraordinary loss incurred in
connection with debt refinancings of which $296,000 was incurred during the nine
months ended September 30, 1998.
6
<PAGE>
NOTE 3 - PRO FORMA RESULTS OF OPERATIONS FOR THE DLJ AND OTHER ACQUISITIONS
(CONTINUED)
One customer, the Boeing Company, accounted for more than 10% of the
Company's 1998 consolidated revenues. If the Company had completed its 1998 and
1999 acquisitions at the beginning of 1998, three customers would have accounted
for 10% or more of the Company's consolidated revenues as follows:
<TABLE>
<CAPTION>
PRO FORMA FOR THE
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 1998
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Boeing ........................................................ 18.6% 24.1%
Textron ....................................................... 17.2% 11.0%
Bombardier .................................................... 13.2% 3.8%
</TABLE>
Complete loss of any of these customers could have a significant adverse
impact on the results of operations expected in future periods.
NOTE 4 - INVENTORIES
Inventories are comprised of the following (amounts in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Raw material .................................................... $ 26,219 $ 19,221
Work-in process ................................................. 18,658 7,231
Finished goods .................................................. 6,413 7,829
----------- -----------
Total inventories ............................................ $ 51,290 $ 34,281
=========== ===========
</TABLE>
NOTE 5 - BORROWINGS
Long-term obligations include the following amounts (amounts in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Senior credit facility
$25 million working capital revolving line of credit .......... $ - $ 5,800
$25 million acquisition revolving line of credit .............. 13,500 -
Term loans .................................................... 169,050 79,888
12% senior subordinated notes .................................... 100,000 100,000
Capital lease obligations and equipment term financing ........... 1,776 367
Other ........................................................... 450 427
----------- -----------
Total long-term obligations ................................... 284,776 186,482
Less current portion .......................................... (3,682) (1,529)
----------- -----------
Long-term obligations, less current portion ................. $ 281,094 $ 184,953
=========== ===========
</TABLE>
In conjunction with the January 1999 PATS acquisition, the Company borrowed
$14,918,000 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 and $20,000,000 to repay borrowings
under its acquisition and working capital revolving credit facilities. The
interest rate margins applicable to the $70,000,000 incremental term loan
borrowings are 2.00% for prime rate borrowings or 3.25% for Euro-Dollar
borrowings.
7
<PAGE>
NOTE 5 - BORROWINGS (CONTINUED)
In conjunction with the August 1999 Custom Woodwork acquisition, the
Company borrowed $13,500,000 under its acquisition revolving credit facility.
Subsequent to September 30, 1999, the Company borrowed $11,500,000 under its
acquisition revolving credit facility in conjunction with the October 1999 PCI
NewCo and International Custom Interiors acquisitions.
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 nine months ended September 30, 1999, the liquidation preference
of the preferred stock increased by $3,901,000 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 $39,785,000 as of September 30,
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.
NOTE 8 - LITIGATION
As part of its investigation of the crash off the Canadian coast on
September 2, 1998 of Swissair Flight 111, the Canadian Transportation Safety
Board notified the Company that they recovered burned wire which had been
attached to the in-flight entertainment system installed on some of Swissair's
aircraft by a subsidiary of the Company. At the request of the attorneys for
families of persons who died aboard the flight, the Company put its insurance
carrier on notice of a potential claim by those families. The Transportation
Safety Board has advised the Company that it has no evidence that the system
installed by the Company's subsidiary malfunctioned or failed during the flight.
The Company is fully cooperating with the investigation.
Families of persons who died aboard the flight have filed actions in
federal and state courts against the Company, our subsidiary, and many other
parties unaffiliated with the Company, including Swissair and Boeing. The action
claims negligence, strict liability and breach of warranty relating to the
installation and testing of the in-flight entertainment system. The actions seek
compensatory and punitive damages and costs in an unstated amount. The Company
intends to vigorously defend against the claims.
In August 1998, the Company and its chief executive officer were served in
an action filed in state court in California by the Company's chief financial
officer claiming that he was due additional compensation in the form of stock
options, and claiming fraud, negligent misrepresentation and breach of contract
in connection therewith, fraudulent misrepresentation in violation of provisions
of the California Labor Code for which doubled damages are sought, promissory
estoppel, and wrongful discharge in violation of public policy as a result of
his allegations of improprieties in connection with the DLJ acquisition
transactions. The plaintiff later amended his complaint to allege breach of an
implied contract as well. The action seeks not less than $1,500,000 plus
punitive damages and costs. The Company intends to vigorously defend against the
claims. The plaintiff's employment with the Company was terminated.
The Company and its subsidiaries are also involved in other routine
legal and administrative proceedings incident to the normal conduct of
business. Management believes the ultimate disposition of all of the
foregoing matters will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
8
<PAGE>
NOTE 9 - CONSOLIDATED STATEMENTS OF CASH FLOWS
Assets acquired and liabilities assumed in connection with acquisitions are
as follows (amounts in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
1998
-------------------------------
|| EIGHT MONTHS
ONE MONTH || ENDED
ENDED || AUGUST 31
1999 SEPTEMBER 30 || (PREDECESSOR)
----------- ------------ || -------------
(UNAUDITED) (UNAUDITED) ||
<S> <C> <C> || <C>
1999 and 1998 acquisitions ||
Fair value of assets acquired ............................................... $ 136,359 $ 310,450 || 91,640
Liabilities assumed ......................................................... (20,324) (119,585) || (4,569)
----------- ----------- || -----------
Cash paid ................................................................. 116,035 190,865 || 87,071
Less cash acquired ........................................................ (2,245) (5,739) || (1,263)
----------- ----------- || -----------
Net cash paid for 1999 and 1998 acquisitions ............................ 113,790 185,126 || 85,808
||
Contingent consideration paid in conjunction with the ||
1997 Audio International acquisition ........................................ 3,000 - || -
----------- ----------- || -----------
Net cash paid for acquisitions ............................................ $ 116,790 $ 185,126 || 85,808
=========== =========== || ===========
</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, as amended by SFAS
No. 137 in June 1999, is 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.
NOTE 11 - 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.
9
<PAGE>
NOTE 11 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
BALANCE SHEETS
SEPTEMBER 30, 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 ......................... $ 807 $ 2,211 $ 121 $ - $ 3,139
Accounts receivable, net ....................... - 38,818 1,256 - 40,074
Inventories .................................... - 49,578 1,712 - 51,290
Other current assets ........................... 3,532 2,135 96 - 5,763
----------- ----------- ---------- ----------- -----------
Total current assets ......................... 4,339 92,742 3,185 - 100,266
Property and equipment, net ....................... 1,262 32,853 2,416 - 36,531
Other assets, principally intangibles, net ........ 15,844 292,935 12,823 - 321,602
Investments in subsidiaries ....................... 363,948 20,297 - (384,245)(1) -
Intercompany receivables .......................... 38,808 331 3,902 (43,041)(2) -
----------- ----------- ---------- ----------- -----------
Total assets ............................... $ 424,201 $ 439,158 $ 22,326 $ (427,286) $ 458,399
=========== =========== ========== =========== ===========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term obligations ......................... $ 3,490 $ 164 $ 429 $ - $ 4,083
Other current liabilities ...................... 8,033 27,669 1,231 - 36,933
----------- ----------- ---------- ----------- -----------
Total current liabilities .................... 11,523 27,833 1,660 - 41,016
----------- ----------- ---------- ----------- -----------
Long-term obligations ............................. 280,416 636 42 - 281,094
Intercompany payables ............................. 873 41,837 331 (43,041)(2) -
Other long-term liabilities ....................... 20,912 4,904 610 - 26,426
Mandatorily redeemable preferred stock ............ 39,785 - - - 39,785
----------- ----------- ---------- ----------- -----------
Stockholders' equity
Paid-in capital ................................ 72,760 300,450 15,440 (315,890)(1) 72,760
Retained earnings (deficit) .................... (2,068) 63,498 4,857 (68,355)(1) (2,068)
Accumulated other comprehensive
income (loss) ................................ - - (614) - (614)
----------- ----------- ---------- ----------- -----------
Total stockholders' equity ................... 70,692 363,948 19,683 (384,245) 70,078
----------- ----------- ---------- ----------- -----------
Total liabilities, mandatorily redeemable
preferred stock and stockholders' equity . $ 424,201 $ 439,158 $ 22,326 $ (427,286) $ 458,399
=========== =========== ========== =========== ===========
</TABLE>
10
<PAGE>
NOTE 11 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 (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 ...................... $ 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) -
----------- ----------- ---------- ----------- -----------
Total assets ............................... $ 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 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
Mandatorily redeemable preferred stock ............ 35,884 - - - 35,884
----------- ----------- ---------- ----------- -----------
Stockholders' equity
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 stockholder's equity ................... 61,605 250,366 20,388 (270,480) 61,879
----------- ----------- ---------- ----------- -----------
Total liabilities, mandatorily redeemable
preferred stock and stockholders' equity . $ 310,927 $ 311,955 $ 22,898 $ (315,205) $ 330,575
=========== =========== ========== =========== ===========
</TABLE>
11
<PAGE>
NOTE 11 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
---------------------------------------------------------------------------
DECRANE GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS CO. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
------------ ------------ ------------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues .......................................... $ - $ 174,583 $ 8,591 $ (5,338)(3) $ 177,836
Cost of sales ..................................... - 116,546 6,873 (5,338)(3) 118,081
----------- ----------- ---------- ----------- -----------
Gross profit ...................................... - 58,037 1,718 - 59,755
Selling, general and administrative expenses ...... 4,981 21,402 1,124 - 27,507
Amortization of intangible assets ................. 116 9,015 375 - 9,506
Interest expense .................................. 17,407 2,444 33 - 19,884
Intercompany charges .............................. (3,603) 3,475 128 - -
Equity in earnings of subsidiaries ................ (11,619) (363) - 11,982 (4) -
Other expenses (income) ........................... - 61 (372) - (311)
Provision (benefit) for income taxes .............. (7,782) 10,384 67 - 2,669
----------- ----------- ---------- ----------- -----------
Net income ........................................ $ 500 $ 11,619 $ 363 $ (11,982) $ 500
=========== =========== ========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
ONE MONTH ENDED SEPTEMBER 30, 1998 (UNAUDITED)
---------------------------------------------------------------------------
DECRANE GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS CO. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
------------ ------------ ------------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues .......................................... $ - $ 15,659 $ 1,096 $ (743)(3) $ 16,012
Cost of sales ..................................... - 10,975 848 (743)(3) 11,080
----------- ----------- ---------- ----------- -----------
Gross profit ...................................... - 4,684 248 - 4,932
Selling, general and administrative expenses ...... 359 2,714 97 - 3,170
Amortization of intangible assets ................. 9 749 44 - 802
Interest expense .................................. 1,701 64 - - 1,765
Intercompany charges .............................. (576) 559 17 - -
Equity in (earnings) loss of subsidiaries ......... (2) 62 - (60)(4) -
Other expenses (income) ........................... - (7) 188 - 181
Provision (benefit) for income taxes .............. (1,011) 541 (36) - (506)
Extraordinary charge, net of tax .................. 296 - - - 296
----------- ----------- ---------- ----------- -----------
Net income (loss) ................................. $ (776) $ 2 $ (62) $ 60 $ (776)
=========== =========== ========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED AUGUST 31, 1998 (PREDECESSOR - UNAUDITED)
---------------------------------------------------------------------------
DECRANE
AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS CO. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
------------ ------------ ------------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues .......................................... $ - $ 87,312 $ 8,503 $ (5,738)(3) $ 90,077
Cost of sales ..................................... - 59,252 6,587 (5,738)(3) 60,101
----------- ----------- ---------- ----------- -----------
Gross profit ...................................... - 28,060 1,916 - 29,976
Selling, general and administrative expenses ...... 3,949 11,041 729 - 15,719
Nonrecurring charges .............................. 3,632 - - 3,632
Amortization of intangible assets ................. - 1,337 10 - 1,347
Interest expense .................................. 2,343 7 - - 2,350
Intercompany charges .............................. (4,357) 4,229 128 - -
Equity in earnings of subsidiaries ................ (6,824) (489) - 7,313 (4) -
Other expenses (income) ........................... 600 (164) 411 - 847
Provision (benefit) for income taxes .............. (2,532) 5,275 149 - 2,892
----------- ----------- ---------- ----------- -----------
Net income ........................................ $ 3,189 $ 6,824 $ 489 $ (7,313) $ 3,189
=========== =========== ========== =========== ===========
</TABLE>
12
<PAGE>
NOTE 11 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 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 ..................................... $ 500 $ 11,619 $ 363 $ (11,982) $ 500
Adjustments to net income
Non-cash net income adjustments .............. 1,851 13,041 621 - 15,513
Equity in earnings of subsidiaries ........... (11,619) (363) - 11,982(4) -
Changes in working capital ..................... 20,073 (25,286) (578) - (5,791)
----------- ----------- ---------- ----------- ------------
Net cash provided by (used for)
operating activities........................ 10,805 (989) 406 - 10,222
----------- ----------- ---------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisitions, net of cash acquired (119,035) 2,245 - - (116,790)
Capital expenditures and other ................. (66) (3,952) (623) - (4,641)
----------- ----------- ---------- ----------- ------------
Net cash used for investing activities ....... (119,101) (1,707) (623) - (121,431)
----------- ----------- ---------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Term debt borrowings ........................... 90,000 - - - 90,000
Net proceeds from sale of common stock ......... 12,500 - - - 12,500
Net revolving line of credit borrowings ........ 7,700 - - - 7,700
Customer advance ............................... - 5,000 - - 5,000
Other long-term borrowings ..................... 636 - - - 636
Deferred financing costs ....................... (3,062) - - - (3,062)
Principal payments on long-term
debt and leases .............................. (1,129) (675) (20) - (1,824)
Other, net ..................................... - (180) 159 - (21)
----------- ----------- ---------- ----------- -----------
Net cash provided by financing activities .... 106,645 4,145 139 - 110,929
----------- ----------- ---------- ----------- -----------
Effect of foreign currency translation on cash .... - - (99) - (99)
----------- ----------- ---------- ----------- -----------
Net increase (decrease) in cash and equivalents ... (1,651) 1,449 (177) - (379)
Cash and equivalents at beginning of period ....... 2,458 762 298 - 3,518
----------- ----------- ---------- ----------- -----------
Cash and equivalents at end of period ............. $ 807 $ 2,211 $ 121 $ - $ 3,139
=========== =========== ========== =========== ===========
</TABLE>
13
<PAGE>
NOTE 11 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
ONE MONTH ENDED SEPTEMBER 30, 1998 (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) .............................. $ (776) $ 2 $ (62) $ 60 $ (776)
Adjustments to net income (loss)
Non-cash net income adjustments .............. 750 1,020 62 - 1,832
Equity in earnings of subsidiaries ........... (2) 62 - (60)(4) -
Changes in working capital ..................... (1,681) (711) (170) - (2,562)
----------- ----------- ---------- ----------- -----------
Net cash provided by (used for)
operating activities........................ (1,709) 373 (170) - (1,506)
----------- ----------- ---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of DeCrane Aircraft ................... (186,494) 1,052 316 - (185,126)
Capital expenditures and other ................. - (240) (67) - (307)
----------- ------------ ---------- ----------- -----------
Net cash provided by (used for)
investing activities ....................... (186,494) 812 249 - (185,433)
----------- ----------- ---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Senior credit facility and bridge
notes borrowings ............................. 185,400 - - - 185,400
Proceeds from sale of equity ................... 99,000 - - - 99,000
Proceeds from stock options exercised .......... 4,314 - - - 4,314
Repayment of existing credit facility........... (93,000) - - - (93,000)
Payment of financing fees and expenses ......... (2,843) - - - (2,843)
Net revolving line of credit repayments ........ (1,600) - 81 - (1,519)
Principal payments on long-term
debt and leases .............................. (1) (118) (10) - (129)
----------- ----------- ---------- ----------- -----------
Net cash provided by (used for)
financing activities ....................... 191,270 (118) 71 - 191,223
----------- ----------- ---------- ----------- -----------
Effect of foreign currency translation on cash .... - - (17) - (17)
----------- ----------- ---------- ----------- -----------
Net increase (decrease) in cash and equivalents ... 3,067 1,067 133 - 4,267
Cash and equivalents at beginning of period ....... - - - - -
----------- ----------- ---------- ----------- -----------
Cash and equivalents at end of period ............. $ 3,067 $ 1,067 $ 133 $ - $ 4,267
=========== =========== ========== =========== ===========
</TABLE>
14
<PAGE>
NOTE 11 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED AUGUST 31, 1998 (PREDECESSOR - UNAUDITED)
---------------------------------------------------------------------------
DECRANE
AIRCRAFT 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 ..................................... $ 3,189 $ 6,824 $ 489 $ (7,313) $3,189
Adjustments to net income
Non-cash net income adjustments .............. (2,222) 3,420 557 - 1,755
Equity in earnings of subsidiaries ........... (6,824) (489) - 7,313(4) -
Changes in working capital ..................... 5,492 (7,393) (29) - (1,930)
----------- ----------- ---------- ----------- -----------
Net cash provided by (used for)
operating activities........................ (365) 2,362 1,017 - 3,014
----------- ----------- ---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisitions, net of cash acquired (87,071) 1,263 - - (85,808)
Capital expenditures and other ................. (44) (1,306) (220) - (1,570)
----------- ----------- ---------- ----------- -----------
Net cash used for investing activities ....... (87,115) (43) (220) - (87,378)
----------- ----------- ---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net revolving line of credit borrowings ........ 57,000 - (554) - 56,446
Net proceeds from sale of common stock ............ 34,815 - - - 34,815
Principal payments on long-term
debt and leases .............................. (3) (1,280) (34) - (1,317)
Other, net ..................................... 23 (96) - - (73)
----------- ----------- ---------- ----------- -----------
Net cash provided by (used for)
financing activities ....................... 91,835 (1,376) (588) - 89,871
----------- ----------- ---------- ----------- -----------
Effect of foreign currency translation on cash .... - - 26 - 26
----------- ----------- ---------- ----------- -----------
Net increase in cash and equivalents .............. 4,355 943 235 - 5,533
Cash and equivalents at beginning of period ....... 16 109 81 - 206
----------- ----------- ---------- ----------- -----------
Cash and equivalents at end of period ............. $ 4,371 $ 1,052 $ 316 $ - $ 5,739
=========== =========== ========== =========== ===========
</TABLE>
15
<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 sixteen 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 historical financial statements included
herein, consist of:
- - Avtech, acquired on June 26, 1998;
- - Dettmers, acquired on June 30, 1998;
- - PATS, acquired on January 22, 1999;
- - PPI, acquired on April 23, 1999; and
- - Custom Woodwork on August 5, 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 October 1999, we acquired PCI NewCo and International Custom Interiors.
Our historical financial statements do not reflect these acquisitions since they
were acquired subsequent to September 30, 1999.
INDUSTRY OUTLOOK AND TRENDS
During the first six months of 1999, Boeing, our largest customer,
initiated a program to reduce inventory levels and, in addition, they have
announced lower production rates for some of their models of commercial
aircraft. These factors have resulted in lower sales volume for various products
we supply to Boeing both directly and indirectly through sales to other Boeing
suppliers, most notably electrical contacts and connectors. We believe the
demand for these products will continue to be lower over the next twelve months
and possibly beyond.
Offsetting this anticipated weakness in demand for products we supply to
the commercial aircraft market, is the high level of middle- and high-end
corporate aircraft production and consequent strong demand for cabin management
products we manufacture, such as audio and video systems, seats and furniture.
We anticipate this high level of demand for such products to continue for at
least the next twelve months.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
REFLECTS THE COMBINED HISTORICAL RESULTS FOR THE ONE MONTH ENDED SEPTEMBER 31,
1998 AND THE TWO MONTHS ENDED AUGUST 31, 1998 (PREDECESSOR).
REVENUES. Revenues increased $18.1 million, or 38.4%, to $65.2 million for
the three months ended September 30, 1999 from $47.1 million for the three
months ended September 30, 1998. Revenues increased due to:
- - the inclusion of $23.9 million of revenues resulting from the PATS, PPI and
Custom Woodwork acquisitions; and
- - a $2.7 million increase in entertainment and cabin management product
revenues.
16
<PAGE>
The increases were offset by:
- - a $7.2 million decrease in revenues due to weak demand for our commercial
aircraft products; and
- - a $1.3 million net decrease in revenues from our other products and
services.
GROSS PROFIT. Gross profit increased $6.9 million, or 42.6%, to $23.1
million for the three months ended September 30, 1999. Gross profit as a percent
of revenues increased to 35.4% for the quarter ended September 30, 1999 from
34.4% for the same period last year. Factors contributing to the gross profit
increase were:
- - a contribution of $9.0 million from the acquired companies;
- - a $1.2 million increase due to higher entertainment and cabin management
products revenues; and
- - a $1.2 million increase resulting from the portion
of the DLJ acquisition purchase price allocated to inventory and charged to
operations as the inventory was sold during the one month ended
September 30, 1998; and
- - a $0.1 million increase relating to other products and services.
Offsetting the above favorable factors was:
- - a $2.7 million decrease due to lower commercial aircraft product revenues;
- - a $1.4 million decrease due to lower margins resulting from fixed overhead
costs absorbed over a lower revenue base;
- - a $0.5 million charge for the portion of the Custom Woodwork acquisition
purchase price allocated to inventory and charged to operations as the
inventory was sold during the three months ended September 30, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.6 million, or 18.4%, to $10.3 million for
the three months ended September 30, 1999, from $8.7 million for the same period
last year. SG&A expenses as a percent of revenues decreased to 15.7 % for the
third quarter 1999 compared to 18.5% for the same quarter last year. The net
increase in SG&A expenses is a result of:
- - a $2.0 million increase from the inclusion of expenses from the acquired
companies; offset by
- - a net $0.4 million decrease in expenses at our other companies.
OPERATING INCOME. Operating income increased $6.3 million, or 252.0%, to
$8.8 million for the three months ended September 30, 1999, from $2.5 million
for the same period last year. Operating income as a percent of revenues
increased to 13.5% for the third quarter of 1999, from 5.3% for the same quarter
last year. Operating income increased due to:
- - the inclusion of $7.0 million from the acquired companies ,
- - a $3.6 million charge recorded in 1998 for nonrecurring tender offer
expenses;
- - a $1.2 million charge resulting from the portion of the DLJ acquisition
purchase price allocated to inventory and charged to operations as the
inventory was sold during the one month ended September 30, 1998; and
- - a $1.5 million improvement resulting from existing business growth.
The increases were offset by:
- - a $3.8 million reduction resulting from weakened demand for our commercial
aircraft products;
- - higher amortization expenses of $2.7 million associated with the DLJ
acquisition and the PATS, PPI and Custom Woodwork acquisitions; and
- - a $0.5 million charge for the portion of the Custom Woodwork acquisition
purchase price allocated to inventory and charged to operations as the
inventory was sold during the three months ended September 30, 1999.
INTEREST EXPENSE. Interest expense increased $4.3 million to $7.2 million
for the three months ended September 30, 1999, from $2.9 million for the same
period last year. Higher debt levels resulting from the tender offer and the
PATS, PPI and Custom Woodwork 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.
17
<PAGE>
NET INCOME (LOSS). Net income increased $1.6 million, to $0.7 million for
the three months ended September 30,1999 compared to a net loss of $0.9 million
for the same period in 1998. The increase was due to the factors described
above.
BOOKINGS AND BACKLOG. Bookings increased $13.9 million, or 28.1%, to $63.4
million for the three months ended September 30, 1999 compared to $49.5 million
for the same period in 1998. An increase in bookings of $29.9 million
attributable to companies acquired was offset by decreases of $12.2 million for
commercial aircraft products and $3.8 million for our other products and
services. Backlog increased $64.4 million, or 85.4%, to $139.8 million as of
September 30, 1999 compared to $75.4 million as of December 31, 1998. A $71.0
million increase in backlog attributable to companies acquired as offset by
decreases of $5.7 million for commercial aircraft products and $0.9 million for
our other products and services.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
THE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
REFLECTS THE COMBINED HISTORICAL RESULTS FOR THE ONE MONTH ENDED SEPTEMBER 31,
1998 AND THE EIGHT MONTHS ENDED AUGUST 31, 1998 (PREDECESSOR).
REVENUES. Revenues increased $71.7 million, or 67.6%, to $177.8 million for
the nine months ended September 30, 1999 from $106.1 million for the nine months
ended September 30, 1998. Revenues increased due to:
- - the inclusion of $76.9 million of revenues resulting from the Avtech,
Dettmers, PATS, PPI and Custom Woodwork acquisitions; and
- - a $6.7 million increase in entertainment and cabin management product
revenues.
The increases were offset by:
- - a $8.7 million decrease in revenues due to weak demand for our commercial
aircraft products; and
- - a $3.2 million net decrease in revenues from our other products and
services.
GROSS PROFIT. Gross profit increased $24.9 million, or 71.3%, to $59.8
million for the nine months ended September 30, 1999. Gross profit as a percent
of revenues increased to 33.6% for the nine months ended September 30, 1999 from
32.9% for the same period last year. Factors contributing to the gross profit
increase were:
- - a contribution of $29.1 million from the acquired companies;
- - a $3.5 million increase due to higher entertainment and cabin management
products revenues; and
- - a $1.2 million increase resulting from the portion
of the DLJ acquisition purchase price allocated to inventory and charged to
operations as the inventory was sold during the one month ended
September 30, 1998.
Offsetting the above favorable factors were:
- - a $2.8 million decrease due to lower commercial aircraft product revenues;
- - a $2.5 million decrease due to lower margins resulting from fixed overhead
costs absorbed over a lower revenue base;
- - a $1.6 million charge for the portions of PPI and Custom Woodwork
acquisition purchase prices allocated to inventory and charged to
operations as the inventory was sold during the nine months ended
September 30, 1999; and
- - a $2.0 million decrease related to other products and services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $8.6 million, or 45.5%, to $27.5 million for
the nine months ended September 30, 1999, from $18.9 million for the same period
last year. SG&A expenses as a percent of revenues decreased to 15.5% for the
nine months ended September 30, 1999 compared to 17.8% for the same period last
year. SG&A expenses increased as a result of:
- - a $8.0 million increase from the inclusion of expenses from acquired
companies; and
- - a $0.6 million increase in expenses at our other companies.
18
<PAGE>
OPERATING INCOME. Operating income increased $12.5 million to $22.7 million
for the nine months ended September 30, 1999, from $10.2 million for the same
period last year. Operating income as a percent of revenues increased to 12.8%
for the nine months ended September 30, 1999, from 9.6% for the same period last
year. Operating income increased due to:
- - the inclusion of $21.0 million from the acquired companies;
- - a $3.6 million charge recorded in 1998 for nonrecurring tender offer
expenses;
- - a $2.6 million increase related to entertainment and cabin management
products; and
- - a $1.2 million charge resulting from the portion of the DLJ acquisition
purchase price allocated to inventory and charged to operations as the
inventory was sold during the one month ended September 30, 1998.
The increases were offset by:
- - higher amortization expenses of $7.4 million associated with the DLJ
acquisition and the PATS, PPI and Custom Woodwork acquisitions; and
- - a $5.5 million reduction resulting from weakened demand for our commercial
aircraft products;
- - a $1.6 million charge for the portions of the PPI and Custom Woodwork
acquisition purchase prices allocated to inventory and charged to
operations as the inventory was sold during the nine months ended September
30, 1999; and
- - a $1.4 million decrease related to other products and services.
INTEREST EXPENSE. Interest expense increased $15.8 million to $19.9 million
for the nine months ended September 30, 1999, from $4.1 million for the same
period last year. Higher debt levels resulting from the tender offer and the
Avtech, Dettmers, PATS, PPI, and Custom Woodwork 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. Net income decreased $1.9 million, to $0.5 million for the nine
months ended September 30,1999 compared to $2.4 million for the same period in
1998.
BOOKINGS AND BACKLOG. Bookings increased $115.1 million, or 103.4%, to
$226.4 million for the nine months ended September 30, 1999 compared to $111.3
million for the same period in 1998. An increase in bookings of $132.5 million
attributable to companies acquired was offset by decreases of $15.3 million for
commercial aircraft products and $2.1 million for our other products and
services. Backlog increased $64.4 million, or 85.4%, to $139.8 million as of
September 30, 1999 compared to $75.4 million as of December 31, 1998. A $71.0
million increase in backlog attributable to companies acquired as offset by
decreases of $5.7 million for commercial aircraft products and $0.9 million for
our other products and services.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1999, we generated $10.2 million of
cash from operating activities which is the net of $15.5 million of cash
generated from operations after adding back depreciation, amortization and other
non-cash items, and $5.9 million used for working capital and $0.1 resulting
from an increase in other liabilities. The following factors contributed to the
$5.9 million working capital increase:
- - a net $5.7 million decrease in accounts payable and accrued expenses
resulting from lower inventory levels, the 1999 payment of $3.0 million
accrued contingent consideration pertaining to the 1997 Audio International
acquisition and payment timing patterns;
- - a $2.6 million accounts receivable increase due to higher sales; and
- - a $1.3 million increase in prepaid expenses and other assets.
The working capital increases were offset by:
- - a $1.4 million inventory decrease as a result of adjustments to inventory
levels based on production forecasts; and
- - a $2.3 million increase in income taxes payable due to higher current
taxable income.
19
<PAGE>
Cash used for investing activities during the nine months ended September
30, 1999 consisted of $113.8 million for the PATS, PPI and Custom Woodwork
acquisitions, $3.0 million of contingent consideration paid during 1999 related
to the 1997 Audio International acquisition, and $4.8 million for capital
expenditures. We anticipate spending $6.6 million for capital expenditures in
1999.
Net cash provided by financing activities was $110.9 million for the nine
months ended September 30, 1999. The cash provided was primarily used to fund
our acquisitions as follows:
- - January 1999 - the senior term loan facility was amended to provide for an
additional $20.0 million of term loan borrowings and we used the funds,
along with $14.9 million of borrowings under our acquisition revolving
credit facility and a $5.0 million customer advance to acquire all of the
common stock of PATS;
- - April 1999 - the term loan facility was further amended and we borrowed an
additional $70 million and used $50.0 million of the proceeds to partially
fund the PPI acquisition and $20.0 million to repay borrowings under our
acquisition and working capital revolving credit facilities; we also sold
543,478 shares of common stock and used the $12.5 million net proceeds to
fund the remaining portion of the PPI acquisition; and
- - August 1999 - we borrowed an additional $13.8 million under our acquisition
and working capital revolving credit facilities to fund the Custom Woodwork
acquisition.
Subsequent to September 30, 1999 we borrowed an additional $11.5 million
under our acquisition revolving credit facility to fund the PCI NewCo and
International Custom Interiors acquisitions.
At September 30, 1999, senior credit facility borrowings totaling $182.6
million are at variable interest rates based on defined margins over the current
prime or Euro-Dollar rates. As of September 30, 1999 we had $59.1 million of
working capital, $25.0 million of borrowings available under our working capital
senior credit facility and $11.5 million available under our acquisition senior
credit facility. We believe that the current levels of working capital and
amounts available under our senior credit facilities will enable us to meet our
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, as amended by SFAS
No. 137 in June 1999, is 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.
We expect to incur less than $1.0 million in the aggregate to remediate and
test our systems, and evaluate and address the risks of our key customers and
vendors. 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.
20
<PAGE>
Our Year 2000 compliance efforts have been 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.
Our assessment of year 2000 performance standards is complete for our
information technology systems and for those systems deemed to be critical to
our operations. Our initial review of third-party compliance risks from our key
vendors and customers has also been completed. We will continue our review of
data from all of those vendors and customers who responded during the second
quarter of 1999 to determine if additional steps are necessary to mitigate
risks. Our management does not anticipate any resulting failures in our systems,
products or supply chain that would disrupt our operations to a material degree
at this time. Between now and the end of the year, we will continue to test our
systems, monitor the readiness of our vendors and suppliers, and take necessary
actions to correct noncompliant systems.
We completed the renovation, upgrade or replacement of all of our
significant information technology systems for year 2000 performance standards
during the third quarter of 1999. Several of our subsidiaries completed the
installation of accounting and manufacturing control systems replacing existing
systems not compliant with year 2000 performance standards. All of our
significant systems that 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.
21
<PAGE>
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 September 30,
1999, the current prime rate was 8.25% and the current Euro-Dollar rate was
5.52%. Based on $182.6 million of variable-rate debt outstanding as of September
30, 1999, a hypothetical one percent rise in interest rates, to 9.25% for prime
rate borrowings and 6.52% for Euro-Dollar borrowings, would reduce our pre-tax
earnings by $1.8 million annually. Subsequent to September 30, 1999, we
increased our variable-rate debt by $11.5 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 September 30, 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 foreign 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 nine months ended September 30, 1999 and no such
contracts are open as of that date.
22
<PAGE>
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.
INCORPORATION OF 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 office located at 2361 Rosecrans Avenue, Suite 180, El Segundo,
California 90245. Our telephone number is (310) 725-9123.
23
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As part of its investigation of the crash off the Canadian coast on
September 2, 1998 of Swissair Flight 111, the Canadian Transportation Safety
Board notified us that they recovered burned wire which had been attached to the
in-flight entertainment system installed on some of Swissair's aircraft by one
of our subsidiaries. Attorneys for families of persons who died aboard the
flight requested that we put our insurance carrier on notice of a potential
claim by those families, and we did so. The Transportation Safety Board has
advised us that it has no evidence that the system we installed malfunctioned or
failed during the flight. We are fully cooperating with the investigation.
Families of persons who died aboard the flight have filed actions in
federal and state courts against the Company, our subsidiary Hollingsead, and
many other parties unaffiliated with the Company, including Swissair and Boeing.
The action claims negligence, strict liability and breach of warranty relating
to the installation and testing of the in-flight entertainment system. The
actions seek compensatory and punitive damages and costs in an unstated amount.
We intend to vigorously defend against the claims.
In August 1998, DeCrane Aircraft and R. Jack DeCrane, its chief executive
officer, were served in an action filed in state court in California by Robert
A. Rankin, claiming that he was due additional compensation in the form of stock
options, and claiming fraud, negligent misrepresentation and breach of contract
in connection therewith, fraudulent misrepresentation in violation of provisions
of the California Labor Code for which doubled damages are sought, promissory
estoppel, and wrongful discharge in violation of public policy as a result of
his allegations of improprieties in connection with the DLJ acquisition
transactions. The plaintiff later amended his complaint to allege breach of an
implied contract as well. The action seeks not less than $1.5 million plus
punitive damages and costs. We intend to vigorously defend against the claims.
Mr. Rankin's employment with DeCrane Aircraft was terminated.
We are also involved in other routine legal and administrative
proceedings incident to the normal conduct of business. We believe the
ultimate disposition of all of the foregoing matters will not have a material
adverse effect on our consolidated financial position, results of operations
or cash flows.
ITEM 5. OTHER INFORMATION
ACQUISITION OF PPI HOLDINGS, INC.
On April 23, 1999 we 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. We intend to continue to use the
acquired assets to manufacture products similar to those previously manufactured
by PPI.
The acquisition is described in Note 2 to consolidated financial statements
included with this report and our prospectus. The prospectus is part of our
Registration Statement No. 333-70363 on Form S-1 filed with the Securities and
Exchange Commission effective May 14,1999.
ACQUISITION OF CUSTOM WOODWORK & PLASTICS, INC.
On August 5, 1999 we acquired substantially all of the assets, subject to
accounts payable and accrued expenses assumed, of Custom Woodwork & Plastics,
Inc. Custom Woodwork is a Georgia-based designer and manufacturer of interior
furniture components for middle- and high-end corporate aircraft. We intend to
continue to use the acquired assets to manufacture products similar to those
previously manufactured by Custom Woodwork.
The acquisition is described in Note 2 to consolidated financial statements
included with this report.
Regulation S-X compliant audited financial statements of Custom Woodwork
and the related pro forma consolidated financial information are included in our
Form 8-K we filed on October 19, 1999.
24
<PAGE>
ACQUISITION OF PCI NEWCO, INC.
On October 6, 1999 we acquired substantially all of the assets, subject to
accounts payable and accrued expenses assumed, of PCI NewCo, Inc. PCI NewCo is a
Kansas-based manufacturer of composite material and components for middle- and
high-end corporate aircraft. We intend to continue to use the acquired assets to
manufacture products similar to those previously manufactured by PCI NewCo.
The acquisition is described in Note 2 to consolidated financial statements
included with this report.
On October 19, 1999 we filed a Form 8-K describing the PCI NewCo
acquisition. PCI NewCo audited financial statements compliant with Regulation
S-X are not yet available. As a result, the pro forma consolidated financial
information required by the Securities Exchange Act of 1934 cannot be prepared
at this time. The audited financial statements and pro forma information for the
appropriate periods will be filed by amendment to our Form 8-K as soon as
practicable, but in no event later than December 20, 1999.
ACQUISITION OF INTERNATIONAL CUSTOM INTERIORS, INC.
On October 8, 1999 we acquired all of the common stock of International
Custom Interiors, Inc. International Custom Interiors is a Florida-based
provider of upholstery services and manufacturer of furniture for middle- and
high-end corporate aircraft. We intend to continue to use the acquired assets to
manufacture products similar to those previously manufactured by International
Custom Interiors.
The acquisition is described in Note 2 to consolidated financial statements
included with this report.
On October 19, 1999 we filed a Form 8-K describing the International Custom
Interiors acquisition. International Custom Interiors does not constitute a
significant subsidiary. As a result, the filing of Regulation S-X-compliant
audited financial statements and consolidated pro forma financial information is
not required.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
3.19.1 Articles of Incorporation of CWP Acquisition, Inc. *
3.19.2 By Laws of CWP Acquisition, Inc. *
3.20.1 Articles of Incorporation of PCI Acquisition Co., Inc. *
3.20.2 By Laws of PCI Acquisition Co., Inc. *
3.21.1 Articles of Incorporation of International Custom Interiors, Inc.*
3.21.2 By Laws of International Custom Interiors, Inc. *
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) *
21.1 List of Subsidiaries of Registrant *
27 Financial Data Schedule **
- -------------------
* Previously filed
** Filed herewith
b. Reports on Form 8-K
On October 19, 1999 we filed a Form 8-K regarding our acquisition of Custom
Woodwork & Plastics, Inc., PCI NewCo, Inc. and International Customer
Interiors, Inc.
25
<PAGE>
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)
November 15, 1999 By: /s/ RICHARD J. KAPLAN
----------------------------------------------------
Name: Richard J. Kaplan
Title: Assistant Secretary and Assistant Treasurer
(chief accounting officer)
26
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