<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 June 30, 2000
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 July 31, 2000 was 3,893,567 shares.
================================================================================
<PAGE>
DECRANE HOLDINGS CO.
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
ITEM 1. FINANCIAL STATEMENTS ----
<S> <C> <C>
Consolidated Balance Sheets as of December 31, 1999 and June 30, 2000 ............................ 1
Consolidated Statements of Operations for the three months and six months
ended June 30, 1999 and 2000 ................................................................. 2
Consolidated Statements of Stockholders' Equity for the six months ended June 30, 2000 ........... 3
Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and 2000 ............ 4
Condensed Notes to Consolidated Financial Statements ............................................. 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ............ 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK ........................................ 24
</TABLE>
PART II - OTHER INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
ITEM 1. LEGAL PROCEEDINGS ................................................................................ 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits ......................................................................................... 26
Reports on Form 8-K .............................................................................. 26
</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>
DECEMBER 31, JUNE 30,
1999 2000
------------ ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents .................................................................... $ 7,918 $ 7,917
Accounts receivable, net ..................................................................... 39,580 61,757
Inventories .................................................................................. 58,721 79,674
Deferred income taxes ........................................................................ 5,592 5,295
Prepaid expenses and other current assets..................................................... 2,114 2,794
----------- -----------
Total current assets ....................................................................... 113,925 157,437
Property and equipment, net ..................................................................... 37,700 53,426
Other assets, principally intangibles, net ...................................................... 374,111 402,522
----------- -----------
Total assets ............................................................................. $ 525,736 $ 613,385
=========== ===========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt ............................................................ $ 5,070 $ 6,852
Accounts payable ............................................................................. 14,948 18,310
Accrued liabilities .......................................................................... 61,082 44,416
Income taxes payable ......................................................................... 3,576 4,121
----------- -----------
Total current liabilities .................................................................. 84,676 73,699
Long-term debt .................................................................................. 310,581 372,954
Deferred income taxes ........................................................................... 21,249 22,349
Other long-term liabilities ..................................................................... 2,989 3,279
Commitments and contingencies (Note 10)
Mandatorily redeemable preferred stock .......................................................... 41,178 69,111
----------- -----------
Stockholders' equity
Undesignated preferred stock, $.01 par value, 1,140,000 shares authorized;
none issued and outstanding as of December 31, 1998 and June 30, 2000 ...................... - -
Common stock, $.01 par value, 4,500,000 and 10,000,000 shares authorized as of
December 31, 1999 and June 30, 2000, respectively; 3,571,827 and 3,893,567 shares
issued and outstanding as of December 31, 1999 and June 30, 2000, respectively ............. 36 39
Additional paid-in capital ................................................................... 75,944 80,478
Notes receivable for shares sold ............................................................. (2,468) (2,485)
Accumulated deficit .......................................................................... (6,923) (4,181)
Accumulated other comprehensive loss ......................................................... (1,526) (1,858)
----------- -----------
Total stockholders' equity ................................................................. 65,063 71,993
----------- -----------
Total liabilities, mandatorily redeemable preferred stock and stockholders' equity ....... $ 525,736 $ 613,385
=========== ===========
</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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues .............................................................. $ 62,703 $ 82,094 $ 112,598 $ 161,272
Cost of sales ......................................................... 42,079 54,483 75,974 107,509
----------- ----------- ----------- -----------
Gross profit ..................................................... 20,624 27,611 36,624 53,763
----------- ----------- ----------- -----------
Operating expenses
Selling, general and administrative ................................ 9,079 9,893 17,250 20,939
Amortization of intangible assets .................................. 2,894 4,037 5,458 8,250
----------- ----------- ----------- -----------
Total operating expenses ......................................... 11,973 13,930 22,708 29,189
----------- ----------- ----------- -----------
Income from operations ................................................ 8,651 13,681 13,916 24,574
Other expenses
Interest expense ................................................... 6,978 10,037 12,729 18,713
Other expenses (income) ............................................ (223) 109 (367) 173
----------- ----------- ----------- -----------
Income before provision for income taxes .............................. 1,896 3,535 1,554 5,688
Provision for income taxes ............................................ 1,804 1,548 1,737 2,946
----------- ----------- ----------- -----------
Net income (loss) ..................................................... $ 92 $ 1,987 $ (183) $ 2,742
=========== =========== =========== ===========
</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>
UNDESIGNATED NOTES ACCUMULATED
PREFERRED COMMON STOCK ADDITIONAL RECEIVABLE OTHER
------------------ PAID-IN FOR SHARES ACCUMULATED COMPREHENSIVE
STOCK SHARES AMOUNT CAPITAL SOLD DEFICIT LOSS TOTAL
----- ------- ------- -------- ---- ------- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 .................. - 3,571,827 $ 36 $ 75,944 $(2,468) $ (6,923) $ (1,526) $65,063
Comprehensive income
Net income ............................... - - - - - 2,742 - 2,742
Translation adjustment ................... - - - - - - (332) (332)
--------
2,410
--------
Proceeds from the sales of common stock...... - 326,087 3 7,497 - - - 7,500
Mandatorily redeemable preferred stock
issuance costs ........................... - - - (100) - - - (100)
Repurchase of common stock and
cancellation of related note receivable... - (4,347) - (101) 51 - - (50)
Noncash dividend accretion on mandatorily
redeemable preferred stock .............. - - - (2,933) - - - (2,933)
Compensatory stock option expense ........... - - - 171 - - - 171
Notes receivable interest accrued ........... - - - - (68) - - (68)
--------- --------- --------- --------- -------- -------- -------- -------
Balance, June 30, 2000
(Unaudited) .............................. $ - 3,893,567 39 $80,478 $(2,485) $ (4,181) $ (1,858) $71,993
========= ========== ========= ========= ========= ========= ========== =======
</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>
SIX MONTHS ENDED
JUNE 30,
-----------------
1999 2000
-------- ------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ............................................................................ $ (183) $ 2,742
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization ............................................................ 8,785 13,474
Deferred income taxes..................................................................... 161 1,407
Other, net ............................................................................... 131 522
Changes in assets and liabilities, net of effect from acquisitions
Accounts receivable .................................................................... (7,130) (13,134)
Inventories ............................................................................ 2,399 (7,661)
Prepaid expenses and other assets ...................................................... (757) (316)
Accounts payable ....................................................................... (1,384) (768)
Accrued liabilities .................................................................... 228 (377)
Income taxes payable ................................................................... 2,511 1,199
Other long-term liabilities ............................................................ (55) (195)
----------- -----------
Net cash provided by (used for) operating activities ................................. 4,706 (3,107)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisitions, net of cash acquired ............................................. (102,975) (76,861)
Capital expenditures ......................................................................... (3,054) (12,635)
Other, net ................................................................................... 78 75
----------- -----------
Net cash used for investing activities ............................................... (105,951) (89,421)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Term debt borrowings ......................................................................... 90,000 55,000
Proceeds from the sale of DeCrane Aircraft preferred stock ................................... - 25,000
Net borrowings (repayments) under senior credit facility ..................................... (2,800) 10,000
Proceeds from the sale of common stock ....................................................... 12,500 7,500
Customer advance ............................................................................. 5,000 -
Other long-term borrowings ................................................................... 636 -
Deferred financing costs ..................................................................... (3,062) (2,170)
Principal payments on term debt, capitalized leases and other debt ........................... (1,223) (2,611)
Other, net ................................................................................... 171 (187)
----------- -----------
Net cash provided by financing activities ............................................ 101,222 92,532
----------- -----------
Effect of foreign currency translation on cash .................................................. (6) (5)
----------- -----------
Net decrease in cash and cash equivalents ....................................................... (29) (1)
Cash and cash equivalents at beginning of period ................................................ 3,518 7,918
----------- -----------
Cash and cash equivalents at end of period ...................................................... $ 3,489 $ 7,917
=========== ===========
</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 statement 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,
1999 has been derived from audited financial statements but 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 audited financial statements and
related notes included in the Company's 1999 Form 10-K. Some reclassifications
have been made to prior periods' financial statements to conform to the 2000
presentation.
NOTE 2 - ACQUISITIONS
During the six months ended June 30, 2000, the Company acquired:
- substantially all of the assets of Carl F. Booth & Co., Inc.,
an Indiana-based manufacturer of wood veneer panels primarily
used in aircraft interior cabinetry, on May 11, 2000; and
- all of the common stock of ERDA, Inc., a Wisconsin-based
designer and manufacturer of aircraft seating, on June 30,
2000.
The companies acquired will be part of the Cabin Management Group. The
total purchase price was $51,128,000, including certain liabilities assumed of
$3,871,000, but not including contingent consideration of $2,000,000 related to
one of the acquisitions and an indeterminable amount for the other. The
contingent consideration is payable over three years based on future attainment
of defined performance criteria. 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 $35,584,000 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. 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 June 30, 2000 reflects the financial
position of the companies acquired and the consolidated statements of operations
for the three months and six months ended June 30, 2000 includes their operating
results subsequent to their respective acquisition dates.
The acquisitions were funded with borrowings under the Company's senior
credit facility as described in Note 7 and the proceeds from the sale of capital
stock described in Note 9.
5
<PAGE>
NOTE 3 - UNAUDITED PRO FORMA RESULTS OF OPERATIONS FOR 1999 AND 2000
ACQUISITIONS
Unaudited pro forma consolidated results of operations are presented in
the table below for six months ended June 30, 1999 and 2000. The pro forma
results of operations reflect the Company's 1999 acquisitions described in the
1999 audited financial statements and the 2000 Carl F. Booth and ERDA
acquisitions described in Note 2 as if all of the transactions were consummated
as of January 1, 1999. Amounts are in thousands.
<TABLE>
<CAPTION>
PRO FORMA FOR THE
SIX MONTHS ENDED
JUNE 30,
-----------------
1999 2000
------- ------
(UNAUDITED)
<S> <C> <C>
Revenues ........................................................................................ $ 163,899 $ 180,302
EBITDA, as defined (Note 12) .................................................................... 34,175 41,977
Net income ...................................................................................... 770 3,381
</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.
NOTE 4 - 1999 RESTRUCTURING OF THE SYSTEMS INTEGRATION GROUP
In December 1999, the Company announced a plan to reorganize and
restructure the operations of two subsidiaries within its Systems Integration
Group. The restructuring was a result of management's decision to exit the
manufacturing business at these subsidiaries and consolidate and relocate
operations into one facility to more efficiently and effectively manage the
business and be more competitive.
In 1999, the Company recorded nonrecurring pre-tax charges to
operations of $9,935,000 in connection with the restructuring plan as described
below:
- Inventory write-downs to net realizable value as a consequence
of exiting the manufacturing business;
- Certain property and equipment asset impairment write-downs
to net realizable value related to the closing of a
manufacturing facility;
- Severance and other compensation costs related to the
termination of approximately fifty manufacturing and
administrative employees upon closing of the manufacturing
facility, which ceased operations on June 2, 2000, and
elimination of duplicate administrative personnel following
the consolidation of the operations;
- Lease termination and other related costs expected to be
incurred during the remaining term of a long-term lease
agreement at the facility being vacated following the
restructuring, net of expected sublease income; and
- Other exit costs, principally legal and consulting fees.
The Company commenced the restructuring during 1999 and expects to
complete the plan in the third quarter of 2000. Of the total charge, $7,242,000
represented a noncash write-down of assets. As of December 31, 1999, $7,754,000
had been incurred and the remaining $2,181,000 was reflected as an accrued
liability. Components of the amounts incurred through June 30, 2000 are as
follows (amounts in thousands):
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
DECEMBER 31, AMOUNTS JUNE 30,
1999 INCURRED 2000
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Severance and other compensation costs ............................................. $ 784 $ (710) $ 74
Lease termination and other related costs .......................................... 721 (290) 431
Other exit costs ................................................................... 676 (280) 396
----------- ----------- -----------
Total ........................................................................... $ 2,181 $ (1,280) $ 901
=========== =========== ===========
</TABLE>
6
<PAGE>
NOTE 4 - 1999 RESTRUCTURING OF THE SYSTEMS INTEGRATION GROUP (CONTINUED)
Through June 30, 2000, severance and other compensation costs of
approximately $1,003,000 have been paid to date to approximately fifty
employees, of which $710,000 was incurred during the six months ended June 30,
2000. The amounts paid to date have been primarily to manufacturing employees
either terminated or subject to termination as the Company phases out of the
manufacturing business. The Company expects to incur the remaining costs
during the third quarter of 2000 when the restructuring plan is completed and
duplicate administrative personnel are eliminated. No significant adjustments
have been made to the original estimates.
The remaining balance of restructuring costs includes leases
termination and other exit costs. Most of the restructuring plan will be
completed by the third quarter of 2000, however, future cash payments will
extend beyond this date due to future lease payments on the vacated facility and
the incurrence of other exit costs. The cash payments will be funded from
existing cash balances and internally generated cash from operations.
NOTE 5 - INVENTORIES
Inventories are comprised of the following (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ --------
(UNAUDITED)
<S> <C> <C>
Raw materials ................................................................................... $ 28,249 $ 44,274
Work-in process ................................................................................. 20,520 26,177
Finished goods .................................................................................. 9,952 9,223
----------- -----------
Total inventories ............................................................................ $ 58,721 $ 79,674
=========== ===========
</TABLE>
Inventoried costs are not in excess of estimated realizable value and
include direct engineering, production and tooling costs, and applicable
manufacturing overhead. In accordance with industry practice, inventoried costs
include amounts relating to programs and contracts with long production cycles.
Included above are engineering costs related to long-term contracts that will be
recoverable based on future sales in the amount of $5,720,000 at December 31,
1999 and $7,530,000 at June 30, 2000. Periodic assessments are performed to
ensure recoverability of engineering costs and adjustments are made, if
necessary, to reduce inventoried costs to estimated realizable value. No
adjustments were required in 1999 and 2000.
NOTE 6 - ACCRUED LIABILITIES
Accrued liabilities are comprised of the following (amounts in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ ----------
(UNAUDITED)
<S> <C> <C>
Acquisition related contingent consideration .................................................... $ 29,825 $ 500
Salaries, wages, compensated absences and payroll related taxes ................................. 8,673 11,243
Customer deposits ............................................................................... 8,072 12,958
Accrued interest ................................................................................ 3,228 3,236
Other accrued liabilities ....................................................................... 11,284 16,479
----------- -----------
Total accrued liabilities .................................................................... $ 61,082 $ 44,416
=========== ===========
</TABLE>
7
<PAGE>
NOTE 7 - LONG-TERM DEBT
Long-term debt includes the following amounts (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ ----------
(UNAUDITED)
<S> <C> <C>
Senior credit facility
$25 million working capital revolving line of credit ......................................... $ - $ 8,000
$25 million acquisition revolving line of credit ............................................. - 2,000
Term loans ................................................................................... 213,213 266,175
12% senior subordinated notes ................................................................... 100,000 100,000
Capital lease obligations and equipment term financing, with interest at
4.7% to 25.7%, secured by equipment .......................................................... 2,411 3,631
Other ........................................................................................... 27 -
----------- -----------
Total long-term debt ......................................................................... 315,651 379,806
Less current portion ......................................................................... (5,070) (6,852)
----------- -----------
Long-term debt, less current portion ....................................................... $ 310,581 $ 372,954
=========== ===========
</TABLE>
During the six months ended June 30, 2000, the Company amended its
senior credit facility and borrowed an additional $55,000,000 under the term
loan facility and used the proceeds to partially fund the acquisitions described
in Note 2. The amendment increased the prime and Euro-Dollar interest rate
margins charged on the loans. Currently, the applicable margins are 1.75% to
2.75% for prime rate borrowings and 3.00% to 4.00% for Euro-Dollar rate
borrowings.
NOTE 8 - 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 9 - CAPITAL STRUCTURE
During the six months ended June 30, 2000, the Company and DeCrane
Aircraft, the Company's wholly-owned subsidiary, sold capital stock and used the
net proceeds to partially fund the acquisitions described in Note 2.
MANDATORILY REDEEMABLE PREFERRED STOCK
The table below summarizes mandatorily redeemable preferred stock
transactions during the six months ended June 30, 2000.
<TABLE>
<CAPTION>
DECRANE AIRCRAFT DECRANE HOLDINGS
16% PREFERRED STOCK 14% PREFERRED STOCK TOTAL
-------------------- -------------------
SHARES AMOUNT SHARES AMOUNT AMOUNT
------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1999 ............................... - $ - 342,417 $ 41,178 $ 41,178
Proceeds from sale of preferred stock .................... 250,000 25,000 - - 25,000
Noncash dividend accretion ............................... - - - 2,933 2,933
----------- ----------- ----------- ----------- -----------
Balance, June 30, 2000 (unaudited) ....................... 250,000 $ 25,000 342,417 $ 44,111 $ 69,111
=========== =========== =========== =========== ===========
</TABLE>
8
<PAGE>
NOTE 9 - CAPITAL STRUCTURE (CONTINUED)
DECRANE AIRCRAFT MANDATORILY REDEEMABLE PREFERRED STOCK
DeCrane Aircraft is authorized to issue 10,000,000 shares of $.01 par
value preferred stock. On June 30, 2000, DeCrane Aircraft designated 700,000 of
those shares to be 16% Senior Redeemable Exchangeable Preferred Stock Due 2009.
The preferred stock has a $100.00 per share liquidation preference, plus accrued
and unpaid cash dividends, and is non-voting. The DeCrane Aircraft preferred
stock dividend and redemption obligations rank senior to the Company's preferred
stock obligations described below.
Holders of the DeCrane Aircraft senior redeemable preferred stock are
entitled to receive, when, as and if declared, dividends at a rate equal to 16%
per annum. Prior to June 30, 2005, DeCrane Aircraft may, at its option, pay
dividends either in cash or by the issuance of additional shares of preferred
stock. The preferred stock is mandatorily redeemable on March 31, 2009. Upon the
occurrence of a change in control, as defined, each holder has the right to
require DeCrane Aircraft to redeem all or part of such holder's shares at a
price equal to 101 %of the liquidation preference (116% if prior to July 1,
2001), plus accrued and unpaid cash dividends.
DECRANE HOLDINGS MANDATORILY REDEEMABLE PREFERRED STOCK
During the six months ended June 30, 2000, the liquidation preference
of the DeCrane Holdings preferred stock increased by $2,933,000 to reflect
non-cash dividend accretion. The dividend accretion was charged to additional
paid-in capital. In connection with DeCrane Aircraft's issuance of preferred
stock, the non-cash dividend period of DeCrane Holdings' preferred stock was
extended two years to September 30, 2005. The preferred stock has a total
liquidation value of $44,111,000 ($128.82 per share) as of June 30, 2000. The
DeCrane Holdings preferred stock dividend and redemption obligations are
subordinate to DeCrane Aircraft's preferred stock obligations.
COMMON STOCK AND NOTES RECEIVABLE FOR SHARES SOLD
During the six months ended June 30, 2000, the Company increased to
10,000,000 the total number of authorized common shares and sold 326,087 shares
of common stock for $7,500,000 or $23.00 per share. The Company also repurchased
4,347 shares of common stock from a former employee at $23.00 per share.
COMMON STOCK WARRANTS
In connection with DeCrane Aircraft's sale of preferred stock, the
Company issued warrants to purchase 139,357 shares of its common stock for $.01
per share. The warrants are exercisable at any time and expire on June 30, 2010.
The Company also issued additional warrants to purchase 9,429 shares of common
stock to its existing warrant holders pursuant to anti-dilution provisions in
their warrant agreements. As of June 30, 2000, warrants to purchase a total of
453,786 common shares are issued and outstanding. Warrants to purchase 293,994
shares are exercisable at $.01 per share and 159,792 are exercisable at $23.00
per share.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
CONTINGENT ACQUISITION CONSIDERATION
The maximum determinable contingent consideration payment
obligations, resulting from the acquisitions described in Note 2, are as
follows as of June 30, 2000:
Based on future attainment of defined performance criteria
for the year ending December 31,
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
2000 .................................................................................................... $ 21,575
2001 .................................................................................................... 1,950
2002 .................................................................................................... 1,850
2003 .................................................................................................... 750
-----------
Total maximum obligation .............................................................................. $ 26,125
===========
</TABLE>
Contingent consideration payable, if any, is payable during the first
quarter of the following year.
9
<PAGE>
NOTE 11 - CONSOLIDATED STATEMENTS OF CASH FLOWS
Assets acquired and liabilities assumed in connection with acquisitions
are as follows (amounts in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------
1999 2000
----- ----
(UNAUDITED)
<S> <C> <C>
Fair value of assets acquired ................................................................... $ 117,528 $ 62,381
Liabilities assumed ............................................................................. (15,308) (14,951)
----------- -----------
Cash paid .................................................................................... 102,220 47,430
Less cash acquired ........................................................................... (2,245) (173)
----------- -----------
Net cash paid for companies acquired during the period ..................................... 99,975 47,257
Contingent consideration paid for previously completed acquisitions ............................. 3,000 29,325
Additional acquisition related expenses ......................................................... - 279
----------- -----------
Total cash paid for acquisitions ......................................................... $ 102,975 $ 76,861
=========== ===========
</TABLE>
NOTE 12 - BUSINESS SEGMENT INFORMATION
During 1999, the Company reorganized its businesses into three separate
groups: Cabin Management, Specialty Avionics and Systems Integration. As
prescribed by SFAS No. 131, "Disclosure About Segments of an Enterprise and
Related Information," the Company has restated disclosure information for
earlier periods to reflect its three separate operating groups.
The Company supplies products and services to the general aviation
industry. The Company's subsidiaries are organized into three groups, each of
which are strategic businesses that are managed separately because each business
develops, manufactures and sells distinct products and services. The groups and
a description of their businesses are as follows:
- Cabin Management - provides interior cabin components for the
corporate aircraft market, including furniture, cabinetry,
seats and in-flight entertainment systems;
- Specialty Avionics - designs, engineers and manufacturers
electronic components, display devices and interconnect
components and assemblies; and
- Systems Integration - provides auxiliary fuel tanks, auxiliary
power units and system integration services.
Management utilizes more than one measurement to evaluate group
performance and allocate resources, however, management considers the primary
measure to be earnings before interest, income taxes, depreciation and
amortization (referred to herein as EBITDA) as a measurement of their overall
economic returns and cash flows. This is consistent with the manner in which the
Company's overall performance is measured by its ultimate investors.
10
<PAGE>
NOTE 12 - BUSINESS SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
(UNAUDITED, IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues
Cabin Management ................................................... $ 17,616 $ 40,554 $ 25,437 $ 76,778
Specialty Avionics ................................................. 29,169 26,045 59,738 52,842
Systems Integration ................................................ 16,571 15,783 28,219 32,392
Inter-group elimination (1) ........................................ (653) (288) (796) (740)
----------- ----------- ----------- -----------
Consolidated revenues ............................................ $ 62,703 $ 82,094 $ 112,598 $ 161,272
=========== =========== =========== ===========
EBITDA (2)
Cabin Management ................................................... $ 6,140 $ 11,986 $ 8,437 $ 21,381
Specialty Avionics ................................................. 6,893 5,983 14,513 12,131
Systems Integration ................................................ 2,197 3,514 3,006 6,956
Corporate (3) ...................................................... (1,063) (1,542) (2,824) (3,345)
----------- ----------- ----------- -----------
Consolidated EBITDA .............................................. $ 14,167 $ 19,941 $ 23,132 $ 37,123
=========== =========== =========== ===========
Total assets (as of period end date)
Cabin Management ............................................................................. $ 104,879 $ 272,161
Specialty Avionics ........................................................................... 228,546 221,572
Systems Integration .......................................................................... 91,971 84,790
Corporate .................................................................................... 21,379 34,862
----------- -----------
Consolidated total assets .................................................................. $ 446,775 $ 613,385
=========== ===========
</TABLE>
---------------------------
(1) Inter-group sales are accounted for at prices comparable to sales to
unaffiliated customers, and are eliminated in consolidation.
(2) A reconciliation of consolidated EBITDA to income before income taxes is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
(UNAUDITED, IN THOUSANDS)
<S> <C> <C> <C> <C>
Consolidated EBITDA .............................................. $ 14,167 $ 19,941 $ 23,132 $ 37,123
Depreciation and amortization (a) ................................ (4,310) (6,171) (8,010) (12,371)
Noncash acquisition related charges .............................. (1,093) - (1,093) -
Other non-operating costs ........................................ (113) (89) (113) (178)
Interest expense ................................................. (6,978) (10,037) (12,729) (18,713)
Other (expenses) income .......................................... 223 (109) 367 (173)
----------- ----------- ----------- -----------
Consolidated income before income taxes ........................ $ 1,896 $ 3,535 $ 1,554 $ 5,688
=========== =========== =========== ===========
</TABLE>
--------------------------
(a) Reflects depreciation and amortization of long-lived assets, goodwill
and other intangible assets. Excludes amortization of deferred
financing costs, which are classified as a component of interest
expense, of $443,000 and $500,000 for the three months ended June 30,
1999 and 2000, respectively, and $775,000 and $1,103,000 for the six
months ended June 30, 1999 and 2000, respectively.
(3) Reflects the Company's corporate headquarters costs and expenses not
allocated to the groups.
11
<PAGE>
NOTE 13 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
In conjunction with the senior credit facility and 12% senior
subordinated notes described in Note 7, 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.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
ISSUER SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
----------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents .............................. $ 7,839 $ (323) $ 402 $ - $ 7,918
Accounts receivable, net ............................... - 38,201 1,379 - 39,580
Inventories ............................................ - 57,072 1,649 - 58,721
Other current assets ................................... 6,645 938 123 - 7,706
--------- --------- --------- --------- ---------
Total current assets ................................. 14,484 95,888 3,553 - 113,925
Property and equipment, net ............................... 1,282 34,174 2,244 - 37,700
Other assets, principally intangibles, net ................ 17,065 344,986 12,060 - 374,111
Investments in subsidiaries ............................... 360,515 20,305 - (380,820)(1) -
Intercompany receivables .................................. 77,566 17,334 2,612 (97,512)(2) -
--------- --------- --------- --------- ---------
Total assets ....................................... $ 470,912 $ 512,687 $ 20,469 $(478,332) $ 525,736
========= ========= ========= ========= =========
</TABLE>
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Current liabilities
Current portion of long-term debt ...................... $ 4,640 $ 404 $ 26 $ - $ 5,070
Other current liabilities .............................. 10,237 68,691 678 - 79,606
--------- --------- --------- --------- ---------
Total current liabilities ............................ 14,877 69,095 704 - 84,676
Long-term debt ............................................ 309,836 712 33 - 310,581
Intercompany payables ..................................... 17,797 79,384 331 (97,512)(2) -
Other long-term liabilities ............................... 20,635 2,981 622 - 24,238
Mandatorily redeemable preferred stock .................... 41,178 - - - 41,178
--------- --------- --------- --------- ---------
Stockholders' equity
Paid-in capital ........................................ 73,512 289,415 15,440 (304,855)(1) 73,512
Retained earnings (deficit) ............................ (6,923) 71,100 4,865 (75,965)(1) (6,923)
Accumulated other comprehensive loss ................... - - (1,526) - (1,526)
--------- --------- --------- --------- ---------
Total stockholders' equity ........................... 66,589 360,515 18,779 (380,820) 65,063
--------- --------- --------- --------- ---------
Total liabilities, mandatorily redeemable
preferred stock and stockholders' equity ......... $ 470,912 $ 512,687 $ 20,469 $(478,332) $ 525,736
========= ========= ========= ========= =========
</TABLE>
12
<PAGE>
NOTE 13 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, 2000 (UNAUDITED)
----------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
ISSUER SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
----------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents .............................. $ 7,908 $ (264) $ 273 $ - $ 7,917
Accounts receivable, net ............................... - 60,112 1,645 - 61,757
Inventories ............................................ - 77,591 2,083 - 79,674
Other current assets ................................... 5,770 2,067 252 - 8,089
--------- --------- --------- --------- ---------
Total current assets ................................. 13,678 139,506 4,253 - 157,437
Property and equipment, net ............................... 4,748 46,596 2,082 - 53,426
Other assets, principally intangibles, net ................ 18,256 373,842 10,424 - 402,522
Investments in subsidiaries ............................... 393,383 20,559 - (413,942)(1) -
Intercompany receivables .................................. 137,509 10,219 3,104 (150,832)(2) -
--------- --------- --------- --------- ---------
Total assets ....................................... $ 567,574 $ 590,722 $ 19,863 $(564,774) $ 613,385
========= ========= ========= ========= =========
</TABLE>
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Current liabilities
Current portion on long-term debt ...................... $ 6,403 $ 423 $ 26 $ - $ 6,852
Other current liabilities .............................. 14,993 51,334 520 - 66,847
--------- --------- --------- --------- ---------
Total current liabilities ............................ 21,396 51,757 546 - 73,699
Long-term debt ............................................ 370,958 1,977 19 - 372,954
Intercompany payables ..................................... 10,219 140,613 - (150,832)(2) -
Other long-term liabilities ............................... 22,039 2,992 597 - 25,628
Mandatorily redeemable preferred stock .................... 69,111 - - - 69,111
--------- --------- --------- --------- ---------
Stockholders' equity
Paid-in capital ........................................ 78,032 316,311 15,440 (331,751)(1) 78,032
Retained earnings (deficit) ............................ (4,181) 77,072 5,119 (82,191)(1) (4,181)
Accumulated other comprehensive loss ................... - - (1,858) - (1,858)
--------- --------- --------- --------- ---------
Total stockholders' equity ........................... 73,851 393,383 18,701 (413,942) 71,993
--------- --------- --------- --------- ---------
Total liabilities, mandatorily redeemable
preferred stock and stockholders' equity ......... $ 567,574 $ 590,722 $ 19,863 $(564,774) $ 613,385
========= ========= ========= ========= =========
</TABLE>
13
<PAGE>
NOTE 13 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
----------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
ISSUER SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
----------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues ............................................. $ - $ 110,320 $ 6,247 $ (3,969)(3) $ 112,598
Cost of sales ........................................ - 74,933 5,010 (3,969)(3) 75,974
--------- --------- --------- --------- ---------
Gross profit ......................................... - 35,387 1,237 - 36,624
Selling, general and administrative expenses ......... 2,978 13,551 721 - 17,250
Amortization of intangible assets .................... 78 5,128 252 - 5,458
Interest expense ..................................... 12,525 186 18 - 12,729
Intercompany charges ................................. (3,386) 3,290 96 - -
Equity in earnings of subsidiaries ................... (7,238) (496) - 7,734(4) -
Other expenses (income) .............................. - 75 (442) - (367)
Provision (benefit) for income taxes ................. (4,774) 6,415 96 - 1,737
--------- --------- --------- --------- ---------
Net income (loss) .................................... $ (183) $ 7,238 $ 496 $ (7,734) $ (183)
========= ========= ========= ========= =========
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
----------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
ISSUER SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
----------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues ............................................... $ - $ 160,349 $ 6,261 $ (5,338)(3) $ 161,272
Cost of sales .......................................... - 107,959 4,888 (5,338)(3) 107,509
--------- --------- --------- --------- ---------
Gross profit ........................................... - 52,390 1,373 - 53,763
Selling, general and administrative expenses ........... 3,745 16,537 657 - 20,939
Amortization of intangible assets ...................... 101 7,932 217 - 8,250
Interest expense ....................................... 18,524 178 11 - 18,713
Intercompany charges ................................... (6,822) 6,822 - - -
Equity in earnings of subsidiaries ..................... (11,822) (391) - 12,213(4) -
Other expenses ......................................... 114 30 29 - 173
Provision (benefit) for income taxes ................... (6,582) 9,460 68 - 2,946
--------- --------- --------- --------- ---------
Net income ............................................. $ 2,742 $ 11,822 $ 391 $ (12,213) $ 2,742
========= ========= ========= ========= =========
</TABLE>
14
<PAGE>
NOTE 13 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
----------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
ISSUER SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
----------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ...................................... $ (183) $ 7,238 $ 496 $ (7,734)(4) $ (183)
Adjustments to net income (loss)
Non-cash net income adjustments ...................... 1,154 7,631 292 - 9,077
Equity in earnings of subsidiaries ................... (7,238) (496) - 7,734(4) -
Changes in working capital ............................. 14,179 (17,583) (784) - (4,188)
--------- --------- --------- --------- ---------
Net cash provided by (used for)
operating activities ............................... 7,912 (3,210) 4 - 4,706
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisitions, net of cash acquired ....... (105,220) 2,245 - - (102,975)
Capital expenditures and other ......................... (22) (2,515) (439) - (2,976)
--------- --------- --------- --------- ---------
Net cash provided by (used for)
investing activities ............................... (105,242) (270) (439) - (105,951)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Term debt borrowings ................................... 90,000 - - - 90,000
Capital contribution ................................... 12,500 - - - 12,500
Customer advance ....................................... - 5,000 - - 5,000
Other long-term borrowings ............................. 636 - - - 636
Deferred financing costs ............................... (3,062) - - - (3,062)
Net revolving line of credit repayments ................ (2,800) - - - (2,800)
Principal payments on long-term debt and
capital leases ....................................... (697) (511) (15) - (1,223)
Other, net ............................................. - (94) 265 - 171
--------- --------- --------- --------- ---------
Net cash provided by financing activities ............ 96,577 4,395 250 - 101,222
--------- --------- --------- --------- ---------
Effect of foreign currency translation on cash ............ - - (6) - (6)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and equivalents ........... (753) 915 (191) - (29)
Cash and equivalents at beginning of period ............... 2,458 762 298 - 3,518
--------- --------- --------- --------- ---------
Cash and equivalents at end of period ..................... $ 1,705 $ 1,677 $ 107 $ - $ 3,489
========= ========= ========= ========= =========
</TABLE>
15
<PAGE>
NOTE 13 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
-----------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
ISSUER SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ...................................... $ 2,742 $ 11,822 $ 391 $(12,213)(4) $ 2,742
Adjustments to net income (loss)
Non-cash net income adjustments ............... 2,936 11,985 482 - 15,403
Equity in earnings of subsidiaries ............ (11,822) (391) - 12,213(4) -
Changes in working capital ...................... (6,141) (14,489) (622) - (21,252)
-------- -------- -------- -------- --------
Net cash provided by (used for)
operating activities ........................ (12,285) 8,927 251 - (3,107)
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisition, net of
cash acquired ................................. (77,034) 173 - - (76,861)
Capital expenditures and other .................. (3,626) (8,572) (362) - (12,560)
-------- -------- -------- -------- --------
Net cash used for investing activities ........ (80,660) (8,399) (362) - (89,421)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Debt financing for acquisitions ................. 55,000 - - - 55,000
Preferred and common stock financing
for acquisitions .............................. 32,500 - - - 32,500
Line of credit borrowings ....................... 10,000 - - - 10,000
Principal payments on long-term debt and
capital leases ................................ (2,266) (332) (13) - (2,611)
Deferred financing costs ........................ (2,170) - - - (2,170)
Other, net ...................................... (50) (137) - - (187)
-------- -------- -------- -------- --------
Net cash provided by
financing activities ........................ 93,014 (469) (13) - 92,532
-------- -------- -------- -------- --------
Effect of foreign currency
translation on cash ............................. - - (5) - (5)
-------- -------- -------- -------- --------
Net increase (decrease) in cash
and equivalents ................................. 69 59 (129) - (1)
Cash and equivalents at beginning
of period ....................................... 7,839 (323) 402 - 7,918
-------- -------- -------- -------- --------
Cash and equivalents at end of period .............. $ 7,908 $ (264) $ 273 $ - $ 7,917
======== ======== ======== ======== ========
</TABLE>
16
<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
Our financial position, results of operations and cash flows have been
affected by our history of acquisitions. Since January 1, 1999, we have
completed eight acquisitions and, as a result, our historical financial
statements do not reflect the financial position, results of operations and cash
flows of our current businesses. The companies we have acquired since January 1,
1999, which affect the comparability of the historical financial statements
included herein, consist of:
CABIN MANAGEMENT GROUP
- PPI, acquired on April 23, 1999;
- Custom Woodwork, acquired on August 5, 1999;
- PCI NewCo, acquired on October 6, 1999;
- International Custom Interiors, acquired on October 8, 1999;
- The Infinity Partners, acquired on December 17, 1999;
- Carl F. Booth, acquired on May 11, 2000;
- ERDA, acquired on June 30, 2000; and
SYSTEMS INTEGRATION GROUP
- PATS, acquired on January 22, 1999.
Our historical financial statements reflect the financial position,
results of operations and cash flows of the companies we acquired subsequent to
their respective 1999 and 2000 acquisition dates.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
REVENUES. Revenues increased $19.4 million, or 30.9%, to $82.1 million
for the three months ended June 30, 2000 from $62.7 million for the three months
ended June 30, 1999. The increase primarily resulted from the inclusion of
revenues in 2000 from companies we acquired during 1999 and 2000. By segment,
revenues changed as follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
FROM 1999
-------------------------
AMOUNT PERCENT
----------- ----------
(IN MILLIONS)
<S> <C> <C>
Cabin Management ....................................................................... $ 23.0 130.7 %
Specialty Avionics ..................................................................... (3.2) (11.0)
Systems Integration .................................................................... (0.8) (4.8)
Inter-group elimination ................................................................ 0.4
-----------
Total ................................................................................ $ 19.4
=============
</TABLE>
CABIN MANAGEMENT. Revenues increased by $23.0 million, or 130.7% over
the prior year, due to:
- the inclusion of $20.7 million of revenues resulting from our
acquisitions of PPI Holdings, Custom Woodwork, PCI NewCo,
International Custom Interiors and Infinity in 1999 and Carl
Booth in 2000; and
- a $2.3 million increase in entertainment and cabin management
product revenues primarily related to volume growth.
SPECIALTY AVIONICS. Revenues decreased by $3.2 million, or 11.0% from
the prior year, due to somewhat lower demand for our commercial aircraft
products.
SYSTEMS INTEGRATION. Revenues decreased by $0.8 million, or 4.8% from
the prior year, primarily due to the timing of orders received and when they
were shipped.
17
<PAGE>
GROSS PROFIT. Gross profit increased $7.0 million, or 33.9%, to $27.6
million for the three months ended June 30, 2000. The increase primarily results
from the inclusion of gross profit in 2000 from companies we acquired in 1999
and 2000. Gross profit as a percent of revenues increased to 33.6% for the three
months ended June 30, 2000 from 32.9% for the same period last year primarily as
a result of the higher margins of companies acquired during 1999 and 2000. By
segment, gross profit changed as follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
FROM 1999
-------------------------
AMOUNT PERCENT
----------- ----------
(IN MILLIONS)
<S> <C> <C>
Cabin Management ....................................................................... $ 7.6 105.6 %
Specialty Avionics ..................................................................... (2.4) (24.5)
Systems Integration .................................................................... 1.8 50.0
-------------
Total ................................................................................ $ 7.0
=============
</TABLE>
CABIN MANAGEMENT. Gross profit increased by $7.6 million, or 105.6%
over the prior year, due to:
- the inclusion of $7.0 million of gross profit resulting from
our 1999 and 2000 acquisitions; and
- $0.6 million from increased demand of entertainment cabin
management products.
SPECIALTY AVIONICS. Gross profit decreased by $2.4 million, or 24.5%
from the prior year, due to somewhat lower demand for our commercial aircraft
products.
SYSTEMS INTEGRATION. Gross profit increased by $1.8 million, or 50.0%
over the prior year, due to auxiliary fuel tank manufacturing and installation
efficiencies achieved and the 1999 restructuring and exit from the manufacturing
business described in Note 4 to the unaudited consolidated financial statements.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.8 million, or 8.8%, to $9.9 million for the
three months ended June 30, 2000, from $9.1 million for the same period last
year. The increase primarily results from the inclusion of $1.5 million of SG&A
expenses in 2000 from companies we acquired during 1999 and 2000. SG&A expenses
as a percent of revenues decreased to 12.1% for the three months ended June 30,
2000 compared to 14.5% for the same period last year. By segment, SG&A expenses
changed as follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
FROM 1999
------------------------
AMOUNT PERCENT
------------ ----------
(IN MILLIONS)
<S> <C> <C>
Cabin Management ....................................................................... $ 0.8 33.3 %
Specialty Avionics ..................................................................... (0.9) (25.7)
Systems Integration .................................................................... 0.4 21.1
Corporate .............................................................................. 0.5 38.5
-------------
Total ................................................................................ $ 0.8
=============
</TABLE>
CABIN MANAGEMENT. SG&A expenses increased by $0.8 million, or 33.3%
over the prior year, due to
- the inclusion of $1.5 million resulting from our 1999 and 2000
acquisitions; offset by
- a $0.7 million decrease in expenses resulting from the
centralization of administrative activities.
SPECIALTY AVIONICS. SG&A expenses decreased by $0.9 million, or 25.7%
from the prior year, due to reduced selling costs related to lower sales.
SYSTEMS INTEGRATION. SG&A expenses increased by $0.4 million, or 21.1%
over the prior year, due to:
- increased costs in support of volume growth; offset in part by
- reductions attributable to the centralization of
administrative activities as a result of the 1999
restructuring.
CORPORATE. SG&A expenses increased by $0.5 million, or 38.5% from the
prior year due to increased spending on sales and marketing programs.
18
<PAGE>
DEPRECIATION AND AMORTIZATION OF INTANGIBLES. Depreciation and
amortization expense, which includes amortization of goodwill and identifiable
intangible assets, increased $1.7 million, or 38.6%, for the three months ended
June 30, 2000. The increase primarily results from the inclusion of $0.8 million
of depreciation expense in 2000 from companies we acquired during 1999 and 2000.
By segment, depreciation expense changed as follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
FROM 1999
---------------------
AMOUNT PERCENT
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Cabin Management ....................................................................... $ 1.0 125.0 %
Specialty Avionics ..................................................................... 0.2 7.4
Systems Integration .................................................................... 0.4 50.0
Corporate .............................................................................. 0.1 -
-------------
Total ................................................................................ $ 1.7
=============
</TABLE>
CABIN MANAGEMENT. Depreciation and amortization expense increased by
$1.0 million, or 125.0% over the prior year, due to:
- the inclusion of $0.8 million resulting from our 1999 and 2000
acquisitions; and
- a $0.2 million increase resulting from plant expansion
programs.
SPECIALTY AVIONICS. Depreciation and amortization expense increased by
$0.2 million, or 7.4% over the prior year.
SYSTEMS INTEGRATION. Depreciation and amortization expense increased by
$0.4 million, or 50.0% over the prior year.
CORPORATE. Depreciation and amortization expense increased by $0.1
million due to amortization associated with computer software installed during
the second half of 1999.
EBITDA AND OPERATING INCOME. EBITDA increased $5.8 million to $19.9
million, or 41.1%, for the three months ended June 30, 2000, from $14.1 million
for the same period last year. The increase primarily results from the
contribution to year 2000 results from companies we acquired during 1999 and
2000. EBITDA as a percent of revenues increased to 24.2% for the three months
ended June 30, 2000, from 22.6% for the same period last year. Operating income
increased $5.0 million to $13.7 million, or 57.5%, for the three months ended
June 30, 2000, from $8.7 million for the same period last year. By segment,
EBITDA changed as follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
FROM 1999
-------------------------
AMOUNT PERCENT
------------ ----------
(IN MILLIONS)
<S> <C> <C>
EBITDA
Cabin Management ..................................................................... $ 5.7 91.9 %
Specialty Avionics ................................................................... (0.9) (13.0)
Systems Integration .................................................................. 1.3 59.1
Corporate ............................................................................ (0.3) (25.0)
-----------
Total EBITDA ....................................................................... 5.8
Depreciation and amortization .......................................................... 1.7
Other non-operating costs .............................................................. (0.9)
-------------
Total operating income (loss) ...................................................... $ 5.0
===========
</TABLE>
CABIN MANAGEMENT. EBITDA increased by $5.7 million, or 91.9% over the
prior year, due primarily to acquisitions.
SPECIALTY AVIONICS. EBITDA decreased by $0.9 million, or 13.0% from the
prior year, due to somewhat lower demand for our commercial aircraft products.
SYSTEMS INTEGRATION. EBITDA increased by $1.3 million, or 59.1% over
the prior year, resulting in part from our 1999 restructuring which included our
exit from the manufacturing business. While not affecting the comparison of 1999
to 2000 results, we charged $0.6 million to the accrued liability established in
1999; no adjustments have been made to our original 1999 estimates.
CORPORATE. EBITDA decreased by $0.3 million, or 25.0% from the prior
year, as a result of higher expenses in support of companies acquired during
1999 and 2000 and sales and marketing programs initiated during late 1999 and
2000.
19
<PAGE>
INTEREST EXPENSE. Interest expense increased $3.0 million to $10.0
million for the three months ended June 30, 2000, from $7.0 million for the same
period last year. Interest expense increased:
- $2.0 million due to higher debt levels associated with our
acquisition of companies during 1999 and 2000; and
- $1.0 million due to higher average interest rates charged
during 2000.
PROVISION FOR INCOME TAXES. The provision for income taxes differs from
the amount determined by applying the applicable U.S. statutory federal rate to
the income before income taxes primarily due to the effects of state and foreign
income taxes and non-deductible expenses, principally goodwill amortization. The
difference in the effective tax rates between periods is mostly a result of
higher goodwill amortization.
NET INCOME. Net income increased $1.9 million to $2.0 million for the
three months ended June 30, 2000 compared to $0.1 million for the same period in
1999.
BOOKINGS. Bookings increased $31.6 million to $88.7 million for the
three months ended June 30, 2000 compared to $57.1 million for the same period
in 1999. The increase in bookings for 2000 results from:
- a $19.8 million increase associated with companies we acquired
in 1999 and 2000; and
- a $11.8 million increase related to business growth,
principally in Cabin Management's furniture product lines.
BACKLOG AT END OF PERIOD. Backlog increased $12.4 million to $168.5
million as of June 30, 2000 compared to $156.1 million as of December 31, 1999.
The increase primarily results from the timing of receipt of customer orders. By
segment, backlog changed as follows:
- a $9.6 million increase related to Cabin Management companies
acquired companies in 2000;
- a $4.8 million increase related to Specialty Avionics,
reflecting a recovery in demand for some of our commercial
aircraft products; and
- a $2.0 million decrease related to Systems Integration,
resulting from our 1999 restructuring and exit from the
manufacturing business.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
REVENUES. Revenues increased $48.7 million, or 43.3%, to $161.3 million
for the six months ended June 30, 2000 from $112.6 million for the six months
ended June 30, 1999. The increase primarily results from the inclusion of
revenues in 2000 from companies we acquired during 1999. By segment, revenues
changed as follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
FROM 1999
-----------------------
AMOUNT PERCENT
--------- ----------
(IN MILLIONS)
<S> <C> <C>
Cabin Management ....................................................................... $ 51.3 201.2 %
Specialty Avionics ..................................................................... (6.9) (11.6)
Systems Integration .................................................................... 4.2 14.9
Inter-group elimination ................................................................ 0.1
-----------
Total ................................................................................ $ 48.7
=============
</TABLE>
CABIN MANAGEMENT. Revenues increased by $51.3 million, or 201.2% over
the prior year, due to:
- the inclusion of $48.0 million of revenues resulting from our
acquisitions of PPI Holdings, Custom Woodwork, PCI NewCo,
International Custom Interiors and Infinity in 1999 and Carl
Booth in 2000; and
- a $3.3 million increase in entertainment and cabin management
product revenues primarily related to volume growth.
SPECIALTY AVIONICS. Revenues decreased by $6.9 million, or 11.6% from
the prior year, due to somewhat lower demand for our commercial aircraft
products.
SYSTEMS INTEGRATION. Revenues increased by $4.2 million, or 14.9% over
the prior year, due to stronger customer demand and the inclusion of PATS for
the full six months of 2000; PATS was acquired on January 22, 1999.
20
<PAGE>
GROSS PROFIT. Gross profit increased $17.2 million, or 47.0%, to $53.8
million for the six months ended June 30, 2000. The increase primarily results
from the inclusion of gross profit in 2000 from companies we acquired in 1999
and 2000. Gross profit as a percent of revenues increased to 33.4% for the six
months ended June 30, 2000 from 32.5% for the same period last year primarily as
a result of the higher margins of companies acquired during 1999 and 2000. By
segment, gross profit changed as follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
FROM 1999
----------------------
AMOUNT PERCENT
--------- ----------
(IN MILLIONS)
<S> <C> <C>
Cabin Management ....................................................................... $ 16.4 145.1 %
Specialty Avionics ..................................................................... (4.3) (21.7)
Systems Integration .................................................................... 5.1 92.7
-------------
Total ................................................................................ $ 17.2
=============
</TABLE>
CABIN MANAGEMENT. Gross profit increased by $16.4 million, or 145.1%
over the prior year, due almost entirely to gross profit from our 1999 and 2000
acquisitions.
SPECIALTY AVIONICS. Gross profit decreased by $4.3 million, or 21.7%
from the prior year, due to somewhat lower demand for our commercial aircraft
products.
SYSTEMS INTEGRATION. Gross profit increased by $5.1 million, or 92.7%
over the prior year, due almost entirely to a $4.2 million increase in gross
profit resulting from favorable auxiliary fuel tank manufacturing and
installation efficiencies achieved and the 1999 restructuring and exit from the
manufacturing business described in Note 4 to the unaudited consolidated
financial statements.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $3.6 million, or 20.8%, to $20.9 million for
the six months ended June 30, 2000, from $17.3 million for the same period last
year. The increase primarily results from the inclusion of $3.5 million of SG&A
expenses in 2000 from companies we acquired during 1999. SG&A expenses as a
percent of revenues decreased to 13.0% for the six months ended June 30, 2000
compared to 15.4% for the same period last year. By segment, SG&A expenses
changed as follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
FROM 1999
----------------------
AMOUNT PERCENT
---------- ---------
(IN MILLIONS)
<S> <C> <C>
Cabin Management ....................................................................... $ 2.6 60.5 %
Specialty Avionics ..................................................................... (1.2) (17.4)
Systems Integration .................................................................... 1.2 36.4
Corporate .............................................................................. 1.0 35.7
-------------
Total ................................................................................ $ 3.6
=============
</TABLE>
CABIN MANAGEMENT. SG&A expenses increased by $2.6 million, or 60.5%
over the prior year, due to
- the inclusion of $3.5 million related to our 1999 and 2000
acquisitions; offset by
- a $0.9 million decrease in expenses resulting from the
centralization of administrative activities.
SPECIALTY AVIONICS. SG&A expenses decreased by $1.2 million, or 17.4%
from the prior year, due to reduced selling costs related to lower sales.
SYSTEMS INTEGRATION. SG&A expenses increased by $1.2 million, or 36.4%
over the prior year, due to:
- a $2.0 million increase in SG&A expenses resulting from our
acquisition of PATS in 1999; offset by
- a $0.8 million decrease in expenses from the centralization of
administrative activities as a result of the 1999
restructuring.
CORPORATE. SG&A expenses increased by $1.0 million, or 35.7% over the
prior year due to increased spending for sales and marketing programs.
21
<PAGE>
DEPRECIATION AND AMORTIZATION OF INTANGIBLES. Depreciation and
amortization expense, which includes amortization of goodwill and identifiable
intangible assets, increased $4.4 million, or 55.0%, for the six months ended
June 30, 2000. The increase primarily results from the inclusion of $2.1 million
of depreciation expense in 2000 from companies we acquired during 1999. By
segment, depreciation expense changed as follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
FROM 1999
----------------------
AMOUNT PERCENT
--------- ----------
(IN MILLIONS)
<S> <C> <C>
Cabin Management ....................................................................... $ 2.6 216.7 %
Specialty Avionics ..................................................................... 0.6 11.5
Systems Integration .................................................................... 1.0 66.7
Corporate .............................................................................. 0.2 -
-------------
Total ................................................................................ $ 4.4
===========
</TABLE>
CABIN MANAGEMENT. Depreciation and amortization expense increased by
$2.6 million, or 216.7% over the prior year, due to:
- the inclusion of $2.1 million resulting from our 1999 and 2000
acquisitions; and
- a $0.5 million increase resulting from plant expansion
programs.
SPECIALTY AVIONICS. Depreciation and amortization expense increased by
$0.6 million, or 11.5% over the prior year.
SYSTEMS INTEGRATION. Depreciation and amortization expense increased by
$1.0 million, or 66.7% over the prior year.
CORPORATE. Depreciation and amortization expense increased by $0.2
million due to amortization associated with computer software installed during
the second half of 1999.
EBITDA AND OPERATING INCOME. EBITDA increased $14.1 million to $37.1
million, or 60.6%, for the six months ended June 30, 2000, from $23.0 million
for the same period last year. The increase primarily results from the
contribution to year 2000 results from companies we acquired. EBITDA as a
percent of revenues increased to 23.0% for the six months ended June 30, 2000,
from 20.4% for the same period last year. Operating income increased $10.7
million to $24.6 million, or 77.0%, for the six months ended June 30, 2000, from
$13.9 million for the same period last year. By segment, EBITDA changed as
follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
FROM 1999
----------------------
AMOUNT PERCENT
---------- ---------
(IN MILLIONS)
<S> <C> <C>
EBITDA
Cabin Management ..................................................................... $ 12.9 153.6 %
Specialty Avionics ................................................................... (2.4) (16.6)
Systems Integration .................................................................. 4.0 133.3
Corporate ............................................................................ (0.4) 13.8
-----------
Total EBITDA ....................................................................... 14.1
Depreciation and amortization .......................................................... 4.4
Other non-operating costs .............................................................. (1.0)
-------------
Total operating income (loss) ...................................................... $ 10.7
===========
</TABLE>
CABIN MANAGEMENT. EBITDA increased by $12.9 million, or 153.6% over the
prior year, due primarily to acquisitions.
SPECIALTY AVIONICS. EBITDA decreased by $2.4 million, or 16.6% from the
prior year, due to somewhat lower demand for our commercial aircraft products.
SYSTEMS INTEGRATION. EBITDA increased by $4.0 million, or 133.3% from
the prior year, due to:
- a $1.4 million increase resulting primarily from favorable
manufacturing efficiencies of auxiliary fuel tanks and power
units; and
- a $2.6 million increase resulting in part from our 1999
restructuring which included our exit from the manufacturing
business. While not affecting the comparison of 1999 to 2000
results, we charged $1.3 million to the accrued liability
established in 1999; no adjustments have been made to our
original 1999 estimates.
22
<PAGE>
CORPORATE. EBITDA decreased by $0.4 million, or 13.8% over the prior
year, as a result of higher expenses in support of companies acquired during
1999 and 2000 and sales and marketing programs initiated during late 1999 and
2000.
INTEREST EXPENSE. Interest expense increased $6.0 million to $18.7
million for the six months ended June 30, 2000, from $12.7 million for the same
period last year. Interest expense increased:
- $4.6 million due to higher debt levels associated with our
acquisition of companies during 1999 and 2000; and
- $1.4 million due to higher average interest rates charged
during 2000.
PROVISION FOR INCOME TAXES. The provision for income taxes differs from
the amount determined by applying the applicable U.S. statutory federal rate to
the income before income taxes primarily due to the effects of state and foreign
income taxes and non-deductible expenses, principally goodwill amortization. The
difference in the effective tax rates between periods is mostly a result of
higher goodwill amortization.
NET INCOME (LOSS). Net income increased $2.9 million to $2.7 million
for the six months ended June 30, 2000 compared to a net loss of $0.2 million
for the same period in 1999.
BOOKINGS. Bookings increased $56.8 million, or 54.4%, to $161.3 million
for the six months ended June 30, 2000 compared to $104.5 million for the same
period in 1999. The increase in bookings for 2000 results from:
- a $47.1 million increase associated with companies we acquired
in 1999 and 2000; and
- a $9.7 million increase related to business growth,
principally in Cabin Management's furniture product lines.
LIQUIDITY AND CAPITAL RESOURCES
We have required cash primarily to fund acquisitions and, to a lesser
extent, to fund capital expenditures and for working capital. Our principal
sources of liquidity have been cash flow from operations and third party
borrowings.
For the six months ended June 30, 2000, we used $3.1 million of cash
from operating activities, which is the net of $18.1 million of cash generated
from operations after adding back depreciation, amortization and other noncash
items, $21.0 million used for working capital and $0.2 million resulting from an
decrease in other liabilities. The following factors contributed to the $21.0
million working capital increase:
- a $13.1 million accounts receivable increase due to increased
shipments, timing differences relating to completing of
projects and the associated collection;
- a net $7.7 million increase in inventory due to longer lead
times involved with production and increases to meet current
and projected revenue growth;
- a $1.4 million net decrease in current liabilities; offset by
- a $1.2 million increase in income taxes payable due to higher
current taxable income.
Cash used for investing activities was $89.4 million for the six months
ended June 30, 2000, and consisted of:
- $47.2 million for our Carl Booth and ERDA acquisitions;
- $29.6 million for contingent consideration earned in 1999 and
paid in 2000; and
- $12.6 million for capital expenditures, including $5.7 million
for the purchase of a furniture manufacturing facility for our
Cabin Management Group.
We anticipate spending $16.8 million for capital expenditures in 2000.
Net cash provided by financing activities was $92.5 million for the six
months ended June 30, 2000 and was primarily used to fund our acquisitions. We
obtained these funds by borrowing $65.0 million under our senior credit
facility, selling $25.0 million of DeCrane Aircraft 16% mandatorily redeemable
preferred stock and $7.5million of common stock. We used $2.6 million to make
principal payments on our senior term debt, capitalized leases and other debt,
and paid $2.2 million of financing costs.
23
<PAGE>
At June 30, 2000, senior credit facility borrowings totaling $276.2
million are at variable interest rates based on defined margins over the current
prime or Euro-Dollar rates. At June 30, 2000 we had $83.7 million of working
capital and had $17.0 million of borrowings available under our working capital
credit facility and $23.0 million available under our acquisition credit
facility. Although we cannot be certain, we believe that operating cash flow,
together with borrowings under our bank credit facility, will be sufficient to
meet our future short-and long-term operating expenses, working capital
requirements, capital expenditures and debt service obligations for the next
twelve months. However, our ability to pay principal or interest, to refinance
our debt and to satisfy our other debt obligations will depend on our future
operating performance. We will be affected by economic, financial, competitive,
legislative, regulatory, business and other factors beyond our control. In
addition, we are continually considering acquisitions that complement or expand
our existing businesses or that may enable us to expand into new markets. Future
acquisitions may require additional debt, equity financing or both. We may not
be able to obtain any additional financing on acceptable terms.
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 June
30, 2000, the current prime rate was 9.50% and the current Euro-Dollar rate was
6.51%. Based on $276.2 million of variable-rate debt outstanding as of June 30,
2000, a hypothetical one percent rise in interest rates, to 10.50% for prime
rate borrowings and 7.51% for Euro-Dollar borrowings, would reduce our pre-tax
earnings by $2.8 million annually. 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.
The estimated fair value of our $100.0 million fixed-rate long-term
debt is approximately $88.0 million at June 30, 2000. 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, while we have not entered
into any such contracts since 1998 and no such contracts are open as of June 30,
2000, we may do so in the future depending on our assessment of future foreign
exchange rate trends.
24
<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.
We are vulnerable to a variety of risks 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;
- our reliance on key customers and the adverse effect a
significant decline in business from any one of them would
have on our business;
- changes in prevailing interest rates and the availability of
financing to fund our plans for continued growth;
- competition from larger companies;
- Federal Aviation Administration prescribed standards and
licensing requirements, which apply many of the products and
services we provide;
- inflation, and other general changes in costs of goods and
services;
- liability and other claims asserted against us that exceeds
our insurance coverage;
- the ability to attract and retain qualified personnel;
- labor disturbances; and
- 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 Form 10-K for the year
ended December 31, 1999. The Form 10-K includes our audited 1999 financial
statements, 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.
25
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Refer to the legal proceedings described in Item 3 of our Form 10-K for
the year ended December 31, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
3.1.2.1 Certificate of Amendment of Certificate of Incorporation of
DeCrane Holdings Co. dated May 8, 2000 **
3.3.1 Certificate of Formation and Certificate of Merger for
Aerospace Display Systems, LLC *
3.3.2 Limited Liability Company Operating Agreement for Aerospace
Display Systems, LLC *
3.19.1 Certificate of Formation and Certificate of Merger for Custom
Woodwork & Plastics, LLC *
3.19.2 Limited Liability Company Operating Agreements for Custom
Woodwork & Plastics, LLC *
3.25.1 Certificate of Formation and Certificate of Amendment of Carl
F. Booth & Co., LLC *
3.25.2 Limited Liability Company Agreement of Carl F. Booth & Co.,
LLC *
3.26.1 Restated Articles of Incorporation of ERDA, Inc. *
3.26.2 Bylaws of ERDA, Inc. (formerly ERDA Acquisition Co., Inc.) *
4.3.1 Form of Class B Warrant for the Purchase of Common Stock of
DeCrane Holdings Co. *
4.5.1 Amendment No. 1 to the Certificate of Designations,
Preferences and Rights of 14% Senior Redeemable Exchangeable
Preferred Stock Due 2008, effective June 29, 2000 *
10.1 Securities Purchase Agreement dated as of June 30, 2000 among
DeCrane Aircraft Holdings, Inc., DeCrane Holdings Co. and the
purchasers named therein *
10.2 Amended and Restated Investors' Agreement dated as of June 30,
2000 by and among DeCrane Holdings Co., DeCrane Aircraft
Holdings, Inc. and the stockholders named therein *
10.10.3 Third Amended and Restated Credit Agreement dated as of May
11, 2000 among DeCrane Aircraft Holdings, Inc., the lenders
listed therein, DLJ Capital Funding, Inc., as syndication
agent, and Bank One NA, as administrative agent *
10.22 Executive Deferred Compensation Plan *
21.1 List of Subsidiaries of Registrant *
27 Financial Data Schedule **
----------------------
* Previously filed
** Filed herewith
b. Reports on Form 8-K
- On May 25, 2000, we filed a Form 8-K dated May 11, 2000
regarding our acquisition of Carl F. Booth & Co., Inc.
- On June 16, 2000, we filed Amendment No. 1 to our Form 8-K
dated May 11, 2000 regarding our acquisition of Carl F. Booth
& Co., Inc.
- On July 13, 2000, we filed a Form 8-K dated June 30, 2000
regarding our acquisition of ERDA, Inc.
- On August 2, 2000 we filed Amendment No. 1 to our Form 8-K
dated June 30, 2000 regarding our acquisition of ERDA, Inc.
26
<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)
August 14, 2000 By: /s/ RICHARD J. KAPLAN
---------------------------------------
Name: Richard J. Kaplan
Title: Assistant Secretary, Assistant
Treasurer and Director (chief
accounting officer)
27
