<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 September 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 October 31, 2000 was 3,914,274 shares.
================================================================================
<PAGE>
DECRANE HOLDINGS CO.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets as of December 31, 1999 and September 30, 2000 ....................... 1
Consolidated Statements of Operations for the three months and nine months
ended September 30, 1999 and 2000 ............................................................ 2
Consolidated Statements of Stockholders' Equity for the nine months ended September 30, 2000 ..... 3
Consolidated Statements of Cash Flows for the nine months ended September 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 DISCLOSURES ABOUT MARKET RISK ....................................... 24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ................................................................................ 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits ......................................................................................... 26
Reports on Form 8-K .............................................................................. 27
</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, SEPTEMBER 30,
1999 2000
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents .................................................................... $ 7,918 $ 1,848
Accounts receivable, net ..................................................................... 39,580 64,869
Inventories .................................................................................. 58,721 81,074
Deferred income taxes ........................................................................ 5,592 4,759
Prepaid expenses and other current assets..................................................... 2,114 1,420
----------- -----------
Total current assets ....................................................................... 113,925 153,970
Property and equipment, net ..................................................................... 37,700 55,840
Other assets, principally intangibles, net ...................................................... 374,111 414,335
----------- -----------
Total assets ............................................................................. $ 525,736 $ 624,145
=========== ===========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt ............................................................ $ 5,070 $ 8,273
Accounts payable ............................................................................. 14,948 18,662
Accrued liabilities .......................................................................... 61,082 36,818
Income taxes payable ......................................................................... 3,576 3,903
----------- -----------
Total current liabilities .................................................................. 84,676 67,656
Long-term debt .................................................................................. 310,581 380,316
Deferred income taxes ........................................................................... 21,249 32,078
Other long-term liabilities ..................................................................... 2,989 2,324
Commitments and contingencies (Note 10)
Mandatorily redeemable preferred stock .......................................................... 41,178 71,655
----------- -----------
Stockholders' equity
Undesignated preferred stock, $.01 par value, 1,140,000 shares authorized;
none issued and outstanding as of December 31, 1998 and September 30, 2000 ................. - -
Common stock, $.01 par value, 4,500,000 and 10,000,000 shares authorized as of
December 31, 1999 and September 30, 2000, respectively; 3,571,827 and 3,914,274 shares
issued and outstanding as of December 31, 1999 and September 30, 2000, respectively ........ 36 39
Additional paid-in capital ................................................................... 75,944 78,496
Notes receivable for shares sold ............................................................. (2,468) (2,519)
Accumulated deficit .......................................................................... (6,923) (3,291)
Accumulated other comprehensive loss ......................................................... (1,526) (2,609)
----------- -----------
Total stockholders' equity ................................................................. 65,063 70,116
----------- -----------
Total liabilities, mandatorily redeemable preferred stock and stockholders' equity ....... $ 525,736 $ 624,145
=========== ===========
</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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues .............................................................. $ 65,238 $ 93,149 $ 177,836 $ 254,421
Cost of sales ......................................................... 42,107 62,018 118,081 169,527
----------- ----------- ----------- -----------
Gross profit ..................................................... 23,131 31,131 59,755 84,894
----------- ----------- ----------- -----------
Operating expenses
Selling, general and administrative ................................ 10,031 11,526 27,281 32,465
Amortization of intangible assets .................................. 4,048 4,699 9,506 12,949
----------- ----------- ----------- -----------
Total operating expenses ......................................... 14,079 16,225 36,787 45,414
----------- ----------- ----------- -----------
Income from operations ................................................ 9,052 14,906 22,968 39,480
Other expenses
Interest expense ................................................... 7,155 11,264 19,884 29,977
Other expenses (income) ............................................ 282 55 (85) 228
----------- ----------- ----------- -----------
Income before provision for income taxes .............................. 1,615 3,587 3,169 9,275
Provision for income taxes ............................................ 932 2,697 2,669 5,643
----------- ----------- ----------- -----------
Net income ............................................................ 683 890 500 3,632
Noncash preferred stock dividend accretion ............................ (1,345) (1,544) (3,901) (4,477)
DeCrane Aircraft accrued preferred stock dividends .................... - (1,000) - (1,000)
----------- ----------- ----------- -----------
Net loss applicable to common stockholders ............................ $ (662) $ (1,654) $ (3,401) $ (1,845)
=========== =========== =========== ===========
</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>
NOTES ACCUMULATED
UNDESIGNATED COMMON STOCK ADDITIONAL RECEIVABLE OTHER
PREFERRED -------------------- 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 ...................... - - - - - 3,632 - 3,632
Translation adjustment .......... - - - - - - (1,083) (1,083)
-------
2,549
-------
Proceeds from the sales of common stock - 346,794 3 7,973 - - - 7,976
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 ...... - - - (4,477) - - - (4,477)
DeCrane Aircraft accrued mandatorily
redeemable preferred stock dividends - - - (1,000) - - - (1,000)
Compensatory stock option expense .. - - - 257 - - - 257
Notes receivable interest accrued .. - - - - (102) - - (102)
--------- --------- --------- --------- -------- -------- -------- --------
Balance, September 30, 2000
(Unaudited) ..................... $ - 3,914,274 39 $ 78,496 $ (2,519) $ (3,291) $ (2,609) $ 70,116
========= ========= ========= ========= ======== ======== ======== =========
</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,
------------------------
1999 2000
----------- -----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................................................... $ 500 $ 3,632
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization ............................................................ 14,875 21,233
Deferred income taxes..................................................................... 462 4,019
Other, net ............................................................................... 176 797
Changes in assets and liabilities, net of effect from acquisitions
Accounts receivable .................................................................... (2,598) (15,899)
Inventories ............................................................................ 1,423 (9,011)
Prepaid expenses and other assets ...................................................... (1,276) (1,162)
Accounts payable ....................................................................... (1,967) 904
Accrued liabilities .................................................................... (3,792) (6,602)
Income taxes payable ................................................................... 2,342 981
Other long-term liabilities ............................................................ 77 (1,108)
----------- -----------
Net cash provided by (used for) operating activities ................................. 10,222 (2,216)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisitions, net of cash acquired ............................................. (116,790) (87,215)
Capital expenditures ......................................................................... (4,752) (17,701)
Other, net ................................................................................... 111 71
----------- -----------
Net cash used for investing activities ............................................... (121,431) (104,845)
----------- -----------
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 revolving credit facility .................................. 7,700 16,400
Proceeds from the sale of common stock ....................................................... 12,500 7,976
Other long-term borrowings ................................................................... 5,636 2,958
Principal payments on term debt, capitalized leases and other debt ........................... (1,824) (4,096)
Deferred financing costs ..................................................................... (3,062) (2,000)
Other, net ................................................................................... (21) (247)
----------- -----------
Net cash provided by financing activities ............................................ 110,929 100,991
----------- -----------
Effect of foreign currency translation on cash .................................................. (99) -
----------- -----------
Net decrease in cash and cash equivalents ....................................................... (379) (6,070)
Cash and cash equivalents at beginning of period ................................................ 3,518 7,918
----------- -----------
Cash and cash equivalents at end of period ...................................................... $ 3,139 $ 1,848
=========== ===========
</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 nine months ended September 30, 2000, the Company acquired:
CABIN MANAGEMENT GROUP
- 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;
- all of the common stock of ERDA, Inc., a Wisconsin-based designer and
manufacturer of aircraft seating, on June 30, 2000; and
SPECIALTY AVIONICS GROUP
- all of the common stock of Coltech, Inc., an Arizona-based designer
and manufacturer of audio components for commercial and corporate
aircraft, on August 31, 2000.
The total purchase price was $58,682,000, including certain liabilities
assumed of $1,586,000, but not including contingent consideration of $2,000,000
related to one of the acquisitions and an indeterminable amount for another. 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, including $18,936,000 related to identifiable
intangible assets. The $31,466,000 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 September 30, 2000 reflects the
financial position of the companies acquired and the consolidated statements of
operations for the three months and nine months ended September 30, 2000 include
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 nine months ended September 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
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1999 2000
---------- ----------
(UNAUDITED)
<S> <C> <C>
Revenues ........................................................................................ $ 249,678 $ 275,726
EBITDA, as defined (Note 12) .................................................................... 55,936 65,971
Net income ...................................................................................... 1,604 4,676
</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 completed 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 September 30, 2000 are as follows
(amounts in thousands):
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
DECEMBER 31, AMOUNTS SEPTEMBER 30,
1999 INCURRED 2000
----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Severance and other compensation costs ............................................. $ 784 $ (784) $ -
Lease termination and other related costs .......................................... 721 (629) 92
Other exit costs ................................................................... 676 (590) 86
----------- ----------- -----------
Total ........................................................................... $ 2,181 $ (2,003) $ 178
=========== =========== ===========
</TABLE>
6
<PAGE>
NOTE 4 - 1999 RESTRUCTURING OF THE SYSTEMS INTEGRATION GROUP (CONTINUED)
Through September 30, 2000, severance and other compensation costs of
approximately $1,077,000 have been paid to date to approximately fifty
employees, of which $784,000 was incurred during the nine months ended September
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. No significant adjustments have been made to the
original estimates.
The remaining balance of restructuring costs includes lease termination and
other exit costs. The restructuring plan was completed in 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, SEPTEMBER 30,
1999 2000
----------- -----------
(UNAUDITED)
<S> <C> <C>
Raw materials ................................................................................... $ 28,249 $ 48,592
Work-in process ................................................................................. 20,520 23,692
Finished goods .................................................................................. 9,952 8,790
----------- -----------
Total inventories ............................................................................ $ 58,721 $ 81,074
=========== ===========
</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 of $5,720,000 at December 31, 1999 and
$7,530,000 at September 30, 2000 related to long-term contracts that will be
recoverable based on future sales. 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, SEPTEMBER 30,
1999 2000
----------- -----------
(UNAUDITED)
<S> <C> <C>
Acquisition related contingent consideration .................................................... $ 29,825 $ -
Salaries, wages, compensated absences and payroll related taxes ................................. 8,673 12,095
Customer deposits ............................................................................... 8,072 11,879
Accrued interest ................................................................................ 3,228 362
Other accrued liabilities ....................................................................... 11,284 12,482
----------- -----------
Total accrued liabilities .................................................................... $ 61,082 $ 36,818
=========== ===========
</TABLE>
7
<PAGE>
NOTE 7 - LONG-TERM DEBT
Long-term debt includes the following amounts (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
----------- -----------
(UNAUDITED)
<S> <C> <C>
Senior credit facility
$25 million working capital revolving line of credit ......................................... $ - $ 6,900
$25 million acquisition revolving line of credit ............................................. - 9,500
Term loans ................................................................................... 213,213 265,075
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 2,452
Other ........................................................................................... 27 4,662
----------- -----------
Total long-term debt ......................................................................... 315,651 388,589
Less current portion ......................................................................... (5,070) (8,273)
----------- -----------
Long-term debt, less current portion ....................................................... $ 310,581 $ 380,316
=========== ===========
</TABLE>
During the nine months ended September 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 1.50% to
2.75% for prime rate borrowings and 2.75% 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 income before income
taxes primarily due to the effects of state and foreign income taxes and
non-deductible expenses, principally goodwill and other intangible asset
amortization. The difference in the effective tax rates between periods is
mostly a result of the relationship of non-deductible expenses to income before
income taxes.
NOTE 9 - CAPITAL STRUCTURE
During the nine months ended September 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 nine months ended September 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 ............................... - - - 4,477 4,477
Accrued dividend ......................................... 10,000 1,000 - - 1,000
----------- ----------- ----------- ----------- -----------
Balance, September 30, 2000 (unaudited) .................. 260,000 $ 26,000 342,417 $ 45,655 $ 71,655
=========== =========== =========== =========== ===========
</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. For the three months ended September 30, 2000, DeCrane
Aircraft will elect to issue 10,000 additional shares in lieu of a cash
dividend payment. 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 nine months ended September 30, 2000, the liquidation
preference of the DeCrane Holdings preferred stock increased by $4,477,000 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 $45,655,000 ($133.33 per share) as of September
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 nine months ended September 30, 2000, the Company increased
to 10,000,000 the total number of authorized common shares and sold 346,794
shares of common stock, including 20,707 shares to management and a
non-employee director, for $7,976,000 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 September 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
September 30, 2000:
<TABLE>
<CAPTION>
(IN THOUSANDS)
Based on future attainment of defined performance criteria
for the year ending December 31,
<S> <C>
2000 ................................................................ $ 21,575
2001 ................................................................ 1,450
2002 ................................................................ 1,350
2003 ................................................................ 750
-----------
Total maximum determinable obligation ............................. $ 25,125
===========
</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>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 2000
----------- -----------
(UNAUDITED)
<S> <C> <C>
Fair value of assets acquired ................................................................... $ 136,359 $ 77,904
Liabilities assumed ............................................................................. (20,324) (20,516)
----------- -----------
Cash paid .................................................................................... 116,035 57,388
Less cash acquired ........................................................................... (2,245) (292)
----------- -----------
Net cash paid for companies acquired during the period ..................................... 113,790 57,096
Contingent consideration paid for previously completed acquisitions ............................. 3,000 29,825
Additional acquisition related expenses ......................................................... - 294
----------- -----------
Total cash paid for acquisitions ......................................................... $ 116,790 $ 87,215
=========== ===========
</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 systems integration services.
Management utilizes more than one measurement to evaluate group
performance and allocate resources, however, management considers EBITDA to
be the primary measurement of their overall economic returns and cash flows.
Management defines EBITDA as earnings before interest, income taxes,
depreciation and amortization, non-cash acquisition related charges and other
non-operating costs. This is consistent with the manner in which the
Company's lenders and ultimate investors measure its overall performance.
10
<PAGE>
NOTE 12 - BUSINESS SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
(UNAUDITED, IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues
Cabin Management ................................................... $ 22,538 $ 50,303 $ 47,975 $ 127,081
Specialty Avionics ................................................. 26,045 28,164 85,783 81,006
Systems Integration ................................................ 17,005 14,870 45,224 47,262
Inter-group elimination (1) ........................................ (350) (188) (1,146) (928)
----------- ----------- ----------- -----------
Consolidated revenues ............................................ $ 65,238 $ 93,149 $ 177,836 $ 254,421
=========== =========== =========== ===========
EBITDA (2)
Cabin Management ................................................... $ 7,157 $ 12,234 $ 15,594 $ 33,615
Specialty Avionics ................................................. 6,389 7,491 20,902 19,622
Systems Integration ................................................ 3,608 3,925 6,614 10,881
Corporate (3) ...................................................... (1,465) (1,491) (4,289) (4,836)
----------- ----------- ----------- -----------
Consolidated EBITDA .............................................. $ 15,689 $ 22,159 $ 38,821 $ 59,282
=========== =========== =========== ===========
Total assets (as of period end date)
Cabin Management ............................................................................. $ 118,156 $ 285,372
Specialty Avionics ........................................................................... 225,255 229,198
Systems Integration .......................................................................... 95,273 81,604
Corporate .................................................................................... 20,079 27,971
----------- -----------
Consolidated total assets .................................................................. $ 458,763 $ 624,145
=========== ===========
</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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
(UNAUDITED, IN THOUSANDS)
<S> <C> <C> <C> <C>
Consolidated EBITDA .............................................. $ 15,689 $ 22,159 $ 38,821 $ 59,282
Depreciation and amortization (a) ................................ (5,633) (7,166) (13,643) (19,537)
Non-cash acquisition related charges ............................. (513) - (1,606) -
Other non-operating costs ........................................ (491) (87) (604) (265)
Interest expense ................................................. (7,155) (11,264) (19,884) (29,977)
Other (expenses) income .......................................... (282) (55) 85 (228)
----------- ----------- ----------- -----------
Consolidated income before income taxes ........................ $ 1,615 $ 3,587 $ 3,169 $ 9,275
=========== =========== =========== ===========
</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 $457,000 and $593,000 for the three months ended September
30, 1999 and 2000, respectively, and $1,232,000 and $1,696,000 for the
nine months ended September 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.
<TABLE>
<CAPTION>
BALANCE SHEETS
DECEMBER 31, 1999
----------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
ISSUER SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
----------- ------------ ------------- ------------- -------------
(IN THOUSANDS)
ASSETS
<S> <C> <C> <C> <C> <C>
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
=========== ============ ============= ============= =============
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
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>
<TABLE>
<CAPTION>
NOTE 13 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
BALANCE SHEETS (CONTINUED)
SEPTEMBER 30, 2000 (UNAUDITED)
----------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
ISSUER SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
----------- ------------ ------------- ------------- -------------
(IN THOUSANDS)
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets
Cash and cash equivalents ...................... $ 1,356 $ 273 $ 219 $ - $ 1,848
Accounts receivable, net ....................... - 63,638 1,231 - 64,869
Inventories .................................... - 78,397 2,677 - 81,074
Other current assets ........................... 4,934 1,005 240 - 6,179
----------- ------------ ------------- ------------- -------------
Total current assets ......................... 6,290 143,313 4,367 - 153,970
Property and equipment, net ....................... 4,519 49,335 1,986 - 55,840
Other assets, principally intangibles, net ........ 17,449 387,073 9,813 - 414,335
Investments in subsidiaries ....................... 394,771 20,803 - (415,574)(1) -
Intercompany receivables .......................... 147,984 - 3,352 (151,336)(2) -
----------- ------------ ------------- ------------- -------------
Total assets ............................... $ 571,013 $ 600,524 $ 19,518 $(566,910) $ 624,145
=========== ============ ============= ============= =============
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion on long-term debt .............. $ 6,935 $ 1,314 $ 24 $ - $ 8,273
Other current liabilities ...................... 12,290 46,405 688 - 59,383
----------- ------------ ------------- ------------- -------------
Total current liabilities .................... 19,225 47,719 712 - 67,656
Long-term debt .................................... 375,634 4,670 12 - 380,316
Intercompany payables ............................. - 151,336 - (151,336)(2) -
Other long-term liabilities ....................... 31,774 2,028 600 - 34,402
Mandatorily redeemable preferred stock ............ 71,655 - - - 71,655
----------- ------------ ------------- ------------- -------------
Stockholders' equity
Paid-in capital ................................ 76,016 316,311 15,440 (331,751)(1) 76,016
Retained earnings (deficit) .................... (3,291) 78,460 5,363 (83,823)(1) (3,291)
Accumulated other comprehensive loss ........... - - (2,609) - (2,609)
----------- ------------ ------------- ------------- -------------
Total stockholders' equity ................... 72,725 394,771 18,194 (415,574) 70,116
----------- ------------ ------------- ------------- -------------
Total liabilities, mandatorily redeemable
preferred stock and stockholders' equity . $ 571,013 $ 600,524 $ 19,518 $(566,910) $ 624,145
=========== =========== ============= ============= =============
</TABLE>
13
<PAGE>
NOTE 13 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
----------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
ISSUER 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 ...... 4,755 21,402 1,124 - 27,281
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) ........................... 226 61 (372) - (85)
Provision (benefit) for income taxes .............. (7,782) 10,384 67 - 2,669
----------- ------------ ------------- ------------- -------------
Net income ........................................ $ 500 $ 11,619 $ 363 $ (11,982) $ 500
=========== ============ ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED)
----------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
ISSUER SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
----------- ------------ ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues .......................................... $ - $ 252,477 $ 8,838 $ (6,894)(3) $ 254,421
Cost of sales ..................................... - 169,591 6,830 (6,894)(3) 169,527
----------- ------------ ------------- ------------- -------------
Gross profit ...................................... - 82,886 2,008 - 84,894
Selling, general and administrative expenses ...... 5,535 25,969 961 - 32,465
Amortization of intangible assets ................. 152 12,479 318 - 12,949
Interest expense .................................. 23,051 6,923 3 - 29,977
Intercompany charges .............................. (5,184) 5,184 - - -
Equity in earnings of subsidiaries ................ (13,210) (696) - 13,906 (4) -
Other expenses (income) ........................... 261 61 (94) - 228
Provision (benefit) for income taxes .............. (14,237) 19,756 124 - 5,643
----------- ------------ ------------- ------------- -------------
Net income ........................................ $ 3,632 $ 13,210 $ 696 $ (13,906) $ 3,632
=========== ============ ============= ============= =============
</TABLE>
14
<PAGE>
NOTE 13 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 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 ..................................... $ 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
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>
15
<PAGE>
NOTE 13 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 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 ..................................... $ 3,632 $ 13,210 $ 696 $ (13,906)(4) $ 3,632
Adjustments to net income (loss)
Non-cash net income adjustments .............. 6,467 18,864 718 - 26,049
Equity in earnings of subsidiaries ........... (13,210) (696) - 13,906 (4) -
Changes in working capital ..................... (11,146) (19,529) (1,222) - (31,897)
----------- ------------ ------------- ------------- -------------
Net cash provided by (used for)
operating activities........................ (14,257) 11,849 192 - (2,216)
----------- ------------ ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisition, net of
cash acquired ................................ (87,507) 292 - - (87,215)
Capital expenditures and other ................. (3,626) (13,642) (362) - (17,630)
----------- ------------ ------------- ------------- -------------
Net cash used for investing activities ....... (91,133) (13,350) (362) - (104,845)
----------- ------------ ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Debt financing for acquisitions ................ 55,000 - - - 55,000
Preferred stock financing for acquisitions...... 25,000 - - - 25,000
Line of credit borrowings ...................... 16,400 - - - 16,400
Proceeds from sale of common stock ............. 7,976 - - - 7,976
Other long-term borrowings ..................... - 2,958 - - 2,958
Principal payments on long-term debt and
capital leases ............................... (3,419) (664) (13) - (4,096)
Deferred financing costs ....................... (2,000) - - - (2,000)
Other, net ..................................... (50) (197) - - (247)
----------- ------------ ------------- ------------- -------------
Net cash provided by (used for)
financing activities ....................... 98,907 2,097 (13) - 100,991
----------- ------------ ------------- ------------- -------------
Effect of foreign currency
translation on cash ............................ - - - - -
----------- ------------ ------------- ------------- -------------
Net increase (decrease) in cash
and equivalents ................................ (6,483) 596 (183) - (6,070)
Cash and equivalents at beginning
of period ...................................... 7,839 (323) 402 - 7,918
----------- ------------ ------------- ------------- -------------
Cash and equivalents at end of period ............. $ 1,356 $ 273 $ 219 $ - $ 1,848
=========== ============ ============= ============= =============
</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 positions, results of operations and cash flows have been
affected by our history of acquisitions. Since January 1, 1999, we have
completed nine 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;
SPECIALTY AVIONICS GROUP
- Coltech, acquired on August 31, 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 SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUES. Revenues increased $27.9 million, or 42.8%, to $93.1 million for
the three months ended September 30, 2000 from $65.2 million for the three
months ended September 30, 1999. The increase primarily results 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 ....................................... $ 27.8 123.6 %
Specialty Avionics ..................................... 2.1 8.0
Systems Integration .................................... (2.1) (12.4)
Inter-group elimination ................................ 0.1 -
-------------
Total ................................................ $ 27.9
=============
</TABLE>
CABIN MANAGEMENT. Revenues increased by $27.8 million, or 123.6% over
the prior year, due to:
- the inclusion of $23.4 million of revenues resulting from our
acquisitions of Custom Woodwork, PCI NewCo, International Custom
Interiors and Infinity in 1999 and Carl F. Booth and ERDA in 2000;
and
- a $4.4 million increase in entertainment and cabin management product
revenues primarily relating to volume growth.
17
<PAGE>
SPECIALTY AVIONICS. Revenues increased by $2.1 million, or 8.0% over
the prior year, due to volume growth for our commercial aircraft interconnect
products.
SYSTEMS INTEGRATION. Revenues decreased by $2.1 million, or 12.4% from
the prior year, primarily due to the timing of when orders are received
versus shipped.
GROSS PROFIT. Gross profit increased $8.0 million, or 34.7%, to $31.1
million for the three months ended September 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 decreased to 33.4%
for the three months ended September 30, 2000 from 35.4% for the same period
last year primarily as a result of companies acquired during 2000 and in 1999
that recorded lower margins. By segment, gross profit changed as follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
FROM 1999
AMOUNT PERCENT
------------- -------------
(IN MILLIONS)
<S> <C> <C>
Cabin Management ............................................... $ 6.1 66.4 %
Specialty Avionics ............................................. 1.0 11.8
Systems Integration ............................................ 0.9 16.7
-------------
Total ........................................................ $ 8.0
=============
</TABLE>
CABIN MANAGEMENT. Gross profit increased by $6.1 million, or 66.4% over
the prior year, due to:
- the inclusion of $7.7 million of gross profit resulting from
our 1999 and 2000 acquisitions; offset by
- a $1.6 million decrease resulting from higher engineering costs
associated with developing of new entertainment system products.
SPECIALTY AVIONICS. Gross profit increased by $1.0 million, or 11.8%
from the prior year, primarily due to sales volume increases and product mix.
SYSTEMS INTEGRATION. Gross profit increased by $0.9 million, or 16.7%
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 $1.5 million, or 15.0%, to $11.5 million
for the three months ended September 30, 2000, from $10.0 million for the
same period last year. The increase primarily results from the inclusion of
$2.0 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 12.4% for the
three months ended September 30, 2000 compared to 15.3% 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 ............................................... $ 1.5 55.6 %
Specialty Avionics ............................................. 0.1 3.0
Systems Integration ............................................ 0.1 5.0
Corporate ...................................................... (0.2) (10.0)
-------------
Total ........................................................ $ 1.5
=============
</TABLE>
CABIN MANAGEMENT. SG&A expenses increased by $1.5 million, or 55.6%
over the prior year, due to:
- the inclusion of $2.0 million resulting from our 1999 and 2000
acquisitions; offset by
- a $0.5 million decrease in expenses resulting from the
centralization of administrative activities.
SPECIALTY AVIONICS AND SYSTEMS INTEGRATION. The increases in SG&A
expenses were insignificant.
CORPORATE. SG&A expenses decreased by $0.2 million, or 10.0% from the
prior year due to decreased spending on outside professional services.
18
<PAGE>
DEPRECIATION AND AMORTIZATION OF INTANGIBLES. Depreciation and
amortization expense, which includes amortization of goodwill and
identifiable intangible assets, increased $1.6 million, or 28.6%, for the
three months ended September 30, 2000. The increase results from the
inclusion of $1.4 million of depreciation and amortization expense in 2000
from companies we acquired during 1999 and 2000 and additional depreciation
reflecting our capital expenditures during the period.
EBITDA AND OPERATING INCOME. EBITDA increased $6.5 million to $22.2
million, or 41.4%, for the three months ended September 30, 2000, from $15.7
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 decreased to 23.8% for the three
months ended September 30, 2000, from 24.1% for the same period last year.
Operating income increased $5.8 million to $14.9 million, or 63.8%, for the
three months ended September 30, 2000, from $9.1 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 ............................................. $ 5.1 70.8 %
Specialty Avionics ........................................... 1.1 17.2
Systems Integration .......................................... 0.3 8.3
-------------
Total EBITDA ............................................... 6.5
Depreciation and amortization .................................. (1.6)
Other non-operating costs ...................................... 0.9
-------------
Total operating income (loss) .............................. $ 5.8
=============
</TABLE>
CABIN MANAGEMENT. EBITDA increased by $5.1 million, or 70.8% over the
prior year, due to:
- a $7.1 million increase resulting from our acquisitions; offset
by
- a $2.0 million decrease resulting from higher labor costs
associated with developing of new entertainment system products.
SPECIALTY AVIONICS. EBITDA increased by $1.1 million, or 17.2% from the
prior year, due to:
- $1.0 million of growth related to product sales; and
- $0.1 million resulting from our acquisitions.
SYSTEMS INTEGRATION. EBITDA increased by $0.3 million, or 8.3% over the
prior year, due to the timing of when orders are received versus shipped. While
not affecting the comparison of 1999 to 2000 results, we charged $0.7 million to
the accrued liability established in 1999 for such restructuring; no adjustments
have been made to our original 1999 estimates.
INTEREST EXPENSE. Interest expense increased $4.1 million to $11.3 million
for the three months ended September 30, 2000, from $7.2 million for the same
period last year. Interest expense increased:
- $3.6 million due to higher debt levels associated with our
acquisition of companies during 1999 and 2000; and
- $0.5 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 the relationship of non-deductible expenses to income
before income taxes.
NET INCOME. Net income increased $0.2 million to $0.9 million for the
three months ended September 30, 2000 compared to $0.7 million for the same
period in 1999.
19
<PAGE>
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. Net loss applicable to common
stockholders increased $1.0 million to $1.7 million for the three months ended
September 30, 2000 compared to $0.7 million for the same period in 1999. The net
increase resulted from:
- a $1.0 million increase in accrued dividends resulting from
DeCrane Aircraft's issuance of 16% mandatorily redeemable
preferred stock on June 30, 2000; and
- a $0.2 million increase in noncash preferred stock dividend
accretion on our 14% mandatorily redeemable preferred stock;
offset by
- a $0.2 increase in net income.
BOOKINGS. Bookings increased $34.5 million, or 54.4%, to $97.9 million for
the three months ended September 30, 2000 compared to $63.4 million for the same
period in 1999. The increase in bookings for 2000 results from:
- a $27.0 million increase associated with companies we acquired
in 1999 and 2000; and
- a $7.5 million increase related to business growth, principally
in Cabin Management's furniture product lines.
BACKLOG AT END OF PERIOD. Backlog increased $17.2 million, or 11.0%, to
$173.3 million as of September 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 $10.4 million increase related to Cabin Management companies
acquired companies in 2000;
- a $5.3 million increase related to Specialty Avionics,
reflecting a recovery in demand for some of our commercial
aircraft products; and
- a $1.5 million increase related to Systems Integration,
resulting from the timing of when orders are received versus
when they are shipped.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUES. Revenues increased $76.6 million, or 43.1%, to $254.4 million for
the nine months ended September 30, 2000 from $177.8 million for the nine months
ended September 30, 1999. The increase primarily results 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 ............................................... $ 79.1 165.1 %
Specialty Avionics ............................................. (4.8) (5.6)
Systems Integration ............................................ 2.1 4.6
Inter-group elimination ........................................ 0.2 -
-------------
Total ........................................................ $ 76.6
=============
</TABLE>
CABIN MANAGEMENT. Revenues increased by $79.1 million, or 165.1% over
the prior year, due to:
- the inclusion of $72.4 million of revenues resulting from our
acquisitions of PPI, Custom Woodwork, PCI NewCo, International
Custom Interiors and Infinity in 1999 and Carl F. Booth and ERDA
in 2000; and
- a $6.7 million increase in entertainment and cabin management
product revenues reflecting primarily a higher volume of
corporate jet production by original equipment manufacturers
(OEM's).
SPECIALTY AVIONICS. Revenues decreased by $4.8 million, or 5.6% from
the prior year, due to somewhat lower demand for our commercial aircraft
products during the first two quarters of the year.
SYSTEMS INTEGRATION. Revenues increased by $2.1 million, or 4.6% over
the prior year, due to the inclusion of PATS for the full nine months of
2000; PATS was acquired on January 22, 1999.
20
<PAGE>
GROSS PROFIT. Gross profit increased $25.1 million, or 41.9%, to $84.9
million for the nine months ended September 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 decreased to 33.4% for the
nine months ended September 30, 2000 from 33.6% for the same period last year
primarily as a result of lower margins in Cabin Management entertainment
products and Specialty Avionics products. By segment, gross profit changed as
follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
FROM 1999
AMOUNT PERCENT
(IN MILLIONS)
------------- -------------
<S> <C> <C>
Cabin Management ............................................... $ 22.6 109.7 %
Specialty Avionics ............................................. (3.2) (11.3)
Systems Integration ............................................ 5.7 52.3
-------------
Total ........................................................ $ 25.1
=============
</TABLE>
CABIN MANAGEMENT. Gross profit increased by $22.6 million, or 109.7%
over the prior year, due to:
- a $25.0 million increase in gross profit resulting from our
1999 and 2000 acquisitions; offset by
- lower margins in our entertainment systems products; and
- production startup inefficiencies at a new manufacturing
facility.
SPECIALTY AVIONICS. Gross profit decreased by $3.2 million, or 11.3% from
the prior year, due to somewhat lower demand for our commercial aircraft
products as a result of lower commercial jet production by Boeing and price
reductions to several large customers.
SYSTEMS INTEGRATION. Gross profit increased by $5.7 million, or 52.3%
over the prior year, due to:
- a $5.2 million increase in gross profit resulting from
favorable auxiliary fuel tank manufacturing and installation
efficiencies achieved; and
- a $0.5 million reduction in engineering costs attributable to
project development.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $5.2 million, or 19.0%, to $32.5 million
for the nine months ended September 30, 2000, from $27.3 million for the same
period last year. The increase primarily results from the inclusion of $5.2
million of SG&A expenses in 2000 from companies we acquired in 1999 and 2000.
SG&A expenses as a percent of revenues decreased to 12.8% for the nine months
ended September 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 ................................................. $ 4.4 62.9 %
Specialty Avionics ............................................... (1.2) (11.8)
Systems Integration .............................................. 1.2 22.2
Corporate ........................................................ 0.8 17.0
-------------
Total .......................................................... $ 5.2
=============
</TABLE>
CABIN MANAGEMENT. SG&A expenses increased by $4.4 million, or 62.9%
over the prior year, due to:
- the inclusion of $4.9 million related to our 1999 and 2000
acquisitions; offset by
- a $0.5 million decrease in expenses resulting from the
consolidation of administrative activities.
SPECIALTY AVIONICS. SG&A expenses decreased by $1.2 million, or 11.8%
from the prior year, due to reduced selling costs related to lower sales.
SYSTEMS INTEGRATION. SG&A expenses increased by $1.2 million, or 22.2%
over the prior year, due to:
- a $0.5 million increase in SG&A expenses resulting from an
increase in engineering project management.
- a $0.7 million increase in expenses from additional sales and
program management resources.
CORPORATE. SG&A expenses increased by $0.8 million, or 17.0% over the
prior year due to increased spending for sales and marketing programs during
the first two quarters.
21
<PAGE>
DEPRECIATION AND AMORTIZATION OF INTANGIBLES. Depreciation and
amortization expense, which includes amortization of goodwill and
identifiable intangible assets, increased $5.9 million, or 43.3%, for the
nine months ended September 30, 2000. The increase results from the inclusion
of $3.7 million of depreciation and amortization expense in 2000 from
companies we acquired during 1999 and 2000 and additional depreciation
reflecting our capital expenditures during the period.
EBITDA AND OPERATING INCOME. EBITDA increased $20.5 million to $59.3
million, or 52.8%, for the nine months ended September 30, 2000, from $38.8
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 23.3% for the nine
months ended September 30, 2000, from 21.8% for the same period last year.
Operating income increased $16.5 million to $39.5 million, or 71.8%, for the
nine months ended September 30, 2000, from $23.0 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 ............................................. $ 18.0 115.4 %
Specialty Avionics ........................................... (1.3) (6.2)
Systems Integration .......................................... 4.3 65.2
Corporate .................................................... (0.5) (11.6)
------------
Total EBITDA ............................................... 20.5
Depreciation and amortization .................................. (5.9)
Other non-operating costs ...................................... 1.9
------------
Total operating income (loss) .............................. $ 16.5
============
</TABLE>
CABIN MANAGEMENT. EBITDA increased by $18.0 million, or 115.4% over the
prior year, due to acquisitions and increased production of corporate jets by
OEM's.
SPECIALTY AVIONICS. EBITDA decreased by $1.3 million, or 6.2% from the
prior year, due to somewhat lower demand for our commercial aircraft products
as a result of lower commercial jet production by Boeing.
SYSTEMS INTEGRATION. EBITDA increased by $4.3 million, or 65.2% from
the prior year, due to:
- a $1.7 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 improved
operating results subsequent to our 1999 restructuring which
included our exit from the manufacturing business. While not
affecting the comparison of 1999 to 2000 results, we charged
$2.0 million to the accrued liability established in 1999 for
such restructuring; no adjustments have been made to our
original 1999 estimates.
CORPORATE. EBITDA decreased by $0.5 million, or 11.6% over the prior year,
due to increased spending for sales and marketing programs during the first two
quarters of 2000.
INTEREST EXPENSE. Interest expense increased $10.1 million to $30.0 million
for the nine months ended September 30, 2000, from $19.9 million for the same
period last year. Interest expense increased:
- $8.2 million due to higher debt levels associated with our
acquisition of companies during 1999 and 2000; and
- $1.9 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 the
relationship of non-deductible expenses to income before income taxes.
NET INCOME (LOSS). Net income increased $3.1 million to $3.6 million for
the nine months ended September 30, 2000 compared to $0.5 million for the same
period in 1999.
22
<PAGE>
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. Net loss applicable to common
stockholders decreased $1.6 million to $1.8 million for the nine months ended
September 30, 2000 compared to $3.4 million for the same period in 1999. The net
decrease resulted from: o a $3.1 increase in net income; offset by
- a $1.0 million increase in accrued dividends resulting from
DeCrane Aircraft's issuance of 16% mandatorily redeemable
preferred stock on June 30, 2000; and
- a $0.5 million increase in noncash preferred stock dividend
accretion on our 14% mandatorily redeemable preferred stock.
BOOKINGS. Bookings increased $35.6 million, or 15.7%, to $262.0 million for
the nine months ended September 30, 2000 compared to $226.4 million for the same
period in 1999. The increase in bookings for 2000 results from:
- a $15.7 million increase associated with companies we acquired
in 1999 and 2000; and
- a $19.9 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, third party borrowings
and the issuance of common and preferred stock.
For the nine months ended September 30, 2000, we used $2.2 million of cash
for operating activities, which is the net of $29.7 million of cash generated
from operations after adding back depreciation, amortization and other noncash
items, $30.8 million used for working capital and $1.1 million resulting from a
decrease in other liabilities. The following factors contributed to the $30.8
million working capital increase:
- a $15.9 million accounts receivable increase due to higher
revenues, timing differences relating to completing of projects
and the associated collection;
- a $9.0 million increase in inventory due to longer production
lead times and inventory level increases to meet current and
projected revenue growth;
- a $1.2 million increase in prepaid and other assets; and
- a $5.7 million net decrease in current liabilities; offset by
- a $1.0 million increase in income taxes payable due to higher
current taxable income.
Cash used for investing activities was $104.8 million for the nine months
ended September 30, 2000, and consisted of:
- $57.0 million for our Carl Booth, ERDA and Coltech
acquisitions;
- $30.1 million for contingent consideration earned in 1999 and
paid in 2000; and
- $17.7 million for capital expenditures, including $5.7 million
for the purchase of a furniture manufacturing facility for our
Cabin Management Group.
We anticipate spending $21.4 million for capital expenditures in 2000.
Net cash provided by financing activities was $101.0 million for the nine
months ended September 30, 2000 and was primarily used to fund our acquisitions.
We obtained these funds by borrowing $71.4 million under our senior credit
facility, selling $25.0 million of DeCrane Aircraft 16% mandatorily redeemable
preferred stock and $8.0 million of common stock. We used $4.1 million to make
principal payments on our senior term debt, capitalized leases and other debt,
and paid $2.0 million of financing costs.
23
<PAGE>
At September 30, 2000, senior credit facility borrowings totaling $281.5
million are at variable interest rates based on defined margins over the current
prime or Euro-Dollar rates. At September 30, 2000 we had $86.3 million of
working capital and had $18.1 million of borrowings available under our working
capital credit facility and $15.5 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 September 30, 2000, the current prime rate was 9.50% and the current
Euro-Dollar rate was 6.62%. Based on $281.5 million of variable-rate debt
outstanding as of September 30, 2000, a hypothetical one percent rise in
interest rates, to 10.50% for prime rate borrowings and 7.62% 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 $92.0 million at September 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 September 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.
SWISSAIR
All of the actions related to the Swissair matter described in Item 3 of
our Form 10-K have been transferred to the United States District Court for
the Eastern District of Pennsylvania and assigned under MDL Case No. 1269 to
the Honorable James T. Giles for coordinated or consolidated pretrial
proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
a. Exhibits
<S> <C>
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.) *
3.27.1 Articles of Incorporation of Coltech, Inc. **
3.27.2 Bylaws of Coltech, Inc. **
4.1.3 Supplemental Indenture to be dated August 5, 1999 among CWP
Acquisition, Inc. d/b/a Custom Woodwork & Plastics, Inc., the
other guarantors under the Indenture, DeCrane Aircraft and
State Street Bank and Trust Company **
4.1.4 Supplemental Indenture to be dated October 6, 1999 among PCI
Acquisition Co., Inc. d/b/a PCI Newco, Inc., the other
guarantors under the Indenture, DeCrane Aircraft and State
Street Bank and Trust Company **
4.1.5 Supplemental Indenture to be dated October 8, 1999 among
International Custom Interiors, Inc., the other guarantors
under the Indenture, DeCrane Aircraft and State Street Bank
and Trust Company **
4.1.6 Supplemental Indenture to be dated December 17, 1999 among
DAH-IP Acquisition, L.P. d/b/a Infinity Partners, L.P., DAH-IP
Holdings, Inc., DAH-IP Infinity, Inc., the other guarantors
under the Indenture, DeCrane Aircraft and State Street Bank
and Trust Company **
4.1.7 Supplemental Indenture to be dated May 11, 2000 among Booth
Acquisition, LLC, the other guarantors under the Indenture,
DeCrane Aircraft and State Street Bank and Trust Company **
4.1.8 Supplemental Indenture to be dated June 16, 2000 among DeCrane
Aircraft Furniture Co., L.P., the other guarantors under the
Indenture, DeCrane Aircraft and State Street Bank and Trust
Company **
4.1.9 Supplemental Indenture to be dated June 30, 2000 among ERDA,
Inc., the other guarantors under the Indenture, DeCrane
Aircraft and State Street Bank and Trust Company **
4.1.10 Supplemental Indenture to be dated August 31, 2000 among
Coltech, Inc., the other guarantors under the Indenture,
DeCrane Aircraft and State Street Bank and Trust Company **
4.6 Certificate of Designations, Preferences and Rights of 16%
Senior Redeemable Exchangeable Preferred Stock due 2009 *
4.7 Senior Preferred Stock Registration Rights Agreement dated
as of June 30, 2000 among DeCrane Aircraft Holdings, Inc.
and the Holders of Senior Preferred Stock *
</TABLE>
26
<PAGE>
<TABLE>
<S> <C>
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 October
6, 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 *
10.10.3.1 First Amendment to the Third Amended and Restated Credit
Agreement dated as of May 11, 2000 among DeCrane Aircraft, 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
</TABLE>
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.
27
<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 14, 2000 By: /S/ RICHARD J. KAPLAN
----------------------------------
Name: Richard J. Kaplan
Title: Assistant Secretary,
Assistant Treasurer and
Director (chief accounting
officer)
28
