DECRANE HOLDINGS CO
10-Q/A, 2001-01-17
AIRCRAFT PARTS & AUXILIARY EQUIPMENT, NEC
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q/A
(AMENDMENT NO. 1)



  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2000

333-70363
(Commission File Number)


DECRANE HOLDINGS CO.
(Exact name of registrant as specified in its charter)


 Delaware
(State or other jurisdiction of
incorporation or organization)

  13-4019703
(I.R.S. Employer
Identification No.) 		 

 c/o DLJ Merchant Banking Partners II, L.P.
277 Park Avenue,
New York, NY
(Address, of principal executive offices)

  
10172
(Zip code) 		 

(212) 892-3000
(Registrant’s telephone number, including area code)

(Not Applicable)
(Former address and telephone number of principal executive offices, if changed since last report)

             Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [x] No [  ]

             The number of shares of Registrant’s Common Stock, $.01 par value, outstanding as of October 31, 2000 was 3,914,274 shares.



DECRANE HOLDINGS CO.

Explanatory Note

             See Note 1 to our consolidated financial statements on page 5 for information regarding our revision of previously issued financial statements we are filing in this Form 10-Q / A (Amendment No. 1).

INDEX

      Page
PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements (Unaudited) 1
     
  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 		18
     
Item 3. Quantitative and Qualitative Disclosure About Market Risk 25
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 27
     
Item 6. Exhibits and Reports on Form 8-K 27
  Exhibits 27
  Reports on Form 8-K 28
 
SIGNATURES 29
   

PART I.   FINANCIAL INFORMATION

Item 1.   Financial Statements

DECRANE HOLDINGS CO. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

December 31, 1999 September 30, 2000
(revised)
(unaudited)
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)            
Minority interest in preferred stock of subsidiary    —    26,000  
Manditorily redeemable preferred stock    41,178    45,655  
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    79,496  
    Notes receivable for shares sold    (2,468 )  (2,519 )
    Accumulated deficit    (6,923 )  (4,291 )
    Accumulated other comprehensive loss    (1,526 )  (2,609 )
       Total stockholders’ equity    65,063    70,116  
          Total liabilities, manditorily redeemable preferred stock and stockholders’
                equity 		  $ 525,736   $ 624,145  

The accompanying notes are an integral part of the consolidated financial statements.

1

DECRANE HOLDINGS CO. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)

Three Months Ended September 30, Nine Months Ended September 30,
1999 2000 1999 2000
(revised) (revised)
(unaudited)
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  
    Minority interest in preferred stock of subsidiary    —    1,000    —    1,000  
    Other expenses (income)    282    55    (85 )  228  
Income before provision for income taxes    1,615    2,587    3,169    8,275  
Provision for income taxes    932    2,697    2,669    5,643  
Net income (loss)    683    (110 )  500    2,632  
Noncash preferred stock dividend accretion    (1,345 )  (1,544 )  (3,901 )  (4,477 )
Net loss applicable to common stockholders   $ (662 ) $ (1,654 ) $ (3,401 ) $ (1,845 )

The accompanying notes are an integral part of the consolidated financial statements.

2

DECRANE HOLDINGS CO. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)

Common Stock
Undesignated Preferred Stock Shares Amount Additional Paid-in Capital Notes Receivable For Shares Sold Accumulated Deficit Accumulated Other Comprehensive Loss Total
(revised) (revised) (revised)
Balance, December 31, 1999   $ —    3,571,827   $ 36   $ 75,944   $ (2,468 ) $ (6,923 ) $ (1,526 ) $ 65,063  
Comprehensive income                                          
    Net income (Unaudited)    —    —    —    —    —    2,632    —    2,632  
    Translation adjustment
         (Unaudited) 		   —    —    —    —    —    —    (1,083 )  (1,083 )
                    
                                      1,549  
                    
Proceeds from the sales of
    common stock (Unaudited) 		   —    346,794    3    7,973    —    —    —    7,976  
Repurchase of common stock
    and cancellation of related
    note receivable (Unaudited) 		   —    (4,347 )  —    (101 )  51    —    —    (50 )
Noncash dividend accretion on
    manditorily redeemable
    preferred stock (Unaudited) 		   —    —    —    (4,477 )  —    —    —    (4,477 )
Compensatory stock option
    expense and other
    (Unaudited) 		   —    —    —    157    —    —    —    157  
Notes receivable interest accrued
    (Unaudited) 		   —    —    —    —    (102 )  —    —    (102 )
Balance, September 30, 2000
    (Unaudited) 		  $ —    3,914,274   $ 39   $ 79,496   $ (2,519 ) $ (4,291 ) $ (2,609 ) $ 70,116  

The accompanying notes are an integral part of the consolidated financial statements.

3

DECRANE HOLDINGS CO. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

Nine Months Ended
September 30,
1999 2000
(revised)
(unaudited)
Cash flows from operating activities      
    Net income   $ 500   $ 2,632  
    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  
          Minority interest in preferred stock of subsidiary    —    1,000  
          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 preferred stock of subsidiary    —    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  

The accompanying notes are an integral part of the consolidated financial statements.

4

DECRANE HOLDINGS CO. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1.   Consolidated Financial Statements

    Basis of Presentation

             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.

    Revision of Previously Issued Financial Statements

             The accompanying consolidated financial statements as of and for three months and nine months ended September 30, 2000 have been revised to reflect DeCrane Aircrafts’ minority stockholders’ interest in its 16% manditorily redeemable preferred stock in the Company’s consolidated financial statements (Note 9). DeCrane Aircraft, the Company’s wholly-owned subsidiary, issued its preferred stock on June 30, 2000. Previously, the Company had aggregated the DeCrane Aircraft preferred stock with the Company’s 14% manditorily redeemable preferred stock and had reflected the related accrued dividend as an adjustment to the net loss applicable to common stockholders as opposed to an adjustment to net income (loss). The impact of this revision, which has been reflected throughout the consolidated financial statements and accompanying notes, is as follows (amounts in thousands):

Three Months Ended September 30, 2000 Nine Months Ended September 30, 2000
Previously Reported As Revised Previously Reported As Revised
(unaudited)
Consolidated Balance Sheet (as of September 30, 2000)                      
    Minority interest in preferred stock of subsidiary             $ —   $ 26,000  
    Manditorily redeemable preferred stock              71,655    45,655  
    Additional paid-in capital              78,496    79,496  
    Accumulated deficit              (3,291 )  (4,291 )
                     
Consolidated Statements of Operations                      
    Minority interest in preferred stock of subsidiary   $ —   $ 1,000   $ —   $ 1,000  
    Net income (loss)    890    (110 )  3,632    2,632  
    DeCrane Aircraft accrued preferred stock dividends    (1,000 )  —    (1,000 )  —  
    Net loss applicable to common stockholders    (1,654 )  (1,654 )  (1,845 )  (1,845 )

             In addition, unaudited pro forma net income (loss) was revised (Note 3). Unaudited pro forma net income (loss) for the nine months ended September 30, 1999 was revised to a net loss of $(1,518,000) from net income of $1,604,000 and, for the nine months ended September 30, 2000, net income was revised to $1,024,000 from $4,676,000.

5

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.

Note 3.   Unaudited Pro Forma Results of Operations for 1999 and 2000 Acquisitions (Revised)

             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, ERDA and Coltech acquisitions described in Note 2 as if all of the transactions were consummated as of January 1, 1999. Amounts are in thousands.

Pro Forma for the Nine Months Ended September 30,
1999 2000
(revised) (revised)
(unaudited)
Revenues   $ 249,678   $ 275,726  
EBITDA, as defined (Note 12)    55,936    65,971  
Net income (loss)    (1,518 )  1,024  

             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.

6

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):

Balance at December 31, 1999 Amounts Incurred Balance at September 30, 2000
(unaudited) (unaudited)
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  

             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.

7

Note 5.   Inventories

             Inventories are comprised of the following (amounts in thousands):

December 31, 1999 September 30,2000
(unaudited)
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  

             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):

December 31, 1999 September 30, 2000
(unaudited)
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  

Note 7.   Long-Term Debt

             Long-term debt includes the following amounts (amounts in thousands):

December 31, 1999 September 30, 2000
(unaudited)
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  

             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

8

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 (Revised)

             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 minority interest in preferred stock of subsidiary. 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.

    Manditorily Redeemable Preferred Stock (Revised)

             The table below summarizes manditorily redeemable preferred stock transactions during the nine months ended September 30, 2000.

DeCrane Aircraft 16% Preferred Stock DeCrane Holdings 14% Preferred Stock
Shares Amount Shares Amount
(in thousands, except share data)
Balance, December 31, 1999    —   $ —    342,417   $ 41,178  
Proceeds from sale of preferred stock    250,000    25,000    —    —  
Noncash dividend accretion    —    —    —    4,477  
Accrued dividend    10,000    1,000    —    —  
Balance, September 30, 2000 (unaudited)    260,000   $ 26,000    342,417   $ 45,655  

             DeCrane Aircrafts’ 16% manditorily redeemable preferred stock is reflected as minority interest in preferred stock of subsidiary in the consolidated financial statements.

    DeCrane Aircraft Manditorily 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; such shares have been reflected as a component of minority interest in preferred stock of subsidiary. The preferred stock is manditorily 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 Manditorily 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

9

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:

(in thousands)
Based on future attainment of defined performance criteria
    for the year ending December 31,		       
       2000   $ 21,575  
       2001    1,450  
       2002    1,350  
       2003    750  
          Total maximum determinable obligation   $ 25,125  

             Contingent consideration payable, if any, is payable during the first quarter of the following year.

Note 11.   Consolidated Statements of Cash Flows

             Assets acquired and liabilities assumed in connection with acquisitions are as follows (amounts in thousands):

Nine Months Ended September 30,
1999 2000
(unaudited)
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  
10

Note 12.   Business Segment Information (Revised)

             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, minority interest in preferred stock of subsidiary, 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.

Three Months Ended Nine Months Ended
September 30, September 30,
1999 2000 1999 2000
(in thousands)
(unaudited)
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  

The accompanying notes appear on the next page.

11

    Notes to Business Segment Information

             (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:

Three Months Ended Nine Months Ended
September 30, September 30,
1999 2000 1999 2000
(revised) (revised)
(in thousands)
(unaudited)
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 )
Minority interest in preferred stock of subsidiary    —    (1,000 )  —    (1,000 )
Other (expenses) income    (282 )  (55 )  85    (228 )
    Consolidated income before income taxes   $ 1,615   $ 2,587   $ 3,169   $ 8,275  

______________

  (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.

Note 13.   Supplemental Condensed Consolidating Financial Information (Revised)

             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.

12

BALANCE SHEETS

December 31, 1999
Issuer Guarantor Subsidiaries Non-Guarantor Subsidiaries Consolidating Adjustments Consolidated Total
(in thousands)
ASSETS                           
Current assets                           
    Cash and cash equivalents   $ 7,839   $ (323 ) $ 402   $ —   $ 7,918  
    Accounts receivable, net    —    38,201    1,379    —    39,580  
    Inventories    —    57,072    1,649    —    58,721  
    Other current assets    6,645    938    123    —    7,706  
       Total current assets    14,484    95,888    3,553    —    113,925  
Property and equipment, net    1,282    34,174    2,244    —    37,700  
Other assets, principally intangibles, net    17,065    344,986    12,060    —    374,111  
Investments in subsidiaries    360,515    20,305    —    (380,820 )(1)  —  
Intercompany receivables    77,566    17,334    2,612    (97,512 )(2)  —  
          Total assets   $ 470,912   $ 512,687   $ 20,469   $ (478,332 ) $ 525,736  
                          
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  
Manditorily 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, manditorily redeemable
                preferred stock and stockholders’ equity 		  $ 470,912   $ 512,687   $ 20,469   $ (478,332 ) $ 525,736  
13

BALANCE SHEETS (Continued)

September 30, 2000 (unaudited)
Issuer Guarantor
Subsidiaries		 Non-Guarantor
Subsidiaries		 Consolidating
Adjustments		 Consolidated
Total
(revised) (revised)
(in thousands)
ASSETS                           
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  
Minority interest in preferred stock of
    subsidiary 		   26,000    —    —    —    26,000  
Manditorily redeemable preferred
    stock 		   45,655    —    —    —    45,655  
Stockholders’ equity                           
    Paid-in capital    77,016    316,311    15,440    (331,751 )(1)  77,016  
    Retained earnings (deficit)    (4,291 )  78,460    5,363    (83,823 )(1)  (4,291 )
    Accumulated other comprehensive
         loss 		   —    —    (2,609 )  —    (2,609 )
       Total stockholders’ equity    72,725    394,771    18,194    (415,574 )  70,116  
          Total liabilities, manditorily
                redeemable preferred stock
               and stockholders’ equity 		  $ 571,013   $ 600,524   $ 19,518   $ (566,910 ) $ 624,145
14

STATEMENTS OF OPERATIONS

Nine Months Ended September 30, 1999 (unaudited)
Issuer Guarantor Subsidiaries Non-Guarantor Subsidiaries Consolidating Adjustments Consolidated Total
(in thousands)
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  
Nine Months Ended September 30, 2000 (unaudited)
Issuer Guarantor Subsidiaries Non-Guarantor Subsidiaries Consolidating Adjustments Consolidated Total
(revised) (revised)
(in thousands)
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  
Minority interest in preferred stock of
    subsidiary 		   1,000    —    —    —    1,000  
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   $ 2,632   $ 13,210   $ 696   $ (13,906 ) $ 2,632  
15

STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 1999 (unaudited)
Issuer Guarantor Subsidiaries Non-Guarantor Subsidiaries Consolidating Adjustments Consolidated Total
(in thousands)
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  
16

STATEMENTS OF CASH FLOWS (Continued)

Nine Months Ended September 30, 2000 (unaudited)
Issuer Guarantor
Subsidiaries		 Non-Guarantor
Subsidiaries		 Consolidating
Adjustments		 Consolidated
Total
(revised) (revised)
(in thousands)
Cash flows from operating
    activities		            
    Net income   $ 2,632   $ 13,210   $ 696   $ (13,906 )(4) $ 2,632  
    Adjustments to net income (loss)                           
       Non-cash net income adjustments    7,467    18,864    718    —    27,049  
       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  
    Subsidiary 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  
17

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

             The following discussion should be read in conjunction with our consolidated financial statements and related notes included in this report.

Overview

             Our financial position, results of operations and cash flows have been affected by our history of acquisitions. Since January 1, 1999, we have completed 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:

Increase (Decrease)
From 1999
Amount Percent
(in millions)
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       
  

             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
18

    • a $4.4 million increase in entertainment and cabin management product revenues primarily relating to volume growth.

             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:

Increase (Decrease)
From 1999
Amount Percent
(in millions)
Cabin Management   $ 6.1    66.4 %
Specialty Avionics    1.0    11.8  
Systems Integration    0.9    16.7  
  
          Total   $ 8.0       
  

             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:

Increase (Decrease)
From 1999
Amount Percent
(in millions)
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       
  

             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.

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             Corporate. SG&A expenses decreased by $0.2 million, or 10.0% from the prior year due to decreased spending on outside professional services.

             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:

Increase (Decrease)
From 1999
Amount Percent
(in millions)
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       
  

             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.

             Minority interest in preferred stock of subsidiary (Revised). Minority interest was $1.0 million for the three months ended September 30, 2000 and reflects the dividend accrued during the period on DeCrane Aircrafts’ 16% preferred stock issued on June 30, 2000.

             Provision for income taxes (Revised). 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

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of state and foreign income taxes and non-deductible expenses, principally goodwill amortization and minority interest in preferred stock of subsidiary. 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) (Revised). Net income (loss) decreased $0.8 million to a net loss of $(0.1) million for the three months ended September 30, 2000 compared to net income of $0.7 million for the same period in 1999.

             Net loss applicable to common stockholders (Revised). 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 loss increase resulted from:

    • a $0.8 million decrease in net income, which includes a $1.0 million charge for minority interest in preferred stock of subsidiary; and
    • a $0.2 million increase in noncash preferred stock dividend accretion on our 14% manditorily redeemable preferred stock.

             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:

Increase (Decrease)
From 1999
Amount Percent
(in millions)
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       
  

             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).
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             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.

             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:

Increase (Decrease)
From 1999
Amount Percent
(in millions)
Cabin Management   $ 22.6    109.7 %
Specialty Avionics    (3.2 )  (11.3 )
Systems Integration    5.7    52.3  
  
    Total   $ 25.1       
  

             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:

Increase (Decrease)
From 1999
Amount Percent
(in millions)
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       
  

             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.
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             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.

             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:

Increase (Decrease)
From 1999
Amount Percent
(in millions)
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       
  

             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.

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             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.

             Minority interest in preferred stock of subsidiary (Revised). Minority interest was $1.0 million for the nine months ended September 30, 2000 and reflects the dividend accrued during the period on DeCrane Aircrafts’ 16% preferred stock issued on June 30, 2000.

             Provision for income taxes (Revised). 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 and minority interest in preferred stock of subsidiary. 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 (Revised). Net income increased $2.1 million to $2.6 million for the nine months ended September 30, 2000 compared to $0.5 million for the same period in 1999.

             Net loss applicable to common stockholders (Revised). 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 loss decrease resulted from:

    • a $2.1 increase in net income, which is net of a $1.0 million charge for minority interest in preferred stock of subsidiary; offset by
    • a $0.5 million increase in noncash preferred stock dividend accretion on our 14% manditorily 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.
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             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% manditorily 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.

             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

25

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.

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.

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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

a.   Exhibits

 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 *
     
 10.1  Securities Purchase Agreement dated as of June 30, 2000 among DeCrane Aircraft Holdings, Inc., DeCrane Holdings Co. and the purchasers named therein *
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 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
   

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.
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SIGNATURES

             Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this amended report to be signed on its behalf by the undersigned thereunto duly authorized.




     DeCrane Holdings Co.
(Registrant)


  By:     /s/ RICHARD J. KAPLAN
   
January 17, 2001     Name:   Richard J. Kaplan
Title:     Assistant Secretary, Assistant Treasurer and
               Director (Chief Accounting Officer)

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