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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 26, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-18348
BE AEROSPACE, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
06-1209796
(I.R.S.Employer Identification No.)
1400 Corporate Center Way, Wellington, Florida 33414
(Address of principal executive offices) (Zip Code)
(561) 791-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of
the Act:
Common Stock, $.01 Par Value
(Title of Class)
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 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[ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates was approximately $164,360,986 on May 1, 2000 based on the
closing sales price of the registrant's Common Stock as reported on the Nasdaq
National Market as of such date.
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of May 1, 2000 was 25,115,944 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the registrant's Proxy Statement to be filed with the
Commission in connection with the 2000 Annual Meeting of Stockholders are
incorporated by reference in Part III of this Form 10-K.
INDEX
PART I
ITEM 1. Business.............................................................3
ITEM 2. Properties..........................................................16
ITEM 3. Legal Proceedings...................................................18
ITEM 4. Submission of Matters to a Vote of Security Holders.................18
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.............................................................19
ITEM 6. Selected Financial Data.............................................20
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................22
ITEM 7a. Quantitative and Qualitative Disclosures about Market Risk..........33
ITEM 8. Consolidated Financial Statements and Supplementary Data............33
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................33
PART III
ITEM 10. Directors and Executive Officers of the Registrant..................34
ITEM 11. Executive Compensation..............................................37
ITEM 12. Security Ownership of Certain Beneficial Owners and Management......37
ITEM 13. Certain Relationships and Related Transactions......................37
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....38
Index to Consolidated Financial Statements and Schedule............F-1
PART I
In this Form 10-K, when we use the terms the "company," "B/E," "we," "us," and
"our," unless otherwise indicated or the context requires, we are referring to
BE Aerospace, Inc. and its consolidated subsidiaries. Certain disclosures
included in this Form 10-K constitute forward-looking statements that are
subject to risks and uncertainty. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Forward-Looking Statements."
ITEM 1. BUSINESS
INTRODUCTION
The Company
Our company is the world's largest manufacturer of commercial and general
aviation aircraft cabin interior products. We serve virtually all major airlines
and a wide variety of general aviation customers and airframe manufacturers. We
believe that we have achieved leading global market positions and significant
market shares in each of our major product categories, which include:
o commercial aircraft seats, including an extensive line of
first class, business class, tourist class and commuter aircraft
seats, with a worldwide market share of approximately 46%;
o a full line of food and beverage preparation and storage
equipment, including coffee makers, water boilers, beverage
containers, refrigerators, freezers, chillers and ovens, with
worldwide market shares for each of these products in excess of 50%;
o both chemical and gaseous oxygen delivery systems, with a worldwide
market share of approximately 50%; and
o general aviation interior products, including an extensive
line of executive aircraft seats, indirect overhead lighting systems,
oxygen, safety and air valve products, with worldwide market shares in
excess of 50%.
In addition, we offer our customers in-house capabilities to design,
project manage, integrate, install, test and certify reconfigurations,
modifications and passenger to freighter conversions for commercial aircraft
passenger cabins and to manufacture related products, including engineering kits
and interface components as well as aircraft interior structures, such as
galleys, lavatories and crew rests. We also provide upgrade, maintenance and
repair services for our airline customers around the world.
We have substantially expanded the size, scope and nature of our business
as a result of a number of acquisitions. Since 1989, we have completed 15
acquisitions, including six acquisitions in fiscal 1999, for an aggregate
purchase price of approximately $677 million in order to position ourselves as
the preferred global supplier to our customers.
During the period from 1989 to 1996, we acquired nine commercial aircraft
cabin interior products manufacturers for approximately $290 million. Through
these acquisitions we built worldwide market leadership positions and our
company became the number one manufacturer for a large number of product
offerings. At the same time, we rationalized our businesses and began
re-engineering our operations. We integrated the acquisitions by eliminating 11
operating facilities and consolidating personnel at the acquired businesses,
resulting in headcount reductions of approximately 1,300 employees through
January 1998.
During fiscal 1999 we completed six acquisitions for approximately $387
million. Through these acquisitions we extended our product offerings into
oxygen systems and we entered three new markets. These markets include the
structural reconfiguration of passenger cabins, the conversion of passenger
aircraft to freighters and the business jet cabin interiors market. During the
fourth quarter of fiscal 1999, we launched a series of initiatives directed
towards expanding our profit margins by improving productivity, reducing costs
and inventory levels and speeding production of finished products. These actions
included eliminating seven principal facilities, reducing our employment base by
over 1,000 employees during fiscal 2000 and rationalizing our product offerings.
The plan also included initiatives to install company-wide information
technology and engineering design systems and implement lean manufacturing
techniques in our remaining factories. We recognized a charge in the fourth
quarter of fiscal 1999 of $87.8 million to provide for the entire amount of the
restructuring, along with costs associated with new product introductions, all
of which was charged to cost of sales. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
During fiscal 2000, we restructured our Seating Products operations and
decided to discontinue certain product and service offerings. This product line
rationalization is expected to eliminate two additional facilities bringing the
total number of facilities down to 14 from 31. This is also expected to result
in a headcount reduction of approximately 700. The total cost of this product
and service line rationalization was approximately $34 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
All of the aforementioned initiatives to integrate, rationalize and
restructure the fifteen acquired businesses had an aggregate cost of
approximately $180 million. These initiatives enabled us to eliminate 17
facilities and reduce headcount by over 3,000 employees. We believe these
initiatives will enable us to substantially expand profit margins, strengthen
the global business management focus on our core product categories, achieve a
more effective leveraging of our resources and improve our ability to rapidly
react to changing business conditions. In conjunction with these efforts, we
have also implemented a company-wide information technology system, a
company-wide engineering system and initiated lean manufacturing in our
remaining facilities. Common management information and engineering systems and
lean manufacturing processes across all operations, coupled with a rationalized
product offering are expected to provide us with the ongoing benefit of a
generally lower cost structure, and expanding gross and operating margins.
INDUSTRY OVERVIEW
The commercial and business jet aircraft cabin interior products
industries encompass a broad range of products and services, including aircraft
seating products, passenger entertainment and service systems, food and beverage
preparation and storage systems, oxygen delivery systems, lavatories, lighting
systems, evacuation equipment, overhead bins, as well as a wide variety of
engineering design, integration, installation and certification services and
maintenance, upgrade and repair services. We estimate that the industry had
annual sales in excess of $3.5 billion during fiscal 2000.
Historically, revenues in the airline cabin interior products industry
have been derived from five sources:
o retrofit programs in which airlines purchase new interior
furnishings to overhaul the interiors of aircraft already in service,
o refurbishment programs in which airlines purchase components
and services to improve the appearance and functionality of certain
cabin interior equipment,
o new installation programs in which airlines purchase new equipment
to outfit a newly delivered aircraft,
o spare parts and
o equipment to upgrade the functionality or appearance of the aircraft
interior.
The retrofit and refurbishment cycles for commercial aircraft cabin
interior products differ by product category. Aircraft seating typically has a
refurbishment cycle of one to two years and a retrofit cycle of four to eight
years. See "Recent Industry Conditions." Galley and lavatory structures as well
as food and beverage preparation and storage equipment are periodically upgraded
or repaired, and require a continual flow of spare parts, but may be retrofitted
only once or twice during the life of the aircraft.
The various product and service categories in which we currently
participate include*:
SEATING PRODUCTS. This is the largest single product category in the
industry and includes first class, business class, tourist class and
commuter seats. We estimate that the aggregate size of the worldwide
aircraft seat market (including spare parts) during fiscal 2000 was in
excess of $730 million. Including our company, there are approximately ten
companies worldwide that supply aircraft seats. We have a market share of
approximately 46%, and along with two other competitors share
approximately 90% of the worldwide market (based on installed base as of
February 26, 2000).
INTERIOR SYSTEMS PRODUCTS. This product category includes interior systems
for both narrow-body and wide-body commercial aircraft and business
jet/VIP aircraft, including a wide selection of coffee and beverage
makers, water boilers, ovens, liquid containers, air chillers, wine
coolers and other refrigeration equipment, oxygen delivery systems, air
valves, lighting and switches, and other interior systems and components.
We believe that we are the only manufacturer with a complete line of
interior systems products and the only supplier with the capability to
fully integrate overhead passenger service units with either chemical or
gaseous oxygen equipment.
BUSINESS JET AND VIP PRODUCTS. We are the industry's leading manufacturer
with a broad product line, including a complete line of executive aircraft
seating products, lighting, air valves and oxygen delivery systems as well
as sidewalls, bulkheads, credenzas, closets, galley structures,
lavatories, tables and sofas. We have the capability to provide complete
interior packages, including all design services, all interior components
and program management services for executive aircraft interiors. We are
the preferred supplier of seating products, interior lighting systems and
WEMAC components for essentially every business jet manufacturer.
FLIGHT STRUCTURES AND ENGINEERING SERVICES. We provide engineering design,
integration, installation and certification services to the airline
industry. These services include project management of aircraft, including
reconfigurations and passenger to freighter conversions. Historically, the
airlines have relied on in-house engineering resources or consultants to
provide such services. As cabin interiors have become increasingly
sophisticated and the airline industry increasingly differentiated, the
airlines have begun to outsource such services in order to increase speed
to market and to improve productivity and reduce costs. We provide design,
integration, installation and certification services for commercial
aircraft passenger cabin interiors, offering customers a broad range of
capabilities including design, project management, integration, test and
certification of reconfigurations for commercial aircraft passenger cabin
interiors. We also provide engineering and structural components for the
conversion of passenger aircraft to freighters, as well as the manufacture
of other structural components such as crew rest compartments, lavatories
and galleys.
GLOBAL CUSTOMER SERVICE AND PRODUCT SUPPORT. We provide upgrade,
maintenance and repair services for the products that we manufacture as
well as for those supplied by other manufacturers.
* We sold a 51% interest in our In-Flight Entertainment ("IFE") business
during fiscal 1999 and the remaining 49% interest in fiscal 2000. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Through February 27, 1999, we operated in the (1) Aircraft Cabin
Interior Products and Services and (2) In-Flight Entertainment segments of
the commercial airline and general aviation industry. Following the sale of
our controlling interest in the IFE business, we operated a single segment
-- Aircraft Cabin Interior Products and Services. Revenues for similar
classes of products or services within these business segments for the
fiscal years ended February 2000, 1999 and 1998 are presented below
(dollars in millions):
Year Ended
------------------------------------------------------------
Feb. 26, 2000 Feb. 27, 1999 Feb. 28, 1998
------------- ------------- -------------
Seating products $ 325 $ 296 $ 252
Interior systems products 145 138 93
Flight structures and engineering services 122 86 33
Business jet and VIP products 81 65 -
Global customer service, product support and other 50 37 29
In-flight entertainment products - 79 81
---------------- ------------------ ------------------
TOTAL REVENUES $ 723 $ 701 $ 488
================ ================== ==================
RECENT INDUSTRY CONDITIONS
Our principal customers are the world's commercial airlines. Airline
company balance sheets have been substantially strengthened and their liquidity
significantly enhanced over the past several years as a result of record
profitability, debt and equity financings and a closely managed fleet expansion.
Recent increases in fuel prices have not had a material impact on the airline
industry to date. However, should fuel prices continue at or above the current
level for a prolonged period, the airline industry's profitability could be
impacted and discretionary airline spending may be more closely monitored or
even reduced. Among those factors expected to affect the cabin interior products
industry are the following:
LARGE EXISTING INSTALLED BASE. B/E's existing installed product base is
expected to generate continued retrofit, refurbishment and spare parts
revenue as airlines continue to maintain their aircraft cabin interiors.
According to industry sources, the world commercial passenger aircraft
fleet consisted of 11,759 aircraft as of the end of 1999, including 1,038
aircraft with fewer than 120 seats, 7,996 aircraft with between 120 and 240
seats and 2,725 aircraft with more than 240 seats. Further, based on
industry sources, we estimate that there are currently over 10,000 general
aviation aircraft currently in service. Based on such fleet numbers, we
estimate that the total worldwide installed base of commercial and general
aviation aircraft cabin interior products, valued at replacement prices,
was approximately $23 billion at the end of February 26, 2000.
EXPANDING WORLDWIDE FLEET. The expanding worldwide aircraft fleet is
expected to generate additional revenues from new installation programs,
while the increase in the size of the installed base is expected to
generate additional and continual retrofit, refurbishment and spare parts
revenue. Worldwide air traffic has grown every year since 1946 (except in
1990) and, according to the 1999 Current Market Outlook published by the
Boeing Commercial Airplane Group (the "Boeing Report"), is projected to
grow at a compounded average rate of approximately 4.7% per year by 2008,
increasing annual revenue passenger miles from approximately 1.8 trillion
in 1998 to approximately 4.9 trillion by 2018 (according to the February
2000 Airline Monitor). According to the Airbus Industrie Global Market
Forecast published in June 1999 (the "Airbus Industrie Report"), the
worldwide installed seat base, which we consider a good indicator for
potential growth in the aircraft cabin interior products industry, is
expected to increase from approximately 1.8 million passenger seats at the
end of 1998 to approximately 4.2 million passenger seats at the end of
2018.
NEW AIRCRAFT DELIVERIES. The number of new aircraft delivered each year is
an important determinant of fleet expansion and is generally regarded as
cyclical in nature. New aircraft deliveries peaked at 914 during calendar
1999, exclusive of 216 regional jet deliveries. Industry sources project
lower deliveries over the next five years. However, annual deliveries over
the five-year period ending calendar 2004 are expected to be 1.6 times to
2.5 times greater than the lowest level during the last cycle, which ended
in 1995.
WIDE-BODY AIRCRAFT DELIVERIES. The trend towards wide-body aircraft is
significant to our company because wide-body aircraft require almost four
times the dollar value content for our products as compared to narrow-body
aircraft. Deliveries of wide-body, long-haul aircraft constitute an
increasing share of total new aircraft deliveries and are an increasing
percentage of the worldwide fleet. Wide-body aircraft represented 28% of
all new commercial aircraft delivered in 1999, and are expected to increase
to 33% of new deliveries in 2002 and 35% of new deliveries in 2004.
Wide-body aircraft currently carry up to three or four times the number of
seats as narrow-body aircraft, and because of multiple classes of service,
including large first class and business class configurations, our average
revenue per seat on wide-body aircraft is substantially higher. Aircraft
cabin crews on wide-body aircraft may make and serve between 300 and 900
meals and may brew and serve more than 2,000 cups of coffee and 400 glasses
of wine on a single flight.
NEW PRODUCT DEVELOPMENT. The aircraft cabin interior products companies are
engaged in intensive development and marketing efforts. Such products
include full electric "sleeper seats," convertible seats, full face crew
masks, advanced telecommunications equipment, protective breathing
equipment, oxygen-generating systems, new food and beverage preparation
and storage equipment, kevlar barrier nets, de-icing systems, crew rests
and cabin management systems.
GROWING ENGINEERING SERVICES MARKETS. Historically, the airlines have
relied primarily on their own in-house engineering resources to provide
engineering, design, integration and installation services, as well as
services related to repairing or replacing cabin interior products that
have become damaged or otherwise non-functional. As cabin interior product
configurations have become increasingly sophisticated and the airline
industry increasingly competitive, the airlines have begun to outsource
such services in order to increase productivity and reduce costs and
overhead. Outsourced services include:
o engineering design, integration, project management, installation and
certification services,
o modifications and reconfigurations for commercial aircraft and
o services related to the support of product upgrades.
COMPETITIVE STRENGTHS
We believe that we have a strong, competitive position attributable to a
number of factors, including the following:
LEADING MARKET SHARES AND SIGNIFICANT INSTALLED BASE. We believe we have
achieved leading global market positions in each of our major product
categories, with market shares, based upon industry sources, of
approximately 46% for commercial aircraft seats (based on installed base as
of February 26, 2000) and in excess of 50% for executive aircraft seats,
coffee makers, refrigeration equipment, air valves, oxygen delivery systems
and ovens (based on dollar sales for the year ended February 26, 2000). We
believe these market shares provide us with significant competitive
advantages in serving our customers, including economies of scale and the
ability to commit greater product development, global product support and
marketing resources.
COMBINATION OF MANUFACTURING AND CABIN INTERIOR DESIGN SERVICES. We have
continued to expand our products and services, believing that the airline
industry increasingly will seek an integrated approach to the design,
development, integration, installation, testing and sourcing of aircraft
cabin interiors. We believe that we are the only manufacturer of a broad
technologically-advanced line of cabin interior products with interior
design capabilities. Based on our established reputation for quality,
service and product innovation among the world's commercial airlines, we
believe that we are well positioned to provide "one-stop shopping" to these
customers, thereby maximizing our sales opportunities and increasing the
convenience and value of the service provided to our customers.
TECHNOLOGICAL LEADERSHIP/NEW PRODUCT DEVELOPMENT. We believe that we are a
technological leader in our industry, with what we believe is the largest
research and development ("R&D") organization in the cabin interior
products industry, currently comprised of approximately 500 engineers. We
believe our R&D effort and our on-site engineers at both the airlines and
airframe manufacturers enable us to play a leading role in developing and
introducing innovative products to meet emerging industry trends and needs
and thereby gain early entrant advantages.
PROVEN TRACK RECORD OF ACQUISITION INTEGRATION. We have demonstrated the
ability to make strategic acquisitions and successfully integrate such
acquired businesses by identifying opportunities to consolidate facilities
and personnel, including engineering, manufacturing and marketing
activities, as well as rationalizing product lines. See "The Company."
GROWTH OPPORTUNITIES
We believe that we have benefited from three major growth trends in the
aerospace industry.
INCREASE IN REFURBISHMENT AND UPGRADE ORDERS. Our substantial installed
base provides significant on-going revenues from replacements, upgrades,
repairs and the sale of spare parts. Approximately 61% of our revenues for
the year ended February 26, 2000 were derived from these aftermarket
activities. A significant portion of our revenues and operating earnings
during fiscal 2000 were derived from refurbishment and upgrade programs. We
believe that we are well positioned to continue to benefit as a result of
the airlines' improved financial condition and liquidity and the need to
refurbish and upgrade cabin interiors. See "Recent Industry Conditions."
EXPANSION OF WORLDWIDE FLEET AND SHIFT TOWARD WIDE-BODY AIRCRAFT.
Airlines have been taking delivery of a large number of new aircraft due to
high load factors and the projected growth in air travel. See "Recent
Industry Conditions."
BUSINESS JET AND VIP AIRCRAFT FLEET EXPANSION AND RELATED RETROFIT
OPPORTUNITIES. General aviation and VIP airframe manufacturers have
experienced growth in new aircraft deliveries similar to that which
recently occurred in the commercial aircraft industry. According to
industry sources, executive jet aircraft deliveries amounted to 343 units
in calendar 1996 and 661 units in calendar 1999. Industry sources indicate
that executive jet aircraft deliveries should be approximately 595 in
calendar 2000. Several new aircraft models, and larger business jets,
including the Cessna Citation Excel, the Boeing Business Jet, Bombardier
Challenger and Global Express, Gulfstream V, the Falcon 900 and Airbus
Business Jet, which have been or are expected to be introduced over the
next several years and are expected to be a significant contributor to new
general aviation aircraft deliveries going forward. Industry sources
indicate that deliveries of business jets from calendar 2001-2004 are
expected to range from approximately 520 to 570, and that the number of
larger business jets, as described above, as a percentage of total business
jet deliveries will increase from 23% in calendar year 1999 to 27% in
calendar year 2000. This is important to our company because the
typical cost of cabin interior products manufactured for a Cessna Citation
is approximately $162,500; whereas the same contents for a larger business
jet, such as the Boeing Business Jet could range up to approximately
$1,365,200. Advances in engine technology and avionics and the emergence of
fractional ownership of executive aircraft are also important growth
factors. In addition, the general aviation and VIP aircraft fleet consists
of approximately 10,000 aircraft with an average age of approximately 15
years. As aircraft age or ownership changes, operators retrofit and upgrade
the cabin interior, including seats, sofas and tables, sidewalls,
headliners, structures such as closets, lavatories and galleys, and related
equipment including lighting and oxygen delivery systems. In addition,
operators generally reupholster or replace seats every five to seven years.
We believe that we are well positioned to benefit from the retrofit
opportunities due to:
o 15-year average age of the executive jet fleet,
o operators who have historically reupholstered their seats may be more
inclined to replace these seats with lighter weight, more modern and
16G-compliant seating models and
o belief that we are the only manufacturer with the capability for cabin
interior design services, a broad product line for essentially all cabin
interior products and program management services, for true "one-stop
shopping."
BUSINESS STRATEGY
Our business strategy is to maintain a leadership position and to best
serve our customers by:
o offering the broadest and most integrated product lines and services
in the industry, including not only new product and follow-on product
sales, but also design, integration, installation and certification
services as well as maintenance, upgrade and repair services,
o pursuing a worldwide marketing approach focused by airline and general
aviation airframe manufacturers and encompassing our entire product
line,
o pursuing the highest level of quality in every facet of our operations
from the factory floor to customer support,
o remaining the technological leader in our industry,
o enhancing our position in the growing upgrade maintenance, inspection
and repair services market and
o pursuing selective strategic acquisitions in the commercial aircraft
and general aviation cabin interior products industries.
PRODUCTS AND SERVICES
SEATING PRODUCTS
Our company is the world's leading manufacturer of aircraft seats, offering
a wide selection of first class, business class, tourist class and commuter
seats. A typical seat manufactured and sold by our company includes the seat
frame, cushions, armrests and tray table, together with a variety of optional
features such as adjustable lumbar supports, footrests, reading lights,
head/neck supports, oxygen masks and telephones. We estimate that as of February
26, 2000 we had an aggregate installed base of approximately 1.2 million
aircraft seats valued at replacement prices of approximately $2.5 billion.
FIRST AND BUSINESS CLASSES. Based upon major airlines' program selection
and orders on hand, we are the leading worldwide manufacturer of
premium-class seats. Our new line of international first class sleeper
seats incorporate full electric actuation, electric ottoman, privacy panels
and side-wall mounted tables. Our recently released business class seats
incorporate features from over 25 years of seating design. The premium
business class seats include electrical or mechanical actuation, PC power
ports, telephones, translating legrests, adjustable lumbar cushions, 4-way
adjustable headrests and fiber-optic reading lights. The first and business
class products are substantially more expensive than tourist class seats
due to these luxury appointments.
CONVERTIBLE SEATS. We have developed two types of seats that can be
converted from tourist class triple-row seats to business class double-row
seats with minimal conversion complexity. Convertible seats allow airline
customers the flexibility to adjust the ratio of business class to tourist
class seats for a given aircraft configuration. This seat is increasing in
popularity in the European market.
TOURIST CLASS. We are a leading worldwide manufacturer of tourist class
seats and believe we offer the broadest such product line in the industry.
We have designed tourist class seats which incorporate features not
previously utilized in that class, such as laptop power ports and a number
of premium comfort features such as footrests, headrests and adjustable
lumbar systems.
COMMUTER (REGIONAL JET) SEATS. We are the leading manufacturer of regional
aircraft seating in both the U.S. and worldwide markets. Our SilhouetteTM
Composite seats are similar to commercial jet seats in comfort and
performance but typically do not have as many added comfort features.
Consequently, they are lighter weight and require less maintenance.
SPARES. Aircraft seats require regularly scheduled maintenance in the
course of normal passenger use. Airlines depend on seat manufacturers and
secondary suppliers to provide spare parts and kit upgrade programs. As a
result, a significant market exists for spare parts.
INTERIOR SYSTEMS PRODUCTS
We are the world's largest manufacturer of interior systems products for
both narrow- and wide-body aircraft, offering a wide selection of coffee and
beverage makers, water boilers, ovens, liquid containers, refrigeration
equipment, oxygen delivery systems and a variety of other interior components.
We estimate that as of February 26, 2000 we have an aggregate installed base of
such equipment, valued at replacement prices, in excess of $900 million.
COFFEE MAKERS. We are the leading manufacturer of aircraft coffee makers,
with our equipment currently installed in virtually every type of aircraft
for almost every major airline. We manufacture a broad line of coffee
makers, coffee warmers and water boilers, including the Flash Brew Coffee
Maker, with the capability to brew 54 ounces of coffee in one minute, and a
CombiTM unit which will both brew coffee and boil water for tea while
utilizing 25% less electrical power than traditional 5,000-watt water
boilers. We also manufacture a cappuccino/espresso maker.
OVENS. We are the leading supplier of a broad line of specialized ovens,
including high-heat efficiency ovens, high-heat convection ovens and
warming ovens. Our newest offering, the DS Steam Oven, represents a new
method of preparing food in-flight by maintaining constant temperature and
moisture in the food. It addresses the airlines' need to provide a wider
range of foods than can be prepared by convection ovens.
REFRIGERATION EQUIPMENT. We are the worldwide industry leader in the
design, manufacture and supply of commercial aircraft refrigeration
equipment. We manufacture a self-contained wine and beverage chiller, the
first unit specifically designed to rapidly chill wine and beverage
on-board an aircraft.
OXYGEN DELIVERY SYSTEMS. We are a leading manufacturer of oxygen delivery
systems for both commercial and general aviation aircraft. We are the only
manufacturer with the capability to fully integrate overhead passenger
service units with either chemical or gaseous oxygen equipment. Our oxygen
equipment has been approved for use on all Boeing and Airbus aircraft and
is also found on essentially all general aviation and VIP aircraft.
GENERAL AVIATION
We entered the market for general aviation and VIP aircraft products with
the acquisition of Aircraft Modular Products, Inc. ("AMP") in April 1998. By
combining AMP's presence in the general aviation and VIP aircraft cabin interior
products industry with that of our Puritan-Bennett Aero Systems Co. ("PBASCO")
and Aircraft Lighting Corporation ("ALC") product lines, which we acquired
during fiscal 1999, we are now the leading manufacturer of a broad product line
including a complete line of executive aircraft seating products, fluorescent
lighting, air valves and oxygen delivery systems as well as sidewalls,
bulkheads, credenzas, closets, galley structures, lavatories, tables and sofas.
We have the capability to provide complete interior packages, including all
design services, all interior components and program management services for
executive aircraft interiors. We are the preferred supplier of seating products
and direct and indirect lighting systems of essentially every general aviation
airframe manufacturer. We estimate that as of February 26, 2000 we have an
aggregate installed base of such equipment, valued at replacement prices, of
approximately $1.4 billion.
FLIGHT STRUCTURES AND ENGINEERING SERVICES
Our Flight Structures and Engineering Services operation is a leader in
providing design, integration, installation and certification services
associated with the reconfiguration of commercial aircraft cabin interiors,
converting commercial aircraft to freighters and designing and manufacturing
galley structures and crew rest compartments. We estimate that as of February
26, 2000, we had an installed base of such equipment, valued at replacement
prices, of approximately $1.1 billion.
ENGINEERING DESIGN, INTEGRATION, INSTALLATION AND CERTIFICATION SERVICES.
Through the acquisition of SMR Aerospace, Inc. in August 1998, we became a
leader in providing engineering design, integration, installation and
certification services for commercial aircraft passenger cabin interiors,
offering our customers in-house capabilities to design, project manage,
integrate, test and certify reconfigurations and modifications for
commercial aircraft and to manufacture related products, including
engineering kits and interface components. We provide a broad range of
interior reconfiguration services which allow airlines to change the size
of certain classes of service, modify and upgrade the seating, install
telecommunications or entertainment options, relocate galleys, lavatories
and overhead bins, and install crew rest compartments.
PASSENGER TO FREIGHTER CONVERSIONS. We are a leading supplier of structural
design and integration services, including airframe modifications for
passenger-to-freighter conversions. We are the leading provider of Boeing
767 passenger to freighter conversions and have performed conversions for
Boeing 747-200 Combi, Boeing 747-200 (door only) and Airbus A300 B4
aircraft. Freighter conversions require sophisticated engineering
capabilities and very large and complex proprietary parts kits.
CREW REST COMPARTMENTS. We are the worldwide leader in the design,
certification and manufacture of crew rest compartments. Crew rest
compartments are utilized by the flight crew during long-haul international
flights. A crew rest compartment is constructed utilizing lightweight cabin
interior technology and incorporating electrical, HVAC, lavatory and sleep
compartments.
GALLEY STRUCTURES. Galley structures are generally custom designed to
accommodate the unique product specifications and features required by a
particular carrier. Galley structures require intensive design and
engineering work and are among the most sophisticated and expensive of the
aircraft's cabin interior products. We provide a variety of galley
structures, closets and class dividers, emphasizing sophisticated and
higher value-added galleys for wide-body aircraft. We also manufacture
lavatories for commercial and freighter aircraft.
GLOBAL CUSTOMER SERVICE AND PRODUCT SUPPORT
We are an active participant in the markets for aftermarket parts and specialty
kits, interior services and product support. We believe that our broad and
integrated product line, global manufacturing, on-site technical support, and
strong customer relationships uniquely position us to become the premier
value-added supplier in the interior market.
AFTERMARKET PARTS AND UPGRADE KITS. We offer a complete range of spare
parts and upgrade/specialty kits for all of our products. Through control
of intellectual property, on-going value engineering and quality
enhancements of our engineering drawings, timely updates of component
maintenance manuals and strong cooperation with worldwide airline
regulatory bodies, we are uniquely positioned to quickly offer our
customers high quality aftermarket spare parts and upgrade kits.
INTERIOR SERVICES. We offer a comprehensive range of services that allow
our airline customers to outsource routine maintenance services and focus
on their core operational requirements. The spectrum of services includes
refurbishment and/or repair of B/E products, on-board surveys regarding
status and product installations, remanufacturing of used equipment to
extend the product life cycle, and inventory management services.
PRODUCT SUPPORT. We provide airlines a unique and high level of on-sight
support through our extensive, worldwide field engineering team. We can
respond quickly and work directly with our customer's engineering
department. On-line technology is used to assist all parties in improved
and timely communication. Through on-sight surveys, we can ensure spare
parts are manufactured before they are required by the airlines for their
routinely scheduled maintenance checks.
RESEARCH, DEVELOPMENT AND ENGINEERING
We work closely with commercial airlines to improve existing products and
identify customers' emerging needs. Our expenditures in research, development
and engineering totaled $54 million, $56 million and $46 million for the
years ended February 26, 2000, February 27, 1999 and February 28, 1998,
respectively. We currently employ approximately 500 professionals in the
engineering and product development areas. We believe that we have the largest
engineering organization in the cabin interior products industry, with not only
software, electronic, electrical and mechanical design skills, but also
substantial expertise in materials composition and custom cabin interior layout
design and certification.
MARKETING AND CUSTOMERS
We market and sell our products directly to virtually all of the world's
major airlines and commercial and general aviation aircraft manufacturers. We
market our general aviation products directly to all of the world's business jet
airframe manufacturers, modification centers and operators. We have a sales and
marketing organization of 110 persons, along with 32 independent sales
representatives. Our sales to non-U.S. airlines were $311 million, $298 million
and $233 million, for the years ended February 26, 2000, February 27, 1999 and
February 28, 1998, respectively, or approximately 43%, 42% and 48%,
respectively, of net sales during such periods.
Airlines select manufacturers of cabin interior products primarily on the
basis of custom design capabilities, product quality and performance, on-time
delivery, after-sales customer service, product support and price. We believe
that our large installed base, our timely responsiveness in connection with the
custom design, manufacture, delivery and after-sales customer service and
product support of our products and our broad product line and stringent
customer and regulatory requirements all present barriers to entry for potential
new competitors in the cabin interior products market.
We believe that our integrated worldwide marketing approach, focused by
airline and encompassing our entire product line, is preferred by airlines. Led
by a senior executive, teams representing each product line serve designated
airlines that together accounted for almost 70% of the purchases of products
manufactured by our company during fiscal 2000. These airline customer teams
have developed customer specific strategies to meet each airline's product and
service needs. We also staff "on-site" customer engineers at major airlines and
airframe manufacturers to represent our entire product line and work closely
with the customers to develop specifications for each successive generation of
products required by the airlines. These engineers help customers integrate our
wide range of cabin interior products and assist in obtaining the applicable
regulatory certification for each particular product or cabin configuration.
Through our on-site customer engineers, we expect to be able to more efficiently
design and integrate products which address the requirements of our customers.
We provide program management services, integrating all on-board cabin interior
equipment and systems, including installation and FAA certification, allowing
airlines to substantially reduce costs. We believe that we are one of the only
suppliers in the commercial aircraft cabin interior products industry with the
size, resources, breadth of product line and global product support capability
to operate in this manner. We market our general aviation products directly to
all of the world's general aviation airframe manufacturers, modification centers
and operators.
Our program management approach requires that a program manager is
assigned to each significant contract. The program manager is responsible for
all aspects of the specific contract, including management of change orders and
negotiation of related non-recurring engineering charges, monitoring the
progress of the contract through its scheduled delivery dates and overall
contract profitability. We believe that our customers derive substantial
benefits from our program management approach, including better on-time delivery
and higher service levels. We also believe our program management approach
results in better customer satisfaction and higher profitability over the life
of a contract.
During fiscal 2000, approximately 82% of our total revenues were derived
from the airlines compared with 81% in fiscal 1999. Approximately 61% of our
revenues during fiscal 2000 and 56% of our revenues during fiscal 1999 were
from refurbishment, spares and upgrade programs. During the year ended February
26, 2000, no single customer accounted for 10% of total revenues. During the
years ended February 27, 1999 and February 28, 1998, one customer accounted for
approximately 13% and 18%, respectively, of our total revenues, and no other
customer accounted for more than 10% of such revenues. The portion of our
revenues attributable to particular airlines varies from year to year because
of airlines' scheduled purchases of new aircraft and for retrofit and
refurbishment programs for their existing aircraft.
BACKLOG
We estimate that our backlog at February 26, 2000 was approximately $470
million, compared with a backlog of $640 million and $450 million on February
27, 1999 and February 28, 1998, respectively (as adjusted to exclude backlog
from our In-Flight Entertainment business in which we sold a 51% interest in
February 1999 and the remaining 49% interest in October 1999). Of our backlog
at February 26, 2000, approximately 59% is deliverable by the end of fiscal
2001; 68% of our total backlog is with North American carriers, approximately
17% is with European carriers and approximately 12%, or $58 million, is with
Asian carriers. Of such Asian carrier backlog, $34 million is deliverable in
fiscal 2001. Approximately $17 million of the total Asian carrier backlog was
with Japan Airlines, Singapore Airlines and Cathay Pacific, three of the
largest Asian airlines. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
CUSTOMER SERVICE
We believe that our customers place a high value on customer service and
product support and that such service is a critical factor in our industry. The
key elements of such service include:
o rapid response to requests for engineering designs, proposal requests and
technical specifications,
o flexibility with respect to customized features,
o on-time delivery,
o immediate availability of spare parts for a broad range of products and
o prompt attention to customer problems, including on-site customer training
Customer service is particularly important to airlines due to the high
cost to the airlines of late delivery, malfunctions and other problems.
WARRANTY AND PRODUCT LIABILITY
We warrant our products, or specific components thereof, for periods
ranging from one to ten years, depending upon product type and component. We
generally establish reserves for product warranty expense on the basis of the
ratio of warranty costs incurred by the product over the warranty period to
sales of the product. Actual warranty costs reduce the warranty reserve as they
are incurred. We periodically review the adequacy of accrued product warranty
reserves and revisions of such reserves are recognized in the period in which
such revisions are determined.
We also carry product liability insurance. We believe that our insurance
is generally sufficient to cover product liability claims.
COMPETITION
The commercial aircraft cabin interior products market is relatively
fragmented with a number of competitors in each of the individual product
categories. Due to the global nature of the commercial industry, competition in
product categories comes from both U.S. and foreign manufacturers. However, as
aircraft cabin interiors have become increasingly sophisticated and technically
complex, airlines have demanded higher levels of engineering support and
customer service than many smaller cabin interior products suppliers can
provide. At the same time, airlines have recognized that cabin interior product
suppliers must be able to integrate a wide range of products, including
sophisticated electronic components, particularly in wide-body aircraft. We
believe that the airlines' increasing demands on their suppliers will result in
a consolidation of those suppliers that remain. We have participated in this
consolidation through strategic acquisitions and internal growth and we intend
to continue to participate in the consolidation.
Our principal competitors for seating products are Group Zodiac S.A. and
Keiper Recaro GmbH. Our primary competitors for interior systems products are
Britax PLC, JAMCO, Scott Aviation and Intertechnique. Our principal competitors
for Flight Structures and Engineering Services products are TIMCO, JAMCO, Britax
PLC and Driessen Aircraft Interior Systems. The market for general aviation
products and services is highly fragmented, consisting of numerous competitors,
the largest of which is Decrane Aircraft Holdings.
MANUFACTURING AND RAW MATERIALS
Our manufacturing operations consist of both the in-house manufacturing of
component parts and sub-assemblies and the assembly of our specified and
designed component parts that are purchased from outside vendors. We maintain
state-of-the-art facilities, and we have an on-going strategic manufacturing
improvement plan utilizing lean manufacturing processes. We expect that
continuous improvement from implementation of this plan for each of our product
lines will occur over the next several years and should lower production costs,
cycle times and inventory requirements and at the same time improve product
quality, customer response and profitability.
GOVERNMENT REGULATION
The Federal Aviation Administration ("FAA") prescribes standards and
licensing requirements for aircraft components, and licenses component repair
stations within the United States. Comparable agencies regulate such matters in
other countries. We hold several FAA component certificates and perform
component repairs at a number of our U.S. facilities under FAA repair station
licenses. We also hold an approval issued by the UK Civil Aviation Authority
("CAA") to design, manufacture, inspect and test aircraft seating products in
Leighton Buzzard, England and in Kilkeel, Northern Ireland and to design,
manufacture, inspect and test our flight structures and engineering services
products in Dafen, Wales and the necessary approvals to design, manufacture,
inspect, test and repair our interior systems products in Nieuwegein,
Netherlands and to inspect, test and repair products at our service centers
throughout the world.
In March 1992, the FAA adopted Technical Standard Order C127 ("TSO C127")
requiring that all seats on certain new generation commercial aircraft installed
after such date be certified to meet a number of new safety requirements,
including an ability to withstand a 16G force. We understand that the FAA plans
to adopt in the near future additional regulations which will require that
within the next five years all seats, including those on existing older
commercial aircraft which are subject to the FAA's jurisdiction, will have to
comply with similar seat safety requirements. We have developed 32 different
seat models that meet these new seat safety regulations, have successfully
completed thousands of tests to comply with TSO C127 and, based on our installed
base of 16G seats, are the recognized industry leader in this area.
ENVIRONMENTAL MATTERS
We are subject to extensive and changing federal, state and foreign laws
and regulations establishing health and environmental quality standards, and may
be subject to liability or penalties for violations of those standards. We are
also subject to laws and regulations governing remediation of contamination at
facilities that we currently or formerly owned or operated or to which we send
hazardous substances or wastes for treatment, recycling or disposal. We believe
that we are currently in compliance, in all material respects, with all such
laws and regulations. However, we can offer no assurances that we will not be
subject to future liabilities or obligations as a result of new or more
stringent interpretations of existing laws and regulations. In addition, we may
have liabilities or obligations in the future if we discover any environmental
contamination or liability at any of our facilities.
PATENTS
We currently hold 88 United States patents and 45 international patents,
covering a variety of products. We believe that the termination, expiration or
infringement of one or more of such patents would not have a material adverse
effect on our company.
EMPLOYEES
As of February 26, 2000, we had approximately 4,500 employees.
Approximately 73% of these employees are engaged in manufacturing, 11% in
engineering, research and development and 16% in sales, marketing, product
support and general administration. Approximately 16% of our worldwide employees
are represented by unions. We are currently in the process of completing
negotiations with one of our two domestic unions which represents 7% of our
employees. This contract is expected to cover a period of three or four years.
The contract with the only other domestic union, which represents approximately
2% of our employees, runs through the year 2003. We consider our employee
relations to be good.
ITEM 2. PROPERTIES
As of February 26, 2000, we had 14 principal facilities, comprising an
aggregate of approximately 1.4 million square feet of space. The following table
describes the principal facilities and indicates the location, function,
approximate size and ownership status of each location.
Facility
Size
Location Products and Function (Sq. Feet) Ownership
-------- --------------------- ---------- ---------
CORPORATE
Wellington, Florida Corporate headquarters, marketing and sales,
customer service and product support,
finance, human resources, legal 17,700 Owned
SEATING PRODUCTS
Litchfield, Connecticut Manufacturing and warehousing, customer 147,700 Owned
service and product support, research and
development, finance and administration
Winston-Salem, North Carolina Manufacturing and warehousing, customer 264,800 Owned
service and product support, research and
development, finance and administration
Leighton Buzzard, England Manufacturing and warehousing, customer 114,000 Owned
service and product support, finance
Kilkeel, Northern Ireland Manufacturing and warehousing, customer 38,500 Owned
service and product support, finance
INTERIOR SYSTEMS
Delray Beach, Florida Manufacturing and warehousing, research and 52,000 Owned
development, finance and administration
Anaheim, California Manufacturing and warehousing, research and 98,000 Leased
development, finance
Lenexa, Kansas Manufacturing and warehousing, customer 80,000 Owned
service and product support, finance
Nieuwegein, The Netherlands Manufacturing and warehousing, research and 39,000 Leased
development, finance
GENERAL AVIATION AND VIP PRODUCTS
Ft. Lauderdale, Florida Marketing and sales, finance and administration 7,000 Leased
Miami, Florida Manufacturing and warehousing, research and 106,300 Leased
development, finance 52,400 Owned
Holbrook, New York Manufacturing and warehousing, research and 20,100 Leased
development, finance
Fenwick, West Virginia Manufacturing and warehousing, research and 132,600 Owned
development, customer service and product
support, finance
GLOBAL CUSTOMER SERVICE AND PRODUCT SUPPORT
Various service centers in North
America and Europe Upgrade, maintenance, inspection and repair 160,900 Leased
FLIGHT STRUCTURES AND ENGINEERING SERVICES
Arlington, Washington Manufacturing and warehousing, research and
development, customer service and product
support, finance and administration 130,200 Leased
Jacksonville, Florida Manufacturing and warehousing, research and
development, customer service and product
support, finance 75,000 Owned
Dafen, Wales Manufacturing and warehousing, research and
development, customer service and product
support, finance 80,000 Owned
We believe that our facilities are suitable for their present intended purposes
and adequate for our present and anticipated level of operations. We believe
that our fiscal 1999 restructuring plan and fiscal 2000 product and service line
rationalization, together with continued airline profitability, should result in
improvement in the degree of utilization of our facilities.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to litigation or other legal proceedings that we
believe could reasonably be expected to have a material adverse effect on our
company's business, financial condition and results of operations.
In January 1998, we entered into a settlement related to a long-running
dispute with the U.S. Government over export sales between 1992 and 1995 to Iran
Air. The dispute centered on shipments of aircraft seats and related spare parts
for five civilian aircraft operated by Iran Air. Iran Air purchased the seats in
1992 and arranged for them to be installed by a contractor in France. At the
time, Iran was not the subject of a U.S. trade embargo. In connection with our
sale of seats to Iran Air, we applied for and were granted a validated export
license by the U.S. Department of Commerce (the "DOC"). The dispute with the
U.S. Government centered on whether seats were delivered to Iran Air before the
formal license was issued by the DOC, some seven months after we first applied
for the license. The settlement resolved all disputes between our company and
the Department of Justice as well as the DOC's Bureau of Export Enforcement. As
part of the settlement, we plead guilty to a violation of the International
Economic Emergency Powers Act and were placed on probation for a three-year
period. In addition, we entered into a consent order with the DOC under which
the DOC has agreed to suspend the imposition of a three-year export denial order
on PTC Aerospace, provided no further violations of the export laws occur. The
consent order issued by the DOC applies solely to PTC Aerospace ("PTC"), a unit
of our Seating Products operations. PTC is located in Litchfield, Connecticut.
Under the terms of the consent order, if PTC were to violate any federal export
laws during the three-year period ending in January 2001, PTC, not our company,
would be subject to an order denying export privileges. Under our current
organization, we believe that it is unlikely that PTC would be in a position to
engage in any export transactions that are not reviewed and controlled by our
Seating Products operations. As part of the plea agreement that was negotiated
with the Office of the United States Attorney for the District of Connecticut,
we are subject to a three-year term of corporate probation that began in January
1998. The probation is unsupervised and thus we are not subject to external
monitoring or other conditions that impede or affect our ability to conduct
business. Under the probation, we must refrain from violating any federal laws.
We have taken steps to implement a legal compliance program to prevent and
detect any violations of law. We recorded a charge of $4.7 million in our fourth
quarter of fiscal 1998, which ended February 28, 1998, related to fines, civil
penalties and associated legal fees arising from the settlement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the last quarter of the fiscal year covered by this Form 10-K, we
did not submit any matters to a vote of security holders, through the
solicitation of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the Nasdaq National Market under the symbol
"BEAV." The following table sets forth, for the periods indicated, the range of
high and low per share sales prices for the common stock as reported by Nasdaq.
High Low
Fiscal Year Ended February 28, 1998
First Quarter $27 1/2 $19 1/2
Second Quarter 37 23 5/8
Third Quarter 41 1/2 27 1/8
Fourth Quarter 32 1/4 20 1/2
Fiscal Year Ended February 27, 1999
First Quarter 35 3/4 25 3/4
Second Quarter 33 3/8 21 1/2
Third Quarter 27 1/8 13
Fourth Quarter 27 1/4 11 1/2
Fiscal Year Ended February 26, 2000
First Quarter 21 1/8 13 1/2
Second Quarter 22 1/4 16 1/2
Third Quarter 18 3/16 5 3/4
Fourth Quarter 9 7/8 6 3/8
On May 1, 2000 the closing price of our common stock as reported by Nasdaq
was $7 5/16 per share. As of such date, we had 1,076 shareholders of record, and
we estimate that there are approximately 16,000 beneficial owners of our common
stock. We have not paid any cash dividends in the past, and we have no present
intention of doing so in the immediate future. Our Board of Directors intends,
for the foreseeable future, to retain any earnings to reduce indebtedness and
finance our future growth, but expects to review our dividend policy regularly.
The Indentures pursuant to which our 9 7/8%, 8% and 9 1/2% Senior Subordinated
Notes were issued and the terms of our credit facilities permit the declaration
or payment of cash dividends only in certain circumstances described therein.
[Remainder of page intentionally left blank]
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data)
On January 24, 1996, we acquired all of the stock of Burns Aerospace
Corporation. During fiscal 1999, we completed the following acquisitions: (1) On
March 27, 1998, we acquired all of the stock of Aerospace Interiors; (2) on
April 13, 1998, we acquired all of the stock of PBASCO; (3) on April 21, 1998,
we acquired all of the stock of AMP; (4) on July 30, 1998, we acquired all of
the stock of ALC; (5) on August 7, 1998, we acquired all of the stock of SMR;
and (6) on September 3, 1998, we acquired all of the galley equipment business
assets of CF Taylor. We sold a 51% interest in our In-Flight Entertainment
business on February 25, 1999 and completed the sale of our remaining 49% equity
interest on October 5, 1999. The financial data as of and for the fiscal years
ended February 26, 2000, February 27, 1999, February 28, 1998, February 22, 1997
and February 24, 1996 have been derived from financial statements that have been
audited by our independent auditors. The following financial information is
qualified by reference to, and should be read in conjunction with, our financial
statements, including notes thereto, and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
Form 10-K.
Year Ended
-----------------------------------------------------------------------
Feb. 26, Feb. 27, Feb. 28, Feb. 22, Feb. 24,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Statements of Operations Data:
Net sales............................... $ 723,349 $ 701,325 $ 487,999 $ 412,379 $ 232,582
Cost of sales........................... 543,682(a) 522,875 (c) 309,094 270,557 160,031
-------- -------- -------- -------- -------
Gross profit............................ 179,667 178,450 178,905 141,822 72,551
Operating expenses:
Selling, general and administrative... 94,891(a) 83,648 58,622 51,734 42,000
Research, development and engineering. 54,004(a) 56,207 45,685 37,083 58,327(h)
Amortization.......................... 24,076 22,498 11,265 10,607 9,499
Transaction gain, expenses and other expenses -- 53,854 (d) 4,664(f) -- 4,170(i)
-------- -------- -------- -------- --------
Operating earnings (loss)............... 6,696(b) (37,757)(e) 58,669 42,398 (41,445)
Equity in losses of unconsolidated subsidiary 1,289 -- -- -- --
Interest expense, net................... 52,921 41,696 22,765 27,167 18,636
-------- -------- -------- -------- --------
Earnings (loss) before income taxes,
extraordinary item and cumulative effect of
accounting change...................... (47,514) (79,453) 35,904 15,231 (60,081)
Income taxes ........................... 3,283 3,900 5,386 1,522 --
--------- -------- -------- -------- --------
Earnings (loss) before extraordinary item and
cumulative effect of accounting change (50,797) (83,353) 30,518 13,709 (60,081)
Extraordinary item...................... -- -- 8,956(g) -- --
-------- --------- -------- -------- --------
Earnings (loss) before cumulative effect of
accounting change......................... (50,797) (83,353) 21,562 13,709 (60,081)
Cumulative effect of accounting change.. -- -- -- -- (23,332)(h)
-------- -------- -------- -------- --------
Net earnings (loss)..................... $(50,797)(b) $(83,353)(e) $ 21,562 $ 13,709 $(83,413)
======== ======== ======== ======== ========
Basic earnings (loss) per share:
Earnings (loss) before extraordinary item
and cumulative effect of change in
accounting principle................... $ (2.05)(b) $ (3.36)(e) $ 1.36 $ .77 $ (3.71)
Extraordinary item...................... -- -- (.40)(g) -- --
Cumulative effect of accounting change.. -- -- -- -- (1.44)(h)
-------- --------- ------- -------- --------
Net earnings (loss)..................... $ (2.05) $ (3.36) $ .96 $ .77 $ (5.15)
======== ======== ======== ======== ========
Weighted average common shares.......... 24,764 24,814 22,442 17,692 16,185
Diluted earnings (loss) per share:
Earnings (loss) before extraordinary item and
cumulative effect of change in accounting principle $ (2.05)(b) $ (3.36)(e) $ 1.30 $ .72 $ (3.71)
Extraordinary item...................... -- -- (.38)(g) -- --
Cumulative effect of accounting change.. -- -- -- -- (1.44)(h)
-------- -------- -------- -------- --------
Net earnings (loss)..................... $ (2.05) $ (3.36) $ .92 $ .72 $ (5.15)
======== ======== ======== ======== ========
Weighted average common shares (diluted basis) 24,764 24,814 23,430 19,097 16,185
Balance Sheet Data (end of period):
Working capital......................... $129,913 $143,423 $262,504 $122,174 $ 41,824
Total assets............................ 881,789 904,299 681,757 491,089 433,586
Long-term debt.......................... 618,202 583,715 349,557 225,402 273,192
Stockholders' equity.................... 64,497 115,873 196,775 165,761 44,157
SELECTED FINANCIAL DATA (continued)
Footnotes to Table
(a) During fiscal 2000, we announced a consolidation of our facilities and
rationalization of our workforce and product offerings resulting in a
charge of approximately $34,300. During fiscal 2000, our seating
operations experienced manufacturing and other inefficiencies of
approximately $24,000 primarily due to a misalignment of manufacturing
processes with its newly implemented ERP system. We agreed to customer
concessions aggregating approximately $36,100 related to our late
deliveries and quality problems encountered during the period in which
we suffered from inefficiencies related to new product introductions and
ERP implementation problems. The above costs and charges aggregated
$94,375, of which $83,673 was charged to cost of sales, $6,500 was
charged to selling, general and administrative expenses and $4,202 was
charged to research, development and engineering expenses.
(b) Excluding the fiscal 2000 costs and charges discussed in footnote (a)
above, operating earnings, net earnings and diluted earnings per share
(including adding back the $3,000 tax credit recognized in the fourth
quarter) were $101,071, $40,578 and $1.62, respectively.
(c) During fiscal 1999, we implemented a restructuring plan and incurred
costs associated with new product introductions, which together
aggregated $87,825, and which were charged to cost of sales. Excluding
such costs and charges, our gross profit and gross margin for fiscal 1999
would be $266,275 and 38%, respectively. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(d) As a result of the 1999 Acquisitions, we recorded a charge of $79,155 for
the write-off of acquired in-process research and development and
acquisition-related expenses. We also sold a 51% interest in our
In-Flight Entertainment business ("IFE Sale"), as a result of which we
recorded a gain of $25,301. Transaction gain, expenses and other expenses
for the year ended February 27, 1999 consist of the in-process research
and development and other acquisition expenses, offset by the gain
attributable to the IFE Sale.
(e) Excluding the non-operational impact of the fiscal 1999 matters described
above, operating earnings, net earnings and diluted earnings per share
(based upon a 17% tax rate) were $103,922, $50,817 and $2.03,
respectively.
(f) In fiscal 1998, we resolved a long-running dispute with the U.S.
Government over export sales between 1992 and 1995 to Iran Air. We
recorded a charge of $4,664 in fiscal 1998 related to fines, civil
penalties and associated legal fees arising from the settlement. See
"Legal Proceedings."
(g) We incurred an extraordinary charge of $8,956 during fiscal 1998 for
unamortized debt issue costs, tender and redemption premiums and fees and
expenses related to the repurchase of our 9 3/4% Senior Notes.
(h) In fiscal 1996, we changed our method of accounting relating to the
capitalization of pre-contract engineering costs that were previously
included as a component of inventories and amortized to earnings as the
product was shipped. Effective February 24, 1995, we have charged such
costs to research, development and engineering and expensed as incurred
and, as a result, periods prior to fiscal 1996 are not comparable. In
connection with such change in accounting, we recorded a charge to
earnings of $23,332.
(i) In fiscal 1996, in conjunction with our rationalization of our seating
business and as a result of the Burns acquisition, we recorded a charge
to earnings of $4,170 related to costs associated with the integration
and consolidation of our European seating operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Our company is the world's largest manufacturer of commercial and general
aviation aircraft cabin interior products, serving virtually all major airlines
and a wide variety of general aviation customers and airframe manufacturers. We
believe that we have achieved leading global market positions in each of our
major product categories, which include aircraft seats, food and beverage
preparation and storage equipment, galley and other interior structures, oxygen
delivery systems and lighting systems. In addition, we provide design,
integration, installation and certification services, offering our customers
in-house capabilities to design, project manage, integrate, test and certify
reconfigurations and modifications for commercial aircraft cabin interiors and
to manufacture related products, including engineering kits and interface
components. We also provide upgrade, maintenance and repair services for our
airline customers around the world.
Our revenues are generally derived from two primary sources:
refurbishment or upgrade programs for the existing worldwide fleets of
commercial and general aviation aircraft and new aircraft deliveries. We believe
our large installed base of products, estimated to be approximately $6 billion
as of February 26, 2000 (valued at replacement prices), gives us a significant
advantage over our competitors in obtaining orders for refurbishment programs,
principally due to the tendency of the airlines to purchase equipment for such
programs from the original supplier.
Between 1989 and February 2000, we acquired fifteen companies and
integrated the acquisitions by eliminating 17 operating facilities,
rationalizing our product lines and consolidating personnel at the acquired
businesses, resulting in headcount reductions of over 3,000 employees. The
worldwide rationalization of facilities, headcounts and product lines will
continue to aid us in several ways. It will strengthen the global business
management focus on our core product categories, achieve a more effective
leveraging of our resources and improve our ability to rapidly react to changing
business conditions. In conjunction with these efforts, we have also implemented
a company-wide information technology system, a company-wide engineering system
and initiated lean manufacturing in our remaining facilities. Common management
information and engineering systems, lean manufacturing processes across all
operations, coupled with a rationalized product offering are expected to provide
the company with the ongoing benefit of a generally lower cost structure, and
expanding gross and operating margins. The aggregate cost of the fifteen
acquisitions completed since 1989, including integration, product line
rationalization, restructuring and related costs was approximately $860 million.
We sold a 51% interest in our In-Flight Entertainment ("IFE") business in fiscal
1999 and completed the sale of our remaining 49% equity interest in fiscal 2000.
Since early 1994, the airlines have experienced a significant turnaround
in operating results, with the domestic airline industry achieving record
operating earnings during calendar years 1995 though 1998. Airline company
balance sheets have been substantially strengthened and their liquidity enhanced
as a result of this record profitability, debt and equity financings and a
closely managed fleet expansion. Recent increases in fuel prices have not had a
material impact on the profitability of the airline industry to-date. However,
should fuel prices continue at or above the current level for a prolonged
period, the airline industry's profitability may be impacted and discretionary
airline spending will be more closely monitored or even reduced.
During the latter part of fiscal 1999 and throughout fiscal 2000, our
seating operations have negatively impacted our operating results. The operating
inefficiencies resulted in delayed deliveries to customers, increased re-work of
seating products, claims for warranty, penalties, out of sequence charges,
substantial increases in air freight and other expedite-related costs. Late
customer deliveries have resulted in certain airlines diverting seating programs
to other manufacturers and the deferrals of other seating programs. We believe
we have now resolved the problems we encountered in our seating operations.
Our business strategy is to maintain our market leadership position
through various initiatives, including new product development. In fiscal 2000,
research, development and engineering expenses totaled $54,004, or 7.5% of net
sales, versus 8.0% of net sales in fiscal 1999.
The following discussion and analysis addresses the results of our
operations for the year ended February 26, 2000, as compared to our results of
operations for the year ended February 27, 1999. The discussion and analysis
then addresses the results of our operations for the year ended February 27,
1999 as compared to our results of operations for the year ended February 28,
1998. The discussion and analysis then addresses our liquidity, financial
condition and other matters. All dollar amounts are presented in thousands of
dollars, except per share amounts.
YEAR ENDED FEBRUARY 26, 2000 COMPARED WITH YEAR ENDED FEBRUARY 27, 1999
Net sales for fiscal 2000 were $723,349, an increase of approximately
$22,024, or 3.1% over the prior year. Organic revenue growth, exclusive of IFE,
in fiscal 2000 and fiscal 1999 was approximately 5.6% and 13.7%, respectively,
whereas revenue growth on a pro forma basis for fiscal 2000 and 1999, giving
effect to the 1999 Acquisitions and excluding IFE for both periods, was
approximately 4.1% and 15.5%, respectively. Of our backlog of approximately
$470,000 as of February 26, 2000, approximately $279,000 is deliverable by the
end of fiscal 2001. Our backlog at February 27, 1999 aggregated approximately
$640,000.
Gross profit for fiscal 2000 was $179,667. Gross profit for fiscal 2000
before the special costs and charges described below was $263,340 (36.4% of net
sales). This was 1% less than the prior year of $266,275 (calculated on a
comparable basis), which represented 38.0% of net sales. The decrease in gross
profit before special costs and charges is primarily attributable to the mix of
product sales during the year.
During the latter part of fiscal 1999 and throughout fiscal 2000, our
operating results were negatively impacted by our seating operations. These
operating problems resulted in delayed deliveries to customers, increased
re-work of seating products, claims for warranty, penalties, out of sequence
charges, substantial increases in air freight and other expedite-related costs.
Late customer deliveries resulted in certain airlines diverting seating programs
to other manufacturers and the deferral of other seating programs. We believe we
have now resolved the operating problems in our seating business.
During fiscal 2000, we incurred $36,076 of costs in our seating
operations associated with claims for penalties, out of sequence charges,
warranties and substantial increases in air freight and other expedite-related
costs. In addition, we incurred approximately $24,000 of manufacturing and
engineering inefficiencies, of which $16,300 has been included as a component of
cost of sales, $3,700 has been included as a component of selling, general and
administrative expenses and $4,000 has been included as a component of research,
development and engineering expenses. Also, during fiscal 2000, we completed a
review of our businesses and decided to discontinue certain product and service
offerings. This product line rationalization will reduce the number of
facilities by two and is expected to result in a headcount reduction of
approximately 700. The total cost of this product and service line
rationalization was $34,299. Approximately $31,297 of the rationalization costs
are included in cost of sales, with the balance of $3,002 charged to operating
expenses.
The aggregate impact of these operating inefficiencies, penalties, and
product line rationalization costs was to increase cost of sales and operating
expenses by $94,375 during fiscal 2000. Future margin expansion will largely
depend upon the success of our seating business in four areas: achieving planned
efficiencies for recently-introduced products, optimizing manufacturing
processes with the new management information system, successfully implementing
lean manufacturing techniques and rationalizing facilities and personnel. While
our manufacturing productivity and efficiency has improved recently, there can
be no assurance that the rate of these improvements will continue.
Selling, general and administrative expenses were $94,891 (13.1% of net
sales) for fiscal 2000, which was $11,243, or 13%, greater than the comparable
period in the prior year of $83,648 (11.9% of net sales). Severance and other
facility consolidation costs associated with the charges described above,
together with increased operating expenses at our seating products operations
and increased management information system training costs and related expenses
were the principal reasons for the increase.
Research, development and engineering expenses were $54,004 (7.5% of net
sales) during fiscal 2000, a decrease of $2,203 over the prior year.
Amortization expense for fiscal 2000 of $24,076 was $1,578 greater than
the amount recorded in the prior year, and is due to the 1999 Acquisitions.
Based on management's assumptions, a portion of the purchase price for
the 1999 Acquisitions was allocated to purchased in-process research and
development that had not reached technological feasibility and had no future
alternative use. During fiscal 1999, we recorded a charge of $79,155 for the
write-off of acquired in-process research and development and other
acquisition-related expenses.
We generated operating earnings of $6,696 (0.9% of net sales) during
fiscal 2000, as compared to an operating loss of $(37,757) in the prior year.
Equity in losses of unconsolidated subsidiary of $1,289 represents our
share of the losses generated by Sextant In-Flight Systems through October 5,
1999, at which time we sold our remaining 49% interest.
Interest expense, net was $52,921 during fiscal 2000, or $11,225 greater
than interest expense of $41,696 for the prior year, and is due to the increase
in our long-term debt used, in part, to finance the 1999 Acquisitions.
The loss before income taxes in the current year was $(47,514) (which
includes $94,375 of costs and charges primarily related to our Seating Products
operations) as compared to the loss before income taxes in the prior year of
$(79,453) (which includes restructuring and new product introduction costs of
$87,825, acquisition-related expenses of $79,155 and the transaction gain of
$25,301). Earnings before income taxes excluding the above-mentioned costs and
expenses were $46,861 for fiscal 2000 compared to $62,226 in the prior year.
Income tax expense for fiscal 2000 was $3,283 as compared to $3,900 in the prior
year.
The net loss for fiscal 2000 was $(50,797), or $(2.05) per share (basic
and diluted), as compared to a net loss of $(83,353), or $(3.36) per share
(basic and diluted), in fiscal 1999.
YEAR ENDED FEBRUARY 27, 1999 COMPARED TO YEAR ENDED FEBRUARY 28, 1998
Net sales for fiscal 1999 were $701,325, an increase of approximately
$213,326, or 44% over the prior year. Organic revenue growth during fiscal 1999
was approximately 10.6%; organic revenue growth, exclusive of IFE in both fiscal
1999 and fiscal 1998 was approximately 13.7%, whereas revenue growth on a pro
forma basis for both fiscal 1999 and 1998 giving effect to the 1999 Acquisitions
and excluding IFE for both periods was approximately 15.5%. The second half of
fiscal 1999 reflected substantially greater internal growth than the first half
of the year, primarily driven by our Seating Products operations.
Gross profit for fiscal 1999 before the special costs and charges
described above was $266,275 (38.0% of net sales). This was $87,370, or 49%,
greater than the comparable period in the prior year of $178,905, which
represented 36.7% of net sales. The primary reasons for the improvement in gross
margins include: (1) a company-wide re-engineering program that has resulted in
higher employee productivity and better manufacturing efficiency, (2) higher
unit volumes and (3) improvement in product mix. As described above, during
fiscal 1999 we commenced a restructuring plan designed to lower our cost
structure and improve our long-term competitive position. The cost of the
restructuring, along with costs associated with new product introductions, was
$87,825. We recorded such amount as an increase in cost of sales during fiscal
1999; reflecting such costs and charges, gross profit for the year was $178,450
or 25.4% of net sales.
Selling, general and administrative expenses were $83,648 (11.9% of net
sales) for fiscal 1999, which was $25,026, or 43%, greater than the comparable
period in the prior year of $58,622 (12.0% of net sales). The increase in
selling, general and administrative expenses was primarily due to the 1999
Acquisitions along with increases associated with internal growth.
Research, development and engineering expenses were $56,207 (8.0% of net
sales) during fiscal 1999, an increase of $10,522 over the prior year. The
increase in research, development and engineering expense is primarily
attributable to ongoing new product development activities and the 1999
Acquisitions.
Amortization expense for fiscal 1999 of $22,498 was $11,233 greater than
the amount recorded in the prior year and is due to the 1999 Acquisitions.
Based on management's assumptions, a portion of the purchase price for
the 1999 Acquisitions was allocated to purchased in-process research and
development that had not reached technological feasibility and had no future
alternative use. During fiscal 1999, we recorded a charge of $79,155 for the
write-off of acquired in-process research and development and other
acquisition-related expenses. Such amount has been presented as a component of
transaction gain, expenses and other expense in the accompanying financial
statements. Management estimates that the research and development cost to
complete the in-process research and development related to projects will
aggregate approximately $11,000, which will be incurred over a five-year period.
In February 1999, we sold a 51% interest in IFE to Sextant for an initial
cash purchase price of $62,000. The final purchase price will be determined on
the basis of the operating results for the joint venture over its initial two
years of operations and could range from $47,000 to $87,000; accordingly,
$15,000 of the proceeds were deferred as of February 25, 1999, and are included
in other liabilities in the accompanying financial statements as of February 27,
1999. We recorded a gain on this transaction of approximately $25,301, which has
been reflected as a component of transaction gain, expenses and other expense in
the accompanying financial statements.
We incurred an operating loss of $(37,757) (which includes restructuring
and new product introduction costs of $87,825, acquisition-related expenses of
$79,155 and the transaction gain of $25,301) during fiscal 1999, as compared to
operating earnings of $58,669 in the prior year. Operating earnings during
fiscal 1999 excluding such costs, expenses and the transaction gain were
$103,922, or 14.8% of net sales.
Interest expense, net was $41,696 during fiscal 1999, or $18,931 greater
than interest expense of $22,765 for the prior year, and is due to the increase
in our long-term debt incurred in connection with the 1999 Acquisitions.
The loss before income taxes in the current year was $(79,453) (which
includes restructuring and new product introduction costs of $87,825,
acquisition-related expenses of $79,155 and the transaction gain of $25,301) as
compared to earnings before income taxes of $35,904 in the prior year. Earnings
before income taxes excluding the above-mentioned costs and expenses were
$62,226. Income tax expense for fiscal 1999 was $3,900 as compared to $5,386 in
the prior year.
The loss before extraordinary items for fiscal 1999 was $(83,353), or
$(3.36) per share (basic and diluted), as compared to earnings before
extraordinary items of $30,518, or $1.30 per share (diluted), for the comparable
period in the prior year.
We incurred an extraordinary loss of $8,956 during fiscal 1998 for
unamortized debt issue costs, tender and redemption premiums and costs and
expenses associated with the repurchase of our 9 3/4% Notes.
The net loss for fiscal 1999 was $(83,353), or $(3.36) per share (basic
and diluted), as compared to net earnings of $21,562, or $0.92 per share
(diluted), in fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity requirements consist of working capital needs, ongoing
capital expenditures and scheduled payments of interest and principal on
indebtedness. Our primary requirements for working capital have been directly
related to increased inventory levels as a result of revenue growth. Our working
capital was $129,913 as of February 26, 2000, as compared to $143,423 as of
February 27, 1999.
At February 26, 2000, cash and cash equivalents were $37,363, as compared
to $39,500 at February 27, 1999. Cash provided from operating activities was
$16,886 for fiscal 2000. The primary source of cash during fiscal 1999 was
non-cash charges for depreciation and amortization of $42,237, a decrease in
accounts receivable of $36,448 and an increase in payables, accruals and current
taxes of $4,756, offset by a use of cash of $18,910 related to increases in
inventories and other current assets.
Our capital expenditures were $33,169 and $37,465 during fiscal 2000 and
1999, respectively. Our capital expenditure spending over the past two years was
primarily attributable to:
o acquisitions completed during fiscal 1999,
o the purchase of previously leased facilities,
o the development of a new management information system to replace our
existing systems, many of which were inherited in acquisitions and
o expenditures for plant modernization.
We anticipate on-going annual capital expenditures of approximately
$23,000 for the next several years.
We have credit facilities with The Chase Manhattan Bank (the "Bank Credit
Facility"). The Bank Credit Facility consists of a $100,000 revolving credit
facility (of which $50,000 may be utilized for acquisitions) and an acquisition
facility of $33,300. The revolving credit facility expires in April 2004 and the
acquisition facility is amortizable over five years beginning in August 1999.
The Bank Credit Facility is collateralized by our accounts receivable,
inventories and by substantially all of our other personal property.
Indebtedness under the existing Bank Credit Facility consisted of revolving
credit facility outstanding borrowings of $39,000 (bearing interest at LIBOR
plus 1.75%, or approximately 7.8%), letters of credit aggregating approximately
$2,319 and outstanding borrowings under the acquisition facility aggregating
$33,300 (bearing interest at LIBOR plus 1.5%, or approximately 7.9%) as of
February 26, 2000. The Bank Credit Facility was amended on December 21, 1999 and
contains customary affirmative covenants, negative covenants and conditions of
borrowing, all of which were met as of February 26, 2000.
In January 1996, we sold $100,000 of 9 7/8% Senior Subordinated Notes
(the "9 7/8% Notes"). In February 1998, we sold $250,000 of 8% Senior
Subordinated Notes (the "8% Notes"). In conjunction with the sale of the 8%
Notes, we initiated a tender offer for the $125,000 of 9 3/4% Senior Notes due
2003 (the "9 3/4% Notes"). The net proceeds from the sale of the 8% Notes of
approximately $240,419 were used:
o for the tender offer (which expired on February 25, 1998) in which
approximately $101,800 of the 9 3/4% Notes were retired,
o to call the remaining 9 3/4% Notes on March 16, 1998 and
o together with the proceeds from the Bank Credit Facility, to partially
fund the 1999 Acquisitions.
We incurred an extraordinary charge of $8,956 for unamortized debt issue
costs, tender and redemption premiums and fees and expenses related to the
repurchase of the 9 3/4% Notes. In November 1998, we sold $200,000 of 9 1/2%
Senior Subordinated Notes (the "9 1/2% Notes"). The net proceeds from the
offering of approximately $194,100 were used to settle our obligations related
to the SMR acquisition and to repay a portion of our bank borrowings.
Long-term debt consists principally of the Bank Credit Facility, 9 7/8%
Notes, 8% Notes and 9 1/2% Notes. The 9 7/8% Notes, 8% Notes and 9 1/2% Notes
mature on February 1, 2006, March 1, 2008 and November 1, 2008, respectively.
The 9 7/8% Notes, 8% Notes and 9 1/2% Notes contain restrictive covenants,
including limitations on future indebtedness, restricted payments, transactions
with affiliates, liens, dividends, mergers and transfers of assets, all of which
were met by us as of February 26, 2000.
We believe that the cash flow from operations and availability under the
Bank Credit Facility will provide adequate funds for our working capital needs,
planned capital expenditures and debt service requirements through the term of
the Bank Credit Facility. We believe that we will be able to refinance the Bank
Credit Facility prior to its termination, although there can be no assurance
that we will be able to do so. Our ability to fund our operations, make planned
capital expenditures, make scheduled payments and refinance our indebtedness
depends on our future operating performance and cash flow, which, in turn, are
subject to prevailing economic conditions and to financial, business and other
factors, some of which are beyond our control.
DEFERRED TAX ASSETS
We have established a valuation allowance related to the utilization of
our deferred tax assets because of uncertainties that preclude us from
determining that it is more likely than not that we will be able to generate
taxable income to realize such asset during the federal operating loss
carryforward period, which begins to expire in 2012. Such uncertainties include
cumulative losses incurred by us during both of the past two years, the highly
cyclical nature of the industry in which we operate, economic conditions in
Asia that are impacting the airframe manufacturers and the airlines, our high
degree of financial leverage, risks associated with new product introductions,
recent increases in the costs of fuel and its impact on our airline customers,
remediation of our Seating Products operating problems and risks associated
with the integration of our acquired businesses. We monitor these uncertainties
as well as other positive and negative factors that may arise in the future, as
we assess the necessity for a valuation allowance for our deferred tax assets.
YEAR 2000 COSTS
We have successfully addressed the year 2000 ("Y2K") problem. Our
achievement was accomplished through focus and execution in the following areas:
o Assessment
o Remediation and Testing
o Program to Assess and Monitor Progress of Third Parties
A Y2K compliant Enterprise Resource Planning ("ERP") application was
implemented in nine of our facilities, including our largest operating
facilities. We also upgraded our remaining sites' ERP applications to Y2K
certified releases, as well as shop floor microchip enhanced equipment. In all
cases at every facility there were no material issues resulting from Y2K.
We also contacted all vendors and compiled an electronic file of
correspondence tracking and measuring vendor Y2K compliance capabilities. There
have been no material Y2K related issues related to delivery of product from our
vendors.
We ensured our communications infrastructure including, but not limited
to, hubs, routers, personal computers, desktop software, frame relay, PBX's,
T1's, vendors and servers, were Y2K ready. No interruption of business resulted
from Y2K issues.
We checked and replaced all potential problems with our facilities'
environmental items such as HVAC, elevators and security systems. There have
been no facility issues related to Y2K issues.
Through February 26, 2000, we incurred approximately $39,179 associated
with the implementation of our ERP system. A portion of these costs have been
capitalized to the extent permitted under accounting principles generally
accepted in the United States of America. We do not expect future costs related
to the year 2000 to be material. We will continue to monitor our critical
computer applications throughout the year 2000 to ensure that any latent year
2000 matters that may arise are promptly addressed.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, which we are required to adopt effective in
our fiscal year 2002. SFAS No. 133, as amended, will require us to record all
derivatives on the balance sheet at fair value. We do not currently engage in
hedging activities and will continue to evaluate the effect of adopting SFAS
No. 133. We will adopt SFAS No. 133 in our fiscal year 2002.
RISK FACTORS
INDUSTRY CONDITIONS
Our principal customers are the world's commercial airlines. As a result,
our business is directly dependent upon the conditions in the highly cyclical
and competitive commercial airline industry. In the late 1980s and early 1990s,
the world airline industry suffered a severe downturn, which resulted in record
losses and several air carriers seeking protection under bankruptcy laws. As a
consequence, during such period, airlines sought to conserve cash by reducing or
deferring scheduled cabin interior refurbishment and upgrade programs and
delaying purchases of new aircraft. This led to a significant contraction in the
commercial aircraft cabin interior products industry and a decline in our
business and profitability. Since early 1994, the airlines have experienced a
turnaround in operating results, leading the domestic airline industry to record
operating earnings during calendar years 1995 through 1998. This financial
turnaround was, in part, driven by record load factors, rising fare prices and
declining fuel costs. Airline company balance sheets have been substantially
strengthened and their liquidity enhanced as a result of their record
profitability, debt and equity financings and a closely managed fleet expansion.
Recent increases in fuel prices have not had a material impact on the airline
industry to-date. However, should fuel prices continue at or above the current
level for a prolonged period, we would expect to see the airline industry's
profitability will be impacted and discretionary airline spending may be more
closely monitored or even reduced.
In addition, the airline industry is undergoing a process of consolidation
and significantly increased competition. Such consolidation could result in a
reduction of future aircraft orders as overlapping routes are eliminated and
airlines seek greater economies through higher aircraft utilization. Increased
airline competition may also result in airlines seeking to reduce costs by
promoting greater price competition from airline cabin interior products
manufacturers, thereby adversely affecting our revenues and margins.
Recently, turbulence in the financial and currency markets of many Asian
countries has led to uncertainty with respect to the economic outlook for these
countries. Of our $470,000 of backlog at February 26, 2000, approximately
$279,000 is deliverable by the end of fiscal 2001. Of the total backlog at
February 26, 2000, we had approximately $58,000 with Asian carriers. Of such
Asian carrier backlog, approximately $17,000 is with Japan Airlines, Singapore
Airlines and Cathay Pacific. Although not all carriers have been affected by the
current economic events in the Pacific Rim, certain carriers, including
non-Asian carriers that have substantial Asian routes, could cancel or defer
their existing orders. In addition, in December 1998, Boeing announced that in
light of the continued economic conditions in Asia, it would be reducing
production of a number of aircraft types, including particularly wide-body
aircraft that require almost four times the dollar content for our products as
compared to narrow-body aircraft.
SEATING PRODUCTS OPERATIONS
During the latter part of fiscal 1999 and throughout fiscal 2000, our
seating operations negatively impacted operating results. The operating
inefficiencies resulted in delayed deliveries to customers, increased re-work of
seating products, claims for warranty, penalties, out of sequence charges,
substantial increases in air freight and other expedite-related costs. Late
customer deliveries have resulted in certain airlines diverting seating programs
to other manufacturers and the deferrals of other seating programs.
The aggregate impact of these operating inefficiencies, penalties, and
product line rationalization costs was to increase cost of sales and operating
expenses by $94,375 during fiscal 2000. We believe we have addressed the
problems we identified through a number of current initiatives. Future margin
expansion will largely depend on the success of our seating business in four
areas:
o achieving planned efficiencies for recently-introduced products,
o optimizing manufacturing processes with the new management information
system,
o successfully implementing lean manufacturing techniques and
o rationalizing facilities and personnel.
While our manufacturing productivity and efficiencies have improved
recently, there can be no assurance that the rate of these improvements will
continue or that we will not discover other inefficiencies in our seating
operations.
SIGNIFICANT INDEBTEDNESS AND INTEREST PAYMENT OBLIGATIONS
We have substantial indebtedness and, as a result, significant debt
service obligations. As of February 26, 2000, indebtedness outstanding was
$621,925 and represented 90% of total capitalization.
The degree of our leverage could have important consequences to purchasers
or holders of our common stock, including:
o limiting our ability to obtain additional financing to fund our
growth strategy, working capital, capital expenditures, debt service
requirements or other purposes,
o limiting our ability to use operating cash flow in other areas of our
business because we must dedicate a substantial portion of these
funds to make principal payments and fund debt service,
o increasing our vulnerability to adverse economic and industry
conditions and
o increasing our vulnerability to interest rate increases because
borrowings under our Bank Credit Facility are at variable interest
rates.
Our ability to pay interest on the notes and to satisfy our other debt
obligations will depend upon, among other things, our future operating
performance and our ability to refinance indebtedness when necessary. Each of
these factors is to a large extent dependent on economic, financial, competitive
and other factors, beyond our control. If, in the future, we cannot generate
sufficient cash from operations to make scheduled payments on the notes or to
meet our other obligations, we will need to refinance, obtain additional
financing or sell assets. We cannot assure you that our business will generate
cash flow, or that we will be able to obtain funding, sufficient to satisfy our
debt service requirements.
RESTRICTIONS IN DEBT AGREEMENTS ON OUR OPERATIONS
The operating and financial restrictions and covenants in our existing
debt agreements, including our Bank Credit Facility, the indentures governing
the 9 7/8% Notes, the 8% Notes, the 9 1/2% Notes and any future financing
agreements may adversely affect our ability to finance future operations or
capital needs or to engage in other business activities. A breach of any of
these restrictions or covenants could cause a default under the bank credit
facilities and the notes. A significant portion of our indebtedness then may
become immediately due and payable. We are not certain whether we would have, or
be able to obtain, sufficient funds to make these accelerated payments,
including payments on the notes.
NEW PRODUCT INTRODUCTIONS AND TECHNOLOGICAL CHANGE
Airlines currently are taking delivery of a new generation of aircraft and
demanding increasingly sophisticated cabin interior products. As a result, the
cabin interior configurations of commercial aircraft are becoming more complex
and will require more technologically advanced and integrated products. Our
future success may depend to some extent on our ability to continue to develop,
profitably manufacture and deliver, on a timely basis, other technologically
advanced, reliable high-quality products, which can be readily integrated into
complex cabin interior configurations. See "Business-Products and Services."
COMPETITION
We compete with a number of established companies that have significantly
greater financial, technological and marketing resources than we do. Although we
have achieved a significant share of the market for a number of our commercial
airline cabin interior products, there can be no assurance that we will be able
to maintain this market share. Our ability to maintain our market share will
depend on our ability to remain the supplier of retrofit and refurbishment
products and spare parts on the commercial fleets on which our products are
currently in service. It will also depend on our success in causing our products
to be selected for installation in new aircraft, including next-generation
aircraft, expected to be purchased by the airlines over the next decade, and in
avoiding product obsolescence.
GENERAL AVIATION ACQUISITIONS; ABILITY TO INTEGRATE ACQUIRED BUSINESSES;
ADDITIONAL CAPITAL REQUIREMENTS
Between 1989 and January 1996, we acquired nine companies. During fiscal
1999, we acquired six additional companies. See "Business-Introduction." Through
several of these recent acquisitions, we have expanded our activities from the
commercial to the general aviation market. There can be no assurance that we
will be successful in entering the general aviation market. We intend to
consider future strategic acquisitions in the commercial airline and general
aviation cabin interior industries, some of which could be material to us. We
are in discussions from time to time with one or more third parties regarding
possible acquisitions. As of the date of this Form 10-K, we have no agreement or
understanding on any acquisition. Our ability to continue to achieve our goals
will depend upon our ability to integrate effectively the recent and any future
acquisitions and to achieve cost efficiencies. Although we have been successful
in the past in doing so, we may not continue to be successful. See
"Business-Competitive Strengths."
We have recorded $459,175 of inta