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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 0-22371
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DECRANE HOLDINGS CO.
(Exact name of registrant as specified in its charter)
DELAWARE 13-4019703
(State or Other Jurisdiction (I.R.S. Employer
of Identification No.)
Incorporation or Organization)
C/O DLJ MERCHANT BANKING PARTNERS II, L.P.
277 PARK AVENUE, NEW YORK, NY 10172
(212) 892-3000
(Address of Principal Executive Offices)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] YES [ ] NO
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 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 number of shares of Common Stock outstanding on March 30, 2000 was
3,571,827.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
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DECRANE HOLDINGS CO.
TABLE OF CONTENTS
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
PAGE(S) IN
FORM
10-K
----------
PART I
Item 1. Description of Business......................... 1
Item 2. Properties...................................... 14
Item 3. Legal Proceedings............................... 15
Item 4. Submission Of Matters To A Vote Of Security
Holders................................................... 15
PART II
Item 5. Market For Registrant's Common Equity and
Related Stockholder Matters............................... 15
Item 6. Selected Financial Data......................... 16
Item 7. Management's Discussion And Analysis Of
Financial Condition And Results Of Operation.... 18
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk............................................... 28
Item 8. Financial Statements And Financial Statement
Schedules................................................. 29
Item 9. Changes In And Disagreements With Accountants On
Accounting And Financial Disclosure............. 74
PART III
Item 10. Directors And Executive Officers Of The
Registrant................................................ 75
Item 11. Executive Compensation.......................... 77
Item 12. Security Ownership Of Certain Beneficial Owners
And Management............................................ 81
Item 13. Certain Relationships And Related
Transactions.............................................. 83
PART IV
Item 14. Exhibits, Financial Statement Schedules, And
Reports On Form 8-K....................................... 85
Signatures.................................................. 88
i
PART I
DECRANE HOLDINGS CO. IS A HOLDING COMPANY AND DOES NOT HAVE ANY MATERIAL
OPERATIONS OR ASSETS OTHER THAN ITS OWNERSHIP OF THE CAPITAL STOCK OF DECRANE
AIRCRAFT HOLDINGS, INC. DECRANE HOLDINGS CO. AND DLJ MERCHANT BANKING PARTNERS
II, L.P. AND ITS AFFILIATES ACQUIRED DECRANE AIRCRAFT IN AUGUST 1998. DECRANE
AIRCRAFT IS THE PREDECESSOR OF DECRANE HOLDINGS.
AS USED IN THIS REPORT, UNLESS THE CONTEXT INDICATES OTHERWISE, "DECRANE
HOLDINGS" AND "WE," "US," "OUR," AND SIMILAR TERMS REFER TO THE COMBINED
BUSINESS OF DECRANE HOLDINGS CO. (AND DECRANE AIRCRAFT, OUR PREDECESSOR) AND ALL
OF ITS SUBSIDIARIES, COLLECTIVELY. EXCEPT WHERE WE INDICATE OTHERWISE, THIS
REPORT PRESENTS ALL INFORMATION ON A "PRO FORMA" BASIS, GIVING EFFECT TO ALL OF
THE TRANSACTIONS REFERRED TO IN NOTES 2, 3 AND 4 OF OUR FINANCIAL STATEMENTS,
INCLUDING THE ACQUISITION OF DECRANE AIRCRAFT BY DECRANE HOLDINGS AND DLJ AND
DECRANE AIRCRAFT'S ACQUISITIONS DESCRIBED IN OUR FINANCIAL STATEMENTS.
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
Since our founding in 1989, through acquisitions and internal growth, we
have become one of the premier suppliers to the general aviation market. We
offer a complete line of interior cabin furniture, galleys, seating, and
entertainment systems for corporate aircraft. In addition, we manufacture
aviation electronic components, referred to as avionics, and provide systems
integration services. We sell our products in the corporate, commercial
(including regional), retrofit, aftermarket and military aircraft markets.
Within these markets, our customers include original manufacturers of aircraft
and related avionics equipment, commonly referred to as OEM's, major components
suppliers, aircraft repair and modification centers and commercial airlines. For
the year ended December 31, 1999, we generated revenues and EBITDA (as defined)
of $244.0 million and $56.5 million, respectively.
During 1998 and 1999, we completed and integrated eight acquisitions,
increasing our diversification within the aircraft industry and reducing our
reliance on the commercial aircraft market. We have built a leading position in
a number of niche markets in the aircraft industry. The substantial majority of
our revenue is generated by businesses in which we have a leading market share.
In order to take advantage of the complementary nature of our various product
offerings, to rationalize and consolidate the operations of each of our separate
companies and to provide even higher levels of customer service, in 1999 we
reorganized our related businesses into three separate operating groups: Cabin
Management, Specialty Avionics and Systems Integration.
THE CABIN MANAGEMENT GROUP. We are the leading independent provider of
cabin management products for the corporate aircraft market, serving major
manufacturers such as Boeing Business Jet, Bombardier, Cessna, Dassault,
Gulfstream and Raytheon. We provide a full line of interior cabin components,
including seats, furniture, cabinetry, galleys, in-flight entertainment systems,
sidewalls and headliners, which are either sold separately or as a
pre-engineered, pre-fabricated set. Our "cabinet-in-a-box" product offers
customized, pre-engineered, pre-fit interior cabinetry and galley kits to
corporate jet OEM's and independent completion centers. We also have developed
and are currently marketing our "cabin-in-a-box" product, which is comprised of
a customized, pre-engineered, pre-fit cabin interior system, including
furniture, galleys, seats, audio-visual entertainment systems, lighting,
sidewalls, headliners and electrical control units. Our cabin-in-a-box product
will enable our customers to rely on us as the single source for cabin-related
products. We estimate that this product could decrease cycle times by 15% to
20%, offering significant cost reduction opportunities to our customers, and
could increase the dollar content per plane for us. The Cabin Management Group
contributed approximately 42% of our pro forma revenue for the twelve months
ended December 31, 1999.
THE SPECIALTY AVIONICS GROUP. This group designs, engineers and
manufactures electronic components, electronic display devices and interconnect
components and assemblies. Among the products offered by this group are flight
deck communications and audio power control equipment, harness assemblies and
connectors, power and signal contact products and liquid crystal display
devices, commonly referred to as LCD's. Customers of this group include Airbus,
Boeing, Honeywell, Matsushita, and Rockwell Collins. The Specialty Avionics
Group contributed approximately 38% of our pro forma revenue for the twelve
months ended December 31, 1999.
1
THE SYSTEMS INTEGRATION GROUP. This group provides auxiliary fuel tanks,
auxiliary power units and system integration services, including engineering,
kit manufacturing, installation and certification. Customers of this group
include Boeing Business Jet, Bombardier, Cessna, Gulfstream, Raytheon and
Rockwell Collins. The Systems Integration Group contributed approximately 20% of
our pro forma revenue for the twelve months ended December 31, 1999.
INDUSTRY OVERVIEW AND TRENDS
We sell our products in the corporate, commercial, retrofit, aftermarket and
military aircraft markets. Within these markets, our customers include original
manufacturers of aircraft and related avionics equipment, major component
suppliers, aircraft repair and modification centers and commercial airlines.
The leading manufacturers of corporate aircraft include Airbus, Boeing
Business Jet, Cessna, Dassault, Gulfstream and Raytheon, while the leading
manufacturers of regional aircraft include Bombardier, Embraer and Fairchild
Dornier. Airbus and Boeing are the primary manufacturers of commercial aircraft
designed to carry 100 or more passengers. The major systems installed on new
aircraft, such as flight deck avionics systems, are produced by a limited number
of manufacturers, including Honeywell, Rockwell Collins and Sextant Avionique.
The integration of new systems into existing aircraft, referred to as the
retrofit market, and the manufacture and sale of replacement products for
existing aircraft, referred to as the aftermarket, are served by a highly
fragmented group of companies, including many of the foregoing manufacturers and
a number of smaller, specialized companies. We market our commercial aircraft
products directly to the aircraft manufacturers as well as to the manufacturers
of major aircraft sub-systems. In some cases, we sell our products to competing
manufacturers.
We believe the following characteristics of our markets have contributed to
our growth and profitability and should provide further opportunities for our
success:
- INCREASED DEMAND FOR NEW CORPORATE AIRCRAFT. The Teal Group Corporation,
an industry-recognized aerospace research group, projects delivery of
5,067 corporate aircraft between 1999 and 2008, representing an increase
of approximately a 52% over the 3,326 aircraft that were delivered between
1989 and 1998. We believe that the following factors have driven increased
demand for new corporate aircraft:
- the growing popularity of fractional aircraft ownership in the United
States and the expansion of this form of ownership to Europe and the
Far East;
- the introduction of new, larger and more efficient aircraft, including:
- several new middle-to high-end corporate aircraft, such as the
Airbus CJ, Boeing Business Jet, and Bombardier Global Express; and
- additional new model aircraft, such as the Bombardier Continental,
Cessna Sovereign, and Raytheon Horizon, which are expected to be
introduced in the next few years;
- the need for long range flights to expanding international markets;
- the increased demand for more expedient travel;
- the worldwide threat of terrorism; and
- the perceived decline in the level of service afforded commercial
airline passengers.
- INCREASED LONG-TERM DEMAND FOR NEW COMMERCIAL AIRCRAFT. The 1999 CURRENT
MARKET OUTLOOK, released by The Boeing Company in June 1999, projects that
the world jetliner fleet will grow from 12,600 aircraft at the end of 1998
to 19,100 aircraft by 2008, and to 28,400 aircraft by 2018. The report
also projects that, between 1999 and 2008, the commercial aircraft
industry will require 8,900 new commercial aircraft, and between 2009 and
2018, it will require an additional 11,250 aircraft, both to support the
projected world fleet expansion and to replace capacity lost as aircraft
are removed from commercial airline service. Despite the increases
projected for the commercial aircraft industry generally, Boeing has
announced production cutbacks in several of its lines for 2000 and 2001,
and our sales to Boeing have decreased. For example, Boeing deliveries of
its 747, 767 and 777 airplanes have declined due to the recent financial
difficulties of many Asian carriers.
2
- INCREASED DEMAND FOR NEW REGIONAL AIRCRAFT. As part of the total projected
increase for the commercial aircraft fleet, Boeing's 1999 CURRENT MARKET
OUTLOOK projects a compounded annual growth rate of 9.4% for the regional
aircraft fleet from 1999 to 2008. We believe that the projected increase
in the regional aircraft fleet is driven by the following factors:
- the introduction of new regional aircraft with state-of-the-art
cockpits and the same safety equipment as larger commercial aircraft;
- continued integration of the services of regional carriers with major
carriers;
- newer longer-range turboprop and jet aircraft that allow regional
carriers to consider new "point-to-point" routes, which would permit
passengers to bypass hubs; and
- upgraded airport facilities for regional passengers.
- INCREASED DEMAND FOR CABIN MANAGEMENT SYSTEMS. As businesses become
increasingly dependent on new technology, passengers are demanding more
advanced in-flight services, particularly in the corporate aircraft
market. These services include in-flight passenger telecommunications
systems and in-flight entertainment systems, such as video,
video-on-demand and other interactive systems. We believe that demand for
systems in the passenger cabin, as well as avionics systems on the flight
deck, is increasing as a result of:
- a desire by airlines for additional revenue-producing services;
- longer flights combined with a demand by passengers for more
sophisticated forms of in-flight services and entertainment; and
- the advent of new technologies and Federal Aviation Administration
mandates related to aircraft safety and navigation.
In corporate aircraft for example, Honeywell's AIS-1000 OneView-TM-
Airborne Information System delivers more than 40 channels of live
television programming and Internet and e-mail access to corporate
aircraft via direct broadcast satellite service providers.
- SIGNIFICANT BARRIERS TO ENTRY. We believe that there are many barriers to
entry that limit access to the aircraft industry, including:
- the reluctance of aircraft manufacturers to include new companies as
additional approved vendors on their engineering drawings, a favored
status often called "print position";
- the general FAA certification requirements necessary to perform
aircraft modifications or maintenance;
- the required compliance with FAA aircraft manufacturing and aircraft
modification design and installation standards;
- the required compliance with specifications for some products sold to
commercial and military markets;
- the required compliance with qualification and approval standards
imposed by aircraft and electronic systems manufacturers; and
- the initial capital investment and tooling requirements necessary for
the manufacture of some aircraft components and systems.
- REDUCTION IN NUMBER OF APPROVED SUPPLIERS AND VENDORS. Commercial airlines
have come under increasing pressure to reduce the operating and capital
costs associated with providing services. As a result, many OEM's are
initiating proactive programs to reduce cycle times, decrease inventory
and reduce costs. Boeing, for example, has announced that it intends to
reduce its number of suppliers by 19%, from 31,000 to 25,000, by the end
of 2000 and by 42% over the long term. Manufacturers can realize
efficiencies by purchasing a higher number of assemblies from a smaller
number of suppliers, each of whom has multiple related product capability.
- NEW SAFETY MANDATES. New technologies and FAA mandates are driving a
proliferation of new safety systems for airplanes. The world's airlines
and aircraft and electronic systems manufacturers have cooperated with
regulatory agencies in the development of industry standards, regulations
and system
3
requirements for future air navigation systems. We expect that this
initiative will drive a complete modernization of both airborne and
ground-based air traffic management systems. As navigation technology
becomes more accurate, new navigation systems such as global positioning
systems may become federally required. Other new technologies, which have
already been mandated, include traffic collision avoidance systems, cargo
hold fire detection and suppression systems, and windshear detection
systems. In anticipation of new FAA recommendations and mandates, many
airlines have already begun to install enhanced ground proximity warning
systems, predictive windshear detection systems and enhanced digital
flight data recorders. These safety mandates should provide significant
retrofit opportunities for the commercial fleet, which today exceeds
12,000 aircraft.
ACQUISITION HISTORY
DeCrane Aircraft was formed in 1989 to capitalize on emerging trends in the
aircraft market through acquisitions. Since our formation, we have completed
seventeen acquisitions, summarized as follows:
PRINCIPAL PRODUCTS AND SERVICES
ACQUIRED ENTITY OR ASSET AT THE TIME OF THE TRANSACTION
- ----------------------------------------------- -----------------------------------------------
1990
1 Hollingsead International Avionics support structures
1991
2 Tri-Star Electronics International Contacts and connectors
3 Tri-Star Europe Contact blanks
4 Tri-Star Technologies Wire marking equipment
5 Cory Components Connectors & harness assemblies
1996
6 Aerospace Display Systems Dichroic liquid crystal displays
7 Elsinore Engineering Engineering services
8 AMP manufacturing facility Contact blanks
1997
9 Audio International Cabin management & entertainment products
1998
10 Avtech Cockpit audio, lighting, power & control
11 Dettmers Industries Corporate aircraft seats
1999
12 PATS Auxiliary fuel & power systems
13 PPI Aircraft furniture components
14 Custom Woodwork and Plastics Aircraft furniture components
15 PCI NewCo Composite material components
16 International Custom Interiors Aircraft furniture components
17 Infinity Partners Aircraft furniture components
COMPETITIVE STRENGTHS
We have used our strong market positions to compete more effectively, to
capitalize on industry consolidation trends and to cross-sell products to our
existing customer base. We believe that we are well-positioned to take advantage
of the foregoing trends and expected growth in the aircraft industry as a result
of the following competitive strengths:
- LEADING POSITIONS IN NICHE MARKETS. We are a leading provider of
components within a number of the niche markets we serve. Our strategy has
been to combine complementary businesses in markets in which we have a
leading position, thereby increasing sales volume with our customers and
strengthening our competitive position. The substantial majority of our
revenue is generated by businesses in which we have a leading market
share. We believe our combination of component manufacturing and
integration and installation capabilities provides us with competitive
advantages. The combination of product lines we offer provides
opportunities for our customers to deal with a reduced number of vendors
and suppliers, to reduce the number of component parts through the
purchase of sub-assemblies and to reduce cycle times, all of which help to
reduce costs and simplify the production process.
4
- STRONG CUSTOMER RELATIONSHIPS. Through our acquisitions and as a result of
our performance, we have enjoyed long-term relationships with leaders in
our primary markets, including Boeing and Boeing Business Jet, Bombardier,
Cessna, Gulfstream, Honeywell, Matsushita, Raytheon, and Rockwell Collins.
We believe we have been able to develop and solidify these relationships
by combining production and engineering capabilities, providing
engineering support services and enhancing our customers' in-house
production processes.
- DIVERSIFIED REVENUE BASE. We sell our products in the corporate,
commercial, retrofit, aftermarket and military aircraft markets. Within
these markets, our customers include original manufacturers of aircraft
and related avionics equipment, aircraft repair and modification centers,
and airlines. Each of these markets has different demand drivers and
operates on different production cycles. Accordingly, our involvement in
these multiple markets reduces our exposure to cyclical product demand in
any one segment of the aircraft industry. Demand for new products in the
commercial aircraft market, for example, is driven largely by the age of
the existing commercial fleet, the growth in revenue passenger miles and
industry load factors, whereas demand in the corporate aircraft market is
driven largely by the growth in fractional ownership, competition from
commercial airlines and the growth in the global economy. Our aftermarket
sales are dependent in part upon the growing number of aircraft in the
existing fleet while technology advances and safety updates help drive
demand in the retrofit market.
- COMPLEMENTARY AND STRATEGICALLY INTEGRATED BUSINESS LINES. Since 1989, we
have completed seventeen acquisitions of businesses and assets. We believe
that our acquisitions complement each other and create a core of
interrelated products and services, which increases our cross-selling
opportunities to existing and new customers. The complementary nature of
our business lines should allow us to help our customers reduce their
production costs. For example, our acquisitions of PPI, Custom Woodwork,
International Custom Interiors and Infinity, corporate aircraft
furnishings manufacturers; Dettmers, a corporate aircraft seat
manufacturer; and Audio International, a corporate aircraft entertainment
and cabin management product manufacturer; should enable us to offer a
more integrated set of products and services to the middle and high-end
corporate aircraft market.
- LOW-COST, HIGH-QUALITY OPERATIONS. We have established low-cost operations
through cost reduction programs, technological development and, where
appropriate, the use of vertical integration. For example, our low-cost
production capabilities, coupled with our focus on delivering high-quality
products, has enabled us to grow the number of programs under which we
supply electrical contacts to many of our competitors.
We use sophisticated processes to ensure that our products meet or exceed
industry and customer quality requirements. Many customers formally have
recognized the effectiveness of our quality programs by issuing quality
approval letters, awarding quality compliance certificates and authorizing
our inspection personnel to act as their authorized quality certification
representatives. For example, four of our facilities have received a
quality award from Boeing, and nine of our facilities are currently
certified according to the International Standards Organization
specifications ISO-9001 or ISO-9002.
- REGULATORY CERTIFICATIONS. We believe our FAA-certified airframe and
power-plant mechanics who are authorized to perform specified aircraft
modification functions provide us with a significant competitive
advantage. As of December 31, 1999, our subsidiaries include one of only
31 currently active FAA Designated Alteration Stations worldwide, hold
nine FAA domestic repair station certificates and hold numerous Parts
Manufacturer Approval authorizations from the FAA. These certifications
make us one of a few companies with the in-house capability to design,
engineer, produce, install and certify a part, which together help reduce
cycle times.
GROWTH STRATEGY
Our principal strategy is to establish and expand leading positions in
high-margin, niche markets within the corporate, commercial, retrofit,
aftermarket and military aircraft markets. We focus on the manufacture of
corporate aircraft interiors and avionics equipment and the integration of
avionics systems. We also seek to maintain a balance of revenues among the
equipment manufacturer market, the retrofit market and the aftermarket. We
believe that this strategy positions us for future success by:
- BROADENING SALES TO EXISTING CUSTOMER BASE. We have relationships with
virtually every major OEM and with fractional ownership programs, such as
Executive Jet. We plan to continue cross-selling our
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portfolio of products to our existing customer base in order to increase
our dollar content per plane. For example, we originally entered the
corporate aircraft market by offering cabin management systems and
entertainment systems. We then expanded our product offering to include
seating and in 1999, through four separate acquisitions, we added
cabinetry and galley products, which we sell to OEM's. Finally, we
developed pre-fabricated interior kits, cabinet-in-a-box and
cabin-in-a-box, to facilitate cross-selling and further encourage OEM's to
outsource their cabin engineering requirements to us. We believe these
products should reduce cycle times and costs for manufacturers and
increase our dollar content per plane. We currently provide
cabinet-in-a-box kits to several of our customers and are in discussions
with a number of corporate jet manufacturers regarding our cabin-in-a-box
product.
- STRENGTHENING POSITION IN NICHE MARKETS. We plan to continue to strengthen
our position in niche markets by providing engineering and customer
service support to our existing customer base through the integration of
our engineering services with the OEM's engineering capabilities. We also
plan to continue to examine new market niches and consolidate the
fragmented sectors in our markets to further service our customers. We
target for acquisition aircraft component manufacturers and systems
integration and installation providers that meet the following criteria:
- are complementary to our existing businesses;
- have a leading market share in their own niches;
- leverage our existing strengths;
- add new expertise; and/or
- increase cross-selling opportunities.
In analyzing a potential acquisition's value, we focus on economies of
scale, product line extensions, new customer relationships, increased
manufacturing capacity and opportunities for increased cost reductions.
- CONTINUING OPERATIONAL EFFICIENCY IMPROVEMENTS. We are taking advantage of
areas of synergies across and within our three business segments by making
operational efficiency improvements in human resources, support,
procurement and cross-selling. For example, we recently formed the Systems
Integration Group to leverage the engineering capabilities of our
Hollingsead subsidiary with the manufacturing and systems integration and
installation capabilities of our PATS subsidiary. In addition, as part of
the Systems Integration Group's strategy, we are consolidating facilities,
reducing headcount and replacing relatively expensive manufacturing at
Hollingsead with more economical outsourced products. This will allow
Hollingsead to focus on its core engineering and systems integration
competencies. We are also standardizing processes and centralizing
procurement at our four recently acquired cabin furniture companies, and
we continue to evaluate our operations to streamline or increase
efficiencies.
- EXPANDING PRODUCT DEVELOPMENT. Development of advanced cabin features
increases demand for many of our products and provides attractive
cross-selling opportunities. For example, our newly introduced e-CABIN, an
"office in the sky," provides leading-edge business and entertainment
services for the corporate jet cabin and its passengers. Our e-CABIN
provides each passenger with on-demand audio and video entertainment,
including live television and Internet and e-mail access via Honeywell's
OneView system. We will continue considering strategic partnerships with
leading technology companies to keep our product offerings on the cutting
edge, as we have done with Honeywell and its OneView system.
6
PRODUCTS AND SERVICES
Our principal products and services, on a pro forma basis, are:
YEAR ENDED
DECEMBER 31, 1999
PRO FORMA
PRINCIPAL PRODUCTS AND SERVICES REVENUES
- ------------------------------------------------------------ ------------------
CABIN MANAGEMENT GROUP
Interior furnishings, seating, composite components, and
entertainment and cabin control systems................... 42.4%
SPECIALTY AVIONICS GROUP
Cockpit audio, communication, lighting and power and control
devices, electrical contacts, connectors and harness
assemblies, liquid crystal display devices, and wire
marking and crimping equipment............................ 37.7
SYSTEMS INTEGRATION GROUP
Auxiliary fuel systems and power units, and integration of
cabin and fight deck systems.............................. 19.9
--------------
Consolidated pro forma revenues......................... 100.0%
==============
We believe historical data about our products and services is not meaningful
because it is not reflective of the companies we have recently acquired and the
products and services they provide. Historical data is presented in Note 19 of
our financial statements.
CABIN MANAGEMENT GROUP. This group provides a full line of interior cabin
components and services for the middle- to high-end corporate aircraft market.
- INTERIOR FURNISHINGS, SEATING AND COMPOSITE COMPONENTS. We design,
engineer and manufacture customized, pre-fit products and provide services
including:
INTERIOR FURNISHINGS
- entertainment and refreshment centers;
- conference tables;
- hi-low dining/coffee tables;
- end tables;
- cabinets;
- arm and side ledges;
- galleys;
- lavatories;
- vanities;
- room enclosures;
- cabinetry refurbishment services;
SEATING
- - executive track and swivel seats;
- - jump-seats;
- - divans, including models that convert to beds or contain storable tables;
- - upholstery services;
COMPOSITE COMPONENTS
- - sound-damping side walls and headliners;
- - passenger service units;
- - environmental (HVAC) ducting; and
- - closets.
Many of our products are made with what we believe to be high quality
veneers, leathers and fabrics and lightweight structural aluminum
honeycomb or foam- or balsa-core composites reinforced with Kevlar-TM-,
Nomex-TM-, graphite or fiberglass.
- ENTERTAINMENT AND CABIN CONTROL SYSTEMS. We design to customer
specifications, engineer and manufacture fully-integrated in-flight
entertainment and cabin management systems, including audio-video
entertainment systems, cabin lighting, passenger switching and control
modules, chimes and paging systems and headphone systems. Our
entertainment systems include video on demand, and our cabin lighting
products include both halogen and flat-candle fluorescent illumination.
The fully-integrated systems are operated with our passenger switching and
control modules, which includes membrane-type and touch-screen models. We
recently introduced a new fiber-optic based technology for our systems
that replaces traditional wire harnesses with lightweight fiber-optic
cable.
SPECIALTY AVIONICS GROUP. This group designs, engineers and manufactures
electronic components and display devices, interconnect components and
assemblies.
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- COCKPIT AUDIO, COMMUNICATION, LIGHTING AND POWER AND CONTROL DEVICES. We
are a leading manufacturer of cockpit audio, lighting and power and
control devices used in commercial, regional and corporate aircraft. We
also manufacture a variety of other commercial aircraft safety system
components, including warning tone generators, temperature and de-icing
monitoring systems, steep approach monitors and low voltage power supplies
for traffic collision avoidance systems.
- ELECTRICAL CONTACTS. Contacts conduct electronic signals or electricity
and are installed at the terminus of a wire or an electronic or electrical
device. We supply precision-machined contacts for use in connectors found
in virtually every electronic and electrical system on a commercial
aircraft. We sell contacts directly to aircraft and related electronics
manufacturers and, through our private labeling programs, to several major
connector manufacturers who sell connectors to the same markets under
their brand name.
- CONNECTORS AND HARNESS ASSEMBLIES. Electronic and electrical connectors
link wires and devices in avionics systems, and permit their assembly,
installation, repair and removal. Our connectors are specially
manufactured to meet the critical performance requirements demanded by
manufacturers and required in the harsh environment of an operating
aircraft. We produce connectors that are used in aircraft galleys, flight
decks and control panels in the passenger cabin. We also produce wire
harness assemblies for use in cabin avionics systems, from wire,
connectors, contacts and hardware. We typically sell our harness
assemblies to manufacturers of aircraft electronic systems. In addition,
we incorporate and sell our harness assemblies as part of our systems
integration services.
- LIQUID CRYSTAL DISPLAY DEVICES. We manufacturer dichroic liquid crystal
displays, also known as LCD's, and modules used in commercial and military
aircraft. Modules are liquid crystal displays packaged with a backlight
source and additional on-board electronic components. Our products are
used in a variety of flight deck applications, such as flight control
systems, fuel quantity indicators, airborne communications and safety
systems. Dichroic liquid crystal display products are widely used in the
aircraft industry because they are easily adapted to custom design, and
they possess high performance characteristics, which include high
readability in sunlight and darkness, readability from extreme viewing
angles, and the ability to withstand wide temperature fluctuations. We
also manufacture electronic clocks, capable of serving all types of
aircraft, that use our liquid crystal display devices.
- WIRE MARKING AND CRIMPING EQUIPMENT. Wires running between the individual
contacts that comprise a connector are marked according to their function
and, in some applications, the contacts are crimped onto the wire. We
design and manufacture high-speed wire marking systems and portable
crimping machines used by harness manufacturers, wire mills, aircraft
manufacturers and the U.S. military.
SYSTEMS INTEGRATION GROUP. This group provides auxiliary fuel tank,
auxiliary power units and systems integration products and services, including
engineering, kit manufacturing, installation and certification.
- AUXILIARY FUEL SYSTEMS AND AUXILIARY POWER UNITS. We manufacture and
install auxiliary fuel tanks for commercial and corporate aircraft. Our
unique design and tank construction has made us a leader in the auxiliary
fuel tank market. We also manufacture auxiliary power units which provide
ground power to corporate jets made by Cessna, Gulfstream, Learjet and
Raytheon.
- INTEGRATION OF CABIN AND FLIGHT DECK SYSTEMS. We have designed and
patented a wide range of avionics support structures. These structures are
used to support and environmentally cool avionics equipment, including
navigation, communication and flight control equipment. We sell our
avionics support structures under the Box-Mount-TM- name. We sell these
support structures to aircraft and related electronics manufacturers,
airlines and major modification centers. In addition, these products are
essential components of the installation kits used in our systems
integration operations. We also perform all of the functions, including
design, engineering, certification, manufacturing and installation,
necessary to retrofit an aircraft with a new or upgraded avionics system.
INDUSTRY REGULATION
The aviation industry is highly regulated in the United States by the
Federal Aviation Administration and in other countries by similar agencies to
ensure that aviation products and services meet stringent safety and performance
standards. We and our customers are subject to these regulations. In addition,
many customers impose their own compliance and quality requirements on their
suppliers. The FAA prescribes
8
standards and licensing requirements for aircraft components, issues Designated
Alteration Station authorizations, and licenses private repair stations. Our
subsidiaries hold various FAA approvals, which may only be used by the
subsidiary obtaining such approval.
The FAA can authorize or deny authorization of many of the services and
products we provide. Any such denial would preclude our ability to provide the
pertinent service or product. If we failed to comply with applicable FAA
standards or regulations, the FAA could exercise a wide range of remedies,
including a warning letter, a letter of correction, a civil penalty action, and
emergency or non-emergency suspension or revocation of a certificate or
approval.
In July of 1997, the FAA notified us that our FAA-approved repair station
which holds Designated Alteration Station authorization did not fully comply
with some of the requirements for some of the FAA ratings that it held. The FAA
granted us until September 10, 1997 to bring the facility into full compliance,
and curtailed several operations of the repair station, including prohibiting
initiation of new projects under that authorization, until it achieved full
compliance. On August 28, 1997 the FAA inspected the repair station and
determined that it was in full compliance with all FAA requirements applicable
to Class III and Class IV Airframe ratings. The FAA issued a revised Air Agency
Certificate including those ratings, and removed the operating restrictions, as
of September 5, 1997.
The FAA also has the power to issue cease and desist orders and orders of
compliance and to initiate court action for injunctive relief. If the FAA were
to suspend or revoke our certificates or approvals on a nonemergency basis, we
would be permitted to continue making the products and delivering the goods
pending any available appeals, but would be required to stop if the FAA
eventually prevailed on appeal. If the FAA did so on an emergency basis, we
would be obliged to stop immediately the manufacturing of products and
delivering of services that require such certificate or approval. If the FAA
were to determine that noncompliance with its standards creates a safety hazard,
it also could order that the pertinent component or aircraft immediately cease
to be operated until the condition is corrected. This could require that
customers ground aircraft or remove affected components from aircraft currently
in service, both of which are expensive actions.
Each type of aircraft operated by airlines in the United States must possess
an FAA type certificate, generally held by the aircraft manufacturer, indicating
that the type design meets applicable airworthiness standards. When someone else
develops a major modification to an aircraft already type-certificated, that
person must obtain an FAA-issued Supplemental Type Certificate for the
modification. Historically, we have obtained several hundred of these
Supplemental Type Certificates, most of which we obtained on behalf of our
customers as part of our systems integration services. Some of these
certificates we obtain are or will eventually be transferred to our customers.
As of January 1, 2000, we own and/or manage 235 Supplemental Type Certificates.
Many are multi-aircraft certificates which apply to all of the aircraft of a
single type. We foresee the need to obtain additional Supplemental Type
Certificates so that we can expand the services we provide and the customers we
serve.
Supplemental Type Certificates can be issued for proposed aircraft
modifications directly by the FAA, or on behalf of the FAA by one of the 31
holders of currently active Designated Alteration Station authorizations as of
January 1, 2000. The FAA designates what types of Supplemental Type Certificates
can be issued by each Designated Alteration Station. Our subsidiary Hollingsead,
as one of the 31, can directly issue many of the Supplemental Type Certificates
we and our customers require for our systems integration operations. In many
cases, this has increased the speed with which we can obtain such certificates
and help bring our customers' systems to market.
After obtaining a Supplemental Type Certificate, a manufacturer must apply
for a Parts Manufacturer Approval from the FAA, or a supplement to an existing
Parts Manufacturer Approval, which permits the holder to manufacture and sell
installation kits according to the approved design and data package. We have
nine Parts Manufacturer Approvals and over 200 supplements to those approvals.
In general, each initial Parts Manufacturer Approval is an approval of a
manufacturing or modification facility's production quality control system. Each
Parts Manufacturer Approval supplement authorizes the manufacture of a
particular part in accordance with the requirements of the corresponding
Supplemental Type Certificate. We routinely apply for and receive such Parts
Manufacturer Approval supplements. In order to perform the actual installations
of a modification, we are also required to have FAA approval. This authority is
contained either in our Parts Manufacturer Approvals and related supplements, or
in our repair station certificates. In order for a company to perform most kinds
of repair, engineering, installation or other services on aircraft, its facility
9
must be designated as an FAA-authorized repair station. As of January 1, 2000,
we had nine authorized repair stations.
In addition to its approval of design, production, and installation, the FAA
certifies personnel. Several of our engineering personnel have been certified by
the FAA to perform specific tasks related to the design, production, and
performance of aircraft modifications. Such certified personnel include
mechanics and repairmen. The FAA also delegates some of its oversight
responsibilities, such as testing and inspection responsibilities, to
FAA-certified Designated Engineering Representatives. We employ or contract for
several of such designated representatives who evaluate engineering design data
packages, ensure compliance with applicable FAA regulations, oversee product
testing to ensure airworthiness, and work with the FAA to obtain approvals of
those data packages.
U. S. military specification standards are frequently used by both military
and commercial customers in the aircraft industry to define and control
characteristics of a product. Through the use of a government Qualified Parts
List and Qualified Vendor's List, a customer may be assured that a product or
service has met all of the requirements set forth in the military specification.
Parts listed with a Qualified Parts List allow others to reliably design parts
to interface with such parts as a result of the military specification standards
used. We believe that we hold more Qualified Parts Lists for our contact product
line than any other manufacturer.
SALES AND MARKETING
Product line managers and our product engineering staff provide technical
sales support for our direct sales personnel and agents. We may also assign
responsibility for marketing, sales and/or services for key customers to one of
our senior executives. We have nine authorized distributors who purchase, stock
and resell several of our product lines.
Our systems integration services are sold by sales managers on our staff who
are assigned to geographic territories. Because of the significant amount of
technical engineering work required in the sales process, our sales managers are
generally assisted by a support team of program management, installation and
engineering personnel. Each support team specializes in safety systems,
in-flight entertainment, or navigation systems. These support teams continue to
manage the project throughout the entire integration process.
CUSTOMERS
We estimate that in 1999, we sold our products and services to about 1,300
customers on a pro forma basis. Our primary customers include manufacturers of
aircraft and related avionics equipment, airlines, aircraft component
manufacturers and distributors, and aircraft repair and modification companies.
The following customers accounted for 10.0% or more of our consolidated pro
forma revenues:
YEAR ENDED
DECEMBER 31, 1999
PRO FORMA
SIGNIFICANT CUSTOMER(A) REVENUES(B)
- ------------------------------------------------------------ ------------------
Boeing(c)................................................... 16.0%
Textron(d).................................................. 15.6%
Bombardier.................................................. 12.7%
-------------
Total pro forma revenues.................................. 44.3%
=============
-------------------------------
(a) All of our operating groups derive revenues from each of the
customers.
(b) Historical data is not deemed to be meaningful because it is not
reflective of the companies we have recently acquired. Historical
data is presented in Note 6 of our financial statements.
(c) Reflects only our direct revenues from Boeing. Excludes revenues from
components we provide indirectly to Boeing through our sales to other
Boeing suppliers.
(d) Includes Cessna.
Most of our sales to Boeing are pursuant to contracts which may be
terminated by Boeing at any time and include various terms favorable to the
buyer. For example, one provides that we must extend to Boeing any reductions in
prices or lead times that we provide to other customers and that we must match
other suppliers' price reductions of more than five percent, or delete the
affected products from the contract. Another contract relieves Boeing from any
obligation to order products covered by the contract if Boeing's
10
customers request an alternate supplier, or our product is not technologically
competitive in Boeing's judgment, or Boeing changes the design of an aircraft so
that our products are no longer needed, or Boeing reasonably determines that we
cannot meet its requirements in the amounts and within the schedules it
requires. Our contracts with Boeing also generally grant Boeing an irrevocable
non-exclusive worldwide license to use our designs, tooling and other
intellectual property rights related to products sold to Boeing, if we default,
or suffer a bankruptcy filing, or transfer our manufacturing rights to a third
party.
MANUFACTURING AND QUALITY CONTROL
Many of our product lines use process-specific equipment and procedures that
have been custom-designed or fabricated to provide high-quality products at
relatively low cost. Some of our key product lines are vertically integrated,
which we believe improves our product performance, customer service and
competitive pricing.
We have conducted programs to reduce costs including overhead expenses. In
some cases, these programs have involved the use of proprietary equipment or
processes which have enabled us to reduce costs without reducing quality levels.
Several of our key customers have developed their own design, product
performance, manufacturing process and quality system standards and require
their suppliers to comply with such standards. As a result, we have developed
and conducted comprehensive quality policies and procedures which meet or exceed
our customers' requirements. Many of our customers have recognized formally the
effectiveness of our quality programs by issuing quality approval letters and
awarding quality compliance certificates. In addition, some of our customers
have authorized our inspection personnel also to act as their authorized quality
representatives. That authorization enables us to ship directly into the
inventory stockrooms of these customers, eliminating the need for inspection at
the receiving end.
We use sophisticated equipment and procedures to ensure the quality of our
products and to comply with United States military specifications and FAA
certification requirements. We perform a variety of testing procedures,
including environmental testing under different temperature, humidity and
altitude levels, shock and vibration testing and X-ray fluorescent measurement.
These procedures, together with other customer approved techniques for document,
process and quality control, are used throughout our manufacturing facilities.
RAW MATERIALS AND COMPONENT PARTS
The components we manufacture require the use of various raw materials
including gold, aluminum, copper, rhodium, plating chemicals, hardwoods and
plastics. The availability and prices of these materials may fluctuate. Their
price is a significant component in, and part of, the sales price of many of our
products. Although some of our contracts have prices tied to raw materials
prices, we cannot always recover increases in raw materials prices in our
product sale prices. We also purchase a variety of manufactured component parts
from various suppliers. Raw materials and component parts are generally
available from multiple suppliers at competitive prices. However, any delay in
our ability to obtain necessary raw materials and component parts may affect our
ability to meet customer production needs.
INTELLECTUAL PROPERTY AND PROPRIETARY INFORMATION
We have various trade secrets, proprietary information, trademarks, trade
names, patents, copyrights and other intellectual property rights which we
believe are important to our business in the aggregate, but not individually.
COMPETITION
We operate in a highly competitive industry and compete with a number of
companies, many of whom have significantly greater financial, technological,
manufacturing and marketing resources than we do. We believe that our ability to
compete depends on high product performance, short lead-time and timely
delivery, competitive price and superior customer service and support.
The niche markets within the aircraft industry that we serve are relatively
fragmented, with several competitors offering the same products and services we
provide. Due to the global nature of the aircraft industry, competition comes
from both U.S. and foreign companies.
11
Our principal competitors in contacts and connectors are large and
diversified corporations which produce a broad range of products. In other areas
we generally face a group of smaller companies and enterprises, except for the
corporate aircraft manufacturers, which are generally part of large and
diversified companies.
GROUP -- PRINCIPAL PRODUCTS AND SERVICES -- PRINCIPAL COMPETITORS
- -----------------------------------------------------------------
CABIN MANAGEMENT GROUP
INTERIOR FURNISHINGS
- Aviart
- Custom Aircraft Cabinets
- Hiller
- Corporate aircraft manufacturers and independent completion
and modification companies
SEATING
- Aircraft Modular Products, a division of BE Aerospace
- ERDA
COMPOSITE COMPONENTS
- AAR
- Burnham
- Fibre Art
- Plastic Fab
- Sealed Composites Works
- The Nordam Group
ENTERTAINMENT AND CABIN CONTROL SYSTEMS
- Aerospace Lighting
- Baker Electronics
- DPI Labs
- Grimes Aerospace
- Nellcor Puritan Bennett
- Air Show / Pacific Systems
SPECIALTY AVIONICS GROUP
COCKPIT AUDIO, COMMUNICATION, LIGHTING AND POWER AND CONTROL
DEVICES
- Becker Avionics
- Crane ELDEC
- Diehl GmbH
- Gables Engineering
- Page Aerospace
ELECTRICAL CONTACTS
- Amphenol
- Deutsch Engineered Connecting Devices, a division of
Deutsch
CONNECTORS AND HARNESS ASSEMBLIES
- AMP (connectors)
- Electronic Cable Specialists (harness assemblies)
- ITT Cannon (connectors)
- Radiall S.A. (connectors)
LIQUID CRYSTAL DISPLAY DEVICES
- Cristalloid
SYSTEMS INTEGRATION GROUP
AUXILIARY FUEL SYSTEMS AND AUXILIARY POWER UNITS
- Allied Signal (power units)
- Marshall Engineering (fuel systems)
INTEGRATION OF CABIN AND FIGHT DECK SYSTEMS
- Electronic Cable Specialists (avionics support structures)
- Engineering departments of airlines
- Numerous independent airframe maintenance and modification
companies
BACKLOG
As of December 31, 1999, we had an aggregate sales order backlog of
$156.1 million compared to $143.9 million as of December 31, 1998, all on a pro
forma basis. Orders are generally filled within twelve months; however, our
orders are generally subject to cancellation by the customer prior to shipment.
The level of unfilled orders at any given date will be materially affected by
when we receive orders and how fast we fill them. Period-to-period comparisons
of backlog figures may not be meaningful. For that reason, our backlogs do not
necessarily accurately predict actual shipments or sales for any future period.
12
EMPLOYEES
As of December 31, 1999, we had 2,536 employees, of whom 1,997 were in
manufacturing operations, 261 were in engineering, 183 were in finance and
administration and 95 were in sales. The foregoing numbers include 83 temporary
employees but do not reflect the anticipated employee reductions resulting from
the Hollingsead and Elsinore Engineering restructuring. None of our employees is
subject to a collective bargaining agreement, and we have not experienced any
material business interruption as a result of labor disputes since DeCrane
Aircraft was formed. We believe that we generally have a good relationship with
our employees.
ENVIRONMENTAL MATTERS
Our facilities and operations are subject to various federal, state, local,
and foreign environmental laws and regulations, including those relating to
discharges to air, water, and land, the handling and disposal of solid and
hazardous waste, and the cleanup of properties affected by hazardous substances.
In addition, some environmental laws, such as the federal Comprehensive
Environmental Response, Compensation and Liability Act, as amended (CERCLA) and
similar state laws, impose strict liability upon persons responsible for
releases or potential releases of hazardous substances. That liability generally
is retroactive, and may create "joint and several" liability among multiple
parties who have some relationship to a site or a source of waste. We have sent
waste to treatment, storage, or disposal facilities that have been designated as
National Priority List sites under CERCLA or equivalent listings under state
laws. We have received CERCLA requests for information or allegations of
potential responsibility from the Environmental Protection Agency regarding our
use of several of those sites. In addition, some of our operations are located
on properties which are contaminated to varying degrees.
We have not incurred, nor do we expect to incur, liabilities in any
significant amount as a result of the foregoing matters, because in these cases
other entities have been held primarily responsible, the levels of contamination
are sufficiently low so as not to require remediation, or we are indemnified
against such costs. In most cases, we do not believe that we have any material
liability for past waste disposal. However, in a few cases, we do not have
sufficient information to assess our potential liability, if any. It is
possible, given the potentially retroactive nature of environmental liability,
that we will receive additional notices of potential liability relating to
current or former activities.
Some of our manufacturing processes create wastewater which requires
chemical treatment, and one of our facilities was cited for excessive quantity
and strength of its wastewater. The costs associated with remedying that failure
have not been material. In addition, volatile organic compounds were discovered
at a different facility of ours during groundwater sampling in 1998. We have
completed a voluntary cleanup program there and have received a "no further
action" letter.
We believe that we have been and are in substantial compliance with
environmental laws and regulations and that we have no liabilities under
environmental laws and regulations, except for liabilities which we do not
expect would likely have a material adverse effect on our business, financial
position, results of operations or cash flows. However, some risk of
environmental liability is inherent in the nature of our business, and we might
in the future incur material costs to meet current or more stringent compliance,
cleanup, or other obligations pursuant to environmental laws and regulations.
NEW PRODUCT DEVELOPMENT
We continually evaluate opportunities to improve and expand our product
offerings and during 1999 invested $4.3 million to develop new products that
incorporate new technologies to meet the demands of our customers while meeting
the various requirements of the airline industry.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
You may reference Note 19 in the Notes to Consolidated Financial Statements
for a summary of our revenue and assets broken down by geographic area.
AVAILABLE INFORMATION
You may read and copy any materials we have filed with the SEC at the SEC's
Public Reference Room located at 450 Fifth Street, NW, Washington, DC 20549. You
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. You may also access our SEC filings on line at the
SEC home page (http://www.sec.gov).
REPORTS TO SECURITY HOLDERS
We will provide annual reports and quarterly reports to our security
holders. The annual reports we provide will contain financial information that
has been reviewed and audited by a certified public accountant. The quarterly
financial information will have been prepared and reviewed by management.
13
ITEM 2. PROPERTIES
Our principal facilities are described in the following table. We believe
that our facilities are in good condition and are adequate to support our
operations for the foreseeable future.
APPROXIMATE LEASE
LOCATION FACILITY DESCRIPTION SQ. FT. EXPIRATION
- -------------------------------------------------- --------------------------------------------- ------------ ----------
LEASED FACILITIES
Wichita, KS (two buildings)....................... Manufacturing, engineering and administration 156,500 2007
Georgetown, DE (a)................................ Manufacturing and aircraft modifications 110,000 2041
El Segundo, CA.................................... Manufacturing, engineering and administration 81,300 2010
Columbia, MD...................................... Manufacturing, engineering and administration 65,923 2007
Garden Grove, CA (b).............................. Manufacturing, engineering and administration 58,303 2007
Denton, TX (three buildings)...................... Manufacturing, engineering and administration 47,905 2015
Goleta, CA........................................ Engineering 33,200 2010
Wichita, KS....................................... Manufacturing and administration 33,000 2009
Stuart, FL........................................ Manufacturing, engineering and administration 29,700 2008
Orlando, FL....................................... Manufacturing and administration 28,500 2010
Hatfield, PA...................................... Manufacturing, engineering and administration 27,500 2002
Bioggio, Switzerland.............................. Manufacturing 21,915 2004
Denton, TX (d).................................... Manufacturing and administration 20,000 2015
Orlando, FL (c)................................... Manufacturing 20,000 2000
Mezzovico, Switzerland............................ Manufacturing 18,046 2001
Lewisville, TX (d)................................ Manufacturing 13,000 2004
Garden Grove, CA (b).............................. Warehouse 10,000 2003
Seattle, WA....................................... Warehouse 10,000 2001
North Little Rock, AR (three buildings) (e)....... Engineering 8,828 2000
Santa Ana, CA..................................... Engineering and aircraft hanger 8,816 2000
El Segundo, CA.................................... Corporate administration 7,853 2007
Anaheim, CA....................................... Manufacturing 6,036 2004
Goleta, CA (b).................................... Engineering 5,816 2000
Hutchinson, KS.................................... Manufacturing 5,300 2000
Bioggio, Switzerland (two buildings).............. Administration 4,660 2000
Tucson, AZ........................................ Field service office 580 2000
Quebec, Canada.................................... Field service office 380 2000
Wichita, KS....................................... Field service office 350 2000
Cedex, France..................................... Field service office 210 2000
OWNED FACILITIES
Seattle, WA (six buildings)....................... Manufacturing, engineering and administration 87,382
Pooler, GA........................................ Manufacturing and administration 24,000
North Little Rock, AR (e)......................... Manufacturing and engineering 20,000
North Little Rock, AR............................. Manufacturing, engineering and administration 18,000
OWNED AND LEASED FACILITIES -- SUBLEASED TO OTHERS
Seattle, WA (owned)............................... Office space 34,229
Santa Fe Springs, CA (leased)..................... Manufacturing and office space 24,000 2000
Santa Fe Springs, CA (leased)..................... Manufacturing and office space 17,600 2000
Wiltshire, United Kingdom (leased)................ Manufacturing and office space 4,823 2013
- ------------------------------
(a) Includes a 25,000 square foot expansion under construction and expected to
be ready for occupancy in 2000.
(b) Will be vacated in 2000 and subleased in conjunction with the Hollingsead
and Elsinore Engineering restructuring.
(c) Will be replaced with a 33,000 square foot building under construction and
expected to be ready for occupancy in 2000; the new lease will expire in
2010.
(d) During 2000, the Lewisville, TX facility will be vacated and subleased for
the remaining lease term upon occupancy of the Denton, TX facility.
(e) A new, owned 20,000 square foot facility is under construction and expected
to be ready for occupancy in 2000; upon occupancy, the three leased
buildings will be vacated and subleased for the remainder of their lease
terms, if any.
Additionally, the Company owns an 18,000 square foot manufacturing and
engineering facility in North Little Rock, Arkansas. The Company believes its
properties are in good condition and are adequate to support its operations for
the foreseeable future.
14
ITEM 3. LEGAL PROCEEDINGS
As part of its investigation of the crash off the Canadian coast on
September 2, 1998 of Swissair Flight 111, the Canadian Transportation Safety
Board (TSB) notified us that they recovered burned wire which was attached to
the in-flight entertainment system installed on some of Swissair's aircraft by
one of our subsidiaries. We are fully cooperating with the on-going TSB
investigation. Although the TSB has not issued a final report, it has advised us
that it has no evidence to date that the system we installed malfunctioned or
failed during the flight. Families of the 229 persons who died aboard the flight
have filed actions in federal and state courts against us, and many other
parties unaffiliated with us, including Swissair and Boeing. The actions claim
negligence, strict liability and breach of warranty relating to the installation
and testing of the in-flight entertainment system. The actions seek compensatory
and punitive damages and costs in an unstated amount. We intend to defend the
claims vigorously.
We are a party to a license agreement with McDonnell Douglas (now a part of
Boeing) pursuant to which we may request specified data in order to design and
market modifications to aircraft manufactured by McDonnell Douglas. Under the
agreement, we are to pay McDonnell Douglas a royalty of five percent of the net
sales price of all modifications sold by us for which we have requested data
from McDonnell Douglas. We requested data for a single modification, which we
believe is exempt from the agreement's provision requiring royalties. In 1996,
McDonnell Douglas made a demand for $650,000 for royalties. We do not believe
that we are obligated to McDonnell Douglas in any amount. However, if the claim
is asserted, and if we are unsuccessful in defending it, we may be required to
pay royalties to McDonnell Douglas.
We are party to other litigation incident to the normal course of business.
We do not believe that the outcome of any of such other matters in which we are
currently involved will have a material adverse effect on our financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
There is no established public trading market for our shares. We do have
publicly traded warrants, but we are not aware of a market for them.
HOLDERS
As of March 30, 2000 there are 33 holders of common stock of the Company.
DIVIDENDS
We have not paid dividends to date on our stock and do not anticipate paying
any cash dividends on our stock in the foreseeable future. We are a holding
company that is dependent on distributions from our subsidiaries to meet our
cash requirements. The terms of the bank credit facility and senior subordinated
note indenture restrict the ability of DeCrane Aircraft to make distributions to
us and, consequently, will restrict our ability to pay dividends on the stock.
Also, holders of the warrants will not have the right to receive any dividends
so long as their warrants are unexercised.
RECENT SALE OF UNREGISTERED SECURITIES
You may reference Note 13 in the Notes to Consolidated Financial Statements
for a description of all unregistered securities sold by us in 1999.
15
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,(1)
--------------------------------------------------------------------------
EIGHT MONTHS FOUR MONTHS
ENDED ENDED
AUGUST 31, DECEMBER 31,
1995 1996 1997 1998 1998 1999
-------- -------- -------- ------------- ------------- ---------
(PREDECESSOR)(2)
STATEMENT OF OPERATIONS DATA:
Revenues............................................. $55,839 $ 65,099 $108,903 $ 90,077 $ 60,356 $ 244,048
Cost of sales(3)..................................... 43,463 49,392 80,247 60,101 42,739 165,871
------- -------- -------- -------- --------- ---------
Gross profit......................................... 12,376 15,707 28,656 29,976 17,617 78,177
Selling, general and administrative expenses(4)...... 9,426 10,747 15,756 19,351 10,274 40,803
Amortization of intangible assets.................... 1,115 709 905 1,347 3,148 13,073
------- -------- -------- -------- --------- ---------
Operating income..................................... 1,835 4,251 11,995 9,278 4,195 24,301
Interest expense..................................... 3,821 4,248 3,154 2,350 6,867 27,903
Terminated debt offering expenses.................... -- -- -- 600 -- --
Other expenses (income), net......................... 382 108 243 247 335 (199)
------- -------- -------- -------- --------- ---------
Income (loss) before provision for income taxes and
extraordinary item................................. (2,368) (105) 8,598 6,081 (3,007) (3,403)
Provision for income taxes (benefit)(5).............. 1,078 712 3,344 2,892 (2,668) 952
------- -------- -------- -------- --------- ---------
Income (loss) before extraordinary item.............. (3,446) (817) 5,254 3,189 (339) (4,355)
Extraordinary loss from debt refinancing(6).......... -- -- (2,078) -- (2,229) --
------- -------- -------- -------- --------- ---------
Net income (loss).................................... $(3,446) $ (817) $ 3,176 $ 3,189 $ (2,568) $ (4,355)
======= ======== ======== ======== ========= =========
OTHER FINANCIAL DATA:
Cash flows from operating activities................. $ 1,457 $ 2,958 $ 4,641 $ 3,014 $ 1,008 $ 15,200
Cash flows from investing activities................. (1,462) (24,016) (27,809) (87,378) (186,939) (152,774)
Cash flows from financing activities................. 41 21,051 22,957 89,871 189,268 142,052
EBITDA(7)............................................ 5,471 7,602 16,915 13,743 13,476 56,526
EBITDA margin(8)..................................... 9.8% 11.7% 15.5% 15.3% 22.3% 23.2%
Depreciation and amortization(9)..................... $ 3,636 $ 3,351 $ 4,920 $ 4,358 $ 4,604 $ 19,186
Capital expenditures:
Paid in cash(10)................................... 1,203 5,821 3,842 1,745 1,813 7,262
Financed with capital lease obligations............ 33 414 182 116 48 1,711
Ratio of earnings to fixed charges(11)............... -- 1.0x 3.3x 3.0x -- --
OTHER OPERATING DATA:
Bookings(12)......................................... $50,785 $ 81,914 $112,082 $ 94,439 $ 54,021 $ 252,100
Backlog at end of period(13)......................... 19,761 44,433 49,005 84,184 75,388 156,100
AS OF DECEMBER 31,(1)
-----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- ---------
(PREDECESSOR)(2)
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 305 $ 320 $ 206 $ 3,518 $ 7,918
Working capital............................................. 12,583 10,486 24,772 46,227 29,249
Total assets................................................ 36,329 69,266 99,137 330,575 525,736
Total debt(14).............................................. 24,672 42,250 38,838 186,765 315,651
Mandatorily redeemable preferred stock and common stock
warrants.................................................. 1,633 6,879 -- 35,884 41,178
Stockholders' equity (deficit).............................. (1,697) 1,236 39,527 61,879 65,063
See accompanying Notes to Selected Consolidated Financial Data.
16
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
(1) Reflects the results of operations and financial position of companies we
acquired for all periods subsequent to their respective acquisition dates
as follows:
- -the remaining 25% minority interest in Cory
Components--February 20, 1996;
- -Aerospace Display Systems--September 18,
1996;
- -Elsinore Engineering--December 5, 1996;
- -Audio International--November 14, 1997;
- -Avtech--June 26, 1998;
- -Dettmers--June 30, 1998;
- -PATS--January 22, 1999;
- -PPI--April 23, 1999;
- -Custom Woodwork--August 5, 1999;
- -PCI NewCo--October 6, 1999;
- -International Custom Interiors--October 8,
1999; and
- -Infinity--December 17, 1999.
(2) Reflects DeCrane Aircraft's results of operations and financial position
prior to (predecessor) the DLJ acquisition.
(3) Includes non-cash charges to reflect:
- cost of sales based on the fair value of inventory acquired of
$4.4 million for the four months ended December 31, 1998 in connection
with the DLJ acquisition and $1.6 million for the twelve months ended
December 31, 1999 in connection with the PPI and Custom Woodworks
acquisitions, collectively referred to as non-cash acquisition charges;
and
- an inventory write-down of $6.0 million for the twelve months ended
December 31, 1999 related to restructuring the operations of two of our
subsidiaries.
(4) Reflects $3.6 million of non-capitalized transaction costs associated with
the DLJ acquisition in August 1998 and a $3.9 million charge related to
restructuring the operations of two of subsidiaries, $1.3 million of which
was a non-cash asset impairment write-down.
(5) Prior to the acquisition of the remaining 25% minority interest in Cory
Components in 1996, DeCrane Aircraft did not consolidate the earnings of
Cory Components for tax purposes. As such, despite a consolidated pre-tax
loss in each of the years, DeCrane Aircraft recorded a provision for income
taxes from 1993 up to the date of the acquisition in 1996 which primarily
relates to Cory Components. For the four months ended December 31, 1998,
includes a $2.6 million benefit from the reduction of the deferred tax
valuation allowance.
(6) Represents:
- the write-offs, net of an income tax benefit, of deferred financing
costs, unamortized original issue discounts, a prepayment penalty and
other related expenses incurred as a result of the repayment of debt by
DeCrane Aircraft with the net proceeds from its initial public offering
in April 1997; and
- the write-offs, net of an income tax benefit, of deferred financing
costs as a result of the repayment of DeCrane Aircraft's existing
indebtedness in connection with the DLJ acquisition and the refinancing
of the bridge notes during the four months ended December 31, 1998.
(7) EBITDA equals operating income plus depreciation, amortization, the 1999
restructuring charge, DLJ advisory fees, non-cash acquisition related
charges described in Note 3 above and other non-operating costs. EBITDA is
not a measure of performance or financial condition under generally
accepted accounting principles. EBITDA is not intended to represent cash
flow from operations and should not be considered as an alternative to
income from operations or net income computed in accordance with generally
accepted accounting principles, as an indicator of our operating
performance, as an alternative to cash flow from operating activities or as
a measure of liquidity. The funds depicted by EBITDA are not available for
our discretionary use due to funding requirements for working capital,
capital expenditures, debt service, income taxes and other commitments and
contingencies. We believe that EBITDA is a standard measure of liquidity
commonly reported and widely used by analysts, investors and other
interested parties in the financial markets. However, not all companies
calculate EBITDA using the same method, and the EBITDA numbers set forth
above may not be comparable to EBITDA reported by other companies.
(8) EBITDA margin is computed by dividing EBITDA by revenues.
(9) Reflects depreciation and amortization of plant and equipment and goodwill
and other intangible assets. Excludes amortization of deferred financing
costs and debt discounts that are classified as a component of interest
expense.
(10) Includes $4.4 million for the year ended December 31, 1996 related to our
acquisition of a manufacturing facility.
(11) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent net income before income taxes, minority interests in
the income of majority-owned subsidiaries, cumulative effect of an
accounting change, extraordinary items and fixed charges. Fixed charges
consist of:
- interest, whether expensed or capitalized;
- amortization of debt expense and discount or premium relating to any
indebtedness, whether expensed or capitalized; and
- one-third of rental expenses under operating leases which is considered
to be a reasonable approximation of the interest portion of such
expense.
There were deficiencies of earnings to cover fixed charges for the year
ended December 31, 1995, the four months ended December 31, 1998 and the
year ended December 31, 1999 of $2.3 million, $2.9 million and
$3.2 million, respectively.
(12) Bookings represent the total invoice value of purchase orders received
during the period.
(13) Orders are generally subject to cancellation by the customer prior to
shipment. The level of unfilled orders at any given date during the year
will be materially affected by the timing of DeCrane Aircraft's receipt of
orders and the speed with which those orders are filled.
(14) Total debt is defined as long-term debt, including current portion, and
short-term borrowings.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
THE FOLLOWING DISCUSSIONS SHOULD BE READ IN CONJUNCTION WITH OUR
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS
REPORT.
DeCrane Holdings is a holding company and does not have any material
operations other than its ownership of all of the capital stock of DeCrane
Aircraft. As described in Note 2 of our financial statements included in this
report, DeCrane Aircraft is the predecessor of DeCrane Holdings, and the
financial information presented for periods prior to the DLJ acquisition is for
DeCrane Aircraft.
OVERVIEW
Our financial position and results of operations have been affected by our
history of acquisitions. Since our formation in 1989, we have completed
seventeen acquisitions of businesses or assets. As a result, our historical
financial statements do not reflect the financial position and results of
operations of our current businesses. Our most recent acquisitions, which affect
the comparability of the historical financial statements included herein,
consist of:
CABIN MANAGEMENT GROUP
- Audio International, acquired on November 14, 1997;
- Dettmers, acquired on June 30, 1998;
- PPI, acquired on April 23, 1999;
- Custom Woodwork, acquired on August 5, 1999;
- PCI NewCo, acquired on October 6, 1999;
- International Custom Interiors, acquired on October 8, 1999; and
- The Infinity Partners, acquired on December 17, 1999.
SPECIALTY AVIONICS GROUP
- Avtech, acquired on June 26, 1998;
SYSTEMS INTEGRATION GROUP
- PATS, acquired on January 22, 1999;
Our historical financial statements reflect the financial position and
results of operations of the acquired businesses subsequent to their respective
acquisition dates. Additionally, our capital structure was significantly altered
in August 1998 by the financing obtained to fund the tender offer for our stock
in conjunction with our acquisition by DLJ.
THE DLJ ACQUISITION AND FINANCING
In August 1998, DeCrane Holdings and its two subsidiaries, an acquisition
subsidiary and a financing subsidiary, completed a successful $186.3 million
cash tender offer for all of the shares of DeCrane Aircraft. DeCrane Holdings
was organized by DLJ Merchant Banking II, L.P. and several of its affiliates.
The funds for the tender offer and the refinancing of DeCrane Aircraft's
existing debt were obtained from the sale of equity by DeCrane Holdings and the
issuance of debt by its finance subsidiary. DeCrane Holdings received an initial
capital contribution of approximately $99.0 million from the sale of its
preferred and common stock and warrants to DLJ Merchant Banking. DeCrane
Holdings used these funds to capitalize its finance subsidiary. The finance
subsidiary then entered into a $130.0 million syndicated bank credit facility
with a group of lenders led by DLJ Capital Funding, Inc. and issued $100.0
million of senior subordinated increasing rate bridge notes to DLJ Bridge
Finance Inc. The finance subsidiary capitalized the acquisition subsidiary with
the funds necessary to complete the tender offer.
Upon completion of the tender offer, the acquisition and finance
subsidiaries were merged into DeCrane Aircraft, and DeCrane Aircraft's existing
debt was repaid. As a result of the mergers, DeCrane Aircraft became a
wholly-owned subsidiary of DeCrane Holdings, and the bank credit facility and
bridge
18
notes became obligations of DeCrane Aircraft. In October 1998, DeCrane Aircraft
refinanced the bridge notes with the proceeds from the sale of 12% senior
subordinated notes.
The gross purchase price for DeCrane Aircraft's shares and options was
$186.3 million. Assets acquired and liabilities assumed have been recorded at
their estimated fair values based on an independent appraisal and, accordingly,
historical values were increased as follows: $4.4 million for inventory; $2.6
million for fixed assets; and $50.0 million to certain identifiable intangible
assets. The excess of the purchase price over the fair value of the net assets
acquired totaling $70.0 million was allocated to goodwill. The increase in
inventory value was expensed as the inventory was sold during the four months
ended December 31, 1998. The intangible assets, other than goodwill, are being
amortized on a straight-line basis over periods between five and fifteen years.
Goodwill is being amortized on a straight-line basis over a period of thirty
years.
In connection with the DLJ acquisition, DeCrane Holdings raised
approximately $99.0 million through its sale of common stock, preferred stock,
and warrants. The proceeds of those sales were contributed to the paid-in
capital of DeCrane Aircraft. The DeCrane Holdings preferred stock provides for
cumulative dividends that do not require payment in cash through 2003, but will
be payable in cash thereafter and will be mandatorily redeemable in 2009. The
DeCrane Holdings preferred stock is exchangeable into debentures that will
contain customary covenants and events of default, including covenants that
limit the ability of DeCrane Holdings and its subsidiaries to incur debt, pay
dividends and acquire or make equity investments in other companies.
INDUSTRY OUTLOOK AND TRENDS
We sell our products to the corporate, commercial, retrofit, aftermarket and
military aircraft markets. Within these markets, our customers include original
manufacturers of aircraft and related electronic equipment, aircraft repair and
modification centers and commercial airlines.
The Teal Group Corporation, an industry-recognized aerospace research group,
projects delivery of 5,067 corporate aircraft between 1999 and 2008,
representing an increase of approximately 52% over the 3,326 corporate aircraft
that were delivered between 1989 and 1998. Similarly, the 1999 CURRENT MARKET
OUTLOOK, released by The Boeing Company in June 1999, projects that the world
jetliner fleet will grow from 12,600 aircraft at the end of 1998 to 19,100
aircraft by 2008, and to 28,400 aircraft by 2018. The Boeing report also
projects that, between 1999 and 2008, the commercial aircraft industry will
require 8,900 new commercial aircraft, and between 2009 and 2018, it will
require an additional 11,250 new aircraft, both to support the projected world
fleet expansion and to replace capacity lost as aircraft are removed from
commercial airline service.
Boeing has, however, announced production cutbacks in several of its lines
for 2000 and 2001. Our sales to Boeing, our largest customer, have decreased due
to a number of factors at the manufacturer and the overall commercial aircraft
industry. For example, Boeing deliveries of its 747, 767 and 777 airplanes have
declined due to the recent financial difficulties of many Asian carriers. We
believe that over the next two years, Boeing's commercial aircraft deliveries
will stabilize at about 490 aircraft, a decline from the record level of 620
aircraft in 1999. As a result, we expect short-term demand for our commercial
aircraft products to be lower than in previous years, with recovery in the
longer term.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
THE RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 REFLECTS THE
COMBINED HISTORICAL RESULTS FOR THE EIGHT MONTHS ENDED AUGUST 31, 1998
(PREDECESSOR) AND THE FOUR MONTHS ENDED DECEMBER 31, 1998.
19
REVENUES. Revenues increased $93.6 million, or 62.2%, to $244.0 million for
the year ended December 31, 1999 from $150.4 million for the year ended
December 31, 1998 as follows:
INCREASE (DECREASE)
FROM 1998
------------------------
AMOUNT PERCENT
------------- --------
(IN MILLIONS)
Cabin Management............................................ $50.7 33.7%
Specialty Avionics.......................................... 7.5 5.0
Systems Integration......................................... 35.9 23.9
Inter-group eliminations.................................... (0.5) (0.4)
----- ----
Total................................................... $93.6 62.2%
===== ====
CABIN MANAGEMENT. Revenues increased by $50.7 million, or 215.7% over the
prior year, due to:
- the inclusion of $42.8 million of revenues resulting from our acquisitions
of Dettmers, PPI Holdings, Custom Woodwork, PCI NewCo and International
Custom Interiors; and
- a $7.9 million increase in entertainment and cabin management product
revenues primarily related to volume growth.
SPECIALTY AVIONICS. Revenues increased by $7.5 million, or 7.2% over the
prior year, due to:
- the inclusion of $15.2 million of revenues resulting from our acquisition
of Avtech; offset by
- a $7.7 million decrease in revenues due to weak demand for our commercial
aircraft products.
SYSTEMS INTEGRATION. Revenues increased by $35.9 million, or 158.8% over
the prior year, due to:
- the inclusion of $41.3 million of revenues resulting from our acquisition
of PATS; offset by
- a $5.4 million decrease in revenues due to a decline in revenues from our
other products and services.
GROSS PROFIT. Gross profit increased $30.6 million, or 64.0%, to
$78.2 million for the year ended December 31, 1999. Gross profit as a percent of
revenues increased to 32.0% for the year ended December 31, 1999 from 31.6% for
the same period last year. The groups contributed to the increase in gross
profit as follows:
INCREASE (DECREASE)
FROM 1998
------------------------
AMOUNT PERCENT
------------- --------
(IN MILLIONS)
Cabin Management............................................ $18.8 39.5%
Specialty Avionics.......................................... 5.0 10.5
Systems Integration......................................... 6.8 14.0
----- ----
Total................................................... $30.6 64.0%
===== ====
CABIN MANAGEMENT. Gross profit increased by $18.8 million, or 163.5% over
the prior year, due to:
- the inclusion of $15.1 million of gross profit resulting from our
acquisitions of Dettmers, PPI Holdings, Custom Woodwork, PCI NewCo and
International Custom Interiors; and
- a $3.7 million increase related to revenue growth in our entertainment and
cabin management product revenues.
SPECIALTY AVIONICS. Gross profit increased by $5.0 million, or 15.7% over
the prior year, due to:
- the inclusion of $9.5 million of gross profit resulting from our
acquisition of Avtech; offset by
- a $4.5 million decrease in gross profit due to weak demand for our
commercial aircraft products.
SYSTEMS INTEGRATION. Gross profit increased by $6.8 million, or 161.9% over
the prior year, due to:
- the inclusion of $14.2 million of gross profit resulting from our
acquisition of PATS; offset by
20
- a $6.0 million decrease related to the write down of inventories resulting
from the restructuring; and
- a $1.4 million decrease in gross profit due to a decline in revenues from
our other products and services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $11.2 million, or 37.8%, to $40.8 million for
the year ended December 31, 1999, from $29.6 million for the same period last
year. SG&A expenses as a percent of revenues decreased to 16.7% for the year
ended December 31, 1999 compared to 19.7% for the same period last year. The
groups contributed to the increase in SG&A as follows:
INCREASE (DECREASE)
FROM 1998
------------------------
AMOUNT PERCENT
------------- --------
(IN MILLIONS)
Cabin Management............................................ $ 2.5 8.4%
Specialty Avionics.......................................... 3.1 10.5
Systems Integration......................................... 7.5 25.3
Corporate................................................... (1.9) (6.4)
----- ----
Total................................................... $11.2 37.8%
===== ====
CABIN MANAGEMENT. SG&A expenses increased by $2.5 million, or 41.7% over
the prior year, due to our acquisitions of Dettmers, PPI Holdings, Custom
Woodwork, PCI NewCo and International Custom Interiors.
SPECIALTY AVIONICS. SG&A expenses increased by $3.1 million, or 31.0% over
the prior year, due to our acquisition of Avtech.
SYSTEMS INTEGRATION. SG&A expenses increased by $7.5 million, or 174.4%
over the prior year, due to:
- the inclusion of $4.8 million of SG&A expenses resulting from our
acquisition of PATS; and
- a $3.9 million restructuring charge; offset by
- a $1.2 million decrease in other selling, general and administrative
expenses.
CORPORATE. SG&A expenses decreased by $1.9 million, or 20.4% over the prior
year, due to:
- non-capitalizable tender offer expenses resulting from our acquisition by
DLJ of $3.6 million recorded in 1998; partially offset by
- a $1.7 million increase in other corporate expenses including
$0.7 million for marketing and $0.6 million for non-capitalized
acquisition costs.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased $10.2 million, or 114.1%, for the year ended December 31,
1999. The groups contributed to the increase in depreciation and amortization
expense as follows:
INCREASE (DECREASE)
FROM 1998
------------------------
AMOUNT PERCENT
------------- --------
(IN MILLIONS)
Cabin Management............................................ $ 2.3 26.2%
Specialty Avionics.......................................... 4.2 46.8
Systems Integration......................................... 3.5 39.0
Corporate................................................... 0.2 2.1
----- -----
Total................................................... $10.2 114.1%
===== =====
CABIN MANAGEMENT. Depreciation and amortization expense increased by
$2.3 million, or 195.7% over the prior year, due to our acquisitions of
Dettmers, PPI Holdings, Custom Woodwork, PCI NewCo and International Custom
Interiors.
21
SPECIALTY AVIONICS. Depreciation and amortization expense increased by
$4.2 million, or 62.8% over the prior year, due to our acquisition of Avtech.
SYSTEMS INTEGRATION. Depreciation and amortization expense increased by
$3.5 million, or 356.4% over the prior year, due to our acquisition of PATS.
CORPORATE. Depreciation and amortization expense increased by
$0.2 million, or 185.4% over the prior year, due to goodwill recorded from the
DLJ acquisition.
OPERATING INCOME (LOSS). Operating income increased $10.8 million to
$24.3 million, or 80.0%, for the year ended December 31, 1999, from
$13.5 million for the same period last year. Operating income as a percent of
revenues increased to 10.0% for the year ended December 31, 1999, from 9.0% for
the same period last year. The groups contributed to the increase in operating
income as follows:
INCREASE (DECREASE)
FROM 1998
------------------------
AMOUNT PERCENT
------------- --------
(IN MILLIONS)
Cabin Management............................................ $14.4 106.7%
Specialty Avionics.......................................... (2.5) (18.5)
Systems Integration......................................... (3.2) (23.7)
Corporate................................................... 2.1 15.5
----- -----
Total................................................... $10.8 80.0%
===== =====
CABIN MANAGEMENT. Operating income increased by $14.4 million, or 313.0%
over the prior year, due to:
- the inclusion of $11.4 million of operating income resulting from our
acquisitions of Dettmers, PPI Holdings, Custom Woodwork, PCI NewCo and
International Custom Interiors; and
- a $3.0 million increase related to higher unit sales for entertainment and
cabin management products.
SPECIALTY AVIONICS. Operating income decreased by $2.5 million, or 13.3%
over the prior year, due to:
- a $5.4 million decrease in operating income related to weakened demand for
our commercial aircraft products; offset by
- the inclusion of $2.9 million of operating income resulting from our
acquisition of Avtech.
SYSTEMS INTEGRATION. Operating income decreased by $3.2 million, or 533.3%
over the prior year, due to:
- a $10.5 million decrease in operating income related to existing systems
integration products including a restructuring charge of $9.9 million;
offset by
- the inclusion of $7.3 million of operating income resulting from our
acquisition of PATS.
CORPORATE. Operating loss decreased by $2.1 million, or 22.6% over the
prior year, primarily due to a charge in 1998 related to non-capitalizable
tender offer expenses resulting from our acquisition by DLJ.
INTEREST EXPENSE. Interest expense increased $18.7 million to
$27.9 million for the year ended December 31, 1999, from $9.2 million for the
same period last year. Interest expense increased:
- $16.1 million due to higher debt levels associated with the DLJ
acquisition and our acquisition of companies during 1999; and
- $2.6 million due to higher average interest rates incurred during 1999
primarily due to higher margins charged by our lenders on our debt.
PROVISION FOR INCOME TAXES. The provision for income taxes differs from the
amount determined by applying the applicable U.S. statutory federal rate to the
income (loss) before income taxes primarily due to the effects of state and
foreign income taxes and non-deductible expenses, principally goodwill
amortization. The difference in the effective tax rates between periods is
mostly a result of higher goodwill amortization.
22
NET INCOME. Net income decreased $5.0 million to a net loss of
$4.4 million for the year ended December 31, 1999 compared to net income of
$.6 million for the same period in 1998.
BOOKINGS AND BACKLOG. Bookings increased $103.6 million, or 69.8%, to
$252.1 million for the year ended December 31, 1999 compared to $148.5 million
for the same period in 1998. The increase in bookings for 1999 were primarily
due to:
- $94.5 million associated with companies we acquired in 1999; and
- $9.1 million related to other businesses.
Backlog increased $80.7 million to $156.1 million as of December 31, 1999
compared to $75.4 million as of December 31, 1998. The increase in backlog for
1999 includes:
- $72.6 million attributable to existing order backlog for companies we
acquired during 1999; and
- a net $8.1 million increase occurring during 1999 representing an increase
in demand for our products.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
THE RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 REFLECTS THE
COMBINED HISTORICAL RESULTS FOR THE EIGHT MONTHS ENDED AUGUST 31, 1998
(PREDECESSOR) AND THE FOUR MONTHS ENDED DECEMBER 31, 1998.
REVENUES. Revenues increased $41.5 million, or 38.1%, to $150.4 million for
the year ended December 31, 1998 from $108.9 million for the year ended
December 31, 1997 as follows:
INCREASE (DECREASE)
FROM 1997
------------------------
AMOUNT PERCENT
------------- --------
(IN MILLIONS)
Cabin Management............................................ $22.2 20.4%
Specialty Avionics.......................................... 19.3 17.8
Systems Integration......................................... (0.4) (0.6)
Inter-group eliminations.................................... 0.4 0.5
----- ----
Total................................................... $41.5 38.1%
===== ====
CABIN MANAGEMENT. Revenues increased by $22.2 million, or 1,707.7% over the
prior year, due to the inclusion of revenues resulting from our acquisition of
Audio, which was acquired in November 1997, and Dettmers, which was acquired in
June 1998.
SPECIALTY AVIONICS. Revenues increased by $19.3 million, or 22.5% over the
prior year, due to:
- the inclusion of $25.2 million of revenues resulting from our acquisition
of Avtech; offset by
- a decrease in revenues of $5.9 million due to lower unit sales for
electrical contacts compared to the prior year.
SYSTEM INTEGRATION. Revenues decreased by $0.4 million, or 1.7% over the
prior year, due to lower unit sales for our products.
GROSS PROFIT. Gross profit increased $18.9 million, or 65.9%, to $47.6
million for the year ended December 31, 1998 from $28.7 million for the year
ended December 31, 1997. Gross profit as a percent of
23
revenues increased to 31.6% for the year ended December 31, 1998 from 26.4% for
the year ended December 31, 1997. The groups contributed to the increase in
gross profit as follows:
INCREASE (DECREASE)
FROM 1997
------------------------
AMOUNT PERCENT
------------- --------
(IN MILLIONS)
Cabin Management............................................ $10.9 38.0%
Specialty Avionics.......................................... 7.6 26.5
Systems Integration......................................... 0.4 1.4
----- ----
Total................................................... $18.9 65.9%
===== ====
CABIN MANAGEMENT. Gross profit increased by $10.9 million, or 1,816.7% over
the prior year, due to:
- the inclusion of $10.3 million of gross profit resulting from our
acquisitions of Audio and Dettmers; and
- a $.6 million increase related to revenue for entertainment and cabin
management products.
SPECIALTY AVIONICS. Gross profit increased by $7.6 million, or 31.3% over
the prior year, due to:
- the inclusion of $9.6 million of gross profit resulting from our
acquisition of Avtech; offset by
- a $2.0 million decrease in gross profit related to lower commercial
aircraft product revenues.
SYSTEMS INTEGRATION. Gross profit increased by $0.4 million, or 10.5% over
the prior year, related to lower unit cost for our products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $13.8 million, or 87.3%, to $29.6 million for
the year ended December 31, 1998 from $15.8 million for the year ended
December 31, 1997. SG&A expenses as a percent of revenues increased to 19.7% for
the year ended December 31, 1998 from 14.5% for the year ended December 31,
1997. The groups contributed to the increase in SG&A as follows:
INCREASE (DECREASE)
FROM 1997
------------------------
AMOUNT PERCENT
------------- --------
(IN MILLIONS)
Cabin Management............................................ $ 5.5 34.8%
Specialty Avionics.......................................... 2.0 12.6
Systems Integration......................................... 0.5 3.2
Corporate................................................... 5.8 36.7
----- ----
Total................................................... $13.8 87.3%
===== ====
CABIN MANAGEMENT. SG&A expenses increased by $5.5 million, or 1,100.0% over
the prior year, due to our acquisitions of Audio and Dettmers.
SPECIALTY AVIONICS. SG&A expenses increased by $2.0 million, or 25.0% over
the prior year, due to:
- the inclusion of $4.3 million of expenses resulting from our acquisition
of Avtech, which was acquired in June 1998; offset by
- a decrease in expenses of $2.3 million related to our specialty avionics
business.
SYSTEM INTEGRATION. SG&A expenses increased $.5 million, or 13.2% over the
prior year, primarily due to facility relocation costs.
CORPORATE. SG&A expenses increased $5.8 million, or 165.7% over the prior
year, as follows:
- $3.6 million of terminated debt costs,
- $2.2 million of other administrative costs.
24
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased $4.0 million, or 82.1% for the year ended December 31, 1998.
The groups contributed to the increase in depreciation and amortization expense
as follows:
INCREASE (DECREASE)
FROM 1997
------------------------
AMOUNT PERCENT
------------- --------
(IN MILLIONS)
Cabin Management............................................ $1.1 22.1%
Specialty Avionics.......................................... 2.6 53.2
Systems Integration......................................... .3 6.3
Corporate................................................... 0.0 0.5
---- ----
Total................................................... $4.0 82.1%
==== ====
CABIN MANAGEMENT. Depreciation and amortization expense increased by
$1.1 million, or 981.1% over the prior year, due to our acquisitions of Audio
and Dettmers.
SPECIALTY AVIONICS. Depreciation and amortization expense increased by
$2.6 million, or 64.5% over the prior year, due to our acquisitions of Avtech.
SYSTEM INTEGRATION. Depreciation and amortization expense increased
$0.3 million, or 46.1% over the prior year, primarily due to goodwill recorded
from the DLJ acquisition.
OPERATING INCOME. Operating income increased $1.5 million, or 12.5%, to
$13.5 million for the year ended December 31, 1998 from $12.0 million for the
year ended December 31, 1997. Operating income as a percent of revenues
decreased to 9.0% for the year ended December 31, 1998 from 11.0% for the year
ended December 31, 1997. The groups contributed to the increase in operating
income as follows:
INCREASE (DECREASE)
FROM 1997
------------------------
AMOUNT PERCENT
------------- --------
(IN MILLIONS)
Cabin Management............................................