** **

**UNITED STATES**

# **SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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# **FORM 10-Q**

 

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

## ** **

## **For the quarterly period ended September 30, 2001**

 

## **Commission File Number 333-70365**

 

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**DECRANE AIRCRAFT HOLDINGS, INC.**

(Exact name of registrantas specified in its charter)

 

| **Delaware**                                                    |   | **34-1645569**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **2361  Rosecrans Avenue, Suite 180, El Segundo, CA 90245**     |
| (Address, including zip  code, of principal executive offices)  |
|                                                            |   |                                  |
| **(310)  725-9123**                                             |
| (Registrant's telephone  number, including area code)           |

 

----

 

**(NotApplicable)**

(Former address andtelephone number of principal executive offices, if changed since last report)

 

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

ý  Yes    o No

 

----

 

The number of shares ofRegistrant's Common Stock, $.01 par value, outstanding as ofNovember 9, 2001 was 100 shares.

 

** **

**Table ofContents**

 
| **Part I – Financial Information** |
|-----------------------------------------|
|                                    |   |
| **Item 1.**                             | **Financial Statements  (Unaudited)** |
|                                    |   |
|                                    | Consolidated Balance Sheets  as of September 30, 2001 and December 31, 2000 |
|                                    |   |
|                                    | Consolidated  Statements of Operations for the three months and nine months ended September  30, 2001 and 2000 |
|                                    |   |
|                                    | Consolidated  Statements of Stockholder’s Equity for the nine months ended September 30,  2001 |
|                                    |   |
|                                    | Consolidated  Statements of Cash Flows for the nine months ended September 30, 2001 and  2000 |
|                                    |   |
|                                    | Condensed  Notes to Consolidated Financial Statements |
|                                    |   |
| **Item  2.**                            | **Management’s  Discussion and Analysis of Financial Condition andResults  of Operations** |
|                                    |   |
|                                    | Overview |
|                                    |   |
|                                    | Recent Developments |
|                                    |   |
|                                    | Results of Operations |
|                                    |   |
|                                    | Liquidity and Capital  Resources |
|                                    |   |
|                                    | Recently  Issued Accounting Pronouncements |
|                                    |   |
| **Item  3.**                            | **Quantitative  and Qualitative Disclosure About Market Risk** |
|                                    |   |
|                                    | Interest Rate Risk |
|                                    |   |
|                                    | Foreign Currency  Exchange Risk |
|                                    |   |
| **Part II – Other Information**    |
|                                    |   |
| **Item 1.**                             | **Legal Proceedings** |
|                                    |   |
| **Item 6.**                             | **Exhibits and  Reports on Form 8-K** |
|                                    |   |
|                                    | Exhibits |
|                                    |   |
|                                    | Reports on Form 8-K |
|                                    |   |
| **Signatures**                          |   |
|                                         |  |  |

 

**PART I –FINANCIAL INFORMATION**

**ITEM 1.          FINANCIAL STATEMENTS**

**DECRANEAIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES**

**Consolidated Balance Sheets**

**(Inthousands, except share data)**
|                                                                                                                                                              |   | **September  30,** |    | **December  31,** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|-------------------|--------|
|                                                                                                                                                              |   | **2001**           |    | **2000**          |   |
|                                                                                                                                                              |   | **(Unaudited)**    |    |              |   |
| **Assets**                                                                                                                                                        |   |               |    |              |   |
| Current assets                                                                                                                                                    |   |               |    |              |   |
| Cash and cash  equivalents                                                                                                                                        |   | $                  | 7,445   |              | $      | 8,199 |   |
| Accounts  receivable, net                                                                                                                                         |   | 69,779             |    | 53,131            |   |
| Inventories                                                                                                                                                       |   | 91,935             |    | 83,677            |   |
| Deferred income  taxes                                                                                                                                            |   | 13,057             |    | 15,090            |   |
| Prepaid expenses  and other current assets                                                                                                                        |   | 2,148              |    | 987               |   |
| Total current  assets                                                                                                                                             |   | 184,364            |    | 161,084           |   |
|                                                                                                                                                              |   |               |    |              |   |
| Property and  equipment, net                                                                                                                                      |   | 63,886             |    | 59,491            |   |
| Other assets,  principally intangibles, net                                                                                                                       |   | 424,922            |    | 439,582           |   |
| Total assets                                                                                                                                                      |   | $                  | 673,172 |              | $      | 660,157 |   |
|                                                                                                                                                              |   |               |    |              |   |
| **Liabilities,  Mandatorily Redeemable Preferred Stock and Stockholder’s Equity**                                                                            |   |               |    |              |   |
| Current  liabilities                                                                                                                                              |   |               |    |              |   |
| Current portion  of long-term debt                                                                                                                                |   | $                  | 14,499  |              | $      | 9,289 |   |
| Accounts payable                                                                                                                                                  |   | 24,154             |    | 20,304            |   |
| Accrued  liabilities                                                                                                                                              |   | 48,474             |    | 70,472            |   |
| Income taxes  payable                                                                                                                                             |   | 1,303              |    | 3,505             |   |
| Total current  liabilities                                                                                                                                        |   | 88,430             |    | 103,570           |   |
|                                                                                                                                                              |   |               |    |              |   |
| Long-term debt                                                                                                                                                    |   | 389,772            |    | 373,990           |   |
| Deferred income  taxes                                                                                                                                            |   | 43,944             |    | 37,013            |   |
| Other long-term  liabilities                                                                                                                                      |   | 2,492              |    | 2,650             |   |
|                                                                                                                                                              |   |               |    |              |   |
| Commitments and  contingencies (Note 8)                                                                                                                           |   |               |    |              |   |
|                                                                                                                                                              |   |               |    |              |   |
| Mandatorily  redeemable preferred stock                                                                                                                           |   | 26,906             |    | 23,179            |   |
|                                                                                                                                                              |   |               |    |              |   |
| Stockholder’s  equity                                                                                                                                        |   |               |    |              |   |
| Cumulative convertible  preferred stock, $.01 par value, 8,314,018 shares authorized; none issued and  outstanding as of September 30, 2001 and December 31, 2000 |   | —             |    | —            |   |
| Undesignated preferred  stock, $.01 par value, 9,300,000 shares authorized; none issued and  outstanding as of September 30, 2001 and December 31, 2000           |   | —             |    | —            |   |
| Common stock, $.01 par  value, 35,000,000 shares authorized; 100 shares issued and outstanding as of  September 30, 2001 and December 31, 2000                    |   | —             |    | —            |   |
| Additional  paid-in capital                                                                                                                                       |   | 125,989            |    | 127,315           |   |
| Notes receivable  for shares sold                                                                                                                                 |   | (2,657             | )       | (2,552            | )      |
| Accumulated  deficit                                                                                                                                              |   | —             |    | (3,321            | )      |
| Accumulated  other comprehensive loss                                                                                                                             |   | (1,704             | )       | (1,687            | )      |
| Total  stockholder’s equity                                                                                                                                  |   | 121,628            |    | 119,755           |   |
| Total  liabilities and stockholder’s equity                                                                                                                  |   | $                  | 673,172 |              | $      | 660,157 |   |
|                                                                                                                                                                   |        |                    |         |                   |        |  |  |  |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

**DECRANEAIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES**

**ConsolidatedStatements of Operations**

**(Inthousands)**
|                                                |   | **Three  Months Ended** |    | **Nine  Months Ended** |   |
|-----------------------------------------------------|--------|-------------------------|---------|------------------------|--------|
|                                                |   | **September  30,**      |    | **September  30,**     |   |
|                                                |   | **2001**                |    | **2000**               |   | **2001** |   | **2000** |   |
|                                                |   | **(Unaudited)**         |    |
| Revenues                                            |   | $                       | 100,185 |                   | $      | 93,149 |   | $ | 301,696 |   | $ | 254,421 |   |
| Cost of sales                                       |   | 67,409                  |    | 62,018                 |   | 201,299 |   | 169,527 |   |
|                                                |   |                    |    |                   |   |   |   |   |   |
| Gross profit                                        |   | 32,776                  |    | 31,131                 |   | 100,397 |   | 84,894 |   |
|                                                |   |                    |    |                   |   |   |   |   |   |
| Operating  expenses                                 |   |                    |    |                   |   |   |   |   |   |
| Selling, general  and administrative expenses       |   | 13,963                  |    | 11,526                 |   | 42,059 |   | 32,465 |   |
| Amortization of  intangible assets                  |   | 4,936                   |    | 4,699                  |   | 14,857 |   | 12,949 |   |
| Total operating  expenses                           |   | 18,899                  |    | 16,225                 |   | 56,916 |   | 45,414 |   |
|                                                |   |                    |    |                   |   |   |   |   |   |
| Income from  operations                             |   | 13,877                  |    | 14,906                 |   | 43,481 |   | 39,480 |   |
|                                                |   |                    |    |                   |   |   |   |   |   |
| Other expenses                                      |   |                    |    |                   |   |   |   |   |   |
| Interest expense                                    |   | 9,654                   |    | 11,264                 |   | 29,984 |   | 29,977 |   |
| Other expenses  (income), net                       |   | (25                     | )       | 55                     |   | 92 |   | 228 |   |
|                                                |   |                    |    |                   |   |   |   |   |   |
| Income before  provision for income taxes           |   | 4,248                   |    | 3,587                  |   | 13,405 |   | 9,275 |   |
| Provision for  income taxes                         |   | 3,386                   |    | 2,697                  |   | 7,960 |   | 5,643 |   |
|                                                |   |                    |    |                   |   |   |   |   |   |
| Net income                                          |   | 862                     |    | 890                    |   | 5,445 |   | 3,632 |   |
|                                                |   |                    |    |                   |   |   |   |   |   |
| Accrued  preferred stock dividends                  |   | (1,170                  | )       | (1,000                 | )      | (3,376 | ) | (1,000 | ) |
| Preferred stock  redemption value accretion         |   | (117                    | )       | —                 |   | (351 | ) | — |   |
|                                                |   |                    |    |                   |   |   |   |   |   |
| Net income  (loss) applicable to common stockholder |   | $                       | (425    | )                      | $      | (110 | ) | $ | 1,718 |   | $ | 2,632 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

**DECRANEAIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES**

**ConsolidatedStatements of Stockholder’s Equity**

**(Inthousands, except share data)**
|                                        |   |              |   |           |   | **Notes**       |   |            |   | **Accumulated**   |   |     |   |
|---------------------------------------------|--------|-------------------|--------|----------------|--------|-----------------|--------|-----------------|--------|-------------------|--------|----------|--------|
|                                        |   |              |   | **Additional** |   | **Receivable**  |   |            |   | **Other**         |   |     |   |
|                                        |   | **Common  Stock** |   | **Paid-in**    |   | **For  Shares** |   | **Accumulated** |   | **Comprehensive** |   |     |   |
|                                        |   | **Shares**        |   | **Amount**     |   | **Capital**     |   | **Sold**        |   | **Deficit**       |   | **Loss** |   | **Total** |   |
|                                        |   |              |   |           |   |            |   |            |   |              |   |     |   |   |   |
| Balance, December 31, 2000                  |   | 100               |   | $              | — |            | $      | 127,315         |   | $                 | (2,552 | )        | $      | (3,321 | ) | $ | (1,687 | ) | $ | 119,755 |   |
|                                        |   |              |   |           |   |            |   |            |   |              |   |     |   |   |   |
| Comprehensive  income                       |   |              |   |           |   |            |   |            |   |              |   |     |   |   |   |
| Net income                                  |   | —            |   | —         |   | —          |   | —          |   | 5,445             |   | —   |   | 5,445 |   |
| Translation  adjustment                     |   | —            |   | —         |   | —          |   | —          |   | —            |   | (17      | )      | (17 | ) |
|                                        |   |              |   |           |   |            |   |            |   |              |   |     |   | 5,428 |   |
|                                        |   |              |   |           |   |            |   |            |   |              |   |     |   |   |   |
| Accrued  preferred stock dividends          |   | —            |   | —         |   | (1,252          | )      | —          |   | (2,124            | )      | —   |   | (3,376 | ) |
|                                        |   |              |   |           |   |            |   |            |   |              |   |     |   |   |   |
| Preferred stock  redemption value accretion |   | —            |   | —         |   | (351            | )      | —          |   | —            |   | —   |   | (351 | ) |
|                                        |   |              |   |           |   |            |   |            |   |              |   |     |   |   |   |
| Compensatory  stock option expense          |   | —            |   | —         |   | 277             |   | —          |   | —            |   | —   |   | 277 |   |
|                                        |   |              |   |           |   |            |   |            |   |              |   |     |   |   |   |
| Notes receivable  interest accrued          |   | —            |   | —         |   | —          |   | (105            | )      | —            |   | —   |   | (105 | ) |
| Balance,  September 30, 2001 (Unaudited)    |   | 100               |   | $              | — |            | $      | 125,989         |   | $                 | (2,657 | )        | $      | — |   | $ | (1,704 | ) | $ | 121,628 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

**DECRANEAIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES**

**ConsolidatedStatements of Cash Flows**

**(Inthousands)**
|                                                                              |   | **Nine  Months Ended** |   |
|-----------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                              |   | **September  30,**     |   |
|                                                                              |   | **2001**               |   | **2000** |   |
|                                                                              |   | **(Unaudited)**        |   |
| **Cash  flows from operating activities**                                         |   |                   |   |   |   |
| Net income                                                                        |   | $                      | 5,445  |   | $ | 3,632 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities |   |                   |   |   |   |
| Depreciation and  amortization                                                    |   | 25,561                 |   | 21,233 |   |
| Deferred income  taxes                                                            |   | 6,801                  |   | 4,019 |   |
| Other, net                                                                        |   | 605                    |   | 797 |   |
| Changes in  assets and liabilities, net of effect from acquisitions               |   |                   |   |   |   |
| Accounts  receivable                                                              |   | (17,072                | )      | (12,891 | ) |
| Inventories                                                                       |   | (8,260                 | )      | (9,011 | ) |
| Prepaid expenses  and other assets                                                |   | (2,684                 | )      | (1,162 | ) |
| Accounts payable                                                                  |   | 3,832                  |   | 904 |   |
| Accrued  liabilities                                                              |   | (7,894                 | )      | (9,610 | ) |
| Income taxes  payable                                                             |   | 11                     |   | 981 |   |
| Other long-term  liabilities                                                      |   | (143                   | )      | (1,108 | ) |
| Net cash  provided by (used for) operating activities                             |   | 6,202                  |   | (2,216 | ) |
|                                                                              |   |                   |   |   |   |
| **Cash  flows from investing activities**                                         |   |                   |   |   |   |
| Cash paid for  acquisitions, net of cash acquired                                 |   | (13,529                | )      | (87,215 | ) |
| Capital  expenditures                                                             |   | (9,794                 | )      | (17,701 | ) |
| Other, net                                                                        |   | 635                    |   | 71 |   |
| Net cash used  for investing activities                                           |   | (22,688                | )      | (104,845 | ) |
|                                                                              |   |                   |   |   |   |
| **Cash  flows from financing activities**                                         |   |                   |   |   |   |
| Net senior credit  facility borrowings                                            |   | 19,600                 |   | 71,400 |   |
| Proceeds from  the sale of preferred stock                                        |   | —                 |   | 25,000 |   |
| Capital  contribution                                                             |   | —                 |   | 7,976 |   |
| Other long-term  borrowings                                                       |   | 1,989                  |   | 2,958 |   |
| Principal  payments on term debt, capitalized leases and other debt               |   | (5,198                 | )      | (4,096 | ) |
| Deferred  financing costs                                                         |   | (580                   | )      | (2,000 | ) |
| Other, net                                                                        |   | (118                   | )      | (247 | ) |
| Net cash  provided by financing activities                                        |   | 15,693                 |   | 100,991 |   |
|                                                                              |   |                   |   |   |   |
| Effect of  foreign currency translation on cash                                   |   | 39                     |   | — |   |
|                                                                              |   |                   |   |   |   |
| Net decrease in  cash and cash equivalents                                        |   | (754                   | )      | (6,070 | ) |
| Cash and cash  equivalents at beginning of period                                 |   | 8,199                  |   | 7,918 |   |
| Cash and cash  equivalents at end of period                                       |   | $                      | 7,445  |   | $ | 1,848 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

**DECRANEAIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES**

**CondensedNotes to Consolidated Financial Statements**

**(Unaudited)**

**Note 1.           ConsolidatedFinancial Statements**

The consolidated interim financial statements includedin this report are unaudited. The Company believes the interim financialstatements are presented on a basis consistent with the audited financialstatements. The Company also believes that the interim financial statementscontain all adjustments necessary for a fair statement of the results for suchinterim periods. All of these adjustments are normal recurring adjustments. Theresults of operations for interim periods do not necessarily predict theoperating results for the full year. The consolidated balance sheet as ofDecember 31, 2000 has been derived from audited financial statements but doesnot include all disclosures required by accounting principles generallyaccepted in the United States of America as permitted by interim reportingrequirements. The information included in this report should be read inconjunction with Management’s Discussion and Analysis of Financial Conditionand Results of Operations and the audited financial statements and relatednotes included in the Company’s 2000 Form 10-K. Some reclassifications havebeen made to prior periods’ financial statements to conform to the 2001presentation.

**Note 2.           UnauditedPro Forma Results of Operations for 2000 Acquisitions**

Unaudited pro forma consolidated results of operationsare presented in the table below for the nine months ended September 30, 2000.The pro forma results of operations reflects the companies acquired during2000, which are not reflected in the September 30, 2000 historical results, asif all of the acquisitions were consummated as of January 1, 2000. Historicalresults for 2001, which reflects the companies acquired during 2000, arepresented for comparability. Amounts are in thousands.
|                          |   | **Nine Months Ended** |    |
|-------------------------------|--------|-----------------------|---------|
|                          |   | **September  30,**    |    |
|                          |   | **2001**              |    | **2000** |   |
|                          |   | **Historical**        |    | **Pro  Forma** |   |
|                          |   | **(Unaudited)**       |    |
| Revenues                      |   | $                     | 301,696 |   | $ | 278,051 |   |
| EBITDA, as  defined (Note 10) |   | 67,789                |    | 66,985 |   |
| Net income                    |   | 5,445                 |    | 4,542 |   |
|                               |        |                       |         |  |  |  |  |

 

The pro formaresults of operations do not purport to represent what actual results wouldhave been if the transactions described above occurred on such dates or toproject the results of operations for any future period. The above informationreflects adjustments for inventory, depreciation, amortization, general andadministrative expenses and interest expense based on the new cost basis anddebt and capital structure of the Company following the acquisitions.

 

**Note 3.           Inventories**

Inventories are comprised of the following as ofSeptember 30, 2001 and December 31, 2000 (amounts in thousands):
|               |   | **September  30,** |   | **December  31,** |   |
|--------------------|--------|--------------------|--------|-------------------|--------|
|               |   | **2001**           |   | **2000**          |   |
|               |   | **(Unaudited)**    |   |              |   |
| Raw materials      |   | $                  | 49,441 |              | $      | 49,235 |   |
| Work-in process    |   | 34,752             |   | 26,749            |   |
| Finished goods     |   | 7,742              |   | 7,693             |   |
| Total  inventories |   | $                  | 91,935 |              | $      | 83,677 |   |

 

Inventoried costs are not in excess of estimatedrealizable value and include direct engineering, production and tooling costs,and applicable manufacturing overhead. In accordance with industry practice,inventoried costs include amounts relating to programs and contracts with longproduction cycles. Included above are program costs, principally engineering,of $14,545,000 at September 30, 2001 and $8,603,000 at December 31, 2000related to long-term contracts that will be recoverable based on future sales.Periodic assessments are performed to ensure recoverability of program costsand adjustments are made, if necessary, to reduce inventoried costs toestimated realizable value. No adjustments were required in 2001 and 2000.

**Note 4.           AccruedLiabilities**

Accrued liabilities are comprised of the following asof September 30, 2001 and December 31, 2000 (amounts in thousands):
|                                                             |   | **September  30,** |   | **December  31,** |   |
|------------------------------------------------------------------|--------|--------------------|--------|-------------------|--------|
|                                                             |   | **2001**           |   | **2000**          |   |
|                                                             |   | **(Unaudited)**    |   |              |   |
| Acquisition  related contingent consideration                    |   | $                  | 6,204  |              | $      | 20,154 |   |
| Customer  advances and deposits                                  |   | 9,389              |   | 14,082            |   |
| Salaries, wages,  compensated absences and payroll related taxes |   | 14,066             |   | 15,337            |   |
| Accrued interest                                                 |   | 8,092              |   | 3,730             |   |
| Other accrued  liabilities                                       |   | 10,723             |   | 17,169            |   |
| Total accrued  liabilities                                       |   | $                  | 48,474 |              | $      | 70,472 |   |

** **

**Note 5.           Long-TermDebt**

Long-term debt includes the following amounts as ofSeptember 30, 2001 and December 31, 2000 (amounts in thousands):
|                                                                                             |   | **September  30,** |    | **December  31,** |          |
|--------------------------------------------------------------------------------------------------|--------|--------------------|---------|-------------------|---------------|
|                                                                                             |   | **2001**           |    | **2000**          |          |
|                                                                                             |   | **(Unaudited)**    |    |              |          |
| Senior credit  facility                                                                          |   |               |    |              |          |
| $ 25 million  working capital revolving line of credit                                           |   | $                  | —  |              | $             | — |   |
| $ 25 million  acquisition revolving line of credit                                               |   | 12,000             |    | 12,400            |          |
| Term loans                                                                                       |   | 280,132            |    | 263,443           |          |
|                                                                                             |   |               |    |              |          |
| 12% senior  subordinated notes                                                                   |   | 100,000            |    | 100,000           |          |
|                                                                                             |   |               |    |              |          |
| Capital lease  obligations and equipment term debt financing, secured by property and  equipment |   | 8,404              |    | 5,231             |     |
| Other  indebtedness                                                                              |   | 3,735              |    | 2,205             |          |
| Total long-term  debt                                                                            |   | 404,271            |    | 383,279           |          |
| Less current  portion                                                                            |   | (14,499            | )       | (9,289            | )             |
| Long-term debt,  less current portion                                                            |   | $                  | 389,772 |              | $             | 373,990 |   |

 

In April 2001, the Company amended its senior creditfacility and borrowed the remaining $20,000,000 of funds committed under itsterm loan facility. The net proceeds were used to repay amounts thenoutstanding under the acquisition revolving line of credit. Principal paymentsfor the additional term loan are due in $50,000 quarterly installments through2005 and $4,763,000 quarterly installments through 2006. The term loan bearsinterest, at the Company’s option, based on a margin of either 2.75% over theprime rate or 4.00% over the LIBOR rate.

**Note 6.           IncomeTaxes**

The provision forincome taxes differs from the amount determined by applying the applicable U.S.statutory federal rate to income before income taxes primarily due to theeffects of state and foreign income taxes and non-deductible expenses,principally goodwill amortization. The difference in the effective tax ratesbetween periods is mostly a result of the relationship of non-deductibleexpenses to income before income taxes.

 

**Note 7.           CapitalStructure**

**Mandatorily Redeemable Preferred Stock**

The table below summarizes the increase in mandatorilyredeemable preferred stock during the nine months ended September 30, 2001.
|                                              |   | **Number**                                           |   | **Mandatory**  |   | **Unamortized** |   | **Net**   |   |
|---------------------------------------------------|--------|------------------------------------------------------|--------|----------------|--------|-----------------|--------|-----------|--------|
|                                              |   | **of**                                               |   | **Redemption** |   | **Issuance**    |   | **Book**  |   |
|                                              |   | **Shares**                                           |   | **Value**      |   | **Discount**    |   | **Value** |   |
|                                              |   | **(in  thousands, except share and per share data)** |   |
| Balance,  December 31, 2000                       |   | 270,400                                              |   | $              | 27,040 |            | $      | (3,861    | )      | $ | 23,179 |   |
| Accrued  dividends and redemption value accretion |   | 33,763                                               |   | 3,376          |   | 351             |   | 3,727     |   |
| Balance,  September 30, 2001 (Unaudited)          |   | 304,163                                              |   | $              | 30,416 |            | $      | (3,510    | )      | $ | 26,906 |   |
|                                              |   |                                                 |   |           |   |            |   |      |   |
| Per share  liquidation value as of                |   |                                                 |   |           |   |            |   |      |   |
| September 30,  2001 (Unaudited)                   |   |                                                 |   | $              | 100.00 |            |   |      |   |   |

 

Holders of the preferred stock are entitled toreceive, when, as and if declared, dividends at a rate equal to 16% per annum.Prior to June 30, 2005, the Company may, at its option, pay dividends either incash or by the issuance of additional shares of preferred stock. For the ninemonths ended September 30, 2001, the Company elected to issue 33,763 additionalshares in lieu of cash dividend payments. Accrued dividends totaling $2,124,000were charged to retained earnings, eliminating the Company’s cumulativeearnings to date. The remaining accrued dividends and the redemption valueaccretion were charged to additional paid-in capital.

**Reduction of Authorized Shares Subsequent to September30, 2001**

In October 2001,the Company amended its articles of incorporation and reduced its authorizedcapital structure by eliminating all previously authorized but un-issuedcumulative convertible preferred stock and undesignated preferred stock andreducing the number of common shares authorized for issuance. Subsequent to theamendment, the Company is authorized to issue 1,000 shares of common stock($.01 par value) and 700,000 shares of 16% Senior Redeemable ExchangeablePreferred Stock Due 2009 ($.01 par value). No changes were made to thepreferences and rights of the preferred and common stock issued andoutstanding.

 

**Note 8.           Commitmentsand Contingencies**

**Contingent Acquisition Consideration**

The determinable amounts of the Company’s remaining maximumcontingent consideration payment obligations, as of September 30, 2001, aresummarized below. The contingent consideration is payable based upon theacquired companies level of attainment of their defined performance criteria infuture periods and excludes amounts earned and recorded through September 30,2001 (Notes 4 and 9). Provided the defined performance criteria is attained forthe future years ending December 31, the Company’s determinable maximumcontingent consideration payment obligation will be (amounts in thousands):
|                                   |   | **(Unaudited)** |   |
|----------------------------------------|--------|-----------------|--------|
| For  the year ending December 31,      |   |            |   |
| 2001                                   |   | $               | 700    |   |
| 2002                                   |   | 600             |   |
| Total  maximum determinable obligation |   | $               | 1,300  |   |

 

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

**Funding of DeCrane Holdings Preferred StockObligations**

The Company is a wholly owned subsidiary of DeCraneHoldings whose capital structure also includes mandatorily redeemable preferredstock. Since the Company is DeCrane Holdings’ only operating subsidiary andsource of cash, the Company may be required to fund DeCrane Holdings’ preferredstock dividend and redemption obligations in the future.

DeCrane Holdings’preferred stock dividends are payable quarterly at a rate of 14% per annum.Prior to September 30, 2005, dividends are not paid in cash but instead accreteto the liquidation value of the preferred stock, which, in turn, increases theredemption obligation. On or after September 30, 2005, preferred stockdividends are required to be paid in cash, if declared. The DeCrane Holdingspreferred stock has a total redemption value of $52,390,000 as of September 30,2001, including accumulated dividends.

 

**Note 9.           ConsolidatedStatements of Cash Flows**

The following information supplements the Company’s consolidatedstatements of cash flows (amounts in thousands):
|                                                                                  |   | **Nine  Months Ended** |    |
|---------------------------------------------------------------------------------------|--------|------------------------|---------|
|                                                                                  |   | **September  30,**     |    |
|                                                                                  |   | **2001**               |    | **2000** |   |
|                                                                                  |   | **(Unaudited)**        |    |
| Components of  cash paid for acquisitions                                             |   |                   |    |   |   |
| Fair value of  assets acquired                                                        |   | $                      | —  |   | $ | 77,904 |   |
| Liabilities  assumed                                                                  |   | —                 |    | (20,516 | ) |
| Cash paid                                                                             |   | —                 |    | 57,388 |   |
| Less cash  acquired                                                                   |   | —                 |    | (292 | ) |
| Net cash paid  for companies acquired during the period                               |   | —                 |    | 57,096 |   |
|                                                                                  |   |                   |    |   |   |
| Contingent  consideration paid for previously completed acquisitions                  |   | 17,075                 |    | 29,825 |   |
| Cash purchase  price reductions received related to previously completed acquisitions |   | (3,718                 | )  | — |   |
| Additional  acquisition related expenses                                              |   | 172                    |    | 294 |   |
| Total cash paid  for acquisitions                                                     |   | $                      | 13,529  |   | $ | 87,215 |   |

 

During the nine months ended September 30, 2001, theCompany settled its asserted claims against the sellers of two companiesacquired in 2000 for breach of representation and warranty provisions containedin the purchase agreements. The Company received $3,718,000 from the sellersupon entering into the settlement agreements, which also provided that theCompany pay in 2002 a minimum of $3,125,000 of previously contingentconsideration for the year ending December 31, 2001. The $3,125,000 minimumcontingent consideration payable is reflected as an accrued liability as ofSeptember 30, 2001.

**Note 10.         BusinessSegment Information**

The Company supplies products and services to thegeneral aviation industry. The Company’s subsidiaries are organized into threegroups, each of which are strategic businesses that are managed separatelybecause each business develops, manufactures and sells distinct products andservices. The groups and a description of their businesses are as follows:

·        *Cabin Management* – provides interior cabin components for thecorporate aircraft market, including furniture, cabinetry, seats and in-flightentertainment systems;

·        *Specialty Avionics* – designs, engineers and manufactures electroniccomponents, display devices and interconnect components and assemblies; and

·         *Systems Integration* – provides auxiliary fuel tanks, auxiliary powerunits and system integration services.

** **

Management utilizes more than one measurement toevaluate group performance and allocate resources, however, EBITDA isconsidered to be the primary measurement of overall group economic returns andcash flows. Management defines EBITDA as earnings before interest, incometaxes, depreciation and amortization, restructuring and asset impairmentcharges, acquisition related charges and other noncash and nonoperatingcharges. This is consistent with the manner in which the Company’s lenders andultimate investors measure its overall performance.

The accounting policies of the groups aresubstantially the same as those described in the summary of significantaccounting policies in Note 1 to the audited financial statements. Sometransactions are recorded at the Company’s corporate headquarters and are notallocated to the groups, such as, most of the Company’s cash and cashequivalents, debt and related net interest expense, corporate headquarterscosts and income taxes.
|  
 

 

**Three  Months Ended**

 

**Nine  Months Ended**

 

 
 

 

**September  30,**

 

**September  30,**

 

 
 

 

**2001**

 

**2000**

 

**2001**

 

**2000**

 

 
 

 

**(Unaudited)**

 

 
Revenues

 

 

 

 

 

 

 

 

 

 
Cabin Management

 

$

50,719

 

$

50,303

 

$

155,590

 

$

127,081

 

 
Specialty  Avionics

 

31,902

 

28,164

 

94,999

 

81,006

 

 
Systems  Integration

 

18,528

 

14,870

 

53,023

 

47,262

 

 
Inter-group  elimination (1)

 

(964

)

(188

)

(1,916

)

(928

)

 
Consolidated  totals

 

$

100,185

 

$

93,149

 

$

301,696

 

$

254,421

 

 
 

 

 

 

 

 

 

 

 

 

 
EBITDA (2)

 

 

 

 

 

 

 

 

 

 
Cabin Management

 

$

10,703

 

$

12,115

 

$

33,791

 

$

33,496

 

 
Specialty  Avionics

 

9,014

 

7,491

 

26,243

 

19,622

 

 
Systems  Integration

 

4,407

 

3,925

 

13,281

 

10,881

 

 
Corporate (3)

 

(1,845

)

(1,491

)

(5,146

)

(4,836

)

 
Inter-group  elimination (4)

 

(281

)

119

 

(380

)

119

 

 
Consolidated  totals

 

$

21,998

 

$

22,159

 

$

67,789

 

$

59,282

 

 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**September 30,**

 

 

 

**2001**

 

**2000**

 

 

 

**(Unaudited)**

 

 

 

Total assets (as  of period end)

 

 

 

 

 

Cabin Management

 

$

330,445

 

$

282,364

 

Specialty Avionics

 

225,462

 

229,198

 

Systems  Integration

 

77,642

 

81,604

 

Corporate (5)

 

39,939

 

28,259

 

Inter-group  elimination (6)

 

(316

)

(288

)

Consolidated  totals

 

$

673,172

 

$

621,137

 

 

(1)       Inter-group sales are accounted for atprices comparable to sales to unaffiliated customers, and are eliminated inconsolidation.

 

 

(2)

The table below reconciles EBITDA to consolidated  income from operations and income before income taxes (amounts in thousands).

 

 

 

**Three  Months Ended**

 

**Nine  Months Ended**

 

 

 

**September  30,**

 

**September  30,**

 

 

 

**2001**

 

**2000**

 

**2001**

 

**2000**

 

 

 

**(Unaudited)**

 

Consolidated  EBITDA

 

$

21,998

 

$

22,159

 

$

67,789

 

$

59,282

 

Depreciation and  amortization (a)

 

(8,066

)

(7,166

)

(23,914

)

(19,537

)

Acquisition  related charges not capitalized

 

(14

)

(1

)

(117

)

(8

)

Other noncash  charges

 

(41

)

(86

)

(277

)

(257

)

Consolidated  income from operations

 

13,877

 

14,906

 

43,481

 

39,480

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(9,654

)

(11,264

)

(29,984

)

(29,977

)

Other (expenses)  income, net

 

25

 

(55

)

(92

)

(228

)

Consolidated  income before income taxes

 

$

4,248

 

$

3,587

 

$

13,405

 

$

9,275

 

 

(a)

 

Reflects depreciation and amortization of long-lived assets, goodwill  and other intangible assets. Excludes amortization of deferred financing costs,  which are classified as a component of interest expense, of $570,000 and  $593,000 for the three months ended September 30, 2001 and 2000,  respectively, and $1,647,000 and $1,696,000 for the nine months ended  September 30, 2001 and 2000, respectively.

 

 

 

(3)       Reflects the Company’s corporateheadquarters costs and expenses not allocated to the groups.

(4)       Reflects elimination of the effect ofinter-group profits in inventory.

(5)       Reflects the Company’s corporateheadquarters assets, excluding investments in and notes receivable fromsubsidiaries.

(6)       Reflects elimination of inter-groupreceivables and profits in inventory as of period end.
****
**Note 11.         RecentlyIssued Accounting Pronouncements**

**SFAS Nos. 141 and 142**

In June 2001, the Financial Accounting Standards Boardissued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill andOther Intangible Assets.”

SFAS No. 141 establishes accounting and reportingstandards for business combinations. SFAS No. 141 requires that all businesscombinations be accounted for using the purchase method of accounting andprovides criteria for the initial recognition and measurement of goodwill andother intangible assets. SFAS No. 141 is effective for all businesscombinations initiated or completed after June 30, 2001. For businesscombinations completed prior to July 1, 2001, SFAS No. 141 is effectiveconcurrent with the adoption of SFAS No. 142.

SFAS No. 142 establishes accounting and reportingstandards for goodwill and other intangible assets subsequent to theiracquisition. SFAS No. 142 eliminates the current requirement to amortizegoodwill and other indefinite-lived intangible assets requiring insteadperiodic impairment testing with a loss charged to the results of operation inthe periods in which impairment occurs. Finite-lived intangible assets areamortized and are also subject to periodic impairment testing. Adoption of SFASNo. 142 is required for the Company’s fiscal year beginning January 1, 2002.

The Company is currently evaluating the impact the newaccounting standards will have on its financial position and results ofoperations upon adoption on January 1, 2002; there will be no impact on cashflows. While the full, net of tax, impact has yet to be determined, adoption ofthe new standards will result in the following:

·        Underthe criteria established in SFAS No. 141, the values ascribed to the assembledworkforces acquired are not recognized as an intangible asset apart fromgoodwill. As a result, the net book value ascribed to the assembled workforces,net of deferred income tax liabilities, will be reclassified to goodwill as ofJanuary 1, 2002.

·        Adoptionof SFAS No. 142 on January 1, 2002 will reduce amortization expense in futureperiods. If SFAS No. 142 had been effective as of the beginning of 2001,goodwill and assembled workforces amortization totaling $10,657,000 for thenine months ended September 30, 2001 would have been eliminated.

The Company has until June 30, 2002 to complete itstransitional impairment testing of goodwill associated with adopting SFAS No.142 and until March 31, 2002 to complete its transitional impairment testing ofother intangible assets. The amount of impairment losses recognizable uponadoption, if any, is not known at this time.

**SFAS No. 144**

In October 2001,the Financial Accounting Standards Board issued SFAS No. 144, “Accounting forthe Impairment or Disposal of Long-Lived Assets, ” which replaces SFAS No. 121,“Accounting for Impairment of Long-Lived Assets and for Long-Lived to beDisposed Of” and also replaces and broadens the provisions of APB Opinion No.30, “Reporting Results of Operations – Reporting the Effects of Disposal of aSegment of a Business.

 

            SFAS No. 144establishes one accounting model, based on framework established in SFAS No.121, for the recognition, measurement and reporting of impairment of long-livedassets to be held and used and measurement of long-lived assets to be disposedof by sale. Adoption of SFAS No. 144 is required for the Company’s fiscal yearbeginning January 1, 2002 although early application is permitted. The Companyis currently evaluating the impact this new standard will have on its financialposition, results of operations and cash flows.

 

**Note 12.         Impactof Events of September 11, 2001**

The September 11, 2001 terrorist attack on the UnitedStates is adversely impacting the commercial airline industry. All domesticairlines were grounded for a three-day period and, since resuming service, mostmajor U.S. carriers have announced substantially reduced flight schedules, temporaryor permanent retirement of a portion of their fleets, and workforce reductionsaggregating over 100,000 employees. As a result of the substantial reduction inairline traffic arising from the terrorist attack and its aftermath, as well asother factors such as the weakening economy, the airline industry is expectedto incur extremely large losses for the year 2001. Accordingly, the airlinesappear to be taking measures to conserve cash in part by deferring oreliminating the purchase of parts and components for their fleet aircraft andby canceling or deferring the delivery of new aircraft on order with originalequipment manufacturers. These actions, in turn, will have an unfavorableimpact upon that portion of our business. The commercial and regional originalequipment and aftermarket/retrofit portion of our business is currentlyestimated at approximately 28% of our revenues.

In addition, an estimated 64% of our revenues arecurrently derived from the corporate aircraft original equipment and aftermarket/retrofitbusiness. We are unable to determine the impact of the terrorist attack on thisportion of our business, although the weakening economy may negatively impactthis business as well.

In September 2001, the Financial Accounting StandardsBoard’s Emerging Issues Task Force issued EITF No. 01-10, “Accounting for theImpact of the September 11, 2001 Terrorist Acts,” which provides guidance onhow the costs related to the terrorist acts should be reported, how todetermine whether an asset impairment loss should be recognized and howliabilities for losses and other costs should be recognized and reported.

The Company hasbegun an assessment of potential losses and costs it may incur or actions thatmay be necessary as a result of the events of September 11th and itsaftermath. But given the relatively brief period since that date, the Companyis not currently able to determine the impact that significant changes inindustry conditions will have on its consolidated financial position, resultsof operations or cash flows. As a result, the Company’s financial statements asof and for the three months and nine months ended September 30, 2001 do notinclude any charges directly or indirectly resulting from the terrorist acts asaddressed in EITF No. 01-10. However, given the magnitude of the eventsmentioned above and the possible subsequent effects, the impact could bematerial in future periods. As losses and/or costs, if any, become estimable,they will be recognized as a component of earnings from operations.

 
****
**Note 13.         Supplemental Condensed ConsolidatingFinancial Information**

In conjunction with the senior credit facility and 12%senior subordinated notes described in Note 5, the following condensedconsolidating financial information is presented segregating the Company, asthe issuer, and guarantor and non-guarantor subsidiaries. The accompanyingfinancial information in the guarantor subsidiaries column reflects thefinancial position, results of operations and cash flows for those subsidiariesguaranteeing the senior credit facility and the notes.

The guarantor subsidiaries are wholly-ownedsubsidiaries of the Company and their guarantees are full and unconditional ona joint and several basis. There are no restrictions on the ability of the guarantorsubsidiaries to transfer funds to the issuer in the form of cash dividends,loans or advances. Separate financial statements of the guarantor subsidiariesare not presented because management believes that such financial statementswould not be material to investors. Investments in subsidiaries in thefollowing condensed consolidating financial information are accounted for underthe equity method of accounting. Consolidating adjustments include thefollowing:

(1)       Elimination of investments in subsidiaries.

(2)       Elimination of intercompany accounts.

(3)       Elimination of intercompany sales betweenguarantor and non-guarantor subsidiaries.

(4)       Elimination of equity in earnings ofsubsidiaries.

 
****
**Balance Sheets**

 

 

 

**September 30, 2001 (Unaudited)**

 

 

 

**Issuer**

 

**Guarantor  Subsidiaries**

 

**Non- Guarantor  Subsidiaries**

 

**Consolidating  Adjustments**

 

 

 

**Consolidated  Total**

 

 

 

**(in  thousands)**

 

**Assets**

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash  equivalents

 

$

6,728

 

$

223

 

$

494

 

$

—

 

 

 

$

7,445

 

Accounts  receivable, net

 

—

 

67,778

 

2,001

 

—

 

 

 

69,779

 

Inventories

 

—

 

90,029

 

1,906

 

—

 

 

 

91,935

 

Other current  assets

 

13,216

 

1,851

 

138

 

—

 

 

 

15,205

 

Total current  assets

 

19,944

 

159,881

 

4,539

 

—

 

 

 

184,364

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and  equipment, net

 

3,502

 

57,535

 

2,849

 

—

 

 

 

63,886

 

Other assets,  principally intangibles, net

 

16,493

 

398,488

 

9,941

 

—

 

 

 

424,922

 

Investments in  subsidiaries

 

408,647

 

21,214

 

—

 

(429,861

)

(1)

 

—

 

Intercompany  receivables

 

262,681

 

97,888

 

4,633

 

(365,202

)

(2)

 

—

 

Total assets

 

$

711,267

 

$

735,006

 

$

21,962

 

$

(795,063

)

 

 

$

673,172

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Liabilities, Mandatorily Redeemable  Preferred Stock and Stockholder's Equity**        

 

Current  liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Current portion  of long-term debt

 

$

13,066

 

$

1,420

 

$

13

 

$

—

 

 

 

$

14,499

 

Other current  liabilities

 

26,426

 

45,741

 

1,764

 

—

 

 

 

73,931

 

Total current  liabilities

 

39,492

 

47,161

 

1,777

 

—

 

 

 

88,430

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

379,757

 

10,015

 

—

 

—

 

 

 

389,772

 

Intercompany  payables

 

97,888

 

267,314

 

—

 

(365,202

)

(2)

 

—

 

Other long-term  liabilities

 

43,892

 

1,869

 

675

 

—

 

 

 

46,436

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mandatorily  redeemable preferred stock

 

26,906

 

—

 

—

 

—

 

 

 

26,906

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholder’s  equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Paid-in capital

 

123,332

 

338,684

 

15,440

 

(354,124

)

(1)

 

123,332

 

Retained  earnings (deficit)

 

—

 

69,963

 

5,774

 

(75,737

)

(1)

 

—

 

Accumulated  other comprehensive loss

 

—

 

—

 

(1,704

)

—

 

 

 

(1,704

)

Total  stockholder’s equity

 

123,332

 

408,647

 

19,510

 

(429,861

)

 

 

121,628

 

Total  liabilities, mandatorily redeemable preferred stock and stockholder’s equity

 

$

711,267

 

$

735,006

 

$

21,962

 

$

(795,063

)

 

 

$

673,172

 

 

 

 

 
**December  31, 2000**
** **

 

 

**Issuer**

 

**Guarantor  Subsidiaries**

 

**Non-  Guarantor Subsidiaries**

 

**Consolidating****Adjustments**

 

 

 

**Consolidated  Total**

** **

 

 

**(in  thousands)**

** **

**Assets**

 

 

** **

 

** **

 

** **

 

** **

 

 

 

** **

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

7,553

 

$

233

 

$

413

 

$

—

 

 

 

$

8,199

 

Accounts receivable, net

 

—

 

51,396

 

1,735

 

—

 

 

 

53,131

 

Inventories

 

—

 

82,013

 

1,664

 

—

 

 

 

83,677

 

Other current assets

 

14,814

 

1,118

 

145

 

—

 

 

 

16,077

 

Total current assets

 

22,367

 

134,760

 

3,957

 

—

 

 

 

161,084

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

4,423

 

52,303

 

2,765

 

—

 

 

 

59,491

 

Other assets, principally intangibles, net

 

16,514

 

412,730

 

10,338

 

—

 

 

 

439,582

 

Investments in subsidiaries

 

394,794

 

20,739

 

—

 

(415,533

)

(1)

 

—

 

Intercompany receivables

 

251,725

 

92,991

 

3,863

 

(348,579

)

(2)

 

—

 

Total assets

 

$

689,823

 

$

713,523

 

$

20,923

 

$

(764,112

)

 

 

$

660,157

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Liabilities,  Mandatorily Redeemable Preferred Stock and Stockholder’s Equity**        

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

7,997

 

$

1,266

 

$

26

 

$

—

 

 

 

$

9,289

 

Other current liabilities

 

38,635

 

54,384

 

1,262

 

—

 

 

 

94,281

 

Total current liabilities

 

46,632

 

55,650

 

1,288

 

—

 

 

 

103,570

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

368,837

 

5,147

 

6

 

—

 

 

 

373,990

 

Intercompany payables

 

92,991

 

255,588

 

—

 

(348,579

)

(2)

 

—

 

Other long-term liabilities

 

36,742

 

2,344

 

577

 

—

 

 

 

39,663

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mandatorily redeemable preferred stock

 

23,179

 

—

 

—

 

—

 

 

 

23,179

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholder’s equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Paid-in capital

 

124,763

 

338,729

 

15,440

 

(354,169

)

(1)

 

124,763

 

Retained earnings (deficit)

 

(3,321

)

56,065

 

5,299

 

(61,364

)

(1)

 

(3,321

)

Accumulated other comprehensive loss

 

—

 

—

 

(1,687

)

—

 

 

 

(1,687

)

Total stockholder’s equity

 

121,442

 

394,794

 

19,052

 

(415,533

)

 

 

119,755

 

Total liabilities, mandatorily redeemable preferred stock and  stockholder’s equity

 

$

689,823

 

$

713,523

 

$

20,923

 

$

(764,112

)

 

 

$

660,157

 

** **
****
**Statements of Operations**

 

 

 

**Nine  Months Ended September 30, 2001 (Unaudited)**

** **

 

 

 

 

**Guarantor**

 

**Non-  Guarantor**

 

**Consolidating**

 

 

 

**Consolidated**

** **

 

 

**Issuer**

 

**Subsidiaries**

 

**Subsidiaries**

 

**Adjustments**

 

 

 

**Total**

** **

 

 

**(in  thousands)**

** **

Revenues

 

$

—

 

$

299,019

 

$

8,594

 

$

(5,917

)

(3)

 

$

301,696

 

Cost of sales

 

—

 

199,982

 

7,234

 

(5,917

)

(3)

 

201,299

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

—

 

99,037

 

1,360

 

—

 

 

 

100,397

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

6,790

 

34,658

 

611

 

—

 

 

 

42,059

 

Amortization of intangible assets

 

152

 

14,405

 

300

 

—

 

 

 

14,857

 

Interest expense

 

29,082

 

887

 

15

 

—

 

 

 

29,984

 

Intercompany charges

 

(18,055

)

18,055

 

—

 

—

 

 

 

—

 

Equity in earnings of subsidiaries

 

(13,898

)

(593

)

—

 

14,491

 

(4)

 

—

 

Other expenses (income), net

 

248

 

151

 

(307

)

—

 

 

 

92

 

Provision for income taxes (benefit)

 

(9,764

)

17,576

 

148

 

—

 

 

 

7,960

 

Net income

 

$

5,445

 

$

13,898

 

$

593

 

$

(14,491

)

 

 

$

5,445

 

 

 

 

 

 

**Nine  Months Ended September 30, 2000 (Unaudited)**

** **

 

 

 

 

**Guarantor**

 

**Non-  Guarantor**

 

**Consolidating**

 

 

 

**Consolidated**

** **

 

 

**Issuer**

 

**Subsidiaries**

 

**Subsidiaries**

 

**Adjustments**

 

 

 

**Total**

** **

 

 

**(in  thousands)**

** **

Revenues

 

$

—

 

$

252,477

 

$

8,838

 

$

(6,894

)

(3)

 

$

254,421

 

Cost of sales

 

—

 

169,591

 

6,830

 

(6,894

)

(3)

 

169,527

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

—

 

82,886

 

2,008

 

—

 

 

 

84,894

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

5,535

 

25,969

 

961

 

—

 

 

 

32,465

 

Amortization of intangible assets

 

152

 

12,479

 

318

 

—

 

 

 

12,949

 

Interest expense

 

29,665

 

309

 

3

 

—

 

 

 

29,977

 

Intercompany charges

 

(11,798

)

11,798

 

—

 

—

 

 

 

—

 

Equity in earnings of subsidiaries

 

(13,210

)

(696

)

—

 

13,906

 

(4)

 

—

 

Other expenses (income), net

 

261

 

61

 

(94

)

—

 

 

 

228

 

Provision for income taxes (benefit)

 

(14,237

)

19,756

 

124

 

—

 

 

 

5,643

 

Net income

 

$

3,632

 

$

13,210

 

$

696

 

$

(13,906

)

 

 

$

3,632

 

** **
****
**Statements of Cash Flows**

 

 

 

**Nine  Months Ended September 30, 2001 (Unaudited)**

** **

 

 

 

 

**Guarantor**

 

**Non-  Guarantor**

 

**Consolidating**

 

 

 

**Consolidated**

** **

 

 

**Issuer**

 

**Subsidiaries**

 

**Subsidiaries**

 

**Adjustments**

 

 

 

**Total**

** **

 

 

**(in  thousands)**

** **

**Cash  flows from operating activities**      

 

 

 

 

 

Net income

 

$

5,445

 

$

13,898

 

$

593

 

$

(14,491

)

(4)

 

$

5,445

 

Noncash adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of subsidiaries

 

(13,898

)

(593

)

—

 

14,491

 

(4)

 

—

 

Other noncash adjustments

 

9,639

 

22,393

 

935

 

—

 

 

 

32,967

 

Changes in working capital

 

(3,766

)

(27,573

)

(871

)

—

 

 

 

(32,210

)

Net cash provided by (used for) operating activities

 

(2,580

)

8,125

 

657

 

—

 

 

 

6,202

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Cash flows from investing  activities**

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for acquisitions, net of cash acquired

 

(13,529

)

—

 

—

 

—

 

 

 

(13,529

)

Capital expenditures and other

 

(125

)

(8,438

)

(596

)

—

 

 

 

(9,159

)

Net cash used for investing activities

 

(13,654

)

(8,438

)

(596

)

—

 

 

 

(22,688

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Cash flows from financing  activities**

 

 

 

 

 

 

 

 

 

 

 

 

 

Net senior credit facility borrowings

 

19,600

 

—

 

—

 

—

 

 

 

19,600

 

Other long-term borrowings

 

—

 

1,989

 

—

 

—

 

 

 

1,989

 

Principal payments on term debt, capitalized leases and other debt

 

(3,611

)

(1,568

)

(19

)

—

 

 

 

(5,198

)

Deferred financing costs

 

(580

)

—

 

—

 

—

 

 

 

(580

)

Other, net

 

—

 

(118

)

—

 

—

 

 

 

(118

)

Net cash provided by (used for) financing activities

 

15,409

 

303

 

(19

)

—

 

 

 

15,693

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of foreign currency translation on cash

 

—

 

—

 

39

 

—

 

 

 

39

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and equivalents

 

(825

)

(10

)

81

 

—

 

 

 

(754

)

Cash and equivalents at beginning of period

 

7,553

 

233

 

413

 

—

 

 

 

8,199

 

Cash and equivalents at end of period

 

$

6,728

 

$

223

 

$

494

 

$

—

 

 

 

$

7,445

 

 

 

 

 

**Nine  Months Ended September 30, 2000 (Unaudited)**

** **

 

 

 

 

**Guarantor**

 

**Non-  Guarantor**

 

**Consolidating**

 

 

 

**Consolidated**

** **

 

 

**Issuer**

 

**Subsidiaries**

 

**Subsidiaries**

 

**Adjustments**

 

 

 

**Total**

** **

 

 

**(in  thousands)**

** **

**Cash  flows from operating activities**        

 

Net income

 

$

3,632

 

$

13,210

 

$

696

 

$

(13,906

)

(4)

 

$

3,632

 

Noncash adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of subsidiaries

 

(13,210

)

(696

)

—

 

13,906

 

(4)

 

—

 

Other noncash adjustments

 

6,467

 

18,864

 

718

 

—

 

 

 

26,049

 

Changes in working capital

 

(11,146

)

(19,529

)

(1,222

)

—

 

 

 

(31,897

)

Net cash provided by (used for) operating activities

 

(14,257

)

11,849

 

192

 

—

 

 

 

(2,216

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Cash flows from investing  activities**

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for acquisitions

 

(87,507

)

292

 

—

 

—

 

 

 

(87,215

)

Capital expenditures and other

 

(3,626

)

(13,642

)

(362

)

—

 

 

 

(17,630

)

Net cash used for investing activities

 

(91,133

)

(13,350

)

(362

)

—

 

 

 

(104,845

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Cash flows from financing  activities**

 

 

 

 

 

 

 

 

 

 

 

 

 

Net senior credit facility borrowings

 

71,400

 

—

 

—

 

—

 

 

 

71,400

 

Proceeds from sale of preferred stock

 

25,000

 

—

 

—

 

—

 

 

 

25,000

 

Capital contribution

 

7,976

 

—

 

—

 

—

 

 

 

7,976

 

Other long-term borrowings

 

—

 

2,958

 

—

 

—

 

 

 

2,958

 

Principal payments on term debt, capitalized leases and other debt

 

(3,419

)

(664

)

(13

)

—

 

 

 

(4,096

)

Deferred financing costs

 

(2,000

)

—

 

—

 

—

 

 

 

(2,000

)

Other, net

 

(50

)

(197

)

—

 

—

 

 

 

(247

)

Net cash provided by (used for) financing activities

 

98,907

 

2,097

 

(13

)

—

 

 

 

100,991

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of foreign currency translation on cash

 

—

 

—

 

—

 

—

 

 

 

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and equivalents

 

(6,483

)

596

 

(183

)

—

 

 

 

(6,070

)

Cash and equivalents at beginning of period

 

7,839

 

(323

)

402

 

—

 

 

 

7,918

 

Cash and equivalents at end of period

 

$

1,356

 

$

273

 

$

219

 

$

—

 

 

 

$

1,848

 

 
****
**ITEM2.          MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The followingdiscussions should be read in conjunction with our financial statements andaccompanying notes included in this report.

 

**Overview**

 

Our financial positionand results of operations have been affected by our history of acquisitions. Asa result, our historical financial statements do not reflect the financialposition and results of operations of our current businesses. Our most recentacquisitions, which affect the comparability of the historical financialcondition and results of operations described herein, consist of our CabinManagement Group’s acquisitions of Carl F. Booth & Co. on May 11, 2000 andERDA on June 30, 2000.

 

Our historicalfinancial statements reflect the financial position, results of operations andcash flows of the acquired businesses subsequent to their respectiveacquisition dates.

 

**Recent Developments**

 

**Impact of the Events of September 11,2001**

 

The September 11,2001 terrorist attack on the United States is adversely impacting thecommercial airline industry. All domestic airlines were grounded for athree-day period and, since resuming service, most major U.S. carriers haveannounced substantially reduced flight schedules, temporary or permanentretirement of a portion of their fleets, and workforce reductions aggregatingover 100,000 employees. As a result of the substantial reduction in airlinetraffic arising from the terrorist attack and its aftermath, as well as otherfactors such as the weakening economy, the airline industry is expected toincur extremely large losses for the year 2001. Accordingly, the airlinesappear to be taking measures to conserve cash in part by deferring oreliminating the purchase of parts and components for their fleet aircraft andby canceling or deferring the delivery of new aircraft on order with originalequipment manufacturers. These actions, in turn, will have an unfavorableimpact upon that portion of our business. The commercial and regional originalequipment and aftermarket/retrofit portion of our business is currentlyestimated at approximately 28% of our revenues.

 

In addition, anestimated 64% of our revenues are currently derived from the corporate aircraftoriginal equipment and aftermarket/retrofit business. We are unable todetermine the impact of the terrorist attack on this portion of our business,although the weakening economy may negatively impact this business as well.

 

We have begun anassessment of potential losses and costs we may incur or actions that may benecessary as a result of the events of September 11th and itsaftermath. But given the relatively brief period since that date, we are notcurrently able to determine the impact that significant changes in industryconditions will have on our consolidated financial position, results ofoperations or cash flows. As a result, our financial statements as of and forthe three months and nine months ended September 30, 2001 do not include anycharges directly or indirectly resulting from the terrorist acts. However,given the magnitude of the events mentioned above and the possible subsequenteffects, the impact could be material in future periods. As losses and/orcosts, if any, become estimable, they will be recognized as a component ofearnings from operations.

 
****
**Results of Operations**

 

**Three Months Ended September 30, 2001Compared to Three Months Ended September 30, 2000**

 

**Revenues.* ***Revenues increased $7.1 million, or 7.6%,to $100.2 million for the three months ended September 30, 2001 from $93.1million for the three months ended September 30, 2000. By segment, revenueschanged as follows:

 

 

 

**Increase  (Decrease)**

 

 

 
**From 2000**
 

 

 

**Amount**

 

**Percent**

 

 

 

**(in  millions)**

 

 

 

Cabin Management

 

$

 0.4

 

0.8

%

Specialty  Avionics

 

3.7

 

13.3

 

Systems  Integration

 

3.7

 

24.6

 

Inter-group  elimination

 

(0.7

)

 

 

Total

 

$

 7.1

 

 

 

 

*CabinManagement. *Revenues increased by $0.4 million, or0.8% over the prior year, due to:

 

**•**      a $3.1million increase in cabin furniture, seating and related products revenuesreflecting higher volume prior to the September 11th terroristattack; offset by

 

•      a $2.7 million decrease incabin management systems revenues due to delays in new product development.

 

*SpecialtyAvionics.*  Revenues increased by $3.7 million, or 13.3%over the prior year, due to:

 

•      a $2.7 million increase incockpit audio, communications, lighting and power and control devices revenues;and

 

•      a $1.0 million revenueincrease resulting from higher volume for our interconnect products.

 

*SystemsIntegration.*  Revenues increased by $3.7 million, or 24.6%over the prior year, due to:

 

•      a $5.1 million increase in auxiliary fuel tank systemand power unit revenues; offset by

 

•      a $1.4 million decrease incabin and flight deck systems integration revenues.

 
****
**Grossprofit.**  Gross profit increased $1.6 million, or5.3%, to $32.8 million for the three months ended September 30, 2001. Grossprofit as a percent of revenues decreased to 32.7% for the three months endedSeptember 30, 2001 from 33.4% for the same period last year primarily as aresult of reduced profit margins in our Cabin Management group. By segment,gross profit changed as follows:

 

 

 

**Increase  (Decrease)**

 

 

 
**From 2000**
 

 

 

**Amount**

 

**Percent**

 

 

 

**(in millions)**

 

 

 

Cabin Management

 

$

(0.3

)

(1.8

)%

Specialty  Avionics

 

2.0

 

20.7

 

Systems  Integration

 

0.8

 

14.7

 

Inter-group  elimination

 

(0.9

)

 

 

Total

 

$

1.6

 

 

 

 

*CabinManagement.*  Gross profit decreased by $0.3 million, or1.8% from the prior year, primarily due to:

 

•      a $1.3 million increase ingross profit from our cabin furniture and seating products; offset by

 

•      a $1.6 million decrease dueto lower cabin management systems sales volume.

 

*SpecialtyAvionics.*  Gross profit increased by $2.0 million, or20.7% over the prior year, due principally to higher volume for our cockpitaudio, communications, lighting and power and control devices products.

 

*SystemsIntegration.*  Gross profit increased by $0.8 million, or14.7% over the prior year, due to:

 

•      a $1.2 million increase due primarily to higherauxiliary fuel tank systems volume; offset by

 

•      a $0.4 million decrease resulting from lower cabin andflight deck systems integration services volume.

 

**Selling,general and administrative expenses.**  Selling,general and administrative expenses increased $2.5 million, or 21.1%, to $14.0million for the three months ended September 30, 2001, from $11.5 million forthe same period last year. SG&A expenses as a percent of revenues increasedto 13.9% for the three months ended September 30, 2001 compared to 12.4% forthe same period last year. By segment, SG&A expenses changed as follows:

 

 

 

**Increase  (Decrease)**

 

 

 
**From 2000**
 

 

 

**Amount**

 

**Percent**

 

 

 

**(in millions)**

 

 

 

Cabin Management

 

$

1.5

 

35.3

%

Specialty  Avionics

 

0.3

 

7.9

 

Systems  Integration

 

0.3

 

14.2

 

Corporate

 

0.4

 

20.6

 

Total

 

$

2.5

 

 

 

 

*CabinManagement. *SG&A expenses increased by $1.5million, or 35.3% over the prior year, due to increases in expenses to supportincreased production and new programs.

 
**
*SpecialtyAvionics.*  SG&A expenses increased by $0.3 million,or 7.9% over the prior year, due to an increase in labor and employee benefitcosts in support of revenue growth.

 

*SystemsIntegration.*  SG&A expenses increased by $0.3 million,or 14.2% over the prior year, due to refocusing our cabin and flight decksystems integration services to product offerings requiring higher levels ofsales and marketing, program management and customer service support.

 

*Corporate.* SG&A expenses increased by $0.4 million, or 20.6% over the prioryear, primarily due to an increase in promotional costs.

 

**Depreciationand amortization of intangibles.**  Depreciationand amortization expense, which includes amortization of goodwill andidentifiable intangible assets, increased $0.9 million, or 12.6%, for the threemonths ended September 30, 2001. The increase results from the inclusion ofadditional depreciation reflecting our capital expenditures during the period.

 

**EBITDAand Operating income.**  EBITDA decreased $0.2 millionto $22.0 million, or 0.7%, for the three months ended September 30, 2001, from$22.2 million for the same period last year. EBITDA as a percent of revenuesdecreased to 22.0% for the three months ended September 30, 2001, from 23.8%for the same period last year. Operating income decreased $1.0 million to $13.9million, or 6.9%, for the three months ended September 30, 2001, from $14.9million for the same period last year. By segment, EBITDA changed as follows:

 

 

 

**Increase  (Decrease)**

 

 

 
**From 2000**
 

 

 

**Amount**

 

**Percent**

 

 

 

**(in millions)**

 

 

 

EBITDA

 

 

 

 

 

Cabin Management

 

$

(1.4

)

(11.7

)%

Specialty  Avionics

 

1.5

 

20.3

 

Systems  Integration

 

0.5

 

12.3

 

Corporate

 

(0.4

)

(23.7

)

Inter-group  elimination

 

(0.4

)

 

 

Total EBITDA

 

(0.2

)

 

 

 

 

 

 

 

 

Depreciation and  amortization

 

(0.9

)

 

 

Other noncash  and acquisition related charges

 

0.1

 

 

 

Total operating  income

 

$

(1.0

)

 

 

 

*CabinManagement.*  EBITDA decreased by $1.4 million, or 11.7%from the prior year, primarily due to an increase in SG&A expenses.

 

*SpecialtyAvionics.*  EBITDA increased by $1.5 million, or 20.3%over the prior year, due to higher gross profit margins.

 

*SystemsIntegration.*  EBITDA increased by $0.5 million, or 12.3%over the prior year, due to higher auxiliary fuel tank systems revenues andfavorable manufacturing efficiencies.

 
**
*Corporate.* Expenses increased by $0.4 million, or 23.7% from the prior year, due toan increase in SG&A expenses.

 

**Interestexpense.**  Interest expense decreased $1.6 million to$9.7 million for the three months ended September 30, 2001, from $11.3 millionfor the same period last year, due to:

 

•      a $2.3 million decreaseresulting from lower average interest rates charged by our lenders during 2001;offset by

 

•      a $0.7 million increaseresulting from higher levels of indebtedness.

 

**Provisionfor income taxes.**  The provision for income taxes differs fromthe amount determined by applying the applicable U.S. statutory federal rate tothe income before income taxes primarily due to the effects of state andforeign income taxes and non-deductible expenses, principally goodwillamortization. The difference in the effective tax rates between periods ismostly a result of the relationship of non-deductible expenses to income beforeincome taxes.

 

**Netincome.**  Net income was $0.9 million for both thethree months ended September 30, 2001 and 2000.

 

**Netloss applicable to common stockholder.**  Net lossapplicable to DeCrane Holdings, our common stockholder, increased $0.3 millionto a net loss of $0.4 million for the three months ended September 30, 2001compared to a net loss of $0.1 million for the same period in 2000. Theincrease is attributable to a $0.3 million increase in accrued dividends andredemption value accretion resulting from the issuance of 16% mandatorilyredeemable preferred stock on June 30, 2000.

 

**Bookings.** Bookings decreased $11.3 million, or 11.5%, to $86.6 million for thethree months ended September 30, 2001 compared to $97.9 million for the sameperiod in 2000. The decrease in bookings for 2001 results from the timing ofreceipt of orders and reflects one effect of the events of September 11thand its aftermath.

 

**Backlogat end of period.**  Backlog increased $5.3 million to $183.6million as of September 30, 2001 compared to $178.3 million as of December 31,2000. The increase in backlog for 2001 primarily relates to:

 

•      a $8.5 million increase in our SpecialtyAvionics and Cabin Management groups; offset by

 

•      a $3.2 million decrease in our SystemsIntegration group.

 

**Nine Months Ended September 30, 2001Compared to Nine Months Ended September 30, 2000**

 

**Revenues.* ***Revenues increased $47.3 million, or18.6%, to $301.7 million for the nine months ended September 30, 2001 from$254.4 million for the nine months ended September 30, 2000. By segment,revenues changed as follows:

 

 

 

**Increase  (Decrease)**

 

 

 
**From 2000**
 

 

 

**Amount**

 

**Percent**

 

 

 

**(in millions)**

 

 

 

Cabin Management

 

$

28.5

 

22.4

%

Specialty  Avionics

 

14.0

 

17.3

 

Systems  Integration

 

5.8

 

12.2

 

Inter-group  elimination

 

(1.0

)

 

 

Total

 

$

47.3

 

 

 

 

*CabinManagement. *Revenues increased by $28.5 million, or22.4% over the prior year, due to:

 

•      the inclusion of $23.8million of revenues resulting from our acquisitions of Carl F. Booth & Co.and ERDA in 2000; and

 

•      a $4.7 million increase inshipments of cabin furniture and related products revenues.

 

*SpecialtyAvionics.*  Revenues increased by $14.0 million, or17.3% over the prior year, due to:

 

•      a $11.0 million increase incockpit audio, communications, lighting and power and control devices revenues;and

 

•      a $3.0 million revenueincrease resulting from higher volume for our interconnect products.

 

*SystemsIntegration.*  Revenues increased by $5.8 million, or 12.2%over the prior year, due to:

 

•      a $8.9 million increase inauxiliary fuel tank system and power unit revenues; offset by

 

•      a $3.1 million decrease incabin and flight deck systems integration revenues resulting from reducing thenumber of product offerings to focus on our core product lines.

 

**Grossprofit.**  Gross profit increased $15.5 million, or18.3%, to $100.4 million for the nine months ended September 30, 2001. Grossprofit as a percent of revenues of 33.3% for the nine months ended September30, 2001 is comparable to 33.4% for the same period last year. By segment,gross profit changed as follows:

 

 

 

**Increase  (Decrease)**

 

 

 

**From  2000**

 

 

 

**Amount**

 

**Percent**

 

 

 

**(in millions)**

 

 

 

Cabin Management

 

$

3.5

 

8.2

%

Specialty  Avionics

 

8.9

 

35.4

 

Systems  Integration

 

3.8

 

23.2

 

Inter-group  elimination

 

(0.7

)

 

 

Total

 

$

15.5

 

 

 

 
**
*CabinManagement.*  Gross profit increased by $3.5 million, or8.2% over the prior year, primarily due to:

 

•      a $7.1 million increase ingross profit resulting from our 2000 acquisitions; and

 

•      a $0.3 million increaserelated to higher volume; offset by

 

•      a $3.9 million decreaseresulting from nonrecurring startup costs associated with four new programs andthe rationalization of production between manufacturing facilities.

 

*SpecialtyAvionics.*  Gross profit increased by $8.9 million, or35.4% over the prior year, due to:

 

•      a $4.9 million increaserelated to higher volume for our cockpit audio, communications, lighting andpower and control devices products;

 

•      a $3.6 million increaserelated to a shift in product mix to items with higher margins; and

 

•      a $0.4 million increaserelated to higher volume for our interconnect products.

 

*SystemsIntegration.*  Gross profit increased by $3.8 million, or23.2% over the prior year, due to:

 

•      a $3.6 million increase dueto higher auxiliary fuel tank systems volume;

 

•      a $1.2 million increaseresulting, in part, from improved operating results subsequent to our fourthquarter 1999 restructuring; offset by

 

•      a $0.7 million decrease resulting from lower cabin andflight deck systems integration services volume; and

 

•      a $0.3 million decrease inprofit margins on auxiliary fuel tank systems.

 

**Selling,general and administrative expenses.**  Selling,general and administrative expenses increased $9.6 million, or 29.6%, to $42.1million for the nine months ended September 30, 2001, from $32.5 million forthe same period last year. SG&A expenses as a percent of revenues increasedto 13.9% for the nine months ended September 30, 2001 compared to 12.8% for thesame period last year. By segment, SG&A expenses changed as follows:

 

 

 

**Increase  (Decrease)**

 

 

 
**From 2000**
 

 

 

**Amount**

 

**Percent**

 

 

 

**(in millions)**

 

 

 

Cabin Management

 

$

5.5

 

48.7

%

Specialty  Avionics

 

2.0

 

22.8

 

Systems  Integration

 

1.1

 

16.1

 

Corporate

 

1.0

 

17.6

 

Total

 

$

9.6

 

 

 

 
**
*CabinManagement. *SG&A expenses increased by $5.5million, or 48.7% over the prior year, due to:

 

•      a $3.1 million increase inexpenses resulting from our 2000 acquisitions; and

 

•      a $2.4 million increase inexpenses to support increased production and new programs.

 

*SpecialtyAvionics.*  SG&A expenses increased by $2.0 million,or 22.8% over the prior year, due to:

 

•      a $1.9 million increase inlabor and employee benefit costs in support of revenue growth; and

 

•      a $0.1 million increase inresearch and development costs.

 

*SystemsIntegration. *SG&A expenses increased by $1.1million, or 16.1% over the prior year, due to refocusing our cabin and flightdeck systems integration services to product offerings requiring higher levelsof sales and marketing, program management and customer service support.

 

*Corporate.* SG&A expenses increased by $1.0 million, or 17.6% over the prioryear, primarily due an increase in promotional costs.

 

**Depreciationand amortization of intangibles.**  Depreciationand amortization expense, which includes amortization of goodwill andidentifiable intangible assets, increased $4.4 million, or 22.4%, for the ninemonths ended September 30, 2001. The increase results from the inclusion of$2.2 million of depreciation and amortization expense in 2001 from companies weacquired during 2000 and additional depreciation reflecting our capitalexpenditures during the period.

 

**EBITDAand Operating income.**  EBITDA increased $8.5 millionto $67.8 million, or 14.4%, for the nine months ended September 30, 2001, from$59.3 million for the same period last year. EBITDA as a percent of revenuesdecreased to 22.5% for the nine months ended September 30, 2001, from 23.3% forthe same period last year. Operating income increased $4.0 million to $43.5 million,or 10.1%, for the nine months ended September 30, 2001, from $39.5 million forthe same period last year. By segment, EBITDA changed as follows:

 

 

 

**Increase  (Decrease)**

 

 

 
**From 2000**
 

 

 

**Amount**

 

**Percent**

 

 

 

**(in millions)**

 

 

 

EBITDA

 

 

 

 

 

Cabin Management

 

$

0.3

 

0.9

%

Specialty  Avionics

 

6.6

 

33.7

 

Systems  Integration

 

2.4

 

22.1

 

Corporate

 

(0.3

)

(6.4

)

Inter-group  elimination

 

(0.5

)

 

 

Total EBITDA

 

8.5

 

 

 

 

 

 

 

 

 

Depreciation and  amortization

 

(4.4

)

 

 

Other noncash  and acquisition related charges

 

(0.1

)

 

 

Total operating  income

 

$

4.0

 

 

 

 
**
*CabinManagement.*  EBITDA increased by $0.3 million, or 0.9%over the prior year, primarily due to:

 

•      a $5.0 million increaseresulting from our 2000 acquisitions; offset by

 

•      a $4.7 million decreaseresulting from nonrecurring startup costs associated with four new programs andthe rationalization of production between manufacturing facilities.

 

*SpecialtyAvionics.*  EBITDA increased by $6.6 million, or 33.7%over the prior year, due to higher demand for our commercial aircraft productsprior to the September 11th terrorist attack. See “RecentDevelopments – Impact of the Events of September 11, 2001.”

 

*SystemsIntegration. *EBITDA increased by $2.4 million, or22.1% over the prior year, due principally to higher auxiliary fuel tanksystems revenues and favorable manufacturing efficiencies.

 

**Interestexpense.**  Interest expense was $30.0 million for boththe nine months ended September 30, 2001 and 2000, and reflects thefollowing:

 

•      a $5.0 million increaseresulting from higher levels of indebtedness; offset by

 

•      a $5.0 million decreaseresulting from lower average interest rates charged by our lenders during 2001.

 

**Provisionfor income taxes.**  The provision for income taxes differs from theamount determined by applying the applicable U.S. statutory federal rate to theincome before income taxes primarily due to the effects of state and foreignincome taxes and non-deductible expenses, principally goodwill amortization.The difference in the effective tax rates between periods is mostly a result ofthe relationship of non-deductible expenses to income before income taxes.

 

**Netincome.**  Net income increased $1.8 million to $5.4million for the nine months ended September 30, 2001 compared to $3.6million for the same period in 2000.

 

**Netincome applicable to common stockholder.**  Net incomeapplicable to DeCrane Holdings, our common stockholder, decreased $0.9 millionto $1.7 million for the nine months ended September 30, 2001 compared to$2.6 million for the same period in 2000. The net decrease is attributable to:

 

•      a $1.8 million increase innet income; offset by

 

•      a $2.7 million increase inaccrued dividends and redemption value accretion resulting from the issuance of16% mandatorily redeemable preferred stock on June 30, 2000.

 

**Bookings.** Bookings increased $45.1 million, or 17.2%, to $307.0 million for thenine months ended September 30, 2001 compared to $261.9 million for the sameperiod in 2000. The increase in bookings for 2001 results from:

 

•      a $22.5 million increaseassociated with companies we acquired in 2000; and

 

•      a $22.6 million increaserelated to business growth, principally related to product lines in our CabinManagement and Specialty Avionics groups.

 

As described in “RecentDevelopments – Impact of the Events of September 11, 2001,” theterrorist attack is having a severe adverse impact on the commercial airlineindustry and, in turn, will have an unfavorable impact on portions of ourbusiness. In addition, the overall weakening economy may adversely impact otherportions of our business as well. We are not currently able to determine theimpact these events will have on our bookings for future periods. However,given the magnitude of these events, the impact could be material.

 
****
**Liquidity and Capital Resources**

 

We have requiredcash primarily to fund acquisitions, capital expenditures and for workingcapital. Our principal sources of liquidity have been cash flow fromoperations, third party borrowings, capital contributions from DeCrane Holdingsand the issuance of preferred stock.

 

Cash provided byoperating activities was $6.2 million for the nine months ended September 30,2001, which is the net of $38.4 million of cash provided by operations afteradding back depreciation, amortization and other noncash items, $32.1 millionused for working capital, and $0.1 million used to reduce other liabilities.The following factors contributed to the $32.1 million working capitalincrease:

 

•      a $17.1 million accountsreceivable increase resulting from higher revenues, timing differences relatingto completion of projects versus the associated collection and the timing ofother collections;

 

•      a $8.2 million inventoryincrease resulting from longer production lead times and new program costs,primarily engineering, for new cabin interior products and components;

 

•      a $2.7 million increase inprepaid and other assets; and

 

•      a $4.1 million net decreasein accounts payable and accrued expenses.

 

Cash used forinvesting activities was $22.7 million for the nine months ended September 30,2001, and consisted of:

 

•      $17.1 million of contingentacquisition consideration paid during 2001; and

 

•      $9.8 million for capitalexpenditures; offset by

 

•      $3.6 million cash purchaseprice reductions received for previously completed acquisitions; and furtheroffset by

 

•      $0.6 million of proceedsfrom the sale of property and equipment, principally an owned manufacturingfacility replaced with a larger leased facility.

 

We anticipatespending approximately $13.0 million for capital expenditures in 2001.

 

Cash provided byfinancing activities was $15.7 million for the nine months ended September 30,2001 and was primarily used to fund the payment of contingent acquisitionconsideration and capital expenditures. We obtained these funds by borrowing$19.6 million under our senior credit facility and $2.0 million of otherlong-term borrowings. We used $5.2 million to make principal payments on oursenior term debt, capitalized leases and other debt.

 

At September 30,2001, senior credit facility borrowings totaling $292.1 million are at variableinterest rates based on defined margins over the current prime or LIBOR rates.At September 30, 2001 we had $95.9 million of working capital and had $25.0million of borrowings available under our working capital credit facility and$13.0 million available under our acquisition credit facility.

 

We will beaffected by economic, financial, competitive, legislative, regulatory, businessand other factors beyond our control. As described in “Recent Developments –Impact of the Events of September 11, 2001,” the terrorist attack ishaving a severe adverse impact on the commercial airline industry and, in turn,will have an unfavorable impact on portions of our business. In addition, theoverall weakening economy may adversely impact other portions of our businessas well. As a result, we are taking measures to conserve cash by deferring oreliminating planned capital expenditures and any workforce expansion and byconserving working capital

.

Although we cannotbe certain, we believe that operating cash flow, together with borrowings underour bank credit facility, will be sufficient to meet our future short- andlong-term operating expenses, working capital requirements, capitalexpenditures and debt service obligations. However, our ability to payprincipal or interest, to refinance our debt and to satisfy our other debtobligations will depend on our future operating performance.

 

In addition, weare continually considering acquisitions that complement or expand our existingbusinesses or that may enable us to expand into new markets. Futureacquisitions may require additional debt, equity financing or both. We may notbe able to obtain any additional financing on acceptable terms.

 

**RecentlyIssued Accounting Pronouncements**

 

**SFAS Nos. 141 and142**

** **

In June 2001, theFinancial Accounting Standards Board issued SFAS No. 141, “BusinessCombinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.”

 

SFAS No. 141 establishesaccounting and reporting standards for business combinations. SFAS No. 141requires that all business combinations be accounted for using the purchasemethod of accounting and provides criteria for the initial recognition andmeasurement of goodwill and other intangible assets. SFAS No. 141 is effectivefor all business combinations initiated or completed after June 30, 2001. Forbusiness combinations completed prior to July 1, 2001, SFAS No. 141 iseffective concurrent with the adoption of SFAS No. 142.

 

SFAS No. 142establishes accounting and reporting standards for goodwill and otherintangible assets subsequent to their acquisition. SFAS No. 142 eliminates thecurrent requirement to amortize goodwill and other indefinite-lived intangibleassets requiring instead periodic impairment testing with a loss charged to theresults of operation in the periods in which impairment occurs. Finite-livedintangible assets are amortized and are also subject to periodic impairmenttesting. Adoption of SFAS No. 142 is required for our fiscal year beginningJanuary 1, 2002.

 

We are currentlyevaluating the impact the new accounting standards will have on our financialposition and results of operations upon adoption on January 1, 2002; there willbe no impact on cash flows. While the full, net of tax, impact has yet to bedetermined, adoption of the new standards will result in the following:

 

•      Under the criteria established in SFAS No.141, the values ascribed to the assembled workforces acquired are notrecognized as an intangible asset apart from goodwill. As a result, the netbook value ascribed to the assembled workforces, net of deferred income taxliabilities, will be reclassified to goodwill as of January 1, 2002.

 

•      Adoption of SFAS No. 142 on January 1, 2002will reduce amortization expense in future periods. If SFAS No. 142 had beeneffective as of the beginning of 2001, goodwill and assembled workforcesamortization totaling $10,657,000 for the nine months endedSeptember 30, 2001 would have been eliminated.

 

We have until June 30, 2002 to complete our transitional impairmenttesting of goodwill associated with adopting SFAS No. 142 and until March 31,2002 to complete our transitional impairment testing of other intangibleassets. The amount of impairment losses recognizable upon adoption, if any, isnot known at this time.

 

**SFAS No. 144**

** **

In October 2001,the Financial Accounting Standards Board issued SFAS No. 144, “Accounting forthe Impairment or Disposal of Long-Lived Assets, ” which replaces SFAS No. 121,“Accounting for Impairment of Long-Lived Assets and for Long-Lived to beDisposed Of” and also replaces and broadens the provisions of APB Opinion No.30, “Reporting Results of Operations – Reporting the Effects of Disposal of aSegment of a Business.

 

SFAS No. 144establishes one accounting model, based on framework established in SFAS No.121, for the recognition, measurement and reporting of impairment of long-livedassets to be held and used and measurement of long-lived assets to be disposedof by sale. Adoption of SFAS No. 144 is required for our fiscal year beginningJanuary 1, 2002 although early application is permitted. We are currentlyevaluating the impact this new standard will have on our financial position,results of operations and cash flows.

 

**EITF No. 01-10**

** **

In September 2001,the Financial Accounting Standards Board’s Emerging Issues Task Force issuedEITF No. 01-10, “Accounting for the Impact of the September 11, 2001 TerroristActs,” which provides guidance on how the costs related to the terrorist actsshould be reported, how to determine whether an asset impairment loss should berecognized and how liabilities for losses and other costs should be recognizedand reported.

 

We have begun anassessment of potential losses and costs we may incur or actions that may benecessary as a result of the events of September 11th and itsaftermath. But given the relatively brief period since that date, we are notcurrently able to determine the impact that significant changes in industryconditions will have on our consolidated financial position, results ofoperations or cash flows. As a result, our financial statements as of and forthe three months and nine months ended September 30, 2001 do not include anycharges directly or indirectly resulting from the terrorist acts as addressedin EITF No. 01-10. However, given the magnitude of the events mentioned aboveand the possible subsequent effects, the impact could be material in futureperiods. As losses and/or costs, if any, become estimable, they will berecognized as a component of earnings from operations.

 
****
**ITEM3.          QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

We are exposed tovarious market risks, including interest rates and changes in foreign currencyexchange rates. Market risk is the potential loss arising from adverse changesin market rates and prices, such as interest rates and foreign currencyexchange rates. From time to time we use derivative financial instruments tomanage and reduce risks associated with these factors. We do not enter intoderivatives or other financial instruments for trading or speculative purposes.

 

**InterestRate Risk.**  A significant portion of our capitalstructure is comprised of long-term variable- and fixed-rate debt.

 

Market riskrelated to our variable-rate debt is estimated as the potential decrease inpre-tax earnings resulting from an increase in interest rates. The interestrates applicable to variable-rate debt are, at our option, based on definedmargins over the current prime or LIBOR rates. At September 30, 2001, thecurrent prime rate was 6.00% and the current LIBOR rate was 3.99%. Based on$292.1 million of variable-rate debt outstanding as of September 30, 2001, ahypothetical one percent rise in interest rates, to 7.00% for prime rateborrowings and 4.99% for LIBOR borrowings, would reduce our pre-tax earnings by$2.9 million annually. We have, during periods prior to 1998, purchasedinterest rate cap contracts to limit our exposure related to rising interestrates on our variable-rate debt. While we have not entered into similarcontracts during the last three years, we may do so in the future depending onour assessment of future interest rate trends.

 

The estimated fairvalue of our $100.0 million fixed-rate long-term debt is approximately $90.0million at September 30, 2001. Market risk related to our fixed-rate debt isdeemed to be the potential increase in fair value resulting from a decrease ininterest rates. For example, a hypothetical ten percent decrease in theinterest rates, from 12.0% to 10.8%, would increase the fair value of ourfixed-rate debt by approximately $7.0 million.

 

**ForeignCurrency Exchange Rate Risk****. **Ourforeign customers are located in various parts of the world, primarily WesternEurope, the Far East and Canada, and one of our subsidiaries operates inWestern Europe and one has a manufacturing facility in Mexico. To limit ourforeign currency exchange rate risk related to sales to our customers, ordersare primarily valued and sold in U.S. dollars. From time to time we haveentered into forward foreign exchange contracts to limit our exposure relatedto foreign inventory procurement and operating costs. While we have not enteredinto any such contracts since 1998 and no such contracts are open as of September30, 2001, we may do so in the future depending on our assessment of futureforeign exchange rate trends.

 
****
**Special Note RegardingForward-Looking Statements**

 

All statementsother than statements of historical facts included in this report areconsidered forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. These forward-looking statements aresubject to known and unknown risks, uncertainties and other factors, which aredifficult to predict. We are vulnerable to a variety of factors that affectmany businesses, such as:

 

•      fuel prices and generaleconomic conditions that affect demand for aircraft and air travel, which inturn affect demand for our products and services;

 

•      terrorist attacks andmilitary conflicts that affect demand for aircraft and air travel, which inturn affect demand for our products and services;

 

•      our reliance on keycustomers and the adverse effect a significant decline in business from any oneof them would have on our business;

 

•      changes in prevailinginterest rates and the availability of financing to fund our plans forcontinued growth;

 

•      competition from largercompanies;

 

•      Federal AviationAdministration prescribed standards and licensing requirements, which applymany of the products and services we provide;

 

•      inflation, and other generalchanges in costs of goods and services;

 

•      liability and other claimsasserted against us that exceeds our insurance coverage;

 

•      the ability to attract andretain qualified personnel;

 

•      labor disturbances; and

 

•      changes in operatingstrategy, or our acquisition and capital expenditure plans.

 

Changes in suchfactors could cause our actual results to differ materially from thosecontemplated in such forward-looking statements. Although we believe that theexpectations reflected in such forward-looking statements are reasonable, wecan give no assurance that such expectations will prove to be correct. Weundertake no obligation to release publicly any revisions to theseforward-looking statements to reflect events or circumstances after the datehereof or to reflect the occurrence of unanticipated events. You should notrely on our forward-looking statements as if they were certainties.

 
****
**Incorporation of Documents byReference**

 

We have filed withthe Securities and Exchange Commission, and are including within this report byreferring to it here, our Form 10-K for the year ended December 31, 2000. TheForm 10-K includes our audited financial statements, which we refer to in thisreport.

 

You may read andcopy any reports, statements or other information we file at the SEC’sreference room in Washington D.C. Please call the SEC at (202) 942-8090 forfurther information on the operation of the reference rooms. You can alsorequest copies of these documents, upon payment of a duplicating fee, bywriting to the SEC, or review our SEC filings on the SEC’s EDGAR web site,which can be found at http://www.sec.gov. You may also write or call us at ourcorporate office or visit our web site at http://decraneaircraft.com. Ourcorporate offices are located at 2361 Rosecrans Avenue, Suite 180, El Segundo,California 90245. Our telephone number is (310) 725–9123.

 

**PART II – OTHER INFORMATION**

 

**ITEM 1.          LEGAL PROCEEDINGS**

 

Refer to the legalproceedings described in Item 3 of our Form 10-K for the year endedDecember 31, 2000.

 

**ITEM 6.          EXHIBITS AND REPORTS ON FORM 8-K**

 

a.         Exhibits

 

3.2.1.1         Certificate of Amendment of Certificateof Incorporation of DeCrane Aircraft Holdings, Inc. dated October 17, 2001 *

 

10.10.4        Increased Commitments Agreement, datedas of April 27, 2001, pursuant to Third Amended and Restated Credit Agreement,dated as of May 11, 2000, as amended by the First Amendment to the ThirdAmended and Restated Credit Agreement, dated as of June 30, 2000 **

 

*      Filed herewith

 

**   Filed as an exhibit to our Form 10-Q dated March 31, 2001 filedwith the Commission on May 14, 2001

 

b.         Reports on Form8-K

 

None

 

**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 

**DECRANE AIRCRAFT HOLDINGS, INC.  (Registrant)**

 

 

 

 

 

 

November 13, 2001

By:

/s/  Richard J. Kaplan

 

Name:

Richard J. Kaplan

 

Title:

Senior Vice President, Chief Financial Officer,  Secretary, Treasurer and Director

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