UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
Commission File Number 0-22371
----------------------
DECRANE AIRCRAFT HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 34-1645569
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
155 Montrose West Avenue, Suite 210, Copley, OH 44321
(Address, including zip code, of principal executive offices)
(330) 668-3061
(Registrant's telephone number, including area code)
----------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
[ ] Yes [X] No
The number of shares of Registrant's Common Stock, $.01 par value, outstanding
as of April 30, 1997 was 5,251,690 shares.
DECRANE AIRCRAFT HOLDINGS, INC.
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 1997 and December 31,
1996 and Pro Forma as Adjusted as of March 31, 1997............. 3
Consolidated Statements of Operations for the three months
ended March 31, 1997 and 1996................................... 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 1997 and 1996................................... 5
Condensed Notes to Consolidated Financial Statements................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................... 11
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits..................................................... 14
Reports on Form 8-K.......................................... 14
-2-
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
March 31, 1997
----------------------
Pro Forma December
as 31, 1996
Historical Adjusted Historical
---------- -------- ----------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents......................................................... $ 162 $ 162 $ 320
Accounts receivable, net.......................................................... 14,055 14,055 13,185
Inventories....................................................................... 21,568 21,568 19,573
Deferred tax asset................................................................ - 957 -
Prepaid expenses and other current assets......................................... 700 654 812
-------- -------- --------
Total current assets............................................................ 36,485 37,396 33,890
Property and equipment, net......................................................... 12,696 12,696 12,187
Other assets, principally intangibles, net.......................................... 23,430 20,523 23,189
-------- -------- --------
Total assets.................................................................... $ 72,611 $ 70,615 $ 69,266
-------- -------- --------
-------- -------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings............................................................. $ 952 $ 952 $ 1,974
Current portion of long-term obligations to unaffiliated lenders.................. 3,373 1,121 3,004
Convertible subordinated notes payable to related parties......................... 2,961 - 2,922
Accounts payable.................................................................. 10,152 9,676 7,420
Accrued expenses.................................................................. 6,946 6,452 7,241
Income taxes payable.............................................................. 826 826 843
-------- -------- --------
Total current liabilities....................................................... 25,210 19,027 23,404
-------- -------- --------
Long-term liabilities
Long-term obligations
Unaffiliated lenders............................................................ 29,175 13,324 28,323
Related parties................................................................. 6,076 - 6,027
Deferred income taxes............................................................. 3,460 3,460 3,312
Minority interests................................................................ 116 116 85
-------- -------- --------
Total long-term liabilities..................................................... 38,827 16,900 37,747
-------- -------- --------
Commitments and contingencies (Note 10)
Mandatorily redeemable common stock warrants........................................ 6,879 - 6,879
-------- -------- --------
Stockholders' equity
Cumulative convertible preferred stock, $.01 par value (no par value prior
to February 19, 1997), 8,314,018 shares authorized; 6,847,705 shares
issued and outstanding (none on a pro forma basis).............................. 13,850 - 13,850
Undesignated preferred stock, $.01 par value, 10,000,000 shares initially
authorized as of February 19, 1997; none issued and outstanding................. - - -
Common stock, no par value, 4,253,550 shares authorized; 85,593
shares issued and outstanding prior to February 19, 1997........................ - - 216
Common stock, $.01 par value, 9,924,950 shares authorized as of
February 19, 1997; 85,593 shares issued and outstanding (5,251,690
shares on a pro forma basis).................................................... 1 53 -
Additional paid-in capital........................................................ 274 48,834 -
Accumulated deficit............................................................... (12,322) (14,091) (12,951)
Foreign currency translation adjustment........................................... (108) (108) 121
-------- -------- --------
Total stockholders' equity...................................................... 1,695 34,688 1,236
-------- -------- --------
Total liabilities and stockholders' equity.................................... $ 72,611 $ 70,615 $ 69,266
-------- -------- --------
-------- -------- --------
The accompanying notes are an integral part of the consolidated financial
statements.
-3-
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
-------- --------
(UNAUDITED)
Revenues...................................................... $ 26,118 $ 12,945
Cost of sales................................................. 19,712 10,734
-------- --------
Gross profit.............................................. 6,406 2,211
-------- --------
Operating expenses
Selling, general and administrative expenses................ 3,384 2,158
Amortization of intangible assets........................... 207 198
-------- --------
Total operating expenses.................................... 3,591 2,356
-------- --------
Income (loss) from operations................................. 2,815 (145)
Other expenses (income)
Interest expense............................................ 1,592 911
Other expenses (income)..................................... 277 (45)
Minority interests.......................................... 31 112
-------- --------
Income (loss) before provision for income taxes............... 915 (1,123)
Provision for income taxes.................................... 286 214
-------- --------
Net income (loss)............................................. 629 (1,337)
Adjustment to redemption value of mandatorily redeemable
common stock warrants....................................... - 505
Cumulative convertible preferred stock dividends.............. (380) (221)
-------- --------
Net income (loss) applicable to common stockholders........... $ 249 $ (1,053)
-------- --------
-------- --------
Pro forma for the Recapitalization
Net income (loss)........................................... $ 629 $ (1,337)
Net income (loss) per common share.......................... $ .22 $ (.57)
Weighted average number of shares outstanding............... 2,919 2,340
Pro forma for the Recapitalization, as adjusted for
acquisitions and the Offering
Income (loss), as adjusted.................................. $ 1,415 $ (370)
Income (loss) per common share.............................. $ .25 $ (.07)
Weighted average number of shares outstanding............... 5,619 5,302
The accompanying notes are an integral part of the consolidated financial
statements.
-4-
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
-------- --------
(UNAUDITED)
Cash flows from operating activities
Net income (loss)........................................... $ 629 $ (1,337)
Adjustments to reconcile net loss to net cash
provided by operating activities
Depreciation and amortization........................... 1,292 942
Amortization of debt discount........................... 108 77
Deferred income taxes................................... 163 19
Minority interests in earnings of subsidiaries.......... 31 112
Changes in assets and liabilities
Accounts receivable................................... (1,058) 2,256
Inventories........................................... (2,044) (595)
Prepaid expenses and other assets..................... 61 4
Accounts payable...................................... 2,798 (460)
Accrued expenses...................................... (273) 164
Income taxes payable.................................. 1 184
-------- --------
Net cash provided by operating activities 1,708 1,366
-------- --------
Cash flows from investing activities
Purchase of minority shareholder's interest................. - (5,207)
Capital expenditures........................................ (1,370) (301)
-------- --------
Net cash used for investing activities.............. (1,370) (5,508)
-------- --------
Cash flows from financing activities
Proceeds from issuance of cumulative convertible preferred
shares and mandatorily redeemable common stock warrants,
net....................................................... - 6,116
Net borrowings (payments) under revolving line of credit
agreements................................................ 1,834 (1,330)
Promissory note principal payment........................... (956) -
Principal payments on capitalized lease and other
long-term obligations..................................... (756) (423)
Payment of initial public offering and deferred financing
costs..................................................... (613) (166)
Other, net.................................................. 59 (12)
-------- --------
Net cash (used for) provided by financing
activities........................................ (432) 4,185
-------- --------
Effect of foreign currency translation on cash................ (64) 8
-------- --------
Net (decrease) increase in cash and cash equivalents.......... (158) 51
Cash and cash equivalents at beginning of period.............. 320 305
-------- --------
Cash and cash equivalents at end of period.................... $ 162 $ 356
-------- --------
-------- --------
The accompanying notes are an integral part of the consolidated financial
statements.
-5-
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial information as of March 31, 1997 and for the
three months ended March 31, 1997 and 1996 is unaudited. In the opinion of
the Company, the unaudited financial information is presented on a basis
consistent with the audited financial statements and contains all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the results for such interim periods. The results of
operations for interim periods are not necessarily indicative of results of
operations for the full year. The interim financial statements should be read
in conjunction with the audited financial statements and notes thereto
included in the Company's Prospectus dated April 16, 1997 which is a part of
the Company's Form S-1 Registration Statement filed with the Securities and
Exchange Commission on January 17, 1997, as amended.
NOTE 2 - REORGANIZATION AND REVERSE STOCK SPLIT
On February 19, 1997, the Company reorganized as a Delaware corporation.
In conjunction with the reorganization, the Company established a $.01 par
value for its cumulative convertible preferred stock and common stock and
increased the number of common shares and preferred shares authorized to
9,924,950 and 18,314,018 shares (which includes 10,000,000 shares of a newly
designated series of preferred stock), respectively.
Effective March 25, 1997, the Company effected a 3.53-for-1 reverse
stock split. All common share information set forth in the consolidated
financial statements and notes thereto has been restated to reflect the
reverse stock split.
NOTE 3 - RECAPITALIZATION AND CONSUMMATION OF INITIAL PUBLIC OFFERING
In January and March 1997, the holders of certain securities agreed to a
plan for the recapitalization of the Company (the "Recapitalization").
Completion of the Recapitalization was a condition to the consummation of the
Company's initial public offering (the "Offering") and, was effective
concurrent therewith. The Offering was consummated on April 16, 1997.
The Recapitalization provided for: (i) the conversion of all 6,847,705
shares of issued and outstanding cumulative convertible preferred stock
("Preferred Stock") into 1,941,804 shares of common stock; (ii) the cashless
exercise and conversion of all 52,784 and 9,355 issued and outstanding Series
B Preferred Stock warrants and common stock warrants, respectively, into a
total of 16,585 shares of common stock; (iii) the cashless exercise of
508,497 mandatorily redeemable common stock warrants (the "Redeemable
Warrants") into a total of 507,708 shares of common stock; and (iv) the
cancellation of 95,368 Redeemable Warrants.
Redeemable Warrants exercisable into 208,968 common shares remained
after the Recapitalization. Of this amount, 138,075 Redeemable Warrants were
cancelled upon the consummation of the Offering and repayment of the
Company's senior subordinated debt and convertible notes in accordance with
the terms of the respective warrant agreements. Redeemable Warrants
exercisable into 70,893 common shares remained after the Recapitalization.
Concurrent with the consummation of the Offering, the mandatory redemption
feature of these warrants was terminated and, as a result, the value ascribed
thereto was reclassified to stockholders' equity as additional paid-in
capital.
-6-
On April 16, 1997, the Company completed the Offering and sold 2,700,000
shares of common stock for $12.00 per share. Proceeds from the Offering of
$30,132,000, net of $2,268,000 for underwriting discounts and commissions,
together with approximately $12,775,000 of proceeds from borrowings under a
new credit facility were used to repay amounts due under the Company's senior
revolving line of credit, senior term notes, senior subordinated notes and
convertible notes. In conjunction with the debt repayment, the Company
incurred an extraordinary charge (Note 7).
The table below summarizes the changes in Redeemable Warrants and
stockholders' equity for the three months ended March 31, 1997 on a
historical basis, pro forma for the Recapitalization and pro forma for the
Offering as described above (amounts in thousands):
STOCKHOLDERS' EQUITY
MANDATORILY ---------------------------------------------
REDEEMABLE CUMULATIVE COMMON COMMON
COMMON CONVERTIBLE STOCK, STOCK, ADDITIONAL
STOCK PREFERRED NO PAR $.01 PAR PAID-IN
WARRANTS STOCK VALUE VALUE CAPITAL
----------- ----------- ------ -------- ----------
Balance,
December 31, 1996............... $ 6,879 $ 13,850 $ 216 $ - $ -
Delaware reorganization and
reverse stock split.............. - - (216) 1 215
Net income......................... - - - - -
Stock option compensation
expense.......................... - - - - 59
Translation adjustment............. - - - - -
----------- ----------- ------ -------- ----------
Balance, March 31, 1997 -
Historical....................... 6,879 13,850 - 1 274
Conversion of preferred stock
into common stock................ - (13,850) - 19 13,831
Cashless exercise and
conversion of
warrants (A)..................... (4,592) - - 6 4,586
Cancellation of Redeemable
Warrants......................... (861) - - - -
----------- ----------- ------ -------- ----------
Balance, March 31, 1997 -
Pro forma for the
Recapitalization................. 1,426 - - 26 18,691
Proceeds from the
Offering, net (B)................ - - - 27 28,717
Cancellation of Redeemable
warrants upon debt
repayment........................ (1,247) - - - 1,247
Reclassification of warrants
no longer redeemable............. (179) - - - 179
Extraordinary loss from
debt refinancing,
net of income tax
benefit (C)...................... - - - - -
----------- ----------- ------ -------- ----------
Balance, March 31, 1997 -
Pro forma for the
Offering......................... $ - $ - $ - $ 53 $ 48,834
----------- ----------- ------ -------- ----------
----------- ----------- ------ -------- ----------
STOCKHOLDERS' EQUITY
-------------------------------------
FOREIGN
CURRENCY
ACCUMULATED TRANSLATION
DEFICIT ADJUSTMENT TOTAL
----------- ----------- --------
Balance,
December 31, 1996............... $ (12,951) $ 121 $ 1,236
Delaware reorganization and
reverse stock split.............. - - -
Net income......................... 629 - 629
Stock option compensation
expense.......................... - - 59
Translation adjustment............. - (229) (229)
----------- ----------- --------
Balance, March 31, 1997 -
Historical....................... (12,322) (108) 1,695
Conversion of preferred stock
into common stock................ - - -
Cashless exercise and
conversion of
warrants (A)..................... - - 4,592
Cancellation of Redeemable
Warrants......................... 861 - 861
----------- ----------- --------
Balance, March 31, 1997 -
Pro forma for the
Recapitalization................. (11,461) (108) 7,148
Proceeds from the
Offering, net (B)................ - - 28,744
Cancellation of Redeemable
warrants upon debt
repayment........................ - - 1,247
Reclassification of warrants
no longer redeemable............. - - 179
Extraordinary loss from
debt refinancing,
net of income tax
benefit (C)...................... (2,630) - (2,630)
----------- ----------- --------
Balance, March 31, 1997 -
Pro forma for the
Offering......................... $ (14,091) $ (108) $ 34,688
----------- ----------- --------
----------- ----------- --------
(A) Includes Series B cumulative convertible preferred stock warrants, common
stock warrants not subject to redemption and Redeemable Warrants.
(B) Proceeds from the sale of 2,700,000 shares of common stock in the Offering,
net of underwriting discounts and commissions of $2,268,000 and an
estimated $1,388,000 in expenses attributable to the Offering.
(C) Pro forma as of March 31, 1997 and comprised of: (i) a $2,163,000 write-off
of deferred financing costs; (ii) a $1,174,000 write-off of unamortized
original issue discounts; and (iii) a $250,000 prepayment penalty (Note 7),
net of a $957,000 deferred income tax benefit.
-7-
NOTE 4 - PRO FORMA INCOME (LOSS) PER COMMON SHARE
The Company's historical capital structure is not indicative of its
structure as of April 16, 1997 due to the Recapitalization, which occurred
concurrent with the closing of the Offering (Note 3). Accordingly, historical
loss per common share is not considered meaningful and has not been presented
herein.
Pro forma net income (loss) per common share for the Recapitalization
reflects the Recapitalization and is computed using the weighted average
number of common shares assumed to have been outstanding during the periods.
For the three months ended March 31, 1997, the dilutive effect of common
equivalent shares has been included in computing net income per common share.
For the three months ended March 31, 1996, the dilutive effect of common
equivalent shares, other than for certain stock options granted in 1996 and
Redeemable Warrants and Preferred Stock sold in 1996, has not been included
because their inclusion would have decreased the net loss per share.
Redeemable Warrants and Preferred Stock sold in 1996 at prices less than the
initial public offering price have been included for all periods presented
using the treasury stock method.
Pro forma as adjusted income (loss) per common share reflects the
Recapitalization, as described above, and the Offering as if it had occurred
as of the beginning of each year presented. The income (loss) amount used to
compute 1996 pro forma income (loss) per common share for the Offering is
adjusted to reflect the pro forma operating results for acquisitions
consummated during 1996 (Note 5). The pro forma results exclude an
extraordinary charge incurred in April 1997 as a result of the repayment of
debt with the net offering proceeds.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("SFAS 128"). The Company is required to adopt SFAS 128 as of December 31,
1997; earlier application is not permitted. SFAS 128 specifies the
computation, presentation and disclosure requirements for earnings per share.
Post Recapitalization (Note 3), the Company does not believe the adoption of
SFAS 128 will have a material effect on the Company's method of computation,
presentation or disclosure of earnings per share amounts.
NOTE 5 - ACQUISITIONS
During 1996, the Company completed the following acquisitions: (i) on
February 20, 1996, the purchase of the remaining 25% of a subsidiary's stock
it did not already own from the subsidiary's minority shareholder (the
"Minority Interest Acquisition"); (ii) on September 18, 1996, the purchase of
substantially all of the assets, subject to certain liabilities assumed, of
Aerospace Display Systems (the "ADS Acquisition"); and (iii) on December 5,
1996, the purchase of the stock of Elsinore Aerospace Services, Inc. and the
certain assets, subject to certain liabilities, of Elsinore Engineering
(collectively, the "Elsinore Acquisition"). Pro forma consolidated results of
operations for the three months ended March 31, 1996, assuming the Minority
Interest and ADS Acquisitions had been consummated on January 1, 1996, are as
follows (amounts in thousands):
PRO FORMA
AS FOR
REPORTED ACQUISITIONS
--------- ------------
Revenues............................................. $ 12,945 $ 15,482
Net loss............................................. (1,337) (1,529)
Net loss applicable to common stockholders........... (1,053) (1,245)
The above information reflects adjustments for depreciation,
amortization, minority interest and interest expense based on the new cost
basis and debt structure of the Company. The pro forma effect of the Elsinore
Acquisition is not material and, accordingly, is not reflected in the above
information. In addition, pro forma per share information is not considered
meaningful and has not been presented above due to the Recapitalization which
occurred concurrent with the closing of the Offering (Note 3).
-8-
NOTE 6 - SIGNIFICANT CUSTOMERS
Three customers each accounted for more than 10% of the Company's
consolidated revenues during the periods presented, as follows:
THREE MONTHS
ENDED MARCH 31, YEAR ENDED
--------------- DECEMBER
1997 1996 31, 1996
---- ---- ----------
(UNAUDITED)
Customer A.......................................... 20.0% 12.3% 15.8%
Customer B.......................................... 1.1% 15.7% 7.7%
Customer C.......................................... 14.1% 8.5% 7.2%
---- ---- -----
Total............................................. 35.2% 36.5% 30.7%
---- ---- -----
---- ---- -----
Complete loss of either Customer A or C could have a significant adverse
impact on the results of operations expected in future periods.
NOTE 7 - CONVERTIBLE NOTES AND LONG-TERM OBLIGATIONS
In April 1997, the Company used the net proceeds from the Offering (Note
3), together with approximately $12,775,000 of proceeds from borrowings under
a new credit facility, to repay the following: (i) senior revolving line of
credit borrowings of $15,356,000; (ii) senior term notes aggregating
$16,531,000; (iii) senior subordinated notes payable to related parties
aggregating $7,000,000; and (iv) convertible subordinated notes payable to
related parties aggregating $3,000,000. In conjunction with the debt
repayment, the Company incurred an extraordinary charge for the write-off of
deferred financing costs, unamortized original issued discounts, and a
prepayment penalty.
Prior to completion of the Offering, the Company entered into a new
credit agreement with a group of banks for a $40 million senior revolving
line of credit, expiring in April 2002 (the "Credit Facility"). The interest
rate under the Credit Facility initially will be, at the Company's option,
either the Base Rate, as defined in the credit agreement, plus a defined Base
Rate Margin, or the IBOR Rate, as defined, plus a defined IBOR Rate Margin.
The Base Rate is the higher of the Federal Funds rate plus 0.50% or the prime
rate. Initially, the Base Rate Margin and IBOR Rate Margin are zero and
1.00%, respectively. The Company is required to pay a commitment fee on the
unused portion of the Credit Facility. The commitment fee initially will be
0.25% per year.
The interest and commitment fee rates will be reset quarterly,
commencing June 30, 1997, based upon the ratio of debt to the Company's
earnings before interest, taxes, depreciation and amortization ("EBITDA"),
pro forma for acquisitions for the twelve month period ending on such date.
The maximum interest rate under the Credit Facility is either 0.75% above the
prime rate or 2.00% above the IBOR rate. The maximum commitment fee rate is
0.375% per year.
The Credit Facility contains certain restrictive covenants which require
the Company to maintain certain defined financial ratios such as interest
coverage, leverage and working capital, establish minimum levels of net
worth, limit capital expenditures, including capital lease obligations, and
limit additional indebtedness which may be incurred. The Credit Facility also
prohibits the Company from paying any dividends on its common stock in cash.
-9-
NOTE 8 - INCOME TAXES
During the three months ended March 31, 1997, the Company reduced its
deferred tax asset valuation allowance by $142,000 to reflect the book
benefit of federal and state net operating loss carryforwards not previously
recognized. Approximately $3,258,000 and $1,410,000 of the Company's loss
carryforwards remained at March 31, 1997 for federal and state income tax
purposes, respectively. No benefit for the remaining loss carryforwards has
been recognized in the consolidated financial statements.
The amount of loss carryforwards that may be utilized in the future are
subject to potential limitations upon the occurrence of a change in control
of the Company, as defined in the Internal Revenue Code. A change in control
may have occurred as a result of certain equity transactions that occurred
during 1996 and the Offering.
NOTE 9 - FORWARD EXCHANGE CONTRACTS
The Company enters in Swiss franc ("CHF") forward foreign exchange
contracts to purchase Swiss francs as a general economic hedge against
foreign inventory procurement and manufacturing costs. In January 1997, the
Company entered into twelve forward foreign exchange contracts to purchase a
total of CHF 7,800,000 for $5,885,000 at rates ranging between 1.3021 and
1.3492 CHF per U.S. dollar. Settlement of the contracts occurs in equal
monthly amounts of CHF 650,000 through December 15, 1997. As of March 31,
1997, nine forward foreign exchange contracts to purchase a total of CHF
5,850,000 for $4,435,000 at rates ranging between 1.3021 and 1.3359 CHF per
U.S. dollar remained open.
Gains and losses on forward foreign exchange contracts are recognized
currently in the consolidated statements of operations. During the three
months ended March 31, 1997, the Company realized a $85,000 loss on contracts
settled during the period. In addition, the Company has recognized a $395,000
market value loss during the three months ended March 31, 1997 on the
remaining open contracts as of the end of the period. The Company did not
enter into any forward foreign exchange contracts during the three months
ended March 31, 1996.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Two stockholders have asserted the claim that they are entitled to
50,743 more common shares than they received in connection with the Offering
based upon their interpretation of the anti-dilution provisions contained in
certain Redeemable Warrant agreements. The Redeemable Warrants were exercised
as part of the Recapitalization concurrent with the Offering. The
stockholders' claim is based upon the $12.00 Offering price per share being
below a defined threshold amount. The Company is contesting the claim and is
attempting to resolve the difference with the stockholders. The additional
shares, if issued, would result in a reclassification from accumulated
deficit to common stock and additional paid-in capital for an amount equal to
the number of shares issued to the stockholders at the $12.00 per share
Offering price. Management believes the ultimate resolution will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
-10-
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Condensed Notes to Consolidated Financial Statements beginning on page 6,
and with the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the audited consolidated
financial statements and notes thereto included in the Company's Prospectus.
FORWARD-LOOKING STATEMENTS
Management's discussion and analysis of financial condition and results
of operations which are not historical facts are forward-looking statements.
Such forward-looking statements in this document are made pursuant to the
safe harbor provisions of the Securities Act of 1933 and the Securities
Exchange Act of 1994. Forward-looking statements involve a number of risks
and uncertainties. For a discussion of certain risks and uncertainties which
may affect the actual results of any forward-looking information contained
herein, refer to the sections in the Company's Prospectus entitled "Risk
Factors" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
REVENUES. Revenues increased $13.2 million, or 101.8%, to $26.1
million for the three months ended March 31, 1997 from $12.9 million for the
three months ended March 31, 1996. Revenues increased primarily due to the
following: (i) growth in contact sales driven by new aircraft production rate
increases and growth in the Company's private labeling programs of $4.1
million; (ii) an increase of sales to Interactive Flight Technologies, Inc.
of $1.5 million relating to a major systems integration program for Swissair;
(iii) the inclusion of $3.1 million of revenues from Aerospace Display
Systems which was acquired on September 18, 1996; (iv) an increase in sales
of specialty connectors for cabin management and in-flight entertainment
systems principally on Boeing's 777 aircraft of $2.2 million; and (v) an
increase in sales of harness assemblies for in-flight entertainment systems
of $2.7 million. Partially offsetting this increase was a decline in sales to
AT&T Wireless Services, Inc. of $1.8 million, reflecting the completion in
late 1995 and early 1996 of a major systems integration program.
GROSS PROFIT. Gross profit increased $4.2 million, or 189.7%, to $6.4
million for the three months ended March 31, 1997 from $2.2 million for the
three months ended March 31, 1996. Gross profit as a percent of revenues
increased to 24.5% for the three months ended March 31, 1997 from 17.1% for
the three months ended March 31, 1996. This increase was attributable to an
improvement in gross profit as a percent of revenues from increased sales
volume, sustained price increases, favorable mix, and lower material costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses increased $1.2 million, or 56.8%, to $3.4
million for the three months ended March 31, 1997 from $2.2 million for the
three months ended March 31, 1996. SG&A expenses as a percent of revenues
decreased to 13.0% for the three months ended March 31, 1997 from 16.7% for
the three months ended March 31, 1996. SG&A expenses increased primarily due
to the following: (i) the Company added staff to pursue higher sales to
original equipment manufacturers and to develop capabilities for in-flight
entertainment, navigation and satellite communication and safety systems
integration services; and (ii) the inclusion of SG&A expenses from Aerospace
Display Systems which was acquired in 1996.
OPERATING INCOME. Operating income increased $2.9 million to $2.8
million for the three months ended March 31, 1997 from a loss of $.1 million
for the three months ended March 31, 1996. The increase in operating income
resulted from the factors described above.
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INTEREST EXPENSE. Interest expense increased $.7 million, or 74.8%, to
$1.6 million for the three months ended March 31, 1997 from $.9 million for
the three months ended March 31, 1996. This increase resulted from higher
outstanding indebtedness attributed to the funding of the 1996 acquisitions
of Aerospace Display Systems and Elsinore and the purchase of the AMP
Facility.
PROVISION FOR INCOME TAXES. During the three months ended March 31,
1997, the Company reduced its deferred tax asset valuation allowance by
$142,000 to reflect the book benefit of federal and state net operating loss
carryforwards not previously recognized. Approximately $3,258,000 and
$1,410,000 of the Company's loss carryforwards remained at March 31, 1997 for
federal and state income tax purposes, respectively.
NET INCOME (LOSS). Net income increased $1.9 million to $.6 million for
the three months ended March 31, 1997 from a net loss of $1.3 million for the
three months ended March 31, 1996. The increase in net income resulted from
the factors described above.
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS. Net income
applicable to common stockholders increased $1.3 million to $.2 million for
the three months ended March 31, 1997 from a net loss applicable to common
stockholders of $1.1 million for the three months ended March 31, 1996. The
increase resulted from the factors described above partially offset by a $.5
million change in redemption value of mandatorily redeemable common stock
warrants and a $.2 million increase in cumulative preferred stock dividends
attributable to the equity financing of the 1996 acquisitions.
PRO FORMA INCOME (LOSS), AS ADJUSTED. Pro forma net income increased
$1.8 million to $1.4 million for the three months ended March 31, 1997 from a
pro forma net loss of $.4 million for the three months ended March 31, 1996
from the factors described above for net income (loss), less the addition of
pro forma net income of $.2 million for Aerospace Display Systems for the
three months ended March 31, 1996.
BOOKINGS AND BACKLOG. Bookings increased $16.4 million, or 150.1%, to
$27.3 million for the three months ended March 31, 1997 compared to $10.9 for
the same period in 1996. The increase in bookings for 1997 includes $4.3
million attributable to Aerospace Display Systems which was acquired in
September 1996. As of March 31, 1997, the Company had a sales order backlog
of $44.9 million compared to $44.5 million as of December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 1997, the Company generated cash
from operating activities of $1.7 million. Cash from operating activities is
net of $1.6 million for interest expense. The Company used $.5 million in
cash for working capital. The Company's accounts receivable consist of trade
receivables and unbilled receivables, which are recognized pursuant to the
percentage of completion method of accounting for long-term contracts. Trade
receivables increased $2.3 million for the three months ended March 31, 1997
due to higher sales and the invoicing of completed portions of programs under
long-term contracts. Unbilled receivables decreased $1.2 million due to the
aforementioned invoicing of the completed portions of the systems integration
programs for Interactive Flight Technologies, Inc. and Daimler Benz Aerospace
Airbus GmbH. Inventories increased by $2.0 million for the three months ended
March 31, 1997 in support of sales growth. Accounts payable increased by $2.8
million for the three months ended March 31, 1997 as a result of higher
purchases in support of sales and backlog growth.
Capital expenditures of $1.4 million were made during the three months
ended March 31, 1997. The capital expenditures were for projects to: (i)
increase manufacturing capacity in support of revenue growth; (ii) improve
plating controls; and (iii) construct three additional selective plating
machines. The Company anticipates capital expenditures of approximately $3.2
million in 1997.
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Net cash used for financing activities was $.4 million for the three
months ended March 31, 1997. Net borrowing under the senior revolving line of
credit aggregated $1.8 million during the period. The borrowings, together
with cash provided from operations, were used to fund the repayment of debt
and costs associated with the Offering and related debt restructuring.
Cash decreased by $.2 million for the three months ended March 31, 1997
due to the factors described above. Availability under the senior revolving
line of credit was $1.9 million as of March 31, 1997.
On April 16, 1997, the Company completed the Offering and sold 2,700,000
shares of common stock for $12.00 per share. Net proceeds from the Offering
of $30.1 million, together with approximately $12.8 million of proceeds from
borrowings under a new credit facility were used to repay amounts due under
the Company's senior revolving line of credit, senior term notes, senior
subordinated notes and convertible.
Concurrent with the Offering, the Company entered into a new $40 million
revolving Credit Facility which expires in 2002 (See Note 7 to the
consolidated financial statements). The interest rate charged on funds
borrowed under the Credit Facility is over four percentage points lower than
the blended interest rate of the debt repaid. As a result, the Company
anticipates that interest expense will decrease in future periods.
Availability under the Credit Facility was $27.2 million after
consummation of the Offering and repayment of debt. The Company believes that
the current levels of working capital and amounts available under the new
credit facility will enable it to meet its foreseeable short-term and
long-term liquidity requirements.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
20.1 Filed Final Prospectus of the Company dated April 16, 1997
b. Reports on Form 8-K
There were no reports filed on Form 8-K for the three months ended
March 31, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DECRANE AIRCRAFT HOLDINGS, INC.
May 13, 1997 By: /s/ R. Jack DeCrane
--------------------------------
Name: R. Jack DeCrane
Title: Chairman of the Board and
Chief Executive Officer
May 13, 1997 By: /s/ Robert A. Rankin
--------------------------------
Name: Robert A. Rankin
Title: Chief Financial Officer
and Secretary
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