SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of Earliest Event Reported): August 7, 1998
BE AEROSPACE, INC.
(Exact name of registrant as specified in charter)
DELAWARE 0-18348 06-1209796
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
1400 Corporate Center Way, Wellington, Florida 33414
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (561) 791-5000
Exhibit Index Appears on page 5.
Item 2. Acquisition or Disposition of Assets.
On August 7, 1998, BE Aerospace, Inc., a Delaware corporation (the
"Company"), completed the acquisition (the "Acquisition") of SMR Aerospace, Inc,
an Ohio Corporation ("SMR"), and its subsidiaries and affiliated entities
pursuant to an Acquisition Agreement, dated July 21, 1998 (the "Agreement")
among the Company and the shareholders of SMR (the "Sellers"). A copy of the
Agreement is attached to this report as Exhibit 2.1.
SMR, headquartered in Sharon Center, Ohio, is a leader in providing
design, integration, installation and certification services for commercial
aircraft passenger cabin interiors. SMR provides a broad range of interior
reconfiguration services which allow airlines to change the size of certain
classes of service, modify and upgrade the seating, install telecommunications
or entertainment options, relocate galleys, lavatories and overhead bins, and
install crew rest compartments. SMR is also a supplier of structural design and
integration services including airframe modifications for passenger-and
freighter conversions. In addition, SMR provides a variety of niche products and
components that are used to facilitate reconfigurations and conversions.
The $142,000,000 purchase price, consisting of 4,000,000 newly issued
shares of the Company's common stock (the "Shares") and $24 million in cash ($22
million of which was paid to the Flight Structures, Inc. Savings and Retirement
Plan and Trust and $2 million of which was paid to the Sellers), represents a
7.0 multiple of SMR's EBITDA (earnings before interest, taxes, depreciation and
amortization). The Company has filed a registration statement with the
Securities and Exchange Commission to register the Shares which may be
distributed in an underwritten offering in September of 1998. In the event the
Shares are sold for more than $118 million (subject to adjustments), the Sellers
shall refund any excess to the Company. If the Shares are sold for less than
$118 million (subject to adjustments), the Company shall pay the amount of any
deficiency to the Sellers. The Company obtained the $24 million cash portion of
the sale price from its credit facility at The Chase Manhattan Bank.
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Business Acquired.
The following historical consolidated and combined financial
statements and notes thereto are of SMR prior to the
consummation of the Acquisition and are attached hereto at
pages F-1 to F-27.
o Independent Auditors Report.
o Balance sheets as of December 31, 1996 and December 31,
1997.
o Statements of income as of December 31, 1996 and
December 31, 1997.
o Statements of cash flow as of December 31, 1996 and
December 31, 1997.
o Notes to the financial statements.
o Condensed balance sheets (unaudited) as of December 31,
1997 and March 31, 1998.
o Condensed statements of income (unaudited) as of March
31, 1997 and March 31, 1998.
o Condensed statements of cash flows (unaudited) as of
March 31, 1997 and March 31, 1998.
o Notes to the condensed financial statements.
(b) Pro Forma Financial Information.
The following unaudited pro forma consolidated and combined
financial statements and notes thereto are attached hereto
at pages PF-1 to PF-7.
o Pro Forma condensed statement of operations for the year
ended February 28, 1998.
o Notes to pro forma Condensed statement of operations for
the year ended February 28, 1998.
o Pro Forma condensed statement of operations for the
three months ended May 30, 1998.
o Notes to the pro forma condensed statement of operations
for the three months ended May 30, 1998.
o Pro Forma condensed balance sheets as of May 30, 1998.
o Notes to pro forma condensed balance sheets as of
May 30, 1998.
(c) Exhibits.
Exhibit No. Description
2.1 Acquisition Agreement, dated as of July 21, 1998,
among BE Aerospace, Inc., a Delaware Company Oscar
J. Mifsud, Oscar J. Mifsud Trust -- 1998, Patrick
L. Ryan, Patrick L. Ryan Trust -- 1998, David B.
Smith, and David B. Smith Trust -- 1998.
2.2 Stock Purchase Agreement, dated as of July 21,
1998, between Flight Structures, Inc. Savings and
Retirement Plan and Trust and BE Aerospace, Inc.
23.1 Consent of Zalick, Torok, Kirgesner, Cook & Co.,
dated August 17, 1998.
99.1 Press Release dated August 10, 1998.
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 hereunto duly authorized.
BE AEROSPACE, INC.
By:/s/ Thomas P. McCaffrey
-----------------------
Name: Thomas P. McCaffrey
Title: Senior Vice President and Chief Financial
Officer
Date: August 24, 1998
SMR AEROSPACE, INC.
CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS
Years Ended December 31, 1997 and 1996
TABLE OF CONTENTS
Page No.
INDEPENDENT AUDITOR'S REPORT F-2
CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Balance Sheets F-3
Statements of Income F-5
Statements of Retained Earnings, Partners' Capital, and Members' Capital F-6
Statements of Cash Flows F-7
Notes to Consolidated and Combined Financial Statements F-9
F-1
Zalick, Torok, Kirgesner, Cook & Co.
[letterhead]
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
SMR Aerospace, Inc.
Sharon Center, Ohio
We have audited the accompanying consolidated and combined financial statements,
as listed in the accompanying table of contents, of SMR Aerospace, Inc. (an S
Corporation), its affiliates, and subsidiaries as of December 31, 1997 and 1996,
and for the years then ended. These consolidated and combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated and combined financial statements referred to
above present fairly, in all material respects, the financial position of SMR
Aerospace, Inc., its affiliates, and subsidiaries, as of December 31, 1997 and
1996, and its results of operations and cash flows for the years then ended, in
accordance with generally accepted accounting principles.
As stated in Note 20, effective August 7, 1998, the shareholders of SMR
Aerospace, Inc. sold to BE Aerospace, Inc., a Delaware corporation, all of the
outstanding common stock of SMR Aerospace, Inc. (including all of the
investments in the subsidiaries), all of the general and limited partnership
interests in SMR Associates, and all of the membership interests in SMR
Developers. Concurrent with this transaction, BE Aerospace, Inc. also acquired
substantially all of the minority interest in the common stock of Flight
Structures, Inc. which was owned by the FSI Savings and Retirement Plan.
/s/Zalick, Torok, Kirgesner, Cook & Co.
Cleveland, Ohio
February 7, 1998, except for Note 20, as to which the date is August 7, 1998.
F-2
SMR AEROSPACE, INC., AFFILIATES, AND SUBSIDIARIES
BALANCE SHEETS
December 31, 1997 and 1996
1997 1996
---- ----
ASSETS
CURRENT ASSETS
Cash and short-term cash investments $ 2,977,422 $ 160,586
Accounts receivable
Trade 9,597,501 6,728,063
Other 84,386 277,973
Inflatable Survival Systems, Inc. -- 1,000,000
Inventories 10,101,967 6,912,552
Costs and estimated earnings in excess of billings on
uncompleted contracts 7,842,277 7,589,890
Deferred income taxes 452,000 400,000
Prepaid income taxes -- 386,163
Prepaid expenses 249,043 39,281
------------ ------------
TOTAL CURRENT ASSETS 31,304,596 23,494,508
PROPERTY AND EQUIPMENT
Land and buildings 2,999,150 1,541,760
Computers and office equipment 1,798,147 1,374,594
Leasehold improvements 617,675 595,402
Machinery and equipment 2,460,737 2,010,026
Furniture and fixtures 1,018,953 570,088
Automobiles 62,317 39,404
Construction in progress 261,902 7,286
------------ ------------
9,218,881 6,138,560
Accumulated depreciation (3,692,642) (2,919,440)
------------ ------------
5,526,239 3,219,120
OTHER ASSETS
Goodwill, less accumulated amortization of $1,339,715
in 1997 and $945,311 in 1996 2,759,864 3,056,664
Restricted funds 1,864,454 1,129,094
Deferred income taxes 8,860 160,860
License agreements, net 16,667 26,667
Deferred charges, net 52,069 51,117
Cash surrender value of officers' life insurance 93,090 --
Asset held for resale 209,272 --
Other assets 14,622 26,973
------------ ------------
5,018,898 4,451,375
$ 41,849,733 $ 31,165,003
============ ============
See accompanying notes.
F-3
1997 1996
---- ----
LIABILITIES, STOCKHOLDERS' EQUITY,
PARTNERS' CAPITAL, AND MEMBERS'
CAPITAL
CURRENT LIABILITIES
Current portion of long-term debt $ 1,271,175 $ 1,159,871
Current portion of capital lease obligation 144,273 83,935
Accounts payable 4,072,999 4,610,518
Billings in excess of costs and estimated earnings on
uncompleted contracts 4,767,376 1,138,293
Accrued expenses
Commissions 82,260 496,067
Salaries, vacation, and payroll taxes 2,330,854 1,471,287
Warranties 366,251 439,502
Income taxes 937,786 --
Interest 133,094 132,518
Other 856,261 530,957
----------- -----------
TOTAL CURRENT LIABILITIES 14,962,329 10,062,948
LONG-TERM LIABILITIES
Long-term debt, less current portion 4,615,207 4,535,172
Line of credit 4,115,000 5,072,000
Capital lease obligation, less current portion 73,715 103,441
----------- -----------
8,803,922 9,710,613
MINORITY INTEREST IN SUBSIDIARY 1,931,675 956,967
STOCKHOLDERS' EQUITY, PARTNERS'
CAPITAL, AND MEMBERS' CAPITAL
Common stock with a stated value of $5 per share, 750 shares
authorized; 300 shares issued and outstanding 1,500 1,500
Common stock with a stated value of $2 per share, 850 shares
authorized; 300 shares issued and outstanding 600 600
Additional paid-in capital 166,000 6,000
Retained earnings, partners' capital, and members' capital 15,983,707 10,426,375
----------- -----------
16,151,807 10,434,475
$41,849,733 $31,165,003
=========== ===========
F-4
SMR AEROSPACE, INC., AFFILIATES, AND SUBSIDIARIES
STATEMENTS OF INCOME
Years Ended December 31, 1997 and 1996
1997 1996
---- ----
SALES $ 72,805,309 $ 45,240,743
COST OF SALES 43,914,773 29,463,437
------------ ------------
GROSS PROFIT 28,890,536 15,777,306
OPERATING EXPENSES
Selling, general and administrative expenses 8,719,991 6,546,357
Research, development and engineering 7,388,796 6,265,187
------------ ------------
TOTAL OPERATING EXPENSES 16,108,787 12,811,544
------------ ------------
INCOME FROM CONTINUING OPERATIONS 12,781,749 2,965,762
OTHER INCOME (EXPENSE)
Minority interest in net loss (earnings) of subsidiary (1,285,033) 102,994
Interest expense (723,163) (712,141)
Interest income 80,864 73,822
Representation fees 40,000 60,000
Amortization of license agreements and deferred charges (19,157) (64,543)
Miscellaneous 38,824 (5,436)
Loss on disposal of property (13,402) (3,258)
------------ ------------
(1,881,067) (548,562)
INCOME FROM CONTINUING OPERATIONS BEFORE
PROVISION (CREDIT) FOR INCOME TAXES 10,900,682 2,417,200
PROVISION (CREDIT) FOR INCOME TAXES
ON EARNINGS OF SUBISIDARY 2,500,000 (588,000)
------------ ------------
INCOME FROM CONTINUING OPERATIONS 8,400,682 3,005,200
DISCONTINUED OPERATIONS
Loss from operations of discontinued division -- (156,133)
Gain on sale of discontinued division) -- 3,041,772
------------ ------------
-- 2,885,639
NET INCOME $ 8,400,682 $ 5,890,839
============ ============
See accompanying notes.
F-5
SMR AEROSPACE, INC., AFFILIATES, AND SUBSIDIARIES
STATEMENTS OF RETAINED EARNINGS, PARTNERS' CAPITAL,
AND MEMBERS' CAPITAL
Years Ended December 31, 1997 and 1996
1997 1996
---- ----
RETAINED EARNINGS, PARTNERS' CAPITAL, AND
MEMBERS' EQUITY AT BEGINNING OF YEAR $ 10,426,375 $ 8,034,090
NET INCOME 8,400,682 5,890,839
CAPITAL CONTRIBUTIONS -- 460,512
CASH DISTRIBUTIONS (2,843,350) (3,959,066)
----------- ------------
RETAINED EARNINGS, PARTNERS' CAPITAL,
AND MEMBERS' EQUITY AT END OF YEAR $ 15,983,707 $ 10,426,375
============ ============
See accompanying notes.
F-6
SMR AEROSPACE, INC., AFFILIATES, AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
December 31, 1997 and 1996
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,400,682 $ 5,890,839
Adjustments to reconcile net income to net cash flows from
operating activities:
Gain on sale of discontinued operations -- (3,041,772)
Depreciation 855,309 737,782
Amortization of goodwill, license agreements, and
deferred charges 403,452 496,805
Deferred income taxes 100,000 (273,000)
Minority interest in earnings or loss of subsidiary 1,285,033 (102,994)
Loss on disposal of property 13,402 3,258
Increase in cash surrender value of officers' life insurance (93,090) --
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable - trade and other (1,675,851) 303,399
Accounts receivable - affiliate -- 161,270
Inventories (3,189,415) (695,762)
Costs and estimated earnings in excess of billings on
uncompleted contracts, net 3,376,696 (2,961,872)
Prepaid expenses and other 188,752 (183,427)
Increase (decrease) in liabilities:
Accounts payable (537,519) 1,341,147
Accrued expenses 1,636,175 165,620
Advance payments received -- (957,579)
------------ ------------
NET CASH FLOWS FROM OPERATING ACTIVITIES 10,763,626 883,714
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (2,992,115) (1,040,971)
Increase in leased assets -- (151,378)
Proceeds from sale of discontinued operations, net of
related costs -- 7,716,036
Proceeds from sale of property -- 600
Increase in restricted funds (735,360) (150,684)
Increase in asset held for resale (209,272) --
------------ ------------
NET CASH FLOWS FROM INVESTING ACTIVITIES (3,936,747) 6,373,603
See accompanying notes.
F-7
SMR AEROSPACE, INC., AFFILIATES, AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS (Continued)
December 31, 1997 and 1996
1997 1996
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in line of credit (957,000) 2,018,000
Proceeds of long-term debt 1,461,702 --
Payments of long-term debt (1,270,363) (5,231,221)
Payments on capital lease obligation (153,103) (61,793)
Cash contributions to partnerships -- 460,512
Proceeds from issuance of common stock and additional
paid-in capital 160,000 6,600
Cash distributions (2,843,350) (3,959,066)
Redemption of preferred and common stock - minority interest (407,929) (466,548)
----------- -----------
NET CASH FLOWS FROM FINANCING ACTIVITIES (4,010,043) (7,233,516)
----------- -----------
NET CHANGE IN CASH AND SHORT-TERM
CASH INVESTMENTS 2,816,836 23,801
CASH AND SHORT-TERM CASH INVESTMENTS
AT BEGINNING OF YEAR 160,586 136,785
----------- -----------
CASH AND SHORT-TERM CASH
INVESTMENTS AT END OF YEAR $ 2,977,422 $ 160,586
=========== ===========
See accompanying notes.
F-8
SMR AEROSPACE, INC., AFFILIATES, AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 1 - ORGANIZATION AND BASIS OF ACCOUNTING
The consolidated and combined financial statements include the accounts of SMR
Aerospace, Inc., an Ohio Corporation ("SMR Aerospace"); its affiliates through
common ownership: SMR Associates, an Ohio Limited Partnership ("SMR
Associates"), DOPCO Associates, an Ohio General Partnership ("DOPCO"), and SMR
Developers, an Ohio Limited Liability Corporation ("SMR Developers"); its
subsidiaries: Plush Mills, Inc., an Ohio Corporation ("Plush Mills"), SMR
Aerospace Management Company, Inc., an Ohio Corporation ("SMR Management"), and
SMR Holdings, Inc., an Ohio Corporation ("SMR Holdings"). SMR Holdings has the
following subsidiaries: SMR Technologies, Inc., an Ohio Corporation ("SMR
Technologies"), and a 76% owned subsidiary, Flight Structures, Inc., a
Washington Corporation ("FSI"). The following companies are collectively
referred to as "SMR" in the notes to the financial statements: SMR Technologies,
SMR Associates, DOPCO Associates, SMR Developers, and Plush Mills. All
intercompany transactions and balances have been eliminated in consolidation.
The financial statements are presented in accordance with generally accepted
accounting principles.
SMR Technologies manufactures specialty products for the aviation industry, with
operations in Ohio and West Virginia. As more fully explained in Note 3,
substantially all of the operating assets of SMR Technologies' Commercial Life
Raft Division were sold in 1996. Accordingly, the net assets and operating
results of the Commercial Life Raft Division have been reported as discontinued
operations in the accompanying financial statements.
FSI engages in the design, testing, and certification of modifications to
commercial aircraft, as well as the manufacture of certain related components.
Substantially all work performed by FSI is performed under fixed price
contracts. Customers are located throughout the world. A significant amount of
revenues are earned outside the United States.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassifications - Certain reclassifications have been made to the 1996
financial statements to conform to the current year presentation.
Inventories - Inventories of SMR, with a cost of $3,832,289 at December 31, 1997
and $4,166,915 at December 31, 1996, are stated at cost, determined on a
last-in, first-out (LIFO) basis. Inventories of FSI, with a cost of $6,269,678
at December 31, 1997 and $2,745,637 at December 31, 1996, consist of raw
materials and purchased parts and are stated at the lower of weighted average
cost or market.
F-9
SMR AEROSPACE, INC., AFFILIATES, AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
December 31, 1997 and 1996
Inventories consist of the following at December 31, 1997 and 1996:
1997 1996
---- ----
Raw materials and purchased parts $ 8,791,895 $ 4,983,469
Work in process 1,291,415 1,585,783
Finished goods 913,022 1,029,530
------------------- ------------------
10,996,332 7,598,782
LIFO reserve (894,365) (686,230)
------------------- ------------------
$ 10,101,967 $ 6,912,552
=================== ==================
Contract Revenue Recognition - Revenues under fixed price contracts are
recognized on the percentage of completion method, measured by the percentage of
incurred contract costs to estimated total contract costs. Contracts that
consist of an engineering and a manufacturing component are combined for
purposes of computing revenue.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies, tools,
repairs, and depreciation. Selling, general, and administrative costs are
charged to expense as incurred. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions, and estimated profitability, including those
arising from contract penalty provisions, and final contract settlements may
result in revisions to costs and income and are recognized in the period in
which the revisions are determined. An amount equal to contract costs
attributable to claims is included in revenues when realization is probable and
the amount can be reliably estimated.
The asset, "Costs and estimated earnings in excess of billings on uncompleted
contracts", represents revenues in excess of the amounts billed. The liability,
"Billings in excess of costs and estimated earnings on uncompleted contracts",
represents billings in excess of costs and estimated earnings recognized.
Property and Equipment - Property and equipment is stated at cost, less
accumulated depreciation. Major additions and betterments are capitalized;
maintenance and repairs are expensed as incurred. When properties are retired or
otherwise disposed of, gains and losses are recorded in the statement of income.
FSI recognizes depreciation and amortization using the straight-line method.
Leasehold improvements are amortized over the estimated useful life. All other
assets are depreciated over their useful lives of 3 to 10 years.
SMR recognizes depreciation using accelerated methods over the estimated useful
lives of assets ranging from 5 to 39 years.
F-10
SMR AEROSPACE, INC., AFFILIATES, AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
December 31, 1997 and 1996
Depreciation and amortization expense was $855,309 in 1997 and $737,782 in 1996.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", the Company reviews for the impairment of long-lived assets
whenever events or circumstances indicate that the carrying value of an asset
may not be recoverable. An impairment loss would be recognized when the
estimated future cash flows are less than the carrying amount of the asset. No
impairment losses have been identified.
Short-Term Cash Investments - For purposes of the statement of cash flows, cash
and short-term cash investments consist of demand deposits and overnight
investments at a bank. The amount of cash and short-term cash investments
sometimes exceeds federally insured limits.
Goodwill - Goodwill, the excess of the purchase price over the net assets paid
for FSI, is being amortized over 10 years. Amortization expense was $394,404 in
1997 and $404,916 in 1996, and is included in selling, general, and
administrative expenses.
License Agreements - As part of the acquisition of the assets of Seaco/Elliot,
Inc. in June 1994, the cost of an exclusive sales distribution agreement of
$250,000 was being amortized over the five-year term of the agreement.
Amortization expense was $20,833 in 1996. These assets were sold to Inflatable
Survival Systems, Inc. in connection with the sale of SMR Technologies'
Commercial Life Raft Division.
A license agreement, with a cost of $100,000, is being amortized using the
straight-line method over the 10-year term of the license agreement.
Amortization expense was $10,000 in 1997 and 1996. Accumulated amortization was
$83,333 at December 31, 1997 and $73,333 at December 31, 1996.
Deferred Charges - Deferred charges consist primarily of deferred financing
costs that are being amortized using the straight-line method over the term of
the related loans. Certain of the these loans were repaid in 1996, in connection
with the sale of SMR's Commercial Life Raft Division. The remaining net book
value of the related deferred charges was included in amortization expense in
1996, and totaled $59,848. Amortization expense on remaining deferred charges
was $9,157 in 1997 and $4,694 in 1996. Accumulated amortization was $16,055 at
December 31, 1997 and $9,653 at December 31, 1996.
F-11
SMR AEROSPACE, INC., AFFILIATES, AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
December 31, 1997 and 1996
Income Taxes - FSI is a taxpaying entity; therefore, income taxes are provided
for the tax effects of transactions reported in the financial statements and
consist of taxes currently due plus deferred taxes related primarily to
differences between the basis of certain assets and liabilities for financial
and income tax reporting. These assets and liabilities consist primarily of a
general business credit carryforward, contracts less than 10% complete, reserve
for contract losses, property, and certain accrued liabilities. The deferred tax
assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. A deferred tax asset is also recognized
for research and development tax credits earned in the current year that are
available to offset future federal income taxes.
The stockholders of SMR Aerospace, SMR Management, SMR Technologies, and Plush
Mills have elected to be taxed under the Subchapter S provisions of the Internal
Revenue Code. As S Corporations, all items of income, loss, tax credits, and
other tax items are passed through to the stockholders for inclusion on their
personal income tax returns. Accordingly, no provision for income taxes related
to the income of these entities has been recorded.
SMR Associates, DOPCO, and SMR Developers are recognized as partnerships for
income tax purposes. All items of income, loss, tax credits and capital
distributions, among others, are allocated to the Partners or Members in
proportion to their respective ownership interest in the Partnership;
accordingly, no provision for income taxes related to the income of SMR
Associates, DOPCO, or SMR Developers has been recorded.
Restricted Funds - The restricted funds may only be used to retire certain debt
obligations (Note 6). These funds are held in short-term investments that are
stated at cost, which approximates market value.
Research and Development - Research and development costs are charged to expense
as incurred. Total expense was $6,078,000 in 1997 and $5,011,000 in 1996.
NOTE 3 - DISCONTINUED OPERATIONS
During 1996, SMR sold substantially all of the assets of its Commercial Life
Raft Division. On May 31, 1996, the assets of the Commercial Life Raft Division
were sold to Inflatable Survival Systems, Inc. (ISSI) for $8,000,000 in cash and
$1,000,000 account receivable due in September 1997. The sale resulted in a gain
of $3,041,772 in 1996 after recognizing certain expenses directly related to the
sale.
Pursuant to the sale of the Commercial Life Raft Division assets, the Division's
operating results have been reported as discontinued operations in the
accompanying financial statements. The Division had no operations in 1997.
F-12
SMR AEROSPACE, INC., AFFILIATES, AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
December 31, 1997 and 1996
Summarized results of operations of the discontinued operation are presented
below:
1996
----
Net sales $ 2,474,599
Costs and expenses 2,630,732
-------------------
Loss from discontinued operations (156,133)
Gain on sale of assets 3,041,772
-------------------
Total earnings related to discontinued
Commercial Life Raft Division $ 2,885,639
===================
NOTE 4 - CONTRACTS IN PROGRESS
The contracts in progress of FSI are summarized as follows:
1997 1996
---- ----
Total value of contracts in progress $ 109,328,442 $ 81,880,236
Total estimated costs (87,657,197) (61,306,214)
-------------------- --------------------
Total estimated gross profit $ 21,671,245 $ 20,574,022
===================== =================
Costs incurred on uncompleted contracts $ 59,882,335 $ 31,312,201
Estimated earnings 8,578,420 4,266,397
-------------------- --------------------
Total revenues earned on uncompleted contracts 68,460,755 35,578,598
Billings to date (65,385,854) (29,127,001)
-------------------- --------------------
Revenues earned in excess of billings $ 3,074,901 $ 6,451,597
===================== =================
Such amounts are included in the accompanying balance sheet under the following
captions:
1997 1996
---- ----
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 7,842,277 $ 7,589,890
Billings in excess of costs and estimated earnings on
uncompleted contracts including estimated future losses
of $138,000 and $480,000, respectively) (4,767,376) (1,138,293)
----------------- ------------------
$ 3,074,901 $ 6,451,597
================= ===============
F-13
SMR AEROSPACE, INC., AFFILIATES, AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 5 - LINE OF CREDIT
SMR Technologies has a line of credit with Bank One, Akron, NA that allows for
maximum borrowings of $8,000,000. Interest is payable monthly at the LIBOR rate
plus 1.75% (7.402% at December 31, 1997). The line of credit expires in April
1999. The line of credit is collateralized by substantially all assets of SMR
and FSI. $4,115,000 was outstanding at December 31, 1997.
NOTE 6 - LONG-TERM DEBT
Long-term debt consists of the following at December 31:
1997 1996
---- ----
$3,700,000 ten-year term loan payable to Bank One,
Akron, NA $ 775,740 $ 895,740
$1,975,000 five-year term loan payable to Bank One,
Akron, NA 685,012 1,115,008
$2,293,500 notes payable to former stockholders of
FSI 802,725 1,261,425
$2,000,000 capitalized lease obligation for Industrial
Development Bonds, City of Richwood, West Virginia 2,000,000 2,000,000
Notes payable to West Virginia Economic Development Authority
and Valley Developers, Inc. -- 129,851
$1,300,000 term loan payable to Capital One
Funding Corporation 1,273,333 --
ESOT note payable to former FSI stockholder 192,560 293,019
Other 157,012 --
TOTAL 5,886,382 5,695,043
CURRENT PORTION (1,271,175) (1,159,871)
----------- -----------
LONG-TERM PORTION $ 4,615,207 $ 4,535,172
=========== -----------
F-14
SMR AEROSPACE, INC., AFFILIATES, AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
December 31, 1997 and 1996
The proceeds of the $3,700,000 ten-year term loan payable to Bank One, Akron, NA
were used to finance the acquisitions of FSI and Seaco/Elliot, Inc. Interest is
payable monthly at the LIBOR rate plus 1.75% (7.402% at December 31, 1997).
Principal is payable in 120 monthly installments of $10,000 from November 1995
through June 2004.
The proceeds of the $1,975,000 five-year term loan payable to Bank One, Akron,
NA were used to refinance an Employee Stock Ownership Trust term loan payable of
FSI to a financial institution. Interest is payable monthly at the LIBOR rate
plus 1.75% (7.402% at December 31, 1997). Principal is payable in 55 monthly
installments of $35,833 from February 1995 through October 1999.
These loans are collateralized by substantially all assets of SMR and FSI. The
terms of the financing agreement for these loans and the line of credit provide,
among other provisions, requirements for maintaining certain working capital and
other financial ratios, and limit the payment of dividends and distributions to
$250,000 plus an amount for SMR income taxes.
The $2,293,500 notes payable to the former stockholders of FSI provide for
interest at 4%, payable quarterly. Principal is payable in 60 monthly
installments of $38,225 from October 1994 to September 1999. The notes are
collateralized by the common stock of FSI that was purchased by SMR.
The $2,000,000 capitalized lease obligation to the City of Richwood, West
Virginia was assumed by SMR Associates in a 1988 business acquisition. Principal
and interest due on the bonds are payable solely from the lease payments. The
bond principal is due in February 2008. Interest at 6.2% is payable
semiannually. The bonds are collateralized by land and building with a cost of
$1,100,000. SMR Associates was required to deposit at least $100,000 annually
through 1993 into an escrow fund. The balance in the fund of $1,864,454 at
December 31, 1997 and $1,129,094 at December 31, 1996, is classified as
restricted funds on the accompanying statements of assets, liabilities,
stockholders' equity, and partners' capital. SMR Associates deposited $675,000
in 1997 and $100,000 in 1996 into this fund.
The notes payable to the West Virginia Economic Development Authority and Valley
Developers were completely repaid in 1997.
The proceeds of the $1,300,000 term loan payable to Capital One Funding
Corporation ("Capital") were used by SMR Developers to construct an office and
research facility in Sharon Center, Ohio. The loan requires monthly principal
payments ranging from $3,333 to $7,500 from May 1997 through April 2017.
Interest is adjusted weekly based on commercial paper rates (6% at December 31,
1997) and is payable monthly. The loan is guaranteed by SMR Technologies and SMR
Associates, and is secured by a mortgage on the related property.
F-15
SMR AEROSPACE, INC., AFFILIATES, AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
December 31, 1997 and 1996
The ESOT note payable to a former stockholder is payable in monthly installments
of $8,372 plus interest at the prime rate plus 1% (9.5% at December 31, 1997).
It is collateralized by 131,621 shares of common stock of FSI. The note is due
November 30, 1999.
Aggregate maturities of long-term debt are as follows:
Years Ending December 31: Amount
------------------------- ------
1998 $ 1,271,175
1999 890,130
2000 166,000
2001 170,000
2002 172,000
Thereafter 3,217,077
-----------------
$ 5,886,382
=================
NOTE 7 - INCOME TAXES
Income (loss) before taxes of FSI for the year ended December 31, 1997 was
$7,836,981, and was $(1,035,356) for the year ended December 31, 1996. The
difference between the effective tax rate and the statutory rate applied to
pre-tax income of FSI is due primarily to research and development (R&D) tax
credits earned and the income attributable to a foreign sales corporation, which
is taxed at a lower federal income tax rate.
The income tax provision (credit) of FSI consists of the following for the years
ended December 31, 1997 and 1996:
1997 1996
---- ----
Current $ 2,700,000 $ (315,000)
Benefits of R & D credits (300,000) (270,000)
Deferred 100,000 (3,000)
----------------- -------------------
$ 2,500,000 $ (588,000)
================= ================
F-16
SMR AEROSPACE, INC., AFFILIATES, AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
December 31, 1997 and 1996
The net deferred tax asset in the accompanying balance sheets consist of:
1997 1996
----- ----
Net current:
Gross deferred tax assets $ 457,000 $ 491,000
Gross deferred tax liabilities (5,000) (91,000)
----------------- -----------------
452,000 400,000
Net non-current:
Gross deferred tax assets 20,060 226,860
Gross deferred tax liabilities (11,200) (66,000)
----------------- -----------------
8,860 160,860
----------------- -----------------
$ 460,860 $ 560,860
================== =================
The tax effects of significant temporary differences representing deferred tax
assets and liabilities are as follows:
1997 1996
---- ----
General business credit carryforward $ - $ 458,000
Reserve for contract loss 46,000 169,000
Allowance for doubtful accounts 11,000 -
Accrued liabilities 400,000 68,000
Contracts less than 10% complete (5,000) (91,000)
Depreciation (11,200) (66,000)
Other 20,060 22,860
----------------- -----------------
$ 460,860 $ 560,860
================== =================
At December 31, 1996, FSI had a general business credit carryforward which was
fully utilized in 1997.
NOTE 8 - LEASES
Operating Leases - FSI leases its engineering offices, manufacturing facilities
and related land under operating leases with partnerships controlled by former
stockholders of FSI. The building leases expire from 1999 through 2000 and have
renewal options. Rate increases are based on inflation indices and the leases
require FSI to pay a portion of the real estate taxes and other expenses. Total
lease expense paid to the partnerships was $591,000 in 1997 and $526,000 in
1996. In 1997, FSI leased a warehouse facility from a third party. Total rent
expense under this lease was $80,000 in 1997.
F-17
SMR AEROSPACE, INC., AFFILIATES, AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
December 31, 1997 and 1996
Future minimum lease payments under noncancelable operating leases are as
follows:
Year Ended December 31: Amount
----------------------- ------
1998 $ 725,000
1999 699,000
2000 166,000
Total rent expense on all leases was $754,000 in 1997 and $585,000 in 1996. FSI
subleased certain facilities in 1997 and 1996. Rental income was $45,000 in 1997
and $32,000 in 1996.
Capital Leases - FSI leases certain computer equipment and printers under leases
accounted for as capital leases. These leases expire in the year 2000.
The assets and liabilities under capitalized leases are recorded at the lower of
the present value of the minimum lease payments or the fair market value of the
assets at the inception of the lease. The assets are amortized over their
estimated useful lives. Amortization of assets under capitalized leases is
included in depreciation expense for 1997 and 1996.
The assets recorded under these leases are included in property and equipment as
follows:
1997 1996
---- ----
Computers and office equipment $ 440,035 $ 256,321
Less accumulated depreciation (204,989) (62,261)
----------------- ----------------
$ 235,046 $ 194,060
================== ================
Future minimum lease payments under the
capitalized leases are as follows:
Years Ending December 31: Amount
1998 $ 173,197
1999 96,033
2000 740
----------------
Total future minimum lease payments 269,970
Less amounts representing interest (51,982)
217,988
Current portion (144,273)
Long-term portion $ 73,715
================
F-18
SMR AEROSPACE, INC., AFFILIATES, AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 9 - MINORITY INTEREST
Minority interest includes the 24% interest of the ESOP in the common
stockholders' equity of FSI, as well as 100% of FSI's preferred stock.
Minority interest of FSI's preferred stockholders is carried at liquidation
value, which equals the par value of the preferred stock. FSI redeemed 241,360
shares of preferred stock for $241,360 in 1997 and 1996. Minority interest
related to the preferred stock was -0- at December 31, 1997 and $241,360 at
December 31, 1996.
In 1997, FSI repurchased 73,847 shares of its common stock in exchange for cash
of $166,569. In 1996, FSI repurchased 85,810 shares of its common stock in
exchange for cash of $225,188. In 1996, FSI also purchased 571,659 shares of its
common stock in exchange for future contributions to be made to FSI's retirement
plans (Note 10). As a result of these transactions, SMR's ownership percentage
increased to 76%. In 1997, the purchase price for the common shares was more
than the net book value of FSI; therefore these stock repurchases increased
goodwill by $97,604. In 1996, the purchase price for the common shares was less
than the net book value of FSI; therefore, these stock repurchases decreased
goodwill by $321,172. The minority interest of FSI's common stockholders is
carried at net book value.
NOTE 10 - RETIREMENT PLANS
SMR has a noncontributory defined benefit retirement plan covering substantially
all of its hourly employees who meet certain age and length of service
requirements. Pension costs are funded as actuarially determined to at least
meet minimum requirements of the Employee Retirement Income Security Act. The
weighted average discount rate used to measure the projected benefit obligation
is 7% in 1997 and 1996. The expected long-term rate of return on plan assets
used in determining pension cost is 7%. SMR uses the straight-line method of
amortization for unrecognized gains and losses. Plan assets are invested in
mutual funds, United States Government obligations, and money market accounts.
Pension expense includes the following components:
1997 1996
---- ----
Service cost of the current period $ 53,812 $ 56,522
Interest cost on the projected benefit
obligation 40,678 36,333
Actual return on assets held in the plan (81,350) (49,220)
Net amortization and deferral 41,210 18,736
----------------- -----------------
Pension expense $ 54,350 $ 62,371
================= =================
F-19
SMR AEROSPACE, INC., AFFILIATES, AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
December 31, 1997 and 1996
The funded status of SMR's pension plan is as follows:
1997 1996
---- ----
Actuarial present value of projected
benefit obligations $ 655,356 $ 607,371
Plan assets at fair market value 729,993 589,495
----------------- -----------------
Plan assets in excess (deficiency) of
projected benefit obligations 74,637 (17,876)
Unrecognized net asset at transition (34,558) (38,624)
Unrecognized prior service cost 61,073 67,881
Unrecognized net (gain) loss (3,470) 57,658
Additional liability to reflect required
minimum liability at year-end - (86,915)
Other (112,945) 2,613
----------------- -----------------
Accrued pension obligation $ (15,263) $ (15,263)
=================- =================-
SMR also has a defined contribution retirement plan qualified under Section
401(k) of the Internal Revenue Code that covers substantially all employees who
meet certain age and length of service requirements that are not covered by the
defined benefit plan. Under these plans, the Company will make a matching
contribution of 100% of employee elective deferrals, up to a maximum
contribution of 3% of a participant's compensation. In addition, the plan
provides for a floor contribution of 2% of each eligible employee's
compensation. Total expense under these plans was $146,721 in 1997 and $131,100
in 1996.
FSI sponsors a defined contribution savings plan ("Plan") qualified under
Section 401(k) of the Internal Revenue Code of 1986, covering substantially all
full-time employees meeting age and service requirements. Prior to June 30,
1996, FSI sponsored an Employee Stock Ownership Plan ("ESOP") and a 401(k) Plan.
These plans were merged on June 30, 1996.
The Plan provides for the following contributions:
A base non-elective contribution equal to 2% of each eligible employee's
compensation (effective July 1, 1996),
A matching contribution on a dollar-for-dollar basis, up to 3% of each
eligible employee's compensation (this percentage was 6% from October 1,
1996, the date these contributions commenced, to December 31, 1996), and
A cash contribution of $9,250 per month through December 2000 (In 1996, a
contribution of $27,750 was made in September 1996 and $9,250 per month was
contributed from October through December 1996.).
F-20
SMR AEROSPACE, INC., AFFILIATES, AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
December 31, 1997 and 1996
The minimum amount of these contributions is $300,000 annually through June
2001.
Total expense under the Plan was $517,000 in 1997 and $211,200 in 1996. Plan
expense in 1996 includes ESOP contributions made prior to FSI's purchase of the
remaining unallocated shares held by the ESOP on June 30, 1996.
Certain participant's accounts hold shares of FSI common stock (allocated
shares). The total number of allocated shares was 639,257 at December 31, 1997
and 723,564 at December 31, 1996.
Under provisions of the Plan, participants receiving distribution of FSI stock
may require FSI to repurchase such shares at fair market value. The terminated
participant has two periods in which to exercise this "put" option; first,
within 60 days from the date of distribution, and second, for a 60 day period
one year later after the new determination of fair market value and notice to
the participant thereof. Fair market value is determined by independent
appraisal. FSI repurchased 73,847 shares for $166,569 in 1997 and 85,810 shares
for $225,188 in 1996.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
FSI is subject to legal proceedings and claims which arise in the ordinary
course of business. In the opinion of management, the amount of liability, if
any, with respect to these actions will not materially affect the financial
position or results of operations of FSI.
FSI has the responsibility to complete all contracts on a timely basis and
within the guidelines agreed to in the contract. After completion of a
particular job, the work performed by the Company may be subject to review and
acceptance by the Federal Aviation Administration and various other regulatory
agencies. In the past the Company has not had significant expenditures due to
failure to deliver or regulatory agency rejection.
NOTE 12 - SUPPLEMENTAL CASH FLOW INFORMATION
The following are supplemental disclosures of cash flow activities:
1997 1996
---- ----
Cash paid for:
Interest $ 723,092 $ 803,076
Income taxes, net of refunds received 1,076,051 249,411
F-21
SMR AEROSPACE, INC., AFFILIATES, AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
December 31, 1997 and 1996
Non-cash investing and financing transactions were as follows:
1997 1996
---- ----
Property and equipment purchased with
capital lease obligation $ 183,715 $ 249,169
Building addition payment included in accounts
payable at December 31, 1997 70,000 -
NOTE 13 - PARTNER/STOCKHOLDER AGREEMENTS
The partners of SMR Associates and the stockholders of SMR Technologies have a
cross purchase agreement, which covers future transfers of each owner's
interests in these entities. In the event of an individual's retirement after
age 55, disability, or death, the remaining owners are required to purchase that
individual's interest in these entities at a price determined in accordance with
the agreement. In the event of a third party offer to purchase an owner's
interest, the remaining owners have the right to acquire such interest at the
same purchase price. The term for payment of the purchase price can be up to 10
years, with interest computed at the prime rate on the unpaid balance.
SMR Technologies has a consulting and deferred compensation agreement with its
stockholders whereby each stockholder (or his beneficiary) will receive $100,000
for five years after retirement (past age 55), disability, or death. No expense
was recognized under this agreement in 1997 or 1996.
NOTE 14 - SIGNIFICANT CUSTOMERS
Sales to three significant customers totaled $31,879,000 (44% of consolidated
net sales) in 1997. Sales to three significant customers totaled $19,100,000
(42% of consolidated net sales) in 1996. All of these customers are in the
aircraft industry. Accounts receivable from these customers represented 45% of
trade accounts receivable at December 31, 1997 and 50% of trade accounts
receivable at December 31, 1996.
NOTE 15 - USE OF ESTIMATES
Management uses estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets, liabilities,
revenues and expenses and the disclosure of contingent assets and liabilities.
Actual results could vary from the estimates that were used.
F-22
SMR AEROSPACE, INC., AFFILIATES, AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
December 31, 1997 and 1996
The Company has calculated and determined its revenue earned from contracts for
the years ended December 31, 1997 and 1996, and the effect on several asset and
liability amounts, based on the common industry standard determination formula
of actual costs to date compared to total estimated job costs. Due to
uncertainties inherent in the estimation process, and uncertainties relating to
future performance as the contracts are completed, it is at least reasonably
possible that estimated job costs, in total or on individual contracts, will be
revised.
NOTE 16 - CASH DISTRIBUTION
In January 1998, SMR Technologies paid a cash distribution of $675,000 to its
stockholders to pay the balance of income taxes due on the S Corporation income
for the year ended December 31, 1997.
NOTE 17 - CREDIT RISK
The Company extends credit to its customers in the normal course of business.
Management performs ongoing credit evaluations of its customers, and believes
that any risk of loss is minimal.
NOTE 18 - LOSS CONTRACT
FSI recognized a loss of $1,956,000 in 1997 and $4,167,00 in 1996 on a contract
that is considered to be substantially complete as of December 31, 1997.
NOTE 19 - SUBSEQUENT EVENT
On February 2, 1998, the principal on the SMR Associates $2,000,000 Industrial
Development Bonds was called (Note 6). At that time, the escrow fund had a
balance of $1,864,454. An additional $135,546 was deposited into the escrow fund
in order to satisfy the redemption.
NOTE 20 - SALE OF BUSINESS
Effective August 7, 1998, the shareholders of SMR Aerospace, Inc. sold to BE
Aerospace, Inc., a Delaware corporation, all of the outstanding common stock of
SMR Aerospace, Inc. (including all of the investments in the subsidiaries), all
of the general and limited partnership interests in SMR Associates, and all of
the membership interest in SMR Developers. Concurrent with this transaction, BE
Aerospace, Inc. also acquired substantially all of the minority interest in the
common stock of Flight Structures, Inc. which was owned by the FSI Savings and
Retirement Plan. The total purchase price was approximately $142,000,000.
F-23
SMR AEROSPACE, INC., AFFILIATES, AND SUBSIDIARIES
CONDENSED BALANCE SHEETS
(Dollars in thousands, except share amounts)
ASSETS
March 31, December 31,
1998 1997
(Unaudited)
Current assets:
Cash and short-term investments ........................ $ 325 $ 2,978
Accounts receivable, net ............................... 19,970 9,682
Inventories, net ....................................... 10,465 10,102
Costs and estimated earnings in excess of billings on
uncompleted contracts ................................ 3,873 7,842
Other current assets ................................... 639 701
------- -------
Total current assets ......................... 35,272 31,305
Property, plant and equipment, net .......................... 5,747 5,526
Intangibles and other assets, net ........................... 3,060 5,019
------- -------
$44,079 $41,850
======= =======
LIABILITIES, STOCKHOLDERS' EQUITY, PARTNERS'
CAPITAL AND MEMBERS' CAPITAL
Current liabilities:
Accounts payable ....................................... $ 6,013 $ 4,073
Billings in excess of costs and estimated earnings on
uncompleted contracts ................................ 2,752 4,767
Accrued liabilities .................................... 4,527 4,851
Current portion of long term debt ...................... 1,414 1,271
------- -------
Total current liabilities .................... 14,706 14,962
Long-term debt, less current portion ........................ 2,328 4,615
Other long-term liabilities ................................. 6,801 4,189
Minority interest in subsidiary ............................. 2,487 1,932
Stockholders' equity, partners' capital and members' capital:
Common stock, $5 stated value; 750 shares authorized; .... 1
300 shares issued and outstanding ..................... 1
Common stock, $2 stated value; 850 shares authorized; .... 1
300 shares issued and outstanding .................... 1
Additional paid-in capital ............................... 166 166
Retained earnings, partners' capital, and members' capital 17,589 15,984
------- -------
17,757 16,152
$44,079 $41,850
======= =======
See accompanying notes to condensed financial statements.
F-24
SMR AEROSPACE, INC., AFFILIATES, AND SUBSIDIARIES
CONDENSED STATEMENTS OF INCOME
(Dollars in thousands)
(Unaudited)
Three Months Ended
March 31,
-------------------------------------------
1998 1997
------------------ -----------------
Net sales....................................................... $ 26,330 $ 17,028
Cost of sales........................................................ 16,989 10,243
------------------ -----------------
Gross profit.................................................... 9,341 6,785
Research, development and engineering................................ 1,841 1,545
Selling, general and administrative expenses. 2,572 2,198
------------------ -----------------
Operating income................................................ 4,928 3,042
Minority interest in net loss (earnings) of subsidiary............... (560) (244)
Interest expense..................................................... (152) (190)
Other income, net.................................................... 36 13
------------------ -----------------
Income before income taxes........................................... 4,252 2,621
Income taxes......................................................... 1,252 504
------------------ -----------------
Net Income........................................................... $ 3,000 $ 2,117
================== =================
See accompanying notes to condensed financial statements.
F-25
SMR AEROSPACE, INC., AFFILIATES, AND SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months Ended
March 31,
------------------------------------
1998 1997
-------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................. $ 3,000 $ 2,117
Adjustments to reconcile net income to net cash flow from
operating activities:
Depreciation and amortization............................ 341 279
Minority Interest in earnings of subsidiary.............. 560 244
(Increase) decrease in assets:
Accounts receivable...................................... (10,288) (3,245)
Inventories.............................................. (363) (223)
Costs and estimated earnings in excess of billing on
uncompleted contracts................................... 3,969 684
Other assets............................................. 51 (214)
Increase (decrease) in liabilities:
Accounts payable......................................... 1,940 (215)
Billings in excess of costs and estimated earnings on
uncompleted contracts................................... (2,015) 1,685
Accrued liabilities...................................... (324) 105
----------- ----------
Net cash flows provided by
(used in) operating activities...................... (3,129) 1,217
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures....................................... (408) (851)
Increase (decrease) in restricted funds.................... 1,854 (39)
----------- ----------
Net cash flows provided by
(used in) investing activities...................... 1,446 (890)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt............................... -- 705
Repayments of long-term debt............................... (2,172) (356)
Net increase in line of credit............................. 2,597 15
Treasury stock redemption.................................. -- (60)
Distribution to shareholders............................... (1,395) (688)
----------- ----------
Net cash flows (used in) financing activities......... (970) (384)
----------- ----------
CHANGE IN CASH AND CASH EQUIVALENTS............................. (2,653) (57)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................. 2,978 161
----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ....................... $ 325 $ 104
=========== ==========
See accompanying notes to condensed financial statements.
F-26
SMR AEROSPACE, INC., AFFILIATES, AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
Note 1. Basis of Presentation
The condensed financial statements of SMR Aerospace, Inc. (the "Company") have
been prepared by the Company and are unaudited pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
related to the Company's organization, significant accounting policies, and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. In the opinion of management, these unaudited condensed consolidated
financial statements reflect all material adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the results of
operations and statements of financial position for the interim periods
presented. These results are not necessarily indicative of a full year's results
of operations.
Although the Company believes that the disclosures provided are adequate to make
the information presented not misleading, these unaudited interim condensed
financial statements should be read in conjunction with the audited consolidated
and combined financial statements and notes thereto for the year ended December
31, 1997.
Note 2. Subsequent Event
Effective August 7, 1998, the shareholders of SMR Aerospace, Inc. sold to BE
Aerospace, Inc., a Delaware corporation, all of the outstanding common stock of
SMR Aerospace, Inc. (including all of the investments in the subsidiaries), all
of the general and limited partnership interests in SMR Associates, and all of
the membership interest in SMR Developers. Concurrent with this transaction, BE
Aerospace, Inc. also acquired substantially all of the minority interest in the
common stock of Flight Structures, Inc. which was owned by the FSI Savings and
Retirement Plan. The total purchase price was approximately $142 million.
F-27
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The unaudited pro forma combined statements of operations and unaudited
pro forma combined balance sheet give effect to (i) the acquisition by B/E
Aerospace, Inc. ("B/E") of SMR on a purchase accounting basis and (ii) the
issuance of the shares issued in the acquisition of SMR. The pro forma combined
statement of operations for the fiscal year ended February 28, 1998 is comprised
of the results of B/E for the fiscal year ended February 28, 1998 and the
results of SMR for the year ended December 31, 1997. The pro forma combined
statement of operations for the three months ended May 30, 1998 is comprised of
the results of B/E for the three months ended May 30, 1998 and the results of
SMR for the three months ended March 31, 1998. The pro forma combined balance
sheet as of May 30, 1998 has been prepared by combining the consolidated
balance sheet of B/E as of May 30, 1998 with the balance sheet of SMR as of
March 31, 1998.
The pro forma combined statements of operations for the fiscal year
ended February 28, 1998 and the three months ended May 30, 1998 assume that the
acquisition of SMR and the issuance of the shares issued in the acquisition of
SMR occurred on February 23, 1997. The pro forma combined balance sheets as of
May 30, 1998 assumes that the acquisition of SMR and the offering of the shares
issued in the acquisition of SMR occurred on May 30, 1998. The pro forma
combined statements of operations and balance sheet do not purport to represent
the results of operations or financial position of the Company had the
transactions and events assumed therein occurred on the dates specified, nor are
they necessarily indicative of the results of operations that may be achieved in
the future. Certain of the pro forma adjustments represent estimates of costs to
be incurred and cost savings expected to be realized in connection with the
acquisition of SMR (expenses related to the SMR selling shareholders which are
now non-recurring). No assurance can be given as to the amount of costs that
will actually be incurred or cost savings that will actually be realized. The
pro forma adjustments are based on management's preliminary assumptions
regarding purchase accounting adjustments.
Terms of the SMR purchase and sale and related agreements (the
"Agreements") provide for B/E to issue the SMR selling shareholders 4,000,000
shares of common stock valued at approximately $30 per share. The Agreements
also provide that in the event that the SMR selling shareholders do not receive
net proceeds (as defined) from the sale of the B/E stock equal to approximately
$30 per share, that B/E will pay such difference and reflect the same as an
increase in the purchase price of SMR; in the event the SMR selling shareholders
receive net proceeds (as defined) greater than approximately $30 per share, they
are obligated to remit such amount to B/E, and such amounts will be reflected as
additional paid in capital by the Company. B/E has guaranteed its obligations
under the Agreements by posting an irrevocable letter of credit in favor of the
SMR selling shareholders. This letter of credit may be drawn upon after December
31, 1998 if the sellers have not received net proceeds (as defined) of $120
million from the sale of the 4,000,000 shares. The Agreements provide B/E
effective control over the timing, amount of shares and amount per share that
the SMR selling shareholders may sell the B/E shares.
The pro forma combined financial information is based upon certain
assumptions and adjustments described in the notes to the pro forma financial
statements. The pro forma combined financial information should be read in
conjunction with the historical financial statements, and related notes and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" contained, with respect to B/E, in B/E's Annual Report on Form 10-K,
as amended, for the year ended February 28, 1998, and the Quarterly Report on
Form 10-Q, as amended, for the quarter ended May 30, 1998 and, with respect to
SMR, in the audited financial statements attached hereto.
PF-1
B/E Aerospace, Inc.
Pro Forma Combined Statement of Operations (Unaudited)
Year Ended February 28, 1998
(Dollars in thousands)
B/E SMR Adjustments Pro Forma
----------------------------------------------
Net sales $ 487,999 $ 72,805 $ -- $ 560,804
Cost of sales 309,094 43,914(a) 200 353,208
--------- --------- --------- ---------
Gross profit 178,905 28,891 (200) 207,596
Operating expenses:
Research, development and engineering 45,685 7,389 -- 53,074
Selling, general and administrative 58,622 8,593(b) (1,251) 65,964
Amortization expense 11,265 -- (a) 1,729 12,994
In-process research and development,
acquisition and other expenses 4,664 -- (c) 68,400 73,064
--------- --------- --------- ---------
Total operating expenses 120,236 15,982 68,878 205,096
--------- --------- --------- ---------
Operating earnings (loss) 58,669 12,909 (69,078) 2,500
Interest expense, net 22,765 723(d) 2,520 26,008
--------- --------- --------- ---------
Earnings (loss) before income taxes
and extraordinary item 35,904 12,186 (71,598) (23,508)
Minority interest in net earnings of subsidiary -- 1,285(e) (1,285) --
Income taxes 5,386 2,500(f) (1,152) 6,734
--------- --------- --------- ---------
Earnings (loss) extraordinary item 30,518 8,401 (69,161) (30,242)
Extraordinary item 8,956 -- -- 8,956
--------- --------- --------- ---------
Net earnings (loss) $ 21,562 $ 8,401 $ (69,161) $ (39,198)
========= ========= ========= =========
Basic earnings (loss) per share:
Earnings (loss) before extraordinary item $ 1.36 $ (1.14)
Extraordinary item (0.40) (0.34)
--------- ---------
Net earnings (loss) $ 0.96 $ (1.48)
========= =========
Weighted average common shares 22,442 26,442
Diluted earnings (loss) per share:
Earnings (loss) before extraordinary item $ 1.30 $ (1.14)
Extraordinary item (0.38) (0.34)
--------- ---------
Net earnings (loss) $ 0.92 (1.48)
========= =========
Weighted average common shares 23,430 26,442
See accompanying notes to Pro Forma Combined Statement of Operations for
the Year ended February 28, 1998.
PF-2
B/E Aerospace, Inc.
Notes to Pro Forma Combined Statement of Operations
Year ended February 28, 1998
(a) Reflects adjustments to depreciation and amortization based on the
preliminary purchase price allocation related to the acquired property and
equipment and intangible assets.
(b) Reflects adjustments to eliminate costs attributable to the selling
shareholders of the acquired businesses that will no longer be incurred by
B/E. Such costs consist of the following:
Shareholder salaries and benefits $ 711
Shareholder bonuses 540
----------
$ 1,251
(c) Reflects the estimated in-process research and development and acquisition
related expenses associated with the acquisition of SMR.
(d) Represents additional interest expense for the year ended February 28, 1998
that would have been incurred had 1) the acquisition, 2) the offering of
the shares issued in the acquisition of SMR and 3) the refinancing of B/E's
senior notes (which was completed on March 16, 1998) taken place on
February 23, 1997.
(e) To eliminate minority interest.
(f) To adjust income tax expense to reflect a 15% effective tax rate.
PF-3
B/E Aerospace, Inc.
Pro Forma Combined Statement of Operations (Unaudited)
Three Months Ended May 30, 1998
(Dollars in thousands)
B/E SMR Adjustments Pro Forma
----------------------------------------------
Net sales $ 139,991 $ 26,330 $ -- $ 166,321
Cost of sales 88,111 16,989(a) 50 105,150
--------- --------- -------- ---------
Gross profit 51,880 9,341 (50) 61,171
Operating expenses:
Research, development and engineering 11,972 1,841 -- 13,813
Selling, general and administrative 17,999 2,572(b) (475) 20,096
Amortization expense 3,441 -- (a) 432 3,873
In-process research and development and
acquisition related expenses 98,253 -- 98,253
--------- --------- -------- ---------
Total operating expenses 131,665 4,413 (43) 136,035
--------- --------- -------- ---------
Operating earnings (loss) (79,785) 4,928 (7) (74,864)
Interest expense, net 7,782 116(c) 930 8,828
--------- --------- -------- ---------
Earnings (loss) before income taxes (87,567) 4,812 (937) (83,692)
Minority interest -- 560(d) (560) --
Income taxes 1,816 1,252(e) (593) 2,475
--------- --------- -------- ---------
Net earnings (loss) $ (89,383) $ 3,000 $ 216 $ (86,167)
========= ========= ========= =========
Basic (loss) per share:
Net (loss) $ (3.87) $ (3.18)
========= =========
Weighted average common shares 23,070 27,070
Diluted (loss) per share:
Net (loss) $ (3.87) $ (3.18)
========= =========
Weighted average common shares 23,070 27,070
See accompanying notes to Pro Forma Combined Statement of Operations for the
Three Months Ended May 30, 1998.
PF-4
B/E Aerospace, Inc.
Notes to Pro Forma Combined Statement of Operations
Three Months Ended May 30, 1998
(a) Reflects adjustments to depreciation and amortization based on the
preliminary purchase price allocation related to the acquired property and
equipment and intangible assets.
(b) Reflects adjustments to eliminate costs attributable to the selling
shareholders of the acquired businesses that will no longer be incurred by
B/E. Such costs consist of the following:
Shareholder salaries and benefits $ 475
(c) Represents additional interest expense for the three month period ended May
30, 1998 that would have been incurred had 1) the acquisition, 2) the
offering of the shares issued in the acquisition of SMR and 3) the
refinancing of B/E's senior subordinated notes (which was completed on
March 16, 1998) taken place on February 23, 1997.
(d) To eliminate minority interest.
(e) To adjust income tax expense to reflect a 17% effective tax rate.
PF-5
B/E Aerospace, Inc.
Pro Forma Combined Balance Sheets (Unaudited)
May 30, 1998
(Dollars in thousands)
B/E SMR Adjustments Pro Forma
------------------------------------------------
Assets:
Current assets:
Cash and cash equivalents $ 24,821 $ 325 $ -- $ 25,146
Accounts receivable - trade, net 99,565 19,818(b) (400) 118,983
Inventories, net 152,506 10,465(b) (1,100) 161,871
Other current assets 8,867 4,512(b) (1,100) 12,279
--------- --------- --------- ---------
Total current assets 285,759 35,120 (2,600) 318,279
Property & equipment, net 120,543 5,747(b) 2,000 128,290
Intangibles & other assets, net 268,232 3,060(a) 142,000 323,158
(c) (23,734)
(b) 2,000
(b) (68,400)
--------- --------- --------- ---------
$ 674,534 $ 43,927 $ 51,266 $ 769,727
========= ========= ========= =========
Liabilities & Stockholders' Equity
Current liabilities:
Accounts payable $ 45,764 $ 6,013 $ -- $ 51,777
Accrued liabilities 58,795 7,479(b) 400 67,674
(b) 1,000
Current portion of long-term debt 5,793 1,414(b) (1,414) 5,793
--------- --------- --------- ---------
Total current liabilities 110,352 14,906 (14) 125,244
Long-term debt 430,365 9,129(c) (2,428) 466,816
(a) 22,000
(a) 7,750
Deferred income taxes 1,130 -- -- 1,130
Other liabilities 25,528 2,487(c) (2,487) 25,528
--------- --------- --------- ---------
Total liabilities 567,375 26,522 24,821 618,718
--------- --------- --------- ---------
Stockholders' equity:
Common stock 232 2(c) (2) 272
(a) 40
Additional paid-in capital 240,581 -- (a) 119,960 352,791
(a) (7,750)
Accumulated deficit (130,107) 17,403(c) (17,403) (198,507)
(b) (68,400)
Cumulative foreign exchange translation adjustment (3,547) -- -- (3,547)
--------- --------- --------- ---------
Total stockholders' equity 107,159 17,405 26,445 151,009
--------- --------- --------- ---------
$ 674,534 $ 43,927 $ 51,266 $ 769,727
========= ========= ========== =========
See accompanying notes to Pro Forma Combined Balance Sheets as of May 30, 1998.
PF-6
B/E Aerospace, Inc.
Notes to Pro Forma Combined Balance Sheets
May 30, 1998
(a) Reflects the issuance of common stock and use of cash related to the acquisition of SMR:
Common stock issued to SMR selling shareholders in August 1998 $ 120,000
Proceeds from borrowings under the Company's Bank Credit facility 22,000
Estimated offering expenses 7,750
b) The acquisition of SMR has been accounted for as a purchase pursuant to
APB Opinion No. 16 "Business Combinations." The purchase price has been
allocated to the assets and liabilities of SMR based on relative fair
values. Such allocations are subject to final determination based on
valuations and other studies. The final values may differ from those set
forth below:
Purchase cost:
Common stock $ 120,000
ESOP debt 22,000
Purchase accounting reserves 1,400
Less estimated book value of net assets purchased (23,734)
--------
$ 119,666
Allocation of excess of purchase cost over book value of assets:
Property, plant and equipment $ 2,000
Accounts receivable (400)
Inventories (1,100)
Other current assets (1,100)
Goodwill 41,866
Patents 10,000
Purchased in-process research and development 68,400
------
$ 119,666
c) To reclassify the equity in SMR, minority interest, and debt retained by
sellers in excess of $6,700 as part of the allocation of purchase price.
PF-7
EXHIBIT INDEX
Exhibit No. Description of Exhibits Page
- ----------- ----------------------- ----
2.1 Acquisition Agreement, dated as of July 21, 1998,
among BE Aerospace, Inc., a Delaware Company
Oscar J. Mifsud, Oscar J. Mifsud Trust -- 1998,
Patrick L. Ryan, Patrick L. Ryan Trust -- 1998,
David B. Smith, and David B. Smith Trust -- 1998.
2.2 Stock Purchase Agreement, dated as of July 21, 1998,
between Flight Structures, Inc. Savings and
Retirement Plan and Trust and BE Aerospace, Inc.
23.1 Consent of Zalick, Torok, Kirgesner, Cook & Co.,
dated August 17, 1998.
99.1 Press Release dated August 10, 1998.