-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AnUSeGtFkbkF63LfYJwTZYf/wGtuya8pGxNjl340E64bci9VMT6AvF1u5GRqDAjD 8q7ElOmCEx0BqG4c2wgCpA== 0000861361-03-000013.txt : 20030326 0000861361-03-000013.hdr.sgml : 20030325 20030326164533 ACCESSION NUMBER: 0000861361-03-000013 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030326 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BE AEROSPACE INC CENTRAL INDEX KEY: 0000861361 STANDARD INDUSTRIAL CLASSIFICATION: PUBLIC BUILDING AND RELATED FURNITURE [2531] IRS NUMBER: 061209796 STATE OF INCORPORATION: DE FISCAL YEAR END: 0222 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-18348 FILM NUMBER: 03618670 BUSINESS ADDRESS: STREET 1: 1400 CORPORATE CTR WY CITY: WELLINGTON STATE: FL ZIP: 33414 BUSINESS PHONE: 5617915000 MAIL ADDRESS: STREET 1: 1400 CORPORATE CENTER WAY STREET 2: 1400 CORPORATE CENTER WAY CITY: WELLINGTON STATE: FL ZIP: 33414 FORMER COMPANY: FORMER CONFORMED NAME: BE AVIONICS INC DATE OF NAME CHANGE: 19920608 10-K 1 dec0210k.txt BE FORM 10-K United States SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from February 24, 2002 to December 31, 2002 Commission File No. 0-18348 BE AEROSPACE, INC. (Exact name of registrant as specified in its charter) Delaware 06-1209796 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 1400 Corporate Center Way, Wellington, Florida 33414 (Address of principal executive offices) (Zip Code) (561) 791-5000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES[X] NO[ ] The aggregate market value of the registrant's voting stock held by non-affiliates was approximately $269.3 million on August 24, 2002 based on the closing sales price of the registrant's common stock as reported on the Nasdaq National Market as of such date, which is the last business day of the registrant's most recently completed second fiscal quarter. The number of shares of the registrant's common stock, $.01 par value, outstanding as of March 24, 2003 was 35,545,904 shares. DOCUMENTS INCORPORATED BY REFERENCE Certain sections of the registrant's Proxy Statement to be filed with the Commission in connection with the 2003 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K. 1 INDEX PART I ITEM 1. Business..............................................................3 ITEM 2. Properties...........................................................15 ITEM 3. Legal Proceedings....................................................16 ITEM 4. Submission of Matters to a Vote of Security Holders..................16 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters..............................................................17 ITEM 6. Selected Financial Data..............................................18 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................21 ITEM 7a. Quantitative and Qualitative Disclosures about Market Risk...........39 ITEM 8. Consolidated Financial Statements and Supplementary Data.............39 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................39 PART III ITEM 10. Directors and Executive Officers of the Registrant...................40 ITEM 11. Executive Compensation...............................................44 ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters......................................44 ITEM 13. Certain Relationships and Related Transactions.......................44 ITEM 14. Controls and Procedures..............................................44 PART IV ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K......45 Index to Exhibits....................................................46 Signatures...........................................................49 Certifications.......................................................50 Index to Consolidated Financial Statements and Schedule.............F-1 2 PART I Because we have changed our fiscal year to a calendar year, this report contains results for a ten-month transition period from February 24, 2002 to December 31, 2002. References to the "transition period" in this report are to the transition period beginning February 24, 2002 and ending on December 31, 2002. References to a "fiscal year" in this report are to the fiscal years ending the last Saturday of February for each respective year-end. Certain disclosures included in this Form 10-K constitute forward-looking statements that are subject to risks and uncertainties. Where possible, we have identified these statements by the use of terms such as "may," "will," "should," "expect," "anticipate," "believe," "estimate," "intend," and similar words, although some forward-looking statements are expressed differently. Our actual results could differ materially from those described in the forward-looking statements due to a number of risks and uncertainties. These forward-looking statements and risks and uncertainties are more fully explained under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Forward-Looking Statements" and "Risk Factors", respectively. ITEM 1. BUSINESS INTRODUCTION The Company General We are the world's largest manufacturer of cabin interior products for commercial aircraft and business jets and a leading distributor of aftermarket fasteners. We sell our manufactured products directly to virtually all of the world's major airlines and airframe manufacturers and a wide variety of general aviation customers. We believe that we have achieved leading global market positions in each of our major product categories, which include: o Commercial aircraft seats, including an extensive line of first class, business class, tourist class and regional aircraft seats; o A full line of aircraft food and beverage preparation and storage equipment, including coffeemakers, water boilers, beverage containers, refrigerators, freezers, chillers and microwave, high heat convection and steam ovens; o Both chemical and gaseous aircraft oxygen delivery systems; o Business jet and general aviation interior products, including an extensive line of executive aircraft seats, direct and indirect overhead lighting systems, oxygen, safety air valve systems, high-end furniture and cabinetry; and o A broad line of fasteners, consisting of over 100,000 Stock Keeping Units (SKUs). We design, develop and manufacture a broad range of cabin interior structures, provide comprehensive aircraft cabin interior reconfiguration and passenger-to-freighter conversion engineering services and component kits. Our Company was organized as a corporation in Delaware in 1987. We have substantially expanded the size, scope and nature of our business as a result of a number of acquisitions. Since 1989, we have completed 23 acquisitions, including one acquisition during the transition period ended December 31, 2002, three during fiscal 2002 and four during fiscal 2001, for an aggregate purchase price of approximately $980 million in order to position ourselves as a preferred global supplier to our customers. We have undertaken three major facility and product line consolidation efforts, eliminating 21 facilities, with one additional facility expected to be closed by mid-2003. We have also implemented lean manufacturing and continuous improvement programs which together with our common information technology platform have significantly improved our productivity and allowed us to maintain gross and operating margins despite significant decreases in revenues resulting from the downturn in industry conditions following the events of September 11, 2001. 3 Industry Overview The commercial and business jet aircraft cabin interior products industries encompass a broad range of products and services, including aircraft seating products, passenger entertainment and service systems, food and beverage preparation and storage systems, oxygen delivery systems, lavatories, lighting systems, evacuation equipment and overhead bins, as well as passenger-to-freighter conversions, interior reconfiguration and a variety of other engineering design, integration, installation, retrofit and certification services. Historically, the airline cabin interior products industry has derived revenues from five sources: o Retrofit programs in which airlines purchase new interior furnishings to overhaul the interiors of aircraft already in service; o Refurbishment programs in which airlines purchase components and services to improve the appearance and functionality of their cabin interior equipment; o New installation programs in which airlines purchase new equipment to outfit newly delivered aircraft; o Spare parts; and o Equipment to upgrade the functionality or appearance of the aircraft interior. The retrofit and refurbishment cycles for commercial aircraft cabin interior products differ by product category. Aircraft seating typically has a refurbishment cycle of one to two years and a retrofit cycle of four to eight years. Food and beverage preparation and storage equipment are periodically upgraded or repaired, and require a continual flow of spare parts, but may be retrofitted only once or twice during the useful life of an aircraft. Historically, about 70% of fasteners are used in the aftermarket. There is a direct relationship between demand for fastener products and fleet size, utilization and an aircraft's age. Fasteners must be replaced at prescribed intervals and such replacements also drive demand for fasteners. Revenues for aerospace fastener products have been derived from the following sources: o Mandated maintenance and replacement of specified parts; and o Demand for structural modifications, cabin interior modifications and passenger-to-freighter conversions. We estimate that the commercial and business jet cabin interior products and aerospace-grade fastener distribution industries had combined annual sales in excess of $1.4 billion and $0.8 billion, respectively, during calendar 2002. Recent Industry Conditions The September 11, 2001 terrorist attacks have severely impacted conditions in the airline industry. Sharply lower demand from our airline customer base affected our financial results, both for the ten-month period ended December 31, 2002 and the fiscal year ended February 23, 2002. The lower demand reflects the current downturn in the airline industry, which is the most severe ever experienced. High airline operating costs, weak air travel and low ticket prices have damaged many carriers' financial condition. Prior to the September 11, 2001 terrorist attacks, airline profits were already being adversely affected by increases in pilot and other airline wages, higher fuel prices and the softening of the global economy. Air travel dropped significantly following the 2001 terrorist attacks, further weakening many airlines' financial condition. To cut costs, carriers worldwide have reduced fleet sizes, parking or idling about 2,200 aircraft, or 15% of their fleets, as of December 2002. In an attempt to stimulate air travel, airlines have decreased domestic airfares to levels not seen since 1988. Reflecting the reduction in air travel and fares, North American airline revenue has dropped 24% since 2000. As a result of these factors, the U.S. airline industry incurred losses of approximately $7 billion in calendar 2001 and $11 billion in calendar 2002. The airline industry crisis caused two major domestic airlines, US Airways and United Airlines, to file for protection under Chapter 11 of the United States Bankruptcy Act and industry experts believe other major domestic carriers may be required to do so as well. In addition, Hawaiian Airlines filed for bankruptcy protection and at least one smaller domestic carrier, National Airlines, has ceased operations entirely. 4 Accordingly, the airlines are seeking to conserve cash in part by deferring or eliminating cabin interior refurbishment programs and deferring or canceling aircraft purchases. This has caused a substantial contraction in our business, the extent and duration of which cannot be determined at this time. We expect these adverse industry conditions to have a material adverse impact on our results of operations and financial condition until such time as conditions in the industry improve. We took swift action to respond to the rapid change in industry conditions, including consolidating four of our principal facilities into other existing facilities, and targeting a fifth facility for closure by mid-2003. We reduced headcount by about 1,000 positions and later expanded our headcount reduction goal to about 1,400 positions, or about 30% of our pre-September 11, 2001 workforce headcount. When we complete these actions, we expect to have incurred about $155 million in total costs, the cash portion of which is expected to be approximately $65 million. Through December 31, 2002, we had already incurred approximately $145 million of these costs, of which approximately $55 million were cash related costs. We expect to incur the balance of the charges during the first half of calendar 2003. We also froze salaries for an extended period of time and have not paid management bonuses since February 2001. While we believe the steps we have taken to date contribute to a sound plan to counter these difficult conditions, we cannot guarantee that the plans are adequate or that they will be successful. Other factors expected to affect the cabin interior products industry are the following: Existing Installed Base. Existing installed product base typically generates continued retrofit, refurbishment and spare parts revenue as airlines maintain their aircraft cabin interiors. According to industry sources, the world's active commercial passenger aircraft fleet consisted of approximately 13,100 aircraft as of December 2002, including approximately 3,400 aircraft with fewer than 120 seats, approximately 7,500 aircraft with between 120 and 240 seats and approximately 2,200 aircraft with more than 240 seats. Further, based on industry sources, there are approximately 12,300 business jets currently in service. Based on such fleet numbers, we estimate that the total worldwide installed base of commercial and general aviation aircraft cabin interior products, valued at replacement prices, was approximately $13.0 billion as of December 31, 2002. Expanding Worldwide Fleet. The expanding worldwide aircraft fleet is expected to generate additional revenues from new installation programs, while the increase in the size of the installed base is expected to generate additional and continued retrofit, refurbishment and spare parts revenue. Worldwide air traffic has grown every year since 1946 (except in 1974, 1991, 2001 and 2002). According to the January 2003 issue of the Airline Monitor, worldwide air traffic is projected to grow at a compounded average rate of 4.3% per year through 2010, increasing annual revenue passenger miles from approximately 2.0 trillion in 2002 to approximately 5.1 trillion by 2020. According to the Airbus Industrie Global Market Forecast published in September 2002, the worldwide installed seat base, which we consider a good indicator for potential growth in the aircraft cabin interior products industry, is expected to increase from approximately 2.0 million passenger seats at the end of 2000 to approximately 4.3 million passenger seats at the end of 2020. Growing Passenger-to-Freighter Conversion Business. Industry sources project that the size of the worldwide freighter fleet will double over the next twenty years, with more than 2,500 aircraft being added, after taking retirements into account. Industry sources also estimate that almost 70 percent of that increase will come from converting commercial passenger jets to use as freighters. New Aircraft Deliveries. The number of new aircraft delivered each year is generally regarded as cyclical in nature. New aircraft deliveries (including regional jets) decreased to 999 in 2002 from 1,162 in 2001. According to the Airline Monitor published in January 2003, new deliveries (including regional jets) are expected to decline to 850 aircraft in 2003, with average annual new aircraft deliveries (including regional jets) of about 800 during 2004 through 2007. Business Jet and VIP Aircraft Fleet Expansion and Related Retrofit Opportunities. Recently, general aviation and VIP airframe manufacturers have begun to see a slowdown in deliveries which is expected to continue throughout calendar 2003. According to industry sources, business jet aircraft deliveries amounted to 787 units in calendar 2001 and 683 units in calendar 2002. Industry sources indicate that approximately 8,200 business jets will be built between 2002 and 2011 with a value of more than $135 billion. 5 Wide-body Aircraft Deliveries. The trend toward wide-body aircraft is significant to us because wide-body aircraft require almost five times the dollar value content for our products as compared to narrow-body aircraft. Deliveries of wide-body, long haul aircraft constitute an increasing share of total new aircraft deliveries and are an increasing percentage of the worldwide fleet. Wide-body aircraft represented 24% of all new commercial aircraft delivered in 2002, and are expected to stay at approximately this same percentage through 2006. Wide-body aircraft currently carry up to three or four times the number of seats as narrow-body aircraft and because of multiple classes of service, including large first class and business class configurations, our average revenue per seat on wide-body aircraft is substantially higher. Aircraft cabin crews on wide-body aircraft may make and serve between 300 and 900 meals and may brew and serve more than 2,000 cups of coffee and serve more than 400 glasses of wine on a single flight. New Product Development. The aircraft cabin interior products companies are engaged in intensive development and marketing efforts for both new features on existing products and totally new products. These products include a broad range of amenities such as full electric "sleeper seats," convertible seats, full face crew masks, a full range of business and executive jet seating and lighting products, protective breathing equipment, oxygen generating systems, new food and beverage preparation and storage equipment, kevlar barrier nets, de-icing systems and crew rests. Engineering Services Markets. Historically, the airlines have relied primarily on their own in-house engineering resources to provide engineering, design, integration and installation services, as well as services related to repairing or replacing cabin interior products that have become damaged or otherwise non-functional. As cabin interior product configurations have become increasingly sophisticated and the airline industry increasingly competitive, the airlines have begun to outsource such services in order to increase productivity and reduce costs and overhead. Outsourced services include: o Engineering design, integration, project management, installation and certification services; o Modifications and reconfigurations for commercial aircraft; and o Services related to the support of product upgrades. Unless otherwise indicated, the industry data contained in this report is from the January 2003 issue of the Airline Monitor or the Airbus Industrie Global Market Forecast published in September 2002. Competitive Strengths We believe that we have a strong competitive position attributable to a number of factors, including the following: Combination of Manufacturing and Cabin Interior Design Services. We have continued to expand our products and services, believing that the airline industry increasingly will seek an integrated approach to the design, development, integration, installation, testing and sourcing of aircraft cabin interiors. We believe that we are the only company, which both manufactures a broad, technologically advanced line of cabin interior products and offers cabin interior design capabilities. Based on our established reputation among the world's commercial airlines for quality, service and product innovation, we believe that we are well positioned to serve these customers. Technological Leadership/New Product Development. We believe that we are a technological leader in our industry, with what we believe is the largest research and development organization in the cabin interior products industry. We believe our research and development effort and our on-site technicians at both the airlines and airframe manufacturers enable us to play a leading role in developing and introducing innovative products to meet emerging industry trends and needs and thereby gain early entrant advantages. Large Installed Base. We believe our large installed base of commercial and general aviation cabin interior products, estimated to be approximately $5.0 billion as of December 31, 2002 (valued at replacement prices), is a strategic advantage. The airlines tend to purchase spare parts and retrofits and refurbishment programs from the supplier of the existing equipment. As a result, we expect our large installed base to generate continued retrofit, refurbishment and spare parts revenue as airlines continue to maintain, evolve and reconfigure their aircraft cabin interiors. 6 Proven Track Record of Acquisition Integration. We have demonstrated the ability to make strategic acquisitions and successfully integrate such acquired businesses. Our acquisition strategy is subject to a number of risks including increasing leverage, the application of restrictive covenants in connection with additional debt incurred for any further acquisitions and the costs of integrating any acquired companies. Growth Opportunities We believe that we will benefit from the following trends in the aerospace industry as the industry recovers: Large Aftermarket Business. Our substantial installed base provides significant ongoing revenues from replacements, upgrades, repairs and the sale of spare parts. Approximately 60% of our revenues for the transition period ended December 31, 2002 were derived from aftermarket activities. With so many aircraft parked as a result of the recent industry conditions, we are experiencing weak demand for spare parts. Looking ahead, we believe the majority of the idled aircraft will eventually return to service. With airlines' balance sheets so weak, we believe they will not have the financial resources to replace many of the parked aircraft with new ones. That means demand for new aircraft could be depressed for several years. In the meantime, the airlines will operate an older fleet. That should eventually have a positive impact on demand for our aftermarket products. At some point, the airlines will begin to spend to maintain their fleets. We believe this will occur before they begin buying new aircraft. With our aftermarket focus, we should be an early beneficiary of the industry recovery. Aftermarket demand should lead that recovery, because refurbishing existing aircraft is much less expensive than buying new aircraft. Expansion of Worldwide Fleet and Shift Toward Wide-Body Aircraft. Through 2001, airlines were taking delivery of a large number of new aircraft due to high load factors and the projected growth in air travel. Near term, we expect new aircraft deliveries to decline due to recent industry conditions but over time we expect the fleet expansion, along with the trend toward wide-body aircraft, to return to earlier projected levels. As the size of the fleet expands, demand for upgrade, refurbishment programs and for cabin interior products, must grow as well. Opportunity to Substantially Expand our Addressable Markets through our Fastener Distribution Business. Through the acquisition of M & M Aerospace Hardware, Inc. ("M & M"), we have entered a new segment that leverages B/E's key strengths. Because nearly 70% of fastener demand is generated by the existing worldwide fleet, demand for fasteners will increase over time as the fleet expands, much like the market for cabin interior products. We believe we have acquired an outstanding distribution business that possesses excellent information technology, automated parts retrieval, purchasing and customer relationship management systems. In addition, the business has sufficient management, systems and industry knowledge to serve as a platform for future consolidation of this business segment. Business Jet and VIP Aircraft Fleet Expansion and Related Retrofit Opportunities. Business jet manufacturers' backlogs remain at fairly high levels, including several new models in development. According to industry sources, executive jet aircraft deliveries amounted to 241 units in calendar 1996 and 787 units in calendar 2001 and 683 units in calendar 2002. Deliveries in 2003 are expected to increase by about 7% and are expected to increase by over 200% in calendar 2003 from the calendar 1996 delivery levels. Several new aircraft models and larger business jets, including the Boeing Business Jet, Bombardier Challenger and Global Express, Gulfstream V, the Falcon 900, Airbus Corporate Jet, Cessna Citation X and Cessna Citation Excel, are expected to be significant contributors to new general aviation aircraft deliveries going forward. Industry sources indicate that approximately 8,200 business jets will be built between 2002 and 2011 with a value of more than $135 billion, and approximately 40% of these jets are projected to be larger business jets as described above. This is important to us because the typical cost of cabin interior products manufactured for a small jet is approximately $162,000; whereas the same contents for a larger business jet, such as the Boeing Business Jet could range up to approximately $1.4 million. Advances in engine technology and avionics and the emergence of fractional ownership of executive aircraft are also important growth factors. In addition, the general aviation and VIP aircraft fleet consists of approximately 12,300 aircraft with an average age of approximately 15 years. As aircraft age or due to ownership changes, operators retrofit and upgrade cabin interiors, including seats, sofas and tables, sidewalls, headliners, structures such as closets, lavatories and galleys, and related equipment including lighting and oxygen delivery systems. In addition, operators generally reupholster or replace seats every five to seven years. 7 We believe that we are well positioned to benefit from such retrofit opportunities due to: o 15-year average age of the business jet fleet; o Operators who have historically reupholstered their seats may be more inclined to replace these seats with lighter weight, more modern and 16G-compliant seating models; and o Our belief that we are the only manufacturer with the capability for cabin interior design services, a broad product line for essentially all cabin interior products and program management services. In addition to benefiting from these industry trends, we expect that when industry conditions improve and demand increases, we will have enhanced earnings power through substantial operating leverage due to the steps we took to respond to industry conditions, including the consolidation of our facilities. We believe that our factories have the capacity to generate revenues of up to $1 billion without significant additional capital investment. Business Strategy Our business strategy is to maintain a leadership position and to best serve our customers by: o Offering the broadest and most integrated product lines and services in the industry, including not only new product and follow-on product sales, but also design, integration, installation and certification services; o Pursuing the highest level of quality in every facet of our operations, from the factory floor to customer support; o Aggressively pursuing initiatives of continuous improvement of our manufacturing operations to reduce cycle time, lower cost, improve quality and expand our margins; o Pursuing a worldwide marketing and product support approach focused by airline and general aviation airframe manufacturer and encompassing our entire product line; and o Pursuing selective strategic acquisitions. Products and Services We conduct our operations through strategic business units that have been aggregated under three reportable segments: Commercial Aircraft Products, Business Jet Products and Fastener Distribution. Net sales by line of business were as follows:
Fiscal Year Ended Ten-Month Period ---------------------------------------------------- Ended Dec. 31, 2002 February 23, 2002 February 24, 2001 ------------------------- ------------------------ ------------------------ Net % of Net % of Net % of Sales Net Sales Sales Net Sales Sales Net Sales ----------- ------------- ----------- ------------ ----------- ------------ Commercial aircraft products: Seating products $144.6 28.7% $247.8 36.4% $288.1 43.2% Interior systems products 116.0 23.0 152.6 22.4 151.6 22.8 Engineered interior structures, components and assemblies 93.9 18.7 150.2 22.1 140.6 21.1 ----------- ------------- ----------- ------------ ----------- ------------ 354.5 70.4 550.6 80.9 580.3 87.1 Business jet products 71.1 14.1 85.6 12.6 86.1 12.9 Fastener distribution 78.0 15.5 44.3 6.5 -- -- ----------- ------------- ----------- ------------ ----------- ------------ Net sales $503.6 100.0% $680.5 100.0% $666.4 100.0% =========== ============= =========== ============ =========== ============
8 Commercial Aircraft Products Seating Products We are the world's leading manufacturer of aircraft seats, offering a wide selection of first class, business class, tourist class and commuter seats. A typical seat manufactured and sold by us includes the seat frame, cushions, armrests and tray table, together with a variety of optional features such as adjustable lumbar supports, footrests, reading lights, head/neck supports, oxygen masks and telephones. We estimate that as of December 31, 2002 we had an aggregate installed base of approximately 900,000 aircraft seats valued at replacement prices of approximately $1.9 billion. First and Business Classes. Based upon major airlines' program selection and orders on hand, we are the leading worldwide manufacturer of premium class seats. Our line of international first class sleeper seats incorporates full electric actuation, an electric ottoman, privacy panels and sidewall-mounted tables. Our recently released business class seats incorporate features from over 25 years of seating design. The premium business class seats include electrical or mechanical actuation, PC power ports, telephones, leg rests, adjustable lumbar cushions, 4-way adjustable headrests and fiber-optic reading lights. The first and business class products are substantially more expensive than tourist class seats due to these luxury appointments. Convertible Seats. We have developed two types of seats that can be converted from tourist class triple-row seats to business class double-row seats with minimal conversion complexity. Convertible seats allow airline customers the flexibility to adjust the ratio of business class to tourist class seats for a given aircraft configuration. This seat is increasing in popularity in the European market. Tourist Class. We are a leading worldwide manufacturer of tourist class seats and believe we offer the broadest such product line in the industry. We have designed tourist class seats that incorporate features not previously utilized in that class, such as laptop power ports and a number of premium comfort features such as footrests, headrests and adjustable lumbar systems. Commuter (Regional Jet) Seats. We are the leading manufacturer of regional aircraft seating in both the United States and worldwide markets. Our Silhouette(TM) Composite seats are similar to those found in commercial jets but typically do not have as many added comfort features. Consequently, they are lighter in weight and require less maintenance. Spares. Aircraft seats require regularly scheduled maintenance in the course of normal passenger use. Airlines depend on seat manufacturers and secondary suppliers to provide spare parts and kit upgrade programs. As a result, a significant market exists for spare parts. Interior Systems We are the leading manufacturer of interior systems for both narrow- and wide-body aircraft, offering a broad selection of coffee and beverage makers, water boilers, ovens, liquid containers, refrigeration equipment, oxygen delivery systems and a variety of other interior components. We estimate that as of December 31, 2002 we had an aggregate installed base of such equipment, valued at replacement prices, in excess of $1.2 billion. Coffee Makers. We are the leading manufacturer of aircraft coffee makers. We manufacture a broad line of coffee makers, coffee warmers and water boilers, including the Flash Brew Coffee Maker, with the capability to brew 54 ounces of coffee in one minute, and a Combi(TM) unit which will both brew coffee and boil water for tea while utilizing 25% less electrical power than traditional 5,000-watt water boilers. We also manufacture a cappuccino/espresso maker. Ovens. We are the leading manufacturer of a broad line of specialized ovens, including high-heat efficiency ovens, high-heat convection ovens and warming ovens. Our newest offering, the DS Steam Oven, represents a method of preparing food in-flight by maintaining constant temperature and moisture in the food. It addresses the airlines' need to provide a wider range of foods than can be prepared by convection ovens. Refrigeration Equipment. We are the worldwide industry leader in the design, manufacture and supply of commercial aircraft refrigeration equipment. We manufacture a self-contained wine and beverage chiller, the first unit specifically designed to rapidly chill wine and beverages on-board an aircraft. 9 Oxygen Delivery Systems. We are a leading manufacturer of oxygen delivery systems for both commercial and general aviation aircraft. We are the only manufacturer with the capability to fully integrate overhead passenger service units with either chemical or gaseous oxygen equipment. Our oxygen equipment has been approved for use on all Boeing and Airbus aircraft and is also found on essentially all general aviation and VIP aircraft. Engineered Interior Structures, Components and Assemblies We are a leader in designing and manufacturing galley structures, crew rest compartments and components. We estimate that as of December 31, 2002, we had an installed base of engineered interior structures, valued at replacement prices, of approximately $700 million. Engineering Design, Integration, Installation and Certification Services. We are a leader in providing engineering, design, integration, installation and certification services for commercial aircraft passenger cabin interiors. We also offer our customers in-house capabilities to design, manage, integrate, test and certify reconfigurations and modifications for commercial aircraft and to manufacture related products, including engineering kits and interface components. We provide a broad range of interior reconfiguration services which allow airlines to change the size of certain classes of service, modify and upgrade the seating, install telecommunications or entertainment options, relocate galleys, lavatories and overhead bins, and install crew rest compartments. Crew Rest Compartments. We are the worldwide leader in the design, certification and manufacture of crew rest compartments. The flight crew utilizes crew rest compartments during long-haul international flights. A crew rest compartment is constructed utilizing lightweight cabin interior technology and incorporating electrical, heating, ventilation and air conditioning and lavatory and sleep compartments. Aerospace Components and Assemblies. We are a leading manufacturer of complex high-quality machined and fabricated metal components, assemblies and kits for aerospace and defense customers with demanding end-use applications. Our major products consist of gears, gearboxes, pistons and piston assemblies and standard hydraulic fittings. Additionally, we fabricate structural components and related items of fuselage, wing and payload sections including wing skin and fuel tank enclosure parts for commercial aircraft. Through these manufacturing activities we also provide our customers with significant engineering, materials and technical expertise. Passenger to Freighter Conversions. We are a leading supplier of structural design and integration services, including airframe modifications for passenger-to-freighter conversions. We are the leading provider of Boeing 767 passenger-to-freighter conversions and have performed conversions for Boeing 747-200 Combi, Boeing 747-200 (door only) and Airbus A300 B4 aircraft. Freighter conversions require sophisticated engineering capabilities and very large and complex proprietary parts kits. Business Jet Products We are the leading manufacturer of a broad product line including a complete line of business jet seating products, direct and indirect lighting, air valves and oxygen delivery systems as well as sidewalls, bulkheads, credenzas, closets, galley structures, lavatories, tables and sofas. We have the capability to provide complete interior packages, including all design services, all interior components and program management services for executive aircraft interiors. We are the preferred supplier of seating products and direct and indirect lighting systems for essentially every general aviation airframe manufacturer. We estimate that as of December 31, 2002 we had an aggregate installed base of such equipment, valued at replacement prices, of approximately $1.2 billion. Fastener Distribution Through our M & M subsidiary, we offer one of the broadest lines of fasteners and inventory management services worldwide. Approximately 70% of fastener sales are to the aftermarket, and over 35% of orders are shipped the same day that they are received. With over 100,000 SKUs and next-day service, we serve as a distributor for almost every major aerospace fastener manufacturer. Our service offerings include inventory replenishment and management, electronic data interchange, special packaging and bar-coding, quality assurance testing and purchasing assistance. Our seasoned purchasing and sales team, coupled with state-of-the-art information technology and automated retrieval systems, provide the basis for our reputation for high quality and rapid (overnight) delivery. 10 Research, Development and Engineering We work closely with commercial airlines to improve existing products and identify customers' emerging needs. Our expenditures in research, development and engineering totaled $34.1 million, $43.5 million, $48.9 million for the transition period ended December 31, 2002, and for the fiscal years ended February 23, 2002 and February 24, 2001, respectively. We employed 457 professionals in engineering, research and development as of December 31, 2002. We believe that we have the largest engineering organization in the cabin interior products industry, with software, electronic, electrical and mechanical design skills, as well as substantial expertise in materials composition and custom cabin interior layout design and certification. Marketing and Customers We market and sell our commercial aircraft products directly to virtually all of the world's major airlines and aircraft manufacturers. Airlines select manufacturers of cabin interior products primarily on the basis of custom design capabilities, product quality and performance, on-time delivery, after-sales customer service, product support and price. We believe that our large installed base, our timely responsiveness in connection with the custom design, manufacture, delivery and after-sales customer service and product support of our products and our broad product line and stringent customer and regulatory requirements all present barriers to entry for potential new competitors in the cabin interior products market. We believe that airlines prefer our integrated worldwide marketing approach, which is focused by airline and encompasses our entire product line. Led by a senior executive, teams representing each product line serve designated airlines that together accounted for 62% of the purchases of products manufactured by our Commercial Aircraft Products Group during the transition period ended December 31, 2002. Our teams have developed customer-specific strategies to meet each airline's product and service needs. We also staff "on-site" customer engineers at major airlines and airframe manufacturers to represent our entire product line and work closely with the customers to develop specifications for each successive generation of products required by the airlines. These engineers help customers integrate our wide range of cabin interior products and assist in obtaining the applicable regulatory certification for each particular product or cabin configuration. Through our on-site customer engineers, we expect to be able to more efficiently design and integrate products that address the requirements of our customers. We provide program management services, integrating all on-board cabin interior equipment and systems, including installation and Federal Aviation Administration certification, allowing airlines to substantially reduce costs. We believe that we are one of the only suppliers in the commercial aircraft cabin interior products industry with the size, resources, breadth of product line and global product support capability to operate in this manner. We market our business jet products directly to all of the world's general aviation airframe manufacturers, modification centers and operators. Business jet owners typically rely upon the airframe manufacturers and completion centers to coordinate the procurement and installation of their interiors. Business jet owners select manufacturers of business jet products on a basis similar to that for commercial aircraft interior products; customer design capabilities, product quality and performance, on-time delivery, after-sales customer service, product support and price. We believe that potential new competitors would face a number of barriers to entering the cabin interior products market. Barriers to entry include regulatory requirements, our large installed product base, our custom design capability, manufacturing capability, delivery, and after-sales customer service, product support and our broad product line. We market our aerospace fasteners directly to the airlines, completion centers, first-tier suppliers to the airframe manufacturers, the airframe manufacturers and other distributors. We believe that our key competitive advantages are the breadth of our product offerings and our ability to deliver on a timely basis. We believe that our broad product offerings of aerospace fasteners and our ability to deliver products on a next day basis and our core competencies in product information management, purchasing and logistics management provide strong barriers to entry. Our program management approach assigns a program manager to each significant contract. The program manager is responsible for all aspects of the specific contract, including managing change orders, negotiating related non-recurring engineering charges, monitoring the progress of the contract through its scheduled delivery dates and overall contract profitability. We believe that our customers benefit substantially from our program management approach, including better on-time delivery and higher service levels. We also believe our program management approach results in better customer satisfaction. 11 As of December 31, 2002, our direct sales and marketing organization consisted of 171 persons, plus 42 independent sales representatives. Our sales to non-U.S. customers were approximately $234 million for the transition period ended December 31, 2002, $288 million for the fiscal year ended February 23, 2002 and $280 million for the fiscal year ended February 24, 2001, or approximately 46%, 42% and 42%, respectively, of net sales during such periods. During the transition period ended December 31, 2002, approximately 74% of our total revenues were derived from airlines and other commercial aircraft operators compared to approximately 76% in the fiscal year ended February 23, 2002 and compared with 86% in the fiscal year ended February 24, 2001. Approximately 60% of our revenues during the transition period ended December 31, 2002, 63% of our revenues during the fiscal year ended February 23, 2002 and 60% of our revenues during the fiscal year ended February 24, 2001 were from refurbishment, spares and upgrade programs. During the transition period ended December 31, 2002 and for the fiscal years ended February 23, 2002 and February 24, 2001, no single customer accounted for more than 10% of total revenues. The portion of our revenues attributable to particular customers varies from year to year because of airlines' scheduled purchases of new aircraft and for retrofit and refurbishment programs for their existing aircraft. Backlog We estimate that our backlog at December 31, 2002 was approximately $450 million compared to approximately $480 million at February 23, 2002. Of our backlog at December 31, 2002, approximately 60% is scheduled to be deliverable by the end of calendar 2003; 53% of our total backlog is with North American carriers, approximately 16% is with European carriers and approximately 22% is with Asian and Pacific Rim carriers. Customer Service We believe that our customers place a high value on customer service and product support and that such service is a critical factor in our industry. The key elements of such service include: o Rapid response to requests for engineering designs, proposal requests and technical specifications; o Flexibility with respect to customized features; o On-time delivery; o Immediate availability of spare parts for a broad range of products; and o Prompt attention to customer problems, including on-site customer training. Customer service is particularly important to airlines due to the high cost to the airlines of late delivery, malfunctions and other problems. Warranty and Product Liability We warrant our products, or specific components thereof, for periods ranging from one to ten years, depending upon product type and component. We generally establish reserves for product warranty expense after considering relevant factors such as our stated warranty policies and practices, historical frequencies of claims to replace or repair products under warranty and recent sales and claims trends. Actual warranty costs reduce the warranty reserve as they are incurred. We periodically review the adequacy of accrued product warranty reserves and revisions of such reserves are recognized in the period in which such revisions are determined. We also carry product liability insurance. We believe that our insurance is generally sufficient to cover product liability claims. 12 Competition The commercial aircraft cabin interior products market is relatively fragmented, with a number of competitors in each of the individual product categories. Due to the global nature of the commercial aerospace industry, competition comes from both U.S. and foreign manufacturers. However, as aircraft cabin interiors have become increasingly sophisticated and technically complex, airlines have demanded higher levels of engineering support and customer service than many smaller cabin interior products suppliers can provide. At the same time, airlines have recognized that cabin interior product suppliers must be able to integrate a wide range of products, including sophisticated electronic components, particularly in wide-body aircraft. We believe that the airlines' increasing demands on their suppliers will result in a consolidation of those suppliers that remain. We have participated in this consolidation through strategic acquisitions and internal growth and we intend to continue to participate in the consolidation. Our principal competitors for seating products are Group Zodiac S.A. and Keiper Recaro GmbH. Our primary competitors for interior systems products are Britax PLC, JAMCO, Scott Aviation and Intertechnique. Our principal competitors in the passenger-to-freighter conversion business include Boeing Airplane Services, Elbe Flugzeugwerko GMBH, a division of EADS, Israel Aircraft Industries, Pemco World Air Services and Aeronavili. Our principal competitors for other product and service offerings in our engineered interior structures, components and assemblies include TIMCO, JAMCO, Britax PLC and Driessen Aircraft Interior Systems. The market for business jet products is highly fragmented, consisting of numerous competitors, the largest of which is Decrane Aircraft Holdings. Our primary competitors in the fastener distribution market are Honeywell Hardware Products Group, Wesco Aircraft Hardware, C.J. Fox and Pentacon, Inc. Manufacturing and Raw Materials Our manufacturing operations consist of both the in-house manufacturing of component parts and sub-assemblies and the assembly of our specified and designed component parts that are purchased from outside vendors. We maintain state-of-the-art facilities, and we have an ongoing strategic manufacturing improvement plan utilizing lean manufacturing processes. We constantly strive for continuous improvement from implementation of these plans for each of our product lines. We have implemented common information technology platforms company-wide, as appropriate. These activities should lower production costs, shorten cycle times and reduce inventory requirements and at the same time improve product quality, customer response and profitability. We do not believe we are materially dependent on any single supplier or assembler for any of our raw materials or specified and designed component parts and, based upon the existing arrangements with vendors, our current and anticipated requirements and market conditions, we believe that we have made adequate provisions for acquiring raw materials. Government Regulation The Federal Aviation Administration ("FAA") prescribes standards and licensing requirements for aircraft components, and licenses component repair stations within the United States. Comparable agencies regulate such matters in other countries. We hold several FAA component certificates and perform component repairs at a number of our U.S. facilities under FAA repair station licenses. We also hold an approval issued by the U.K. Civil Aviation Authority to design, manufacture, inspect and test aircraft seating products in Leighton Buzzard, England and to manufacture and ship from our Kilkeel, Northern Ireland facility. We also have the necessary approvals to design, manufacture, inspect, test and repair our interior systems products in Nieuwegein, The Netherlands. In March 1992, the FAA adopted Technical Standard Order C127, or TSO C127, requiring that all seats on certain new generation commercial aircraft installed after such date be certified to meet a number of new safety requirements, including the ability to withstand a 16G force. We have developed over 32 different seat models that meet the TSO C127 seat safety regulations, have successfully completed thousands of tests to comply with TSO C127 and, based on our installed base of 16G seats, are the recognized industry leader in this area. In November 2002, our seating group became the first passenger seating supplier to sign a Partnership for Safety Plan (PSP) with the FAA. Based on established qualifications of personnel and systems, the PSP provides us with increased authority to approve test plans and reports, and to witness tests. The PSP provides us with a number of business benefits including greater planning flexibility, simplified scheduling and greater program control and eliminates variables such as FAA workload and priorities. 13 On October 4, 2002, the FAA published a Supplemental Notice of Proposed Rule Making (SNPRM). This SNPRM proposed extending the current requirement for "enhanced safety" seats (16G seats) on aircraft designs registered after 1988, to all aircraft. This proposed rule would require that older design aircraft be retrofitted with new enhanced safety "16G" seats over a multi-year basis. The public comment period for the proposed retrofit rule closed on March 3, 2003. The date for final rule making and any changes to the details of the rule will be based on the comments received and the priority assigned to this proposal by the FAA. Environmental Matters Our operations are subject to extensive and changing federal, state and foreign laws and regulations establishing health and environmental quality standards, including those governing discharges and pollutants into the air and water and the management and disposal of hazardous substances and wastes. We may be subject to liability or penalties for violations of those standards. We are also subject to laws and regulations, such as the Federal Superfund law and similar state statutes, governing remediation of contamination at facilities that we currently or formerly owned or operated or to which we send hazardous substances or wastes for treatment, recycling or disposal. We believe that we are currently in compliance, in all material respects, with all environmental laws and regulations. However, we could become subject to future liabilities or obligations as a result of new or more stringent interpretations of existing laws and regulations. In addition, we may have liabilities or obligations in the future if we discover any environmental contamination or liability relating to our facilities or operations. Patents We currently hold 117 United States patents and 92 international patents, covering a variety of products. We believe that the termination, expiration or infringement of one or more of such patents would not have a material adverse effect on our Company. Employees As of December 31, 2002, we had approximately 3,700 employees, or approximately 1,000 fewer than our headcount as of September 30, 2001. Approximately 66% of our employees are engaged in manufacturing, 14% in engineering, research and development and program management and 20% in sales, marketing, product support and general administration. Unions represent approximately 14% of our worldwide employees. A labor contract representing approximately 220 U.S. employees expires on May 4, 2003. The labor contract with the only other domestic union, which represents approximately 2% of our employees, runs through May 2004. We consider our employee relations to be good. Financial Information About Segments and Foreign and Domestic Operations Financial and other information by segment and relating to foreign and domestic operations for the ten-month transition period ending December 31, 2002 and for the fiscal years ended February 23, 2002 and February 24, 2001, is set forth in note 15 to our consolidated financial statements. Available Information Our filings with the Securities and Exchange Commission (the "SEC"), including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, are available free of charge on our website as soon as reasonably practicable after they are filed with, or furnished to, the SEC. Our Internet website is located at http://www.beaerospace.com. Information included in our website is not incorporated by reference in this annual report. [Remainder of page intentionally left blank] 14 ITEM 2. PROPERTIES As of December 31, 2002, we had 11 principal operating facilities and an administrative facility, which comprises an aggregate of approximately 1.3 million square feet of space. The following table describes the principal facilities and indicates the location, function, approximate size and ownership status of each location.
Facility Size Segment Location Purpose (Sq. Feet) Ownership - -------------------------------------- --------------------------------- ---------------- ------------ --------------- Commercial Aircraft Products Winston-Salem, North Carolina.... Manufacturing 264,800 Leased Leighton Buzzard, England........ Manufacturing 114,000 Owned Kilkeel, Northern Ireland Manufacturing 65,000 Leased Kilkeel, Northern Ireland........ Manufacturing 45,500 Owned Anaheim, California.............. Manufacturing 98,000 Leased Lenexa, Kansas................... Manufacturing 80,000 Leased Nieuwegein, The Netherlands...... Manufacturing 47,350 Leased Marysville, Washington........... Engineering Services/ Manufacturing 110,000 Leased Machined products, California.... Manufacturing 150,800 Owned Business Jet Products Miami, Florida................... Manufacturing 110,000 Leased Holbrook, New York............... Manufacturing 20,100 Leased Fastener Distribution Miami, Florida................... Distribution 210,000 Leased Corporate Wellington, Florida.............. Administrative 17,700 Owned ----------- 1,333,250
We believe that our facilities are suitable for their present intended purposes and adequate for our present and anticipated level of operations. [Remainder of page intentionally left blank] 15 ITEM 3. LEGAL PROCEEDINGS We are not a party to litigation or other legal proceedings that we believe could reasonably be expected to have a material adverse effect on our business, financial condition and results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the last quarter of the fiscal year covered by this Form 10-K, we did not submit any matters to a vote of security holders, through the solicitation of proxies or otherwise. [Remainder of page intentionally left blank] 16 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is quoted on the Nasdaq National Market under the symbol "BEAV." The following table sets forth, for the periods indicated, the range of high and low per share sales prices for the common stock as reported by Nasdaq.
(Amounts in Dollars) High Low ---- --- Calendar Year Ended December 31, 2000 First Quarter $ 9.88 $ 5.88 Second Quarter 8.25 6.00 Third Quarter 17.25 6.50 Fourth Quarter 16.63 11.81 Calendar Year Ended December 31, 2001 First Quarter 25.88 16.00 Second Quarter 24.35 15.49 Third Quarter 19.90 3.50 Fourth Quarter 11.85 6.27 Calendar Year Ended December 31, 2002 First Quarter 10.16 6.31 Second Quarter 14.05 9.06 Third Quarter 13.11 4.00 Fourth Quarter 5.38 2.62
On March 24, 2003 the closing price of our common stock as reported by Nasdaq was $1.56 per share. As of such date, we had 1,027 shareholders of record, and we estimate that there are approximately 15,200 beneficial owners of our common stock. We have not paid any cash dividends in the past, and we have no present intention of doing so in the immediate future. Our Board of Directors intends, for the foreseeable future, to retain any earnings to reduce indebtedness and finance our future growth, but expects to review our dividend policy regularly. The indentures, pursuant to which our 8%, 8 7/8% and 9 1/2% senior subordinated notes were issued, as well as our amended bank credit facility, permit the declaration of cash dividends only in certain circumstances described therein. [Remainder of page intentionally left blank] 17 ITEM 6. SELECTED FINANCIAL DATA (In millions, except per share data) Effective as of February 24, 2001, we acquired Alson Industries, Inc., T.L. Windust Machine, Inc., Maynard Precision, Inc. and DMGI, Inc. ("Fiscal 2001 Acquisitions"). During fiscal 2002, we acquired M&M Aerospace Hardware, Inc., Nelson Aero Space, Inc. and Denton Jet Interiors, Inc. ("Fiscal 2002 Acquisitions"). We also made one acquisition during the transition period ended December 31, 2002. Results for each of these acquisitions are included in our operations in the financial data below since the date of acquisition. The financial data as of the transition period ended December 31, 2002 and for the fiscal years ended February 23, 2002, February 24, 2001, February 26, 2000 and February 27, 1999 have been derived from financial statements that have been audited by our independent auditors. The financial data for the period from February 25, 2001 to December 31, 2001 has been derived from unaudited financial statements. The following financial information is qualified by reference to, and should be read in conjunction with, our historical financial statements, including notes thereto, which are included elsewhere in this Form 10-K.
Ten-Month Period Ended Fiscal Year Ended ------------------------- ----------------------------------------------- Dec. 31, Dec. 31, Feb. 23, Feb. 24, Feb. 26, Feb. 27, 2002(a) 2001(a) 2002(a) 2001(d) 2000(e) 1999(f) ------------- ----------- ----------- ----------- ----------- ----------- Statements of Operations Data: Net sales.................................... $ 503.6 $ 582.6 $ 680.5 $666.4 $ 723.3 $ 701.3 Cost of sales(1)............................. 352.3 464.4 530.1 416.6 543.6 522.9 -------- -------- --------- ------ -------- ------- Gross profit................................. 151.3 118.2 150.4 249.8 179.7 178.4 Operating expenses: Selling, general and administrative........ 98.5 120.2 139.4 124.2 119.0 106.1 Research, development and engineering...... 34.1 36.7 43.5 48.9 54.0 56.2 Legal settlement(b)........................ 29.5 -- -- -- -- -- Transaction gain, expenses and other expenses -- -- -- -- -- 53.9 -------- -------- --------- ------ -------- ------- Operating (loss) earnings.................... (10.8) (38.7) (32.5) 76.7 6.7 (37.8) Equity in losses of unconsolidated subsidiary -- -- -- -- 1.3 -- Interest expense, net........................ 57.3 48.8 60.5 54.2 52.9 41.7 -------- -------- --------- ------ -------- ------- (Loss) earnings before income taxes and extraordinary item......................... (68.1) (87.5) (93.0) 22.5 (47.5) (79.5) Income taxes ................................ 2.7 2.0 1.8 2.2 3.3 3.9 -------- -------- --------- ------ -------- ------- (Loss) earnings before extraordinary item ... (70.8) (89.5) (94.8) 20.3 (50.8) (83.4) Extraordinary item(c)........................ -- 9.3 9.3 -- -- -- -------- -------- --------- ------ -------- ------- Net (loss) earnings(1)....................... $ (70.8) $ (98.8) $ (104.1) $ 20.3 $ (50.8) $ (83.4) ======== ======== ========= ====== ======== ======= Basic net (loss) earnings per share: (Loss) earnings before extraordinary item.... $ (2.03) $ (2.76) $ (2.90) $ 0.80 $ (2.05) $(3.36) Extraordinary item........................... -- (0.29) (0.28) -- -- -- -------- -------- -------- ------ ------- ------- Net (loss) earnings.......................... $ (2.03) $ (3.05) $ (3.18) $ 0.80 $ (2.05) $(3.36) ======== ======== ======== ====== ======= ====== Weighted average common shares............... 34.9 32.4 32.7 25.4 24.8 24.8 Diluted net (loss) earnings per share: (Loss) earnings before extraordinary item.... $ (2.03) $ (2.76) $ (2.90) $ 0.78 $ (2.05) $(3.36) Extraordinary item........................... -- (0.29) (0.28) -- -- -- -------- -------- -------- ------ ------- ------- Net (loss) earnings.......................... $ (2.03) $ (3.05) $ (3.18) $ 0.78 $ (2.05) $(3.36) ======== ======== ======== ====== ======= ====== Weighted average common shares............... 34.9 32.4 32.7 25.9 24.8 24.8 Balance Sheet Data (end of period): Working capital.............................. $ 262.9 $ 295.6 $ 304.8 $174.9 $ 129.9 $ 143.4 Goodwill, intangible and other assets, net .. 534.9 555.2 529.2 433.4 425.8 452.0 Total assets................................. 1,067.1 1,177.8 1,128.3 936.0 881.8 904.3 Long-term debt............................... 836.0 853.7 853.5 603.8 618.2 583.7 Stockholders' equity(1)...................... 69.3 142.6 121.1 135.3 64.5 115.9
(1) The Company has acquired 23 businesses since 1989 for an aggregate purchase price of nearly $1 billion. The Company has incurred and expensed approximately $276.5 in fiscal years 1999 - 2002 related to acquisitions, integration of such acquisitions, consolidation of 17 facilities and reduction of 3,000 employees. The Company incurred and expensed approximately $145 of such costs since the terrorist attacks of September 11, 2001, increasing the number of facilities consolidated to 21, with one additional facility expected to be closed by mid-2003, and its planned headcount reductions to 4,400 employees. 18 SELECTED FINANCIAL DATA (continued) Footnotes to Table (a) In response to the terrorist attacks on September 11, 2001 and the resulting impact on the airline industry subsequent to the attacks, we adopted and began to implement a facility consolidation and integration plan in November 2001 designed to re-align our capacity and cost structure consistent with changed conditions in the airline industry. This plan included closing five facilities, reducing the number of principal production facilities from 16 to 11, and reducing our workforce by approximately 1,000 employees. In response to worsening industry conditions during 2002, the Company revised its consolidation plan to encompass a total of 1,400 employees. The total costs and charges are expected to be approximately $155.0, of which $65.0 is expected to be cash costs. Through December 31, 2002, we incurred approximately $145.0 of the expected total costs (approximately $55.0 of cash costs). We expect to incur the remaining $10.0 of estimated cash costs during the first half of calendar 2003. We incurred costs related to this program as follows:
Transition Period Fiscal Year Ended Ended December 31, 2002 February 23, 2002 -------------------------- ------------------------ Cash charges (severance, integration costs, lease termination costs, relocation, training, facility preparation) $ 32.5 $ 21.3 Write-down of property, plant, equipment, inventory and other assets 7.0 62.9 Impaired intangible assets -- 20.4 ------ ------- $ 39.5 $ 104.6 ====== =======
The consolidation and integration costs have been included as a component of cost of sales. Cost of sales included $100.4 of consolidation and integration costs for the ten-month period ended December 31, 2001. We also incurred acquisition-related expenses of $6.8 during the fiscal year ended February 23, 2002 and the ten-month period ended December 31, 2001, which have been included as a component of selling, general and administrative expenses. (b) In February 2003, we received an adverse arbitration award related to the amounts due us from the Thales Group, which reduced the amount due by $29.5. (c) An extraordinary charge of $9.3 (net of tax) for unamortized debt issue costs, redemption premiums and expenses related to the early retirement of our 9 7/8% senior subordinated notes due February 1, 2006 has been included in our consolidated statement of operations for the ten-month period ended December 31, 2001 and the fiscal year ended February 23, 2002, respectively. Excluding such charge and the costs described in (a) above, our operating earnings were $61.7 and $72.1 and net earnings were $10.9 and $9.8, for the ten-month period ended December 31, 2001 and the fiscal year ended February 23, 2002, respectively. (d) Our operating results during fiscal 2001 were negatively impacted by costs related to acquisitions and the termination of a proposed initial public offering by our subsidiary Advanced Thermal Sciences. These items reduced our net earnings by $8.3. Excluding such costs for the year ended February 24, 2001, our operating earnings were $85.0 and net earnings were $27.7. (e) Our operating results during fiscal 2000 were negatively impacted due to operational problems in our seating operations. These problems, which have since been resolved, arose due to a misalignment between our manufacturing processes, our newly installed Enterprise Resource Planning, or ERP, system and our product and service line rationalization. The aggregate impact of these problems on our results for the year ended February 26, 2000 was $94.4. Substantially all of these costs have been included as a component of cost of sales. Excluding such costs and charges for the year ended February 26, 2000, our gross profit was $263.3, our gross margin was 36.4%, our operating earnings were $101.1 and our net earnings were $40.6. 19 (f) As a result of acquisitions in 1999, we recorded a charge of $79.2 for the write-off of acquired in-process research and development and acquisition-related expenses. We also sold a 51% interest in our in-flight entertainment business, as a result of which we recorded a gain of $25.3. Transaction gain, expenses and other expenses for the year ended February 27, 1999 consist of the in-process research and development and other acquisition expenses, offset by the gain attributable to the sale of our in-flight entertainment business. During fiscal 1999, we implemented a restructuring plan. In connection therewith we closed 7 plants and reduced our workforces by approximately 1,000 positions. As a result, we incurred $87.8 of costs that included both the restructuring referred to above, the rationalization of related product lines and the introduction of new products. Excluding such costs and expenses and the gain attributable to the sale, our gross profit was $266.3, our operating earnings were $103.9 and our net earnings were $51.6. [Remainder of this page intentionally left blank] 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in millions, except per share data) INTRODUCTION Management's discussion and analysis of results of operations and financial condition ("MD&A") is provided as a supplement to the accompanying consolidated financial statements and footnotes to help provide an understanding of our financial condition, changes in financial condition and results of operations. The MD&A is organized as follows: Overview. This section provides a general description of our Company's businesses, as well as recent significant transactions that have either occurred during the transition period ended December 31, 2002 or early calendar year 2003 that we believe are important in understanding the results of operations and anticipating future trends in those operations. Results of Operations. This section provides an analysis of our results of operations for all three years presented in the accompanying consolidated statements of operations. In addition, we provide a brief description of transactions and events that impact the comparability of the results being analyzed. Liquidity and Capital Resources. This section provides an analysis of our cash flows, as well as a discussion of outstanding debt and commitments, both firm and contingent, that existed as of December 31, 2002. Included is a discussion of the amount of financial capacity available to fund future commitments, as well as a discussion of other financing arrangements. New Accounting Pronouncements. This section describes significant new accounting pronouncements and the timing of their adoption and estimated impact, if known, to the financial statements. Critical Accounting Policies. This section discusses those accounting policies that both are considered important to our financial condition and results, and require significant judgment and estimates on the part of management in their application. In addition, all of our significant accounting policies, including the critical accounting policies, are summarized in note 1 to the accompanying consolidated financial statements. Risk Factors and Forward-Looking Statements. These sections discuss important risk factors and how certain of our forward-looking statements throughout MD&A are based on management's present expectations about future events and are inherently susceptible to uncertainty and changes in circumstances. All dollar amounts in the following discussion and analysis are presented in millions of dollars, except per share amounts. OVERVIEW We are the world's largest manufacturer of cabin interior products for commercial aircraft and for business jets and a leading distributor of aftermarket fasteners. We serve virtually all major airlines and a wide variety of business jet customers and airframe manufacturers. We believe that we have achieved leading global market positions in each of our major product categories, which include: o Commercial aircraft seats, including an extensive line of first class, business class, tourist class and regional aircraft seats; o A full line of aircraft food and beverage preparation and storage equipment, including coffeemakers, water boilers, beverage containers, refrigerators, freezers, chillers and high-heat and convection ovens; o Both chemical and gaseous aircraft oxygen delivery systems; o Business jet and general aviation interior products, including an extensive line of executive aircraft seats, indirect overhead lighting systems, oxygen, safety and air valve products; and o A broad line of aftermarket fasteners, covering over 100,000 SKUs. 21 We design, develop and manufacture a broad range of cabin interior structures and provide comprehensive aircraft cabin interior reconfiguration and passenger-to-freighter conversion engineering services and component kits. We generally derive our revenues from two primary sources: refurbishment or upgrade programs for the existing worldwide fleets of commercial and general aviation aircraft and new aircraft deliveries. We believe our large installed base of products, estimated to be over $5.0 billion as of December 31, 2002 (valued at replacement prices), gives us a significant advantage over our competitors in obtaining orders both for spare parts and for refurbishment programs, principally due to the tendency of the airlines to purchase equipment for such programs from the original supplier. For the transition period ended December 31, 2002, approximately 60% of our revenues were from the aftermarket and 40% were from new aircraft deliveries. For fiscal year 2002, 63% of our revenues were from the aftermarket and 37% were from new aircraft deliveries. For fiscal year 2001, 60% of our revenues were from the aftermarket and 40% were from new aircraft deliveries. We conduct our operations through strategic business units that have been aggregated under three reportable segments: Commercial Aircraft Products, Business Jet Products and Fastener Distribution. Net sales by line of business were as follows:
Fiscal Year Ended Ten-Month Period Ended ---------------------------------------------------- Dec. 31, 2002 February 23, 2002 February 24, 2001 ------------------------- ------------------------ ------------------------ Net % of Net % of Net % of Sales Net Sales Sales Net Sales Sales Net Sales ----------- ------------- ----------- ------------ ----------- ------------ Commercial aircraft products: Seating products $144.6 28.7% $247.8 36.4% $288.1 43.2% Interior systems products 116.0 23.0 152.6 22.4 151.6 22.8 Engineered interior structures, components and assemblies 93.9 18.7 150.2 22.1 140.6 21.1 ----------- ------------- ----------- ------------ ----------- ------------ 354.5 70.4 550.6 80.9 580.3 87.1 Business jet products 71.1 14.1 85.6 12.6 86.1 12.9 Fastener distribution 78.0 15.5 44.3 6.5 -- -- ----------- ------------- ----------- ------------ ----------- ------------ Net sales $503.6 100.0% $680.5 100.0% $666.4 100.0% =========== ============= =========== ============ =========== ============
We generated approximately 46% of our total revenues from sales outside the U.S. for the transition period ended December 31, 2002, and approximately 24% of total revenues was generated in Europe and approximately 11% was generated in Asia. In fiscal 2002, we generated approximately 42% of our total revenues from sales outside the U.S., and approximately 20% of total revenues were generated in Europe and approximately 12% was generated in Asia. In fiscal 2001, we generated approximately 42% of our total revenues from sales outside the U.S., and approximately 22% of total revenues were generated in Europe and approximately 10% was generated in Asia. Financial and other information by segment and relating to foreign and domestic operations for each of the ten-month transition period ending December 31, 2002, and the fiscal years ended February 23, 2002 and February 24, 2001, is set forth in note 15 to our consolidated financial statements. We have substantially expanded the size, scope and nature of our business through a number of acquisitions. Since 1989, we have completed 23 acquisitions, including one acquisition during the transition period ended December 31, 2002, three during fiscal year 2002 and four during fiscal year 2001, for an aggregate purchase price of approximately $980.0, in order to position ourselves as the preferred global supplier to our customers. During the period from 1989 to 2000, we integrated the acquired businesses, closing 17 facilities, reducing our workforce by 3,000 positions and implementing common information technology platforms and lean manufacturing initiatives company-wide. This integration effort resulted in costs and charges totaling approximately $125.0. 22 The rapid decline in industry conditions brought about by the terrorist attacks on September 11, 2001 caused us to implement a facility consolidation and integration plan designed to re-align our capacity and cost structure with changed conditions in the airline industry. The facility consolidation and integration plan includes closing five facilities and reducing workforce by approximately 1,400 employees. The total estimated cost of this program is approximately $155.0, including $65.0 of cash charges. Through December 31, 2002, we had incurred approximately $55.0 of the cash costs and expect to incur the remaining $10.0 during the first half of calendar 2003. All of the aforementioned initiatives to integrate, rationalize and restructure the businesses acquired through December 31, 2002 had an aggregate cost of approximately $270, which has already been expensed. These initiatives enabled us to eliminate a total of 21 facilities, with one additional facility expected to be closed by mid-2003, and reduce headcount by over 4,000 employees, with an additional reduction of approximately 400 expected in connection with the closure of the aforementioned facility by mid-2003. We believe these initiatives will enable us to substantially expand profit margins when industry conditions improve and demand increases, strengthen the global business management focus on our core product categories, more effectively leverage our resources and improve our ability to rapidly react to changing business conditions. In conjunction with these efforts, we have also implemented a company-wide information technology system, a company-wide engineering system and initiated lean manufacturing techniques in our remaining facilities. Common management information and engineering systems and lean manufacturing processes across all operations, coupled with a rationalized product offering, are expected to provide us with the ongoing benefit of a generally lower cost structure, and expanding gross and operating margins. New product development is a strategic tool for our company. Our customers regularly request that we engage in new product development and enhancement activities. We believe that these activities, if properly focused and managed, will protect and enhance our leadership position. Research, development and engineering spending have been approximately 6% - 7% of sales for the past several years, and is expected to remain at that level for the foreseeable future. We also believe in providing our businesses with the tools required to remain competitive. In that regard, we have, and will continue to invest in property and equipment that enhances our productivity. Over the past two years, annual capital expenditures were approximately $14 - $18. Taking into consideration our recent capital expenditure investments, current industry conditions and the recent acquisitions, we expect that annual capital expenditures will be approximately $15 for the next few years. Recent Acquisitions - ------------------- We completed the following significant acquisitions during fiscal 2001 and fiscal 2002: Fiscal 2001 Acquisitions - ------------------------ Effective February 24, 2001 we completed the acquisition of four companies that specialize in manufacturing precision-machined components and assemblies for the aerospace industry. We acquired these businesses, Alson Industries, Inc., T.L. Windust Machine, Inc., DMGI, Inc. and Maynard Precision, Inc., for an aggregate purchase price of approximately $70.1. Fiscal 2002 Acquisitions - ------------------------ In May 2001, we acquired the outstanding common stock of Nelson Aero Space, Inc. for approximately $20.0. In July 2001, we acquired the outstanding common stock of Denton Jet Interiors, Inc. for approximately $16.0. On September 14, 2001, we acquired M & M for a purchase price of $184.7. M & M is a leading distributor of aerospace fasteners. The M & M acquisition was completed by issuing to the former shareholders a total of approximately 1.9 million shares of our stock, paying them $152.0 in cash and assuming current liabilities of approximately $8.8. We financed this acquisition through cash on hand and approximately $100.0 of borrowings under our bank credit facility. 23 RESULTS OF OPERATIONS The Transition Period from February 24, 2002 to December 31, 2002 Compared to the Ten-Month Period From February 25, 2001 to December 31, 2001 Consolidated Results To assist in understanding the performance of our operations, where noted, the results discussed below have been adjusted to exclude the effect of certain facility and workforce consolidation costs, as well as certain unusual or nonrecurring items. By presenting "as adjusted" results, we intend to provide a better understanding of the core results and underlying trends from which to consider not only past performance, but also the prospects for the future. In each case where "as adjusted" results are discussed, all of the differences from our reported results are given to reconcile the reported results to the "as adjusted" results. Users of this financial information should consider the types of events and transactions for which adjustments have been made. In addition to providing a discussion of reported results, results for the comparable period in the prior year have also been prepared on a pro forma basis treating companies acquired during the ten-month period ended December 31, 2001 as though acquired as of February 25, 2001. By also discussing these pro forma results, we intend to enhance comparability between periods and make an analysis of the current period results more meaningful. Pro forma adjustments would have increased net sales, gross profit, selling, general and administrative expenses, operating earnings, interest expense and net earnings by $60.9, $24.0, $10.6, $13.4, $4.7 and $8.8, respectively, for the ten-month period ended December 31, 2001. Results for the current transition period ended December 31, 2002 have not been prepared on a pro forma basis, as we made no significant acquisitions in the current period. These "as adjusted" and pro forma results do not conform to U.S. generally accepted accounting principles, or GAAP. While we believe that these measures are useful aids in understanding our results in the periods shown, as the magnitude of these items is such that it is important for readers of this discussion and analysis to be aware of these items and the effect that they had on our results during the periods presented and we use these measures to evaluate our performance. These "as adjusted" and pro forma results should be used only in conjunction with the results presented in accordance with GAAP. The pro forma information is presented for illustrative purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisitions been completed as of the date indicated. Revenues were negatively impacted by the severe change in industry conditions following the terrorist attacks on September 11, 2001. Net sales for the transition period ended December 31, 2002 were $503.6, which is $79.0 or 13.6% lower than net sales of $582.6 for the comparable period in the prior year, which was also negatively impacted by the events of September 11, 2001. On a pro forma basis (treating companies acquired during the ten-month period ended December 31, 2001 as though acquired as of February 25, 2001), net sales during the transition period ended December 31, 2002 would have been $139.9 or 21.7% lower than pro forma net sales of $643.5 for the prior period. Net sales for each of our segments are set forth in the following table:
Transition Ten-Month Period Ended % of Period Ended % of Dec. 31, 2002 Net Sales Dec. 31, 2001 Net Sales Change ------------------ ---------------- ------------------ ----------------- ------------------- Commercial Aircraft Products $354.5 70.4% $476.5 81.8% $ (122.0) Business Jet Products 71.1 14.1% 75.7 13.0% (4.6) Fastener Distribution 78.0 15.5% 30.4 5.2% 47.6 ------------------ ---------------- ------------------ ----------------- ------------------- Total $503.6 100.0% $582.6 100.0% $ (79.0) ================== ================ ================== ================= ===================
Sales of commercial aircraft products were $122.0 or 25.6% lower than sales in the prior year, due to the recession in the airline industry and the further downturn in industry conditions following September 11, 2001. Sales of business jet products and fastener distribution products also reflected restrained demand due to the aviation industry downturn. Because we acquired M&M in September 2001, the current period reflects the full ten-month transition period of fastener distribution revenue compared with four months in the comparable period in the prior year. On a pro forma basis (treating companies acquired during the ten-month period ended December 31, 2001 as though acquired as of February 25, 2001), sales of fastener distribution products were $10.5 or 11.9% lower than pro forma sales in the comparable period in the prior year. Pro forma adjustments would have increased sales of fastener distribution products by $58.1 for the comparable period ended December 31, 2001. 24 Gross profit was $151.3, or 30.0% of net sales for the transition period ended December 31, 2002 as compared to $118.2, or 20.3% of sales for the ten-month period ended December 31, 2001. The period over period increase in gross margin as a percentage of net sales occurred despite the 13.6% decrease in revenues and was due to a $60.9 reduction in facility consolidation and integration costs and the positive impact of our facility consolidation efforts, lean manufacturing and continuous improvement programs. On a pro forma basis (treating companies acquired during the ten-month period ended December 31, 2001 as though acquired as of February 25, 2001) and excluding facility and personnel consolidation and integration costs of $39.5 in 2002 and $100.4 in 2001, gross profit on this pro forma, as adjusted basis would have been $190.8, or 37.9% of sales for the transition period ended December 31, 2002 as compared to $242.6, or 37.7% of pro forma sales for the ten-month period ended December 31, 2001. This increase in gross margin as a percentage of sales on this pro forma, as adjusted basis occurred despite the $139.9 or 21.7% decrease in revenues, and was due to the positive impact of our facility consolidation and integration efforts, lean manufacturing and continuous improvement programs. Selling, general and administrative expenses were $98.5 or 19.6% of net sales for the transition period ended December 31, 2002 as compared to $120.2 or 20.6% of net sales for the comparable period in the prior year. The $21.7 decrease in selling, general and administrative expenses was due to lower spending, primarily as a result of our facility consolidation and integration program and austerity measures, together with a decrease of $13.4 related to the adoption of SFAS No. 142. Because we acquired M & M in September 2001, the current period reflects the full ten-month period of selling, general and administrative expenses of $12.0, as compared with $6.1 of such costs during the four months in the comparable period in the prior year. On a pro forma basis (treating companies acquired during the ten-month period ended December 31, 2001, as though acquired as of February 25, 2001), pro forma, as adjusted, selling, general and administrative expenses would have been $124.0 or 19.3% of pro forma net sales for the comparable period in the prior year. The period over period decrease in selling, general and administrative expenses for the transition period ended December 31, 2002 compared to the pro forma, as adjusted, selling, general and administrative expenses in the comparable period in the prior year of $25.5 or 20.6% resulted from our austerity measures, a lower level of spending $(12.1) and the implementation of SFAS No. 142 $(13.4). We incurred acquisition-related expenses of $6.8 in the prior period in connection with the acquisition of M&M that have been excluded from the pro forma, as adjusted, figures in 2001. Research, development and engineering expenses were $34.1 or 6.8% of net sales for the transition period ended December 31, 2002 as compared with $36.7 or 6.3% of sales for the comparable period in the prior year. The period over period decrease in research, development and engineering expenses is primarily attributable to austerity measures, which were implemented subsequent to the September 11, 2001 terrorist attacks. In February 2003, we received an adverse result in an arbitration proceeding, which had been ongoing since October 2000. The decision reduced the amounts we originally sought in connection with the dispute, resulting in a net amount of $7.8 million due to us. The dispute concerned the sale of our in-flight entertainment business to Thales. Under the terms of the purchase and sale agreement, we received $62 million during 1999, and were to receive two additional payments totaling $31.4 million, and a third and final payment based on actual sales and bookings. Thales did not pay the $31.4 million, or the third and final payment. We initiated arbitration proceedings to compel payment in December 2000. Thales counterclaimed against us, alleging various breaches of the purchase and sale agreement. Previously, we had recorded a receivable of $38.5 million in connection with the sale of the business to Thales. As a result of the arbitration award, we reduced our note receivable by $29.5 as of December 31, 2002, representing the difference between the arbitration panel's award and our previously recorded amounts. Despite a 13.6% decrease in net sales, our operating loss for the current period decreased by $27.9 compared to the operating loss in the comparable period in the prior year due to a $60.9 decrease in facility consolidation and integration costs, and a $24.3 decrease in operating expenses, excluding the $29.5 arbitration result, arising from austerity measures and the implementation of SFAS No. 142. 25 On a pro forma basis (treating companies acquired during the ten-month period ended December 31, 2001, as though acquired as of February 25, 2001) and excluding facility and personnel consolidation and integration costs of $39.5 and the $29.5 arbitration award in 2002 and facility and personnel consolidation and integration costs of $100.4 and acquisition related expenses of $6.8 in 2001, operating earnings on this pro forma, as adjusted basis declined by only $23.7, despite the $139.9 decrease in revenues for the current transition period compared to pro forma revenues in the comparable period in the prior year, reflecting both lower manufacturing costs and lower operating expenses. Our gross margin calculated on the pro forma, as adjusted basis described above for both periods was nearly unchanged, reflecting the impact of our facility consolidation and integration initiatives. Period over period operating expenses calculated on the pro forma, as adjusted basis described above decreased by $28.1, which was attributable to austerity measures and a decrease of $13.4 from the implementation of SFAS No. 142. Pro forma adjustments would have increased operating expenses by $10.6 for the ten-month period ended December 31, 2001. Based on our results for the transition period ended December 31, 2002, we believe our facility consolidation and integration program has eliminated over $35.0 of annualized cash costs. Interest expense, net was $57.3 for the transition period ended December 31, 2002, or $8.5 greater than interest expense of $48.8 for the comparable period in the prior year. The increase in interest expense is due to an increase in debt following the acquisition of M & M in September 2001 and higher interest rates on our bank borrowings. On a pro forma basis (treating companies acquired during the ten-month period ended December 31, 2001, as though acquired as of February 25, 2001), interest expense, net was $57.3 for the transition period ended December 31, 2002, or $3.8 greater than pro forma interest expense of $53.5 for the comparable period in the prior year. The increase in interest expense for the current transition period compared to pro forma interest expense in the comparable period in the prior year is due to higher interest rates on our bank borrowings. The lower level of revenues, which was partially offset by lower facility consolidation and integration costs during the transition period ended December 31, 2002, resulted in a loss before income taxes and extraordinary item of $(68.1) or $19.4 less than the $(87.5) loss before income taxes and extraordinary item in the comparable period in the prior year. Income tax expense for the transition period ended December 31, 2002 was $2.7 as compared to $2.0 in the comparable period in the prior year. We recorded a $9.3 extraordinary item during the ten-month period ended December 31, 2001 related to the early extinguishment of certain long-term debt. Net loss was $(70.8) or $(2.03) per share for the transition period ended December 31, 2002 as compared to a net loss of $(98.8) or $(3.05) per share for the comparable period in the prior year. On a pro forma basis (treating companies acquired during the ten-month period ended December 31, 2001, as though acquired as of February 25, 2001) and excluding facility and personnel consolidation and integration costs of $39.5 and the $29.5 arbitration award in 2002 and facility and personnel consolidation costs of $100.4, acquisition-related expenses of $6.8 and debt extinguishment costs of $9.3 in 2001, our net loss on this pro forma, as adjusted basis would have been $(1.8) or $(0.05) per share for the transition period ended December 31, 2002 as compared to net earnings on this same pro forma, as adjusted basis of $26.5 or $0.79 per share for the comparable period in the prior year. Lower net sales and greater interest expense were the principal reasons for the decrease in net earnings on this pro forma, as adjusted basis as discussed further above. [Remainder of this page intentionally left blank] 26 Fiscal Year Ended February 23, 2002 Compared with the Fiscal Year Ended February 24, 2001 Consolidated Results Revenues were negatively impacted by the severe change in industry conditions following the terrorist attacks on September 11, 2001. Net sales for fiscal 2002 were $680.5, which is $14.1 or 2.1% greater than net sales of $666.4 for the comparable period in the prior year. This increase was entirely attributable to the acquisition of M & M in September 2001. Net sales for each of our segments are set forth in the following table:
FY 2002 FY 2001 Change --------------- ----------- -------------- Commercial Aircraft Products $550.6 $580.3 $ (29.7) Business Jet Products 85.6 86.1 (0.5) Fastener Distribution 44.3 -- 44.3 --------------- ----------- -------------- $680.5 $666.4 $ 14.1 =============== =========== ==============
Net sales at our Commercial Aircraft Products segment were $29.7 or 5.1% lower than the prior year due to the recession in the airline industry and the further downturn in industry conditions following September 11, 2001. Gross profit was $150.4, or 22.1% of net sales for fiscal 2002, including facility consolidation and integration expenses of $104.6, as compared to $249.8 or 37.5% of net sales in the prior year. The decline in the gross margin was due to the facility consolidation and integration costs; excluding such costs, gross margin for fiscal 2002 was essentially unchanged from fiscal 2001. Selling, general and administrative expenses were $139.4 or 20.5% of net sales for fiscal 2002 as compared to $124.2 or 18.6% of net sales in fiscal 2001. The $15.2 year over year increase in selling, general and administrative expenses resulted from recent acquisitions. Included in selling, general and administrative expenses for fiscal 2002 and 2001 were approximately $6.8 and $8.3, respectively, of costs related to acquisitions we completed during each respective fiscal year. Research, development and engineering expenses were $43.5 or 6.4% of net sales for fiscal 2002, as compared with $48.9 or 7.3% of sales in fiscal 2001. The year over year decrease in research, development and engineering expenses is primarily attributable to the timing of customer programs along with austerity measures we implemented subsequent to the September 11, 2001 terrorist attacks. We generated an operating loss of $(32.5) during fiscal 2002, including facility consolidation and related expenses of $111.4. Excluding such costs, we generated operating earnings of $78.9 or 11.6% of net sales, which was $6.1 or 7.2% lower than operating earnings of $85.0 (excluding acquisition-related expenses of $8.3) or 12.8% of net sales in the prior year. The decrease in operating earnings excluding such costs in fiscal 2002 is primarily attributable to the lower level of revenues from our businesses following the terrorist attacks on September 11, 2001. Interest expense, net was $60.5 for fiscal 2002, or $6.3 greater than interest expense of $54.2 for the prior year. The increase in interest expense is due to the larger amount of outstanding debt created by the refinancing of certain indebtedness during fiscal 2002 along with the impact of recent acquisitions. The lower level of revenues and facility and integration consolidation costs during fiscal 2002 resulted in a loss before income taxes and extraordinary item of $(93.0) or $(115.5) less than income before income taxes in the prior year of $22.5. Earnings before facility consolidation and acquisition-related expenses, income taxes, and extraordinary item in fiscal 2002 were $18.4, which was $12.4 or 40.3% lower than pretax earnings in fiscal 2001 of $30.8, calculated on the same basis. Income tax expense for fiscal 2002 was $1.8 as compared to $2.2 in the prior year. The Company recorded a $9.3 extraordinary item during fiscal 2002 related to the early extinguishment of certain long-term debt. Net (loss) earnings was $(104.1) or $(3.18) per share for fiscal 2002, as compared to net earnings of $20.3 or $0.78 per share for fiscal 2001. 27 LIQUIDITY AND CAPITAL RESOURCES Current Financial Condition Our liquidity requirements consist of working capital needs, ongoing capital expenditures and payments of interest and principal on our indebtedness. Our primary requirements for working capital are directly related to the level of our operations; working capital, primarily accounts receivable and inventories, fluctuate with the demand for our product. Our working capital was $262.9 as of December 31, 2002, as compared to $304.8 as of February 23, 2002. At December 31, 2002, our cash and cash equivalents were $156.9 as compared to $159.5 at February 23, 2002. Cash Flows Cash used in operating activities was $13.5 during the transition period ended December 31, 2002 compared to cash provided by operations of $57.9 for fiscal year 2002. The primary sources of cash during the transition period ending December 31, 2002 were a non-cash impairment charge of $7.0, charges for depreciation and amortization of $24.7, a legal settlement charge of $29.5 and a decrease in accounts receivable of $22.2. The primary uses of cash were a net loss of $70.8, an increase in inventories of $8.5 and a decrease in payables and accruals of $15.9. The primary source of cash from investing activities was $33.4 of proceeds received from real estate sales and sales-leaseback transactions. The primary uses of cash from investing activities were related to capital expenditures to implement new information system enhancements and plant modernization along with $6.5 of cash used for acquisitions. Capital Spending Our capital expenditures were $17.4 and $13.9 during the transition period ended December 31, 2002 and the fiscal year ended February 23, 2002, respectively. The period over period increase in capital expenditures is primarily attributable to plant consolidation and modernization efforts. We anticipate ongoing annual capital expenditures of approximately $15 for the next several years. We have no material commitments for capital expenditures. We have, in the past, generally funded our capital expenditures from cash from operations and funds available to us under our bank credit facility. We expect to fund future capital expenditures from cash on hand and from operations and from funds available to us under our bank credit facility. In addition, since 1989, we have completed 23 acquisitions for an aggregate purchase price of approximately $980.0. We have financed these acquisitions primarily through issuances of debt and equity securities, including our 8%, 8 7/8% and 9 1/2% senior subordinated notes. Outstanding Debt and Other Financing Arrangements In January and March 2003, the Company obtained amendments to the credit facility with J.P. Morgan Chase. The amended bank credit facility reduced the total commitments by $15.0 to $135.0 (of which $30.0 may be utilized for acquisitions) during January 2003. The amended bank credit facility provides for another $15.0 reduction in facility size to $120.0 at December 31, 2004. The amended bank credit facility expires in August 2006 and is collateralized by substantially all of our cash, accounts receivable, inventories and other personal property. At December 31, 2002, indebtedness under the old bank credit facility consisted of letters of credit aggregating approximately $5.6 and outstanding borrowings under the revolving facility aggregating to $144.0 (bearing interest at LIBOR plus 3.0%, or approximately 4.64% as of December 31, 2002). The amended bank credit facility bears interest ranging from 200 to 350 basis points over the Eurodollar rate as defined in the agreement (or approximately 4.5% as of the January 2003 effective date). The amended bank credit facility contains customary affirmative covenants, negative covenants and conditions of borrowings, all of which were met as of December 31, 2002. We presented the $15.0 reduction in commitments as short-term debt in our consolidated balance sheet at December 31, 2002. In connection with a recapitalization of our company in April 2001, we issued $250.0 of 8 7/8% senior subordinated notes due 2011, pursuant to an indenture dated April 17, 2001, between us and the Bank of New York, as trustee, and sold the notes to Merrill Lynch & Co., Credit Suisse First Boston, JP Morgan, CIBC World Markets and First Union Securities, Inc. On July 27, 2001, we exchanged the outstanding 8 7/8% senior subordinated notes due 2011 with an aggregate value of $250.0 principal amount for 8 7/8% senior subordinated notes due 2011, Series B, registered under the Securities Act of 1933. 28 Long-term debt consists principally of our 8 7/8% senior subordinated notes, 9 1/2% senior subordinated notes and 8% senior subordinated notes and borrowings outstanding under the amended bank credit facility (net of the $15.0 reduction in commitments, which is a component of short-term debt). The $250.0 of 8% notes mature on March 1, 2008, the $200.0 of 9 1/2% notes mature on November 1, 2008 and the $250.0 of 8 7/8% notes mature on May 1, 2011. The notes are unsecured senior subordinated obligations and are subordinated to all of our senior indebtedness. Each of the 8% notes, 8 7/8% notes and 9 1/2% notes contain restrictive covenants, including limitations on future indebtedness, restricted payments, transactions with affiliates, liens, dividends, mergers and transfers of assets, all of which were met by us as of December 31, 2002. A breach of such covenants, or the covenants under our amended bank credit facility, that continues beyond any grace period can constitute a default, which can limit the ability to borrow and can give rise to a right of the lenders to terminate the applicable facility and/or require immediate repayment of any outstanding debt. Contractual and Other Obligations The following charts reflect our contractual obligations and commercial cash commitments as of December 31, 2002. Commercial commitments include lines of credit, guarantees and other potential cash outflows resulting from a contingent event that requires performance by us or our subsidiaries pursuant to a funding commitment.
Contractual Obligations 2003 2004 2005 2006 2007 Thereafter Total ------------- ------------ ----------- ---------- ------------- ------------- -------------- Long-term debt $ 16.9 $ 17.6 $0.7 $ 114.7 $ 3.3 $ 699.7 $ 852.9 Operating leases 11.1 7.8 6.9 6.1 6.0 44.3 82.2 ------- ----- ----- -------- ----- -------- ------- Total $ 28.0 $ 25.4 $7.6 $ 120.8 $ 9.3 $ 744.0 $ 935.1 ======= ====== ==== ======== ===== ======== ======= Commercial Commitments Letters of Credit $ 5.6 -- -- -- -- -- $ 5.6
We believe that our cash flow from operations (which provides us with our ability to fund our operations, make planned capital expenditures, make scheduled payments and refinance our indebtedness) depends on our future operating performance, which, in turn, is subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control. The September 11, 2001 terrorist attacks have severely impacted conditions in the airline industry. Accordingly, the airlines are seeking to conserve cash in part by deferring or eliminating cabin interior refurbishment programs and canceling or deferring aircraft purchases. This has caused a substantial contraction in our business, the extent and duration of which cannot be determined at this time. However, we believe that our operating cash flow, cash and cash equivalents, borrowing capacity under our amended bank credit facility, and access to capital markets are sufficient to fund our operating needs, including contractual and other obligations, and to service our debt obligations for the foreseeable future. Sale-Leaseback During the third quarter of 2002, we entered into two sale-leaseback transactions involving four of our facilities. Under the terms of the sale-leaseback agreements, the facilities were sold for $27.0, net of transaction costs, and have been leased back for periods ranging from 15 to 20 years. The leasebacks have been accounted for as operating leases. The future lease payments have been included in the above tables. A gain of $4.8 resulting from the sales have been deferred and will be amortized on a straight-line basis to rent expense over the initial term of the leases. Off-Balance Sheet Arrangements - Lease Arrangements We finance our use of certain facilities and equipment under committed lease arrangements provided by various institutions. Since the terms of these arrangements meet the accounting definition of operating lease arrangements, the aggregate sum of future minimum lease payments is not reflected on our consolidated balance sheet. As of December 31, 2002, future minimum lease payments under these arrangements approximated $54.2. We also have various other arrangements whose future minimum lease payments approximated $28.0 at December 31, 2002. 29 Indemnities, Commitments and Guarantees During our normal course of business, we have made certain indemnities, commitments and guarantees under which we may be required to make payments in relation to certain transactions. These indemnities include non-infringement of patents and intellectual property indemnities to our customers in connection with the delivery, design, manufacture and sale of its products, indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease, indemnities to other parties to certain acquisition agreements and indemnities to our directors and officers to the maximum extent permitted under the laws of the State of Delaware. The duration of these indemnities, commitments and guarantees varies, and in certain cases, is indefinite. Substantially all of these indemnities, commitments and guarantees provide for limitations on the maximum potential future payments we could be obligated to make. We have not recorded any liability for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets. Deferred Tax Assets We established a valuation allowance of $124.4 as of December 31, 2002 related to the utilization of our deferred tax assets because of uncertainties that preclude us from determining that it is more likely than not that we will be able to generate taxable income to realize such assets during the federal operating loss carryforward period. The federal operating loss carryforward begins to expire in 2012. Such uncertainties include recent cumulative losses attributable to the recent industry conditions, the highly cyclical nature of the industry in which we operate, risks associated with our facility consolidation and integration plan, our high degree of financial leverage, risks associated with new product introductions, recent increases in the cost of fuel and its impact on our airline customers, and risks associated with the integration of acquired businesses. We monitor these uncertainties, as well as other positive and negative factors that may arise in the future, as we assess the necessity for a valuation allowance for our deferred tax assets. RECENT ACCOUNTING PRONOUNCEMENTS In April 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145, among other things, requires gains and losses on extinguishment of debt to be classified as part of continuing operations rather than treated as extraordinary, as previously required in accordance with SFAS No. 4. SFAS No. 145 also modifies accounting for subleases where the original lessee remains the secondary obligor and requires certain modifications to capital leases to be treated as sale-leaseback transactions. We will adopt SFAS No. 145 on January 1, 2003 and expect no material impact to our consolidated financial statements. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 nullifies the guidance previously provided under Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Among other things, SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred as opposed to when there is a commitment to a restructuring plan as set forth under the nullified guidance. We plan to adopt SFAS No. 146 on January 1, 2003 for future restructurings as required. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure--an amendment of SFAS No. 123." This Statement amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The adoption of SFAS No. 148 is not expected to have a material impact on our financial position or results of operations as we have no plans to adopt the fair value method. 30 In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others", an interpretation of FIN No. 5, 57 and 107, and rescission of FIN No. 34, "Disclosure of Indirect Guarantees of Indebtedness of Others". FIN No. 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002; while, the provisions of the disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of the recognition provisions of FIN No. 45 is not expected to have a material impact on our consolidated results of operations and financial position. In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Entities", an interpretation of Accounting Research Bulletin No. 51. FIN No. 46 requires that variable interest entities be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or is entitled to receive a majority of the entity's residual returns or both. FIN No. 46 also requires disclosures about variable interest entities that companies are not required to consolidate but in which a company has a significant variable interest. The consolidation requirements of FIN No. 46 will apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements will apply to entities established prior to January 31, 2003 in the first fiscal year or interim period beginning after June 15, 2003. The disclosure requirements will apply in all financial statements issued after January 31, 2003. We will begin to adopt the provisions of FIN No. 46 during the first quarter of calendar 2003 but expect the provisions of FIN No. 46 will not have a material impact on our consolidated results of operations and financial position upon adoption as we do not currently have any variable interest entities. CRITICAL ACCOUNTING POLICIES The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. We believe that our critical accounting policies are limited to those described below. For a detailed discussion on the application of these and other accounting policies, see note 1 to our consolidated financial statements. Revenue Recognition Sales of products are recorded on the date of shipment and passage of title, or if required, upon acceptance by the customer. Service revenues are recorded when services are performed. Revenues and costs under certain long-term contracts are recognized using contract accounting under the percentage-of-completion method. We sell our products primarily to airlines and aircraft manufacturers worldwide, including occasional sales collateralized by letters of credit. We perform ongoing credit evaluations of our customers and maintain reserves for estimated credit losses. Actual losses have been within management's expectations. We apply judgment to ensure that the criteria for recognizing sales are consistently applied and achieved for all recognized sales transactions. Accounts Receivable We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. 31 Inventories We value our inventory at the lower of cost or market. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and production requirements. As demonstrated during the transition period ended December 31, 2002 and the fiscal year ended February 23, 2002, demand for our products can fluctuate significantly. Our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory. In the future, if our inventory were determined to be overvalued, we would be required to recognize such costs in our cost of goods sold at the time of such determination. Likewise, if our inventory were determined to be undervalued, we may have over-reported our costs of goods sold in previous periods and would be required to recognize such additional operating income at the time of sale. Long-Lived Assets (including Tangible and Intangible Assets and Goodwill) To conduct our global business operations and execute our strategy, we acquire tangible and intangible assets, which affect the amount of future period amortization expense and possible impairment expense that we may incur. The determination of the value of such intangible assets requires management to make estimates and assumptions that affect our consolidated financial statements. We assess potential impairment to intangible assets of a reporting unit on an annual basis or when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. Our judgments regarding the existence of impairment indicators and future cash flows related to intangible assets are based on operational performance of our acquired businesses, market conditions and other factors. Future events could cause us to conclude that impairment indicators exist and that goodwill or other acquired tangible or intangible assets associated with our acquired businesses is impaired. Any resulting impairment loss could have an adverse impact on our results of operations. Accounting for Income Taxes As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the consolidated statements of operations. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We have recorded a valuation allowance of $124.4 as of December 31, 2002, due to uncertainties related to our ability to utilize some of our deferred tax assets, primarily consisting of certain net operating income losses carried forward, before they expire. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods we may need to establish additional valuation allowance which could materially impact our financial position and results of operations. [Remainder of this page intentionally left blank] 32 RISK FACTORS We are directly dependent upon the conditions in the airline industry and a severe and prolonged downturn could negatively impact our results of operations The September 11, 2001 terrorist attacks have severely impacted conditions in the airline industry. Sharply lower demand from our airline customer base affected our financial results, both for the transition period ended December 31, 2002 and the fiscal year ended February 23, 2002. The lower demand reflects the current downturn in the airline industry, which is the most severe ever experienced. High airline operating costs, weak air travel and low-ticket prices have damaged many carriers' financial condition. Prior to the September 11, 2001 terrorist attacks, airline profits were already being adversely affected by increases in pilot and other airline wages, higher fuel prices and the softening of the global economy. Air travel dropped significantly following the 2001 terrorist attacks, further weakening many airlines' financial condition. To cut costs, carriers worldwide have reduced fleet sizes, parking or idling about 2,200 aircraft, or 15% of their fleets, as of December 2002. In an attempt to stimulate air travel, airlines have decreased domestic airfares to levels not seen since 1988. Reflecting the reduction in air travel and fares, North American airline revenue has dropped 24% since 2000. As a result of these factors, the U.S. airline industry incurred a $7 billion loss in calendar 2001 and an $11 billion loss in calendar 2002. The airline industry crisis caused two major domestic airlines, US Airways and United Airlines, to file for protection under Chapter 11 of the United States Bankruptcy Act and industry experts believe other major domestic carriers may be required to do so as well. In addition, at least one smaller domestic carrier, National Airlines, has ceased operations entirely. Accordingly, the airlines are seeking to conserve cash in part by deferring or eliminating cabin interior refurbishment programs and deferring or canceling aircraft purchases. This has caused a substantial contraction in our business, the extent and duration of which cannot be determined at this time. We expect these adverse industry conditions to have a material adverse impact on our results of operations and financial condition until such time as conditions in the industry improve. Industry conditions could also deteriorate further if there is a prolonged war in Iraq or other outbreak or escalation of national or international hostilities. Several airlines have recently announced additional employee layoffs and the parking or idling of additional aircraft citing the commencement of hostilities with Iraq, along with rising fuel prices and the threat of terrorism. The airline industry is also undergoing a process of consolidation and significantly increased competition. Such consolidation could result in a reduction of future aircraft orders as overlapping routes are eliminated and airlines seek greater economies through higher aircraft utilization. Our substantial indebtedness could limit our ability to obtain additional financing and will require that a significant portion of our cash flow be used for debt service We have substantial indebtedness and, as a result, significant debt service obligations. As of December 31, 2002, we had approximately $696.0 of net indebtedness outstanding, representing approximately 91% of total capitalization. The degree of our leverage and, as a result, significant debt service obligations, could have significant consequences to purchasers or holders of our shares of common stock, including: o Limiting our ability to obtain additional financing to fund our growth strategy, working capital requirements, capital expenditures, acquisitions, debt service requirements or other general corporate requirements; o Limiting our ability to use operating cash flow in other areas of our business because we must dedicate a substantial portion of those funds to fund debt service obligations; o Increasing our vulnerability to adverse economic and industry conditions; and o If we are able to replace our bank credit facility, increasing our exposure to interest rate increases because borrowings under a new bank credit facility will likely be at variable interest rates. 33 We may not be able to generate the necessary amount of cash to service our indebtedness, which may require us to refinance our debt, obtain additional financing or sell assets Our ability to satisfy our debt service obligations will depend upon, among other things, our future operating performance and our ability to refinance indebtedness when necessary. Each of these factors is to a large extent dependent on economic, financial, competitive and other factors beyond our control. If, in the future, we cannot generate sufficient cash from operations to meet our debt service obligations, we will need to refinance, obtain additional financing or sell assets. Our business may not generate cash flow, and we may not be able to obtain funding, sufficient to satisfy our debt service requirements. We have significant financial and operating restrictions in our debt instruments that may have an adverse affect on our operations The indentures governing our outstanding notes contain numerous financial and operating covenants that limit our ability to incur additional indebtedness, to create liens or other encumbrances, to make certain payments and investments, including dividend payments and to sell or otherwise dispose of assets and merge or consolidate with other entities. Agreements governing future indebtedness could also contain significant financial and operating restrictions. Our amended bank credit facility contains customary affirmative and negative covenants. A failure to comply with the obligations contained in any current or future agreements governing our indebtedness, including our indentures, could result in an event of default under our amended bank credit facility, or such indentures, which could permit acceleration of the related debt and acceleration of debt under other instruments that may contain cross-acceleration or cross-default provisions. We are not certain whether we would have, or be able to obtain, sufficient funds to make these accelerated payments. The airline industry is heavily regulated and failure to comply with applicable laws could reduce our sales, or require us to incur additional costs to achieve compliance, which could reduce our results of operations The Federal Aviation Administration prescribes standards and licensing requirements for aircraft components, including virtually all commercial airline and general aviation cabin interior products, and licenses component repair stations within the United States. Comparable agencies, such as the U.K. Civil Aviation Authority and the Japanese Civil Aviation Board, regulate these matters in other countries. If we fail to obtain a required license for one of our products or services or lose a license previously granted, the sale of the subject product or service would be prohibited by law until such license is obtained or renewed. In addition, designing new products to meet existing regulatory requirements and retrofitting installed products to comply with new regulatory requirements can be both expensive and time consuming. From time to time the FAA proposes new regulations. These new regulations generally cause an increase in costs to comply with these regulations; when the FAA first enacted Technical Standard Order C127, all seating companies were required to meet these new rules. Compliance with this rule required industry participants to spend millions of dollars on engineering, plant and equipment to comply with the regulation. A number of smaller seating companies decided that they did not have the resources, financial or otherwise, to comply with these rules and they either sold their businesses or ceased operations. To the extent the FAA implements rule changes in the future, we may incur additional costs to achieve compliance. There are risks associated with the implementation of our facility consolidation program; failure to integrate our combined operations successfully could lead to a loss of revenues and customers We have developed a comprehensive facility consolidation and integration plan, which is designed to reduce our capacity and fixed costs consistent with current demand and anticipated demand. This plan involves shutting five principal facilities, transferring the operations to another facility while maintaining an ongoing business for the transferred operations. If we are not successful in implementing this plan, our costs may not be as currently anticipated, we may incur delays in delivering products to our customers, which could result in significant penalty payments to our customers and the airframe manufacturers. While the facility consolidation program is on track as of the date of this report, there can be no assurance that we will be successful in the implementation of this effort or that we will not incur liabilities as a result thereof. 34 The airline industry is subject to extensive health and environmental regulation, any violation of which could subject us to significant liabilities and penalties We are subject to extensive and changing federal, state and foreign laws and regulations establishing health and environmental quality standards, and may be subject to liability or penalties for violations of those standards. We are also subject to laws and regulations governing remediation of contamination at facilities currently or formerly owned or operated by us or to which we have sent hazardous substances or wastes for treatment, recycling or disposal. We may be subject to future liabilities or obligations as a result of new or more stringent interpretations of existing laws and regulations. In addition, we may have liabilities or obligations in the future if we discover any environmental contamination or liability at any of our facilities, or at facilities we may acquire. We compete with a number of established companies, some of which have significantly greater financial, technological and marketing resources than we do and we may not be able to compete effectively with these companies We compete with numerous established companies. Some of these companies, particularly in the passenger-to-freighter conversion business, have significantly greater financial, technological and marketing resources than we do. Our ability to be an effective competitor will depend on our ability to remain the supplier of retrofit and refurbishment products and spare parts on the commercial fleets on which our products are currently in service. It will also depend on our success in causing our products to be selected for installation in new aircraft, including next-generation aircraft, and in avoiding product obsolescence. Our ability to maintain or expand our market position in the rapidly growing passenger-to-freighter conversion business will depend on our success in being selected to convert specific aircraft, our ability to maintain and enhance our engineering design, our certification and program management capabilities and our ability to effectively use our recent acquisitions to manufacture a broader range of structural components, connectors and fasteners used in this business. If we are unable to manufacture quality products and to deliver our products on time, we may be subject to increased costs or loss of customers or orders, which could reduce our results of operations During the latter part of fiscal 1999 and throughout fiscal 2000, we experienced significant operating inefficiencies in our seating programs which resulted in delayed deliveries to customers, increased re-work of seating products, claims for warranty, penalties, out of sequence charges, substantial increases in air freight and other expedite-related costs. In addition, as a result of our late customer deliveries, certain airlines diverted their seating programs to other manufacturers. To the extent we suffer any of these inefficiencies or shortcomings in the future we will likely experience significant penalties and loss of customers. Our acquisition strategy may be less successful than we expect and therefore, our growth may be limited We intend to consider future acquisitions. We intend to consider future strategic acquisitions, some of which could be material to us and which may include companies that are substantially equivalent or larger in size compared to us. We continually explore and conduct discussions with many third parties regarding possible acquisitions. As of the date of this Form 10-K, we have no acquisition agreements to acquire any business or assets. Our ability to continue to achieve our goals may depend upon our ability to identify and successfully acquire attractive companies, to effectively integrate such companies, achieve cost efficiencies and to manage these businesses as part of our Company. We may not be able to effectively manage or integrate the acquired companies. Further, we may not be successful in implementing appropriate operational, financial and management systems and controls to achieve the benefits expected to result from these acquisitions. Our efforts to integrate these businesses could be affected by a number of factors beyond our control, such as regulatory developments, general economic conditions, increased competition and the loss of certain customers resulting from the acquisitions. In addition, the process of integrating these businesses could cause an interruption of, or loss of momentum in, the activities of our existing business and the loss of key personnel and customers. The diversion of management's attention and any delays or difficulties encountered in connection with the transition and integration of these businesses could have a material adverse effect on our business and results of operations. Further, the benefits that we anticipate from these acquisitions may not develop. 35 We will have to finance any future acquisitions. Depending upon the acquisition opportunities available, we may need to raise additional funds or arrange for additional bank financing. We may seek such additional funds through public offerings or private placements of debt or equity securities or bank loans. Issuance of additional equity securities by us could result in substantial dilution to stockholders. The incurrence of additional indebtedness by us could have adverse consequences to stockholders as described above. In the absence of such financing, our ability to make future acquisitions in accordance with our business strategy, to absorb adverse operating results, to fund capital expenditures or to respond to changing business and economic conditions may be adversely affected, all of which may have a material adverse effect on our business, results of operations and financial condition. There are risks inherent in international operations that could have a material adverse effect on our business operations Our operations are primarily in the United States, with approximately 28% of our sales during the transition period ended December 31, 2002 coming from our foreign operations in the United Kingdom and The Netherlands. While the majority of our operations are based domestically, each of our facilities sells to airlines all over the world. As a result, 40% or more of our consolidated sales for the past three fiscal years were to airlines located outside the United States. We have direct investments in a number of subsidiaries in foreign countries (primarily in Europe). Fluctuations in the value of foreign currencies affect the dollar value of our net investment in foreign subsidiaries, with these fluctuations being included in a separate component of stockholders' equity. Operating results of foreign subsidiaries are translated into U.S. dollars at average monthly exchange rates. At December 31, 2002, we reported a cumulative foreign currency translation amount of $(11.6) in stockholders' equity as a result of foreign currency adjustments, and we may incur additional adjustments in future periods. In addition, the U.S. dollar value of transactions based in foreign currency (collections on foreign sales or payments for foreign purchases) also fluctuates with exchange rates. If in the future a substantial majority of our sales were not denominated in the currency of the country of product origin, we could face increased currency risk. Also, changes in the value of the U.S. dollar or other currencies could result in fluctuations in foreign currency translation amounts or the U.S. dollar value of transactions and, as a result, our net earnings could be adversely affected. Our largest foreign currency exposure results from activity in Euros and British pounds. We may engage in hedging transactions in the future to manage or reduce our foreign exchange risk. However, our attempts to manage our foreign currency exchange risk may not be successful and, as a result, our results of operations and financial condition could be adversely affected. Our foreign operations could also be subject to unexpected changes in regulatory requirements, tariffs and other market barriers and political and economic instability in the countries where we operate. Due to our foreign operations we could be subject to such factors in the future and the impact of any such events that may occur in the future could subject us to additional costs or loss of sales, which could adversely affect our operating results. Our total assets include substantial intangible assets. The write-off of a significant portion of unamortized intangible assets would negatively affect our results of operations Our total assets reflect substantial intangible assets. At December 31, 2002, goodwill and identified intangibles, net, represented approximately 48% of total assets and 736% of stockholders' equity. Intangible assets consist of goodwill and other identified intangible assets associated with our acquisitions, representing the excess of cost over the fair value of tangible assets we have acquired since 1989. We may not be able to realize the value of these assets. Goodwill and other intangible assets with indefinite lives are not amortized, but are reviewed at least annually for impairment. Acquired intangible assets with definite lives are amortized over their individual useful lives. In addition to goodwill, our intangible assets with indefinite lives consist of the M & M trademark. In accordance with SFAS No. 142, the goodwill and trademark with indefinite lives that were being amortized over periods ranging from 30 to 40 years follow the non-amortization approach beginning February 24, 2002. Patents and other intangible assets are amortized using the straight-line method over periods ranging from three to thirty years (see note 7 to our consolidated financial statements). On at least an annual basis, we assess whether there has been an impairment in the value of intangible assets. If the carrying value of the asset exceeds the estimated undiscounted future cash flows from operating activities of the related business, an impairment is deemed to have occurred. In this event, the amount is written down accordingly. Under current accounting rules, this would result in a charge of operating earnings. Any determination requiring the write-off of a significant portion of unamortized goodwill and identified intangible assets would negatively affect our results of operations and total capitalization, which could be material. As of December 31, 2002, we have determined that no impairment existed. 36 Risks Associated with our Capital Stock Provisions in our charter documents may discourage potential acquisitions of our company, even those which the holders of a majority of our common stock may favor Our restated certificate of incorporation and by-laws contain provisions that may have the effect of discouraging a third party from making an acquisition of us by means of a tender offer, proxy contest or otherwise. Our restated certificate of incorporation and by-laws: o Classify the board of directors into three classes, with directors of each class serving for a staggered three-year period; o Provide that directors may be removed only for cause and only upon the approval of the holders of at least two-thirds of the voting power of our shares entitled to vote generally in the election of such directors; o Require at least two-thirds of the voting power of our shares entitled to vote generally in the election of directors to alter, amend or repeal the provisions relating to the classified board and removal of directors described above; o Permit the board of directors to fill vacancies and newly created directorships on the board; o Restrict the ability of stockholders to call special meetings; and o Contain advance notice requirements for stockholder proposals. Such provisions would make the removal of incumbent directors more difficult and time-consuming and may have the effect of discouraging a tender offer or other takeover attempt not previously approved by the board of directors. Our board of directors has declared a dividend of one preferred share purchase right for each share of common stock outstanding. A right will also be attached to each share of common stock subsequently issued. The rights will have certain anti-takeover effects. If triggered, the rights would cause substantial dilution to a person or group of persons that acquires more than 15.0% of our common stock on terms not approved by our board of directors. The rights could discourage or make more difficult a merger, tender offer or other similar transaction. Under our restated certificate of incorporation, our board of directors also has the authority to issue preferred stock in one or more series and to fix the powers, preferences and rights of any such series without stockholder approval. The board of directors could, therefore, issue, without stockholder approval, preferred stock with voting and other rights that could adversely affect the voting power of the holders of common stock and could make it more difficult for a third party to gain control of us. In addition, under certain circumstances, Section 203 of the Delaware General Corporation Law makes it more difficult for an "interested stockholder", or generally a 15% stockholder, to effect various business combinations with a corporation for a three-year period. You may not receive cash dividends on our shares We have never paid a cash dividend and do not plan to pay cash dividends on our common stock in the foreseeable future. We intended to retain our earnings to finance the development and expansion of our business and to repay indebtedness. Also, our ability to declare and pay cash dividends on our common stock is restricted by covenants in our outstanding notes and amended bank credit facility. 37 If the price of our common stock continues to fluctuate significantly, you could lose all or a part of your investment Since the beginning of the transition period ending on December 31, 2002, the closing price of our common stock has ranged from a low of $2.62 to a high of $14.05. The price of our common stock is subject to sudden and material increases and decreases, and decreases could adversely affect investments in our common stock. The price of our common stock could fluctuate widely in response to: o Our quarterly operating results; o Changes in earnings estimates by securities analysts; o Changes in our credit ratings; o Changes in our business; o Changes in the market's perception of our business; o Changes in the businesses, earnings estimates or market perceptions of our competitors or customers; o Changes in the outlook for the airline industry; o Changes in general market or economic conditions; o Changes in the legislative or regulatory environment; o A prolonged war with Iraq or other outbreak or escalation of national or international hostilities; and o Terrorist attacks. In addition, the stock market has experienced extreme price and volume fluctuations in recent years that have significantly affected the quoted prices of the securities of many companies, including companies in our industry. The changes often appear to occur without regard to specific operating performance. The price of our common stock could fluctuate based upon factors that have little or nothing to do with our company and these fluctuations could materially reduce our stock price. FORWARD-LOOKING STATEMENTS This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 31E of the Securities Exchange Act of 1934, including statements regarding the future benefits of our consolidation program, implementation and expected benefits of lean manufacturing and continuous improvement programs, our dealings with customers and partners, the integration of acquired businesses, productivity improvements from recent information technology investments, ongoing capital expenditures, the adequacy of funds to meet our capital requirements, the ability to refinance our indebtedness, if necessary, the reduction of debt, the potential impact of new accounting pronouncements, the impact on our business of the September 11, 2001 terrorist attacks, the recovery of the airline industry and the impact on our business of a prolonged war with Iraq. These forward-looking statements include risks and uncertainties, and our actual experience may differ materially from that anticipated in such statements. Factors that might cause such a difference include those discussed in our filings with the Securities and Exchange Commission, under the heading "Risk Factors" in this Form 10-K, as well as future events that may have the effect of reducing our available operating income and cash balance, such as unexpected operating losses, the impact of rising fuel prices on our airline customers, delays in, or unexpected costs associated with, the integration of our acquired businesses, conditions in the airline industry, problems meeting customer delivery requirements, our success in winning new or expected refurbishment contracts from customers, capital expenditures, cash expenditures related to possible future acquisitions, facility closures, product transition costs, labor disputes involving us, our significant customers or airframe manufacturers, the possibility of a write-down of intangible assets, delays or inefficiencies in the introduction of new products or fluctuations in currency exchange rates. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented herein. These statements should be considered only after carefully reading this entire Form 10-K and the documents incorporated herein by reference. 38 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to a variety of risks, including foreign currency fluctuations and changes in interest rates affecting the cost of our variable-rate debt. Foreign currency - We have direct operations in Europe that receive revenues from customers in various currencies and purchase raw materials and component parts from foreign vendors in various currencies. Accordingly, we are exposed to transaction gains and losses that could result from changes in foreign currency exchange rates relative to the U.S. dollar. The largest foreign currency exposure results from activity in British pounds and Euros. From time to time, we and our foreign subsidiaries may enter into foreign currency exchange contracts to manage risk on transactions conducted in foreign currencies. At December 31, 2002, we had no outstanding forward currency exchange contracts. We did not enter into any other derivative financial instruments. Interest Rates - At December 31, 2002, we had adjustable rate debt of $144.0 and fixed rate debt of $699.7. The weighted average interest rate for the adjustable and fixed rate debt was approximately 4.6% and 8.7%, respectively, at December 31, 2002. If interest rates were to increase by 10% above current rates, the estimate impact on our financial statements would be to reduce pretax income by approximately $0.7. We do not engage in transactions intended to hedge our exposure to changes in interest rates. As of December 31, 2002, we maintained a portfolio of securities consisting mainly of taxable, interest-bearing deposits with weighted average maturities of less than three months. If short-term interest rates were to increase or decrease by 10%, we estimate interest income would increase or decrease by approximately $0.2. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this section is set forth beginning from page F-1 of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. [Remainder of page intentionally left blank] 39 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth information regarding our directors and executive officers as of January 27, 2002. Officers of the Company are elected annually by the Board of Directors.
Title Age Position - ----- --- -------- Amin J. Khoury........... 63 Chairman of the Board Robert J. Khoury......... 60 President, Chief Executive Officer and Director Jim C. Cowart............ 51 Director * Richard G. Hamermesh..... 54 Director* Brian H. Rowe............ 71 Director** Jonathan M. Schofield.... 62 Director*,** Thomas P. McCaffrey...... 48 Corporate Senior Vice President of Administration and Chief Financial Officer Michael B. Baughan....... 43 Senior Vice President and General Manager, Commercial Aircraft Products Group Robert A. Marchetti...... 60 Group Vice President and General Manager, Fastener Distribution Group Mark D. Krosney.......... 56 Group Vice President and General Manager, Business Jet Group Edmund J. Moriarty....... 59 Corporate Vice President-Law, General Counsel and Secretary Jeffrey P. Holtzman...... 47 Vice President-Finance and Treasurer Stephen R. Swisher....... 44 Vice President-Finance and Controller - -------- * Member, Audit Committee ** Member, Stock Option and Compensation Committee
[Remainder of page intentionally left blank] 40 Director Classification Our Restated Certificate of Incorporation provides that the Board of Directors is to be divided into three classes, each nearly as equal in number as possible, so that each director (in certain circumstances after a transitional period) will serve for three years, with one class of directors being elected each year. The Board is currently comprised of two Class I Directors (Brian H. Rowe and Jim C. Cowart), two Class II Directors (Robert J. Khoury and Jonathan M. Schofield) and two Class III Directors (Amin J. Khoury and Richard G. Hamermesh). The terms of the Class I, Class II and Class III Directors expire at the end of each respective three-year term and upon the election and qualification of successor directors at annual meetings of stockholders held at the end of each fiscal year. Our executive officers are elected annually by the Board of Directors following the annual meeting of stockholders and serve at the discretion of the Board of Directors. Current Directors Amin J. Khoury has been our Chairman of the Board since July 1987 when he founded the Company and was Chief Executive Officer until April 1, 1996. Mr. Khoury is currently the Chairman of the Board of Directors and Chief Executive Officer of Applied Extrusion Technologies, Inc., a manufacturer of oriented polypropylene films used in consumer products labeling and packaging applications, a member of the Board of Directors of Brooks Automation, Inc., a leading supplier of integrated automation solutions for the global semiconductor, data storage and flat panel display manufacturing industries, and a member of the Board of Directors of Synthes-Stratec, the world's leading orthopedic trauma medical device company. Mr. Khoury is the brother of Robert J. Khoury. Robert J. Khoury has been a Director since July 1987, when he co-founded the Company. He currently serves as President and Chief Executive Officer. From April 1996 through August 2000, he served as Vice Chairman. Mr. Khoury is a board member of Mar-Test, Inc., a leading test lab for low cycle fatigue testing. Mr. Khoury is the brother of Amin J. Khoury. Jim C. Cowart has been a Director since November 1989. Mr. Cowart is currently a Principal of Cowart & Co. LLC and Auriga Partners, Inc., private capital firms that provide strategic planning, competitive analysis, financial relations and other services. From August 1999 to May 2001, he was Chairman of QualPro Corporation, an aerospace components manufacturing company, and from February 1998 to November 2000, Mr. Cowart was Chairman and CEO of E-Com Architects, Inc., a computer software company. From January 1993 to November 1997, he was the Chairman and CEO of Aurora Electronics Inc. Previously, Mr. Cowart was a founding general partner of Capital Resource Partners, a private investment capital manager, and he held various positions in investment banking and venture capital with Lehman Brothers, Shearson Venture Capital and Kidder, Peabody & Co. Richard G. Hamermesh has been a Director since July 1987. Dr. Hamermesh is currently a Professor of Management Practice at the Harvard Business School. From 1987 to 2001, he was a co-founder and a Managing Partner of The Center for Executive Development, an executive education and development-consulting firm. Prior to this, from 1976 to 1987, Dr. Hamermesh was a member of the faculty of the Harvard Business School. He is also an active investor and entrepreneur, having participated as a principal, director and investor in the founding and early stages of more than 15 organizations. Dr. Hamermesh is also a director of Applied Extrusion Technologies, Inc., a manufacturer of oriented polypropylene films used in consumer products labeling and packaging applications. Brian H. Rowe has been a Director since July 1995. He is currently Chairman Emeritus of GE Aircraft Engines, a principal business unit of the General Electric Company, where he also served as Chairman from September 1993 through January 1995 and as President from 1979 through 1993. Since February 2001, Mr. Rowe has acted as Chairman of Atlas Air, an air cargo carrier, where he has served as a director since March 1995. Mr. Rowe is also a director of the following companies since the date listed: December 1995--Textron Inc., a manufacturer of aircraft, automobile components, an industrial segment, systems and components for commercial aerospace and defense industries, and financial services; and December 1998--Acterna Corporation, a test equipment and communication systems manufacturing company. 41 Jonathan M. Schofield has been a Director since April 2001. Mr. Schofield recently retired from Airbus Industrie of North America, Inc., a subsidiary of Airbus Industrie, a manufacturer of large civil aircraft. From December 1992 through February 2000, Mr. Schofield served as Chairman of the Board and CEO, and served as Chairman from February 2000 until his retirement in March 2001. From 1989 until he joined Airbus, Mr. Schofield was President of United Technologies International Corporation. Mr. Schofield presently sits on the Boards of Aviall, Inc. and SS&C Technologies, Inc., and is a trustee of LIFT Trust. Executive Officers Thomas P. McCaffrey has been Corporate Senior Vice President of Administration and Chief Financial Officer since May 1993. From August 1989 through May 1993, Mr. McCaffrey was an Audit Director with Deloitte & Touche LLP, and from 1976 through 1989 served in several capacities, including Audit Partner, with Coleman & Grant. Michael B. Baughan has been Senior Vice President and General Manager of Commercial Aircraft Products since July 2002. From May 1999 to July 2002, Mr. Baughan was Group Vice President and General Manager of Seating Products. From September 1994 to May 1999, Mr. Baughan was Vice President, Sales and Marketing for Seating Products. Prior to 1994, Mr. Baughan held various positions including President of AET Systems, Manager of Strategic Initiatives at The Boston Company (American Express) and Sales Representative at Dow Chemical Company. Robert A. Marchetti has been Group Vice President and General Manager of Fastener Distribution Group since April 2002. From February 2001 to April 2002, Mr. Marchetti was Group Vice President of Machined Products Group. From 1997 to January 2001 Mr. Marchetti was with Fairchild Corporation's Fasteners Division with his last position being Senior Vice President and Chief Operating Officer. From 1990 to 1997, Mr. Marchetti served as a corporate officer of UNC Inc. where he held several senior positions, Corporate VP of Marketing, President of Tri-Remanufacturing and Chief Operating Officer of the Accessory Overhaul Division. From 1989 to 1990, he served as President of AWA Incorporated. From 1986 through 1989, Mr. Marchetti was Vice President of Marketing at General Electric Aircraft Engines and he was General Manager for a Component Repair Division. Prior to that he held several sales and general management positions from 1965 through 1986 with Copperweld Corporation and Carlisle Corporation. Mark D. Krosney has been Group Vice President and General Manager of Business Jet Group since January 2001. From February 1996 through December 2000, Mr. Krosney was Vice President of Engineering for Seating Products. From 1994 to 1996, Mr. Krosney served as General Manager for A.W. Chesterton. From 1992 to 1994, Mr. Krosney was with Johnson Controls, Automotive System Group, where his last position was General Manager of the Seat Mechanisms Group. Prior to that he was with United Technologies Corporation for 22 years, where he held positions as Divisional Director of Technology for Control Systems, Director of Product Development and Marketing of Diesel Systems and member of the Senior Committee for UTC Corporation. Edmund J. Moriarty has been Corporate Vice President-Law, General Counsel and Secretary since November 16, 1995. From 1991 to 1995, Mr. Moriarty served as Vice President and General Counsel to Rollins, Inc., a national service company. From 1982 through 1991, Mr. Moriarty served as Vice President and General Counsel to Old Ben Coal Company, a wholly owned coal subsidiary of The Standard Oil Company. Jeffrey P. Holtzman has been Vice President-Finance and Treasurer since August 1999. Mr. Holtzman has been a Vice President since November 1996 and Treasurer since September 1993. From June 1986 to July 1993, Mr. Holtzman served in several capacities at FPL Group, Inc., including Assistant Treasurer and Manager of Financial Planning. Mr. Holtzman previously worked for Mellon Bank, Gulf Oil Corporation and Ernst & Young L.L.P. Stephen R. Swisher has been Vice President-Finance and Controller since August 1999. Mr. Swisher has been Controller since 1996 and served as Director of Finance from 1994 to 1996. Prior to 1994, Mr. Swisher held various positions, including Accounting Manager at Burger King Corporation and Audit Manager with Deloitte & Touche LLP. 42 Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive officers, and persons who own more than ten percent of a registered class of our equity securities, to file with the Securities and Exchange Commission (the "SEC") initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Officers, directors and greater-than-ten-percent shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. To our knowledge, based solely on a review of the copies of such reports furnished to us and, with respect to our officers and directors, written representations that no other reports were required, during the transition period ended December 31, 2002, all Section 16(a) filing requirements applicable to our officers, directors and greater-than-ten-percent beneficial owners were complied with. In making the above statements, we have relied on the written representations of our directors and officers and copies of the reports that have been filed with the SEC. [Remainder of this page intentionally left blank] 43 ITEM 11. EXECUTIVE COMPENSATION Information set forth under the caption "Executive Compensation" in the Proxy Statement is incorporated by reference herein. The Compensation Committee Report and the Performance Graph included in the Proxy Statement are not incorporated herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information set forth under the captions "Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information" in the Proxy Statement is incorporated by reference herein. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information set forth under the caption "Certain Relationships and Related Transactions" in the Proxy Statement is incorporated by reference herein. ITEM 14. CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures - Our principal executive officer and our principal financial officer, after evaluating, together with management, the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) within 90 days of the date of filing this report, have concluded that, as of such date, our disclosure controls and procedures were adequate and effective to ensure that material information relating to our company and our consolidated subsidiaries would be made known to them by others within those entities. Changes in internal controls - There were no significant changes in our internal controls or in other factors that could significantly affect our disclosure controls and procedures subsequent to the date of their evaluation, nor were there any significant deficiencies or material weaknesses in our internal controls. As a result, no corrective actions were required or undertaken. [Remainder of this page intentionally left blank] 44 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Form 10-K: 1. Consolidated Financial Statements Independent Auditors' Report. Consolidated Balance Sheets, December 31, 2002 and February 23, 2002. Consolidated Statements of Operations and Comprehensive Income (Loss) for the Ten-Month Transition Period ended December 31, 2002 and for the Fiscal Years Ended February 23, 2002 and February 24, 2001 Consolidated Statements of Stockholders' Equity for the Ten-Month Transition Period Ended December 31, 2002 and for the Fiscal Years Ended February 23, 2002 and February 24, 2001 Consolidated Statements of Cash Flows for the Ten-Month Transition Period Ended December 31, 2002 and for the Fiscal Years Ended February 23, 2002 and February 24, 2001 Notes to Consolidated Financial Statements for the Ten-Month Transition Period Ended December 31, 2002 and for the Fiscal Years Ended February 23, 2002 and February 24, 2001 2. Consolidated Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts All other consolidated financial statement schedules are omitted because such schedules are not required or the information required has been presented in the aforementioned consolidated financial statements. 3. Exhibits - The exhibits listed in the following "Index to Exhibits" are filed with this Form 10-K or incorporated by reference as set forth below. (b) The following reports on Form 8-K were filed during the period from November 24, 2002 to December 31, 2002: Form 8-K, dated and filed December 17, 2002, includes a press release containing earnings information, including certain unaudited financial information. (c) The exhibits listed in the "Index to Exhibits" below are filed with this Form 10-K or incorporated by reference as set forth below. (d) Additional Financial Statement Schedules - None. 45 INDEX TO EXHIBITS Exhibit Number Description Exhibit 3 Articles of Incorporation and By-Laws 3.1 Amended and Restated Certificate of Incorporation (1) 3.2 Certificate of Amendment of the Restated Certificate of Incorporation (2) 3.3 Certificate of Amendment of the Restated Certificate of Incorporation (5) 3.4 Amended and Restated By-Laws * Exhibit 4 Instruments Defining the Rights of Security Holders, including debentures 4.1 Specimen Common Stock Certificate (1) 4.2 Form of Note for the Registrant's 9 1/2% Senior Subordinated Notes (7) 4.3 Indenture dated November 2, 1998 between The Bank of New York, as trustee, and the Registrant relating to the Registrant's 9 1/2% Senior Subordinated Notes (7) 4.4 Form of Note for the Registrant's 8% Series B Senior Subordinated Notes (3) 4.5 Indenture dated February 13, 1998 for the Registrant's issue of 8% Senior Subordinated Notes (3) 4.6 Indenture dated April 17, 2001 between The Bank of New York, as trustee, and the Registrant relating to the Registrant's 8 7/8% Senior Subordinated Notes and Series B 8 7/8% Senior Subordinated Notes (12) 4.7 Form of Note for the Registrant's 8 7/8% Senior Subordinated Notes and Series B Subordinated Notes (12) 4.8 Rights Agreement between the Registrant and BankBoston, N.A., as rights agent, dated as of November 12, 1998 (6) Exhibit 10(i) Material Contracts 10.1 Credit Agreement dated as of August 21, 2001 between the Registrant, Lenders, JP Morgan Securities Inc. and The Chase Manhattan Bank (14) 10.2 Amendment No. 1 to the Credit Agreement dated as of December 14, 2001 (19) 10.3 Amendment No. 2 to the Credit Agreement dated as of January 23, 2003 (20) 10.4 Amendment No. 3 to the Credit Agreement dated as of March 4, 2003* 10.5 Agreement dated as of January 25, 1999 between the Registrant and Sextant Avionics, Inc. related to the sale of a 51% interest in the Registrant's in-flight entertainment business (17) 10.6 Agreement dated as of September 1, 1999 with Thomson-CSF Sextant, Inc. for the sale of a 49% interest in the Registrant's in-flight entertainment business (10) 10.7 Acquisition Agreement dated as of August 10, 2001 between the Registrant and the Shareholders of M&M Aerospace, Inc. (13) 46 Exhibit Number Description Exhibit 10(iii) Executive Compensation Plans and Arrangements 10.8 Amended and Restated Employment Agreement as of September 14, 2001 Between the Registrant and Amin J. Khoury. (14) 10.9 Amendment No. 1 to Amended and Restated Employment Agreement dated May 15, 2002 between the Registrant and Amin J. Khoury. (19) 10.10 Amended and Restated Employment Agreement as of September 14, 2001 Between the Registrant and Robert J. Khoury. (14) 10.11 Amendment No. 1 to Amended and Restated Employment Agreement dated May 15, 2002 between the Registrant and Robert J. Khoury. (19) 10.12 Amended and Restated Employment Agreement as of September 14, 2001 Between the Registrant and Thomas P. McCaffrey. (14) 10.13 Amendment No. 1 to Amended and Restated Employment Agreement dated September 14, 2001 between the Registrant and Thomas P. McCaffrey. (18) 10.14 Amendment No. 2 to Amended and Restated Employment Agreement dated May 15, 2002 between the Registrant and Thomas P. McCaffrey. (19) 10.15 Employment Agreement dated as of March 6, 1998 between the Registrant and Scott A. Smith. (19) 10.16 Employment Agreement dated as of December 7, 1997 between the Registrant and Roman G. Ptakowski. (19) 10.17 Employment Agreement dated as of May 28, 1999 between the Registrant and Michael B. Baughan. (19) 10.18 Employment Agreement dated as of January 15, 2001 between the Registrant and Mark D. Krosney. (19) 10.19 Employment Agreement dated as of February 26, 2001 between the Registrant and Robert A. Marchetti. (19) 10.20 Amended and Restated 1989 Stock Option Plan. (15) 10.21 Amendment No. 1 to Amended and Restated 1989 Stock Option Plan. (9) 10.22 1991 Directors' Stock Option Plan. (4) 10.23 United Kingdom 1992 Employee Share Option Scheme. (2) 10.24 1996 Stock Option Plan. (15) 10.25 Amendment No. 1 to the 1996 Stock Option Plan. (9) 10.26 Amendment No. 2 to the 1996 Stock Option Plan. (11) 10.27 2001 Stock Option Plan. (16) 10.28 2001 Directors' Stock Option Plan. (16) 10.29 1994 Employee Stock Purchase Plan (Amended and Restated as of January 19, 2000). (11) 10.30 Supplemental Executive Deferred Compensation Plan III. (8) 10.31 Amendment No. 3 to Amended and Restated Employment Agreement dated March 24, 2003 between the Registrant and Thomas P. McCaffrey* Exhibit 12 Statements re computation of ratios 12.1 Statement of computation of ratio of earnings to fixed charges* Exhibit 14 Code of Ethics 14.1 Code of Business Conduct* Exhibit 21 Subsidiaries of the Registrant 21.1 Subsidiaries * Exhibit 23 Consents of Experts and Counsel 23.1 Consent of Independent Accountants - Deloitte & Touche LLP* Exhibit 99 Additional Exhibits 99.1 Section 906 Certifications* - ------------------ * Filed herewith. 47 (1) Incorporated by reference to the Company's Registration Statement on Form S-1, as amended (No. 33-33689), filed with the Commission on March 7, 1990. (2) Incorporated by reference to the Company's Registration Statement on Form S-1, as amended (No. 333-54146), filed with the Commission on November 3, 1992. (3) Incorporated by reference to the Company's Registration Statement on Form S-4 (No. 333-47649), filed with the Commission on March 10, 1998. (4) Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 333-48010), filed with the Commission on May 26, 1992. (5) Incorporated by reference to the Company's Registration Statement on Form S-3 (No. 333-60209), filed with the Commission on July 30, 1998. (6) Incorporated by reference to the Company's Current Report on Form 8-K dated November 12, 1998, filed with the Commission on November 18, 1998. (7) Incorporated by reference to the Company's Registration Statement on Form S-4 (No. 333-67703), filed with the Commission on January 13, 1999. (8) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended May 29, 1999, filed with the Commission on July 9, 1999. (9) Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 333-89145), filed with the Commission on October 15, 1999. (10) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended November 27, 1999, filed with the Commission on January 7, 2000. (11) Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 333-30578), filed with the Commission on February 16, 2000. (12) Incorporated by reference to the Company's Registration Statement on Form S-4 (No. 333-62674) as filed with the Commission on June 8, 2001. (13) Incorporated by reference to the Company's Current Report on Form 8-K dated August 10, 2001 and filed with the Commission on August 21, 2001. (14) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended August 25, 2001, filed with the Commission on October 9, 2001. (15) Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 333-14037), filed with the Commission on October 15, 1996. (16) Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 333-71442), filed with the Commission on October 11, 2001. (17) Incorporated by reference to the Company's Current Report on Form 8-K dated February 25, 1999, filed with the Commission on March 12, 1999. (18) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended November 24, 2001, filed with the Commission on January 8, 2002. (19) Incorporated by reference to the Company's Annual Report on Form 10-K/A for the fiscal year ended February 23, 2002, filed with the Commission on May 29, 2002. (20) Incorporated by reference to the Company's Current Report on Form 8-K dated January 23, 2003, filed with the Commission on January 24, 2003. 48 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. BE AEROSPACE, INC. By: /s/ Robert J. Khoury -------------------- Robert J. Khoury President and Chief Executive Officer Date: March 26, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ Amin J. Khoury Chairman March 26, 2003 - ------------------ Amin J. Khoury /s/ Robert J. Khoury President and Chief Executive Officer March 26, 2003 - -------------------- Robert J. Khoury Corporate Senior Vice President of Administration and Chief Financial Officer /s/ Thomas P. McCaffrey (principal financial and accounting officer) March 26, 2003 - ----------------------- Thomas P. McCaffrey /s/ Jim C. Cowart Director March 26, 2003 - ----------------- Jim C. Cowart /s/ Richard G. Hamermesh Director March 26, 2003 - ------------------------ Richard G. Hamermesh /s/ Brian H. Rowe Director March 26, 2003 - ----------------- Brian H. Rowe /s/ Jonathan M. Schofield Director March 26, 2003 - ------------------------- Jonathan M. Schofield
49 CERTIFICATION I, Robert J. Khoury, certify that: 1. I have reviewed this annual report on Form 10-K of BE Aerospace, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrants as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect the internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 26, 2003 By: /s/ Robert J. Khoury -------------------- Robert J. Khoury President and Chief Executive Officer 50 CERTIFICATION I, Thomas P. McCaffrey, certify that: 1. I have reviewed this annual report on Form 10-K of BE Aerospace, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect the internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 26, 2003 By: /s/ Thomas P. McCaffrey ----------------------- Thomas P. McCaffrey Corporate Senior Vice President of Administration and Chief Financial Officer 51 ITEM 8. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE Page ---- Independent Auditors' Report F-2 Consolidated Financial Statements: Consolidated Balance Sheets, December 31, 2002 and February 23, 2002 F-3 Consolidated Statements of Operations and Comprehensive Income F-4 (Loss) for the Ten-Month Transition Period Ended December 31, 2002 and for the Fiscal Years Ended February 23, 2002 and February 24, 2001 Consolidated Statements of Stockholders' Equity for the Ten-Month F-5 Transition Period Ended December 31, 2002 and for the Fiscal Years Ended February 23, 2002 and February 24, 2001 Consolidated Statements of Cash Flows for the Ten-Month Transition F-6 Period Ended December 31, 2002 and for the Fiscal Years Ended February 23, 2002 and February 24, 2001 Notes to Consolidated Financial Statements for the Ten-Month F-7 Transition Period Ended December 31, 2002 and for the Fiscal Years Ended February 23, 2002 and February 24, 2001 Consolidated Financial Statement Schedule: Schedule II - Valuation and Qualifying Accounts for the Ten-Month F-25 Transition Period Ended December 31, 2002 and for the Fiscal Years Ended February 23, 2002 and February 24, 2001 [Remainder of page intentionally left blank] F-1 INDEPENDENT AUDITORS' REPORT ---------------------------- The Board of Directors and Stockholders BE Aerospace, Inc. Wellington, Florida We have audited the accompanying consolidated balance sheets of BE Aerospace, Inc. and subsidiaries (the "Company") as of December 31, 2002 and February 23, 2002, and the related consolidated statements of operations and comprehensive income (loss), stockholders' equity, and cash flows for the 10-month period from February 24, 2002 to December 31, 2002 and the fiscal years ended February 23, 2002 and February 24, 2001. Our audits also included the financial statement schedule listed in item 15(a). These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit 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, such consolidated financial statements present fairly, in all material respects, the financial position of BE Aerospace, Inc. and subsidiaries as of December 31, 2002 and February 23, 2002, and the results of their operations and their cash flows for the 10-month period from February 24, 2002 to December 31, 2002 and the fiscal years ended February 23, 2002 and February 24, 2001, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As discussed in Note 1 to the consolidated financial statements, in 2002 the Company changed its method of accounting for goodwill and intangible assets. /s/ DELOITTE & TOUCHE LLP Costa Mesa, California March 4, 2003 F-2 CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 2002 AND FEBRUARY 23, 2002 - -------------------------------------------------------------------- (In millions, except share data)
December 31, February 23, 2002 2002 ----------------- ---------------- ASSETS - ------ Current Assets: Cash and cash equivalents $ 156.9 $ 159.5 Accounts receivable - trade, less allowance for doubtful accounts of $3.9 (December 31, 2002) and $4.9 (February 23, 2002) 73.8 93.3 Inventories, net 163.2 157.0 Other current assets 22.8 46.6 --------- ---------- Total current assets 416.7 456.4 Property and equipment, net 115.5 142.7 Goodwill, net 344.7 333.1 Identified intangibles, net 165.2 172.9 Other assets, net 25.0 23.2 --------- ---------- $ 1,067.1 $ 1,128.3 ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current Liabilities: Accounts payable and accrued liabilities $ 136.9 $ 150.3 Current portion of long-term debt 16.9 1.3 --------- ---------- Total current liabilities 153.8 151.6 --------- ---------- Long-term debt 836.0 853.5 Other liabilities 8.0 2.1 Commitments, contingencies and off-balance sheet arrangements (Note 10) Stockholders' Equity: Preferred stock, $0.01 par value; 1.0 million shares authorized; no shares outstanding -- -- Common stock, $0.01 par value; 100.0 million shares authorized; 35.2 million (December 31, 2002) and 34.4 million (February 23, 2002) shares issued and outstanding 0.3 0.3 Additional paid-in capital 410.1 405.3 Accumulated deficit (329.5) (258.7) Accumulated other comprehensive loss (11.6) (25.8) --------- ---------- Total stockholders' equity 69.3 121.1 --------- ---------- $ 1,067.1 $ 1,128.3 ========= ==========
See notes to consolidated financial statements. F-3 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) FOR THE TEN-MONTH TRANSITION PERIOD ENDED DECEMBER 31, 2002 AND FOR THE FISCAL YEARS ENDED FEBRUARY 23, 2002 AND FEBRUARY 24, 2001 - ----------------------------------------------------------------------------- (In millions, except per share data)
Transition Fiscal Year Ended Period Ended --------------------------------------- December 31, February 23, February 24, 2002 2002 2001 ------------------ -------------------- ------------------ Net sales $ 503.6 $ 680.5 $ 666.4 Cost of sales (Note 4) 352.3 530.1 416.6 ------- ------- ------- Gross profit 151.3 150.4 249.8 Operating expenses: Selling, general and administrative 98.5 139.4 124.2 Research, development and engineering 34.1 43.5 48.9 Legal settlement 29.5 -- -- ------- ------- ------- Total operating expenses 162.1 182.9 173.1 ------- ------- ------- Operating (loss) earnings (10.8) (32.5) 76.7 Interest expense, net 57.3 60.5 54.2 ------- ------- ------- (Loss) earnings before income taxes and extraordinary item (68.1) (93.0) 22.5 Income taxes 2.7 1.8 2.2 ------- ------- ------- (Loss) earnings before extraordinary item (70.8) (94.8) 20.3 Extraordinary item -- 9.3 -- ------- ------- ------- Net (loss) earnings (70.8) (104.1) 20.3 Other comprehensive income (loss): Foreign exchange translation adjustment 14.2 (3.9) (11.3) ------- ------- ------- Comprehensive (loss) income $ (56.6) $(108.0) $ 9.0 ======= ======= ======= Basic net (loss) earnings per share before extraordinary item $ (2.03) $ (2.90) $ 0.80 Extraordinary item -- (0.28) -- ------- ------- ------- Basic net (loss) earnings per share $ (2.03) $ (3.18) $ 0.80 ======= ======= ======= Weighted average common shares 34.9 32.7 25.4 ======== ======= ======= Diluted net (loss) earnings per share before extraordinary item $ (2.03) $ (2.90) $ 0.78 Extraordinary item -- (0.28) -- -------- ------- ------- Diluted net (loss) earnings per share $ (2.03) $ (3.18) $ 0.78 ======= ======= ======= Weighted average common shares 34.9 32.7 25.9 ======= ======= =======
See notes to consolidated financial statements. F-4 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE TEN-MONTH TRANSITION PERIOD ENDED DECEMBER 31, 2002 AND FOR THE FISCAL YEARS ENDED FEBRUARY 23, 2002 AND FEBRUARY 24, 2001 - ---------------------------------------------------------------------- (In millions)
Accumulated Additional Other Total Common Stock Paid-in Accumulated Comprehensive Stockholders' Shares Amount Capital Deficit Income (Loss) Equity ------ ------ ---------- ----------- ------------- ------------- Balance, February 26, 2000 24.9 $0.2 $249.7 $(174.9) $(10.6) $ 64.4 Sale of stock under employee stock purchase plan 0.3 -- 2.1 -- -- 2.1 Exercise of stock options 0.6 -- 6.4 -- -- 6.4 Employee benefit plan matching contribution 0.2 -- 1.9 -- -- 1.9 Issuance of stock in connection with acquisitions 2.5 0.1 51.4 -- -- 51.5 Net earnings -- -- -- 20.3 -- 20.3 Foreign currency translation adjustment -- -- -- -- (11.3) (11.3) ----- ------ -------- -------- -------- -------- Balance, February 24, 2001 28.5 0.3 311.5 (154.6) (21.9) 135.3 Sale of stock under employee stock purchase plan 0.1 -- 1.9 -- -- 1.9 Exercise of stock options 0.4 -- 4.2 -- -- 4.2 Employee benefit plan matching contribution 0.2 -- 2.6 -- -- 2.6 Issuance of stock in connection with acquisitions 2.4 -- 42.9 -- -- 42.9 Sale of common stock under public offering 2.8 -- 42.2 -- -- 42.2 Net loss -- -- -- (104.1) -- (104.1) Foreign currency translation adjustment -- -- -- -- (3.9) (3.9) ----- ------ -------- --------- ------- -------- Balance, February 23, 2002 34.4 0.3 405.3 (258.7) (25.8) 121.1 Sale of stock under employee stock purchase plan 0.3 -- 1.8 -- -- 1.8 Exercise of stock options 0.2 -- 1.3 -- -- 1.3 Employee benefit plan matching contribution 0.3 -- 1.7 -- -- 1.7 Net loss -- -- -- (70.8) -- (70.8) Foreign currency translation adjustment -- -- -- -- 14.2 14.2 ----- ------ -------- --------- ------- -------- Balance, December 31, 2002 35.2 $0.3 $410.1 $(329.5) $(11.6) $ 69.3 ===== ====== ======== ========= ======= ========
See notes to consolidated financial statements. F-5 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE TEN-MONTH TRANSITION PERIOD ENDED DECEMBER 31, 2002 AND FOR THE FISCAL YEARS ENDED FEBRUARY 23, 2002 AND FEBRUARY 24, 2001 - ----------------------------------------------------------------------- (In millions)
Ten-Month Transition Fiscal Year Ended Period Ended -------------------------------------- December 31, February 23, February 24, 2002 2002 2001 -------------------- ------------------- ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) earnings $ (70.8) $ (104.1) $ 20.3 Adjustments to reconcile net (loss) earnings to net cash flows provided by operating activities: Extraordinary item -- 9.3 -- Depreciation and amortization 24.7 46.8 42.8 Provision for doubtful accounts 0.8 1.9 0.6 Loss on disposal of property and equipment 0.5 -- -- Impairment of property and equipment, inventories and other assets 7.0 62.9 -- Impairment of intangible assets -- 20.4 -- Non-cash employee benefit plan contributions 1.8 2.6 1.9 Legal settlement 29.5 -- -- Changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable 22.2 19.7 6.0 Inventories (8.5) 3.9 (6.4) Other current assets (4.8) 31.3 1.8 Payables, accruals and other liabilities (15.9) (36.8) (9.1) ------- --------- -------- Net cash flows (used in) provided by operating activities (13.5) 57.9 57.9 ------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions, net of cash acquired (6.5) (207.9) -- Capital expenditures (17.4) (13.9) (17.2) Proceeds from real estate sales 33.4 -- -- Change in intangibles and other assets (2.6) (9.2) (0.9) ------- --------- -------- Net cash flows provided by (used in) investing activities 6.9 (231.0) (18.1) ------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from Bank Credit Facility -- 155.0 -- Repayments of Bank Credit Facility (1.0) (66.7) (24.5) Proceeds from issuance of stock, net of expenses 3.0 48.3 8.5 Principal payments on long-term debt (3.3) (112.1) -- Proceeds from long-term debt 2.0 248.4 -- ------- --------- -------- Net cash flows provided by (used in) financing activities 0.7 272.9 (16.0) ------- --------- -------- Effect of exchange rate changes on cash flows 3.3 (0.6) (0.9) ------- --------- -------- Net (decrease) increase in cash and cash equivalents (2.6) 99.2 22.9 Cash and cash equivalents, beginning of period 159.5 60.3 37.4 ------- --------- -------- Cash and cash equivalents, end of period $ 156.9 $ 159.5 $ 60.3 ======= ========= ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during period for: Interest, net $ 68.1 $ 56.7 $ 56.2 Income taxes, net 2.4 1.6 2.9 Interest capitalized in computer equipment and -- -- 0.3 software SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES: Stock issued in connection with acquisitions -- 42.9 51.5 Liabilities assumed and accrued acquisition costs incurred in connection with the acquisitions -- 11.2 14.5 Reclassification of Sextant Note from long-term other asset to other current asset -- -- 15.7
See notes to consolidated financial statements. F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE TEN-MONTH TRANSITION PERIOD ENDED DECEMBER 31, 2002 AND FOR THE FISCAL YEARS ENDED FEBRUARY 23, 2002 AND FEBRUARY 24, 2001 - ----------------------------------------------------------------------- (In millions, except per share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Basis of Presentation - BE Aerospace, Inc. and its wholly-owned subsidiaries (the "Company" or "B/E") designs, manufactures, sells and services a broad line of commercial aircraft and business jet cabin interior products consisting of a broad range of seating products, interior systems, including structures as well as all food and beverage storage and preparation equipment and distributes aerospace fasteners. The Company's principal customers are the operators of commercial and business jet aircraft and aircraft manufacturers. As a result, the Company's business is directly dependent upon the conditions in the commercial airline, business jet and aircraft manufacturing industries. The accompanying financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. In October 2002, the Company changed its year end from the last Saturday in February to December 31, effective with the transition period beginning on February 24, 2002 and ending on December 31, 2002. These financial statements are being filed by the Company as part of a Transitional Report on Form 10-K covering the transition period. References to the "transition period" in these consolidated financial statements are to the transition period beginning February 24, 2002 and ending on December 31, 2002. Prospectively, the Company's fiscal quarters will conform to calendar periods ending March 31, June 30 and September 30. Consolidation - The accompanying consolidated financial statements include the accounts of BE Aerospace, Inc. and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Financial Statement Preparation - The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Certain reclassifications have been made to the prior years' financial statements to conform to the December 31, 2002 presentation. Revenue Recognition - Sales of parts, assembled products and equipment are recorded on the date of shipment and passage of title or, if required, upon acceptance by the customer. Service revenues are recorded when services are performed. Revenues and costs under certain long-term contracts are recognized using contract accounting under the percentage-of-completion method. The Company sells its products primarily to airlines worldwide, including occasional sales collateralized by letters of credit. The Company performs ongoing credit evaluations of its customers and maintains reserves for estimated credit losses. Income Taxes - The Company provides deferred income taxes for temporary differences between amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax purposes. Deferred income taxes are computed using enacted tax rates that are expected to be in effect when the temporary differences reverse. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or all of the deferred tax asset will not be realized. Cash Equivalents - The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Accounts Receivable - The Company performs ongoing credit evaluations of our customers and adjusts credit limits based upon payment history and the customer's current credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. F-7 Inventories - The Company values inventory at the lower of cost or market. The Company regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory is based primarily on an estimated forecast of product demand and production requirements. As demonstrated during the transition period ended December 31, 2002 and during the fiscal year ended February 23, 2002, demand for the Company's products can fluctuate significantly. Estimates of future product demand may prove to be inaccurate, in which case the Company may understate or overstate the provision required for excess and obsolete inventory. In the future, if inventory is determined to be overvalued, the Company would be required to recognize such costs in cost of goods sold at the time of such determination. Likewise, if inventory is determined to be undervalued, the Company may have over-reported costs of goods sold in previous periods and would be required to recognize such additional operating income at the time of sale. Debt Issuance Costs - Costs incurred to issue debt are deferred and amortized as interest expense over the term of the related debt using the straight-line method, which approximates the effective interest method. Change in Accounting for Goodwill and Identified Intangible Assets - Effective February 24, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, acquired intangible assets must be separately identified. Goodwill and other intangible assets with indefinite lives are not amortized, but are reviewed at least annually for impairment. Acquired intangible assets with definite lives are amortized over their individual useful lives. In addition to goodwill, intangible assets with indefinite lives consist of the M & M trademark. In accordance with SFAS No. 142, the goodwill and the trademark with indefinite lives that were being amortized over periods ranging from 30 to 40 years follow the non-amortization approach beginning January 1, 2002. Patents and other intangible assets are amortized using the straight-line method over periods ranging from three to thirty years (see note 7). Upon adoption of SFAS No. 142 and on at least an annual basis, management assesses whether there has been any impairment in the value of goodwill by comparing the fair value to the net carrying value of reporting units. If the carrying value exceeds its estimated fair value, an impairment loss would be recognized if the implied fair value of goodwill was less than its carrying value. In this event, the asset is written down accordingly. In accordance with SFAS No. 142, the Company has completed step one of the impairment tests and fair value analysis for goodwill and other intangible assets, respectively, and there were no impairments or impairment indicators present and no loss was recorded during the ten-month transition period ended December 31, 2002. During the fiscal year ended February 23, 2002, management determined that certain intangible assets having an unamortized cost of $20.4 had been permanently impaired as a result of the decline in industry conditions and facility consolidation. Long-Lived Assets - The Company assesses potential impairments to its long-lived assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. An impairment loss is recognized when the undiscounted cash flows expected to be generated by an asset (or group of assets) is less than its carrying amount. Any required impairment loss is measured as the amount by which the asset's carrying value exceeds its fair value, and is recorded as a reduction in the carrying value of the related asset and a charge to operating results. During the year ended February 23, 2002, management determined that certain property, plant and equipment had been permanently impaired as a result of the decline in industry conditions and facility consolidation. As a result, the Company recorded a charge of $24.1 in the third quarter of the fiscal year ended February 23, 2002. Product Warranty Costs - Estimated costs related to product warranties are accrued at the time products are sold. In estimating its future warranty obligations, the Company considers various relevant factors, including the Company's stated warranty policies and practices, the historical frequency of claims and the cost to replace or repair its products under warranty. The following table provides a reconciliation of the activity related to the Company's accrued warranty expense:
Transition Fiscal Year Ended Period Ended ------------------------------------ December 31, February 23, February 24, 2002 2002 2001 -------------------- ------------------ ----------------- Balance at beginning of period $ 11.3 $ 9.9 $ 22.9 Charges to costs and expenses 2.5 8.4 9.7 Costs incurred (4.9) (7.0) (22.7) ------ ------ ------ Balance at end of period $ 8.9 $ 11.3 $ 9.9 ====== ====== ======
F-8 Accounting for Stock-Based Compensation - The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related Interpretations in accounting for its stock option and purchase plans. Accordingly, no compensation cost has been recognized for its stock option plans and stock purchase plan. Had compensation cost for the Company's stock option plans and stock purchase plan been determined consistent with SFAS No. 123, the Company's net (loss) earnings and net (loss) earnings per share for the transition period ended December 31, 2002 and for the fiscal years ended February 23, 2002 and February 24, 2001 would have been reduced to the pro forma amounts indicated in the following table:
Transition Fiscal Year Ended Period Ended ---------------------------------- December February February 31, 2002 23, 2002 24, 2001 --------------------- ---------------- ----------------- As reported Net (loss) earnings $ (70.8) $ (104.1) $ 20.3 Deduct: Additional expense per SFAS No. 123, fair value method, net of related tax effects 5.8 9.2 14.6 --------------------- ---------------- ----------------- Pro forma $ (76.6) $ (113.3) $ 5.7 --------------------- ---------------- ----------------- Basic net earnings (loss) per share: As reported $ (2.03) $ (3.18) $ 0.80 Pro forma $ (2.19) $ (3.46) $ 0.22 Diluted net earnings (loss) per share: As reported $ (2.03) $ (3.18) $ 0.78 Pro forma $ (2.19) $ (3.46) $ 0.22
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for options granted during the transition period ended on December 31, 2002 and fiscal 2002 and 2001: risk-free interest rates of 3.7%, 4.4% and 6.1%, expected dividend yields of 0.0%; expected lives of 3.5 years, 3.5 years and 3.5 years; and expected volatility of 96%, 85%, and 70%, respectively. Research and Development - Research and development expenditures are expensed as incurred. Foreign Currency Translation - The assets and liabilities of subsidiaries located outside the United States are translated into U.S. dollars at the rates of exchange in effect at the balance sheet dates. Revenue and expense items are translated at the average exchange rates prevailing during the period. Gains and losses resulting from foreign currency transactions are recognized currently in income, and those resulting from translation of financial statements are accumulated as a separate component of stockholders' equity. Recent Accounting Pronouncements In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145, among other things, requires gains and losses on extinguishment of debt to be classified as part of continuing operations rather than treated as extraordinary, as previously required in accordance with SFAS No. 4. SFAS No. 145 also modifies accounting for subleases where the original lessee remains the secondary obligor and requires certain modifications to capital leases to be treated as sale-leaseback transactions. The Company will adopt SFAS No. 145 on January 1, 2003 and expects no material impact to its consolidated financial statements. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 nullifies the guidance previously provided under Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Among other things, SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred as opposed to when there is a commitment to a restructuring plan as set forth under the nullified guidance. The Company plans to adopt SFAS No. 146 on January 1, 2003 for future restructurings as required. F-9 In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure--an amendment of SFAS No. 123." This Statement amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The adoption of SFAS No. 148 is not expected to have a material impact on the Company's financial position or results of operations as the Company has no plans to adopt the fair value method. In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others", an interpretation of FIN No. 5, 57 and 107, and rescission of FIN No. 34, "Disclosure of Indirect Guarantees of Indebtedness of Others". FIN No. 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002; while, the provisions of the disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of the recognition provisions of FIN No. 45 is not expected to have a material impact on the Company's consolidated results of operations and financial position. In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Entities", an interpretation of Accounting Research Bulletin No. 51. FIN No. 46 requires that variable interest entities be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or is entitled to receive a majority of the entity's residual returns or both. FIN No. 46 also requires disclosures about variable interest entities that companies are not required to consolidate but in which a company has a significant variable interest. The consolidation requirements of FIN No. 46 will apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements will apply to entities established prior to January 31, 2003 in the first fiscal year or interim period beginning after June 15, 2003. The disclosure requirements will apply in all financial statements issued after January 31, 2003. The Company will begin to adopt the provisions of FIN No. 46 during the first quarter of calendar 2003 but expects the provisions of FIN No. 46 will not have a material impact on its consolidated results of operations and financial position upon adoption as it does not currently have any variable interest entities. 2. TRANSITION REPORTING In October 2002, the Company changed its fiscal year end from the last Saturday in February to December 31, effective with the transition period beginning on February 24, 2002 and ending on December 31, 2002. These financial statements are being filed by the Company as part of a Transitional Report on Form 10-K covering the transition period. Prospectively, the Company's fiscal quarters will conform to calendar periods ending March 31, June 30 and September 30. All references to the ten-month period from February 25, 2001 to December 31, 2001 are unaudited. The following financial data is presented to illustrate the period's results of operations and earnings per share information for the ten-month period ended December 31, 2001:
2001 ---------------- Net sales $ 582.6 Gross profit 118.2 Operating loss (38.7) Loss before income taxes and extraordinary item (87.5) Income taxes 2.0 Net loss before extraordinary item (89.5) Net loss (98.8) Net loss per share before extraordinary item (2.76) Net loss per share (3.05)
The results for the ten-month period ended December 31, 2001 include approximately $98.9 of facility consolidation charges and $1.5 of transition costs included as a component of cost of sales (See note 4). Also, the Company recorded costs and expenses associated with the acquisition of M & M of approximately $6.8 that is included as a component of selling, general and administrative expenses in the ten-month period ended December 31, 2001 (See note 3). F-10 The Company recorded a $9.3 extraordinary item during the ten-month period ended December 31, 2001 related to the early extinguishments of certain long-term debt. 3. ACQUISITIONS AND DISPOSITION The Company has completed a number of acquisitions and a disposition. The following is a summary of recent transactions: Fiscal Year 2002 Acquisitions - ----------------------------- Effective May 8, 2001, the Company acquired the outstanding common stock of Nelson Aero Space, Inc. for approximately $20.0. Effective July 18, 2001, the Company acquired the outstanding common stock of Denton Jet Interiors, Inc. for approximately $16.0. Both of the transactions have been accounted for using purchase accounting. The assets purchased and liabilities assumed have been reflected in the accompanying consolidated balance sheet as of February 23, 2002. On September 14, 2001, the Company acquired M & M Aerospace Hardware, Inc. ("M & M") for $184.7. M & M is a leading distributor of aerospace fasteners. The M & M acquisition was completed by issuing to the former shareholders a total of approximately 1.9 million shares of B/E stock valued at $32.7, paying them $152.0 in cash and assuming current liabilities of approximately $8.8. The Company financed this acquisition through cash on hand and approximately $100.0 of borrowings under its Bank Credit Facility. This transaction has been accounted for using purchase accounting and has been included in the Company's operations since the date of acquisition. The purchase price of M & M has been allocated based on independent appraisals and management's estimates as follows:
Accounts receivable $ 13.4 Inventories 53.8 Other current assets 0.2 Property and equipment 16.7 Goodwill, (non-amortizing, tax deductible) 88.3 Trademark (indefinite life, non-amortizing) 19.4 Non-compete agreement (useful life of 8 years) 1.7 Current liabilities (8.8) -------- $ 184.7 ========
The Company believes that the M&M acquisition resulted in the recognition of goodwill primarily because of its industry position, management strength and potential to serve as a platform for the consolidation of the business segment. The Company recorded costs and expenses associated with the acquisition of M & M of approximately $6.8, which is included as a component of selling, general and administrative expenses in the accompanying consolidated statements of operations for the fiscal year ended February 23, 2002. Disposition - ----------- In-Flight Entertainment Business - -------------------------------- In February 1999, the Company completed the sale of a 51% interest in its In-Flight Entertainment ("IFE") business to Sextant Avionique, Inc. ("Sextant"), a wholly-owned subsidiary of Sextant Avionique, S.A. (the "IFE Sale") for approximately $62.0 in cash. In October 1999, the Company completed the sale of its remaining 49% equity interest in IFE to Sextant. Terms of the agreement provided for the Company to receive two payments totaling $31.4, and a third payment based on actual sales and bookings as defined in the agreement (the "IFE obligations"). The IFE obligation amounts were included in other current assets net, in the accompanying consolidated financial statements as of February 23, 2002. Sextant had not made any of the payments related to the IFE obligations in accordance with the terms of the purchase and sale agreement. The Company initiated arbitration proceedings to compel payment. Sextant counterclaimed against the Company, claiming various breaches of the IFE Sale agreements. In February 2003, an arbitration panel resolved the dispute by awarding BE Aerospace, Inc. a net amount of $7.8. In connection with this decision, the Company recorded a charge of $29.5 in the accompanying consolidated statement of operations for the transition period ended December 31, 2002. This charge represented the difference between the balance of the IFE obligations receivable and the net amount awarded to the Company as of December 31, 2002. F-11 4. FACILITY CONSOLIDATIONS AND OTHER SPECIAL CHARGES The September 11, 2001 terrorist attacks have severely impacted conditions in the airline industry. Sharply lower demand from our airline customer base affected the Company's financial results, both for the ten-month transition period ended December 31, 2002 and the fiscal year ended February 23, 2002. The lower demand reflects the current downturn in the airline industry, which is the most severe ever experienced. High airline operating costs, weak air travel and low ticket prices have damaged many carriers' financial condition. Prior to the September 11, 2001 terrorist attacks, airline profits were already being adversely affected by increases in pilot and other airline wages, higher fuel prices and the softening of the global economy. Air travel dropped significantly following the 2001 terrorist attacks, further weakening many airlines' financial condition. The rapid decline in industry conditions brought about by the terrorist attacks on September 11, 2001 caused the Company to implement a facility consolidation and integration plan designed to re-align its capacity and cost structure with changed conditions in the airline industry. In November 2001, the Company began implementing a facility consolidation plan that consisted of closing five principal facilities and reduce its workforce by about 1,000 employees. As a result, during fiscal 2002, the Company recorded a charge of $98.9 which included cash expenses of approximately $15.6 and non-cash charges totaling approximately $62.9 associated with the write-down of fixed assets, inventory and other assets and $20.4 million associated with the impairment of related intangible assets. The $15.6 of cash charges related to involuntary severance and benefit programs for approximately 1,000 employees, lease termination costs and preparing facilities for disposal and sale. In addition, the Company incurred approximately $5.7 of transition costs associated with the facilities and personnel consolidation program, which were expensed as incurred. These costs and charges, which aggregate $104.6, have been included in cost of sales for the fiscal year ended February 23, 2002. Industry conditions continued to worsen during the fall of 2002 as the airlines deferred retrofit programs and continued to lower their purchases of spare parts. In addition, the business jet manufacturers announced further production cuts and additional plant shutdowns. In response to these worsening conditions, the Company revised its consolidation plan to encompass a total personnel reduction of 1,400 employees. During the transition period ended December 31, 2002, the Company incurred a total of approximately $39.5 of charges and transition costs associated with the facilities and personnel consolidation and integration program, which have been expensed as incurred as a component of cost of sales. The charges and transition costs included $6.0 of costs associated with additional personnel reductions and a $7.0 charge related to inventories that became obsolete due to the increase in parked aircraft that are not expected to return to active service. Cash requirements related to facility consolidation activities were funded from cash in banks. Through December 31, 2002, the Company has closed four of the five facilities and paid approximately $7.0 for over 1,000 of the planned 1,400 headcount reductions. Through December 31, 2002, the Company has incurred approximately $145.0 of the total estimated costs, including approximately $55.0 of the estimated cash costs. Cash requirements related to facility consolidation activities were funded from cash in banks. The following table summarizes the facility consolidation costs accrued as of December 31, 2002:
Balance Balance Original Cash at Feb. Disposals/ Cash at Dec. Accrual Disposals Paid 23, 2002 Additions Reclass Paid 31, 2002 ------------- ------------ ----------- -------------- ------------ -------------- -------- -------- Accrued liability for severance, lease termination and $15.6 $ -- $(3.1) $12.5 $ 6.0 $ 1.7 $(16.4) $3.8 other costs Impaired inventories, property 62.9 (50.8) -- 12.1 7.0 (19.1) -- -- and equipment Impaired intangible assets 20.4 (20.4) -- -- -- -- -- -- ------------- ------------ ----------- -------------- ------------ -------------- -------- -------- $98.9 $ (71.2) $(3.1) $24.6 $ 13.0 $ (17.4) $(16.4) $3.8 ============= ============ =========== ============== ============ ============== ======== ========
F-12 5. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined using the weighted average cost method. Finished goods and work-in-process inventories include material, labor and manufacturing overhead costs. Inventories consist of the following:
December 31, 2002 February 23, 2002 --------------------------------- ----------------------------- Raw materials and component parts $ 58.8 $ 53.4 Work-in-process 26.5 32.6 Finished goods (primarily aftermarket fasteners) 77.9 71.0 ------ ------ $163.2 $157.0 ====== ======
6. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and depreciated and amortized generally on the straight-line method over their estimated useful lives of two to thirty years (or the lesser of the term of the lease as to leasehold improvements, as appropriate). Property and equipment consist of the following:
Useful Life December 31, February 23, (Years) 2002 2002 --------------- ------------------- ----------------- Land, buildings and improvements 10 - 30 $ 38.2 $ 61.2 Machinery 3 - 13 54.4 56.6 Tooling 3 - 10 16.0 15.8 Computer equipment and software 4 - 15 84.6 81.8 Furniture and equipment 2 - 10 9.9 9.4 ------ ------ 203.1 224.8 Less accumulated depreciation and amortization (87.6) (82.1) ------ ------ $115.5 $142.7 ====== ======
7. GOODWILL AND INTANGIBLE ASSETS Effective February 24, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets." As a result of adopting SFAS No. 142, the Company's goodwill and certain intangible assets are no longer amortized, but are subject to an annual impairment test. In accordance with the implementation of SFAS No. 142, the historical cost and accumulated amortization of certain developed technologies were reset with no impact to the consolidated financial statements. The following sets forth the intangible assets by major asset class, all of which were acquired during business acquisition transactions:
December 31, 2002 February 23, 2002 --------------------------------------- ------------------------------------ Net Net Useful Life Original Accumulated Book Original Accumulated Book (Years) Cost Amortization Value Cost Amortization Value -------------- ----------- --------------- ----------- ----------- -------------- --------- Acquired technologies 4-30 $ 93.2 $14.4 $ 78.8 $ 108.7 $27.2 $ 81.5 Trademarks and patents 7-30 26.0 8.5 17.5 24.6 6.8 17.8 Trademarks (nonamortizing) -- 19.4 -- 19.4 19.4 -- 19.4 Technical qualifications, plans and drawings 3-30 26.1 12.8 13.3 25.5 11.5 14.0 Replacement parts annuity and product approvals 3-30 39.2 18.2 21.0 37.6 15.9 21.7 Covenant not to compete and other identified intangibles 3-10 24.8 9.6 15.2 30.6 12.1 18.5 ------- ----- ------ ------- ----- ------- $ 228.7 $63.5 $165.2 $ 246.4 $73.5 $172.9 ======= ===== ====== ======= ===== =======
Aggregate amortization expense on intangible assets was approximately $7.5, $25.0 and $23.4 for the ten-month transition period ended December 31, 2002 and for the fiscal years ended February 23, 2002 and February 24, 2002, respectively. Amortization expense associated with identified intangible assets is expected to be approximately $8.9 in each of the next five years. F-13 Changes to the original cost basis of goodwill during the transition period ended December 31, 2002 were due to the reclassification of assembled workforce to goodwill and foreign currency fluctuations. The changes in the carrying amount of goodwill for the transition period ended December 31, 2002 are as follows:
Total -------------------- Balance as of February 23, 2002 $ 333.1 Goodwill acquired 2.0 Reclassification of assembled workforce 8.5 Acquisition purchase price adjustment (1.5) Effect of foreign currency translation 2.6 -------- Balance as of December 31, 2002 $ 344.7 ========
A reconciliation of reported earnings (losses) before extraordinary item to earnings (losses) before extraordinary item adjusted to reflect the adoption of the non-amortization provisions of SFAS No. 142 as if SFAS No. 142 was adopted on February 27, 2000:
Transition Fiscal Year Ended Period Ended ------------------------------------------- December February 23, February 24, 31, 2002 2002 2001 ------------------ --------------------- ----------------- Earnings (loss) before extraordinary item: As reported $ (70.8) $ (94.8) $ 20.3 Goodwill amortization -- 8.8 6.6 ------- -------- -------- As adjusted $ (70.8) $ (86.0) $ 26.9 ======= ======== ======== Basic net earnings (loss) per share before extraordinary item: As reported $ (2.03) $ (2.90) $ 0.80 Goodwill amortization -- 0.27 0.26 ------- -------- -------- As adjusted $ (2.03) $ (2.63) $ 1.06 ======= ======== ======== Diluted net earnings (loss) per share before extraordinary item: As reported $ (2.03) $ (2.90) $ 0.78 Goodwill amortization -- 0.27 0.26 ------- -------- ------- As adjusted $ (2.03) $ (2.63) $ 1.04 ======= ======== =======
A reconciliation of reported net earnings (losses) to net earnings (losses) adjusted to reflect the adoption of the non-amortization provisions of SFAS No. 142 as if SFAS No. 142 was adopted on February 27, 2000:
Transition Fiscal Year Ended Period Ended ------------------------------------------- December February 23, February 24, 31, 2002 2002 2001 ----------------- -------------------- ------------------ Net earnings (loss): As reported $ (70.8) $(104.1) $ 20.3 Goodwill amortization, net of taxes -- 8.8 6.6 ------- ------- -------- As adjusted $ (70.8) $ (95.3) $ 26.9 ======= ======= ======== Basic net earnings (loss) per share: As reported $ (2.03) $ (3.18) $ 0.80 Goodwill amortization -- 0.27 0.26 -------- ------- -------- As adjusted $ (2.03) $ (2.91) $ 1.06 ======= ======= ======== Diluted net earnings (loss) per share: As reported $ (2.03) $ (3.18) $ 0.78 Goodwill amortization -- 0.27 0.26 ------- ------- -------- As adjusted $ (2.03) $ (2.91) $ 1.04 ======= ======= ========
F-14 8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consist of the following:
December 31, February 23, 2002 2002 ---------------------- --------------------- Accounts payable $ 67.3 $ 48.1 Accrued salaries, vacation and related benefits 16.3 17.0 Accrued interest 14.3 24.1 Accrued product warranties 8.9 11.3 Accrued acquisition expenses 3.8 13.9 Accrued restructuring 3.8 12.5 Other accrued liabilities 22.5 23.4 -------- ------- $ 136.9 $ 150.3 ======== =======
9. LONG-TERM DEBT Long-term debt consists of the following:
December 31, February 23, 2002 2002 ---------------------- --------------------- 8% Senior Subordinated Notes $ 249.7 $ 249.7 8 7/8% Senior Subordinated Notes 250.0 250.0 9 1/2% Senior Subordinated Notes 200.0 200.0 Bank Credit Facility 144.0 145.0 Other long-term debt 9.2 10.1 -------- ------- 852.9 854.8 Less current portion of long-term debt (16.9) (1.3) -------- ------- $ 836.0 $ 853.5 ======== =======
8% Senior Subordinated Notes The 8% Senior Subordinated Notes (the "8% Notes") are unsecured senior subordinated obligations of the Company, subordinated to any senior indebtedness of the Company and mature on March 1, 2008. Interest on the 8% Notes is payable semiannually in arrears on March 1 and September 1 of each year. The 8% Notes are redeemable at the option of the Company, in whole or in part, on or after March 1, 2003, at predetermined redemption prices together with accrued and unpaid interest through the date of redemption. Upon a change of control (as defined), each holder of the 8% Notes may require the Company to repurchase such holder's 8% Notes at 101% of the principal amount thereof, plus accrued interest to the date of such purchase. 8 7/8% Senior Subordinated Notes In April 2001, the Company sold $250.0 of 8 7/8% Senior Subordinated Notes (the "8 7/8% Notes") due 2011. The net proceeds less debt issue costs received from the sale of the notes were approximately $242.8. Approximately $105.0 of proceeds was used to redeem the Company's $100.0 of 9 7/8% senior subordinated notes due 2006 and approximately $66.7 of proceeds was used to repay balances outstanding under the Company's previous bank credit facility, which was then terminated. The 8 7/8% Notes are unsecured senior subordinated obligations of the Company, subordinated to all existing and future senior indebtedness and mature on May 1, 2011. Interest on the 8 7/8% Notes is payable semiannually in arrears on May 1 and November 1 of each year. The 8 7/8% Notes are redeemable, at the option of the Company, in whole or in part, at any time on or after May 1, 2006, at predetermined redemption prices together with accrued and unpaid interest through the date of redemption. In addition, at any time prior to May 1, 2004, the Company may redeem up to 35% of the aggregate principal amount of the Notes originally issued with the net proceeds of a public equity offering at 108.875 of the principal amount thereof, plus accrued interest, if at least 65% of the aggregate amount of the notes originally issued remains outstanding after the redemption. Upon a change in control (as defined), each holder of the 8 7/8% Notes may require the Company to repurchase such holder's 8 7/8% Notes at 101% of the principal amount thereof, plus accrued interest to the date of such purchase. F-15 The 9 7/8% Senior Subordinated Notes (the "9 7/8% Notes") were senior unsecured obligations of the Company. The Company redeemed the 9 7/8% Notes at a redemption price equal to 104.97% of the principal amount, together with the accrued interest to the redemption date. The Company incurred an extraordinary charge of $9.3 (net of tax) for unamortized debt issue costs, redemption premiums and fees and expenses related to the redemption of the 9 7/8% Notes. 9 1/2% Senior Subordinated Notes The 9 1/2% Senior Subordinated Notes (the "9 1/2 Notes") are unsecured senior subordinated obligations and are subordinated to any senior indebtedness of the Company and mature on November 1, 2008. Interest on the 9 1/2% Notes is payable semiannually in arrears on May 1 and November 1 of each year. The 9 1/2% Notes are redeemable at the option of the Company, in whole or in part, at any time after November 1, 2003 at predetermined redemption prices together with accrued and unpaid interest through the date of redemption. Upon a change of control (as defined), each holder of the 9 1/2% Notes may require the Company to repurchase such holder's 9 1/2% Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to the date of such purchase. The 8% Notes, 8 7/8% Notes and 9 1/2% Notes contain certain restrictive covenants, including limitations on future indebtedness, restricted payments, transactions with affiliates, liens, dividends, mergers and transfers of assets, all of which were met by the Company as of December 31, 2002. Bank Credit Facility In January and March 2003, the Company obtained amendments to the credit facility with J.P. Morgan Chase (the "Amended Bank Credit Facility"). The Amended Bank Credit Facility reduced the total commitments by $15.0 to $135.0 during January 2003 (of which $30.0 may be utilized for acquisitions). The Amended Bank Credit Facility provides for another $15.0 reduction in facility size to $120.0 at December 31, 2004. The Amended Bank Credit Facility expires in August 2006 and is collateralized by substantially all of our cash, accounts receivable, inventories and other personal property. At December 31, 2002, indebtedness under the Bank Credit Facility consisted of letters of credit aggregating approximately $5.6 and outstanding borrowings under the revolving facility aggregating to $144.0 (bearing interest at LIBOR plus 3.0%, or approximately 4.64% as of December 31, 2002). The Amended Bank Credit Facility bears interest ranging from 200 to 350 basis points over the Eurodollar rate as defined in the agreement (or approximately 4.5% as of the January 2003 effective date). The Amended Bank Credit Facility contains customary affirmative covenants, negative covenants and conditions of borrowings, all of which were met as of December 31, 2002. The Company presented the $15.0 reduction in commitments as short-term debt in the consolidated balance sheet at December 31, 2002. B/E Aerospace (UK) Limited, one of the Company's subsidiaries, has a revolving line of credit agreement aggregating approximately $6.4. This credit agreement is collateralized by accounts receivable and inventory of B/E Aerospace (UK) Limited. There were no borrowings outstanding under the credit agreement as of December 31, 2002. Royal Inventum B.V., one of the Company's subsidiaries, has a revolving credit agreement aggregating approximately $0.5. This credit agreement is collateralized by accounts receivable and inventory of the Netherland's entity. There were no borrowings outstanding under the credit agreement as of December 31, 2002. Maturities of long-term debt are as follows:
Year ending December 31, ------------------------ 2003 $ 16.9 2004 17.6 2005 0.7 2006 114.7 2007 3.3 Thereafter 699.7 ------ Total $852.9 ======
Interest expense amounted to $60.7 for the transition period ended December 31, 2002 and $66.2 and $57.9 for the fiscal years ended February 23, 2002 and February 24, 2001, respectively. F-16 10. COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET ARRANGEMENTS Sale-Leaseback Transaction -- During 2002, the Company entered into two sale-leaseback transactions involving four of its facilities. Under the terms of the sale-leaseback agreements, the facilities were sold for $27.0, net of transaction costs, and have been leased back for initial periods ranging from 15 to 20 years. The leasebacks have been accounted for as operating leases. A gain of $4.8 resulting from the sales have been deferred and will be amortized on a straight-line basis to rent expense over the initial term of the leases. Lease Commitments -- The Company finances its use of certain facilities and equipment under committed lease arrangements provided by various institutions. Since the terms of these arrangements meet the accounting definition of operating lease arrangements, the aggregate sum of future minimum lease payments is not reflected on our consolidated balance sheet. At December 31, 2002, future minimum lease payments under these arrangements approximated $54.2. We also have various other agreements whose future minimum lease payments approximated $28.0 at December 31, 2002. Rent expense for the transition period ended December 31, 2002 and for fiscal years 2002 and 2001 was approximately $13.5, $9.7 and $12.3, respectively. Future payments under operating leases with terms currently greater than one year are as follows:
Year ending December 31, ------------------------ 2003 $11.1 2004 7.8 2005 6.9 2006 6.1 2007 6.0 Thereafter 44.3 ----- $82.2 =====
Litigation -- The Company is a defendant in various legal actions arising in the normal course of business, the outcomes of which, in the opinion of management, neither individually nor in the aggregate are likely to result in a material adverse effect to the Company's financial statements. Indemnities, Commitments and Guarantees -- During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include non-infringement of patents and intellectual property indemnities to the Company's customers in connection with the delivery, design, manufacture and sale of its products, indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease, indemnities to other parties to certain acquisition agreements and indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of Delaware. The duration of these indemnities, commitments and guarantees varies, and in certain cases, is indefinite. Substantially all of these indemnities, commitments and guarantees provide for limitations on the maximum potential future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets. Employment Agreements -- The Company has employment and compensation agreements with three key officers of the Company. Agreements for one of the officers provides for an officer to earn a minimum of $765 thousand per year through a three year period ending from any date after which it is measured, adjusted annually for changes in the consumer price index (as defined) or as determined by the Company's Board of Directors, as well as a deferred compensation benefit equal to the product of the years worked times 150% of the highest annual salary paid over the period. Such deferred compensation is payable in a lump sum, less any prior distributions. A second agreement provides for an officer to receive annual minimum compensation of $710 thousand per year through a three year period ending from any date after which it is measured, adjusted annually for changes in the consumer price index (as defined) or as determined by the Company's Board of Directors, as well as a deferred compensation benefit equal to the product of the years worked times the highest annual salary paid over the period. In all other respects, this officer's employment agreement contains similar provisions to those described above in the first agreement. F-17 A third agreement provides for an officer to receive annual minimum compensation of $345 thousand per year through a three year period ending from any date after which it is measured, adjusted annually for changes in the consumer price index (as defined) or as determined by the Company's Board of Directors, as well as a deferred compensation benefit equal to the product of the number of years worked times one-half of this officer's average highest three year's annual salary (as defined). Such deferred compensation is payable in a lump sum, less any prior distributions. Deferred compensation for these three officers has been accrued as provided for under the above-mentioned employment agreements. Through December 31, 2001, the Company funded these and other deferred compensation obligations through corporate-owned life insurance policies and other investments, all of which were maintained in an irrevocable rabbi trust. The rabbi trust was terminated and the funds were deposited into individual retirement accounts for the benefit of the executives in January 2002. All contributions and prior deferred compensation made subsequent to January 2002 are maintained in individual grantor trusts on behalf of each of the executives. In addition, the Company has employment agreements with certain other key members of management that provide for aggregate minimum annual base compensation of $1.9 million expiring on various dates through the year 2003. The Company's employment agreements generally provide for certain protections in the event of a change of control. These protections generally include the payment of severance and related benefits under certain circumstances in the event of a change of control, and for the Company to reimburse such officers for the amount of any excise taxes associated with such benefits. 11. INCOME TAXES Income tax expense consists of the following:
Transition Fiscal Year Ended Period Ended ------------------------------------ December February February 31, 2002 23, 2002 24, 2001 -------------------- ------------------ ----------------- Current: Federal $ -- $ 0.7 $ 1.3 State -- -- -- Foreign 2.7 1.1 0.9 -------- --------- -------- 2.7 1.8 2.2 Deferred: Federal 11.7 22.9 8.3 State (0.2) 3.8 2.5 Foreign 6.6 4.0 1.1 -------- --------- -------- 18.1 30.7 11.9 Change in valuation allowance (18.1) (30.7) (11.9) -------- --------- -------- $ 2.7 $ 1.8 $ 2.2 ======== ========= ========
The difference between income tax expense and the amount computed by applying the statutory U.S. federal income tax rate (35%) to the pretax earnings before extraordinary item consists of the following:
Transition Fiscal Year Ended Period Ended ------------------------------------- December February February 31, 2002 23, 2002 24, 2001 -------------------- ----------------- ------------------- Statutory U.S. federal income tax expense (benefit) $ (23.8) $ (32.5) $ 7.9 Operating loss (with) without tax benefit 6.6 (2.5) 1.0 Goodwill amortization -- 3.2 3.3 Foreign tax rate differential 1.2 2.5 1.3 Meals and entertainment 0.3 0.2 0.3 Officer's life insurance 0.1 0.2 0.3 Change in valuation allowance 18.1 30.7 (11.9) Other, net 0.2 -- -- -------- --------- -------- $ 2.7 $ 1.8 $ 2.2 ======== ========= ========
F-18 The tax effects of temporary differences and carryforwards that give rise to deferred income tax assets and liabilities consist of the following:
December February February 31, 2002 23, 2002 24, 2001 ------------------- ------------------ ------------------ Inventory reserves $ 9.3 $ 8.9 $ 6.3 Acquisition accruals (10.2) (7.3) (6.4) Warranty accruals 2.9 4.8 3.5 Accrued liabilities 12.9 15.0 10.6 Other 1.2 2.1 1.5 -------- --------- -------- Net current deferred income tax asset 16.1 23.5 15.5 -------- --------- -------- Intangible assets 4.0 11.6 9.8 Depreciation (11.9) (15.5) (11.8) Net operating loss carryforward 99.9 83.0 48.3 Research credit carryforward 7.1 7.1 7.1 Deferred compensation 0.7 1.1 11.3 Software development costs (5.5) (5.5) (5.4) Loss on legal settlement 13.0 -- -- Other 1.0 1.0 0.8 -------- --------- -------- Net noncurrent deferred income tax asset 108.3 82.8 60.1 -------- --------- -------- Valuation allowance (124.4) (106.3) (75.6) -------- --------- -------- Net deferred tax assets (liabilities) $ -- $ -- $ -- ======== ========= ========
The Company established a valuation allowance of $124.4, as of December 31, 2002 related to the utilization of its deferred tax assets because of uncertainties that preclude it from determining that it is more likely than not that the Company will be able to generate taxable income to realize such assets during the federal operating loss carryforward period. The federal operating loss carryforward begins to expire in 2012. Such uncertainties include the impact of changing fuel prices on the Company's customers, recent cumulative losses, the highly cyclical nature of the industry in which it operates, economic conditions impacting the airframe manufacturers and the airlines, the Company's high degree of financial leverage, risks associated with new product introductions and risks associated with the integration of acquisitions. The Company monitors these as well as other positive and negative factors that may arise in the future, as it assesses the necessity for a valuation allowance against its deferred tax assets. As of December 31, 2002, the Company had federal, state and foreign net operating loss carryforwards of $223.4, $134.7 and $9.6, respectively. The federal and state net operating loss carryforwards begin to expire in 2012 and 2003, respectively. Approximately $43.1 of the Company's net operating loss carryforward is related to the exercise of stock options and the tax effect of such net operating losses will be credited to additional paid-in capital rather than income tax expense when utilized. As of December 31, 2002, the Company had federal research tax credit and alternative minimum tax credit carryforwards of $7.1 and $1.0, respectively. The federal research tax credits begin to expire in 2012. The Company has not provided for any residual U.S. income taxes on the approximately $24.7 of earnings from its foreign subsidiaries because such earnings are intended to be indefinitely reinvested. Such residual U.S. income taxes, if provided for, would be immaterial. The Company's federal tax returns for the years ended February 22, 1997, February 28, 1998 and February 27, 1999 are currently under examination by the Internal Revenue Service. Management believes that the resolution of this examination will not have a material adverse effect on either the Company's results of operations or financial position. 12. EMPLOYEE RETIREMENT PLANS The Company sponsors and contributes to a qualified, defined contribution Savings and Investment Plan covering substantially all U.S. employees. The Company also sponsors and contributes to nonqualified deferred compensation programs for certain other employees. The Company has invested in corporate-owned life insurance policies to assist in funding this program. The cash surrender values of these policies and other investments associated with these plans are maintained in an irrevocable rabbi trust and are recorded as assets of the Company. In addition, the Company and its subsidiaries participate in government-sponsored programs in certain European countries. In general, the Company's policy is to fund these plans based on legal requirements, tax considerations, local practices and investment opportunities. F-19 The BE Aerospace Savings and Investment Plan was established pursuant to Section 401(k) of the Internal Revenue Code. Under the terms of the plan, covered employees are allowed to contribute up to 15% of their pay, limited to $11.0 thousand per year. The Company match is equal to 50% of employee contributions, subject to a maximum of 8% of an employee's pay and is generally funded in Company stock. Total expense for the plan was $2.1, $3.4 and $1.9 for the transition period ended December 31, 2002 and for the fiscal years ended February 23, 2002 and February 24, 2001, respectively. Participants vest 100% in the Company match after three years of service. 13. STOCKHOLDERS' EQUITY Earnings (Loss) Per Share. Basic earnings per common share are determined by dividing earnings (loss) applicable to common shareholders by the weighted average number of shares of common stock. Diluted earnings per share are determined by dividing earnings (loss) applicable to common shareholders by the weighted average number of shares of common stock and dilutive common stock equivalents outstanding (all related to outstanding stock options discussed below). The following table sets forth the computation of basic and diluted net (loss) earnings per share for the transition period ended December 31, 2002 and for the fiscal years ended February 23, 2002 and February 24, 2001:
Transition Fiscal Year Ended Period Ended ----------------------------------- December February February 31, 2002 23, 2002 24, 2001 ----------------- ---------------- ----------------- Numerator - Net (loss) earnings $ (70.8) $ (104.1) $ 20.3 ======= ======== ======= Denominator: Denominator for basic earnings (loss) per share - Weighted average shares 34.9 32.7 25.4 Effect of dilutive securities - Employee stock options -- -- 0.5 ------- ------- ------- Denominator for diluted (loss) earnings per share - Adjusted weighted average shares 34.9 32.7 25.9 ======= ======= ======= Basic net (loss) earnings per share $ (2.03) $ (3.18) $ 0.80 ======= ======= ======= Diluted net (loss) earnings per share $ (2.03) $ (3.18) $ 0.78 ======= ======= =======
The Company excluded dilutive securities from the calculation of loss per share of approximately 0.8 million and approximately 1.1 million for the transition period ended December 31, 2002 and for the fiscal year ended February 23, 2002, respectively. Stock Option Plans. The Company has various stock option plans, including the Amended and Restated 1989 Stock Option Plan, the 1991 Directors Stock Option Plan, the 1992 Share Option Scheme and the Amended and Restated 1996 Stock Option Plan (collectively, the "Option Plans"), under which shares of the Company's common stock may be granted to key employees and directors of the Company. The Option Plans provide for granting key employees options to purchase the Company's common stock. Options are granted at the discretion of the Stock Option and Compensation Committee of the Board of Directors. Options granted vest 25% on the date of grant and 25% per year thereafter. The following tables set forth options granted, canceled, forfeited and outstanding:
December 31, 2002 ----------------- Option Price Weighted Average Options Per Share Price Per Share ------------ ------------ ---------------- (in thousands) Outstanding, beginning of period 7,059 $4.08 - $31.50 $14.41 Options granted 1,432 3.25 - 9.70 4.42 Options exercised (203) 4.08 - 12.00 6.31 Options forfeited (294) 4.08 - 31.50 17.15 ----- Outstanding, end of period 7,994 3.25 - 31.50 12.50 ===== Exercisable at end of period 5,420 $3.25 - $30.25 $15.59 =====
F-20
February 23, 2002 ----------------- Option Price Weighted Average Options Per Share Price Per Share ------------ ------------ ---------------- (in thousands) Outstanding, beginning of period 6,056 $6.94 - $31.50 $17.30 Options granted 1,980 4.08 - 21.88 5.55 Options exercised (365) 4.08 - 22.75 11.60 Options forfeited (612) 4.08 - 29.87 19.93 ----- Outstanding, end of period 7,059 4.08 - 31.50 14.41 ===== Exercisable at end of year 4,535 $4.08 - $31.50 $17.43 =====
February 24, 2001 ----------------- Option Price Weighted Average Options Per Share Price Per Share ------------ ------------ ---------------- (in thousands) Outstanding, beginning of period 5,808 $7.00 - $31.50 $18.00 Options granted 1,231 6.94 - 16.00 12.05 Options exercised (600) 6.94 - 19.00 10.61 Options forfeited (383) 6.94 - 29.88 19.98 ------ Outstanding, end of period 6,056 6.94 - 31.50 17.30 ====== Exercisable at end of year 3,793 $6.94 - $31.50 $19.54 ======
At December 31, 2002, 450,235 options were available for grant under each of the Company's Option Plans.
Options Outstanding at December 31, 2002 - ------------------------------------------------------------------------------------------------------------------ Weighted Weighted Average Weighted Range of Options Average Remaining Options Average Exercise Price Outstanding Exercise Contractual Exercisable Exercise Price -------------- ----------- --------- ------------ ----------- -------------- (in thousands) (years) (in thousands) $ 3.25 - $4.43 2,854 $4.25 9.23 996 $ 4.20 6.75 - 12.00 2,007 9.60 6.81 1,382 9.75 12.13 - 19.00 1,364 17.87 5.77 1,308 17.88 19.88 - 30.25 1,769 24.98 5.20 1,734 25.05 ----- ----- 7,994 5,420 ===== =====
The estimated fair value of options granted during the transition period ended December 31, 2002 and for fiscal 2002 and fiscal 2001, was $3.54 per share, $4.17 per share and $7.80 per share, respectively. 14. EMPLOYEE STOCK PURCHASE PLAN The Company has established a qualified Employee Stock Purchase Plan, the terms of which allow for qualified employees (as defined) to participate in the purchase of designated shares of the Company's common stock at a price equal to the lower of 85% of the closing price at the beginning or end of each semi-annual stock purchase period. The Company issued 261,000 and 136,000 shares of common stock during the transition period ended December 31, 2002 and during fiscal 2002, respectively, pursuant to this plan at an average price per share of $6.49 and $14.29, respectively. 15. SEGMENT REPORTING The Company is organized based on the products and services it offers. Under this organizational structure, the Company has three reportable segments: Commercial Aircraft Products, Business Jet Products and Fastener Distribution. The Company's Commercial Aircraft Products segment consists of eight operating facilities while the Business Jet and Fastener Distribution segments consist of two and one principal operating facilities, respectively. Each segment reports its results of operations and makes requests for capital expenditures and acquisition funding to the Company's chief operational decision-making group. This group is presently comprised of the Chairman, the President and Chief Executive Officer, and the Corporate Senior Vice President of Administration and Chief Financial Officer. Each operating segment has separate management teams and infrastructures dedicated to providing a full range of products and services to their commercial, business jet and aircraft-manufacturing customers. F-21 The following table presents net sales and other financial information by business segment:
TRANSITION PERIOD ENDED DECEMBER 31, 2002 ---------------------------------------------------------------------- Commercial Aircraft Business Fastener Products Jet Products Distribution Consolidated ----------------- ------------------ ------------------ -------------- Net sales $354.5 $ 71.1 $ 78.0 $ 503.6 Operating earnings (loss) (32.9) 7.6 14.5 (10.8) Total assets 700.9 170.5 195.7 1,067.1 Goodwill 169.2 87.3 88.2 344.7 Capital expenditures 12.0 4.9 0.5 17.4 Depreciation and amortization 19.9 3.6 1.2 24.7
FISCAL YEAR ENDED FEBRUARY 23, 2002 --------------------------------------------------------------------- Commercial Aircraft Business Fastener Products Jet Products Distribution Consolidated ----------------- ----------------- ---------------- ---------------- Net sales $550.6 $ 85.6 $ 44.3 $ 680.5 Operating earnings (loss) (40.1) 6.0 1.6 (32.5) Total assets 761.3 165.0 202.0 1,128.3 Goodwill, net 164.8 82.5 85.8 333.1 Capital expenditures 11.1 2.2 0.6 13.9 Depreciation and amortization 34.9 10.6 1.3 46.8
FISCAL YEAR ENDED FEBRUARY 24, 2001 --------------------------------------------------------------------- Commercial Aircraft Business Fastener Products Jet Products Distribution Consolidated ----------------- ----------------- ---------------- ---------------- Net sales $580.3 $ 86.1 $ -- $ 666.4 Operating earnings 62.5 14.2 -- 76.7 Total assets 739.8 196.2 -- 936.0 Goodwill, net 172.6 43.5 -- 216.1 Capital expenditures 12.6 4.6 -- 17.2 Depreciation and amortization 33.4 9.4 -- 42.8
[Remainder of page intentionally left blank] F-22 Through February 24, 2001, we operated in the (1) commercial aircraft products, (2) business jet products and (3) engineering services segments of the commercial airline and general aviation industry. Following the purchase of M & M Aerospace, Inc., we realigned our business to operate in the following segments - (1) commercial aircraft products, (2) business jet products and (3) fastener distribution. Net sales for similar classes of products or services within these business segments for the transition period ended December 31, 2002 and for the fiscal years ended February 2002 and 2001 are presented below:
Transition Fiscal Year Ended Period Ended -------------------------------- December February February 31, 2002 23, 2002 24, 2001 -------------- -------------- -------------- Commercial aircraft products: Seating products $144.6 $247.8 $288.1 Interior systems products 116.0 152.6 151.6 Engineered interior structures, components and assemblies 93.9 150.2 140.6 -------------- -------------- -------------- 354.5 550.6 580.3 Business jet products 71.1 85.6 86.1 Fastener distribution 78.0 44.3 -- -------------- -------------- -------------- Net sales $503.6 $680.5 $666.4 ============== ============== ==============
The Company operated principally in two geographic areas, the United States and Europe (primarily the United Kingdom), during the transition period ended December 31, 2002 and during the fiscal years ended February 23, 2002 and February 24, 2001. There were no significant transfers between geographic areas during the period. Identifiable assets are those assets of the Company that are identified with the operations in each geographic area. The following table presents net sales and operating earnings (loss) for the transition period ended December 31, 2002 and the fiscal years ended February 23, 2002 and February 24, 2001 and identifiable assets as of December 31, 2002, February 23, 2002 and February 24, 2001 by geographic area:
Transition Fiscal Year Ended Period Ended --------------------------------- December February February 31, 2002 23, 2002 24, 2001 ------------------ ---------------- ---------------- Net sales: United States $ 362.4 $ 535.7 $ 503.8 Europe 141.2 144.8 162.6 --------- -------- ------- Total: $ 503.6 $ 680.5 $ 666.4 ========= ======== ======= Operating (loss) earnings: United States $ 13.9 $ (30.3) $ 65.4 Europe (24.7) (2.2) 11.3 --------- -------- ------- Total: $ (10.8) $ (32.5) $ 76.7 ========= ======== ======= Identifiable assets: United States $ 861.9 $ 948.7 $ 756.7 Europe 205.2 179.6 179.3 --------- -------- ------- Total: $ 1,067.1 $1,128.3 $ 936.0 ========= ======== =======
F-23 Export sales from the United States to customers in foreign countries amounted to approximately $111.5, $113.7 and $160.8 in the transition period ended December 31, 2002 and fiscal years 2002 and 2001, respectively. Net sales to all customers in foreign countries amounted to $233.9, $288.3 and $279.8 in the transition period ended December 31, 2002 and fiscal 2002 and 2001, respectively. Net sales to Europe amounted to 24%, 20% and 22% in the transition period ended December 31, 2002, fiscal 2002 and 2001, respectively. Net sales to Asia amounted to 11%, 12% and 10% in the transition period ended December 31, 2002, fiscal 2002 and 2001, respectively. Major customers (i.e., customers representing more than 10% of net sales) change from year to year depending on the level of refurbishment activity and/or the level of new aircraft purchases by such customers. There were no major customers in the transition period ended December 31, 2002, fiscal 2002 and 2001. 16. FAIR VALUE INFORMATION The following disclosure of the estimated fair value of financial instruments at December 31, 2002 and February 23, 2002 is made in accordance with the requirements of SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies; however, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The carrying amounts of cash and cash equivalents, accounts receivable-trade, and accounts payable are a reasonable estimate of their fair values. At December 31, 2002 and February 23, 2002, the Company's 8 7/8% Notes had carrying values of $250.0 and $250.0 and fair values of $183.8 and $211.2, respectively. At December 31, 2002 and February 23, 2002, the Company's 8% Notes had carrying values of $249.7 and $249.7 and fair values of $186.3 and $209.3, respectively. At December 31, 2002 and February 23, 2002, the Company's 9 1/2% Notes had carrying values of $200.0 and $200.0 and fair values of $150.0 and $176.5, respectively. The carrying amounts under the Bank Credit Facility are a reasonable estimate of fair value as interest is based upon floating market rates. The fair value information presented herein is based on pertinent information available to management at December 31, 2002 and February 23, 2002, respectively. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these consolidated financial statements since that date, and current estimates of fair value may differ significantly from the amounts presented herein. 17. SELECTED QUARTERLY DATA (Unaudited) Summarized quarterly financial data for the transition period ended December 31, 2002 and the fiscal year ended February 23, 2002 are as follows:
Transition Period Ended December 31, 2002 --------------------------------------------------------------------- First Second Third December Quarter Quarter Quarter 2002 ---------------- ----------------- ----------------- ---------------- Net sales $ 154.3 $ 154.8 $ 145.5 $ 49.0 Gross profit 52.9 49.0 37.0 12.4 Net loss (1.5) (6.2) (22.4) (40.7) Basic net loss per share (0.04) (0.18) (0.64) (1.17) Diluted net loss per share (0.04) (0.18) (0.64) (1.17)
Fiscal Year Ended February 23, 2002 --------------------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ---------------- ----------------- ----------------- ---------------- Net sales $ 176.8 $179.1 $ 172.8 $ 151.8 Gross profit (loss) 65.9 69.0 (37.8) 53.3 Net earnings (loss) before extraordinary item 7.8 8.9 (106.2) (5.3) Net (loss) earnings (1.5) 8.9 (106.2) (5.3) Basic net (loss) earnings per share (0.05) 0.28 (3.08) (0.15) Diluted net (loss) earnings per share (0.05) 0.27 (3.08) (0.15)
F-24 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE TEN-MONTH TRANSITION PERIOD ENDED DECEMBER 31, 2002 AND FOR THE FISCAL YEARS ENDED FEBRUARY 23, 2002, AND FEBRUARY 24, 2001 - ----------------------------------------------------------------------- (In millions)
BALANCE BALANCE AT BEGINNING AT END OF PERIOD EXPENSES OTHER DEDUCTIONS OF PERIOD ------------ -------- ----- ---------- --------- DEDUCTED FROM ASSETS: - --------------------- Allowance for doubtful accounts: December 31, 2002 $ 4.9 $ 0.8 $(0.1) $ 1.7 $ 3.9 Fiscal Year 2002 2.6 1.9 1.3 (1) 0.9 4.9 Fiscal Year 2001 3.9 0.6 (0.4) (2) 1.5 2.6 Reserve for obsolete inventories: December 31, 2002 $ 27.9 $ 9.3 (3) $ 4.7 $ 12.9 (3) $29.0 Fiscal Year 2002 16.1 11.7 (3) 8.0 (1) 7.9 (3) 27.9 Fiscal Year 2001 16.5 13.6 0.7 (2) 14.7 16.1
(1) Balances associated with the 2002 acquisitions. (2) Balances associated with the 2001 acquisitions. (3) Excludes $7.0 and $34.5 of inventory impairments associated with the Company's facility consolidation and integration plan during the transition period ended December 31, 2002 and the fiscal year ended February 23, 2002, respectively. F-25 EX-3 3 ex3.txt BY-LAWS EXHIBIT 3.4 BY-LAWS OF BE AEROSPACE, INC. (amended as of October 24, 2002) Section 1. LAW, CERTIFICATE OF INCORPORATION AND BY-LAWS 1.1. These by-laws are subject to the certificate of incorporation of the corporation. In these by-laws, references to law, the certificate of incorporation and by-laws mean the law, the provisions of the certificate of incorporation and the by-laws as from time to time in effect. Section 2. STOCKHOLDERS 2.1. ANNUAL MEETING. The annual meeting of stockholders shall be held at 10:30 a.m. on the third Wednesday in July in each year, unless that day be a legal holiday at the place where the meeting is to be held, in which case the meeting shall be held at the same hour on the next succeeding day not a legal holiday, or at such other date and time as shall be designated from time to time by the board of directors and stated in the notice of the meeting, at which they shall elect a board of directors and stated in the notice of the meeting, at which they shall elect a board of directs and transact such other business as may be required by law or these by-laws or as may properly come before the meeting. 2.2 SPECIAL MEETING. A special meeting of the stockholders may be called at any time by the chairman of the board, if any, the president or the board of directors. A special meeting of the stockholders shall be called by the secretary, or in the case of the death, absence, incapacity or refusal of the secretary, by an assistant secretary or some other officer, upon application of a majority of the directors. Any such application shall state the purpose or purposes of the proposed meeting. Any such call shall state the place, date, hour, and purposes of the meeting. 2.3. PLACE OF MEETING. All meetings of the stockholders for the election of directors or for any other purpose shall be held at such place within or without the State of Delaware as may be determined from time to time by the chairman of the board, if any, the president or the board of directors. Any adjourned session of any meeting of the stockholders shall be held at the place designated in the vote of adjournment. 2.4. NOTICE OF MEETINGS. Except as otherwise provided by law, a written notice of each meeting of stockholders stating the place, day and hour thereof and, in the case of a special meeting, the purposes for which the meeting is called, shall be given not less than ten nor more than sixty days before the meeting, to each stockholder entitled to vote the seat, and to each stockholder who, by law, by the certificate of incorporation or by these by-laws, is entitled to notice, by leaving such notice with him or at his residence or usual place of business, or by depositing it in the United States mail, postage prepaid, and addressed to such stockholder at his address as it appears in the records of the corporation. Such notice shall be given by the secretary, or by an officer or person designated by the board of directors, or in the case of a special meeting by the officer calling the meeting. As to any adjourned session of any meeting of stockholders, notice of the adjourned meeting need not be given if the time and place thereof are announced at the meeting at which the adjournment was taken except that if the adjournment is for more than thirty days or if after the adjournment a new record date is set for the adjourned session, notice of any such adjourned session of the meeting shall be given in the manner heretofore described. No notice of any meeting of stockholders or any adjourned session thereof need be given to a stockholder if a written waiver of notice, executed before or after the meeting as such adjourned session by such stockholder, is filed with the records of the meeting or if the stockholder attends such meeting without objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the stockholders or any adjourned session thereof need be specified in any written waiver of notice. 2 2.5. QUORUM OF STOCKHOLDERS. At any meeting of the stockholders a quorum as to any matter shall consist of a majority of the votes entitled to be cast on the matter, except where a larger quorum is required by law, by the certificate of incorporation or by these by-laws. Any meeting may be adjourned from time to time by a majority of the votes properly cast upon the question, whether or not a quorum is present. If a quorum is present at an original meeting, a quorum need not be present at an adjourned session of that meeting. Shares of its own stock belonging to the corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the corporation, shall neither be entitled to vote not be counted for quorum purposes; provided, however, that the foregoing shall not limit the right of any corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity. 2.6. ACTION BY VOTE. When a quorum is present at any meeting, a plurality of the votes properly cast for election to any office shall elect to such office and a majority of the votes properly cast upon any question other than an election to an office shall decide the question, except when a larger vote is required by law, by the certificate of incorporation or by these by-laws. No ballot shall be required for any election unless requested by a stockholder present or represented at the meeting and entitled to vote in the election. 2.7. ACTION WITHOUT MEETINGS. Unless otherwise provided in the certificate of incorporation, any action required or permitted to be taken by stockholders for or in connection with any corporate action may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. If action is taken by unanimous consent of stockholders, the writing or writings comprising such unanimous consent shall be filed with the records of the meetings of stockholders. If action is taken by less than unanimous consent of stockholders and in accordance with the foregoing, there shall be filed with the records of the meetings of stockholders the writing or writings comprising such less than unanimous consent. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those who have not consented in writing and a certificate signed and attested to by the secretary that such notice was given shall be filed with the records of the meetings of stockholders. In the event that the action which is consented to is such as would have required the filing of a certificate under any of the provisions of the General Corporation Law of Delaware, if such action had been voted upon by the stockholders at a meeting thereof, the certificate filed under such provision shall state that written consent has been given under Section 228 of said General Corporation Law, in lieu of stating that the stockholders have voted upon the corporate action in questions, if such last mentioned statement is required thereby. 2.8. PROXY REPRESENTATION. Every stockholder may authorize another person or persons to act for him by proxy in all matters in which a stockholder is entitled to participate, whether by waiving notice of any meeting, objecting to or voting or participating at a meeting, or expressing consent or dissent without a meeting. Every proxy must be signed by the stockholder or by his attorney-in-fact. No proxy shall be voted or acted upon after three years from its date unless such proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and, if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the corporation generally. The authorization of a proxy may but need not be limited to specified action, provided, however, that if a proxy limits its authorization to a meeting or meetings of stockholders, unless otherwise specifically provided such proxy shall entitle the holder thereof to vote at any adjourned session but shall not be valid after the final adjournment thereof. 3 2.9. INSPECTORS. The directors or the person presiding at the meeting may, but need not, appoint one or more inspectors of election and any substitute inspectors to act at the meeting or any adjournment thereof. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors, if any, shall determine the number of shares of stock outstanding and the voting power of each, the shares of stock represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the person presiding at the meeting, the inspectors shall make a report in writing of any challenge, question or matter determined by them and execute a certificate of any fact found by them. 2.10. LIST OF STOCKHOLDERS. The secretary shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at such meeting, arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in his name. The stock ledger shall be the only evidence as to who are stockholders entitled to examine such list or to vote in person or by proxy at such meeting. 2.11 BUSINESS OF MEETING. No business may be transacted at an annual meeting of stockholders, other than business that is either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors (or any duly authorized committee thereof), (b) otherwise properly brought before the annual meeting by or at the direction of the Board of Directors (or any duly authorized committee thereof), or (c) otherwise properly brought before the annual meeting by any stockholder of the Company who (i) is a stockholder of record on the date of the giving of the notice provided for in this Section 2.11 and on the record date for the determination of stockholders entitled to vote at such annual meeting and (ii) complies with the notice procedures set forth in this Section 2.11. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder, such stockholder must have given timely notice thereof in proper written form to the Secretary of the Company. To be timely, a stockholder's notice to the Secretary must be delivered to or mailed and received by the Secretary of the Company not less than fifty (50) days prior to the date of the annual meeting of stockholders; provided, that in the event that less than 60 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs. To be proper written form, a stockholder's notice to the Secretary must set forth as to each matter such stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of such stockholder, (iii) the class or series and number of shares of capital stock of the Company which are owned beneficially or of record by such stockholder, (iv) a description of all arrangements or understandings between such stockholder and any other person or persons (including their names) in connection with the proposal of such business by such stockholder and any material interest of such stockholder in such business and (v) a representation that such stockholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting. 4 No business shall be conducted at the annual meeting of stockholders except business brought before the annual meeting in accordance with the procedures set forth in this Section 2.11, provided, however, that, once business has been properly brought before the annual meeting in accordance with such procedures, nothing in this Section 2.11 shall be deemed to preclude discussion by any stockholder of any such business. If the Chairman of an annual meeting determines that business was not properly brought before the annual meeting in accordance with the foregoing procedures, the Chairman of an annual meeting determines that business was not properly brought before the meeting and such business shall not be transacted. Section 3. BOARD OF DIRECTORS 3.1. NUMBER. The number of directors which shall constitute the whole board shall be not less than three and not more than 12. Within the foregoing limits, the stockholders at the annual meeting shall determine the number of directors and shall elect the number of directors as determined. Within the foregoing limits, the number of directors may be increased at any time or from time to time by the stockholders or by the directors by a vote of a majority of the directors then in office. The number of directors may be decreased to any number permitted by the foregoing at any time either by the stockholders or by the directors by a vote of the majority of the directors then in office, but only to eliminate vacancies existing by reason of the death, resignation or removal or one or more directors. Directors need not be stockholders. 3.2 CLASSIFICATION, ELECTION AND TENURE. The directors, other than whose who may be elected by the holders of any class or series of preference stock voting separately by class or series, shall be classified, with respect to the duration of the term for which they severally hold office, into three classes, designated Class I, Class II, and Class III, which shall be as nearly equal in number as possible and as provided by resolution of the board of directors in connection with such election. Each initial director in Class I shall hold office for a term expiring at the 1992 annual meeting of stockholders; each initial director of Class II shall hold office for a term expiring at the 1993 annual meeting of stockholders; and each initial director of Class III shall hold office for a term expiring at the 1994 annual meeting of stockholders. Each director shall serve until his successor is duly elected and qualified or until his earlier death, resignation, removal or disqualification. At each annual meeting of stockholders following the 1991 annual meeting, the stockholders shall elect the successors to the class of directors whose term expires at that meeting to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election and until their successors have been duly elected and qualified or until their earlier death, resignation, removal or disqualification. The board of directors shall increase or decrease the number of directors in one or more classes as may be appropriate whenever it increases or decreases the number of directors pursuant to Section 3.1, in order to ensure that the three classes shall be as nearly equal in number as possible. 3.3. POWERS. The business and affairs of the corporation shall be managed by or under the direction of the board of directors who shall have and may exercise all the powers of the corporation and do all such lawful acts and things as are not by law, the certificate of incorporation or these by-laws directed or required to be exercised or done by the stockholders. 5 3.4. VACANCIES. Vacancies and any newly created directorships resulting from any increase in the number of directors may be filled by vote of the stockholders at a meeting called for the purpose, or by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. When one or more directors shall resign from the board, effective at a future date, a majority of the directors then in office, including those who have resigned, shall have power to fill such vacancy or vacancies, the vote or action by writing thereon to take effect when such resignation or resignations shall become effective. The directors shall have and may exercise all their powers notwithstanding the existence of one or more vacancies in their number, subject to any requirements of law or of the certificate of incorporation or of these by-laws as to the number of directors required for a quorum or for any vote or other actions. 3.5. COMMITTEES. The board of directors may, by vote of a majority of the whole board, (a) designate, change the membership of or terminate the existence of any committee or committees, each committee to consist of one or more of the directors; (b) designate one or more directors as alternative members of any such committee who may replace any absent or disqualified member at any meeting of the committee; and (c) determine the extent to which each such committee shall have and may exercise the powers of the board of directors in the management of the business and affairs of the corporation, including the power to authorize the seal of the corporation to be affixed to all papers which require it and the power and authority to declare dividends or to authorize the issuance of stock; excepting, however, such powers which by law, by the certificate of incorporation or by these by-laws they are prohibited from so delegating. In the absence or disqualification of any member of such committee and his alternate, if any, the member or members thereof present at any meeting and not disqualified from voting, whether or not constituting a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Except as the board of directors may otherwise determine, any committee may make rules for the conduct of its business, but unless otherwise provided by the board or such rules, its business shall be conducted as nearly as may be in the same manner as is provided by these by-laws for the conduct of business by the board of directors. Each committee shall keep regular minutes of its meetings and report the same to the board of directors upon request. 3.6. REGULAR MEETINGS. Regular meetings of the board of directors may be held without call or notice at such places within or without the State of Delaware and at such times as the board may from time to time determine, provided that notice of the first regular meeting following any such determination shall be given to absent directors. A regular meeting of the directors may be held without call or notice immediately after and at the same place as the annual meeting of stockholders. 3.7 SPECIAL MEETINGS. Special meetings of the board of directors may be held at any time and at any place within or without the State of Delaware designated in the notice of the meeting, when called by the chairman of the board, if any, the president, or by one-third or more in number of the directors, reasonable notice thereof being given to each director by the secretary or by the chairman of the board, if any, the president or any one of the directors calling the meeting. 3.8 NOTICES. It shall be reasonable and sufficient notice to a director to send notice by mail at least forty-eight hours or by telegram at least twenty-four hours before the meeting addressed to him at his usual or last known business or residence address or to give notice to him in person or by telephone at least twenty-four hours before the meeting. Notice of a meeting need not be given to any director if a written waiver of notice, executed by him before or after the meeting, is filed with the records of the meeting, or to any director who attends the meeting without protesting prior thereto or at its commencement the lack of notice to him. Neither notice of a meeting nor a waiver of a notice need specify the purposes of the meeting. 3.9. QUORUM. Except as may be otherwise provided by law, by the certificate of incorporation or by these by-laws, at any meeting of the directors a majority of the directors then in office shall constitute a quorum; a quorum shall not in any case be less than one-third of the total number of directors constituting the whole board. Any meeting may be adjourned from time to time by a majority of the votes cast upon the question, whether or not a quorum is present, and the meeting may be held as adjourned without further notice. 6 3.10. ACTION BY VOTE. Except as may be otherwise provided by law, by the certificate of incorporation or by these by-laws, when a quorum is present at any meeting the vote of a majority of the directors present shall be the act of the board of directors. 3.11. ACTION WITHOUT A MEETING. Any action required or permitted to be takes at any meeting of the board of directors or a committee thereof may be taken without a meeting if all the members of the board or of such committee, as the case may be, consent thereto in writing, and such writing or writings are filed with the records of the meetings of the board or of such committee. Such consent shall be treated for all purposes as the act of the board or of such committee, as the case may be. 3.12. PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE. Members of the board of directors, or any committee designated by such board, may participate in a meeting of such board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meting can hear each other or by any other means permitted by law. Such participation shall constitute presence in person at such meeting. 3.13. COMPENSATION. In the discretion of the board of directors, each director may be paid such fees for his services as director and be reimbursed for his reasonable expenses incurred in the performance of his duties as director as the board of directors from time to time may determine. Nothing contained in this section shall be construed to preclude any director from serving the corporation in any other capacity and receiving reasonable compensation therefor. 3.14. INTERESTED DIRECTORS AND OFFICERS. (a) No contract or transaction between the corporation and one or more of its directors or officers, or between the corporation and any other corporation, partnership, association, or other organization in which one or more of the corporation's directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: (1) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors or the committee, and the board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (2) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (3) The contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the board of directors, a committee thereof, or the stockholders. (b) Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee which authorizes the contract or transaction. 7 Section 4. OFFICERS AND AGENTS 4.1. ENUMERATION; QUALIFICATION. The officers of the corporation shall be a president, chief financial officer, a secretary and such other officers, if any, as the board of directors from time to time may in its discretion elect or appoint including without limitation a chairman of the board, one or more vice presidents and a controller. The corporation may also have such agents, if any, as the board of directors from time to time may in its discretion choose. Any officer may be but none need be a director or stockholder. Any two or more officers may be held by the same person. Any officer may be required by the board of directors to secure the faithful performance of his duties to the corporation by giving bond in such amount and with sureties or otherwise as the board of directors may determine. 4.2. POWERS. Subject to law, to the certificate of incorporation and to the other provisions of these by-laws, each officer shall have, in addition to the duties and powers herein set forth, such duties and powers as are commonly incident to his office and such additional duties and powers as the board of directors may from time to time designate. 4.3. ELECTION. The officers may be elected by the board of directors at their first meeting following the annual meeting of the stockholders or at any other time. At any time or from time to time the directors may delegate to any officer their power to elect or appoint any other officer or any agents. 4.4. TENURE. Each officer shall hold office until the first meeting of the board of directors following the next annual meeting of the stockholders and until his respective successor is chosen and qualified unless a shorter period shall have been specified by the terms of his election or appointment, or in each case until he sooner dies, resigns, is removed or becomes disqualified. Each agent shall retain his authority at the pleasure of the directors, or the officer by whom he was appointed or by the officer who then holds agent appointive power. 4.5. CHAIRMAN OF THE BOARD OF DIRECTORS, PRESIDENT AND VICE PRESIDENT. The chairman of the board, if any, shall have such duties and powers as shall be designated from time to time by the board of directors. Unless the board of directors otherwise specifies, the chairman of the board, or if there is none the chief executive officer, shall preside, or designate the person who shall preside, at all meetings of the stockholders and of the board of directors. Unless the board of directors otherwise specifies, the president shall be the chief executive officer and shall have direct charge of all business operations of the corporation and, subject to the control of the directors, shall have general charge and supervision of the business of the corporation. Any vice presidents shall have such duties and powers as shall be set forth in these by-laws or as shall be designated from time to time by the board of directors or by the president. 4.6. CHIEF FINANCIAL OFFICER. The chief financial officer of the corporation shall be in charge of its funds and valuable papers, and shall have such other duties and powers as may be designated from time to time by the board of directors or by the president. If no controller is elected, the chief financial officer shall also have the duties and powers of the controller. 4.7. CONTROLLER AND ASSISTANT CONTROLLERS. If a controller is elected, he shall be in charge of the corporation's books of account and accounting records, and of its accounting procedures. He shall have such other duties and powers as may be designated from time to time by the board of directors, the president or the chief financial officer. 8 Any assistant controller shall have such duties and powers as shall be designated from time to time by the board of directors, the president, the chief financial officer or the controller. 4.8. SECRETARY AND ASSISTANT SECRETARIES. The secretary shall record all proceedings of the stockholders, of the board of directors and of committees of the board of directors in a book or series of books to be kept therefor and shall file therein all actions by written consent of stockholders or directors. In the absence of the secretary from any meeting, an assistant secretary, or if there be none or he is absent, a temporary secretary chosen at the meeting, shall record the proceedings thereof. Unless a transfer agent has been appointed the secretary shall keep or cause to be kept the stock and transfer records of the corporation, which shall contain the names and record addresses of all stockholders and the number of shares registered in the name of each stockholder. He shall have such other duties and powers as may from time to time be designated by the board of directors or the president. Any assistant secretaries shall have such duties and powers as shall be designated from time to time by the board of directors, the president or the secretary. Section 5. RESIGNATIONS AND REMOVALS 5.1. Any director or officer may resign at any time by delivering his resignation in writing to the chairman of the board, if any, the president, or the secretary or to a meeting of the board of directors. Such resignations shall be effective upon receipt unless specified to be effective at some other time, and without in either case the necessity of its being accepted unless the resignation shall so state. Except as otherwise provided in the certificate of incorporation or these by-laws relating to the rights of the holders of any class or series of preference sk, voting separately by class or series, to elect directors under specified circumstances, any director or directors may be removed from office at any time, but only for cause and only by the affirmative vote, at any regular meeting or special meeting of the stockholders, of not less than two-thirds of the total number of votes of the then outstanding shares of capital stock of the corporation entitled to vote generally in the election of directors, voting together as a single class, but only if notice of such proposal was contained in the notice of such meeting. Any vacancy in the board of directors resulting from any such removal may be filed by vote of a majority of the directors then in office, although less than a quorum, and any director or directors so chosen shall hold office until the next election of the class for which such directors shall have been chosen and until their successors shall be elected and qualified or until their earlier death, resignation or removal. The board of directors may at any time remove any officer wither with or without cause. The board of directors may at any time terminate or modify the authority of any agent. No director or officer resigning and (except where a right to receive compensation shall be expressly provided in a duly authorized written agreement with the corporation) no director or officer removed shall have any right to any compensation as such director or officer for any period following his resignation or removal, or any right to damages on account of such removal, whether his compensation be by the month or by the year or otherwise; unless, in the case of a resignation, the directors, or, in the case of removal, the body acting on the removal, shall in their or its discretion provide for compensation. Section 6. VACANCIES 6.1. If the office of the president or the chief financial officer or the secretary becomes vacant, the directors may elect a successor by vote of a majority of the directors then in office. If the office of any other officer becomes vacant, any person or body empowered to elect or appoint that officer may choose a successor. Each such successor shall hold office for the unexpired term, and in the case of the president, the chief financial officer and the secretary until his successor is chosen and qualified or in each case until he sooner dies, resigns, is removed or becomes disqualified. Any vacancy of a directorship shall be filled as specified in Section 3.4 of these by-laws. 9 Section 7. CAPITAL STOCK 7.1. STOCK CERTIFICATES. Each stockholders shall be entitled to a certificate stating the number and the class and the designation of the series, if any, of the shares held by him, in such form as shall, in conformity to law, the certificate of incorporation and the by-laws, be prescribed from time to time by the board of directors. Such certificate shall be signed by the chairman or vice chairman of the board, if any, or the president or a vice president and by the chief financial officer or by the secretary or an assistant secretary. Any of or all the signatures on the certificate may be a facsimile. In case an officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed on such certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent, or registrar at the time of its issue. 7.2. LOSS OF CERTIFICATES. In the case of the alleged theft, loss, destruction or mutilation of a certificate of stock, a duplicate certificate may be issued in place thereof, upon such terms, including receipt of a bond sufficient to indemnify the corporation against any claim on account thereof, as the board of directors may prescribe. 10 Section 8. TRANSFER OF SHARES OF STOCK 8.1. TRANSFER ON BOOKS. Subject to the restrictions, if any, stated as noted on the stock certificate, shares of stock may be transferred on the books of the corporation by the surrender to the corporation or its transfer agent of the certificate therefor properly endorsed or accompanied by a written assignment and power of attorney properly executed, with necessary transfer stamps affixed, and with such proof of the authenticity of signature as the board of directors of the transfer agent of the corporation may reasonably require. Except as may be otherwise required by law, by the certificate of incorporation or by these by-laws, the corporation shall be entitled to treat the record holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to receive notice and to vote or to give any consent with respect thereto and to be held liable for such calls and assessments, if any, as may lawfully be made thereon, regardless of any transfer, pledge or other disposition of such stock until the shares have been properly transferred on the books of the corporation. It shall be the duty of each stockholder to notify the corporation of his post office address. 8.2. RECORD DATE AND CLOSING TRANSFER BOOKS. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days (or such longer period as may be required by law) before the date of such meeting, nor more than sixty days prior to any other action. If no record date is fixed: (a) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (b) The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the board of directors is necessary, shall be the day on which the first written consent is expressed. (c) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. Section 9. CORPORATE SEAL 9.1. Subject to alteration by the directors, the seal of the corporation shall consist of a flat-faced circular die with the word "Delaware" and the name of the corporation cut or engraved thereon, together with such other words, dates or images as may be approved from time to time by the directors. 11 Section 10. EXECUTION OF PAPERS 10.1. Except as the board of directors may generally or in particular cases authorize the execution thereof in some other manner, all deeds, leases, transfers, contracts, bonds, notes, checks, drafts or other obligations made, accepted or endorsed by the corporation shall be signed by the chairman of the board, if any, the president, a vice president or the chief financial officer. Section 11. FISCAL YEAR 11.1. The fiscal year of the corporation shall end on December 31 of each year. Section 12. AMENDMENTS 12.1. These by-laws may be adopted, amended or repealed by vote of a majority of the directors then in office or by vote of a majority of the stock outstanding and entitled to vote. Any by-law, whether adopted, amended or repealed by the stockholders or directors, may be amended or reinstated by the stockholders or the directors. EX-10 4 ex104.txt AM 3 TO BANK CREDIT FACILITY EXHIBIT 10.4 AMENDMENT NO. 3 AMENDMENT NO. 3 dated as of March 4, 2003 between BE AEROSPACE, INC., a corporation duly organized and validly existing under the laws of the State of Delaware (the "Borrower"), each of the lenders that is a signatory hereto under the caption "LENDERS" on the signature pages hereto (individually a "Lender" and collectively the "Lenders") and JPMORGAN CHASE BANK (formerly known as The Chase Manhattan Bank) as administrative agent (in such capacity, together with its successors in such capacity, the "Administrative Agent") under the Credit Agreement referred to below. The Borrower, the Lenders and Administrative Agent are parties to a Credit Agreement dated as of August 21, 2001 (as heretofore amended, the "Credit Agreement"). The Borrower, the Lenders and the Administrative Agent wish to amend the Credit Agreement in certain respects and, accordingly, the parties hereto hereby agree as follows: Section 1. Definitions. Unless otherwise defined herein, terms defined in the Credit Agreement are used herein as defined therein. Section 2. Amendments. Subject to the execution of this Amendment No. 3 by the Borrower and the Required Lenders, the definition of "Adjusted Net Worth" in the Credit Agreement shall be amended by deleting the figure "$15,000,000" therein and substituting "$30,000,000" in lieu thereof. Section 3. Representations and Warranties. The Borrower represents and warrants to the Lenders that the representations and warranties set forth in Article III of the Credit Agreement (as amended hereby) are true and complete on the date hereof as if made on and as of the date hereof (or, if such representation or warranty is expressly stated to be made as of a specific date, as of such specific date) and as if each reference in said Article III to "this Agreement" included reference to this Amendment No. 3. Section 4. Miscellaneous. Except as expressly provided herein, the Credit Agreement shall remain unchanged and in full force and effect. This Amendment No. 3 may be executed in any number of counterparts, all of which taken together shall constitute one and the same amendatory instrument and any of the parties hereto may execute this Amendment No. 3 by signing any such counterpart. This Amendment No. 3 shall be governed by, and construed in accordance with, the law of the State of New York. IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 3 to be duly executed as of the date and year first above written. BE AEROSPACE, INC. By /s/ Thomas P. McCaffrey -------------------------------- Name: Thomas P. McCaffrey LENDERS JPMORGAN CHASE BANK (formerly known as BANK OF AMERICA, N.A. The Chase Manhattan Bank) By:/s/ Matthew H. Massie By: ------------------------------ ------------------------------- Name: Matthew H. Massie Name: Title: Managing Director Title: CREDIT SUISSE FIRST BOSTON FIRST UNION NATIONAL BANK By:/s/ Jay Chall By: ------------------------------ ------------------------------- Name: Jay Chall Name: Title: Director Title: CREDIT SUISSE FIRST BOSTON By:/s/ Cassandra Droogan ------------------------------ Name: Cassandra Droogan Title: Associate MERRILL LYNCH CAPITAL CORPORATION THE BANK OF NEW YORK By: /s/ Nancy E. Meadows By:/s/ Brendan T. Nedzi ---------------------------- ------------------------------- Name: Nancy E. Meadows Name: Brendan T. Nedzi Title: Assistant Vice Title: Senior Vice President CREDIT LYONNAIS, NEW YORK GE CAPITAL CORPORATION BRANCH By: /s/ Scott R. Chappelka By:/s/ Karl Kieffer ---------------------------- ------------------------------- Name: Scott R. Chappelka Name: Karl Kieffer Title: Vice President Title: Duly Authorized Signatory Amendment No. 3 EX-10 5 am3tpm.txt AM 3 TO T. P. MCCAFFREY EMPLOYMENT AGREEMENT EXHIBIT 10.31 THIRD AMENDMENT TO EMPLOYMENT AGREEMENT THIS THIRD AMENDMENT (the "Amendment"), made and entered into effective as of the 24th day of March, 2003, by and between BE AEROSPACE, INC., a Delaware corporation (the "Company"), and THOMAS P. MCCAFFREY (the "Executive"). WITNESSETH: WHEREAS, the Company and the Executive entered into that certain Employment Agreement, restated and dated as of September 14, 2001, and thereafter amended said employment agreement effective September 14, 2001 and May 15, 2002 (hereinafter collectively "Employment Agreement"); WHEREAS, the Executive and the Company now mutually desire to further amend the Employment Agreement. NOW, THEREFORE, effective as of the 24th day of March, 2003, the Employment Agreement shall be amended as follows: 1. Section 5(e)(i)(a) shall be amended by striking the reference to "Termination Date" in that Section, and replacing it with "Change of Control Date." 2. Except as amended by this Amendment, all terms and conditions of the Employment Agreement shall remain in full force and effect. This Amendment may be executed in any number of counterparts which together shall constitute one instrument, shall be governed by and construed in accordance with the laws of (other than the conflict of laws rules) of the State of Florida and shall bind and inure to the benefit of the parties hereto and their respective successors, assigns and heirs. IN WITNESS WHEREOF, the parties hereto have hereunto set their hands as of the date first written above. EXECUTIVE COMPANY BE AEROSPACE, Inc., a Delaware corporation /s/ Thomas P. McCaffrey By: /s/ Robert J. Khoury - ----------------------- -------------------- Thomas P. McCaffrey Name: Robert J. Khoury Title: President and Chief Executive Officer 1 EX-12 6 ex12.txt COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12.1 Computation of Ratio of Earnings to Fixed Charges (Unaudited) (In millions)
Ten-Month Transition Period Fiscal Year Ended Ended ---------------------------------------------------------------- 12/31/2002 2/23/2002 2/24/2001 2/26/2000 2/27/1999 --------------- --------------- ---------------- --------------- --------------- Earnings: (Loss) earnings before income taxes and extraordinary items $ (68.1) $ (93.0) $ 22.5 $(47.5) $ (79.5) Fixed charges, excluding capitalized interest 60.7 68.5 60.4 57.4 46.8 ------- ------- ------ ------ ------- Total (loss) earnings $ (7.4) $ (24.5) $ 82.9 $ 9.9 $ (32.7) ------- ------- ------ ------ ------- Fixed Charges: Interest expense $ 58.5 $ 66.2 $ 57.9 $ 54.9 $ 44.8 Capitalized interest -- -- 0.3 1.5 2.1 Amortization of deferred debt issuance costs 2.2 2.3 2.5 2.5 2.0 ------- ------- ------ ------ ------- Total fixed charges $ 60.7 $ 68.5 $ 60.7 $ 58.9 $ 48.9 ------- ------- ------ ------ ------- Ratio of (loss) earnings to total fixed charges * * 1.4 0.2 * ======= ======= ====== ====== =======
* Earnings were insufficient to cover fixed charges by $68.1, $93.0 and $81.6 for the transition period ended December 31, 2002 and for the fiscal years ended February 23, 2002 and February 27, 1999, respectively. EX-14 7 ex14.txt CODE OF BUSINESS CONDUCT EXHIBIT 14.1 BE Aerospace, Inc. CODE OF BUSINESS CONDUCT 02/2003 TABLE OF CONTENTS INTRODUCTION ADMINISTERING AND ENFORCING THE CODE OF BUSINESS CONDUCT Seeking Guidance - The Corporate Compliance Committee Reporting and Investigation of Alleged Violations Enforcement COMPLIANCE WITH APPLICABLE LAWS AND ETHICAL STANDARDS Accuracy and Retention of Business Records Business Relationships with Non-Company Individuals and Entities Discussions with Foreign Agents and Consultants Requirements Applicable to All Contracts, Agreements and Arrangements Gifts and Entertainment Conflicts of Interest Political Contributions and Lobbying Activities Protecting Company Property and Information Securities Laws Antitrust Laws, Restrictive Trade Practices, Boycotts, Export Controls and Technology Transfer Restrictions INTRODUCTION This Code of Business Conduct applies to BE Aerospace, Inc. and all subsidiaries and entities controlled by it (collectively, the "Company"), and the Company's directors, officers and employees. Compliance with the Code of Business Conduct is required of all Company employees. The Code of Business Conduct should also be followed by the Company's agents and representatives, including consultants. The Company's senior management is charged with ensuring that this Code of Business Conduct and the Company's Corporate Policies will govern, without exception, all business activities of the Company. The Audit Committee of the Board of Directors is responsible for ensuring that appropriate ethics and compliance policies and procedures are maintained. Any illegal or unethical action, or the appearance of misconduct or impropriety by anyone acting on the Company's behalf is unacceptable. Each employee should use the Code of Business Conduct as a general guideline. Additional requirements are contained in the Corporate Policies. These Corporate Policies can be obtained from supervisors. In addition to complying with the requirements contained in the Corporate Policies, in specific situations, before taking any action each employee should consider the following questions and, unless the answer to each question is "yes," the action should not be taken: 02/2003 Page 2 of 13 o Is this action legal and ethical? o Does this action comply with both the spirit and the letter of this Code of Business Conduct? o Will this action appear appropriate? o Is it clear that the Company would not be embarrassed or compromised if this action were to become known within the Company or publicly? Each supervisor should set an example of ethical behavior by his/her own conduct and his/her oversight of the work and conduct of his/her subordinates and the Company's agents and representatives, including consultants. The Code of Business Conduct is not an employment contract between the Company and any employee. No employee should interpret the Code of Business Conduct or any of the Corporate Policies stated in the Code of Business Conduct as a contract for any purpose, including a promise of continued employment. ADMINISTERING AND ENFORCING THE CODE OF BUSINESS CONDUCT SEEKING GUIDANCE - THE CORPORATE COMPLIANCE COMMITTEE The Company's Chief Executive Officer has recommended and our Audit Committee has appointed a Corporate Compliance Committee to oversee compliance with the Code of Business Conduct, and a Chief Compliance Officer to administer the compliance program. All Company employees are required to comply with the policies and instructions promulgated by either the Corporate Compliance Committee or Chief Compliance Officer. The following officers of the Company are the current members of the Corporate Compliance Committee: Jeff Moriarty, Corporate Vice President Law, 561-791-5000 (ext. 1408) General Counsel and Chief Compliance Officer Thomas P. McCaffrey, Corporate Senior Vice President of 561-791-5000 (ext. 1403) Administration and Chief Financial Officer Joseph A. Piegari, Corporate Vice President 561-791-5000 (ext. 1109) Human Resources The Corporate Compliance Committee shall be responsible for the administration of the Code of Business Conduct. The Committee in consultation with the Chief Executive Officer shall establish such procedures as it shall deem necessary or desirable in order to discharge this responsibility. The Corporate Compliance Committee shall periodically review the Code of Business Conduct and when necessary or desirable, make recommendations to the Chief Executive Officer and the Audit Committee of the Board of Directors (i) to ensure its continued conformance to applicable law; and (ii) to ensure that any weaknesses revealed through monitoring, auditing and reporting systems are eliminated and or corrected. Questions about the Code of Business Conduct normally should be addressed to supervisors who will relay them to the Chief Compliance Officer or the Corporate Compliance Committee, if necessary. If the employee is not comfortable raising such questions with his supervisor, they may be addressed to the Chief Compliance Officer or any member of the Corporate Compliance Committee. Page 3 of 13 For an interpretation of law, an employee should communicate directly with the Company's Law Department, which has ultimate responsibility for the resolution of such questions. Annually, randomly selected employees will be required to sign a statement that they have followed the Code of Business Conduct and are unaware of any situation that constitutes a violation of the Code of Business Conduct. Reporting and Investigation of Alleged Violations Every employee should report any violation or suspected violation of law, rules, regulations and the Code of Business Conduct to his/her supervisor or department head, who will report the information to the Chief Compliance Officer. Alternatively, an employee may report the matter directly to any member of the Corporate Compliance Committee. No employee will be retaliated against for making a good faith report of a suspected violation of the Code of Business Conduct. BE Aerospace Compliance Line: A toll-free compliance line (888-207-3606) is available to employees as another way to report problems under, or ask questions about, this Code of Business Conduct. (Callers outside the United States should dial the AT&T USADirect access code for the United States, wait for the dial tone, then dial 888-207-3606.) The compliance line is open 24 hours a day, seven days a week. Calls can be made anonymously and the matter will be investigated by the Corporate Compliance Committee or its designee to the extent sufficient information is received to conduct such investigation. All reports will be treated confidentially to the extent possible. It is imperative that reporting employees not conduct their own preliminary investigations. Such actions could compromise the integrity of an investigation and adversely affect the Company and others. Employees who wish to follow up on a report may contact the Chief Compliance Officer. If, after discussion with the Chief Compliance Officer or the Corporate Compliance Committee, an employee feels that appropriate action has not taken place, he may report the matter to the Audit Committee of the Board of Directors of the Company. The Company will take all reasonable steps to keep confidential the identity of any employee reporting a suspected violation. No employee shall be subject to retaliation because of any such report made in good faith. The Chief Compliance Officer shall report to the Audit Committee of the Board of Directors at least once each year regarding the general effectiveness of the Code of Business Conduct. Enforcement The Company will not tolerate violation or circumvention of any laws of the U.S. or a foreign country by an employee during the course of his/her employment or by any agent or representative acting on the Company's behalf. Nor will the Company tolerate the disregard or circumvention of corporate policy or the engagement in unethical dealings in connection with the Company's business. Employees who fail to comply with this Code of Business Conduct or to cooperate with any investigation will be subject to disciplinary action. In addition, any supervisor, manager or officer who directs, approves or condones infractions, or has knowledge of them and does not act promptly to report and correct them in accordance with this Code of Business Conduct, will be subject to disciplinary action. Disciplinary action may include termination, referral for criminal prosecution and reimbursement to the Company or others for any losses or damages resulting from the violation. If the reporting employee is involved in the Code of Business Conduct violation, the fact that he/she reported the violation will be given consideration by the Company in any resulting disciplinary action. COMPLIANCE WITH APPLICABLE LAWS AND ETHICAL STANDARDS It is the policy of the Company that its business shall be conducted in accordance with all applicable laws of the U.S. and foreign jurisdictions, and in a manner that will always reflect a high standard of ethics. U.S. laws frequently affect and restrict the activities of Company employees, agents and representatives. For example, various laws require that: Page 4 of 13 o All transactions involving Company assets shall be properly recorded. o No employee, agent or representative of the Company shall give or offer anything of value to any public official with the intent to influence any official act. o No employee, agent or representative of the Company shall pay or offer any bribe. o Except as permitted by law, no funds or assets of the Company shall be contributed to any political party or organization or to any individual who either holds public office or is a candidate for public office. o There shall be no trading of securities on the basis of material non-public information. This is only a very brief summary of a few of the applicable U.S. laws. In its international operations, the Company also encounters laws, regulations, policies and customs that vary widely from those in the U.S. Each employee should become aware of the laws, regulations, policies and customs applicable to his/her activities on behalf of the Company, and if a question, potential conflict or violation arises, seek guidance from, or report the matter to, the Chief Compliance Officer or to the Corporate Compliance Committee. Accounting standards and applicable U.S. laws require that all transactions and dispositions of Company assets must be properly recorded in all the books and accounts of the Company, and that the Company must establish and maintain a system of internal accounting controls to ensure reliability of its books and records and proper recording of all transactions including disposition of assets. The Company shall make and retain books, records and accounts that, in reasonable detail, accurately and fairly reflect the Company's transactions and disposition of its assets and conform to applicable legal requirements and generally accepted accounting principles as applied in the U.S. Each transaction must conform to management's general or specific authorization, and each entity shall devise and maintain an appropriate system of internal accounting controls. No entry may be made on the Company's books and records that misrepresents, hides or disguises the true nature of any transaction. The Company shall not: o Establish or use any secret or off-balance sheet function or account for any purpose; o Use corporate funds to establish or use any numbered bank account that is not identified by the name of the owner; or o Establish or use any offshore corporate entity for any purpose other than a legitimate Company business purpose. Company records should be retained for the period of time specified in the Company's Record Retention Plan. After that, they may be disposed of unless litigation or an investigation is pending. Employees should consult the Company Law Department for assistance in reviewing applicable retention guidelines or the propriety of disposing of a Company record. Page 5 of 13 The Company follows generally accepted accounting principles in the United States. For a detailed description of those policies see the Company's most recent Form 10-K as filed with the Securities and Exchange Commission. Applicable U.S. law requires that the Company must establish and maintain disclosure controls and procedures to ensure full, fair, accurate, and timely disclosure in reports the Company files with, or submits to the Securities and Exchange Commission ("SEC"). The Company shall maintain disclosure controls and to ensure the accuracy, completeness and timeliness of disclosures made by the Company to its securityholders, the SEC and the investment community. The disclosure controls and procedures are set forth in the Company's Disclosure Guidelines. Business Relationships with Non-Company Individuals and Entities No contract, agreement, arrangement, payment, gift or entertainment, domestic or foreign, shall be offered, promised, agreed, paid or received that would violate any applicable U.S. or foreign law. o The U.S. Foreign Corrupt Practices Act ("FCPA") makes it a crime for any U.S. company or person to offer or pay anything of value to a foreign official for the purpose of securing any improper advantage in obtaining, retaining or directing business or to induce that official to affect any governmental act or decision. For purposes of the FCPA, a foreign official includes any officer or employee of or any person acting in an official capacity for, or on behalf of, any foreign political party, party official, public international organization, or candidate for foreign political office. A company convicted of violating the anti-bribery provisions of the FCPA may be fined up to $2 million per violation. An employee or agent of the Company who is convicted of a violation of the FCPA may be fined up to $100,000 or imprisoned for up to five years, or both, per violation. o Federal and state anti-bribery statutes make it a crime to give or offer anything of value to any public official with the intent to influence any official act or induce the official to violate his duty or to commit fraud. A person convicted under Federal law of bribing a public official can be fined as much as three times the amount of the bribe and sentenced to as much as 15 years in prison. State laws establish similar penalties for bribery of state officials. Government agencies and other organizations often have strict standards which generally prohibit their employees from soliciting or accepting gratuities such as entertainment, meals, transportation, gifts or other business courtesies. o Commercial bribery is both a criminal and a civil offense under federal, state and foreign laws. The Company expects all those who do business with the Company to follow the ethical and legal standards set forth in this Code of Business Conduct and the Company's Foreign Corrupt Practices Act Compliance Memorandum. Company employees, consultants and representatives must respect the law and the policies of federal, state, local and foreign governments or their agencies with which the Company does business. Corporate policies prohibit the offering or providing of anything of value, under any circumstances, to a domestic or foreign government, official or employee, unless expressly permitted under such Corporate Policies. U.S. rules also apply to the use of intermediaries, such as consultants and sales representatives. Such foreign representatives or intermediaries should not be asked to perform, nor should any Company employee accept, encourage or permit any activity that a Company employee is not permitted to do directly. Any employee asked Page 6 of 13 to make or accept a payment, gift or business gratuity in violation of this Code of Business Conduct or the Company's Foreign Corrupt Practices Act Compliance Memorandum must report the matter immediately to the Chief Compliance Officer. Discussions with Foreign Sales Representatives and Marketing Consultants Employees may be approached by a third party offering to "deliver projects," send the Company orders or otherwise represent the Company in various capacities. Frequently the third party will claim a special relationship or position relative to the matter under consideration and will press for an immediate response or agreement. When solicited by a third party, employees should follow these procedures: o Make no commitments (oral or written) of any kind. Tell the third party at the outset that there can be no agreement with the Company until both parties have executed a written agreement. o Do not send the third party any corporate literature until after a written agreement is executed. o If the third party is unwilling to identify the project unless the Company makes a commitment, the conversation should be politely, but firmly, terminated. o All sales representative arrangements shall be in accordance with the Company's Process for Sales Representative, Marketing Consultant and Distributor Selection, Approval and Commission Management. Written approval of the Chief Compliance Officer or the Corporate Compliance Committee is required prior to signing any sales representative agreement or arrangement that involves: o aggregate commission payments of $2,000,000 or more; or o employment of a foreign government official or a payment of anything having a value of more than $1,000 (other than a facilitating payment approved by the Corporate Compliance Committee) to any foreign government official involving any government contract or action. A Marketing Consulting Arrangement is any contract, arrangement or agreement, whether written or not, with a third person, primarily for the purpose of obtaining advice or assistance in obtaining or retaining business with or approvals from any other person or entity including, but not limited to, governmental entities. Written approval of the Company's Law Department is required prior to signing any Marketing Consulting Arrangement that: o Involves aggregate compensation of $100,000 or more over the term of the Consulting Arrangement; or o (i) involves multiple, separate or concurrent contracts, agreements or arrangements; (ii) contemplates the utilization of, or the assignment of, contract obligations or fee payments to third parties; (iii) permits unusual multiple payments; (iv) permits upfront payments of any kind in excess of $100,000; (v) involves the use of foreign accounts in countries other than the country in which the consultant is representing the Company; or (vi) involves the use of undisclosed principals or undisclosed third party by the consultant. Requirements Applicable to All Contracts, Agreements and Arrangements General. The documentation embodying every contract, agreement and arrangement shall fully, clearly and completely reflect the intention of the contracting parties as to all material items and issues that are the subject matter of the contract, agreement or arrangement, including relevant specifics regarding services or goods to be provided and fees to be paid. Page 7 of 13 There shall be no "secret" or unwritten side contracts, agreements or arrangements. All contracts, agreements or arrangements must be reviewed prior to execution by the Company's Law Department unless standard form agreements previously prepared or reviewed and approved by the Law Department are utilized (examples include the Company's standard terms and conditions of sale; general terms and purchase and products support agreements; confidentiality agreements; and standard purchase order terms and conditions and supplier agreements. Any proposed payment to be made for goods, services or actions is an arrangement subject to this Code of Business Conduct. Fair Dealing Each employee, officer and director should deal fairly with customers, suppliers, competitors and employees. No person may take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts or any other unfair-dealing practice. Gifts and Entertainment Under no circumstances should any gift or entertainment ever be offered, given, provided or accepted by any Company employee, immediate family member of an employee or agent unless such gift or entertainment: o Is not a cash gift; o Is consistent with customary business practices; o Is not excessive in value; o Cannot be construed as a bribe or payoff; and o Does not violate applicable laws or regulations. In addition to meeting the foregoing criteria, such gift or entertainment must conform to all other requirements of this Code of Business Conduct. Gifts received that do not meet the foregoing criteria must be returned or, if return is not practical, given to the Corporate Compliance Committee who will donate the gift to a charitable organization and inform the giver of its disposition. Unless the giving, providing or receiving of the gift or entertainment falls within the definition of Exempt Gifts and Entertainment below, a memorandum requesting approval and describing the proposed gift or entertainment, including its purpose, signed by an employee of the Company shall be delivered to, and approved by, the Chief Compliance Officer. If the value of the gift or entertainment exceeds $1,000 per individual recipient, specific prior written approval of the Chief Compliance Officer is required. Exempt Gifts and Entertainment. If they meet all of the general requirements listed in the box above, the following gifts and entertainment shall be exempt from the requirements of the preceding paragraphs: o Business courtesy entertainment provided to others. Entertainment, including meals, that is infrequent (in respect of the same recipient), arises out of the usual course of business, involves a Page 8 of 13 reasonable expense (as defined below), does not obligate the recipient in any manner and is reasonable and appropriate for the individuals involved and the business at hand. Ordinarily, such entertainment would be given in the context of conducting business discussions or advancing business relationships and, in the case of a domestic government official, generally provided on Company, customer or provider premises. o Business courtesy gifts given to others. Gifts given to providers, customers and potential suppliers as to which the presentation and acceptance are lawful and a normal business practice and the gift itself is reasonable and appropriate for the individuals involved and the business at hand and of nominal value (as defined below). Ordinarily, such a gift to a domestic government official would be clearly promotional in nature, marked with a Company logo or other identification and made generally available by the Company. o Gifts and entertainment received from others. Gifts, meals or entertainment received by Company employees that is infrequent (in respect of the same provider), arises out of the usual course of business, involves reasonable expense or nominal value (as defined below), does not obligate the recipient in any manner and is reasonable and appropriate for the individuals involved and the business at hand. o Reasonable expense and nominal value defined. For purposes of clauses (i), (ii) and (iii) above, reasonable expense for entertainment and nominal value for a gift shall in each case be the lesser of $100 or the amount permitted by applicable law or regulation, in the case of a domestic government official, and not more than $200 in the case of any other individual recipient. The provision of gifts and entertainment to government officials is often constrained or prohibited by applicable laws and regulations. Therefore, it is essential to consult and comply with all applicable laws and regulations before providing any gift or entertainment, regardless of its value to a government official. Conflicts of Interest An employee may not participate in any activities that could conflict with his/her responsibilities with the Company. A "conflict of interest" exists when a person's private interest interferes in any way, or even appears to interfere, with the interests of the Company. A conflict situation can arise when an employee, officer or director takes actions or has interests that may make it difficult to perform his or her work for the Company objectively and effectively. Conflicts of interest also arise when an employee, officer or director, or a member of his or her family, receives improper personal benefits as a result of his or her position in the Company. Conflicts of interest are prohibited as a matter of Company policy. Each employee, officer and director is expected to avoid any outside activity, financial interest or relationship that may present a possible conflict of interest or the appearance of a conflict. An employee should discuss any actual or potential conflict of interest with his/her supervisor, who may in turn refer the matter to the Chief Compliance Officer or Corporate Compliance Committee. Alternatively, the employee may communicate directly with the Corporate Compliance Committee. It is the employee's duty to report any known conflict of interest to his/her supervisor, the Chief Compliance Officer or the Corporate Compliance Committee and to seek prior written approval in accordance with applicable Corporate Policy before engaging in an activity that may result in a conflict of interest. Page 9 of 13 Family Members. An employee must not knowingly conduct business on behalf of the Company with family members (spouse, parents, children and in-laws) or an organization with which any family member is associated unless specific written approval has been granted in advance by the Corporate Compliance Committee. Ownership in Other Businesses. An employee's ownership or financial interest in any business enterprise that does or seeks to do business with (as a supplier, customer, lessor, lessee or agent), or is in competition with, the Company, may also create the reality or appearance of a conflict of interest. Such a conflict of interest does not exist if (i) the enterprise is a corporation whose securities are listed on a national securities exchange, are quoted on NASDAQ or are customarily traded at least once a week on an over-the-counter market, and the employee's interest in the enterprise does not exceed the greater of $25,000 or 20% of the value of the employee's total investment in business enterprises or (ii) the ownership is through a widely-held mutual fund. Outside Activities and Employment. Without prior written consent of the Corporate Compliance Committee, no employee may serve (even without compensation) as a consultant to, or as a director, officer, or part-time employee of a company that competes with, or does or seeks to do, business with the Company. Corporate Opportunities. Employees, officers and directors are prohibited from (a) taking for themselves personal opportunities that are properly within the scope of the Company's activities, (b) using corporate property, information or position for personal gain, and (c) competing with the Company. Employees, officers and directors owe a duty to the Company to advance its legitimate interests to the best of their abilities. The direct or indirect use of Company funds or assets for political contributions is prohibited unless authorized by the Board of Directors. Lobbying in any form on behalf of the Company is prohibited unless approved by the Company. Political Contributions and Lobbying Activities Political Contributions. U.S. corporations are barred by federal law from making political contributions in connection with federal elections. Many states and foreign jurisdictions have similar prohibitions. Therefore, except as permitted by such laws and authorized by the Company's Board of Directors: o No funds shall be contributed to any political organization or to any individual who holds or is a candidate for public office. o Except for Company-approved political action committees, business groups and trade associations, the Company shall not support any organization that raises funds for political purposes. Lobbying Activities. Without prior approval of the Company's Chief Executive Officer, no employee, agent or representative may contact on behalf of the Company any federal, state or local government official or member or an employee of a legislative body or government agency or department for the purpose of influencing policy, legislation, agency regulations or any other official action. Prior to any lobbying efforts, the Company and the employee may have to register with the appropriate governmental entity. Personal Activities. The Company encourages employees to participate in the political process on their own time. Employees have a right to make political contributions in their own name and from their own assets. Employees will not be required by the Company to make any political contributions. Employees will not be reimbursed or compensated by the Company for any political contributions. Page 10 of 13 Protecting Company Property and Information Each employee should ensure that Company property and information are used only for Company business. Protection of Company Property and Assets. The Company's assets, such as office equipment, production equipment and products, must not be used for personal reasons, except as may be specifically authorized by Corporate Policies. These assets should not be taken out of Company facilities unless necessary and authorized in connection with Company work. Incidental or occasional use of Company office equipment, such as telephones, computers or copy machine is permitted. However, excessive use of such equipment is not permitted and may result in disciplinary action. The Company's assets also include confidential and proprietary information relating to the present or planned business activities or assets of the Company that have not been released publicly by the Company. Confidential information includes, for example, pricing, inventions, financial data, trade secrets and know-how, acquisition and divestiture opportunities, marketing and sales programs, research and development information and customer and supplier information. No employee should disclose the Company's confidential or proprietary information to anyone within or outside the Company unless the recipient legitimately needs the information to carry on his assigned responsibilities as an employee with the Company, or is an outsider who has been properly authorized by management to receive such information. Inquiries from the press media, investors or the public regarding the Company should only be answered by the officers and employees designated to respond to such inquiries. The obligation not to disclose the Company's confidential or proprietary information continues after employment with the Company terminates. Protection of Company Intellectual Property. Innovations and ideas concerning products or manufacturing processes may be eligible for patent, copyright, trademark, or other trade protection. All management, technical and other employees who may make, conceive or learn about an invention, discovery, improvement or idea, whether or not patentable, are required to sign a "Proprietary Rights and Consulting Agreement" providing that any such invention, discovery, improvement or idea becomes the property of the Company. Consult with the Company's Law Department for details. The obligation to maintain the confidentiality of information may be subject to legal or regulatory requirements to disclose that information. In such cases, the Company's Law Department will assist in determining what disclosure is required. Securities Laws The laws of many countries, particularly the U.S., prohibit an employee from purchasing or selling Company stock or other securities for personal profit based on information not available to the public but know because of the employee's work at the Company. Use of Inside Information and Securities Trading. In the course of business activities, an employee may become aware of nonpublic information regarding the business, operations or securities of the Company. The securities laws and Corporate Policy prohibit trading securities on the basis of such nonpublic information (often called "inside information") if it is material. Information is deemed to be material if an investor would consider it important in deciding whether to buy, sell, or hold securities. Examples of items that may be material include: o Financial results and forecasts. o Possible mergers, acquisitions, divestitures and investments. Page 11 of 13 o Obtaining or losing important contracts. o Significant discoveries o Major litigation developments Information is considered to be nonpublic unless it has been adequately disclosed to the public and there has been sufficient time and opportunity for the market as a whole to assimilate the information. Generally, this means that the information has been available to the public for at least one business day. An employee who is aware of nonpublic material information related to the Company, or to firms negotiating or competing with the Company, may not buy or sell shares or other securities of the Company or these firms. Such information may not be disclosed to anyone, other than Company employees or appropriate agents or representatives who have established their need to know, until the information has been adequately disclosed to the public by authorized Company officials. Consult the Company's Finance or Law Department if you have any question as to whether certain information is material or has been adequately disclosed to the public. All Company executive officers must consult with the Company's Chief Financial Officer or General Counsel before engaging in any transactions involving the Company's Securities. Antitrust Laws, Restrictive Trade Practices, Boycotts and Technology Transfer Restrictions An employee should not discuss or enter into any agreements or understandings with any competitors of the Company concerning either the Company's prices, markets, marketing activities or customers. Antitrust Laws and Restrictive Trade Practices. The Company's policy is to conduct its business activities in accordance with all applicable antitrust, competition and trade practice laws. These antitrust laws prohibit, among other things, price fixing. In other words, the Company must make its pricing decisions independently of its competitors. The exchange of sensitive information with competitors, such as product prices, profit margins, billing practices or other information that may facilitate reaching an agreement on prices, can pose substantial risk under the antitrust laws. Other activities prohibited by the antitrust laws include: market and customer allocation; group boycotts/refusals to deal; resale price maintenance; unlawful tying; unlawful exclusivity agreements; monopolization; price discrimination; unlawful termination of dealers, suppliers or distributors; and, under certain circumstances, attempts to engage in these types of activities. Any agreement or joint activity involving the Company and another party, the intent or effect of which is to reduce competition, may violate the antitrust laws. Unlawful agreements need not take the form of a written contract or consist of express commitments or mutual assurances. Courts sometimes infer agreements based on "loose talk," informal discussions or the mere exchange of information between competitors from which pricing agreements or other collusion could result. In all contacts with competitors, including social activities or trade association meetings, avoid discussing pricing policy, terms and conditions of sale or credit (other than in arms-length negotiations), costs, inventories, marketing and product plans, market surveys and studies, production plans and capabilities, allocation or division of territories, sales customers or jobs, boycotts, or any other competitively sensitive or proprietary or confidential information. If a competitor raises any such topic, even lightly or with apparent innocence, employees should object, stop the conversation immediately, and tell the competitor that under no circumstances are these matters to be discussed. If necessary, employees should leave the meeting. Employees Page 12 of 13 must immediately report any discussion, action, or transaction that may involve prohibited conduct to the Chief Compliance Officer or the Corporate Compliance Committee. The U.S. antitrust laws can also apply to conduct that takes place outside the U.S. if such conduct has a direct, substantial and reasonably foreseeable effect on commerce within the U.S. In addition, many countries have their own antitrust laws. The antitrust laws of the European Union and certain other countries generally impose more stringent rules than in the U.S. with respect to many types of business practices, including, among others; distribution agreements; patent, copyright, and trademark licenses; rebates and discounts to customers; and pricing policy generally. Violations of the antitrust laws can result in both criminal and civil penalties for the Company and the individuals involved. Contact the Chief Compliance Officer for advice and assistance before taking any action that might involve these laws. Boycotts. The Company will not directly or indirectly engage in any activity that could have the effect of promoting a boycott or restrictive trade practice fostered by a foreign country against customers or suppliers located in a country friendly to the U.S. or against a U.S. person, firm or corporation. Since U.S. law requires that a request to participate in such an activity be reported promptly to the U.S. Government, the advice of the Chief Compliance Officer should be sought immediately and prior to any action upon such a request. Export Controls and Technology Transfer Restrictions. Under no circumstances will sales be made contrary to United States export laws or regulations. Transmission of technical data and U.S. origin products may require a U.S. export license, even for oral or written disclosure to a foreign person in the U.S. All exports shall comply with the Company's Export Control Compliance Memorandum. Serious consequences, including fines and the loss of export privileges, can result if an item or technology that requires a license is exported or disclosed without a proper license. If there are any questions as to whether a license is needed, check first with the Chief Compliance Officer. Page 13 of 13 EX-21 8 ex21.txt LIST OF SUBSIDIARIES EXHIBIT 21.1 LIST OF SUBSIDIARIES -------------------- BE Aerospace, Inc. BE Aerospace (USA), Inc. BE Aerospace Netherlands BV Royal Inventum B.V. BE Aerospace (UK) Holdings Limited BE Aerospace Services, Ltd. BE Aerospace (UK) Limited CF Taylor (B/E) UK Limited B/E Aerospace Services, Inc. Advanced Thermal Sciences Corporation Acurex Corporation B/E Aerospace International Ltd. Nordskog Industries, Inc. Burns Aerospace Europe (SARL) BE Aerospace (France) SARL BE Intellectual Property, Inc. Aerospace Lighting Corporation Flight Structures, Inc. BE Aerospace Canada, Inc. B/E Aerospace (Canada) Company BE Aerospace El Salvador, Inc. BE Aerospace El Salvador, Sociedad Amonima de Capital Variable BE Aerospace Australia, Inc. IFE Sales, LLC T.L. Windust Machine, Inc. DMGI, Inc. B/E Aerospace Machined Products, Inc. Maynard Precision, Inc. Modoc Engineering Corporation ATS Japan Corporation Advanced Thermal Sciences Taiwan Corporation Denton Jet Interiors, Inc. Modern Metals, Inc. Nelson Aero Space, Inc. M & M Aerospace Hardware, Inc. M&M Aerospace Hardware SARL M&M Aerospace Hardware GmbH M&M Aerospace Hardware Ltd. EX-23 9 ex23.txt INDEPENDENT AUDITOR'S CONSENT EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 333-66934, 333-68334, 333-89145, 333-30578, 333-14037, 33-48119, 33-72194 and 33-82894 on Form S-8 of BE Aerospace, Inc. of our report dated March 4, 2003 (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the adoption of a new accounting principle), appearing in this Annual Report on Form 10-K of BE Aerospace, Inc. for the 10-month period from February 24, 2002 to December 31, 2002. /s/ DELOITTE & TOUCHE LLP Costa Mesa, California March 26, 2003 EX-99.1 CHARTER 10 ex99.txt 906 CERTIFICATION EXHIBIT 99.1 BE AEROSPACE, INC. STATEMENT PURSUANT TO 18 U.S.C. SECTION 1350 AS REQUIRED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2003 In connection with the Transition Report of BE Aerospace, Inc. (the "Company") on Form 10-K for the transition period from February 24, 2002 to December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned hereby certify that to the best of our knowledge: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. March 26, 2003 /s/ Robert J. Khoury President and Chief Executive Officer -------------------- March 26, 2003 /s/ Thomas P. McCaffrey Corporate Senior Vice President of ----------------------- Administration and Chief Financial Officer This certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Form 10-K or as a separate disclosure document. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----