<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 6, 1999
REGISTRATION NO. 333-70363
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
DECRANE HOLDINGS CO.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3728 13-4019703
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code No.) Identification
Incorporation or Organization) No.)
</TABLE>
C/O DLJ MERCHANT BANKING PARTNERS II, L.P.
277 PARK AVENUE
NEW YORK, NEW YORK 10172
(212) 892-3000
(Address, including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
THOMPSON DEAN
Chairman of the Board and President
DECRANE HOLDINGS CO.
277 Park Avenue
New York, New York 10172
(212) 892-3000
(Name, Address, including Zip Code, and Telephone Number,
including Area Code, of Agent for Service)
--------------------------
COPIES TO:
STEPHEN A. SILVERMAN, ESQ.
JAMES BRYCE CLARK, ESQ.
SPOLIN & SILVERMAN LLP
100 Wilshire Boulevard, Suite 940
Santa Monica, California 90401
(310) 576-1221
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
FROM TIME TO TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
--------------------------
If any of the securities being registered on this form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
TITLE OF SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) FEE(1)
<S> <C> <C> <C> <C>
Warrants to purchase common stock..... 100,000 warrants $23.00 $3,565,000 $1,023.15
Common Stock, par value $0.01......... (2)
</TABLE>
(1) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457; fee previously paid.
(2) 155,000 shares of common stock of DeCrane Holdings are issuable initially
upon exercise of the warrants registered hereunder, at the exercise rate of
1.55 shares per warrant. An indeterminate number of shares of common stock
as may be issuable upon exercise of the warrants are registered hereunder,
including such shares as may be issuable pursuant to the adjustments
described herein under "Description of Warrants." Any additional common
stock issuable upon such adjustments will be issued for no additional
consideration.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8 OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8, MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS SUBJECT TO COMPLETION, DATED MAY 6, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
[LOGO]
DeCrane Holdings Co.
COMMON STOCK, PAR VALUE $0.01 PER SHARE
WARRANTS TO PURCHASE COMMON STOCK
This prospectus relates to the resale of 100,000 warrants each to purchase
1.55 shares of common stock, par value $0.01 per share of DeCrane Holdings Co.,
and the shares issued upon the exercise of warrants, held by certain holders
named herein or in an accompanying supplement to this prospectus. All of the
offered securities are being sold by such persons or entities and we will not
receive any proceeds received therefrom, other than upon exercise of warrants.
The warrants were issued, and shares issued upon the exercise of warrants by
persons other than exercising warrantholders have been or will be issued,
pursuant to an exemption from the registration requirements of the Securities
Act of 1933. The offered securities are being registered by us pursuant to
registration rights granted in connection with the issuance in October, 1998 of
the warrants, which were paired in units with the 12% Series A Senior
Subordinated Notes of DeCrane Aircraft Holdings, Inc. when originally issued.
The warrants may trade separately from the notes on and after the effective date
of the registration statement of which this prospectus is a part.
The offered securities may be offered by the holders from time to time in
transactions in the over-the-counter market, in privately negotiated
transactions, in underwritten offerings or by a combination of such methods of
sale, at fixed prices that may be changed, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices or at
negotiated prices. The warrantholders may effect such transactions by selling
the warrants to or through broker-dealers and such broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
holders or the purchasers of the offered securities for whom such broker-dealers
may act as agent or to whom they sell as principal or both. The foregoing
compensation to a particular broker-dealer might be in excess of customary
commissions. If required, the names of any such broker-dealers and the
applicable compensation, if any, will be set forth in an accompanying supplement
to this prospectus.
Selling holders, and any broker-dealers or agents that participate with the
holders in the distribution of the offered securities, may be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act, and
any commissions received by them and any profit on the resale of the offered
securities purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.
The information in this prospectus is not yet complete and may be amended.
We have filed a registration statement regarding these securities with the
Securities and Exchange Commission. You may not sell or accept offers to buy
before the registration statement becomes effective. This prospectus is not an
offer to sell, or the solicitation of an offer to buy. We will not participate
in any sale of these securities in any state in which offer, solicitation or
sale would be unlawful before registering or qualifying under the securities
laws of that state.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF RISK FACTORS THAT
YOU SHOULD CONSIDER BEFORE INVESTING IN THE OFFERED SECURITIES.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is , 1999
<PAGE>
EXPLANATORY NOTE
This prospectus relates to the resale of 100,000 warrants each to purchase
1.55 shares of common stock, par value $0.01 per share of DeCrane Holdings Co.
by holders who are named in an accompanying supplement to this prospectus, and
any stockholders of the shares received upon exercise of those warrants who may
wish to sell their shares. This prospectus refers to the warrants and warrant
shares, collectively, as offered securities. All of the warrants are being sold
by such persons or entities and we will not receive any of the proceeds received
therefrom, other than upon exercise of warrants. The warrants were issued, and
shares issued upon the exercise of warrants by persons other than exercising
warrantholders, have been or will be issued, pursuant to an exemption from the
registration requirements of the Securities Act of 1933. The offered securities
are being registered by us pursuant to registration rights granted in connection
with the initial private placement of the warrants as part of the DLJ
acquisition described herein.
The offered securities may be offered by the warrantholders from time to
time in transactions in the over-the-counter market, in privately negotiated
transactions, in underwritten offerings or by a combination of such methods of
sale, and may be offered at fixed prices that may be changed, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. The warrantholders may effect such transactions
by selling the warrants to or through broker-dealers and such broker-dealers may
receive compensation in the form of discounts, concessions or commissions from
the warrantholders or the purchasers of the offered securities for whom such
broker-dealers may act as agent or to whom they sell as principal or both. That
compensation to a particular broker-dealer might be in excess of customary
commissions. If required, the names of any such broker-dealers and the
applicable compensation, if any, will be set forth in an accompanying supplement
to this prospectus. See "Plan of Distribution."
Any selling warrantholders and stockholders and any broker-dealers or agents
that participate with those warrantholders and stockholders in the distribution
of the offered securities may be deemed to be "underwriters" within the meaning
of Section 2(11) of the Securities Act, and any commissions received by them and
any profit on the resale of the offered securities purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
The information in this prospectus is not yet complete and may be amended.
We have filed a registration statement regarding these securities with the
Securities and Exchange Commission. You may not sell or accept offers to buy
before the registration statement becomes effective. This prospectus is not an
offer to sell, or the solicitation of an offer to buy. We will not participate
in any sale of these securities in any state in which offer, solicitation or
sale would be unlawful before registering or qualifying under the securities
laws of that state.
1
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY CONTAINS BASIC INFORMATION ABOUT THIS OFFERING. IT
LIKELY DOES NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. TO FULLY
UNDERSTAND THIS OFFERING, YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY,
INCLUDING THE FINANCIAL STATEMENTS AND THEIR RELATED NOTES.
THE SECURITIES REGISTERED BY THIS PROSPECTUS ARE EQUITY OBLIGATIONS ISSUED
BY DECRANE HOLDINGS CO. DECRANE HOLDINGS CO. IS A HOLDING COMPANY AND DOES NOT
HAVE ANY MATERIAL OPERATIONS OR ASSETS OTHER THAN ITS OWNERSHIP OF THE CAPITAL
STOCK OF DECRANE AIRCRAFT HOLDINGS, INC. EXCEPT WHERE WE INDICATE OTHERWISE,
THIS PROSPECTUS PRESENTS ALL INFORMATION ON A "PRO FORMA" BASIS, GIVING EFFECT
TO ALL OF THE TRANSACTIONS REFERRED TO IN "UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL DATA," INCLUDING THE DLJ ACQUISITION OF DECRANE AIRCRAFT AND DECRANE
AIRCRAFT'S ACQUISITIONS OF AVTECH CORPORATION, DETTMERS INDUSTRIES, INC., PATS,
INC. AND PPI HOLDINGS, INC.
OUR COMPANY
We manufacture electronic components and other parts and systems, and
provide systems integration services, for niche markets within the commercial,
regional and high-end corporate aircraft industries. We believe that we are a
leading provider of components within each niche market we serve. Since DeCrane
Aircraft was founded in 1989, our strategy has been to combine complementary
businesses with leading market positions. We generated revenues of $244.4
million, Adjusted EBITDA of $55.8 million and a loss before extraordinary item
of $1.1 million for the twelve months ended December 31, 1998 on a pro forma
basis. Adjusted EBITDA is defined in "Summary Pro Forma Consolidated Financial
Data" herein.
We seek to maximize our sales by emphasizing the complementary nature of our
products and services. We manufacture:
- electrical contacts,
- connectors,
- wire harness assemblies,
- structural supports for connectors and harnesses,
- auxiliary fuel tank systems, and auxiliary power systems for ground power;
- dichroic liquid crystal displays,
- cockpit audio and communications, lighting, and power and control devices
for commercial aircraft, and
- stereo systems, video monitors, passenger switches, cabin lighting,
seating and climate controls for the high-end corporate aircraft market.
Our systems integration services include design and engineering of aircraft
electronic and other systems, certifications on behalf of the Federal Aviation
Administration, the assembly of installation kits for various aircraft systems,
and installation services. Smoke detection, fire suppression and in-flight
entertainment systems for aircraft are among the systems for which we supply
design, certification, assembly and/or installation services. We manufacture
many of the components required to complete a systems integration project. We
believe that our combination of strong component manufacturing and integration
capabilities gives us a critical competitive advantage, which would be difficult
for competitors to duplicate.
By successfully combining and growing complementary businesses, we have
achieved strong revenue growth. From 1994 to 1998, DeCrane Aircraft's revenues
increased from $47.1 million to $150.5 million on a historical basis. That
increase resulted in a compound annual growth rate of 33.7%. During the same
period, DeCrane Aircraft's EBITDA increased from $5.2 million to $26.9 million
on a
2
<PAGE>
historical basis, representing a combined annual growth rate of 50.8%, and its
historical income before extraordinary items increased from a $1.8 million loss
to $3.1 million in income. Since 1990, we have completed thirteen acquisitions,
most recently Avtech Corporation and Dettmers Industries, Inc. in June 1998,
PATS, Inc. in January 1999 and PPI Holdings, Inc. in April 1999.
RECENT DEVELOPMENTS
Until August 1998, DeCrane Aircraft was a publicly-held company. In August
1998, holding companies organized by DLJ Merchant Banking Partners II, L.P. and
affiliated funds and entities completed a successful tender offer for all shares
of the common stock of DeCrane Aircraft. See "Recent Developments--The DLJ
Acquisition." In January 1999, we acquired all of the stock of PATS, Inc., a
manufacturer of auxiliary fuel tank systems and other products. See "Recent
Developments-- PATS." In April 1999, we acquired all of the stock of PPI
Holdings, Inc., a manufacturer of interior furniture components primarily for
middle- and high-end corporate aircraft. See "Recent Developments--PPI."
------------------------
Our principal executive offices are located at 2361 Rosecrans Avenue, Suite
180, El Segundo, California 90245. Our telephone number is (310) 725-9123.
Further information is available as noted under "Where You Can Get More
Information" at the end of the "Business" section.
3
<PAGE>
COMMON STOCK
<TABLE>
<S> <C>
Common Stock.................... The holders of DeCrane Holdings common stock are entitled to one
vote per share on all matters submitted for action by the
shareholders. There is no provision for cumulative voting with
respect to the election of directors. Holders of DeCrane Holdings
common stock are entitled to share equally, share for share, if
dividends are declared on common stock, whether payable in cash,
property or securities of DeCrane Holdings. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of
DeCrane Holdings, after payment has been made from the funds
available therefore to the holders of preferred stock, if any, for
the full amount to which they are entitled, the holders of common
stock are entitled to share equally, share for share, in the assets
available for distribution. See "Description of Capital Stock of
DeCrane Holdings."
THE WARRANTS
Warrants........................ 100,000 warrants each of which will entitle the holder thereof to
purchase 1.55 shares of DeCrane Holdings common stock. The total
number of warrants represent 155,000 shares, which constitutes
approximately 5% of the common stock of DeCrane Holdings on a fully
diluted basis (assuming exercise of all outstanding warrants,
including those held by affiliates of DLJ).
Exercise........................ Each warrant will entitle the holder thereof, to purchase 1.55
shares of common stock at an exercise price of $23.00 per share.
The warrants are exercisable at any time prior to the expiration of
the warrants, as set forth below. The exercise price and number of
shares of common stock issuable upon exercise of the warrants will
be subject to adjustment from time to time upon the occurrence of
changes with respect to the common stock of DeCrane Holdings,
including some types of distributions of shares of common stock,
issuances of options or convertible securities, dividends and
distributions and some changes in options and convertible
securities of DeCrane Holdings. A warrant does not entitle the
holder thereof to receive any dividends paid on shares of common
stock.
Expiration...................... September 30, 2008.
Transfer Agent.................. The transfer agent and registrar for the offered securities is the
Secretary of DeCrane Holdings. The transfer agent can be reached
c/o DeCrane Aircraft Holdings, Inc., at (310) 725-9123.
Use of Proceeds................. We will not receive any cash proceeds from sales of warrants or
warrant shares. See "Use of Proceeds."
United States Tax Consequences.. You should review the information under "United States Tax
Consequences" before you make an investment in the offered
securities.
The Units....................... The warrants were originally sold as "units," paired with the 12%
Series A Senior Subordinated Notes of DeCrane Aircraft Holdings,
Inc. The warrants may trade separately from the notes on and after
the effective date of the registration statement of which this
prospectus is a part.
</TABLE>
4
<PAGE>
SUMMARY PRO FORMA CONSOLIDATED FINANCIAL DATA
The table below presents summary unaudited pro forma consolidated financial
data for DeCrane Holdings. The summary unaudited pro forma financial data were
derived from historical financial data and give pro forma effect to the
transactions described in the unaudited pro forma consolidated financial
statements included elsewhere in this prospectus. The pro forma financial data
do not purport to represent what the actual results of operations or actual
financial position would have been if such transactions had actually occurred on
such dates or to project the future results of operations or financial position.
The information in this table should be read in conjunction with "Recent
Developments," "Unaudited Pro Forma Consolidated Financial Data," "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the DeCrane Holdings consolidated
financial statements and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED
DECEMBER 31,
1998(1)
-------------
(DOLLARS IN
THOUSANDS)
<S> <C>
PRO FORMA STATEMENT OF OPERATIONS DATA:
Revenues........................................................................................... $ 244,359
Gross profit (2)................................................................................... 78,952
Operating income................................................................................... 31,119
Provision for income taxes......................................................................... 3,089
Loss before extraordinary item..................................................................... (1,142)
OTHER PRO FORMA FINANCIAL DATA:
Cash flows from operating activities............................................................... $ 5,486
Cash flows from investing activities............................................................... (365,413)
Cash flows from financing activities............................................................... 361,280
EBITDA (3)......................................................................................... 52,563
EBITDA margin (4).................................................................................. 21.5%
Adjusted EBITDA (5)................................................................................ $ 55,756
Adjusted EBITDA margin (4)......................................................................... 22.8%
Depreciation and amortization (6).................................................................. $ 16,996
Capital expenditures............................................................................... 6,693
Cash interest expense.............................................................................. 27,120
Adjusted EBITDA to cash interest expense........................................................... 2.1x
Ratio of earnings to fixed charges (7)............................................................. 1.1x
OTHER OPERATING DATA:
Bookings (8)....................................................................................... $ 254,220
Backlog at end of period (9)....................................................................... 130,931
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1998 (1)
-------------
(DOLLARS IN
THOUSANDS)
<S> <C>
PRO FORMA BALANCE SHEET DATA:
Cash and cash equivalents.......................................................................... $ 7,894
Working capital.................................................................................... 63,565
Total assets....................................................................................... 448,569
Total debt (10).................................................................................... 275,515
Mandatorily redeemable preferred stock............................................................. 35,884
Stockholders' equity............................................................................... 73,985
</TABLE>
See accompanying notes to Summary Pro Forma Consolidated Financial Data.
5
<PAGE>
NOTES TO SUMMARY PRO FORMA CONSOLIDATED FINANCIAL DATA
(1) Reflects the following as if each had occurred as of January 1, 1998: the
Avtech, Dettmers, PATS and PPI acquisitions; the DLJ acquisition; and the
initial offering.
(2) Net of $4.4 million of non-cash acquisition related charges to reflect cost
of sales based on the fair value of inventory acquired in connection with
the DLJ acquisition.
(3) EBITDA equals operating income plus depreciation, amortization and non-cash
acquisition related charges described in Note 2 above. EBITDA is not a
measure of performance or financial condition under generally accepted
accounting principles. EBITDA is not intended to represent cash flow from
operations and should not be considered as an alternative to income from
operations or net income computed in accordance with generally accepted
accounting principles, as an indicator of our operating performance, as an
alternative to cash flow from operating activities or as a measure of
liquidity. The funds depicted by EBITDA are not available for our
discretionary use due to funding requirements for working capital, capital
expenditures, debt service, income taxes and other commitments and
contingencies. We believe that EBITDA is a standard measure of liquidity
commonly reported and widely used by analysts, investors and other
interested parties in the financial markets. However, not all companies
calculate EBITDA using the same method and the EBITDA numbers set forth
above may not be comparable to EBITDA reported by other companies.
(4) EBITDA margin is computed by dividing EBITDA by revenues. Adjusted EBITDA
margin is computed by dividing Adjusted EBITDA by revenues.
(5) Adjusted EBITDA equals EBITDA plus the following nonrecurring charges:
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED
DECEMBER 31,
1998
-------------
(DOLLARS IN
THOUSANDS)
<S> <C>
EBITDA (See Note 3 above).......................................................... $ 52,563
Adjustment for nonrecurring charges:
Workforce reductions............................................................. 2,430
Engineering costs................................................................ 350
Reduction of corporate expenses.................................................. 310
Non-cash stock option compensation expense....................................... 73
Expiration of employment contract for a former shareholder of a previously
acquired company............................................................... 30
-------------
Total adjustments.............................................................. 3,193
-------------
Adjusted EBITDA.................................................................... $ 55,756
-------------
-------------
</TABLE>
(6) Reflects depreciation of plant and equipment and amortization of goodwill
and other intangible assets. Excludes amortization of deferred financing
costs and debt discounts, which is classified as a component of interest
expense.
(7) For purposes of calculating the ratio of earnings to fixed charges, earnings
represent net income before income taxes, minority interest in the income of
majority-owned subsidiaries, extraordinary items and fixed charges. Fixed
charges consist of:
- interest, whether expensed or capitalized;
- amortization of debt expense and discount relating to any indebtedness,
whether expensed or capitalized; and
- one-third of rental expense under operating leases which is considered to
be a reasonable approximation of the interest portion of such expense.
(8) Bookings represent the total invoice value of purchase orders received
during the period.
(9) Orders are generally subject to cancellation by the customer prior to
shipment. The level of unfilled orders at any given date during the year
will be materially affected by the timing of the Company's receipt of orders
and the speed with which those orders are filled.
(10) Total debt is defined as long-term debt, including current portion, and
short-term borrowings.
6
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The table below presents summary historical consolidated financial data for
DeCrane Holdings and its wholly-owned subsidiary, DeCrane Aircraft, for periods
prior to the DLJ acquisition. The summary historical financial data for the four
months ended December 31, 1998 were derived from the audited financial
statements of DeCrane Holdings. The summary historical financial data for the
years ended December 31, 1996 and 1997 and the eight months ended August 31,
1998 were derived from audited financial statements of DeCrane Aircraft
(Predecessor). The information in this table should be read in conjunction with
"Selected Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the DeCrane Holdings
consolidated financial statements and related notes included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
(PREDECESSOR)
-------------------------------------------------------
EIGHT
MONTHS FOUR MONTHS
YEAR ENDED DECEMBER 31, ENDED ENDED
------------------------------------------ AUGUST 31, DECEMBER
1994 1995 1996(1) 1997(2) 1998(3) 31, 1998(3)
--------- --------- --------- --------- ----------- -----------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS
DATA:
Revenues.................... $ 47,092 $ 55,839 $ 65,099 $ 108,903 $ 90,077 $ 60,356
Gross profit(4)............. 10,685 12,376 15,707 28,656 29,976 17,617
Operating income............ 1,760 1,835 4,251 11,995 9,278 4,195
Interest expense............ 3,244 3,821 4,248 3,154 2,350 6,867
Provision for income taxes
(benefit)(5).............. 613 1,078 712 3,344 2,892 (2,668)
Income (loss) before
extraordinary item........ (2,429) (3,446) (817) 5,254 3,189 (339)
Extraordinary loss from debt
refinancing(6)............ (264) -- -- (2,078) -- (2,229)
Net income (loss)........... (2,693) (3,446) (817) 3,176 3,189 (2,568)
OTHER FINANCIAL DATA:
Cash flows from:
Operating activities...... $ (2,322) $ 1,457 $ 2,958 $ 4,641 $ 3,014 $ 1,008
Investing activities...... (993) (1,462) (24,016) (27,809) (87,378) (192,678)
Financing activities...... 3,028 41 21,051 22,957 89,871 189,268
EBITDA(7)................... 5,196 5,471 7,602 16,915 13,636 13,247
EBITDA margin(8)............ 11.0% 9.8% 11.7% 15.5% 15.1% 21.9%
Depreciation and
amortization(9)........... $ 3,436 $ 3,636 $ 3,351 $ 4,920 $ 4,358 $ 4,604
Capital expenditures(10).... 1,016 1,203 5,821 3,842 1,745 1,813
Ratio of earnings to fixed
charges(11)............... -- -- 1.0x 3.3x 3.0x --
OTHER OPERATING DATA:
Bookings(12)................ $ 47,896 $ 50,785 $ 81,914 $ 112,082 $ 94,439 $ 54,021
Backlog at end of
period(13)................ 24,493 19,761 44,433 49,005 84,184 75,388
AS OF
DECEMBER
31,
BALANCE SHEET DATA: 1998(14)
-----------
Cash and cash equivalents............................................................ $ 3,518
Working capital...................................................................... 46,227
Total assets......................................................................... 330,575
Total debt(15)....................................................................... 186,765
Mandatorily redeemable preferred stock............................................... 35,884
Stockholders' equity................................................................. 61,879
</TABLE>
See accompanying notes to Summary Historical Consolidated Financial Data.
7
<PAGE>
NOTES TO SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
(1) Includes the effect of: the acquisition of the remaining 25% minority
interest in Cory Components beginning February 20, 1996, the date on which
the transaction occurred; and the results of Aerospace Display Systems
beginning September 18, 1996 and Elsinore Aerospace Services, Inc. and
Elsinore Engineering, Inc. beginning December 5, 1996, the dates on which
they were acquired.
(2) Includes the effect of the acquisition of Audio International beginning
November 14, 1997, the date on which it was acquired.
(3) The results of operations of Avtech and Dettmers, which were acquired on
June 26, 1998 and June 30, 1998, respectively, have been included in DeCrane
Aircraft's results of operations for the periods subsequent to their
acquisitions. The results of operations for the four months ended December
31, 1998 also reflect the DLJ acquisition.
(4) Net of $4.4 million of non-cash charges for the four months ended December
31, 1998 to reflect cost of sales based on the fair value of inventory
acquired in connection with the DLJ acquisition.
(5) Prior to the acquisition of the remaining 25% minority interest in Cory
Components in 1996, DeCrane Aircraft did not consolidate the earnings of
Cory Components for tax purposes. As such, despite a consolidated pre-tax
loss in each of the years, DeCrane Aircraft recorded a provision for income
taxes up to the date of the acquisition in February 1996 which primarily
relates to Cory Components.
(6) Represents:
- the write-off, net of an income tax benefit, of deferred financing costs,
unamortized original issue discounts, a prepayment penalty and other
related expenses incurred as a result of the repayment of debt by the
Company with the net proceeds from its initial public offering in April
1997; and
- the write-offs, net of income tax benefit, of deferred financing costs as
a result of the repayment of DeCrane Aircraft's existing indebtedness in
connection with the DLJ acquisition and the refinancing of the bridge
notes during the four months ended December 31, 1998.
(7) EBITDA equals operating income plus depreciation, amortization and non-cash
acquisition related charges described in Note 4 above. EBITDA is not a
measure of performance or financial condition under generally accepted
accounting principles. EBITDA is not intended to represent cash flow from
operations and should not be considered as an alternative to income from
operations or net income computed in accordance with generally accepted
accounting principles, as an indicator of our operating performance, as an
alternative to cash flow from operating activities or as a measure of
liquidity. The funds depicted by EBITDA are not available for our
discretionary use due to funding requirements for working capital, capital
expenditures, debt service, income taxes and other commitments and
contingencies. We believe that EBITDA is a standard measure of liquidity
commonly reported and widely used by analysts, investors and other
interested parties in the financial markets. However, not all companies
calculate EBITDA using the same method and the EBITDA numbers set forth
above may not be comparable to EBITDA reported by other companies.
(8) EBITDA margin is computed by dividing EBITDA by revenues.
(9) Reflects depreciation and amortization of plant and equipment and goodwill
and other intangible assets. Excludes amortization of deferred financing
costs and debt discounts which is classified as a component of interest
expense.
(10) Includes $4.4 million for the year ended December 31, 1996 related to the
acquisition of a manufacturing facility.
(11) For purposes of calculating the ratio of earnings to fixed charges,
earnings represent net income before income taxes, minority interest in the
income of majority-owned subsidiaries, extraordinary items and fixed
charges. Fixed charges consist of:
- interest, whether expensed or capitalized;
- amortization of debt expense and discount relating to any indebtedness,
whether expensed or capitalized; and
- one-third of rental expense under operating leases which is considered to
be a reasonable approximation of the interest portion of such expense.
There was a deficiency of earnings to fixed charges for the years ended
December 31, 1994 and 1995 and the four months ended December 31, 1998 of
$1.8 million, $2.3 million and $2.9 million, respectively.
(12) Bookings represent the total invoice value of purchase orders received
during the period.
(13) Orders are generally subject to cancellation by the customer prior to
shipment. The level of unfilled orders at any given date during the year
will be materially affected by the timing of the receipt of orders and the
speed with which those orders are filled.
(14) Reflects the DLJ acquisition.
(15) Total debt is defined as long-term debt, including current portion, and
short-term borrowings.
8
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING INFORMATION AS PART OF YOUR
EVALUATION OF OUR COMPANY AND ITS BUSINESS BEFORE MAKING AN INVESTMENT IN THE
OFFERED SECURITIES.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this prospectus discuss future expectations,
beliefs or strategies, projections or other "forward-looking" information. These
statements are subject to known and unknown risks. Many factors could cause
actual company results, performance or achievements, or industry results, to be
materially different from the projections expressed or implied by this
prospectus. Some of those risks are specifically described below, but we are
also vulnerable to a variety of elements that affect many businesses, such as:
- fuel prices and general economic conditions that affect demand for
aircraft and air travel, which in turn affect demand for our products and
services;
- changes in prevailing interest rates and the availability of financing to
fund our plans for continued growth;
- inflation, and other general changes in costs of goods and services;
- liability and other claims asserted against us;
- the ability to attract and retain qualified personnel;
- labor disturbances; and
- changes in operating strategy, or our acquisition and capital expenditure
plans.
We cannot predict any of the foregoing with certainty, so our forward-looking
statements are not necessarily accurate predictions. Also, we are not obligated
to update any of these statements, to reflect actual results or report later
developments. You should not rely on our forward-looking statements as if they
were certainties.
SUBSTANTIAL LEVERAGE--OUR SUBSTANTIAL LEVELS OF DEBT COULD ADVERSELY AFFECT OUR
FINANCIAL HEALTH AND PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE
NOTES.
We incurred significant debt as part of the DLJ acquisition transaction. As
of December 31, 1998, on a pro forma basis, we would have had total consolidated
indebtedness of approximately $275.5 million, and would have available $25.9
million of additional revolving borrowings under the DeCrane Aircraft bank
credit facility. In order to borrow those funds, we will have to satisfy funding
conditions of the kind usually imposed in similar agreements. The bank credit
facility, and the indenture under which DeCrane Aircraft's senior subordinated
notes are issued, each also permit us to incur significant amounts of additional
debt, and to secure that debt with some of our assets.
The amount of debt we carry could have important consequences:
- It may limit the cash flow available for general corporate purposes, and
acquisitions. Interest payments for 1998 would have been $27.1 million on
a pro forma basis. The principal payments on long term debt scheduled to
occur during 1999 will be $2.0 million, assuming that the PPI acquisition
is completed.
- It may limit our ability to obtain additional debt financing in the future
for working capital, capital expenditures or acquisitions.
- It may limit our flexibility in reacting to competitive and other changes
in the industry and economic conditions generally.
9
<PAGE>
- It may expose us to increased interest expenses, when interest rates
fluctuate, because some of our borrowing may be, and in recent years most
of it has been, at variable "floating" rates.
- Restrictions in our debt agreements may cause us not to respond to changes
in our markets or exploit business opportunities. The indenture for
DeCrane Aircraft's notes and its bank credit facility each impose various
contractual restrictions on our operations and businesses. The bank credit
facility contains additional restrictions, and requires that we satisfy
several tests of financial condition. Our ability to do so can be affected
by events beyond our control, and we cannot assure you that we will meet
those tests. Our failure to do so could result in a default under the bank
credit facility or the notes.
ADDITIONAL BORROWINGS--DESPITE CURRENT INDEBTEDNESS LEVELS, WE MAY STILL BE ABLE
TO INCUR SUBSTANTIALLY MORE DEBT. THIS COULD INTENSIFY THE RISKS DESCRIBED
ABOVE.
DeCrane Aircraft and its subsidiaries may be able to incur substantial
additional indebtedness in the future under the terms of its debt agreements. If
new debt is added to our current debt levels, the related risks that we now face
could intensify.
POTENTIAL INABILITY TO SERVICE DEBT--WE WILL REQUIRE A SIGNIFICANT AMOUNT OF
CASH TO SERVICE DEBT. OUR ABILITY TO GENERATE CASH DEPENDS ON CASH FLOWS FROM
OUR SUBSIDIARIES, AND MANY FACTORS BEYOND OUR CONTROL.
We conduct all of our operations through subsidiaries. DeCrane Holdings has
no material operations or assets other than the capital stock of DeCrane
Aircraft. State law may also limit the amount of the dividends that our
subsidiaries are permitted to pay to DeCrane Aircraft or that DeCrane Aircraft
is permitted to pay to DeCrane Holdings.
Our ability to satisfy our debt obligations, including these notes, and to
fund planned capital expenditures will depend on our ability to generate cash in
the future. This, to an extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control.
We anticipate that our operating cash flow, together with borrowings under
our bank credit facility, will be sufficient to meet our anticipated future
operating and capital expenditures and debt payments as they become due for the
next three years. However, if our cash flow is lower than we expect, we might be
forced to reduce or delay acquisitions or capital expenditures, sell assets or
reduce operating expenses, in order to make all required debt service payments.
For example, a reduction in our operating expenses might reduce important
efforts such as selling and marketing programs, management information system
upgrades and new product development.
On a pro forma basis, we would have had a $1.1 million loss before
extraordinary item for the twelve months ended December 31, 1998. In the past,
our acquisitions resulted in increased interest and amortization expenses. As a
result DeCrane Aircraft incurred historical net losses in each year from our
inception through 1996, despite positive operating income. The first historical
net profit reported by DeCrane Aircraft occurred in 1997, in part because of the
repayment of a significant part of its outstanding debt with the net proceeds of
its initial public offering.
AIRCRAFT INDUSTRY RISKS--OUR AIRCRAFT INDUSTRY MARKETS ARE CYCLICAL AND AFFECTED
BY MANY FACTORS BEYOND OUR CONTROL, INCLUDING MILITARY SPENDING TRENDS AND
REGIONAL ECONOMIC INSTABILITY IN ASIA.
A downturn in any of our principal markets could adversely affect our
business.
- The principal markets for manufacturers of commercial aircraft are the
commercial and regional airline industries, which are cyclical and have
been adversely affected by a number of factors, including increased fuel
and labor costs and intense price competition. As a result of the
10
<PAGE>
increase and decrease in response to changes in customer demand caused by
general economic conditions. If production by commercial aircraft
manufacturers decreases, we may sell fewer products to them and suffer a
decrease in our revenue. For example, new commercial aircraft deliveries
declined from a peak of approximately 767 aircraft in 1991 to
approximately 367 aircraft in 1995, according to AEROSPACE AND
AIRTRANSPORT CURRENT ANALYSIS published by Standard and Poor's Industry
Surveys, and the Boeing Company has also recently announced production
line cutbacks for 1999 and 2000.
- The principal markets for corporate aircraft manufacturers are
corporations and wealthy individuals. The corporate aircraft market is
also cyclical and has been adversely affected by a number of factors,
including the general state of the U.S. economy, corporate profits,
interest rates and commercial airline fares. A downturn in any of these
factors could depress the demand for corporate aircraft.
- The military aircraft industry is dependent upon the level of equipment
expenditures by the armed forces of countries throughout the world, and
especially those of the United States. In recent years, this industry has
been adversely affected by a number of factors, including the reduction in
military spending since the end of the Cold War. Further decreases in
military spending could further depress demand for military aircraft.
- The Asian markets are important for manufacturers of commercial aircraft
and components for those aircraft. Boeing has a large backlog of aircraft
sales to customers in Asia, and some deliveries have been deferred or
cancelled. Boeing has characterized the economic situation in Asia as a
risk to its deliveries over the next few years. It has previously
announced scheduled production slowdowns in its 747 and 777 aircraft
lines, among others, during 1999. Boeing continues to reassess its
production rates based on Asian demand and expects to make downward
revisions based on its customer requirements. That situation could, if it
continues or worsens, result in additional significant cancellations or
deferrals of deliveries for new aircraft.
CONCENTRATION OF KEY CUSTOMERS--WE RECEIVE A SIGNIFICANT SHARE OF OUR REVENUES
FROM A SMALL GROUP OF KEY CUSTOMERS, AND ARE VULNERABLE TO CHANGES IN THEIR
ECONOMIC CONDITION AND PURCHASING PLANS.
A significant decline in business from any one of our key customers could
have a material adverse effect on our business. Our two largest customers for
the fiscal year ended December 31, 1998 were Boeing, including McDonnell
Douglas, and Matsushita Avionics Systems. Boeing accounted for approximately
29.6% of our consolidated revenues for that year, and Matsushita for
approximately 5.0%, on a pro forma basis but excluding the effects of the
acquisition of PPI.
If we completed our acquisition of PPI at the beginning of 1998, as is
assumed by our pro forma financial statements, it would have resulted in 48.4%
of our consolidated revenues concentrated among four principal customers for
1998 on a pro forma basis. Boeing would have been 25.1%, Cessna 11.4%, Raytheon
7.6%, and Matsushita 4.3% of those revenues.
In addition to the percentage of revenues directly earned from Boeing, a
significant part of our revenues from components are sold to Boeing indirectly,
through sales to suppliers of Boeing. Most of our contracts with Boeing allow
Boeing to stop purchasing or terminate the contract at any time. In addition,
under some circumstances, those contracts may allow Boeing to enforce
alternative economic terms, which would make the contracts less commercially
favorable to us. During October 1997, Boeing announced that parts shortages
adversely affected its production and delivery rates. Boeing shut down its 737
and 747 production lines for approximately one month and did not resume normal
production rates until late November 1997. In late 1998, among other things,
Boeing announced reductions in its previously scheduled production for the 747
and 777 programs in 1999 and 2000, as described in "-- Aircraft Industry Risks"
above. Boeing might suffer further production schedule disruptions. Boeing
recently announced internal studies indicating that about one-fourth of its
product lines are not likely
11
<PAGE>
to be profitable as currently conducted. Boeing did not disclose which lines
fail to return break-even or positive returns; however, it has previously
acknowledged that some of its commercial airplane programs were not meeting
expectations. Boeing plans to announce specific growth and profit information
for its commercial aircraft product lines later in 1999.
We generally sell components and services to Matsushita pursuant to purchase
orders, rather than under long-term contracts. However, we do have a supply
agreement for connectors through September 1999. On a pro forma basis, again
excluding PPI, during the twelve months ended December 31, 1998 as compared to
the same period in 1997, our revenues from Boeing increased $25.5 million while
our revenues from Matsushita declined by $1.8 million.
REGULATION--MANY OF OUR OPERATIONS ARE CLOSELY REGULATED BY THE FAA. IF WE FAIL
TO COMPLY WITH ITS MANY STANDARDS, OR THOSE STANDARDS CHANGE, WE COULD LOSE
INSTALLATION OR CERTIFICATION CAPABILITIES WHICH ARE IMPORTANT TO OUR
BUSINESS.
The Federal Aviation Administration prescribes standards and licensing
requirements for aircraft components, licenses private repair stations and
issues Designated Alteration Station approvals, which give the holder the right
to certify some aircraft design modifications on behalf of the FAA. Our ability
to arrange for rapid government certification of the systems integration
services we perform is important to our business. It depends on our continuing
access to, or use of, these FAA certifications and approvals, and our employment
of, or access to, FAA-certified individual engineering professionals. We cannot
assure you that we will continue to have adequate access to those
certifications, approvals and certified professionals. The FAA curtailed our
subsidiary's use of a Designated Alteration Station certification for new
projects for several months during 1997, until the facility was brought into
compliance with the FAA's regulations governing FAA-certified repair stations as
further described in "Business--Industry Regulation." The loss of a required
license or certificate, or its unavailability, could adversely affect our
operations. The FAA could also change its policies regarding the delegation of
inspection and certification responsibilities to private companies, which could
adversely affect our business.
GOLD AND COPPER PRICES--A SIGNIFICANT INCREASE IN THE PRICE OF GOLD OR COPPER
COULD REDUCE OUR PROFIT.
A significant portion of the cost of the materials used in our contacts is
comprised of the cost of gold, and to a lesser extent, the cost of copper.
Accordingly, a significant increase in the price of gold or copper could
adversely affect our results of operations. We have not purchased commodities
contracts for gold or copper and do not anticipate doing so.
ENVIRONMENTAL RISKS AND REGULATION--SOME OF OUR OPERATIONS AND FACILITIES
GENERATE WASTE OR HAVE DONE SO IN THE PAST, WHICH MAY RESULT IN UNKNOWN FUTURE
LIABILITIES FOR ENVIRONMENTAL REMEDIATION.
Federal and state laws, particularly the federal Comprehensive Environmental
Response, Compensation and Liability Act, impose strict, retroactive and joint
and several liability upon persons responsible for releases or potential
releases of hazardous substances. We have sent waste to treatment, storage or
disposal facilities that have been designated as National Priority List sites
under that statute or equivalent listings under state laws. We have received
requests for information or allegations of potential responsibility from the
Environmental Protection Agency regarding our use of some sites. Given the
retroactive nature of federal environmental liability, it is possible that we
will receive additional notices of potential liability relating to current or
former activities. We may incur costs in the future for prior waste disposal by
us or former owners of our subsidiaries or our facilities. Some of our
operations are located on properties which are contaminated to varying degrees.
Some of our manufacturing processes create wastewater which requires chemical
treatment, and one of our facilities has been cited for failure to adequately
treat that water. We may incur costs in the future to address existing or future
contamination.
12
<PAGE>
YEAR 2000--SOME OF THE ADMINISTRATIVE AND MANUFACTURING SYSTEMS ON WHICH WE RELY
MAY NOT OPERATE CORRECTLY DUE TO THE DATE CHANGES OCCURRING ON OR AROUND
JANUARY 1, 2000.
Many existing computer programs use only two digits to identify a year in
the date field. These programs, if not corrected, could fail or create erroneous
results when dealing with dates later than December 31, 1999. This "Year 2000"
issue is believed to affect virtually all companies and organizations, including
DeCrane Aircraft. We are dependent in part on computer- and date-controlled
systems for some internal functions, particularly inventory control, purchasing,
customer billing and payroll. Similarly, suppliers of components and services on
which we rely, and our customers, may have Year 2000 compliance risks which
would affect their operations and their transactions with us. Other parties with
whom we have commercial relationships rely heavily on computer-based technology.
We have taken steps to identify and limit the risks to our operations and
products, which are described under "Management's Discussion and Analysis of
Financial Conditions and Results of Operations." However, Year 2000 issues
present a number of risks that are beyond our reasonable control, such as the
failure of utility companies to deliver electricity, the failure of
telecommunications companies to provide voice and data services, the failure of
financial institutions to process transactions and transfer funds, the failure
of vendors to deliver materials or perform services required by us and the
collateral effects on us of the effects of Year 2000 issues on the economy in
general or on our customers in particular. Although we believe that our
compliance efforts are designed to appropriately identify and address those Year
2000 issues that are subject to our reasonable control, we cannot assure you
that our efforts will be fully effective, or that Year 2000 risks will not have
a material adverse effect on our business, financial condition or results of
operations. If the risks to our operating computer systems, machinery and
vendors, or our customer base, is greater than we anticipate, the resulting
losses might be difficult to resolve quickly, because a pattern of similar
system failures in the business community would strain available resources for
assistance or remediation.
CONTROL BY PRINCIPAL SHAREHOLDERS--WE ARE CONTROLLED BY PRINCIPAL SHAREHOLDERS
WHO ARE AFFILIATED WITH OUR LENDERS AND MAY HAVE ECONOMIC INTERESTS WHICH
DIFFER OR CONFLICT WITH YOURS.
All of the outstanding shares of common stock of DeCrane Holdings are held
by DLJ Merchant Banking Partners II, L.P. and affiliated funds and entities.
Those DLJ affiliates own approximately 94% of the common stock of DeCrane
Holdings, on a fully diluted basis assuming exercise of all outstanding
warrants. As a result of their stock ownership, the DLJ affiliates control
DeCrane Holdings and DeCrane Aircraft, and have the power to elect all of their
directors, appoint new management, approve sales of all or substantially all of
the assets of the companies, issue additional capital stock, establish stock
purchase programs and declare dividends. The ownership by the DLJ affiliates
could have a depressive effect on the common stock and the warrants.
DLJ Capital Funding, Inc., which is an agent and lender under our bank
credit facility, DLJ Bridge Finance, Inc., which purchased the original bridge
notes refinanced by the old notes, and Donaldson, Lufkin & Jenrette Securities
Corporation, which was the initial purchaser of the old notes, are also DLJ
affiliates.
The interests of those principal shareholders could conflict with your
interests as a holder of common stock or warrants. Those shareholders may also
have an interest in pursuing transactions that they believe enhance the value of
their equity investment in DeCrane Aircraft or DeCrane Holdings, even though the
transactions involve risks to your investment.
NO PRIOR PUBLIC MARKET--YOU CANNOT BE SURE THAT AN ACTIVE TRADING MARKET WILL
DEVELOP FOR THE OFFERED SECURITIES.
There is no existing trading market for the offered securities. We cannot
assure you that any market for the warrants or the warrant shares will develop,
or about your ability to sell the offered
13
<PAGE>
securities or the price at which you may be able to sell them. If such a market
were to develop, the offered securities could trade at prices that may be higher
or lower than their initial offering price. That trading price could depend on
many factors, including our operating results and the market for similar
securities.
DIVIDENDS--YOU CANNOT BE SURE THAT WE WILL PAY DIVIDENDS ON THE COMMON STOCK.
DeCrane Holdings has not paid dividends to date on its common stock and does
not anticipate paying any cash dividends on its common stock in the foreseeable
future. DeCrane Holdings is a holding company that is dependent on distributions
from its subsidiaries to meet its cash requirements. The terms of the bank
credit facility and senior subordinated note indenture restrict the ability of
DeCrane Aircraft to make distributions to DeCrane Holdings and, consequently,
will restrict the ability of DeCrane Holdings to pay dividends on the common
stock. Also, holders of the warrants will not have the right to receive any
dividends so long as their warrants are unexercised.
14
<PAGE>
RECENT DEVELOPMENTS
THE DLJ ACQUISITION
In August 1998, DeCrane Holdings and two other holding companies organized
by DLJ Merchant Banking Partners II, L.P. and several affiliates, completed a
successful tender offer for all shares of the common stock of DeCrane Aircraft
for $23.00 per share, resulting in a net price of approximately $182.0 million.
All outstanding options to purchase shares were purchased for the same price,
net of their exercise price. At the completion of the tender offer, the two
other holding companies merged with DeCrane Aircraft. All of the old outstanding
shares and share options were cancelled, non-tendering shareholders were paid
out, and as a result DeCrane Aircraft became a wholly-owned subsidiary of
DeCrane Holdings.
Prior to the tender offer, one of the merging holding companies entered into
a $130.0 million syndicated bank credit facility, with a group of lenders led by
DLJ Capital Funding, Inc. That syndicated facility is now our bank credit
facility. For its principal terms, see "Description of Bank Credit Facility."
The initial borrowings from that facility totalled $80.0 million of term loans
and $5.4 million of revolving loans, and were used to fund the purchase of
shares in the tender offer, as well as to refinance existing debt of DeCrane
Aircraft. That same merging company also issued $100.0 million of senior
subordinated increasing rate notes to DLJ Bridge Finance, Inc. before merging
into DeCrane Aircraft, making the bridge notes the obligation of DeCrane
Aircraft. The proceeds from those bridge notes were used to fund the tender
offer purchases. The bridge notes were refinanced by the issuance of $100.0
million of 12% Series A Senior Subordinated Notes due 2008 by DeCrane Aircraft
in October 1998 to the initial purchaser Donaldson, Lufkin & Jenrette Securities
Corporation.
DeCrane Holdings raised additional funds for the tender offer purchases, and
expenses of the acquisition transactions, by selling all of the shares of its
common stock for $65.0 million and all of the shares of its Senior Redeemable
Exchangeable Preferred Stock due 2009 for $34.0 million. In connection with the
latter, DeCrane Holdings also issued to DLJ Merchant Banking and its affiliates
warrants to acquire an additional 5.0% of its common stock on a fully diluted
basis.
The following table sets forth the cash sources and uses of funds for the
DLJ acquisition, including the initial offering of units including the warrants,
completed in October 1998, and related fees and expenses (dollars in thousands):
<TABLE>
<S> <C>
SOURCES
Cash from income tax refund (1)................................................ $ 4,368
Proceeds from the exercise of stock options.................................... 4,314
Bank credit facility:
Revolving credit facility.................................................... 5,400
Term facility................................................................ 80,000
Units sold in the initial offering............................................. 100,000
DLJ equity investment.......................................................... 99,000
Estimated additional borrowings to fund transaction fees and expenses.......... 2,528
-----------
Total Sources............................................................ $ 295,610
-----------
-----------
USES
Purchase price for the shares.................................................. $ 173,116
Purchase of shares from the exercise of stock options.......................... 13,194
Repayment of prior senior credit facility...................................... 93,000
Estimated transaction fees and expenses........................................ 16,300
-----------
Total Uses............................................................... $ 295,610
-----------
-----------
</TABLE>
- ------------------------
(1) As of June 30, 1998, DeCrane Aircraft had approximately $4.4 million of
income taxes refundable. Since that time, we have received all of this
amount and used the cash to reduce our indebtedness.
15
<PAGE>
PATS
In January 1999, we acquired 100% of the stock of PATS, Inc. for a purchase
price of approximately $41.5 million (including the assumption of debt), subject
to adjustments for changes to its net working capital, and reserves for
environmental and other indemnities made by the selling shareholders. PATS is a
designer, manufacturer and installer of auxiliary fuel tanks which significantly
extend the flight range of commercial and corporate aircraft. Among other
things, PATS is the principal supplier of auxiliary fuel tank systems to the
Boeing Business Jet program. See "Business--Products and Services--Auxiliary
Fuel Systems." PATS is also a supplier of auxiliary power units which supply
ground power to aircraft.
PPI
In April 1999, we acquired all of the stock of PPI Holdings, Inc. for a
price of approximately $79.7 million in cash, which is to be adjusted upwards or
downwards based on post-closing contingencies relating to financial matters.
That purchase price includes $19.5 million which is to be paid over
approximately two years after the closing, but is contingent upon the acquired
business achieving specific financial performance criteria. PPI is a
manufacturer of interior furniture components primarily for middle- and high-end
corporate aircraft.
16
<PAGE>
USE OF PROCEEDS
We are registering the offered securities in order to satisfy our
obligations under the Registration Rights Agreement entered into at the time of
the initial offering of the units which included the warrants and the DeCrane
Aircraft old notes. All of the securities offered hereby are being sold by the
holders of the relevant warrants or warrant shares. DeCrane Holdings will not
receive any of the proceeds from the sale of the offered securities, other than
upon the exercise of warrants by exercising warrantholders. DeCrane Holdings
will pay some expenses relating to the registration and sale of the offered
securities.
17
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated cash and cash equivalents
and total capitalization of DeCrane Holdings as of December 31, 1998 on a
historical and pro forma basis. This table should be read in conjunction with
the DeCrane Holdings consolidated financial statements and related notes, the
"Unaudited Pro Forma Consolidated Financial Statements" and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in the prospectus.
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1998
-------------------------
ACTUAL PRO FORMA(1)
---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents.............................................................. $ 3,518 $ 7,894
---------- -------------
---------- -------------
Total debt:
Bank credit facility
Term facility...................................................................... $ 79,888 $ 149,888
Revolving credit facility.......................................................... 5,800 24,100
Senior Subordinated Notes due 2008................................................... 100,000 100,000
Other debt........................................................................... 1,077 1,527
---------- -------------
Total debt............................................................................. 186,765 275,515
Mandatorily redeemable preferred stock................................................. 35,884 35,884
Stockholders' equity................................................................... 61,879 73,985
---------- -------------
Total capitalization................................................................... $ 284,528 $ 385,384
---------- -------------
---------- -------------
</TABLE>
- ------------------------
(1) Pro forma reflects the additional borrowings required to fund the PATS and
PPI acquisitions.
18
<PAGE>
DIVIDEND POLICY
DeCrane Holdings has not paid dividends to date on our common stock and we
do not anticipate paying any cash dividends on our common stock in the
foreseeable future. DeCrane Holdings is a holding company that is dependent on
distributions from its subsidiary to meet its cash requirements. The terms of
DeCrane Aircraft's bank credit facility and the indenture for its senior
subordinated notes restrict the ability of DeCrane Aircraft to make
distributions to DeCrane Holdings and, consequently, will restrict our ability
to pay dividends on our stock. Further, holders of our warrants will not have
the right to receive any dividends in any case, so long as their warrants are
unexercised.
19
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(1) As of December 31, 1998, reflects DeCrane Holdings' financial position
subsequent to the DLJ acquisition and the initial offering. For the twelve
months ended December 31, 1998, reflects DeCrane Holdings' historical
results of operations for the four months ended December 31, 1998 and the
historical results of operations for DeCrane Aircraft (Predecessor) for the
eight months ended August 31, 1998.
(2) Reflects DeCrane Aircraft's purchase of all of the outstanding stock of
PATS in January 1999 and the purchase of all of the outstanding stock of
PPI in April 1999. Sources and uses of funds for the acquisitions, had they
occurred on December 31, 1998, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
PPI
HOLDINGS,
PATS, INC. INC. TOTAL
----------- ------------- ----------
<S> <C> <C> <C>
SOURCES:
Senior credit facility borrowings:
Term B facility.................................... $ 20,000 $ -- $ 20,000
Term C facility.................................... -- 50,000 50,000
Acquisition facility............................... 16,500 -- 16,500
Working capital facility........................... 1,000 800 1,800
DLJ Merchant Banking and affiliates equity investment
(a)................................................ -- 12,500 12,500
Customer prepayment.................................. 5,000 -- 5,000
----------- ------------- ----------
Total Sources.................................... $ 42,500 $ 63,300 $ 105,800
----------- ------------- ----------
----------- ------------- ----------
USES:
Purchase of common stock............................. $ 31,212 $ 53,250 $ 84,462
Debt repaid upon acquisition......................... 9,277 7,550 16,827
Estimated acquisition fees and expenses.............. 1,136 1,000 2,136
Estimated financing fees and expenses................ 875 1,500 2,375
----------- ------------- ----------
Total Uses....................................... $ 42,500 $ 63,300 $ 105,800
----------- ------------- ----------
----------- ------------- ----------
</TABLE>
- --------------------
(a) Contributed to DeCrane Aircrafts' paid-in capital by DeCrane Holdings.
(3) Reflects the financial position of PATS and PPI as of December 31, 1998.
(4) Reflects the excess purchase price of the acquisitions over the fair value
of net assets acquired. For purposes of the Pro Forma Consolidated
Financial Data, we allocated the excess purchase price to goodwill which is
being amortized on a straight-line basis over 30 years. Such allocation is
preliminary and may change upon the completion of the final valuations of
the net assets acquired.
(5) Reflects $2.1 million of credit facility amendment fees and expenses
capitalized as deferred financing costs net of a $0.2 million write off of
PPI deferred financing costs related to debt to be repaid upon acquisition.
(6) Reflects the $16.8 million repayment of PATS and PPI debt upon acquisition
offset by $0.5 million of Term C facility borrowings classified as a
current obligation.
(7) Reflects a customer prepayment for product to be delivered by PATS through
2001 used by DeCrane Aircraft to finance the acquisition. The prepayment
will be offset semiannually against future amounts receivable and has a
7.5% effective interest rate.
(8) Reflects the income tax benefit of the write off of PPI deferred financing
costs.
23
<PAGE>
(9) Reflects the long-term portion of senior credit facility borrowings for the
acquisitions. The terms of the senior credit facility are described in the
DeCrane Holdings historical consolidated financial statements and related
notes included elsewhere in this prospectus.
(10) Reflects the $12.5 million equity investment net of $0.3 million of
issuance costs, the elimination of the acquired companies
stockholders'equity upon acquisition and the $0.1 million write off, net of
income tax benefit, of PPI deferred financing costs.
(11) Reflects the results of operations for the companies acquired for the
periods not included in the historical columns. The results of operations
for the acquired companies are for the periods from January 1, 1998: to
June 25, 1998 for Avtech; June 29, 1998 for Dettmers; and December 31, 1998
for PATS and PPI.
(12) Reflects the elimination of intercompany sales.
(13) Reflects the net change in cost of goods sales attributable to the
following (dollars in thousands):
<TABLE>
<S> <C>
Decrease in depreciation expense (a)................................. $ (658)
Elimination of intercompany sales.................................... (133)
Work force reductions attributable to merging the companies
acquired........................................................... (60)
---------
Net increase (decrease) in cost of sales............................. $ (851)
---------
---------
</TABLE>
- ------------------------
(a) To reflect a decrease in depreciation expense resulting from the fair
value and remaining economic useful lives of depreciable assets acquired
in connection with the DLJ acquisition.
(14) Reflects the net decrease in selling, general and administrative expenses
attributable to the following (dollars in thousands):
<TABLE>
<S> <C>
Decrease in compensation expense (a)............................... $ (1,775)
Decrease in investor relations expenses (b)........................ (221)
Other, net (c)..................................................... 268
---------
Net decrease in selling, general and administrative expenses....... $ (1,728)
---------
---------
</TABLE>
- ------------------------
(a) To reflect the resignation of some former employees and changes to
employment agreements for remaining employees of the companies acquired.
(b) To reflect the decrease in investor relations expenses associated with
becoming a privately held company as a result of the DLJ acquisition.
(c) To reflect an increase in depreciation expense resulting from the fair
value and remaining economic useful lives of depreciable assets acquired
in connection with the DLJ acquisition, net of cost savings attributable
to employee benefit plans implemented at the companies acquired.
(15) Reflects a reduction for nonrecurring charges incurred by DeCrane Aircraft
on behalf of its stockholders related to the DLJ acquisition, and by Avtech
and PATS on behalf of their stockholders related to their respective
acquisitions by DeCrane Aircraft.
(16) Reflects a reduction in expense attributable to employment contract
termination expenses and nonrecurring bonuses awarded prior to, and in
anticipation of, the acquisitions of Avtech and PATS by DeCrane Aircraft.
(17) Reflects a reduction in expense attributable to the termination of the
Employee Stock Ownership Plans in conjunction with the acquisitions of
Avtech and PATS.
24
<PAGE>
(18) Reflects a net increase in amortization expense pertaining to the
amortization of goodwill and other intangible assets related to the DLJ,
PATS and PPI acquisitions on a straight-line basis as follows (dollars in
thousands):
<TABLE>
<CAPTION>
AMORTIZATION
AMOUNT YEARS EXPENSE
---------- --------- ------------
<S> <C> <C> <C>
Elimination of Predecessor amortization
DeCrane Aircraft..................................................... $ (1,347)
PPI.................................................................. (328)
DLJ acquisition amortization:
Goodwill............................................................. $ 166,674 30 3,704
FAA certifications................................................... 30,391 15 1,351
Engineering drawings................................................. 9,138 15 406
Assembled workforce.................................................. 6,588 7 627
Tradenames, trademarks and patents................................... 3,908 5 to 12 269
Goodwill amortization attributable to 1999 acquisitions (a)
PATS................................................................. 27,376 30 913
PPI.................................................................. 44,130 30 1,471
------------
Net increase in amortization....................................... $ 7,066
------------
------------
</TABLE>
- ------------------------
(a) Amortization expense may change upon completion of the final valuations
of the net assets acquired.
(19) Reflects the net increase in interest expense, including deferred financing
cost amortization and commitment fees, as a result of the following
(dollars in thousands):
<TABLE>
<CAPTION>
INTEREST
RATE OR TERM AMOUNT EXPENSE
------------------------ --------- ---------
<S> <C> <C> <C>
Elimination of historical net interest expense (a):
Pertaining to debt refinanced (b):
Interest expense........................................ $ (3,575)
Deferred financing cost amortization, commitment fees
and expenses.......................................... (236)
Interest income (c)....................................... 207
Successor net interest expense............................ (6,794)
Pro forma interest expense (d):
Interest expense:
Revolving credit facility:
Working capital facility.............................. LIBOR (e) +2.75% $ 8,912 692
Acquisition facility.................................. LIBOR (e) +2.75% 16,500 1,282
Term facility:
Term A................................................ LIBOR (e) +2.75% 35,000 2,720
Term B................................................ LIBOR (e) +3.00% 65,000 5,213
Term C................................................ LIBOR (e) +3.25% 50,000 4,135
Bridge notes............................................ Prime + (f) 100,000 10,625
Customer prepayment interest............................ 7.50% 5,000 375
Deferred financing cost amortization:
Revolving credit facility............................... 6 years (g) 1,277 213
Term facility:
Term A................................................ 6 years (h) 894 200
Term B................................................ 7 years (h) 2,025 315
Term C................................................ 7 years (h) 1,200 176
Bridge notes............................................ 7.5 years (g) 3,180 424
Commitment fees and expenses.............................. 219
---------
Net increase in interest expense........................ $ 16,191
---------
---------
</TABLE>
- ------------------------
(a) Excludes interest expense pertaining capital lease obligations and other
debt obligations not refinanced.
(b) Includes DeCrane Aircraft Predecessor debt refinanced in conjunction
with the DLJ acquisition, Dettmers debt not acquired and PATS and PPI
debt refinanced in conjunction
25
<PAGE>
with their acquisitions by DeCrane Aircraft. See the notes to the DeCrane
Holdings, PATS and PPI consolidated financial statements included
elsewhere in this prospectus for a description of the debt refinanced.
(c) Interest income earned from invested surplus cash balances prior to
acquisition.
(d) Pro forma for the DLJ, PATS and PPI acquisitions as if they had occurred
on January 1, 1998.
(e) Calculations based on LIBOR at 5.02%.
(f) Calculations based on Prime at 8.5%, the rate in effect during the
period the bridge notes were issued and outstanding, plus 2.125%.
(g) Deferred financing costs are amortized on a straight-line basis over the
term of the agreement.
(h) Deferred financing costs are amortized using the effective interest
method.
(20) Reflects adjustment for nonrecurring charges associated with a terminated
debt offering in June 1998. Such offering was terminated upon initiation of
the DLJ acquisition.
(21) Represents an increase in the provision for income taxes as a result of a
change in pro forma taxable income, a provision for income taxes on the
income of PPI which was taxed as an S Corporation prior to its acquisition,
and elimination of the $2.6 million one time benefit caused by reversal of
DeCrane Holdings' deferred tax valuation allowance. The effective tax rate
differs from the U.S. federal statutory rate due to goodwill amortization
related to acquisitions not deductible for income tax purposes.
(22) Reflects incremental expenses associated with regulatory compliance as a
result of the initial offering.
(23) Reflects the net increase in interest expense, including deferred financing
cost amortization and commitment fees, as a result of the initial offering
as follows (dollars in thousands):
<TABLE>
<CAPTION>
INTEREST
RATE OR TERM AMOUNT EXPENSE
--------------------- --------- ---------
<S> <C> <C> <C>
Elimination of bridge notes interest expense:
Interest expense.............................................. Prime + (a) $ 100,000 $ (10,625)
Deferred financing cost amortization.......................... 7.5 years (b) 3,180 (424)
Senior subordinated notes due 2008:
Interest expense.............................................. 12.00% 100,000 12,000
Deferred financing cost amortization (c)...................... 10 years (d) 5,810 581
Revolving credit facility:
Interest expense.............................................. LIBOR (e) + 2.75% 4,610 358
Commitment fees and expenses.................................. (23)
---------
Net increase in interest expense.............................. $ 1,867
---------
---------
</TABLE>
- --------------------------
(a) Calculations based on Prime at 8.50%, the rate in effect during the
period the bridge notes were issued and outstanding, plus 2.125%.
(b) Deferred financing costs are amortized on a straight-line basis over the
term of the agreement.
(c) Includes $1.2 million for the value ascribed to the warrants issued by
DeCrane Holdings in conjunction with the sale of the units in the initial
offering.
(d) Deferred financing costs are amortized using the effective interest
method.
(e) Calculations based on LIBOR at 5.02%.
(24) Represents a decrease in the provision for income taxes as a result of a
decrease in pro forma taxable income.
(25) In conjunction with the DLJ acquisition, deferred financing costs of
$347,000, net of income tax benefit, were written off as an extraordinary
charge as a result of the termination of DeCrane Aircraft's prior senior
credit facility. In conjunction with the initial offering, deferred
financing
26
<PAGE>
costs of $1.9 million, net of income tax benefit, were written off as an
extraordinary charge as a result of the termination of the bridge notes. In
conjunction with the PPI acquisition, deferred financing costs of $.1
million, net of income tax benefit, were written off as an extraordinary
charge as a result of the repayment of PPI debt upon acquisition. These
amounts have not been reflected in the unaudited pro forma consolidated
statement of operations.
(26) Supplemental financial data, pro forma for the Acquisition and Offering
adjustments, is as follows (dollars in thousands):
<TABLE>
<S> <C>
Cash flows from operating activities............................. $ 5,486
Cash flows from investing activities............................. (365,413)
Cash flows from financing activities............................. 361,280
EBITDA (a)....................................................... 52,563
Depreciation and amortization (b)................................ 16,996
Capital expenditures............................................. 6,693
Cash interest expense............................................ 27,120
Ratio of earnings to fixed charges (c)........................... 1.1x
</TABLE>
- ------------------------
(a) EBITDA equals operating income plus depreciation, amortization and
non-cash acquisition related charges to reflect cost of sales based on
the fair value of inventory acquired in connection with the DLJ
acquisition. EBITDA is not a measure of performance or financial
condition under generally accepted accounting principles. EBITDA is not
intended to represent cash flow from operations and should not be
considered as an alternative to income from operations or net income
computed in accordance with generally accepted accounting principles, as
an indicator of our operating performance, as an alternative to cash flow
from operating activities or as a measure of liquidity. The funds
depicted by EBITDA are not available for our discretionary use due to
funding requirements for working capital, capital expenditures, debt
service, income taxes and other commitments and contingencies. We believe
that EBITDA is a standard measure of liquidity commonly reported and
widely used by analysts, investors and other interested parties in the
financial markets. However, not all companies calculate EBITDA using the
same method and the EBITDA numbers set forth above may not be comparable
to EBITDA reported by other companies.
(b) Reflects depreciation and amortization of plant and equipment, goodwill
and other intangible assets. Excludes amortization of deferred financing
costs and debt discounts which is classified as a component of interest
expense.
(c) For purposes of calculating the earnings to fixed charges ratio,
earnings represent net income before income taxes, minority interest in
the income of majority-owned subsidiaries, extraordinary items and fixed
charges. Fixed charges consist of:
- interest, whether expensed or capitalized;
- amortization of debt expense and discount relating to any indebtedness,
whether expensed or capitalized; and
- one-third of rental expense under operating leases which is considered
to be a reasonable approximation of the interest portion of such
expense.
27
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents historical consolidated financial data of
DeCrane Holdings as of and for the four months ended December 31, 1998 and
DeCrane Aircraft (Predecessor) as of and for each of the four years in the
period ended December 31, 1997 and the eight months ended August 31, 1998
derived from the audited financial statements. The information in this table
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the DeCrane Holdings
consolidated financial statements and related notes included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
(PREDECESSOR)
-----------------------------------------------------------
EIGHT MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------------------------- AUGUST 31,
1994 1995 1996(1) 1997(2) 1998(3)
--------- --------- ----------- --------- -------------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenues....................................................... $ 47,092 $ 55,839 $ 65,099 $ 108,903 $ 90,077
Cost of sales(5)............................................... 36,407 43,463 49,392 80,247 60,101
--------- --------- ----------- --------- -------------
Gross profit................................................... 10,685 12,376 15,707 28,656 29,976
Selling, general and administrative expenses................... 7,716 9,426 10,747 15,756 15,719
Nonrecurring charges(6)........................................ -- -- -- -- 3,632
Amortization of intangible assets.............................. 1,209 1,115 709 905 1,347
--------- --------- ----------- --------- -------------
Operating income............................................... 1,760 1,835 4,251 11,995 9,278
Interest expense............................................... 3,244 3,821 4,248 3,154 2,350
Terminated debt offering expenses.............................. -- -- -- -- 600
Other expenses, net............................................ 332 382 108 243 247
--------- --------- ----------- --------- -------------
Income (loss) before provision for income taxes and
extraordinary item........................................... (1,816) (2,368) (105) 8,598 6,081
Provision for income taxes (benefit)(7)........................ 613 1,078 712 3,344 2,892
--------- --------- ----------- --------- -------------
Income (loss) before extraordinary item........................ (2,429) (3,446) (817) 5,254 3,189
Extraordinary loss from debt refinancing(8).................... (264) -- -- (2,078) --
--------- --------- ----------- --------- -------------
Net income (loss).............................................. $ (2,693) $ (3,446) $ (817) $ 3,176 $ 3,189
--------- --------- ----------- --------- -------------
--------- --------- ----------- --------- -------------
OTHER FINANCIAL DATA:
Cash flows from operating activities........................... $ (2,322) $ 1,457 $ 2,958 $ 4,641 $ 3,014
Cash flows from investing activities........................... (993) (1,462) (24,016) (27,809) (87,378)
Cash flows from financing activities........................... 3,028 41 21,051 22,957 89,871
EBITDA(9)...................................................... 5,196 5,471 7,602 16,915 13,636
EBITDA margin(10).............................................. 11.0% 9.8% 11.7% 15.5% 15.1%
Depreciation and amortization(11).............................. $ 3,436 $ 3,636 $ 3,351 $ 4,920 $ 4,358
Capital expenditures(12)....................................... 1,016 1,203 5,821 3,842 1,745
Ratio of earnings to fixed charges(13)......................... -- -- 1.0x 3.3x 3.0x
OTHER OPERATING DATA:
Bookings(14)................................................... $ 47,896 $ 50,785 $ 81,914 $ 112,082 $ 94,439
Backlog at end of period(15)................................... 24,493 19,761 44,433 49,005 84,184
<CAPTION>
FOUR MONTHS
ENDED
DECEMBER 31,
1998(4)
-------------
STATEMENT OF OPERATIONS DATA:
<S> <C>
Revenues....................................................... $ 60,356
Cost of sales(5)............................................... 42,739
-------------
Gross profit................................................... 17,617
Selling, general and administrative expenses................... 10,274
Nonrecurring charges(6)........................................ --
Amortization of intangible assets.............................. 3,148
-------------
Operating income............................................... 4,195
Interest expense............................................... 6,867
Terminated debt offering expenses.............................. --
Other expenses, net............................................ 335
-------------
Income (loss) before provision for income taxes and
extraordinary item........................................... (3,007)
Provision for income taxes (benefit)(7)........................ (2,668)
-------------
Income (loss) before extraordinary item........................ (339)
Extraordinary loss from debt refinancing(8).................... (2,229)
-------------
Net income (loss).............................................. $ (2,568)
-------------
-------------
OTHER FINANCIAL DATA:
Cash flows from operating activities........................... $ 1,008
Cash flows from investing activities........................... (192,678)
Cash flows from financing activities........................... 189,268
EBITDA(9)...................................................... 13,247
EBITDA margin(10).............................................. 21.9%
Depreciation and amortization(11).............................. $ 4,604
Capital expenditures(12)....................................... 1,813
Ratio of earnings to fixed charges(13)......................... --
OTHER OPERATING DATA:
Bookings(14)................................................... $ 54,021
Backlog at end of period(15)................................... 75,388
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------------
(PREDECESSOR)
----------------------------------------------
1994 1995 1996(1) 1997(2) 1998(16)
--------- --------- --------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................................... $ 236 $ 305 $ 320 $ 206 $ 3,518
Working capital............................................... 11,459 12,583 10,486 24,772 46,227
Total assets.................................................. 37,685 36,329 69,266 99,137 330,575
Total debt(17)................................................ 23,874 24,672 42,250 38,838 186,765
Mandatorily redeemable preferred stock and common stock
warrants.................................................... 2,329 1,633 6,879 -- 35,884
Stockholders' equity (deficit)................................ 766 (1,697) 1,236 39,527 61,879
</TABLE>
See accompanying notes to Selected Consolidated Financial Data
28
<PAGE>
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
(1) Includes the effect of: the acquisition of the remaining 25% minority
interest in Cory Components beginning February 20, 1996, the date on which
the transaction occurred; and the results of Aerospace Display Systems
beginning September 18, 1996, and Elsinore Aerospace Services, Inc. and
Elsinore Engineering, Inc. beginning December 5, 1996, the dates on which
they were acquired.
(2) Includes the effect of the acquisition of Audio International beginning
November 14, 1997, the date on which it was acquired.
(3) Includes the results of operations of Avtech and Dettmers beginning June
26, 1998 and June 30, 1998, respectively, the dates on which they were
acquired.
(4) Reflects the results of operations subsequent to the DLJ acquisition.
(5) Includes $4.4 million of non-cash charges for the four months ended
December 31, 1998 to reflect cost of sales based on the fair value of
inventory acquired in connection with the DLJ acquisition.
(6) Represents non-capitalizable transaction costs associated with the DLJ
acquisition.
(7) Prior to the acquisition of the remaining 25% minority interest in Cory
Components in 1996, DeCrane Aircraft did not consolidate the earnings of
Cory Components for tax purposes. As such, despite a consolidated pre-tax
loss in each of the years, DeCrane Aircraft recorded a provision for income
taxes from 1993 up to the date of the acquisition in 1996 which primarily
relates to Cory Components. For the four months ended December 31, 1998,
includes a $2.6 million benefit from the reduction of the deferred tax
valuation allowance.
(8) Represents:
- the write-offs of unamortized deferred financing costs, unamortized
original issue discounts and a prepayment penalty incurred as a result of
the refinancing by DeCrane Aircraft of a substantial portion of its debt
in November 1994;
- the write-offs, net of an income tax benefit, of deferred financing costs,
unamortized original issue discounts, a prepayment penalty and other
related expenses incurred as a result of the repayment of debt by DeCrane
Aircraft with the net proceeds from its initial public offering in April
1997; and
- the write-offs, net of an income tax benefit, of deferred financing costs
as a result of the repayment of DeCrane Aircraft's existing indebtedness
in connection with the DLJ acquisition and the refinancing of the bridge
notes during the four months ended December 31, 1998.
(9) EBITDA equals operating income plus depreciation, amortization and non-cash
acquisition related charges described in Note 5 above. EBITDA is not a
measure of performance or financial condition under generally accepted
accounting principles. EBITDA is not intended to represent cash flow from
operations and should not be considered as an alternative to income from
operations or net income computed in accordance with generally accepted
accounting principles, as an indicator of our operating performance, as an
alternative to cash flow from operating activities or as a measure of
liquidity. The funds depicted by EBITDA are not available for our
discretionary use due to funding requirements for working capital, capital
expenditures, debt service, income taxes and other commitments and
contingencies. We believe that EBITDA is a standard measure of liquidity
commonly reported and widely used by analysts, investors and other
interested parties in the financial markets. However, not all companies
calculate EBITDA using the same method and the EBITDA numbers set forth
above may not be comparable to EBITDA reported by other companies.
(10) EBITDA margin is computed by dividing EBITDA by revenues.
(11) Reflects depreciation and amortization of plant and equipment and goodwill
and other intangible assets. Excludes amortization of deferred financing
costs and debt discounts which are classified as a component of interest
expense.
(12) Includes $4.4 million for the year ended December 31, 1996 related to the
acquisition of a manufacturing facility.
(13) For purposes of calculating the earnings to fixed charges ratio, earnings
represent net income before income taxes, minority interests in the income
of majority-owned subsidiaries, cumulative effect of an accounting change,
extraordinary items and fixed charges. Fixed charges consist of:
- interest, whether expensed or capitalized;
- amortization of debt expense and discount or premium relating to any
indebtedness, whether expensed or capitalized; and
- one-third of rental expenses under operating leases which is considered to
be a reasonable approximation of the interest portion of such expense.
There was a deficiency of earnings to cover fixed charges for the years
ended December 31, 1994 and 1995 and the four months ended December 31, 1998
of $1.8 million, $2.3 million and $2.9 million, respectively.
(14) Bookings represent the total invoice value of purchase orders received
during the period.
(15) Orders are generally subject to cancellation by the customer prior to
shipment. The level of unfilled orders at any given date during the year
will be materially affected by the timing of DeCrane Aircraft's receipt of
orders and the speed with which those orders are filled.
(16) Reflects the financial position of Avtech and Dettmers and the DLJ
acquisition.
(17) Total debt is defined as long-term debt, including current portion, and
short-term borrowings.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSIONS SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS OF DECRANE HOLDINGS AND RELATED NOTES INCLUDED
ELSEWHERE IN THIS PROSPECTUS.
DeCrane Holdings is a holding company and does not have any material
operations or assets other than its ownership of all of the capital stock of
DeCrane Aircraft as described in "--The DLJ Acquisition and Financing" below.
OVERVIEW
Our results of operations have been affected by our history of acquisitions.
Since our formation in 1989, we have completed thirteen acquisitions of
businesses or assets, most recently PATS in January 1999 and PPI in April 1999.
As a result, our historical financial statements do not reflect the results of
all of our current businesses. Additionally, our capital structure was
significantly altered by the tender offer for our stock successfully conducted
by an affiliate of DLJ Merchant Banking Partners II, L.P. in August 1998.
THE DLJ ACQUISITION AND FINANCING
In August 1998, DeCrane Holdings and its two subsidiaries, an acquisition
subsidiary and a financing subsidiary, completed a successful $186.3 million
cash tender offer for all of the shares of DeCrane Aircraft. DeCrane Holdings
was organized by DLJ Merchant Banking II, L.P. and several of its affiliates.
The funds for the tender offer, and the refinancing of DeCrane Aircraft's
existing debt, were obtained from the sale of equity by DeCrane Holdings and the
issuance of debt by its finance subsidiary. DeCrane Holdings received an initial
capital contribution of approximately $99.0 million from the sale of its
preferred and common stock and warrants to DLJ Merchant Banking. DeCrane
Holdings used these funds to capitalize its finance subsidiary. The finance
subsidiary then entered into a $130.0 million syndicated bank credit facility
with a group of lenders led by DLJ Capital Funding, Inc. and issued $100.0
million of senior subordinated increasing rate bridge notes to DLJ Bridge
Finance Inc. The finance subsidiary capitalized the acquisition subsidiary with
the funds necessary to complete the tender offer.
Upon completion of the tender offer, the acquisition and finance
subsidiaries were merged into DeCrane Aircraft and DeCrane Aircraft's existing
debt was repaid. As a result of the mergers, DeCrane Aircraft became a
wholly-owned subsidiary of DeCrane Holdings and the bank credit facility and
bridge notes became obligations of DeCrane Aircraft. In October 1998, DeCrane
Aircraft refinanced the bridge notes with the proceeds from the sale of the old
notes issued under the indenture described in this prospectus.
The gross purchase price for DeCrane Aircraft's shares and options was
$186.3 million. Assets acquired and liabilities assumed have been recorded at
their estimated fair values based on an independent appraisal. The purchase
price was allocated to the assets acquired based on the estimated fair values of
$4.4 million for inventory, $2.6 million for fixed assets, and $50.0 million for
identifiable intangible assets. The excess of the purchase price over the fair
value of the net assets acquired totalling $70.0 million was allocated to
goodwill. The increase in inventory value was expensed as the inventory was sold
during the four months ended December 31, 1998. The intangible assets, other
than goodwill, are being amortized on a straight-line basis over periods between
five and fifteen years. Goodwill is being amortized on a straight-line basis
over a period of thirty years.
The term loan facility under DeCrane Aircraft's bank credit facility
consists of a $35.0 million amortizing Term A loan maturing in six years and a
$65.0 million amortizing Term B loan maturing in seven years. The Term B loan
was increased from $45.0 to $65.0 million at the time of the PATS
30
<PAGE>
acquisition. Scheduled aggregate amortization is $1.1 million in 1999. The bank
credit facility also includes a $25.0 million working capital revolving credit
facility and a $25.0 million acquisition revolving credit facility, of which
$5.4 million was borrowed upon completion of the DLJ acquisition. Both revolving
credit facilities will terminate after six years.
Borrowings under our bank credit facility generally bear interest based on a
margin over, at DeCrane Aircraft's option, either the base rate or the
Euro-Dollar rate. The applicable margin for the revolving credit facilities and
Term A loan is 1.50% for base rate borrowings and 2.75% for Euro-Dollar
borrowings for the first six months after the January 1999 PATS acquisition
amendment was adopted; the Term B loan has a margin of 1.75% for base rate
borrowings and 3.00% for Euro-Dollar borrowings. After the first six months, the
applicable margin will vary based upon DeCrane Aircraft's ratio of total debt to
EBITDA, as defined. DeCrane Aircraft's obligations under the bank credit
facility are:
- guaranteed by DeCrane Holdings and all existing and future wholly-owned
domestic subsidiaries of DeCrane Aircraft;
- secured by substantially all of the assets of DeCrane Aircraft and the
subsidiary guarantors, including a pledge of the capital stock of all
existing and future subsidiaries of DeCrane Aircraft, provided that no
more than 65% of the voting stock of any foreign subsidiary shall be
pledged; and
- secured by a pledge by DeCrane Holdings of the stock of DeCrane Aircraft.
The bank credit facility contains customary covenants and events of default.
The $100.0 million DeCrane Aircraft senior subordinated notes, including the
old notes and the new notes to be exchanged for old notes in an exchange offer
for which a separate registration statement has been filed, will mature in 2008
and are guaranteed by DeCrane Aircraft's wholly-owned domestic subsidiaries.
Interest on the notes is payable semiannually in cash. The notes contain
customary covenants and events of default, including covenants that limit
DeCrane Aircraft's ability to incur debt, pay dividends and acquire or make
equity investments in other companies.
In connection with the DLJ acquisition, DeCrane Holdings raised
approximately $99.0 million through its sale of common stock, preferred stock
and warrants. The proceeds of those sales were contributed to the paid-in
capital of DeCrane Aircraft. The DeCrane Holdings preferred stock provides for
cumulative dividends that do not require payment in cash through 2003, but will
be payable in cash thereafter and will be mandatorily redeemable in 2009. The
DeCrane Holdings preferred stock is exchangeable into debentures that will
contain customary covenants and events of default, including covenants that
limit the ability of DeCrane Holdings and its subsidiaries to incur debt, pay
dividends and acquire or make equity investments in other companies.
INDUSTRY OUTLOOK AND TRENDS
We sell to the commercial, regional, corporate and military aircraft
markets. Within these markets, our customers include original manufacturers of
aircraft and related electronic equipment, aircraft repair and modification
centers, and airlines. We believe there are favorable trends in the markets we
serve that will result in continuing strong demand for our products and
services.
The 1998 CURRENT MARKET OUTLOOK released by the Boeing Company in early 1998
projected that:
- worldwide revenue passenger kilometers will increase at a compounded
annual growth rate of 5.0% over the next ten years;
- the world jetliner fleet will grow from 12,300 aircraft at the end of 1997
to nearly 17,700 aircraft in 2007 and to 26,200 aircraft by 2017; and
31
<PAGE>
- over the next 20 years, the industry will require 17,650 new aircraft,
both to support the projected world fleet expansion and to replace
capacity lost as older aircraft are removed from commercial airline
service.
We believe these projected increases over the prolonged time frame indicated
above will result in strong demand for our products and services in the
commercial, regional and corporate aircraft markets that we serve. However, the
shorter-term outlook includes Boeing's recent announcements concerning
production line cutbacks, which will result in a projected decline in commercial
aircraft deliveries in late 1999 and 2000.
RESULTS OF OPERATIONS
The following table sets forth the items in the consolidated statements of
operations for DeCrane Holdings as percentages of its revenues for the periods
indicated. The percentages for the years ended December 31, 1996 and 1997
reflect the historical results of operations of DeCrane Aircraft prior to the
DLJ acquisition. The percentages for the year ended December 31, 1998 reflect
the combined historical results of operations of DeCrane Aircraft for the eight
months ended August 31, 1998 prior to the DLJ acquisition and DeCrane Holdings
for the four months ended December 31, 1998 subsequent to the DLJ acquisition.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Revenues............................................................................ 100.0% 100.0% 100.0%
Cost of sales....................................................................... 75.9 73.7 68.4
--------- --------- ---------
Gross profit........................................................................ 24.1 26.3 31.6
Selling, general and administrative expenses........................................ 16.5 14.5 19.7
Amortization of intangible assets................................................... 1.1 0.8 3.0
--------- --------- ---------
Operating income.................................................................... 6.5 11.0 8.9
Interest expense.................................................................... 6.5 2.9 6.1
Other expense, net.................................................................. 0.2 0.2 0.8
--------- --------- ---------
Income (loss) before provision for income taxes,
and extraordinary item............................................................ (0.2) 7.9 2.0
Provision for income taxes.......................................................... (1.1) (3.1) (0.1)
--------- --------- ---------
Income (loss) before extraordinary item............................................. (1.3) 4.8 1.9
Extraordinary loss from debt refinancing............................................ -- (1.9) (1.5)
--------- --------- ---------
Net income (loss)................................................................... (1.3)% 2.9% 0.4%
--------- --------- ---------
--------- --------- ---------
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES. Revenues increased $41.6 million, or 38.2%, to $150.5 million for
the year ended December 31, 1998 from $108.9 million for the year ended December
31, 1997. Revenues increased primarily due to the inclusion of:
- $20.2 million of revenues from Audio International, which was acquired on
November 14, 1997;
- $25.2 million of revenues from Avtech, which was acquired on June 26,
1998; and
- $3.3 million of revenues from Dettmers, which was acquired on June 30,
1998.
These revenue increases were somewhat offset by continued softness in the
electrical contact markets, where we experienced a sales decline of
approximately $8.6 million for the year ended December 31, 1998 compared with
the same period last year.
32
<PAGE>
GROSS PROFIT. Gross profit increased $18.9 million, or 65.9%, to $47.6
million for the year ended December 31, 1998 from $28.7 million for the year
ended December 31, 1997. Gross profit as a percent of revenues increased to
31.6% for the year ended December 31, 1998 from 26.3% for the year ended
December 31, 1997. Factors contributing to the gross profit increase were:
- $12.4 million from an overall increase in sales volume, primarily a result
of the November 1997 Audio International and June 1998 Avtech and Dettmers
acquisitions;
- $10.3 million due to the higher overall gross margins of the acquired
companies; and
- $1.8 million due to overall margin improvements at existing companies.
The increase was offset by:
- a $1.2 million decrease due to a decline in electrical contact revenues;
and
- a $4.4 million charge for the portion of the DLJ acquisition purchase
price allocated to inventory and expensed as the inventory was sold during
the four months ended December 31, 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $13.8 million, or 87.3%, to $29.6 million for
the year ended December 31, 1998 from $15.8 million for the year ended December
31, 1997. SG&A expenses as a percent of revenues increased to 19.7% for the year
ended December 31, 1998 from 14.5% for the year ended December 31, 1997. SG&A
expenses increased primarily as a result of:
- the inclusion of $9.2 million of expenses pertaining to Audio
International, Avtech and Dettmers which were acquired during 1997 and
1998;
- $3.6 of non-capitalizable costs associated with the DLJ acquisition; and
- a $1.9 million increase in research and development costs related to new
product introductions at Audio International and Dettmers.
OPERATING INCOME. Operating income increased $1.5 million to $13.5 million
for the year ended December 31, 1998 from $12.0 million for the year ended
December 31, 1997. Operating income as a percent of revenues decreased to 8.9%
for the year ended December 31, 1998 from 11.0% for the year ended December 31,
1997. An overall $13.1 million increase in operating income, including $12.0
million from the acquisitions of Audio International, Avtech and Dettmers, was
offset by:
- the $4.4 million charge for the portion of the DLJ purchase price
allocated to inventory;
- $3.6 million of higher amortization expense associated with acquisitions,
including the DLJ acquisition; and
- the $3.6 million charge for non-capitalizable costs associated with the
DLJ acquisition.
INTEREST EXPENSE. Interest expense increased $6.0 million, or 187.5%, to
$9.2 million for the year ended December 31, 1998 from $3.2 million for the year
ended December 31, 1997. This increase resulted primarily from the higher debt
levels associated with the DLJ acquisition.
PROVISION FOR INCOME TAXES. During the year ended December 31, 1998, we
decreased our provision for income taxes by $3.2 million to $0.2 million from
$3.4 million for the year ended December 31, 1997, as a result of lower income
before taxes and the reduction of our deferred tax asset valuation allowance by
$2.6 million. This decrease was significantly offset by an increase in
non-deductible expenses, particularly the amortization of intangible assets,
during the same period. We have approximately $17.4 million and $0.6 million in
loss carry forwards available at December 31, 1998 for federal and state income
tax purposes.
33
<PAGE>
EXTRAORDINARY LOSS FROM DEBT REFINANCING. During the year ended December
31, 1998, we incurred a $2.2 million extraordinary charge, net of an estimated
$1.5 million income tax benefit, as a result of the refinancing of the bridge
notes with a units offering consisting of notes and warrants. During the year
ended December 31, 1997, we incurred a $2.1 million extraordinary charge, net of
an estimated $1.4 million income tax benefit, as a result of a debt refinancing
with the proceeds from our initial public offering.
NET INCOME (LOSS). Net income decreased $2.6 million to $0.6 million for
the year ended December 31, 1998 compared to $3.2 million for the same period in
1997 primarily due to the higher amortization, interest and other expenses
associated with the DLJ acquisition.
BOOKINGS AND BACKLOG. Bookings increased $36.4 million, or 32.5%, to $148.5
million for the year ended December 31, 1998 compared to $112.1 million for the
same period in 1997. The increase in bookings for 1998 includes:
- $21.0 million attributable to Audio International;
- $15.4 million attributable to Avtech; and
- $2.9 million attributable to Dettmers.
As of December 31, 1998, we had a sales order backlog of $75.4 million
compared to $49.0 million as of December 31, 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES. Revenues increased $43.8 million, or 67.3%, to $108.9 million for
1997 from $65.1 million for 1996. Revenues increased primarily due to:
- the inclusion of $10.7 million of revenues from Aerospace Display Systems;
- growth in our private labeling programs of $6.4 million;
- growth in contact sales of $6.3 million driven by new aircraft production
rate increases;
- an increase in sales of harness assemblies for in-flight entertainment
systems of $5.1 million;
- an increase in sales of specialty connectors for cabin management and
in-flight entertainment systems principally on Boeing's 777 aircraft of
$4.9 million;
- an increase of sales to Interactive Flight Technologies, Inc. of $3.3
million relating to a major systems integration program for Swiss Air
Transport Co. Ltd.;
- the inclusion of $3.0 million of revenue from Elsinore;
- new systems integration programs for navigational systems of $1.5 million;
- the inclusion of $1.3 million of revenue from Audio International;
- a new systems integration program for United Parcel Service, Inc. of $0.9
million; and
- the overall growth in the commercial aircraft market.
Partially offsetting this increase was a decline in sales to AT&T Wireless
Services, Inc. of $3.8 million, reflecting the completion in late 1995 and early
1996 of a major systems integration program.
34
<PAGE>
GROSS PROFIT. Gross profit increased $12.9 million, or 82.4%, to $28.7
million for 1997 from $15.7 million for 1996. Gross profit as a percentage of
revenues increased to 26.3% for 1997 from 24.1% for 1996. This increase in gross
profit was attributable to:
- a $10.6 million increase as a result of increased sales volume, $3.8
million of which was attributable to the Aerospace Display Systems,
Elsinore and Audio International acquisitions; and
- a $2.3 million increase attributable to a favorable shift in revenues to
higher margin products, cost reductions and sustained price increases.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased $5.0
million, or 46.6%, to $15.8 million for 1997 from $10.7 million for 1996. SG&A
expenses as a percentage of revenues decreased to 14.5% for 1997 from 16.5% for
1996. SG&A expenses increased primarily due to:
- $2.3 million of incremental expenses resulting from the acquisition of
Aerospace Display Systems, the AMP facility and Elsinore, all of which
occurred in late 1996;
- $0.8 million for additional staff to pursue higher sales to aircraft
manufacturers and to develop capabilities for in-flight entertainment,
navigation and satellite communication and safety systems integration
services; and
- $0.6 million of incremental expenses resulting from the acquisition of
Audio International, which occurred in 1997.
OPERATING INCOME. Operating income increased $7.7 million, or 182.2%, to
$12.0 million for 1997 from $4.3 million for 1996. Operating income as a
percentage of revenues increased to 11.0% for 1997 from 6.5% for 1996. The
increase in operating income resulted from the factors described above.
INTEREST EXPENSE. Interest expense decreased $1.1 million, or 25.8%, to
$3.2 million for 1997 from $4.2 million for 1996. The decrease resulted from the
completion of the initial public offering on April 16, 1997 and the repayment of
a substantial portion of debt with the net proceeds.
PROVISION FOR INCOME TAXES. During 1997, we reduced our deferred tax asset
valuation allowance by $0.5 million to reflect the book benefit of federal and
state net operating loss carry forwards not previously recognized. We have
approximately $2.5 million of net operating loss carry forwards available at
December 31, 1997 for federal income tax purposes.
EXTRAORDINARY LOSS FROM DEBT REFINANCING. During 1997, we incurred a $2.1
million extraordinary charge, net of an estimated $1.4 million income tax
benefit, as a result of refinancing debt with the net proceeds from the initial
public offering.
NET INCOME (LOSS). Net income increased $4.0 million to $3.2 million for
1997 from a net loss of $0.8 million for 1996. The increase is a result of the
factors described above.
LIQUIDITY AND CAPITAL RESOURCES
We have required cash primarily to fund acquisitions and, to a lesser
extent, to fund capital expenditures and for working capital. Our principal
sources of liquidity have been cash flow from operations and third party
borrowings. Cash increased $3.3 million during 1998.
For the year ended December 31, 1998, we generated cash from operating
activities of $4.0 million. Our accounts receivable consist of trade receivables
and unbilled receivables, which are recognized pursuant to the percentage of
completion method of accounting for long-term contracts. Accounts receivable
increased $6.6 million for the year ended December 31, 1998 from higher overall
sales. Unbilled receivables comprised $3.5 million of this increase. Inventories
decreased $2.2 million
35
<PAGE>
for the year ended December 31, 1998, due to improved inventory management at
several subsidiaries as well as the sale of some contact product lines and the
disposal of obsolete inventory items. Accounts payable decreased $2.9 million
for the year ended December 31, 1998 as a result of payment of various assumed
transaction expenses in the acquisitions of 1998 and an agreement with a new
gold supplier for significantly lower prices in exchange for shorter payment
terms. Accrued expenses, however, increased $5.9 million for the year ended
December 31, 1998, primarily as a result of a $2.8 million increase in accrued
interest.
Net cash used in investing activities was $280.1 million during the year
ended December 31, 1998. Of this amount, $190.9 million was used for the DeCrane
Aircraft acquisition, $83.6 million was used for the Avtech acquisition and $2.2
million for the Dettmers acquisition. The total purchase price for the Dettmers
acquisition also included additional contingent consideration with a maximum of
$2.0 million payable between 1999 and 2002. We spent $3.6 million on capital
expenditures during the year ended December 31, 1998, which was lower than the
$4.5 million originally anticipated because the actual cash outlays for our
information systems upgrade program were delayed until 1999. The bank credit
facility contains restrictions on our ability to make capital expenditures;
however, we believe the permitted capital expenditures will be sufficient to
complete our investment program and maintain our facilities.
Net cash provided by financing activities was $279.2 million for the year
ended December 31, 1998. In connection with the DLJ acquisition, we entered into
a new bank credit facility that initially provided for term loan borrowings in
the aggregate principal amount of $80.0 million, now increased to $99.9 million,
and revolving loan borrowings up to an aggregate principal amount of $50.0
million, including $25.0 million for working capital purposes which expires in
2004. In 1998, prior to the DLJ acquisition, we also completed a common stock
offering and used the $34.8 million net proceeds to reduce the amount
outstanding under our credit facility, and borrowed $85.8 million under our
then-existing senior credit facility to finance the Avtech and Dettmers
acquisitions.
The DLJ acquisition created substantial debt for us, resulting in
significant debt service obligations. Although we cannot be certain, we
anticipate that operating cash flow, together with borrowings under the bank
credit facility, will be sufficient to meet our future short- and long-term
operating expenses, working capital, capital expenditures and debt service
obligations for the next three years. However, our ability to pay principal or
interest, to refinance our debt and to satisfy our other debt obligations will
depend on our future operating performance. We will be affected by economic,
financial, competitive, legislative, regulatory, business and other factors
beyond our control. In addition, we are continually considering acquisitions
that complement or expand our existing businesses or that may enable us to
expand into new markets. Future acquisitions may require additional debt, equity
financing or both. We may not be able to obtain any additional financing on
acceptable terms.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. It also requires that gains or losses
resulting from changes in the values of those derivatives be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. Adoption of SFAS No. 133 is required for the fiscal year beginning
January 1, 2000. Management believes the adoption of SFAS No. 133 will not have
a material impact on our consolidated financial position or results of
operations.
SWISS FRANC FORWARD EXCHANGE CONTRACTS
Some of the contact blanks we use in the production of our contacts are
manufactured at our Swiss facility and shipped to our El Segundo, California
facility for plating and assembly. In 1996, 1997
36
<PAGE>
and 1998, solely in an effort to mitigate the effects of currency fluctuations
between the U.S. Dollar and the Swiss Franc, we entered into forward exchange
contracts at fixed rates. We plan to continue efforts to mitigate this risk in
the future. We do not engage in any currency exchange transactions for trading
or speculative purposes. Realized and unrealized gains and losses on foreign
exchange contracts are recognized currently in the consolidated statements of
operations.
COMPLIANCE OF KEY SYSTEMS WITH YEAR 2000 PERFORMANCE STANDARDS
We are dependent in part on computer- and date-controlled systems for some
internal functions, particularly inventory control, purchasing, customer billing
and payroll. Similarly, suppliers of components and services on which we rely,
and our customers, may have Year 2000 compliance risks which would affect their
operations and their transactions with us. Other parties with whom we have
commercial relationships, including raw materials suppliers and service
providers, such as banking and financial services, data processing services,
telecommunications services and utilities, are highly reliant on computer-based
technology.
The costs we have incurred to remediate and test our systems, and evaluate
and address the risks of our key customers and vendors, have been immaterial to
date and we presently expect to incur less than $1.0 million of costs in the
aggregate. All of our Year 2000 compliance costs have been or are expected to be
funded from our operating cash flow. We believe the number of products
manufactured by us whose functioning is dependent upon computer-controlled
systems is not significant. We are not aware of any material customer- or
vendor-related Year 2000 issues. Our review of third-party compliance risks from
our key vendors and customers is not yet complete. We intend to complete our
review of data from all of those vendors and customers who respond during the
second quarter of 1999. However, even assuming that all of the non-responding
parties suffer interruptions to their operations due to Year 2000 systems
failures, our management does not anticipate any resulting failures in our
systems, products or supply chain that would disrupt our operations to a
material degree. Our manufacturing operations and our products generally are not
based upon date-controlled machinery; our business operations and systems are
not so time-sensitive that brief interruptions, or a shift to backup paper
records, should cause significant losses.
Our Year 2000 compliance efforts are directed primarily towards ensuring
that we will be able to continue to perform three critical functions:
- make and sell our products,
- order and receive raw material and supplies, and
- pay our employees and vendors.
However, the novelty and complexity of the issues presented, and our
dependence on the technical skills of employees and independent contractors and
on the representations and preparedness of third parties, could cause our
efforts to be less than fully effective. Moreover, Year 2000 issues present a
number of risks that are beyond our control, such as the failure of utility
companies to deliver electricity, the failure of telecommunications companies to
provide voice and data services, the failure of financial institutions to
process transactions and transfer funds, the failure of vendors to deliver
materials or perform services required by us and the collateral effects on us of
the effects of Year 2000 issues on the economy in general or on our customers in
particular. Additionally, in view of the mixed results achieved by software
vendors in correcting these problems, we cannot assure you that new systems we
obtain to replace noncompliant systems will themselves prove to be fully
compliant. Although we believe that our compliance efforts are designed to
appropriately identify and address those Year 2000 issues that are subject to
our reasonable control, we cannot assure you that our efforts will be fully
effective, or that Year 2000 issues will not have a material adverse effect on
our business, financial condition or results of operations. In the worst case, a
protracted failure of general business
37
<PAGE>
systems among our customers or vendors, or in our own plant, could cause
production delays or cancelled orders which would significantly reduce our
revenue for the duration of such a situation. We have not developed a
contingency plan which assumes significant and protracted Year 2000-related
failures of major vendors, customers or systems, and do not plan to do so.
COMMON EUROPEAN CURRENCY
The Treaty on European Economic and Monetary Union provides for the
introduction of a single European currency, the Euro, in substitution for the
national currencies of the member states of the European Union that adopt the
Euro. In May 1998, the European Council determined the 11 member states that met
the requirement for the Monetary Union and the currency exchange rates among the
currencies for the member states joining the Monetary Union. The transitory
period for the Monetary Union started on January 1, 1999. According to the
European Council Resolution of July 7, 1997, the transition will be made in
three steps, beginning with a transition period from January 1, 1999 to December
31, 2001, in which currency accounts may be opened and financial statements may
be drawn in Euros, and local currencies and Euros will coexist. From January 1,
2002 to June 30, 2002, local currencies will be exchanged for Euros. On July 1,
2002, local currencies are scheduled to disappear. We could incur substantial
transitional costs as we redesign our software systems to reflect the adoption
of the new currency. In addition, we do not know whether the adoption of the
Euro will affect the enforceability of, or the denomination of payment
obligations under, our commercial agreements in currencies to be replaced by the
Euro.
38
<PAGE>
BUSINESS
We manufacture aviation electronic components called "avionics" and related
components, and provide systems integration services, for niche markets within
the commercial, regional, corporate and military aircraft industries. We believe
that we are a leading provider of components within each niche market we serve.
Since DeCrane Aircraft was founded in 1989, our strategy has been to combine
complementary businesses with leading positions in cabin and flight deck
systems. We generated revenues of $244.4 million, Adjusted EBITDA of $55.8
million and a loss before extraordinary item of $1.1 million for the twelve
months ended December 31, 1998 on a pro forma basis.
We seek to maximize our sales by emphasizing the complementary nature of our
products and services. We manufacture:
- electrical contacts;
- connectors, which often include our contacts;
- wire harness assemblies, which often include our connectors;
- structural supports for avionic connectors and harnesses, often packaged
with other products of ours and sold as "installation kits";
- auxiliary fuel tank systems and auxiliary power systems;
- dichroic liquid crystal display devices, commonly called "LCDs," which are
often used with flight deck avionics;
- cockpit audio and communications, lighting, and power and control devices
for commercial aircraft; and
- stereo systems, video monitors, passenger switches, cabin lighting,
seating and climate controls for the high-end corporate aircraft market.
Our systems integration services include design and engineering of avionics
systems, supplemental type certifications on behalf of the Federal Aviation
Administration, the assembly of installation kits for various aircraft systems
and installation services. Smoke detection, fire suppression and in-flight
entertainment systems for jet aircraft are among the systems for which we supply
design, certification, assembly and/or installation services. We manufacture
many of the components required to complete a systems integration project. We
believe that our combination of these component manufacturing and integration
capabilities gives us a critical competitive advantage which would be difficult
for competitors to duplicate.
By successfully combining and growing complementary businesses, we have
achieved strong revenue growth. From 1994 to 1998, DeCrane Aircraft's revenues
increased from $47.1 million to $150.5 million on a historical basis. That
increase resulted in a compound annual growth rate of 33.7%. During the same
period, DeCrane Aircraft's EBITDA increased from $5.2 million to $26.9 million
on a historical basis, representing a combined annual growth rate of 50.8%, and
our historical income before extraordinary items increased from a $1.8 million
loss to $3.1 million in income. We have achieved this growth primarily by:
- obtaining new customers and additional business from existing customers;
- selectively acquiring complementary avionics businesses, generally with
high margins;
- taking advantage of favorable trends in the aerospace industry;
- initiating cost reduction programs and productivity improvements; and
- increasing the revenues of acquired businesses, by refocusing or
diversifying their strategies and products.
Since 1990, DeCrane Aircraft has completed thirteen acquisitions, most recently
PATS, Inc. in January 1999 and PPI Holdings, Inc. in April 1999.
39
<PAGE>
INDUSTRY OVERVIEW AND TRENDS
We sell to the commercial, regional, corporate and military aircraft
markets. Within these markets, our customers include original manufacturers of
aircraft and related electronic equipment, aircraft repair and modification
centers and airlines.
The Boeing Company and Airbus Industrie are the primary manufacturers of
commercial aircraft designed to carry 100 or more passengers. The leading
manufacturers of regional and corporate aircraft include Bombardier, Dassault
and Gulfstream and will soon include the Boeing Business Jet and the Airbus A319
corporate jet. The major systems installed on new aircraft, such as flight deck
avionics systems, are produced by a limited number of manufacturers, including
AlliedSignal, Rockwell Collins, Honeywell and Sextant Avionique. The integration
of new systems into existing aircraft, called the "retrofit" market, and the
manufacture and sale of replacement products for existing aircraft, called the
"aftermarket," are served by a highly fragmented group of companies, including
many of the foregoing manufacturers and a number of smaller, specialized
companies like our operating subsidiaries. We market our commercial aircraft
products directly to the aircraft manufacturers as well as to the manufacturers
of major aircraft sub-systems. In some cases, we sell our products to competing
manufacturers--so some of our competitors ultimately may also sell some of our
products. The aviation industry has been consolidating at an increasing pace in
recent years, and we expect that consolidation will continue for the foreseeable
future.
We believe that there are many barriers to entry which limit access to the
aircraft industry, including:
- the reluctance of aircraft manufacturers to include new companies as
additional approved vendors on their engineering drawings, a favored
status often called "print position";
- the general FAA certification requirements necessary to perform aircraft
modifications or maintenance;
- the required compliance with FAA aircraft manufacturing and aircraft
modification design and installation standards;
- the required compliance with military specifications for some products
sold to military and commercial markets;
- the required compliance with qualification and approval standards imposed
by aircraft and electronic systems manufacturers; and
- the initial capital investment and tooling requirements necessary for the
manufacture of some aircraft components and systems.
We believe the following trends are affecting the industry:
INCREASED DEMAND FOR NEW COMMERCIAL AIRCRAFT. The 1998 CURRENT MARKET
OUTLOOK released by Boeing in early 1998 projected that the world jetliner fleet
will grow from 12,300 aircraft at the end of 1997 to nearly 17,700 aircraft in
2007 and to 26,200 aircraft by 2017. The report also estimated that, over the
next 20 years, the industry will require 17,650 new aircraft, both to support
the projected world fleet expansion and to replace capacity lost as aircraft are
removed from commercial airline service. We believe that every commercial
aircraft model currently produced by Boeing and Airbus contains components
manufactured by us. Boeing has, however, recently announced production cutbacks
in several of its lines for 1999 and 2000. Boeing continues to re-evaluate its
production schedules in response to instability in its Asian markets and to
assess the profitability of its various product lines. These events are
described in greater detail in "Risk Factors--Instability of Asian Market" and
"Risk Factors--Dependence on Key Customers."
INCREASED DEMAND FOR NEW REGIONAL AIRCRAFT. We believe that the total
commercial regional aircraft fleet will grow over the next ten years. Boeing's
1998 CURRENT MARKET OUTLOOK projected that worldwide
40
<PAGE>
revenue passenger kilometers will increase at a compound annual growth rate of
5.0% over that period. We believe that this increase will drive demand for
regional aircraft production as well, due to:
- the introduction of new regional aircraft with state-of-the-art cockpits
and the same safety equipment as larger commercial aircraft;
- continued integration of the services of regional carriers with major
carriers;
- newer longer-range turboprop and jet aircraft that allow regional carriers
to consider new point-to-point routes, which would permit passengers to
bypass hubs; and
- upgraded airport facilities for regional passengers.
INCREASED DEMAND FOR NEW CORPORATE AIRCRAFT. We believe that the following
factors will drive increased demand for new corporate aircraft:
- the introduction of new, larger and more efficient aircraft;
- the growing popularity of fractional aircraft ownership;
- the minimal availability of used aircraft;
- the need for long range flights to expanding international markets; and
- the increased demand for more expedient travel.
INCREASED DEMAND FOR CABIN AND FLIGHT DECK SYSTEMS. In recent years, demand
for cabin systems has increased. These systems include in-flight passenger
telecommunications systems and in-flight entertainment systems, such as video,
video-on-demand and other interactive systems. We believe that demand for
avionics systems on the flight deck, as well as in the passenger cabin, is
increasing, as a result of:
- a desire by airlines for additional revenue-producing services;
- longer flights combined with a demand by airline passengers for more
sophisticated forms of in-flight services; and
- the advent of new technologies and FAA mandates related to aircraft safety
and navigation.
INDUSTRY CONSOLIDATION-REDUCTION IN NUMBER OF APPROVED SUPPLIERS AND
VENDORS. To reduce purchasing costs and have greater control over quality,
manufacturers and aircraft operators have been reducing the number of vendors
and suppliers from whom they purchase. Suppliers and vendors must now possess
the size and production and distribution capabilities required to provide a
broader range of products and services to airlines and manufacturers.
NEW SAFETY REQUIREMENTS. New technologies and FAA mandates are driving a
proliferation of new safety systems for airplanes. The world's airlines and
aircraft and electronic systems manufacturers have cooperated with regulatory
agencies in the development of industry standards, regulations and system
requirements for future air navigation systems. We expect that this initiative
will drive a complete modernization of both airborne and ground-based air
traffic management systems. As navigation technology becomes more accurate, new
navigation systems such as global positioning systems may become federally
required. Other new technologies which have already been mandated include
traffic collision avoidance systems, cargo hold fire detection and suppression
systems, and windshear detection systems. In anticipation of new FAA
recommendations and mandates, many airlines have already begun to install
enhanced ground proximity warning systems, predictive windshear detection
systems and enhanced digital flight data recorders. Each of these systems
presents aircraft avionics retrofit opportunities for us.
DOWNSIZING AND OUTSOURCING. Airlines have come under increasing pressure to
reduce the operating and capital costs associated with providing services. In
response, airlines have increased purchases of some components from third
parties and have outsourced some repair, overhaul and
41
<PAGE>
retrofit functions. Similarly, aircraft and electronic system manufacturers
increasingly are reducing their level of vertical integration by outsourcing
more manufacturing, repair and retrofit functions to third parties. We believe
that these trends are creating increased demand for low-cost, high-quality
component manufacturers and systems integrators.
ACQUISITION HISTORY
DeCrane Aircraft was formed in 1989 to capitalize on emerging trends in the
aircraft market through acquisitions. Since its formation, DeCrane Aircraft has
completed thirteen acquisitions, summarized as follows:
<TABLE>
<CAPTION>
YEAR OF PRINCIPAL PRODUCTS AND SERVICES
COMPLETION ACQUIRED ENTITY OR ASSET AT THE TIME OF THE TRANSACTION
- ------------- ------------------------------------------------- -------------------------------------------------
<C> <S> <C>
1990 Hollingsead International Avionics support structures
1991 Tri-Star Electronics International Contacts and connectors
1991 Tri-Star Europe, S.A. Contact blanks
1991 Tri-Star Technologies Wire marking equipment
1991 Cory Components Connectors & harness assemblies
1996 Aerospace Display Systems Dichroic liquid crystal displays
1996 Elsinore Engineering Engineering services
1996 AMP manufacturing facility Contact blanks
1997 Audio International Cabin management & entertainment products
1998 Avtech Corporation Cockpit audio, lighting, power & control
1998 Dettmers Industries Corporate aircraft seats
1999 PATS Auxiliary fuel & power systems
1999 PPI Aircraft furniture components
</TABLE>
COMPETITIVE STRENGTHS
We believe that we are well-positioned to take advantage of the foregoing
trends and expected growth, as a result of the following competitive strengths:
LEADING POSITIONS IN NICHE MARKETS. We have established strong sales
positions in several specialized niches within the commercial aircraft industry.
We believe that we are:
- the largest supplier of bulk contacts to commercial aircraft
manufacturers;
- the largest supplier of dichroic liquid crystal display devices for use by
commercial aircraft manufacturers;
- the largest provider of aircraft entertainment and cabin management
products and systems for the high-end corporate aircraft market;
- a major supplier of wire harness assemblies for use in in-flight
entertainment systems; and
- a leading supplier of cockpit audio controls.
We have used our strong market positions to compete more effectively as well
as to capitalize on industry consolidation trends.
DIVERSIFIED REVENUE BASE. We sell to the commercial, regional, corporate
and military aircraft markets. Within these markets, our customers include
manufacturers of aircraft and related electronic equipment, aircraft repair and
modification centers, and airlines. Each of these markets typically experience
different production cycles. We believe that our involvement in multiple
markets, reduces our exposure to cyclical product demand in the aircraft
industry. Additionally, as a primary supplier of products and services to
manufacturers of cabin and flight deck systems, we believe we have opportunities
for growth that are independent of the original aircraft market. Such systems
typically are
42
<PAGE>
installed on a retrofit basis by purchasers and operators of existing aircraft
rather than by aircraft manufacturers.
COMPLEMENTARY AND STRATEGICALLY INTEGRATED BUSINESS LINES. Since DeCrane
Aircraft was formed in 1989, we have completed twelve acquisitions of businesses
and assets. We have successfully executed our strategy of acquiring
complementary businesses in the cabin and flight deck markets. Our acquisitions
complement each other, and create a core of avionics products and services which
increases our cross-selling opportunities. For example, our acquisitions of
Dettmers, a corporate aircraft seat manufacturer, and Audio, which makes custom
aircraft entertainment and cabin management products, will enable us to offer a
more integrated set of products and services to the high-end corporate aircraft
market.
STRONG CUSTOMER RELATIONSHIPS. We seek to establish and maintain long-term
relationships with leaders in our primary markets. For example, we have entered
into requirements contracts to supply bulk contacts and specific connectors to
Boeing, which is the largest commercial aircraft manufacturer. Through these and
other similar agreements, we believe that we are:
- the supplier of a substantial majority of the bulk contacts for all
aircraft currently manufactured by Boeing;
- the sole source supplier of some connectors for in-flight entertainment
systems installed by Boeing on its 777 aircraft;
- a significant supplier of cockpit audio control systems to Boeing; and
- the primary supplier of auxiliary fuel systems to the Boeing Business Jet
program.
We are also a preferred supplier of wire harness assemblies to Matsushita for
its in-flight entertainment systems.
LOW-COST, HIGH-QUALITY OPERATIONS. We believe that we have established
low-cost operations through cost reduction programs, technological development
and, where appropriate, the use of vertical integration. Our low-cost operations
are demonstrated, for example, by the growth of programs under which we supply
contacts to many of our competitors.
We use sophisticated processes to ensure that our products meet or exceed
industry and customer quality requirements. Many customers formally have
recognized the effectiveness of our quality programs by issuing quality approval
letters, awarding quality compliance certificates and authorizing our inspection
personnel to act as their authorized quality certification representatives. For
example, four of our facilities have received a quality award from Boeing, and
nine of our facilities are currently certified according to the International
Standards Organization specifications ISO-9001 or ISO-9002.
REGULATORY CERTIFICATIONS. We employ FAA-certified airframe and power-plant
mechanics who are authorized to perform specified aircraft modification
functions. This level of expertise enables us to respond rapidly and effectively
to our customers' technical requirements. As of February 1, 1999, our
subsidiaries:
- include one of only 31 currently active Designated Alteration Stations
worldwide which are authorized by the FAA to provide approval and
certification of the design of specific aircraft modifications on behalf
of the FAA;
- hold numerous Parts Manufacturer Approval authorizations from the FAA,
permitting them to manufacture and sell various parts in many different
types of aircraft; and
- hold nine FAA domestic repair station certificates, authorizing them to
perform specific aircraft modifications.
43
<PAGE>
GROWTH STRATEGY
Our principal strategy is to establish and expand leading positions in
high-margin, niche markets within the commercial, regional, corporate and
military aircraft markets. We focus on the manufacture of avionics components
and the integration of avionics systems. We also seek to maintain a balance of
revenues among the equipment manufacturer market, the retrofit market and the
aftermarket. We believe that such a strategy will position us to grow by:
CAPITALIZING ON GROWTH IN AIRCRAFT PRODUCTION AND INCREASED DEMAND FOR CABIN
AND FLIGHT DECK SYSTEMS. Our strong market positions, and alignment with many
of the leading participants in the industry, should permit us to take advantage
of the projected increases in the production of aircraft discussed above. For
example, in-flight entertainment systems have become more sophisticated in
recent years with the inclusion of such products as video-on-demand and in-seat
video tape players. Increasingly, airlines view sophisticated in-flight
entertainment systems as a required service on airlines' long-haul flights,
particularly in first class. Such systems are also increasingly being installed
in business and coach class and on planes serving shorter routes. We believe
that the trend toward jets instead of turboprops in the corporate and regional
markets will further increase our dollar content per aircraft, as well as the
demand for our products and services in that market. We believe that this
increased demand creates a significant retrofit and aftermarket opportunity for
cabin avionics systems, as well as the components and systems integration
services necessary to such systems. We work closely with manufacturers and
modification centers to meet their delivery and scheduling requirements, and, in
some cases, to provide total, turnkey solutions to adding avionics systems new
aircraft.
EXPANDING SYSTEMS INTEGRATION SERVICES. Our systems integration services
began in the in-flight passenger telecommunications market. Beginning in 1995,
we expanded our systems integration expertise and sales efforts to include
navigation and satellite communication, safety, and in-flight entertainment
systems. We believe that we are one of the few companies having in-house
capabilities in each of the four elements of systems integration: design,
certification, kitting and system installation.
EMPHASIZING INTEGRATED PRODUCT SYSTEMS AND COMPLEMENTARY SERVICES. Over the
past several years, we increasingly have combined our manufactured components to
create higher value-added products. This activity has created additional
opportunities to cross-sell and vertically integrate our products. For example,
our contact business provides components to our connector business, which
supplies components to our wire harness business. Our harness assemblies often
are packaged with its avionics support structures to form the foundation as the
installation kits which we then sell to our systems integration customers. We
believe that these complementary products and services provide opportunities to
increase our sales to existing customers and compete more effectively for new
customers.
COMPLETING ADDITIONAL STRATEGIC ACQUISITIONS. We operate in a fragmented
market, which we estimated to include over 100 companies with revenues of less
than $100 million in 1997. We target for acquisition aircraft component
manufacturers and systems integration providers that are complementary to our
existing businesses, and have a leading market share in their own niches. We
seek to leverage our existing strengths, and add new expertise, through
acquisitions that offer strategic value and cross-selling opportunities. We
regard economies of scale, product line extensions, new customer relationships,
increased manufacturing capacity and opportunities for increased cost reductions
as particularly important in our analysis of a potential acquisition's strategic
value. We are continually engaged in discussions with potential acquisition
candidates. However, acquisitions involve many uncertainties, and our attempts
to identify appropriate acquisitions, and finance and complete any particular
acquisition, may not be successful.
44
<PAGE>
PRODUCTS AND SERVICES
We believe that our products are used in each of the commercial aircraft
models currently produced by Boeing and Airbus, the two largest commercial
aircraft OEMs. Our seven principal classes of products and services are:
<TABLE>
<CAPTION>
SHARE OF 1998
SALES ON A
CLASS PRO FORMA BASIS
--------------------------------------------------- -----------------
<C> <S> <C>
- entertainment and cabin management products 26%
- cockpit audio, communications, lighting and power
and control devices 19%
- electrical contacts 14%
- auxiliary fuel systems and auxiliary power units 14%
- connectors and harness assemblies 13%
- integration of cabin and flight deck systems 7%
- liquid crystal display devices 6%
</TABLE>
No other product or service accounted for more than 5% of our pro forma
revenues in 1998.
ENTERTAINMENT AND CABIN MANAGEMENT. We are a leading supplier of aircraft
entertainment and cabin management products and systems to the high-end
corporate aircraft market. We supply switching and control modules, audio and
video components, stereo systems, video monitors, amplifiers, chimes and paging
devices, headphone systems, passenger switches, and cabin lighting and climate
controls. We also offer systems integration services for cabin management
electronics to corporate aircraft manufacturers and major modification centers.
COCKPIT AUDIO, COMMUNICATION, LIGHTING AND POWER AND CONTROL DEVICES. We
are a leading manufacturer of cockpit audio, lighting and power and control
devices used in commercial, regional and corporate aircraft. We believe we are
the primary supplier of cockpit audio control systems to Boeing, and a leading
supplier of power conversion and fluorescent lamp ballast devices and dimmers to
corporate aircraft OEMs. We also manufacture a variety of other commercial
aircraft safety system components, including warning tone generators,
temperature and de-icing monitoring systems, steep approach monitors and low
voltage power supplies for traffic collision avoidance systems.
ELECTRICAL CONTACTS. Contacts conduct electronic signals or electricity and
are installed at the terminus of a wire or an electronic or electrical device.
We supply precision-machined contacts for use in connectors found in virtually
every electronic and electrical system on a commercial aircraft. We sell
contacts directly to aircraft and related electronics manufacturers and, through
our private labeling programs, to several major connector manufacturers who sell
connectors to the same markets under their brand name. We believe that we are
the supplier of a substantial majority of the bulk contact requirements for all
aircraft currently manufactured by Boeing, and the largest supplier of bulk
contacts to the commercial aircraft manufacturers.
AUXILIARY FUEL SYSTEMS AND AUXILIARY POWER UNITS. Through our newest
subsidiary, PATS, we manufacture and install auxiliary fuel tanks for commercial
and corporate aircraft. Our unique design and tank construction have made us a
leader in the auxiliary fuel tank market. We have a contract with Boeing's
Business Jet program to supply 120 aircraft with multiple auxiliary fuel tanks.
In connection with our acquisition of PATS, Boeing agreed to make modifications
to the contract and to pre-pay $5.0 million against future deliveries of the
systems. We believe that the auxiliary fuel tanks will permit the Boeing
Business Jet 737-700 to compete with long-range aircraft such as the Gulfstream
G-V and
45
<PAGE>
Bombardier's Global Express. We also manufacture auxiliary power units which
provide ground power to aircraft.
CONNECTORS AND HARNESS ASSEMBLIES. Electronic and electrical connectors
link wires and devices in avionics systems, and permit their assembly,
installation, repair and removal. Our connectors are specially manufactured to
meet the critical performance requirements demanded by manufacturers and
required in the harsh environment of an operating aircraft. We produce
connectors that are used in aircraft galleys, flight decks and control panels in
the passenger cabin. We are the sole-source supplier of several specific
connectors for in-flight entertainment systems installed by Boeing on its 777
aircraft.
We also produce wire harness assemblies for use in cabin avionics systems,
from wire, connectors, contacts and hardware. We typically sell our harness
assemblies to manufacturers of aircraft electronic systems. In addition, we
incorporate and sell our harness assemblies as part of our systems integration
services. We are a primary supplier of harness assemblies to Matsushita, one of
the largest manufacturers of in-flight entertainment systems.
INTEGRATION OF CABIN AND FLIGHT DECK SYSTEMS. We have designed, patented
and produced a wide range of avionics support structures. These structures are
used to support and environmentally cool avionics equipment, including
navigation, communication and flight control equipment. Our avionics support
structures are sold under the Box-Mount-TM- name, which we believe is highly
respected in the marketplace. We sell these support structures to aircraft and
related electronics manufacturers, airlines and major modification centers. In
addition, these products are essential components of the installation kits used
in our systems integration operations. We also perform all of the functions,
including design, engineering, certification, manufacturing & installation,
necessary to retrofit an aircraft with a new or upgraded avionics system.
DICHROIC LIQUID CRYSTAL DISPLAY DEVICES. We believe we are a leading
manufacturer of dichroic liquid crystal displays, also known as "LCDs," and
modules used in commercial and military aircraft and the largest supplier to the
commercial aircraft industry. Modules are liquid crystal displays packaged with
a backlight source and some on-board electronic components. We believe we are a
primary supplier of these devices to aircraft and avionics OEMs and the U.S.
military. Our products are used in a variety of flight deck applications, such
as flight control systems, fuel quantity indicators, airborne communications and
safety systems. Dichroic liquid crystal display products are widely used in the
aircraft industry because they are easily adapted to custom design, and they
possess high performance characteristics, which include high readability in
sunlight and darkness, readability from extreme viewing angles, and the ability
to withstand wide temperature fluctuations. We also manufacture electronic
clocks which use our liquid crystal display devices. We believe that we are the
only clock manufacturer which has designed a line of clocks capable of serving
all types of aircraft.
46
<PAGE>
INDUSTRY REGULATION
The aviation industry is highly regulated in the U.S. by the Federal
Aviation Administration, and in other countries by similar agencies to ensure
that aviation products and services meet stringent safety and performance
standards. We and our customers are subject to these regulations. In addition,
many customers impose their own compliance and quality requirements on their
suppliers. The FAA prescribes standards and licensing requirements for aircraft
components, issues Designated Alteration Station authorizations, and licenses
private repair stations. Our subsidiaries hold various FAA approvals, which may
only be used by the subsidiary obtaining such approval.
The FAA can authorize or deny authorization of many of the services and
products we provide. Any such denial would preclude our ability to provide the
pertinent service or product. If we failed to comply with applicable FAA
standards or regulations, the FAA could exercise a wide range of remedies,
including a warning letter, a letter of correction, a civil penalty action, and
emergency or non-emergency suspension or revocation of a certificate or
approval.
In July of 1997, the FAA notified us that our FAA-approved repair station
which holds Designated Alteration Station authorization did not fully comply
with some of the requirements for some of the FAA ratings that it held. The FAA
granted us until September 10, 1997 to bring the facility into full compliance,
and curtailed several operations of the repair station, including prohibiting
initiation of new projects under that authorization, until it achieved full
compliance. On August 28, 1997 the FAA inspected the repair station and
determined that it was in full compliance with all FAA requirements applicable
to Class III and Class IV Airframe ratings. The FAA issued a revised Air Agency
Certificate including those ratings, and removed the operating restrictions, as
of September 5, 1997.
The FAA also has the power to issue cease and desist orders and orders of
compliance and to initiate court action for injunctive relief. If the FAA were
to suspend or revoke our certificates or approvals on a nonemergency basis, we
would be permitted to continue making the products and delivering the goods
pending any available appeals, but would be required to stop if the FAA
eventually prevailed on appeal. If the FAA did so on an emergency basis, we
would be obliged to stop immediately the manufacturing of products and
delivering of services that require such certificate or approval. If the FAA
were to determine that noncompliance with its standards creates a safety hazard,
it also could order that the pertinent component or aircraft immediately cease
to be operated until the condition is corrected. This could require that
customers ground aircraft or remove affected components from aircraft currently
in service, both of which are expensive actions.
Each type of aircraft operated by airlines in the United States must possess
an FAA type certificate, generally held by the aircraft manufacturer, indicating
that the type design meets applicable airworthiness standards. When someone else
develops a major modification to an aircraft already type-certificated, that
person must obtain an FAA-issued Supplemental Type Certificate for the
modification. Historically, we have obtained several hundred of these
Supplemental Type Certificates, most of which we obtained on behalf of our
customers as part of our systems integration services. Some of these
certificates we obtain are or will eventually be transferred to our customers.
As of February 1, 1999, we own and/or manage slightly over 200 Supplemental Type
Certificates. Many are multi-aircraft certificates which apply to all of the
aircraft of a single type. We foresee the need to obtain additional Supplemental
Type Certificates so that we can expand the services we provide and the
customers we serve.
Supplemental Type Certificates can be issued for proposed aircraft
modifications directly by the FAA, or on behalf of the FAA by one of the 31
holders of currently active Designated Alteration Station authorizations as of
February 1, 1999. The FAA designates what types of Supplemental Type
Certificates can be issued by each Designated Alteration Station. Our subsidiary
Hollingsead, as one of the 31, can directly issue many of the Supplemental Type
Certificates we and our customers require for
47
<PAGE>
our systems integration operations. In many cases, this has increased the speed
with which we can obtain such certificates and help bring our customers' systems
to market.
After obtaining a Supplemental Type Certificate, a manufacturer must apply
for a Parts Manufacturer Approval from the FAA, or a supplement to an existing
Parts Manufacturer Approval, which permits the holder to manufacture and sell
installation kits according to the approved design and data package. We have
eight Parts Manufacturer Approvals and multiple supplements to each of those
approvals. In general, each initial Parts Manufacturer Approval is an approval
of a manufacturing or modification facility's production quality control system.
Each Parts Manufacturer Approval supplement authorizes the manufacture of a
particular part in accordance with the requirements of the corresponding
Supplemental Type Certificate. We routinely apply for and receive such Parts
Manufacturer Approval supplements. In order to perform the actual installations
of a modification, we are also required to have FAA approval. This authority is
contained either in our Parts Manufacturer Approvals and related supplements, or
in our repair station certificates. In order for a company to perform most kinds
of repair, engineering, installation or other services on aircraft, its facility
must be designated as an FAA-authorized repair station. As of February 1, 1999,
we had nine authorized repair stations.
In addition to its approval of design, production, and installation, the FAA
certifies personnel. Several of our engineering personnel have been certified by
the FAA to perform specific tasks related to the design, production, and
performance of aircraft modifications. Such certified personnel include
mechanics and repairmen. The FAA also delegates some of its oversight
responsibilities, such as testing and inspection responsibilities, to
FAA-certified Designated Engineering Representatives. We employ or contract for
several of such designated representatives who evaluate engineering design data
packages, ensure compliance with applicable FAA regulations, oversee product
testing to ensure airworthiness, and work with the FAA to obtain approvals of
those data packages.
U. S. military specification standards are frequently used by both military
and commercial customers in the aircraft industry to define and control
characteristics of a product. Through the use of a government Qualified Parts
List and Qualified Vendor's List, a customer may be assured that a product or
service has met all of the requirements set forth in the military specification.
Parts listed with a Qualified Parts List allow others to reliably design parts
to interface with such parts as a result of the military specification standards
used. We believe that we hold more Qualified Parts Lists for our contact product
line than any other manufacturer.
SALES AND MARKETING
Product line managers and our product engineering staff provide technical
sales support for our direct sales personnel and agents. We may also assign
responsibility for marketing, sales and/or services for key customers to one of
our senior executives. We have nine authorized distributors who purchase, stock
and resell several of our product lines.
Our systems integration services are sold by sales managers on our staff who
are assigned to geographic territories. Because of the significant amount of
technical engineering work required in the sales process, our sales managers are
generally assisted by a support team of program management, installation and
engineering personnel. Each support team specializes in safety systems,
in-flight entertainment, or navigation systems. These support teams continue to
manage the project throughout the entire integration process.
CUSTOMERS
We estimate that in 1998, we sold our products and services to about 1,300
customers. Our primary customers include manufacturers of aircraft and related
electronics, airlines, aircraft component manufacturers and distributors, and
aircraft repair and modification companies. Boeing accounted for
48
<PAGE>
approximately 29.6% and Matsushita for approximately 5.0% of our 1998
consolidated pro forma revenues BEFORE taking into account the PPI acquisition.
See "Business--Customers" for the expected changes to those numbers resulting
from the acquisition. In addition, a significant portion of our sales of
components also are sold to Boeing indirectly through our sales to suppliers of
Boeing.
Historically, our systems integration operations have been affected by the
timing and magnitude of program awards, at times resulting in quarterly and
yearly fluctuations in revenue and earnings. We believe that we have reduced our
exposure to such fluctuations by developing capabilities in multiple specialties
such as safety systems, in-flight entertainment systems and navigation systems.
We have secured orders for integration services in each of these targeted areas.
The timing and magnitude of program awards for systems integration services may
make other customers significant sources of nonrecurring income in a single
year. However, we believe that we will continue to be able to significantly
offset such year-to-year fluctuations with new contracts.
Most of our sales to Boeing are pursuant to contracts which may be
terminated by Boeing at any time, and include various terms favorable to the
buyer. For example, one provides that we must extend to Boeing any reductions in
prices or lead times that we provide to other customers; and that we must match
other suppliers' price reductions of more than five percent, or else delete the
affected products from the contract. Another contract relieves Boeing from any
obligation to order products covered by the contract if Boeing's customers
request an alternate supplier, or our product is not technologically competitive
in Boeing's judgment, or Boeing changes the design of an aircraft so that our
products are no longer needed, or Boeing reasonably determines that we cannot
meet its requirements in the amounts and within the schedules it requires. Our
contracts with Boeing also generally grant Boeing an irrevocable non-exclusive
worldwide license to use our designs tooling and other intellectual property
rights related to products sold to Boeing, if we default, or suffer a bankruptcy
filing, or transfer our manufacturing rights to a third party.
We generally sell components and services to Matsushita pursuant to purchase
orders. However, we do have one supply agreement with Matsushita for connectors,
through September 1999.
MANUFACTURING AND QUALITY CONTROL
Many of our product lines use process-specific equipment and procedures that
have been custom-designed or fabricated to provide high-quality products at
relatively low cost. Some of our key product lines are vertically integrated,
which we believe improves our product performance, customer service and
competitive pricing.
We have conducted programs to reduce costs including overhead expenses. In
some cases these programs have involved the use of proprietary equipment or
processes which have enabled us to reduce costs without reducing quality levels.
Several of our key customers have developed their own design, product
performance, manufacturing process and quality system standards and require
their suppliers to comply with such standards. As a result, we have developed
and conducted comprehensive quality policies and procedures which meet or exceed
our customers' requirements. Many of our customers have recognized formally the
effectiveness of our quality programs by issuing quality approval letters and
awarding quality compliance certificates. In addition, some of our customers
have authorized our inspection personnel also to act as their authorized quality
representatives. That authorization enables us to ship directly into the
inventory stockrooms of these customers, eliminating the need for inspection at
the receiving end.
We use sophisticated equipment and procedures to ensure the quality of our
products and to comply with mil-specs and FAA certification requirements. We
perform a variety of testing procedures, including environmental testing under
different temperature, humidity and altitude levels, shock and
49
<PAGE>
vibration testing and X-ray fluorescent measurement. These procedures, together
with other customer approved techniques for document, process and quality
control, are used throughout our manufacturing facilities.
RAW MATERIALS AND COMPONENT PARTS
The components we manufacture require the use of various raw materials
including gold, aluminum, copper, rhodium, plating chemicals and plastics. The
availability and prices of these materials may fluctuate. Their price is a
significant component in, and part of, the sales price of many of our products.
Although some of our contracts have prices tied to raw materials prices, we
cannot always recover increases in raw materials prices in our product sale
prices. We also purchase a variety of manufactured component parts from various
suppliers. Raw materials and component parts are generally available from
multiple suppliers at competitive prices. However, any delay in our ability to
obtain necessary raw materials and component parts may affect our ability to
meet customer production needs.
INTELLECTUAL PROPERTY AND PROPRIETARY INFORMATION
We have various trade secrets, proprietary information, trademarks, trade
names, patents, copyrights and other intellectual property rights which we
believe are important to our business in the aggregate, but not individually.
COMPETITION
We compete with a number of established companies that have significantly
greater financial, technological, manufacturing and marketing resources than
ours. We believe that our ability to compete depends on high product
performance, short lead-time and timely delivery, competitive price and superior
customer service and support.
The niche markets within the aircraft industry that we serve are relatively
fragmented, with several competitors for each of the products and services we
provide. Due to the global nature of the aircraft industry, competition in these
categories comes from both U.S. and foreign companies. However, we know of no
single competitor that offers the same range of products and services as those
we provide.
50
<PAGE>
Our principal competitors in contacts and connectors are large and
diversified corporations which produce a broad range of products. In other areas
we generally face a group of smaller companies and enterprises.
<TABLE>
<CAPTION>
CLASS OF PRODUCT PRINCIPAL COMPETITORS
- --------------------------------------------------- ---------------------------------------------------
<S> <C>
- cockpit audio, - Becker Avionics, Inc.
communications, lighting and power - Crane ELDEC Corp.
and control devices - Diehl GmbH & Co.
- Gables Engineering Inc.
- Page Aerospace, Inc.
- electrical contacts - Amphenol Corporation
- Deutsch Engineered Connecting Devices, a division
of Deutsch Co.
- ITT Cannon, a division of ITT Industries, Inc.
- auxiliary fuel systems and auxiliary power units - Marshall Engineering
- connectors - AMP, Inc.
- ITT Cannon
- Radiall S.A.
- entertainment and cabin management products - Aerospace Lighting Corporation
- Baker Electronics
- DPI Labs
- Grimes Aerospace Company
- Nellcor Puritan Bennett Inc.
- Pacific Systems Corporation
- integration of cabin and flight deck avionics - Electronic Cable Specialists
systems - Engineering departments of airlines
- Numerous independent airframe maintenance and
modification companies
- dichroic LCD devices - Cristalloid, Inc.
</TABLE>
BACKLOG
As of December 31, 1998, we had an aggregate sales order backlog of $130.9
million compared to $125.5 million as of December 31, 1997, all on a pro forma
basis. Orders are generally filled within twelve months; however, our orders are
generally subject to cancellation by the customer prior to shipment. The level
of unfilled orders at any given date will be materially affected by when we
receive orders and how fast we fill them. Period-to-period comparisons of
backlog figures may not be meaningful. For that reason, our backlogs do not
necessarily accurately predict actual shipments or sales for any future period.
EMPLOYEES
As of December 31, 1998, we had 1,451 employees, of whom 206 were in
engineering, 68 were in sales, 1,040 were in manufacturing operations and 137
were in finance and administration. The foregoing numbers include 44 temporary
employees. None of our employees are subject to a collective bargaining
agreement, and we have not experienced any material business interruption as a
result of
51
<PAGE>
labor disputes since DeCrane Aircraft was formed. We believe that we have a good
relationship with our employees.
FACILITIES
We lease most of our principal facilities, as described in the following
table.
<TABLE>
<CAPTION>
APPROX. LEASE
LOCATION DESCRIPTION SQ. FT. EXPIRATION
- ---------------------------------------------- ------------------------------------------- --------- -----------
<S> <C> <C> <C>
Wichita, KS................................... Manufacturing facility 107,000 2007
Georgetown, DE................................ Manufacturing facility 85,000 2041
El Segundo, CA................................ Manufacturing and engineering facility 81,300 2005
Columbia, MD.................................. Manufacturing facility and offices 65,923 2007
Garden Grove, CA.............................. Manufacturing and engineering facility 58,300 2004
Stuart, FL.................................... Manufacturing facility and offices 29,700 2008
Lugano, Switzerland........................... Manufacturing facility 28,000 2003
Hatfield, PA.................................. Manufacturing and engineering facility 27,500 2002
Lugano, Switzerland........................... Manufacturing facility 21,000 2001
Irvine, CA.................................... Manufacturing facility 16,400 1999
Seattle, WA................................... Storage facility 10,000 2001
Wiltshire, United Kingdom..................... Manufacturing facility 5,700 2013
Hutchinson, KS................................ Manufacturing facility 5,300 1999
El Segundo, CA................................ Executive offices 5,000 2004
Santa Barbara, CA............................. Engineering facility 3,500 2000
Seattle, WA................................... Engineering facility 3,200 1999
Santa Ana, CA................................. Engineering facility 1,300 1999
</TABLE>
We also have a leased manufacturing facility of approximately 52,000 square
feet in Santa Fe Springs, CA, which expires in 2000, and that we have leased in
part to several subtenants. Additionally, we own a manufacturing and engineering
facility comprised of six buildings having an aggregate of 87,382 square feet in
Seattle, Washington, and additional leased rental office and vacant space
nearby, comprising another 34,229 square feet, and an 18,000 square foot
manufacturing and engineering facility in North Little Rock, Arkansas. We
believe that our properties are in good condition and are adequate to support
our operations for the foreseeable future.
ENVIRONMENTAL MATTERS
Our facilities and operations are subject to various federal, state, local,
and foreign environmental requirements, including those relating to discharges
to air, water, and land, the handling and disposal of solid and hazardous waste,
and the cleanup of properties affected by hazardous substances. In addition,
some environmental laws, such as the federal Comprehensive Environmental
Response, Compensation and Liability Act, as amended, similar state laws, impose
strict liability upon persons responsible for releases or potential releases of
hazardous substances. That liability generally is retroactive, and may be
separately asserted federal environmental as "joint and several" liability
against multiple parties who have some relationship to a site or a source of
waste. We have sent waste to treatment, storage, or disposal facilities that
have been designated as National Priority List sites under that statute or
equivalent listings under state laws. We have received requests for information
or allegations of potential responsibility from the Environmental Protection
Agency regarding our use of several of those sites. In addition, some of our
operations are located on properties which are contaminated to varying degrees.
We have not incurred, nor do we expect to incur, liabilities in any
significant amount as a result of the foregoing matters, because in these cases
other entities have been held primarily responsible, the
52
<PAGE>
levels of contamination are sufficiently low so as not to require remediation,
or we are indemnified against such costs. In most cases, we do not believe that
we have any material liability for past waste disposal. However, in a few cases,
we do not have sufficient information to assess our potential liability, if any.
It is possible, given the retroactive nature of federal environmental liability,
that we will from time to time receive additional notices of potential liability
relating to current or former activities. Some of our manufacturing processes
create wastewater which requires chemical treatment, and one of our facilities
has been cited for failure to adequately treat that water. The costs associated
with remedying that failure have been immaterial. See "--Legal Proceedings." We
have been and are in substantial compliance with environmental requirements. We
believe that we have no liabilities under environmental requirements, except for
liabilities which would we do not expect would likely have a material adverse
effect on our business, results of operations or financial condition. However,
some risk of environmental liability is inherent in the nature of our business,
and we might in the future incur material costs to meet current or more
stringent compliance, cleanup, or other obligations pursuant to environmental
requirements as described in "Risk Factors--Environmental Risks and
Regulations."
LEGAL PROCEEDINGS
One of our manufacturing facilities has received several notices of
violation related to its wastewater discharge permit, most recently in June
1998. We have taken various corrective measures. However, we continue to
experience difficulty in meeting the wastewater flow limitations contained in
its discharge permit and we are evaluating additional measures, including
seeking modification to our permit. We have installed new treatment equipment.
The cost for such installation, plus the anticipated cost of any additional
installations and/or outsourcing of the plating processes that create the
discharge, is not expected to be material. We do not believe that the notices
will result in any material sanctions.
As part of its investigation of the crash off the Canadian coast on
September 2, 1998 of Swissair Flight 111, the Canadian Transportation Safety
Board notified us that they recovered burned wire which was attached to the
in-flight entertainment system installed on some of Swissair's aircraft by one
of our subsidiaries. Attorneys for families of persons who died aboard the
flight requested that we put our insurance carrier on notice of a potential
claim by those families, and we did so. The Transportation Safety Board has
advised us that it has no evidence that the system we installed malfunctioned or
failed during the flight. We are fully cooperating with the investigation.
On July 21, 1998, plaintiffs seeking to represent a purported class of our
stockholders filed in Delaware Chancery Court an action entitled TAAM
Associates, Inc. v. DeCrane, et al. against DeCrane Aircraft, our directors,
DLJ, Inc. and one of its affiliates. The complaint alleged, among other things,
that our directors had breached their fiduciary duties by entering into the
merger with the DLJ affiliate described in "Recent Developments--The DLJ
Acquisition" without engaging in an auction or "active market check" and,
therefore, agreed to terms that were unfair and inadequate from the standpoint
of our stockholders. On July 24, 1998, the plaintiffs amended the complaint to
add allegations that the Schedule 14D-9 we filed with the SEC as part of the
tender offer and merger transaction contained various material misstatements or
omissions; that the termination fees to the affiliate of DLJ were unreasonable;
and that the directors who approved the DLJ acquisition had conflicts of
interest. The complaint sought among other things an injunction barring the
transaction, or damages plus attorneys' fees and litigation expenses. Without
admitting any wrongdoing in the action, in order to avoid the burden and expense
of further litigation, the defendants reached an agreement in principle with the
plaintiffs which contemplates settlement of the action. The foregoing defendants
and the plaintiffs entered into a memorandum of understanding under which the
parties, subject to selected facts being confirmed through discovery which has
not been completed, would enter into a settlement agreement subject to approval
by the Court of Chancery. That memorandum of understanding required that we make
several additional disclosures by filing an amendment to our Schedule 14D-9,
which we did, and provided for a complete release and settlement of all claims
arising out of the facts set forth in the
53
<PAGE>
complaint. The memorandum also contemplates that plaintiffs' counsel will apply
to the Court of Chancery for an award of attorney's fees and litigation expenses
in an amount not exceeding $375,000, which application the defendants agreed not
to oppose.
In August 1998, DeCrane Aircraft and R. Jack DeCrane, its chief executive
officer, were served in an action filed in state court in California by Robert
A. Rankin, claiming that he was due additional compensation in the form of stock
options, and claiming fraud, negligent misrepresentation and breach of contract
in connection therewith, fraudulent misrepresentation in violation of provisions
of the California Labor Code for which doubled damages are sought, promissory
estoppel, and wrongful discharge in violation of public policy as a result of
his allegations of improprieties in connection with the DLJ acquisition
transactions. The action seeks not less than $1.5 million plus punitive damages
and costs. Discovery has not been completed. We intend to vigorously defend
against the claim. Mr. Rankin's employment with DeCrane Aircraft was terminated.
We are party to other litigation incident to the normal course of business.
We do not believe that the outcome of any of such other matters in which we are
currently involved will have a material adverse effect on our financial
condition or results of operations.
WHERE YOU CAN GET MORE INFORMATION
Each registered holder of the warrants or warrant shares will receive a copy
of this prospectus and any related amendments or supplements. Any registered
holder may request from us any information it wishes in order to verify the
information in this prospectus. Apart from this prospectus and any responses we
make to those requests, no-one is authorized to give information about the
offered securities on our behalf.
We have filed with the Securities and Exchange Commission a registration
statement on the SEC's Form S-1, to register the offered securities. This
prospectus is a part of that registration statement. However, the registration
statement has additional information which is not included here, in accordance
with SEC rules. Our descriptions and statements about any contract or other
document in this Prospectus are summaries. We are required to attach copies of
most important contracts and documents as exhibits to the registration
statement.
We intend to become a reporting company as a result of the registration of
the offered securities, and file annual, quarterly and current reports, proxy
statements and other information with the SEC. Our fiscal year ends on December
31. You may read and copy any reports, statements or other information we file
at the SEC's reference room in Washington D.C. Please call the SEC at (202)
942-8090 for further information on the operation of the reference rooms. You
can also request companies of these documents, upon payment of a duplicating
fee, by writing to the SEC, or review our SEC filings on the SEC's EDGAR web
site, which can be found at http\\www.sec.gov. You may also write or call us at
our corporate headquarters located at 2361 Rosecrans Avenue, Suite 180, El
Segundo, California 90245. Our telephone number is (310) 725-9123.
54
<PAGE>
MANAGEMENT
The following table sets forth certain information concerning each person
who is currently a director or executive officer of DeCrane Holdings. Each
director also serves as a director of DeCrane Aircraft.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ---------------------------------------------------------------
<S> <C> <C>
Thompson Dean............................. 40 Chairman of the Board of Directors and President of DeCrane
Holdings
R. Jack DeCrane........................... 52 Director of DeCrane Holdings, and Chief Executive Officer of
DeCrane Aircraft
Charles H. Becker......................... 52 President and Chief Operating Officer of DeCrane Aircraft
Richard J. Kaplan......................... 56 Senior Vice President, Chief Financial Officer, Secretary and
Treasurer of DeCrane Aircraft
John F. Fort, III......................... 57 Director
Dr. Robert J. Hermann..................... 65 Director
Dr. Paul G. Kaminski...................... 56 Director
Susan C. Schnabel......................... 37 Director
Timothy J. White.......................... 37 Director and Secretary of DeCrane Holdings
</TABLE>
R. JACK DECRANE is the founder of DeCrane Aircraft. Mr. DeCrane served as
President since it was founded in December 1989, until April 1993 when he was
elected to the newly-created office of Chief Executive Officer of DeCrane
Aircraft. Prior to founding our company, Mr. DeCrane held various positions at
the aerospace division of B.F. Goodrich. Mr. DeCrane was a Group Vice President
at the aerospace division of B.F. Goodrich with management responsibility for
three business units from 1986 to 1989. He became a director of DeCrane Holdings
in 1998.
CHARLES H. BECKER has been President and Chief Operating Officer of DeCrane
Aircraft since April 1998. Mr. Becker previously served as Group Vice President
of Components of DeCrane Aircraft from December 1996 to April 1998, and
President of Tri-Star from December 1994 to April 1998. Prior to joining us, Mr.
Becker was President of the Interconnect Systems Division of Microdot, Inc., a
manufacturer of electrical contacts and connectors for aerospace applications,
from 1984 to 1994.
RICHARD J. KAPLAN has been the Senior Vice President, Chief Financial
Officer, Secretary and Treasurer for DeCrane Aircraft since April 1999. From
April 1998 to March 1999, he served as Executive Vice President and Chief
Operating Officer of Developers Diversified Realty Corporation. From 1977 to
1998, he was a partner with Price Waterhouse LLP, having joined the firm in
1964.
THOMPSON DEAN has been the Managing Partner of DLJ Merchant Banking, Inc.
since November 1996. Previously, Mr. Dean was a Managing Director of DLJ
Merchant Banking, Inc. and its predecessor. Mr. Dean serves as a director of
Commvault Inc., Von Hoffman Press, Inc., Manufacturer's Services Limited, Phase
Metrics, Inc., AKI Holding Corp. and Insilco Holding Corporation. He became a
director of DeCrane Holdings in 1998.
JOHN F. FORT, III served as Chairman of the Board of Directors of Tyco
International, Inc. from 1982 to December 1992, and as Chief Executive Officer
from 1982 to June 1992. Mr. Fort serves as a director of Tyco International,
Inc., Dover Corporation and Roper Industries. He became a director of DeCrane
Holdings in 1998.
DR. ROBERT J. HERMANN is a Senior Partner of Global Technology Partners. Dr.
Hermann most recently served as Senior Vice President for Science and Technology
at United Technologies Corporation and served in various other capacities at
United Technologies Corporation since 1982. Prior to joining United Technologies
Corporation, Dr. Hermann spent 20 years with the National
55
<PAGE>
Security Agency. In 1977 he was appointed Principal Deputy Assistant Secretary
of Defense for Communications, Command, Control and Intelligence, and in 1979
was named Assistant Secretary of the Air Force for Research, Development and
Logistics and Director of the National Reconnaissance Office. He became a
director in 1998.
DR. PAUL G. KAMINSKI is a Senior Partner of Global Technology Partners. Dr.
Kaminski currently serves as Chief Executive Officer of Technovation, Inc., a
consulting firm focusing on business strategy and advanced technology. Dr.
Kaminski served as U.S. Undersecretary of Defense for Acquisition and Technology
from October 1994 to 1997. Prior to that time, he served as Chairman and Chief
Executive Officer of Technology Strategies and Alliances. Dr. Kaminski is a
former Chairman of the Defense Science Board and is currently a member of the
Senate Select Committee on Intelligence-Technical Advisory Group, the NRO
Advisory Council and the National Academy of Engineering. Dr. Kaminski is a
director of General Dynamics Corporation, Dyncorp, Eagle-Picher Technologies and
several privately held information technology companies. He became a director of
DeCrane Aircraft in 1998.
SUSAN C. SCHNABEL has been a Managing Director of DLJ Merchant Banking, Inc.
since January 1998. In 1997, she served as Chief Financial Officer of PETsMART,
a high growth specialty retailer of pet products and supplies. From 1990 to
1996, Ms. Schnabel was with Donaldson, Lufkin & Jenrette Securities Corporation,
where she became a Managing Director in 1996. Ms. Schnabel serves as a director
of Dick's Clothing and Sporting Goods, Environmental Systems Products and
Wavetek Corporation. She became a director of DeCrane Aircraft in 1998.
TIMOTHY J. WHITE has been a Vice President of DLJ Merchant Banking, Inc.
since June 1998. From October 1994 to May 1998, Mr. White was an Associate and
Vice President at Donaldson, Lufkin & Jenrette Securities Corporation. From May
1994 to October 1994, Mr. White was an Associate Counsel in the Office of the
Independent Counsel, United States Department of Justice. Prior to that time,
Mr. White was an attorney with Davis Polk & Wardwell. He became a director of
DeCrane Aircraft in 1998.
56
<PAGE>
SUMMARY COMPENSATION TABLE
The following table describes all annual compensation awarded to, earned by
or paid to our Chief Executive Officer and the four-most highly compensated
executive officers other than the Chief Executive Officer for the years ended
December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
-------------------------------------------- ------------------------------------------------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING ALL OTHER
COMPENSATION STOCK OPTIONS/ LTIP COMPENSATION
YEAR SALARY BONUS (1) AWARDS SAR(2) PAYOUT (3)
--------- --------- --------- ----------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
R. Jack DeCrane..... 1998 $ 281,761 $1,044,000 $ 30,151 50,000 --
Chief Executive 1997 244,744 220,000 -- 50,000 $ 29,411
Officer 1996 206,600 146,000 7,813 34,028 --
and Director(4)
Charles H. Becker... 1998 $ 206,948 $ 160,000 $ 14,678 -- --
President and Chief 1997 174,492 102,000 6,168 15,000 $ 18,000
Operating Officer(5) 1996 148,750 65,000 9,103 19,850 30,586
R.G. MacDonald(6)... 1998 $ 212,744 $ 107,000 $ 20,260 -- --
1997 184,859 102,000 10,536 4,000 --
1996 177,437 82,000 13,200 -- --
John R. Hinson ..... 1998 $ 136,155 $ 126,000 $ 3,872 -- --
Chief Financial 1997 108,400 33,500 2,112 -- --
Officer and 1996 88,273 28,500 2,083 -- --
Secretary
Robert A. 1998 $ 131,115 $ -- $ 9,856 -- --
Rankin(8)......... 1997 149,309 103,000 7,158 15,000 --
1996 139,375 65,000 12,838 19,850 --
</TABLE>
- ------------------------
(1) Amounts paid by us for premiums on health, life and long-term disability
insurance and automobile leases provided by us for the benefit of the named
executive officer.
(2) Number of shares of common stock issuable upon exercise of options granted
during the last fiscal year.
(3) Relocation costs.
(4) Mr. DeCrane also served as Chairman of the Board of Directors through August
1998.
(5) Mr. Becker served as Group Vice President of Components, and President of
Tri-Star, through April 1998. Mr. Becker became President and Chief
Operating Officer in April 1998.
(6) Mr. MacDonald served as President through December 1996 and Vice Chairman of
the Board of Directors through August 1998.
(7) Mr. Hinson served as Chief Financial Officer, Secretary and Treasurer until
March 1999.
(8) Mr. Rankin served as Chief Financial Officer, Secretary and Treasurer until
August 1998.
STOCK OPTION/SARS GRANTS IN LAST FISCAL YEAR
The following table sets forth individual grants of stock options granted to
the executive officers named below during the fiscal year ended December 31,
1998, pursuant to the share incentive plan
57
<PAGE>
then in place. See "Employment Agreements and Compensation Arrangements--Former
Share Incentive Plan."
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED
SECURITIES ANNUAL RATES OF STOCK
UNDERLYING % OF EXERCISE OR PRICE APPRECIATION
OPTIONS/ OPTIONS/SAR BASE PRICE EXPIRATION ------------------------
NAME SAR GRANTED GRANTED PER SHARE DATE 5% 10%
- ------------------------------------------- ------------ --------------- ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
R. Jack DeCrane............................ 50,000 100% $ 16.875 2007 $ (1) $ (1)
Charles H. Becker.......................... -- -- -- -- -- --
R.G. MacDonald............................. -- -- -- -- -- --
John R. Hinson............................. -- -- -- -- -- --
Robert A. Rankin........................... -- -- -- -- -- --
</TABLE>
- ------------------------
(1) All options for the common stock of DeCrane Aircraft were cancelled, and the
holders thereof were paid $23.00 per share, shortly after the grant of these
options.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
The following table sets forth information about the stock options exercised
by the executive officers named below during the fiscal year ended December 31,
1998.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
SHARES UNDERLYING IN-THE-MONEY
ACQUIRED VALUE UNEXERCISED OPTIONS/SAR
NAME ON EXERCISE REALIZED OPTIONS/SAR AT FY-END(1)
- ------------------------------------ --------------- --------- ------------- -----------------
EXERCISABLE/ EXERCISABLE/
UNEXERCISABLE UNEXERCISABLE
------------- -----------------
<S> <C> <C> <C> <C>
R. Jack DeCrane..................... -- $3,347,850 $ 0/0 $ 0/0
Charles H. Becker................... -- $ 811,419 0/0 0/0
R.G. MacDonald...................... -- $1,299,422 0/0 0/0
John R. Hinson...................... -- $ 107,092 0/0 0/0
Robert A. Rankin.................... -- $ 811,419 0/0 0/0
</TABLE>
- ------------------------
(1) Based on the common stock share price of $23.00 per share as of August 28,
1998, the measuring date.
In August 1998, on the effective date of the mergers conducted as a part of
the DLJ acquisition, all outstanding options for the common stock of DeCrane
Aircraft were canceled. See "Recent Developments--The DLJ Acquisition". The
holders of all vested and unvested options received a cash payment determined,
for each option, as follows:
($23.00 per share--exercise price of option) X maximum number of shares
holder could have purchased,
if all options were fully
vested, by exercising option
just before the effective
date.
EMPLOYMENT AGREEMENTS AND COMPENSATION ARRANGEMENTS
On July 17, 1998, the Compensation Committee of the Board of Directors of
DeCrane Aircraft approved an employment agreement between DeCrane Aircraft and
R. Jack DeCrane replacing his
58
<PAGE>
prior employment agreement that was to expire on September 1, 1998. Mr.
DeCrane's employment agreement provides for various benefits, including:
- an initial salary of $310,000, which is subject to annual review and
increase, but not decrease;
- an annual bonus ranging from 0% to 100% of Mr. DeCrane's annual base
salary depending on the degree to which we achieve performance goals;
- a $500,000 bonus in recognition of our then-recent acquisition of Avtech
Corporation;
- a $250,000 signing bonus;
- options to purchase 50,000 shares of common stock of DeCrane Aircraft at a
price equal to the fair market value of the shares as of July 16, 1998,
one-half of which were immediately exercisable; the rest became
exercisable upon the completion of the DLJ acquisition; and
- a $150,000 cash continuation bonus payable on January 2, 1999, if employed
by us on January 1, 1999.
Mr. DeCrane's immediately exercisable options were cancelled in August 1998
and he received a cash payout in lieu of the options, calculated according to
the formula noted above under "Aggregated Option/SAR Exercises in Last Fiscal
Year and FY-End Option/SAR Values."
The employment agreement also provides that if change-of-control events
occur, and Mr. DeCrane's employment is terminated by us for any reason other
than for cause or as a result of his death or disability, or by Mr. DeCrane for
good reason, as defined in the agreement, then we will pay Mr. DeCrane a lump
sum in cash within fifteen days. The amount of that payment will be $1.00 less
than three times the sum of Mr. DeCrane's average base salary plus bonus for the
five calendar years preceding his termination date.
401(K) RETIREMENT PLAN
Effective April 1992, we adopted the Lincoln National Life Insurance Company
Non-Standardized 401(k) Salary Reduction Plan and Trust Prototype Plan. The
401(k) allows employees as participants to defer, on a pre-tax basis, a portion
of their salary and accumulate tax deferred earnings, plus interest, as a
retirement fund. Effective October 1, 1997, we matched 25% of the employee
contribution up to 6% of the employee's salary for the fourth quarter of 1997
and each quarter of 1998. Effective January 1, 1999, we plan to match 50% of the
employee contribution for up to 6% of the employee's salary. The full amount
vested in a participant's account will be distributed to a participant following
termination of employment, normal retirement or in the event of disability or
death.
INCENTIVE PLANS
Our board of directors has approved a stock option incentive plan providing
for the issuance of options for the common stock of DeCrane Holdings as
incentive compensation to designated executive personnel and other key employees
of DeCrane Aircraft and its subsidiaries, to persons and in amounts determined
by the compensation committee of the Board from time to time, and has reserved
an aggregate amount of the common stock of DeCrane Holdings equal to 10% of all
such stock outstanding, on a fully diluted bases, for stock issued under those
options. Under the plan, the Board's compensation committee will make a single
award during 1999 to each designated participant, which will progressively vest
as the participant's operating unit achieves EBITDA targets set for that unit
during the four year period following the award. No awards have been made under
the plan.
Our board of directors has approved a stock purchase plan providing for the
purchase of shares of common stock of DeCrane Holdings as incentive compensation
to designated executive personnel and other key employees of DeCrane Aircraft
and its subsidiaries, with a portion of the purchase price to be loaned to the
participants by DeCrane Aircraft, available to persons and in amounts determined
by
59
<PAGE>
the compensation committee of the Board from time to time. No awards have been
made under the plan.
ARRANGEMENTS PRIOR TO DLJ ACQUISITION
We adopted a Share Incentive Plan in 1993 which permitted us to grant to our
eligible employees options to purchase shares of our common stock, shares of
common stock with conditional vesting based upon performance criteria, and
options to receive payments based on the appreciation of common stock, commonly
known as Share Appreciation Rights, called "SARs." That plan permitted such
grants to be made to key employees of DeCrane Aircraft designated by a
compensation committee of the Board of Directors. As described above, all
options to purchase common stock outstanding in August 1998 were terminated when
the DLJ acquisition transactions were completed, and the holders received cash
payments in exchange for those options.
In 1996 we introduced an incentive plan for our management personnel tied to
DeCrane Aircraft's and each operating unit's annual budget as approved each year
by the Compensation Committee of the Board of Directors. The 1996 incentive plan
matrix provides for an annual bonus of up to 70% of participating employees'
base salary if the relevant operating unit achieves 110% of budget. Fifty
percent of the bonus was payable solely based on performance of the relevant
operating unit and the remainder was payable upon the achievement by the
employee of his or her individual objectives in the discretion of our Chief
Executive Officer or the president of the relevant operating unit.
DIRECTORS' COMPENSATION
DeCrane Holdings does not compensate or intend to compensate its directors.
The directors of DeCrane Aircraft generally do not receive annual fees or fees
for attending meetings of DeCrane Aircraft of the Board of Directors or
committees thereof. However, John F. Fort, III, an independent director not
affiliated with any investor in DeCrane Holdings, receives a director's fee of
$5,000 for each meeting attended. Also, all directors are reimbursed for
out-of-pocket expenses. We expect to continue those policies.
60
<PAGE>
SECURITY OWNERSHIP OF SIGNIFICANT BENEFICIAL OWNERS AND MANAGEMENT
All of the outstanding shares of common stock of DeCrane Aircraft are owned
by DeCrane Holdings. DeCrane Aircraft has no other class of stock outstanding.
DeCrane Holdings has 3,389,663 shares of common stock issued and outstanding,
owned by 18 shareholders. The following table sets forth the beneficial
ownership of DeCrane Holdings' voting securities as of April 1, 1999 by its
principal owners and other persons who we are required to mention, such as
executive officers and directors.
<TABLE>
<CAPTION>
COMMON STOCK 14% SENIOR REDEEMABLE
----------------------------- EXCHANGEABLE PREFERRED STOCK
NUMBER OF DUE 2008
SHARES, ----------------------------
PARTIALLY NUMBER OF
NAME OF BENEFICIAL OWNER (1) DILUTED(2) PERCENTAGE(2) SHARES PERCENTAGE
- --------------------------------------------------------- ---------- ----------------- ----------- ---------------
<S> <C> <C> <C> <C>
DLJ Merchant Banking Partners II, L.P. and
affiliates(3).......................................... 3,519,565 99% 340,000 99%
Thompson Dean(4)......................................... -- -- --
DLJMB Inc.
277 Park Avenue
New York, New York 10172
Susan C. Schnabel(4)..................................... -- -- -- --
DLJMB Inc.
277 Park Avenue
New York, New York 10172
Timothy J. White(4)...................................... -- -- -- --
DLJMB Inc.
277 Park Avenue
New York, New York 10172
Global Technology Partners, LLC(5)....................... -- -- -- --
1300 I Street N.W.
Washington, D.C.
Dr. Robert J. Hermann(5)................................. 5,938 -- 714 --
c/o Global Technology Partners, LLC
1300 I Street, N.W.
Washington, D.C.
Dr. Paul G. Kaminski(5).................................. 5,938 -- 714 --
c/o Global Technology Partners, LLC
1300 I Street, N.W.
Washington, D.C.
John F. Fort, III........................................ -- -- -- --
R. Jack DeCrane.......................................... -- -- -- --
Charles H. Becker........................................ -- -- -- --
Richard J. Kaplan........................................ -- -- -- --
All directors and named executive officers as a group
(9 persons)............................................ 11,876 -- 1,428 --
</TABLE>
- ------------------------
(1) Each person who has the power to vote and direct the disposition of shares
is deemed to be a beneficial owner of those shares.
(2) The common stock columns show number of shares owned and total percentage of
ownership in the manner required by SEC rules. The entry for each holder of
warrants assumes that the
61
<PAGE>
particular holder, and no-one else, fully exercises all rights under those
warrants to purchase shares of common stock.
(3) Reflects 3,369,565 shares, and warrants for the issuance of an additional
150,000 shares, held directly by DLJ Merchant Banking Partners II, L.P. and
the following related investors: DLJ Merchant Banking Partners II-A, L.P.;
DLJ Offshore Partners II, C.V.; DLJ Diversified Partners, L.P.; DLJ
Diversified Partners-A, L.P.; DLJ Millennium Partners, L.P.; DLJ Millennium
Partners-A, L.P.; DLJMB Funding II, Inc.; UK Investment Plan 1997 Partners,
Inc.; DLJ EAB Partners, L.P.; DLJ First ESC L.P. and DLJ ESC II L.P. See
"Related Party Transactions" and "Plan of Distribution." The address of DLJ
Offshore Partners II, C.V. is John B. Gorsiraweg 14, Willemstad, Curacao,
Netherlands Antilles. The address of UK Investment Plan 1997 Partners, Inc.
is 2121 Avenue of the Stars, Fox Plaza, Suite 3000, Los Angeles, California
90067. The address of each of the other persons is 277 Park Avenue, New
York, New York 10172.
(4) Messrs. Dean and White and Ms. Schnabel are officers of DLJ Merchant
Banking, Inc., an affiliate of DLJ Merchant Banking and Donaldson, Lufkin &
Jenrette Securities Corporation. The share data shown for these individuals
excludes shares shown as held by the DLJ affiliates; Messrs. Dean and White
and Ms. Schnabel disclaim beneficial ownership of those shares.
(5) Messrs. Hermann and Kaminski are members of Global Technology Partners, LLC.
Six members of Global Technology Partners, including Messrs. Hermann and
Kaminski, acquired 20,098 shares of DeCrane Holdings common stock, and 2,417
shares of DeCrane Holdings 14% Senior Redeemable Exchangeable Preferred
Stock due 2008, in a transaction negotiated with DeCrane Holdings. The share
data shown for Global Technology Partners and Messrs. Hermann and Kaminski
excludes shares shown as held by the individual members; Messrs. Hermann and
Kaminski disclaim beneficial ownership in any of the shares held by the
other members.
DeCrane Holdings is authorized to issue an aggregate of 4,500,000 shares of
DeCrane Holdings Common Stock, par value $.01 per share, of which 3,389,663 are
outstanding, excluding 305,000 reserved for issuance for outstanding warrants.
DeCrane Holdings is authorized to issue up to 2,500,000 shares of DeCrane
Holdings preferred stock, par value $.01 per share, in one or more series, of
which 342,417 are outstanding. For a full description of DeCrane Holdings'
capital stock, please review DeCrane Holdings' Certificate of Incorporation and
Certificate of Designation for its 14% Senior Redeemable Exchangeable Preferred
Stock due 2008. You can obtain a copy from us or from the exhibits to the
registration statement of which this prospectus is a part. See "Where You Can
Obtain More Information" at the end of "Business."
62
<PAGE>
RELATED PARTY TRANSACTIONS
The Merger Agreement entered into in connection with the DLJ acquisition
entitled DeCrane Holdings to designate a number of directors proportionally
commensurate with its stock ownership of DeCrane Aircraft. DeCrane Holdings
selected all of the current members of the Board of Directors of DeCrane
Aircraft. DLJ Merchant Banking or its designate selected all of the members of
the Board of Directors of DeCrane Holdings.
DLJ Capital Funding, Inc., another DLJ affiliate of DLJ Merchant Banking,
received customary fees and reimbursement of expenses in connection with the
arrangement and syndication of the bank credit facility and as a lender
thereunder. DLJ Bridge Finance, Inc., also an affiliate of DLJ Merchant Banking,
received customary fees in connection with its commitment to purchase and its
purchase of the bridge notes. Donaldson, Lufkin & Jenrette Securities
Corporation, which is also an affiliate of DLJ Merchant Banking, acted as
financial advisor and dealer manager in connection with the tender offer, as
arranger of the bank credit facility and received customary fees for those
services; DLJ Securities Corporation also acted as the initial purchaser of the
old notes. The aggregate amount of all fees payable to the DLJ entities in
connection with the DLJ acquisition is approximately $12.0 million. DeCrane
Aircraft is also obligated to reimburse DLJ Securities Corporation for
reasonable out-of-pocket expenses incurred in connection with the tender offer,
including the fees and disbursements of outside counsel, and to indemnify DLJ
Securities Corporation against liabilities, including liabilities under the
federal securities laws. In addition, DeCrane Aircraft is obligated to pay DLJ
Securities Corporation an annual advisory fee of $300,000 beginning on the
consummation of the tender offer for a period of five years. We may from time to
time enter into other investment banking relationships with DLJ Securities
Corporation or one of its affiliates pursuant to which DLJ Securities
Corporation or its affiliate will receive customary fees and will be entitled to
reimbursement for all reasonable disbursements and out-of-pocket expenses
incurred in connection therewith. We expect that any such arrangement will
include provisions for the indemnification of DLJ Securities Corporation against
liabilities, including liabilities under the federal securities laws.
In connection with the DLJ acquisition, an Investors' Agreement dated as of
August 28, 1998 was entered into among DeCrane Holdings, DLJ Merchant Banking
and its affiliates which hold DeCrane Holdings stock. It provides that:
- Any person acquiring shares of common stock or preferred stock of DeCrane
Holdings who is required by the terms of the investors' agreement or any
employment agreement or stock purchase, option, stock option or other
compensation plan of DeCrane Holdings to become a party thereto shall
execute an agreement to become bound by the investors' agreement and
thereafter shall be bound by it.
- Transfers of the shares of DeCrane Holdings common stock and preferred
stock by the parties to the agreement.
- Parties to the agreement may participate in some specific kinds of sales
of shares of DeCrane Holdings' common stock by the DLJ affiliates.
- The DLJ affiliates may require the other parties to the agreement to sell
shares of DeCrane Holdings' common stock in some cases should the DLJ
affiliates choose to sell any such shares owned by them.
- The DLJ affiliates may request six demand registrations with respect to
the warrants for DeCrane Holdings common stock held by DLJ Merchant
Banking, the common stock and preferred stock held by those affiliates,
which are immediately exercisable subject to customary deferral and
cutback provisions.
63
<PAGE>
- The parties to the agreement are entitled to unlimited piggyback
registration rights subject to customary cutback provisions, and excluding
registrations of shares issuable in connection with any employee benefit
plan or acquisition.
- DeCrane Holdings will indemnify the shareholders against some liabilities
and expenses, including liabilities under the Securities Act.
- The DLJ affiliates have the right to appoint all of the members of the
Boards of Directors of DeCrane Holdings and DeCrane Aircraft, and at least
one of such directors on each board will be an independent director.
Messrs. Hermann, Kaminski and Fort are independent directors.
Each warrant for DeCrane Holdings common stock held by the DLJ affiliates
entitles the holder thereof to purchase one share of common stock at an exercise
price of not less than $0.01 per share subject to customary antidilution
provisions and other customary terms. Those DLJ warrants are exercisable at any
time prior to 5:00 p.m. New York City time on August 28, 2009, subject to
applicable federal and state securities laws.
In connection with the DLJ acquisition, Global Technology Partners, LLC will
have options to purchase up to 1.25% of DeCrane Holdings common stock. The
options will vest over a three-year period, subject to acceleration if the
foregoing DLJ affiliates sell any of their shares of common stock. Those options
will be exercisable at an exercise price equal to the price paid for DeCrane
Holdings' common stock by the foregoing DLJ affiliates. In addition, in December
1998 six members of Global Technology Partners, including Messrs. Hermann and
Kaminski, purchased approximately $704,000 of shares of newly issued common and
preferred stock of DeCrane Holdings. DeCrane Aircraft loaned half of the
purchase price for such shares to those members at an interest rate equal to the
interest rate on the longest maturity senior bank debt of DeCrane Aircraft in
effect from time to time, plus 1.0%. The loans are repayable out of the proceeds
from the sale of such stock and are secured by such stock. DeCrane Holdings has
indemnified Global Technology Partners against some claims and liabilities,
including liabilities under the Securities Act.
In connection with our acquisition of PPI in April 1999, DLJ Merchant
Banking invested an additional $12.5 million of capital in DeCrane Holdings by
purchasing 543,478 additional shares of its common stock, at $23.00 per share.
This additional investment is included as part of the acquisition financing in
the unaudited pro forma financial data in this prospectus.
64
<PAGE>
DESCRIPTION OF WARRANTS
The warrants have been issued pursuant to a warrant agreement between
DeCrane Holdings and State Street Bank and Trust Company, as warrant agent, a
copy of which is available as set forth above under "Business--Where You Can Get
More Information." The following summary of the warrant agreement does not
purport to be complete and is qualified in its entirety by reference to the
warrant agreement, including the definitions therein of terms used below.
GENERAL
There are 100,000 warrants outstanding. Each warrant, when exercised, will
entitle the holder thereof to receive 1.55 fully paid and non-assessable shares
of DeCrane Holdings common stock, at an exercise price of $23.00 per share. The
exercise price and the number of warrant shares are both subject to adjustment
in special cases described below. The holders of all of the warrants would be
entitled, in the aggregate, to purchase shares of common stock representing
approximately 5% of common stock on a fully diluted basis on the date of this
prospectus, assuming exercise of all outstanding warrants issued by DeCrane
Holdings, including the separately-issued DLJ warrants. Unless exercised, the
warrants will automatically expire at 5:00 p.m. New York City time on September
30, 2008.
The warrants may be exercised by surrendering to us the warrant certificates
evidencing the warrants to be exercised with the accompanying form of election
to purchase properly completed and executed, together with payment of the
exercise price. Payment of the exercise price may be made in cash in United
States dollars by wire transfer or by certified or official bank check to the
order of DeCrane Holdings. Upon surrender of the warrant certificate and payment
of the exercise price, we will deliver or cause to be delivered, to or upon the
written order of such holder, stock certificates representing the number of
whole warrant shares to which the holder is entitled. If less than all of the
warrants evidenced by a warrant certificate are to be exercised, a new warrant
certificate will be issued for the remaining number of warrants. Holders of
warrants will be able to exercise their warrants only if a registration
statement relating to the warrant shares underlying the warrants is then in
effect, or the exercise of such warrants is exempt from the registration
requirements of the Securities Act, and such securities are qualified for sale
or exempt from qualification under the applicable securities laws of the states
in which the various holders of warrants or other persons to whom it is proposed
that warrant shares be issued on exercise of the warrants reside.
No fractional warrant shares will be issued upon exercise of the warrants.
DeCrane Holdings will pay to the holder of the warrant at the time of exercise
an amount in cash equal to the current market value of any such fractional
warrant shares less a corresponding fraction of the exercise price.
The holders of the warrants will have no right to vote on matters submitted
to the stockholders of DeCrane Holdings and will have no right to receive
dividends. The holders of the warrants will not be entitled to share in the
assets of DeCrane Holdings in the event of liquidation, dissolution or the
winding up of DeCrane Holdings. In the event a bankruptcy or reorganization is
commenced by or against DeCrane Holdings, a bankruptcy court may hold that
unexercised warrants are executory contracts which may be subject to rejection
by DeCrane Holdings with approval of the bankruptcy court, and the holders of
the warrants may, even if sufficient funds are available, receive nothing or a
lesser amount as a result of any such bankruptcy case than they would be
entitled to if they had exercised their warrants prior to the commencement of
any such case.
65
<PAGE>
ADJUSTMENTS
The number of warrant shares purchasable upon exercise of the warrants and
the exercise price will be subject to adjustment in some events including:
- the payment by DeCrane Holdings of dividends and other distributions on
the common stock in common stock,
- subdivisions, combinations and reclassifications of the common stock,
- the issuance to all holders of common stock of rights, options or warrants
entitling them to subscribe for common stock or securities convertible
into, or exchangeable or exercisable for, common stock at a price which is
less than the Fair Market Value, as defined below, per share of common
stock,
- some distributions to all holders of common stock of any of DeCrane
Holdings' assets or debt securities or any rights or warrants to purchase
any such securities, excluding those rights and warrants referred to in
the preceding bullet point,
- the issuance of shares of common stock for consideration per share less
than the then Fair Market Value per share of common stock, excluding
securities issued in transactions referred to in the first four bullet
points above or the next bullet point below, and subject to exceptions,
- the issuance of securities convertible into or exchangeable for common
stock for a conversion or exchange price plus consideration received upon
issuance less than the then Fair Market Value per share of common stock at
the time of issuance of such convertible or exchangeable security,
excluding securities issued in transactions referred to in the first four
bullet points above, and
- other events that could have the effect of depriving holders of the
warrants of the benefit of all or a portion of the purchase rights
evidenced by the warrants.
Adjustments to the exercise price will be calculated to the nearest cent. No
adjustment need be made for any of the foregoing transactions if warrant holders
are to participate in the transaction on a basis and with notice that the Board
of Directors determines to be fair and appropriate in light of the basis and
notice and on which other holders of common stock participate in the
transaction.
The following defined terms are used above:
"FAIR MARKET VALUE" per security, at any date of determination, means
(1) in connection with a sale to a party that is not an affiliate of
DeCrane Holdings in an arm's-length transaction, a "Non-Affiliate Sale,"
the price per security at which such security is sold, and
(2) in connection with any sale to an affiliate of DeCrane Holdings,
(a) the last price per security at which such security was sold
in a Non-Affiliate Sale within the three-month period preceding such
date of determination or
(b) if clause (a) is not applicable, the fair market value of
such security determined in good faith by a majority of the board of
directors of DeCrane Holdings, including a majority of the
Disinterested Directors, as defined below, and approved in a board
resolution delivered to the warrant agent, or a nationally recognized
investment banking, appraisal or valuation firm, which is not an
affiliate of DeCrane Holdings, in each case, taking into account,
among all other factors deemed relevant by the board of directors or
such investment banking, appraisal or valuation firm, the trading
price and volume of such security on any national securities exchange
or automated quotation system on which such security is traded.
66
<PAGE>
"DISINTERESTED DIRECTOR" means, in connection with any issuance of
securities that gives rise to a determination of the Fair Market Value
thereof, each member of the board of directors of DeCrane Holdings who is
not an officer, employee, director or other Affiliate of the party to whom
DeCrane Holdings is proposing to issue the securities giving rise to such
determination.
No adjustment in the exercise price will be required unless such adjustment
would require an increase or decrease of at least one percent in the exercise
price; PROVIDED, HOWEVER, that any adjustment that is not made will be carried
forward and taken into account in any subsequent adjustment. In the case of some
types of consolidations or mergers of DeCrane Holdings, or the sale of all or
substantially all of the assets of DeCrane Holdings to another corporation,
- each warrant will thereafter be exercisable for the right to receive the
kind and amount of shares of stock or other securities or property to
which such holder would have been entitled as a result of such
consolidation, merger or sale had the warrants been exercised immediately
prior thereto, and
- the person formed by or surviving any such consolidation or merger, if
other than DeCrane Holdings, or to which such sale shall have been made
will assume the obligations of DeCrane Holdings under the warrant
agreement.
RESERVATION OF SHARES
DeCrane Holdings has authorized and reserved for issuance and will at all
times reserve and keep available such number of shares of common stock as will
be issuable upon the exercise of all outstanding warrants. Such shares of common
stock, when paid for and issued, will be duly and validly issued, fully paid and
non-assessable, free of preemptive rights and free from all taxes, liens,
charges and security interests with respect to the issuance thereof.
AMENDMENT
From time to time, DeCrane Holdings and the warrant agent, without the
consent of the holders of the warrants, may amend or supplement the warrant
agreement for some purposes, including curing defects or inconsistencies or
making any change that does not adversely affect the legal rights of any holder.
Any amendment or supplement to the warrant agreement that adversely affects the
legal rights of the holders of the warrants will require the written consent of
the holders of a majority of the then outstanding warrants, excluding warrants
held by DeCrane Holdings or any of its affiliates. The consent of each holder of
the warrants affected will be required for any amendment pursuant to which the
exercise price would be increased or the number of warrant shares purchasable
upon exercise of warrants would be decreased, other than pursuant to adjustments
provided in the warrant agreement.
ADDITIONAL INFORMATION
Anyone who receives this prospectus may obtain a copy of the warrant
agreement and warrant registration rights agreement without charge by writing to
DeCrane Holdings at 2361 Rosecrans Avenue, Suite 180, El Segundo, California
90245.
67
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
DeCrane Holdings is authorized to issue an aggregate of 4,500,000 shares of
common stock, par value $.01 per share, of which 3,389,663 are outstanding and
owned by 18 shareholders, excluding 155,000 shares reserved for issuance for the
warrants described in this prospectus, and 150,000 warrants outstanding and
issued to DLJ affiliates. DeCrane Holdings is authorized to issue up to
2,500,000 shares of preferred stock, par value $.01 per share, in one or more
series, of which 342,417 are outstanding. There is no existing trading market
for either the common or preferred stock. The following is a summary of the
rights and privileges pertaining to the common stock and preferred stock. For a
full description of the capital stock, reference is made to DeCrane Holdings'
certificate of incorporation currently in effect, a copy of which is available
from DeCrane Holdings. See "Where You Can Get More Information" at the end of
the "Business" section.
COMMON STOCK
VOTING RIGHTS
The holders of common stock are entitled to one vote per share on all
matters submitted for action by the shareholders. There is no provision for
cumulative voting with respect to the election of directors. Accordingly, the
holders of more than 50% of the shares of common stock can, if they choose to do
so, elect the board of directors and determine most matters on which
stockholders are entitled to vote. Pursuant to the Investors' Agreement, the
shareholders who are party to such agreement have agreed to vote their shares to
cause the DLJ affiliates owing common stock of DeCrane Holdings to select all
six of DeCrane Holdings' directors. See "Related Party Transactions-- The DLJ
Acquisition."
DIVIDEND RIGHTS
Holders of common stock are entitled to share equally, share for share, if
dividends are declared on common stock, whether payable in cash, property or
securities of DeCrane Holdings.
LIQUIDATION RIGHTS
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of DeCrane Holdings, after payment has been made from the funds
available therefore to the holders of preferred stock, if any, for the full
amount to which they are entitled, the holders of the shares of common stock are
entitled to share equally, share for share, in the assets available for
distribution. Holders of common stock have no conversion, redemption or
preemptive rights.
PREFERRED STOCK
The board of directors of DeCrane Holdings has authorized the designation of
1,360,000 shares of 14% Senior Exchangeable Redeemable Preferred Stock due 2009,
par value $0.01 per share, of which 342,417 shares have been issued and are
outstanding. Holders of the DeCrane Holdings preferred stock are entitled to
receive, when, as and if declared by the board of directors, dividends at a rate
equal to 14% per annum, subject to increases of 0.25% for each quarter that no
dividend is paid, up to a maximum of an additional 5%. Prior to September 30,
2003, dividends are not paid in cash but instead accrete in liquidation value.
Shares have a liquidation preference of $100, subject to increase through
accretion, plus accrued and unpaid cash dividends. The DeCrane Holdings
preferred stock is mandatorily redeemable on August 28, 2009 and is redeemable
at DeCrane Holdings' option:
- prior to September 30, 2001 with the net cash proceeds of public equity
offerings at a redemption price equal to 114% of liquidation value plus
accrued and unpaid cash dividends,
68
<PAGE>
- on or after September 30, 2003, at a redemption price equal to the 107% of
liquidation value plus accrued and unpaid cash dividends,
- on or after September 30, 2004 at a redemption price of 104.667% of
liquidation value plus accrued and unpaid cash dividends,
- on or after September 30, 2005 at a redemption price of 102.333% of
liquidation value plus accrued and unpaid cash dividends,
- on or after September 30, 2006 at a redemption price of 100.000% of
liquidation value plus accrued and unpaid cash dividends, or
- in the event of a change of control, as defined in the Certificate of
Designation for the preferred stock, at a redemption price equal to the
present value of all remaining dividends, premium and liquidation value
payments that would become due on the DeCrane Holdings preferred stock as
if the DeCrane Holdings preferred stock was to remain outstanding and be
redeemed on September 30, 2003, computed using a discount rate equal to
the Treasury Rate plus 50 basis points.
Upon the occurrence of a change of control, each holder will have the right
to require DeCrane Holdings to repurchase all or any part of such holder's
DeCrane Holdings preferred stock at an offer price equal to 101% of the
liquidation preference thereof plus accrued and unpaid cash dividends. Holders
of the DeCrane Holdings preferred stock are not entitled to voting rights;
PROVIDED that DeCrane Holdings has agreed that it will not amend or modify its
charter so as to adversely affect the holders of the DeCrane Holdings preferred
stock or create, authorize or issue securities prior to or on a par with the
DeCrane Holdings preferred stock without the consent of the holders thereof. In
addition, if and whenever
- four consecutive or any six quarterly dividend payments are not made,
- DeCrane Holdings fails to fulfill its obligations to redeem the DeCrane
Holdings preferred stock on August 28, 2009 or in the event of a change of
control,
- DeCrane Holdings makes any payments on the Common Stock or other security
ranking junior to or on parity with the DeCrane Holdings preferred stock
in violation of the Certificate of Designations, or
- DeCrane Holdings amends its charter or creates parity or prior securities
in violation of the Certificate of Designations,
the number of directors will be increased by two and the holders of the DeCrane
Holdings preferred stock will be entitled to elect the additional directors
until such violation is remedied.
We may, at our option, at any time on any dividend payment date so long as
no shares are held by any DLJ affiliate, exchange the shares of DeCrane Holdings
preferred stock for 14% senior subordinated exchange debentures of DeCrane
Holdings due September 30, 2009. Those exchange debentures will be subordinated
to all senior debt of DeCrane Holdings and will contain customary covenants and
events of default, including covenants that limit the ability of DeCrane
Holdings and its subsidiaries to incur debt, pay dividends and acquire or make
equity investments in other companies.
In addition, we may issue additional shares of preferred stock from time to
time in one or more series and with such designations and preferences for each
series as shall be stated in the resolutions providing for the designation and
issue of each such series adopted by our board of directors. The board of
directors is authorized by our Certificate of Incorporation to determine the
voting, dividend, redemption and liquidation preferences and limitations
pertaining to such series. The board of directors, without shareholder approval,
may issue preferred stock with voting and other rights that could adversely
affect all of the rights of the holders of the common stock and could have
antitakeover
69
<PAGE>
effects. We have no present plans to issue any additional shares of preferred
stock. The ability of the board of directors to issue preferred stock without
stockholder approval could have the effect of delaying, deferring or preventing
a change in control of DeCrane Holdings or the removal of existing management.
SECTION 203 OF DELAWARE GENERAL CORPORATION LAW
DeCrane Holdings is a Delaware corporation and subject to Section 203 of the
Delaware General Corporation Law. Section 203 prevents an "interested
stockholder" (defined generally as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination," as defined in Section 203, with a Delaware corporation for three
years following the date such person became an interested stockholder, subject
to some exceptions such as transactions done with the approval of the board of
directors and of the holders of at least two-thirds of the outstanding shares of
voting stock not owned by the interested stockholder. The existence of this
provision would be expected to have an anti-takeover effect, including possibly
discouraging takeover attempts that might result in a premium over the market
price for the shares of DeCrane Holdings common stock.
DLJ WARRANTS
Each of the 150,000 warrants issued to affiliates of DLJ Merchant Banking
entitles the holder thereof to purchase one share of common stock of DeCrane
Holdings at an exercise price of not less than $0.01 per share subject to
customary antidilution provisions, which differ in some respects than those
contained in the warrants which are the subject of this prospectus, and other
customary terms. The DLJ warrants are exercisable at any time prior to 5:00
p.m., New York time, on August 28, 2009. The exercise of the DLJ warrants also
is subject to applicable federal and state securities laws.
The holders of the DLJ warrants are entitled to request six demand
registrations with respect to the DLJ warrants, together with all or any portion
of any preferred stock and the common stock owned by them, which rights will be
immediately exercisable, subject to customary deferral and cutback provisions.
In addition, the holders of the DLJ warrants are entitled to unlimited piggyback
registration rights with respect to such warrants, subject to customary cutback
provisions.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the DeCrane Holdings common stock is
the Secretary of DeCrane Holdings.
70
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
This section is a summary of federal income tax considerations relevant to
the offered securities. It is not a complete analysis of all potential tax
effects. We have not considered foreign or state taxes, gift taxes or gift
taxes, among other things, and your individual tax liabilities and consequences
also depend on your own circumstances. We based this summary on U.S. federal tax
law, regulations, pronouncements and judicial decisions now in effect. All of
the laws and rules may change, and changes can be made retroactively as well.
YOU SHOULD CONSULT YOUR OWN TAX ADVISOR TO DETERMINE THE TAX CONSEQUENCES TO
YOU OF PARTICIPATING IN THIS EXCHANGE OFFER.
The registration of existing warrants as contemplated by this prospectus
should not be a taxable event. However, dividends paid on common stock received
upon the exercise of a warrant will be taxed as ordinary income.
U.S. HOLDERS
As used herein, the term "U.S. holder" means a beneficial owner of an
offered security that for United States federal income tax purposes is a citizen
or resident of the United States, a corporation created or organized in or under
the laws of the United States or of any political subdivision thereof, an estate
the income of which is subject to United States federal income taxation
regardless of its source, or a trust if a court within the United States is able
to exercise primary supervision over the administration of the trust and one or
more United States persons have the authority to control all substantial
decisions of the trust.
A U.S. holder will generally not recognize any gain or loss upon exercise of
any warrants (except with respect to any cash received in lieu of a fractional
warrant share). A U.S. holder will have an initial tax basis in the warrant
shares received on exercise of the warrants equal to the sum of its tax basis in
the warrants and the aggregate cash exercise price, if any, paid in respect of
such exercise. A U.S. holder's holding period in such warrant shares will
commence on the day after the warrants are exercised.
If a warrant expires without being exercised, a U.S. holder will recognize a
capital loss in an amount equal to its tax basis in the warrant. Upon the sale
or exchange of a warrant, a U.S. holder will generally recognize a capital gain
or loss equal to the difference, if any, between the amount realized on such
sale or exchange and the U.S. holder's tax basis in such warrant. Such capital
gain or loss will be long-term capital gain or loss if, at the time of such sale
or exchange, the warrant has been held for more than one year.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Some noncorporate U.S. holders may be subject to backup withholding at a
rate of 31% dividends received with respect to, and the proceeds of a
disposition of, warrant shares. Backup withholding will apply only if the U.S.
holder
- fails to furnish its Taxpayer Identification Number which, in the case of
an individual, is his or her social security number,
- furnishes an incorrect number,
- is notified by the IRS that it has failed to properly report payments of
interest or dividends or
- under some circumstances, fails to certify, under penalty of perjury, that
it has furnished a correct Tax Identification Number and has not been
notified by the IRS that it is subject to backup withholding. U.S. holders
should consult their tax advisors regarding their qualification
71
<PAGE>
for exemption from backup withholding and the procedure for obtaining such
an exemption if applicable. The amount of any backup withholding from a
payment to a U.S. holder is not an additional tax and is allowable as a
credit against such U.S. holder's United States federal income tax
liability and may entitle such U.S. holder to a refund, PROVIDED that the
required information is furnished to the IRS.
NON-U.S. HOLDERS
"Non-U.S. holder" means an owner of an offered security that is, for United
States federal income tax purposes, a nonresident alien individual, a foreign
corporation, a nonresident alien fiduciary of a foreign estate or trust, or a
foreign partnership one or more of the members of which is a nonresident alien
individual, a foreign corporation or a nonresident alien fiduciary of a foreign
estate or trust.
Under present United States federal tax law, and subject to the discussion
below concerning backup withholding:
- Dividends paid to a non-U.S. holder of warrant shares, and after December
31, 1999, any deemed dividends resulting from some kinds of adjustments
to the number of warrant shares to be issued on exercise of a warrant,
generally will be subject to withholding tax at a 30% rate or such lower
rate as may be specified by an applicable income tax treaty.
- A non-U.S. holder of a warrant or warrant shares will not be subject to
United States federal income tax on gain realized on the sale, exchange
or other disposition of such warrant or warrant shares, unless
- such holder is an individual who is present in the United States for
183 days or more in the taxable year of the disposition, and either
the gain is attributable to an office or other fixed place of
business maintained by such individual in the United States or,
generally, such individual has a "tax home" in the United States,
- such gain is effectively connected with the Non-U.S. Holder's conduct
of a trade or business in the United States, or
- the warrant or warrant share was a "United States Real Property
Interest" as defined in Section 897(c)(1) of the Internal Revenue
Code at any time during the five year period prior to the sale or
exchange or at any time during the time that the non-U.S. holder held
such warrant or warrant share, whichever time was shorter.
A warrant or warrant share would be a United States Real Property
Interest only if, at any time during the five years prior to the sale or
exchange of such warrant or warrant share, or at any time during the
period that the non-U.S. holder held such warrant or warrant share,
whichever time was shorter, DeCrane Holdings had been a "United States
real property holding corporation" as defined in Section 897(c)(2) of the
Internal Revenue Code and the non-U.S. holder directly or constructively
had owned more than 5% of such series of common stock. We do not believe
that the foregoing was or is likely to become the case regarding DeCrane
Holdings.
- - An individual non-U.S. holder who is treated as the owner of, or has made
some specific types of lifetime transfers of, an interest in a warrant or
warrant shares will be required to include the value thereof in his gross
estate for U.S. federal estate tax purposes, and may be subject to U.S.
federal estate tax unless an applicable estate tax treaty provides
otherwise.
Currently, for purposes of determining whether tax is to be withheld at a
30% rate or at a reduced treaty rate, we ordinarily will presume that dividends
paid on or before December 31, 1999 to an address in a foreign country are paid
to a resident of such country, unless we know that such presumption is not
warranted. Under Treasury Regulations effective for payments after December
72
<PAGE>
31, 1999, non-U.S. holders will be required to satisfy applicable certification
requirements to claim treaty benefits.
If a non-U.S. holder of a warrant or warrant share is engaged in a trade or
business in the United States, and if dividends with respect to warrant shares
or gain realized on the sale, exchange or other disposition of warrants or
warrant shares is effectively connected with the conduct of such trade or
business, the non-U.S. holder, although exempt from the withholding tax
discussed in the preceding paragraphs, will generally be subject to regular
United States income tax on such effectively connected income in the same manner
as if it were a U.S. Holder. See "--U.S. Holders" above. In lieu of the
certificate described in the preceding paragraph, such a holder will be required
to provide to the withholding agent a properly executed IRS Form 4224 on or
after January 1, 2000, a Form W-8, to claim an exemption from withholding tax.
In addition, if such non-U.S. holder is a foreign corporation, it may be subject
to a 30% branch profits tax, unless reduced or eliminated by an applicable
treaty, on its earnings and profits for the taxable year attributable to such
effectively connected income, subject to several adjustments.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Backup withholding, described above under "--U.S. Holders--Backup
Withholding and Information Reporting," generally will not apply to dividends
paid on or before December 31, 1999 to a non-U.S. holder at an address outside
the United States, PROVIDED that DeCrane Holdings or its paying agent does not
have actual knowledge that the payee is a United States person. Under Treasury
Regulations effective for payments made after December 31, 1999, however, a
non-U.S. holder will be subject to backup withholding unless applicable
certification requirements are met.
Under current Treasury Regulations, payments on the sale, exchange or other
disposition of a warrant or warrant share made to or through a foreign office of
a broker generally will not be subject to backup withholding. However, if such
broker is
- a United States person,
- a controlled foreign corporation for United States federal income tax
purposes,
- a foreign person 50 percent or more of whose gross income is effectively
connected with a United States trade or business for a specified
three-year period or
- in the case of payments made after December 31, 1999, a foreign
partnership which has some specific types of connections to the United
States,
then information reporting, but not backup withholding, will be required unless
the broker has in its records documentary evidence that the beneficial owner is
not a United States person and several other conditions are met, or the
beneficial owner otherwise establishes an exemption. Backup withholding may
apply to any payment that such broker is required to report if the broker has
actual knowledge that the payee is a United States person. Payments to or
through the United States office of a broker will be subject to backup
withholding and information reporting unless the holder certifies, under
penalties of perjury, that it is not a United States person or otherwise
establishes an exemption.
Non-U.S. holders of warrants or warrant shares should consult their tax
advisers regarding the application of information reporting and backup
withholding in their particular situations, the availability of an exemption
therefrom, and the procedure for obtaining such an exemption, if available. Any
amount withheld from a payment to a non-U.S. holder under the backup withholding
rules is not an additional tax and is allowable as a credit against such
holder's United States federal income tax liability, if any, or may entitle such
holder to a refund, if the required information is furnished to the IRS.
73
<PAGE>
PLAN OF DISTRIBUTION
This prospectus is to be used in connection with offers and sales of the
offered securities by the holders thereof from time to time. DLJ Securities
Corporation may act as a principal or agent for one party when acting as
principal or as agent for both parties, and may receive compensation in the form
of discounts and commissions, including from both parties when it acts as agent
for both. Those sales will be made at prevailing market prices at the time of
sale, at prices related thereto or at negotiated prices.
DLJ Merchant Banking Partners II, L.P. and several of its affiliates
beneficially own approximately 94% of the common stock of DeCrane Holdings.
Thompson Dean, Susan C. Schnabel and Timothy J. White, each of whom is a
principal of DLJ Merchant Banking, are members of the Board of Directors of
DeCrane Holdings. DLJ Capital Funding, Inc. acted as syndication agent in
connection with the bank credit facility of DeCrane Aircraft, for which it
received customary fees and expenses. DLJ Bridge Finance Inc. purchased the
bridge notes which were refinanced by the initial offering of old notes, for
which it received customary fees and expenses. DLJ Securities Corporation acted
as dealer/manager in connection with the tender offer in the DLJ acquisition, as
arranger in connection with the bank credit facility, and as the initial
purchaser of the old notes, and is the financial advisor to DeCrane Holdings and
DeCrane Aircraft. See "Recent Developments--The DLJ Acquisition." DLJ Merchant
Banking, DLJ Capital Funding, Inc. and DLJ Bridge Finance, Inc. are affiliates
of DLJ Securities Corporation.
We will not receive any proceeds from any sales of the warrants or any
warrant shares.
DLJ Securities Corporation has, from time to time, provided investment
banking and other financial advisory services to us, for which it has received
customary compensation, and will provide such services and financial advisory
services to us in the future. DLJ Securities Corporation was the initial
purchaser in the initial offering of the old notes and received an underwriting
discount of approximately $3.3 million in connection therewith. See "Certain
Relationships and Transactions."
We have entered into a warrant registration rights agreement with DLJ
Securities Corporation regarding the use by DLJ of this prospectus. Pursuant to
such agreement, we have agreed to bear all registration expenses incurred under
that agreement, and to indemnify DLJ Securities Corporation against some
liabilities, including liabilities under the Securities Act.
74
<PAGE>
LEGAL MATTERS
The validity of the warrants offered hereby will be passed upon for DeCrane
Holdings by Spolin & Silverman LLP, Santa Monica, California.
EXPERTS
The consolidated balance sheet as of December 31, 1998 and the consolidated
statements of operations, of stockholders' equity and of cash flows for the four
months ended December 31, 1998 of DeCrane Holdings Co., the consolidated balance
sheet as of December 31, 1997 and the consolidated statements of operations, of
stockholders' equity and of cash flows for the years ended December 31, 1996 and
1997 and the eight months ended August 31, 1998 of DeCrane Aircraft Holdings,
Inc., the balance sheets as of September 30, 1996 and 1997 and the statements of
income, of stockholders' equity and of cash flows for each of the three years in
the period ended September 30, 1997 of Avtech Corporation, and the consolidated
balance sheets as of June 30, 1997 and 1998 and the consolidated statements of
operations, of stockholders' equity and of cash flows for the years then ended
of PATS, Inc. included in this Prospectus have been so included in reliance on
the reports of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The consolidated balance sheets as of December 31, 1997 and 1998 and the
consolidated statements of income, stockholders' equity and cash flows for the
period from June 12, 1997 to December 31, 1997 and the year ended December 31,
1998 of PPI Holdings, Inc., and the consolidated statements of income,
stockholders' equity and cash flows for the year ended December 31, 1996 and for
the period from January 1, 1997 to June 11, 1997 of Precision Pattern Inc., the
predecessor to PPI Holdings, Inc., included in this prospectus have been so
included in reliance on the report of Baird, Kurtz & Dobson, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
75
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
DECRANE HOLDINGS CO. AND SUBSIDIARY
Reports of Independent Accountants....................................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 (predecessor) and 1998............................... F-4
Consolidated Statements of Operations for the years ended December 31, 1996 and 1997,
the eight months ended August 31, 1998 (predecessor) and the four months ended
December 31, 1998...................................................................................... F-5
Consolidated Statements of Stockholders Equity for the years ended December 31, 1996 and 1997,
the eight months ended August 31, 1998 (predecessor) and the four months ended December 31, 1998....... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1997,
the eight months ended August 31, 1998 (predecessor) and the four months ended
December 31, 1998...................................................................................... F-8
Notes to Consolidated Financial Statements............................................................... F-9
AVTECH CORPORATION
Report of Independent Accountants........................................................................ F-45
Balance Sheets as of September 30, 1996 and 1997 and June 25, 1998 (unaudited)........................... F-46
Statements of Income for the years ended September 30, 1995, 1996 and 1997 and the nine months ended June
30, 1997 and June 25, 1998 (unaudited)................................................................. F-47
Statements of Stockholders' Equity for the years ended September 30, 1995, 1996 and 1997 and the nine
months ended June 25, 1998 (unaudited)................................................................. F-48
Statements of Cash Flows for the years ended September 30, 1995, 1996 and 1997 and the nine months ended
June 30, 1997 and June 25, 1998 (unaudited)............................................................ F-49
Notes to Financial Statements............................................................................ F-50
PATS, INC. AND SUBSIDIARIES
Report of Independent Accountants........................................................................ F-57
Consolidated Balance Sheets as of June 30, 1997 and 1998 and December 31, 1998 (unaudited)............... F-58
Consolidated Statements of Operations for the years ended June 30, 1997 and 1998 and the six months ended
December 31, 1997 and 1998 (unaudited)................................................................. F-59
Consolidated Statements of Stockholders' Equity for the years ended June 30, 1997 and 1998 and the six
months ended December 31, 1998 (unaudited)............................................................. F-60
Consolidated Statements of Cash Flows for the years ended June 30, 1997 and 1998 and the six months ended
December 31, 1997 and 1998 (unaudited)................................................................. F-61
Notes to Consolidated Financial Statements............................................................... F-62
PPI HOLDINGS, INC. AND SUBSIDIARY
Report of Independent Accountants........................................................................ F-68
Consolidated Balance Sheets as of December 31, 1997 and 1998............................................. F-69
Consolidated Statements of Income for the year ended December 31, 1996 and the period from January 1,
1997 to June 11, 1997 (predecessor) and the period from June 12, 1997 to December 31, 1997 and the year
ended December 31, 1998................................................................................ F-70
Consolidated Statements of Stockholders' Equity for the year ended December 31, 1996 and the period from
January 1, 1997 to June 11, 1997 (predecessor) and the period from June 12, 1997 to December 31, 1997
and the year ended December 31, 1998................................................................... F-71
Consolidated Statements of Cash Flows for the year ended December 31, 1996 and the period from January 1,
1997 to June 11, 1997 (predecessor) and the period from June 12, 1997 to December 31, 1997 and the year
ended December 31, 1998................................................................................ F-72
Note to Consolidated Financial Statements................................................................ F-73
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
DeCrane Holdings Co.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of DeCrane
Holdings Co. and its subsidiary at December 31, 1998 and the results of their
operations and their cash flows for the four months ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
February 19, 1999
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
DeCrane Aircraft Holdings Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of DeCrane
Aircraft Holdings, Inc. and its subsidiaries at December 31, 1997 and the
results of their operations and their cash flows for the years ended December
31, 1996 and 1997 and the eight months ended August 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
February 19, 1999
F-3
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER
31,
1997 DECEMBER 31,
(PREDECESSOR) 1998
----------- ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................................ $ 206 $ 3,518
Accounts receivable, net................................................. 18,152 30,441
Inventories.............................................................. 25,976 34,281
Deferred income taxes.................................................... -- 4,300
Prepaid expenses and other current assets................................ 782 3,897
----------- ------------
Total current assets................................................... 45,116 76,437
Property and equipment, net................................................ 14,054 28,160
Other assets, principally intangibles, net................................. 39,967 225,978
----------- ------------
Total assets......................................................... $ 99,137 $ 330,575
----------- ------------
----------- ------------
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS'
EQUITY
Current liabilities
Short-term borrowings.................................................... $ 568 $ 283
Current portion of long-term obligations................................. 858 1,529
Accounts payable......................................................... 8,032 6,383
Accrued expenses......................................................... 6,911 18,272
Income taxes payable..................................................... 3,975 3,743
----------- ------------
Total current liabilities.............................................. 20,344 30,210
----------- ------------
Long-term liabilities
Long-term obligations.................................................... 37,412 184,953
Deferred income taxes.................................................... 1,758 16,990
Other long-term liabilities.............................................. 96 659
----------- ------------
Total long-term liabilities............................................ 39,266 202,602
----------- ------------
Commitments and contingencies (Note 15).................................... -- --
Mandatorily redeemable preferred stock..................................... -- 35,884
----------- ------------
Stockholders' equity
Cumulative convertible preferred stock, $.01 par value, 8,314,018 shares
authorized; none issued and outstanding as of December 31, 1997; none
authorized, issued and outstanding as of December 31, 1998............. -- --
Undesignated preferred stock, $.01 par value, 10,000,000 and 1,140,000
shares authorized as of December 31, 1997 and 1998, respectively; none
issued and outstanding as of December 31, 1997 and 1998................ -- --
Common stock, no par value, 4,253,550 shares authorized; none issued and
outstanding as of December 31, 1997; none authorized, issued and
outstanding as of December 31, 1998.................................... -- --
Common stock, $.01 par value, 9,924,950 and 3,500,000 shares authorized
as of December 31, 1997 and 1998, respectively; 5,318,563 and 2,846,185
shares issued and outstanding as of December 31, 1997 and 1998,
respectively........................................................... 53 28
Additional paid-in capital............................................... 51,057 64,497
Notes receivable for shares sold......................................... -- (352)
Accumulated deficit...................................................... (11,444) (2,568)
Accumulated other comprehensive income (loss)............................ (139) 274
----------- ------------
Total stockholders' equity............................................. 39,527 61,879
----------- ------------
Total liabilities, mandatorily redeemable preferred stock and
stockholders' equity............................................... $ 99,137 $ 330,575
----------- ------------
----------- ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
EIGHT
YEAR ENDED DECEMBER MONTHS
31, ENDED FOUR MONTHS
-------------------- AUGUST 31, ENDED
1998 DECEMBER
1996 1997 (PREDECESSOR) 31, 1998
(PREDECESSOR)
<S> <C> <C> <C> <C>
--------- --------- ----------- -----------
Revenues........................................ $ 65,099 $ 108,903 $ 90,077 $ 60,356
Cost of sales................................... 49,392 80,247 60,101 42,739
--------- --------- ----------- -----------
Gross profit.............................. 15,707 28,656 29,976 17,617
--------- --------- ----------- -----------
Operating expenses
Selling, general and administrative
expenses.................................... 10,747 15,756 15,719 10,274
Nonrecurring charges.......................... -- -- 3,632 --
Amortization of intangible assets............. 709 905 1,347 3,148
--------- --------- ----------- -----------
Total operating expenses.................... 11,456 16,661 20,698 13,422
--------- --------- ----------- -----------
Income from operations.......................... 4,251 11,995 9,278 4,195
Other expenses
Interest expense.............................. 4,248 3,154 2,350 6,867
Terminated debt offering expenses............. -- -- 600 --
Other expenses................................ 108 243 247 335
--------- --------- ----------- -----------
Income (loss) before provision for income taxes
and extraordinary item........................ (105) 8,598 6,081 (3,007)
Provision (benefit) for income taxes............ 712 3,344 2,892 (2,668)
--------- --------- ----------- -----------
Income (loss) before extraordinary item......... (817) 5,254 3,189 (339)
Extraordinary loss from debt refinancing, net of
income tax benefit............................ -- 2,078 -- 2,229
--------- --------- ----------- -----------
Net income (loss)............................... $ (817) $ 3,176 $ 3,189 $ (2,568)
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------------
ACCUMULATED
NO PAR VALUE $.01 PAR VALUE OTHER
CUMULATIVE --------------- ----------------- NOTES COMPRE-
CONVERTIBLE NUMBER NUMBER ADDITIONAL RECEIVABLE ACCUM- HENSIVE
PREFERRED OF OF PAID-IN FOR SHARES ULATED INCOME
PREDECESSOR: STOCK SHARES AMOUNT SHARES AMOUNT CAPITAL ISSUED DEFICIT (LOSS)
- ------------------------------ ----------- ------- ------ --------- ------ ---------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995...................... $ 5,549 85,593 $ 58 -- $-- $ -- $ -- $ (7,807) $ 503
Comprehensive loss
Net loss.................. -- -- -- -- -- -- -- (817) --
Translation adjustment.... -- -- -- -- -- -- -- -- (382)
Adjustment to estimated
redemption value of
mandatorily redeemable
common stock warrants..... -- -- -- -- -- -- -- (4,320) --
Issuance of cumulative
convertible preferred
stock, net................ 8,301 -- -- -- -- -- -- -- --
Mandatorily redeemable
common stock warrants
issued pursuant to anti-
dilution provisions....... -- -- -- -- -- -- -- (7) --
Stock option compensation
expense................... -- -- 158 -- -- -- -- -- --
----------- ------- ------ --------- ------ ---------- ----------- -------- -----------
Balance, December 31,
1996...................... 13,850 85,593 216 -- -- -- -- (12,951) 121
Comprehensive income
Net income................ -- -- -- -- -- -- -- 3,176 --
Translation adjustment.... -- -- -- -- -- -- -- -- (260)
Delaware reorganization and
reverse stock split....... -- (85,593) (216) 85,593 1 215 -- -- --
Adjustment to estimated
redemption value of
mandatorily redeemable
common stock warrants..... -- -- -- -- -- -- -- (2,203) --
<CAPTION>
PREDECESSOR: TOTAL
- ------------------------------ -------
<S> <C>
Balance, December 31,
1995...................... $(1,697)
-------
Comprehensive loss
Net loss.................. (817)
Translation adjustment.... (382)
-------
(1,199)
Adjustment to estimated
redemption value of
mandatorily redeemable
common stock warrants..... (4,320)
Issuance of cumulative
convertible preferred
stock, net................ 8,301
Mandatorily redeemable
common stock warrants
issued pursuant to anti-
dilution provisions....... (7)
Stock option compensation
expense................... 158
-------
Balance, December 31,
1996...................... 1,236
-------
Comprehensive income
Net income................ 3,176
Translation adjustment.... (260)
-------
2,916
Delaware reorganization and
reverse stock split....... --
Adjustment to estimated
redemption value of
mandatorily redeemable
common stock warrants..... (2,203)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA) (CONTINUED)
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------------
ACCUMULATED
NO PAR VALUE $.01 PAR VALUE OTHER
CUMULATIVE --------------- ----------------- NOTES COMPRE-
CONVERTIBLE NUMBER NUMBER ADDITIONAL RECEIVABLE ACCUM- HENSIVE
PREFERRED OF OF PAID-IN FOR SHARES ULATED INCOME
STOCK SHARES AMOUNT SHARES AMOUNT CAPITAL ISSUED DEFICIT (LOSS)
----------- ------- ------ --------- ------ ---------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Recapitalization
Conversion of preferred
stock into common
stock................... (13,850) -- -- 1,941,804 19 13,831 -- -- --
Cashless exercise and
conversion of
warrants................ -- -- -- 524,293 6 6,097 -- -- --
Cancellation of
mandatorily redeemable
common stock warrants... -- -- -- -- -- -- -- 1,143 --
Initial Public Offering
Proceeds from the
offering, net........... -- -- -- 2,700,000 27 28,229 -- -- --
Cancellation of
mandatorily redeemable
common stock warrants
upon debt repayment and
reclassification of
warrants no longer
redeemable.............. -- -- -- -- -- 1,836 -- -- --
Common shares issued
pursuant to
anti-dilution
provisions.............. -- -- -- 50,743 -- 609 -- (609) --
Cashless exercise of common
stock warrants............ -- -- -- 16,130 -- -- -- -- --
Stock option compensation
expense................... -- -- -- -- -- 240 -- -- --
----------- ------- ------ --------- ------ ---------- ----------- -------- -----------
Balance, December 31,
1997...................... -- -- -- 5,318,563 53 51,057 -- (11,444) (139)
Comprehensive income
Net income................ -- -- -- -- -- -- -- 3,189 --
Translation adjustment.... -- -- -- -- -- -- -- -- 94
Exercise of stock options... -- -- -- 575,692 6 8,206 -- -- --
Sale of common stock........ -- -- -- 2,206,177 22 34,793 -- -- --
----------- ------- ------ --------- ------ ---------- ----------- -------- -----------
Balance, August 31, 1998.... $ -- -- $-- 8,100,432 $81 $ 94,056 $ -- $ (8,255) $ (45)
----------- ------- ------ --------- ------ ---------- ----------- -------- -----------
----------- ------- ------ --------- ------ ---------- ----------- -------- -----------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Initial sale of common
stock..................... $ -- -- $-- 2,826,087 $28 $ 64,477 $ -- $ -- $--
Comprehensive loss
Net loss.................. -- -- -- -- -- -- -- (2,568) --
Translation adjustment.... -- -- -- -- -- -- -- -- 274
Sale of common stock........ -- -- -- 20,098 -- 462 -- -- --
Dividends on mandatorily
redeemable preferred
stock..................... -- -- -- -- -- (1,642) -- -- --
Notes receivable issued in
connection with sale of
common and preferred
stock..................... -- -- -- -- -- -- (352) -- --
Value of warrants issued in
connection with debt
offering.................. -- -- -- -- -- 1,200 -- -- --
----------- ------- ------ --------- ------ ---------- ----------- -------- -----------
Balance, December 31,
1998...................... $ -- -- $-- 2,846,185 $28 $ 64,497 $ (352) $ (2,568) $ 274
----------- ------- ------ --------- ------ ---------- ----------- -------- -----------
----------- ------- ------ --------- ------ ---------- ----------- -------- -----------
<CAPTION>
TOTAL
-------
<S> <C>
Recapitalization
Conversion of preferred
stock into common
stock................... --
Cashless exercise and
conversion of
warrants................ 6,103
Cancellation of
mandatorily redeemable
common stock warrants... 1,143
Initial Public Offering
Proceeds from the
offering, net........... 28,256
Cancellation of
mandatorily redeemable
common stock warrants
upon debt repayment and
reclassification of
warrants no longer
redeemable.............. 1,836
Common shares issued
pursuant to
anti-dilution
provisions.............. --
Cashless exercise of common
stock warrants............ --
Stock option compensation
expense................... 240
-------
Balance, December 31,
1997...................... 39,527
-------
Comprehensive income
Net income................ 3,189
Translation adjustment.... 94
-------
3,283
Exercise of stock options... 8,212
Sale of common stock........ 34,815
-------
Balance, August 31, 1998.... $85,837
-------
-------
- -----------------------------------------------
- -------------------------------------------------------
Initial sale of common
stock..................... $64,505
-------
Comprehensive loss
Net loss.................. (2,568)
Translation adjustment.... 274
-------
(2,294)
Sale of common stock........ 462
Dividends on mandatorily
redeemable preferred
stock..................... (1,642)
Notes receivable issued in
connection with sale of
common and preferred
stock..................... (352)
Value of warrants issued in
connection with debt
offering.................. 1,200
-------
Balance, December 31,
1998...................... $61,879
-------
-------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31, EIGHT MONTHS
-------------------- ENDED
AUGUST 31, 1998
1996 1997 (PREDECESSOR)
(PREDECESSOR)
<S> <C> <C> <C>
--------- --------- ---------------
Cash flows from operating activities
Net income (loss)................................................................. $ (817) $ 3,176 $ 3,189
Adjustments to reconcile net income (loss) to net cash provided by (used for)
operating activities
Depreciation and amortization................................................. 4,343 5,372 4,454
Extraordinary loss from debt refinancing...................................... -- 2,078 --
Deferred income taxes......................................................... 88 (1,281) (2,339)
Other, net.................................................................... 188 654 (360)
Changes in assets and liabilities
Accounts receivable....................................................... (3,069) (3,159) (3,621)
Inventories............................................................... (2,665) (4,956) (2,017)
Prepaid expenses and other assets......................................... (3) (136) (58)
Accounts payable.......................................................... 1,891 (361) (1,127)
Accrued expenses.......................................................... 2,477 (1,041) 3,519
Income taxes payable...................................................... 525 4,295 1,374
--------- --------- -------
Net cash provided by operating activities............................. 2,958 4,641 3,014
--------- --------- -------
Cash flows from investing activities
Purchase of DeCrane Aircraft, including $4,555 of acquisition costs............... -- -- --
Cash paid for acquisitions, net of cash acquired.................................. (18,200) (23,597) (85,808)
Capital expenditures.............................................................. (5,821) (3,842) (1,745)
Other, net........................................................................ 5 (370) 175
--------- --------- -------
Net cash used for investing activities................................ (24,016) (27,809) (87,378)
--------- --------- -------
Cash flows from financing activities
Financing of DeCrane Aircraft acquisition
Proceeds from senior credit facility and bridge notes........................... -- -- --
Proceeds from sale of common stock and mandatorily redeemable preferred stock... -- -- --
Proceeds from stock options exercised........................................... -- -- --
Repayment of existing senior credit facility.................................... -- -- --
Financing fees and expenses..................................................... -- -- --
Common stock offerings and application of the net proceeds
Net proceeds from sale of common stock.......................................... -- 28,933 34,815
Borrowings under credit facility................................................ -- 12,312 --
Repayment of debt............................................................... -- (42,160) (34,815)
Financing of acquisitions
Revolving line of credit borrowings............................................. 6,399 23,597 85,808
Proceeds from issuance of cumulative convertible preferred stock and mandatorily
redeemable common stock warrants, net.......................................... 8,805 -- --
Senior term loan borrowings..................................................... 5,000 -- --
Convertible subordinated note borrowings from related parties................... 3,000 -- --
Promissory note principal payments.............................................. -- (1,095) --
Net borrowings under revolving line of credit agreements.......................... 1,191 2,906 5,453
Principal payments on capitalized lease and other long-term obligations........... (2,001) (1,675) (1,317)
Other, net........................................................................ (1,343) 139 (73)
--------- --------- -------
Net cash provided by financing activities............................. 21,051 22,957 89,871
--------- --------- -------
Effect of foreign currency translation on cash...................................... 22 97 26
--------- --------- -------
Net increase (decrease) in cash and cash equivalents................................ 15 (114) 5,533
Cash and cash equivalents at beginning of period.................................... 305 320 206
--------- --------- -------
Cash and cash equivalents at end of period.......................................... $ 320 $ 206 $ 5,739
--------- --------- -------
--------- --------- -------
<CAPTION>
FOUR MONTHS
ENDED
DECEMBER 31,
1998
<S> <C>
--------------
Cash flows from operating activities
Net income (loss)................................................................. $ (2,568)
Adjustments to reconcile net income (loss) to net cash provided by (used for)
operating activities
Depreciation and amortization................................................. 4,998
Extraordinary loss from debt refinancing...................................... 2,229
Deferred income taxes......................................................... (5,072)
Other, net.................................................................... (97)
Changes in assets and liabilities
Accounts receivable....................................................... (2,929)
Inventories............................................................... 4,313
Prepaid expenses and other assets......................................... (562)
Accounts payable.......................................................... (1,754)
Accrued expenses.......................................................... 2,342
Income taxes payable...................................................... 108
--------------
Net cash provided by operating activities............................. 1,008
--------------
Cash flows from investing activities
Purchase of DeCrane Aircraft, including $4,555 of acquisition costs............... (190,865)
Cash paid for acquisitions, net of cash acquired.................................. --
Capital expenditures.............................................................. (1,813)
Other, net........................................................................ --
--------------
Net cash used for investing activities................................ (192,678)
--------------
Cash flows from financing activities
Financing of DeCrane Aircraft acquisition
Proceeds from senior credit facility and bridge notes........................... 191,722
Proceeds from sale of common stock and mandatorily redeemable preferred stock... 99,000
Proceeds from stock options exercised........................................... 4,314
Repayment of existing senior credit facility.................................... (93,000)
Financing fees and expenses..................................................... (11,171)
Common stock offerings and application of the net proceeds
Net proceeds from sale of common stock.......................................... --
Borrowings under credit facility................................................ --
Repayment of debt............................................................... --
Financing of acquisitions
Revolving line of credit borrowings............................................. --
Proceeds from issuance of cumulative convertible preferred stock and mandatorily
redeemable common stock warrants, net.......................................... --
Senior term loan borrowings..................................................... --
Convertible subordinated note borrowings from related parties................... --
Promissory note principal payments.............................................. --
Net borrowings under revolving line of credit agreements.......................... (1,103)
Principal payments on capitalized lease and other long-term obligations........... (458)
Other, net........................................................................ (36)
--------------
Net cash provided by financing activities............................. 189,268
--------------
Effect of foreign currency translation on cash...................................... 181
--------------
Net increase (decrease) in cash and cash equivalents................................ (2,221)
Cash and cash equivalents at beginning of period.................................... 5,739
--------------
Cash and cash equivalents at end of period.......................................... $ 3,518
--------------
--------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND DESCRIPTION OF BUSINESS
In July 1998, DeCrane Holdings Co. ("DeCrane Holdings") was incorporated as
a Delaware corporation. As a result of the DLJ Acquisition in August 1998 (Note
2), DeCrane Aircraft Holdings, Inc. ("DeCrane Aircraft") became a wholly-owned
subsidiary of DeCrane Holdings. DeCrane Aircraft is the predecessor of DeCrane
Holdings, and financial information for DeCrane Aircraft is presented as of
December 31, 1997 and for the years ended December 31, 1996 and 1997 and the
eight months ended August 31, 1998. From inception through August 27, 1998,
DeCrane Holdings had no operations or cash flows. References to the "Company"
include both DeCrane Holdings and its predecessor, DeCrane Aircraft.
Through its subsidiary, DeCrane Holdings manufactures avionics components
and provides avionics systems integration services in certain niche markets of
the commercial, regional and high-end corporate jet aircraft industries.
BASIS OF PRESENTATION
DeCrane Holdings is a holding company, which has no material operations or
assets separate from its investment in DeCrane Aircraft. The consolidated
financial statements as of December 31, 1998 and for the four months then ended
include the accounts of DeCrane Holdings and its subsidiary. The consolidated
financial statements of the predecessor include the accounts of DeCrane Aircraft
and all wholly-owned and majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. Certain
reclassifications have been made to prior years' financial statements to conform
to the current year presentation.
Preparation of these consolidated financial statements in conformity with
generally accepted accounting principles requires the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
INVENTORIES
Inventories are stated at the lower of cost, as determined under the
first-in, first-out ("FIFO") method, or market. Costs include materials, labor
and manufacturing overhead.
PROPERTY AND EQUIPMENT
Property and equipment are stated at the Company's allocated fair value for
assets acquired through purchase acquisitions and at cost for all new additions,
and are depreciated using the straight-line method over their estimated useful
lives. Useful lives for machinery and equipment range from two to twenty years.
Building and building improvements are depreciated using the straight-line
method over their estimated useful lives of forty years. Leasehold improvements
are amortized using the straight-line method over their estimated useful lives
or remaining lease term, whichever is less. Expenditures for maintenance and
repairs are expensed as incurred. The costs for improvements are capitalized.
Upon retirement or disposal, the cost and accumulated depreciation of property
and equipment are reduced and any gain or loss is recorded in income or expense.
F-9
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER ASSETS
Goodwill is amortized on a straight-line basis over thirty years. Other
intangibles are amortized on a straight-line basis over their estimated useful
lives, ranging from five to fifteen years. Deferred financing costs are
amortized using either a straight-line or effective interest method, over the
term of the related debt.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets and certain intangible assets for
impairment when events or changes in circumstances indicate the carrying amount
of an asset may not be recoverable. In the event the sum of the expected
undiscounted future cash flows resulting from the use of the asset is less than
the carrying amount of the asset, an impairment loss equal to the excess of the
asset's carrying value over its fair value is recorded. The Company has
recognized no such losses.
ACCRUED WARRANTIES
Two of the Company's subsidiaries sell a majority of their products to
customers with various repair or replacement warranties. The terms of the
warranties vary according to the customer and/or the product involved. The most
common warranty period is the earlier of: (a) 12 to 60 months from the date of
delivery to the operator; or (b) 42 months from the date of manufacture.
Provisions for estimated future warranty costs are made in the period
corresponding to the sale of the product and such costs have been within
management's expectations. Classification between short and long-term warranty
obligations is estimated based on historical trends.
DERIVATIVES
Market value gains and losses on forward foreign exchange contracts are
recognized currently in the consolidated statements of operations.
INCOME TAXES
Deferred income taxes are determined using the liability method. A deferred
tax asset or liability is determined based on the difference between the
financial statement and tax basis of assets and liabilities as measured by the
enacted tax rates which will be in effect when these differences reverse.
Deferred tax expense is the result of changes in the asset and/or liability for
deferred taxes. If necessary, valuation allowances are established to reduce
deferred tax assets to the amount expected to be realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
All financial instruments are held for purposes other than trading. The
estimated fair values of all nonderivative financial instruments approximate
their carrying amounts at December 31, 1997 and 1998 either because of the short
maturity of the instrument, or based on their effective interest rates compared
to current market rates for similar long-term obligations. The estimated fair
value of the Company's long-term obligations is based on either quoted market
prices or current rates for similar issues for debt of the same remaining
maturities. The estimated fair value of foreign currency forward exchange
contracts is based on quotes obtained from various financial institutions that
deal in this type of instrument.
F-10
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The financial statements of the Company's U.K. and Swiss subsidiaries have
been translated into U.S. dollars from their functional currencies, pounds
sterling and Swiss francs, respectively, in the consolidated financial
statements. Assets and liabilities have been translated at the exchange rate on
the balance sheet date and income statement amounts have been translated at
average exchange rates in effect during the period. The net translation
adjustment is reflected as a component of accumulated comprehensive income or
loss within stockholders' equity.
Realized foreign currency exchange gains (losses) included in other expenses
(income) in the consolidated statements of operations were $71,000, $(72,000),
$(411,000) and $(262,000) for the years ended December 31, 1996 and 1997, the
eight months ended August 31, 1998 and the four months ended December 31, 1998,
respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Such costs were
$1,195,000 and $832,000 for the eight months ended August 31, 1998 and the four
months ended December 31, 1998, respectively. Research and development costs
were not significant for the years ended December 31, 1996 and 1997.
STOCK OPTION PLAN
As permitted under Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation," the Company measures
compensation expense related to the employee stock option plan utilizing the
intrinsic value method as prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees." Refer to Note 14 for information
concerning the pro forma effect on results of operations assuming the fair value
method of measuring compensation expense was utilized.
REVENUE RECOGNITION
Revenues from the sale of manufactured products, except for products
manufactured under long-term contracts, are recorded when products are shipped.
Revenues on long-term contracts are recognized using the
percentage-of-completion method based on costs incurred to date compared with
total estimated costs at completion. Reimbursements for nonrecurring engineering
costs, which are expensed as incurred, are included in revenues at the time a
negotiated settlement is reached with the customer. Unbilled accounts receivable
were $654,000 and $4,156,000 at December 31, 1997 and 1998, respectively.
Unbilled accounts receivable are expected to be billed and collected during the
succeeding twelve-month period.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, cash equivalents include
short-term, highly liquid investments with original maturities of three months
or less.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." Comprehensive income is defined as
the change in equity of a business enterprise during a period from transactions
and other events and circumstances from non-owner sources. For the Company,
comprehensive income consists of its reported net income or loss and the change
in the
F-11
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
foreign currency translation adjustment during a period. The Company adopted
SFAS 130 for the period ended December 31, 1998 and has reclassified earlier
periods to reflect application of the statement.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." This statement establishes standards
for reporting financial and descriptive information about operating segments.
Under SFAS No. 131, information pertaining to an entity's operating segments
must be reported on the basis that is used internally for evaluating segment
performance and making resource allocation determinations. The Company adopted
SFAS 131 for the period ended December 31, 1998 and has restated disclosure
information in earlier periods to reflect application of the statement (Note
17).
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. It also requires that gains or losses resulting from changes in the
values of those derivatives be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. Adoption of SFAS No.
133 is required for the fiscal year beginning January 1, 2000. Management
believes the adoption of SFAS No. 133 will not have a material impact on the
Company's consolidated financial position or results of operations.
NOTE 2 - THE DLJ ACQUISITION
In July 1998, a newly incorporated entity, DeCrane Holdings Co., and two
other holding companies were organized by DLJ Merchant Banking Partners II, L.P.
and affiliated funds and entities to carry out a tender offer for all the shares
of the Company's common stock, including options to purchase shares which became
immediately vested, for $23.00 per share. At the completion of the tender offer
in August 1998, the two other holding companies merged with the Company. All of
the Company's old outstanding shares which were tendered were cancelled,
non-tendering shareholders were paid out, and as a result the Company became a
wholly-owned subsidiary of DeCrane Holdings.
As a result of the tender offer, the Company terminated a debt offering
which was in process at that time and recorded a $0.6 million pre-tax charge for
the eight months ended August 31, 1998 for the estimated costs incurred. The
gross purchase price for the Company's shares and options was $186.3 million.
Assets acquired and liabilities assumed have been recorded at their estimated
fair values based on an independent appraisal and, accordingly, historical
values were increased as follows: (a) $4.4 million to inventory; (b) $2.6
million to fixed assets; and (c) $50.0 million to certain identifiable
intangible assets. The excess of the purchase price over the fair value of the
net assets acquired totalling $70.0 million was allocated to goodwill. The
increase in inventory value was expensed as the inventory was sold during the
four months ended December 31, 1998. The intangible assets, other than goodwill,
are being amortized on a straight-line basis over periods between five and
fifteen years. Goodwill is being amortized on a straight-line basis over a
period of thirty years.
At the completion of the tender offer, the Company was required to repay all
of its borrowings under its previous credit facility (Note 10). In order to fund
the purchase of the shares in the tender offer, repay the credit facility and
pay expenses incurred in connection therewith, the Company: (a) issued $100.0
million of senior subordinated increasing rate notes (the Bridge Notes) which
were subsequently replaced by $100.0 million of 12% Senior Subordinated Notes
due 2008 (the Notes) from the Company's "Units" offering (Note 10); (b) entered
into a new syndicated senior secured loan facility; and (c) received a $99.0
million equity contribution from DeCrane Holdings. In conjunction with the debt
repayment and
F-12
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - THE DLJ ACQUISITION (CONTINUED)
refinancing of the Bridge Notes, the Company incurred a $2.2 million
extraordinary charge, net of income tax benefit of $1.5 million for the four
months ended December 31, 1998.
The Bridge Notes were purchased by an affiliate of DLJ and accrued interest
at 10%. The terms of the issue called for floating rate increases to the prime
rates plus 2.5% after six months, and increases of 0.5% every three months
subject to a 17.0% maximum, as long as the Bridge Notes remained outstanding.
The Bridge Notes were to mature on August 28, 1999, but were refinanced in
October 1998 (Note 10).
DeCrane Holdings' initial capitalization consists of the net proceeds from
the sale of all of the shares of its common stock for $65.0 million and shares
of its senior redeemable exchangeable preferred stock due 2009 for $34.0
million, along with warrants to purchase 150,000 common shares, to the DLJ funds
(Note 13).
The Company incurred non-recurring charges totaling approximately $3.6
million (pre-tax) during the eight months ended August 31, 1998 in conjunction
with the DLJ Acquisition.
NOTE 3 - ACQUISITIONS
AVTECH
On June 26, 1998, the Company purchased substantially all of the common
stock of Avtech Corporation. Avtech is a manufacturer of avionics components and
an avionics systems integrator for the commercial and high-end corporate jet
aircraft industries.
The total purchase price was $84,693,000 in cash at closing, including
$1,250,000 of acquisition related costs. The acquisition was financed with
borrowings under the Company's credit facility. The acquisition was accounted
for as a purchase and the $57,911,000 difference between the purchase price and
the fair value of the net assets acquired was recorded as goodwill and is being
amortized on a straight-line basis over 30 years.
The consolidated results of operations for the eight months ended August 31,
1998 and the four months ended December 31, 1998 include the operating results
of Avtech subsequent to June 25, 1998.
DETTMERS
On June 30, 1998, the Company purchased certain assets, subject to certain
liabilities assumed, of Dettmers Industries Inc.. Dettmers is a manufacturer of
seats for high-end corporate jet aircraft.
The total purchase price was $2,314,000 in cash at closing, including
$205,000 of acquisition related costs, plus contingent consideration aggregating
a maximum of $2,000,000 payable over four years based on future attainment of
defined performance criteria during each of the years in the four-year period
ending December 31, 2002. The acquisition was financed with borrowings under the
Company's credit facility. The acquisition was accounted for as a purchase and
the $2,068,000 difference between the purchase price, excluding the contingent
consideration, and the fair value of the net assets acquired was recorded as
goodwill and is being amortized on a straight-line basis over 30 years. The
amount of contingent consideration paid in the future, if any, will increase
goodwill and will be amortized prospectively over the remaining period of the
initial 30-year term.
The consolidated results of operations for the eight months ended August 31,
1998 and the four months ended December 31, 1998 include the operating results
of Dettmers subsequent to June 29, 1998.
F-13
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - ACQUISITIONS (CONTINUED)
AUDIO INTERNATIONAL
On November 14, 1997, the Company purchased all of the outstanding stock of
Audio International, Inc.. Audio International provides premium, customized
aircraft entertainment and cabin management products and systems for the
high-end corporate jet market.
The total purchase price was $24,726,000 in cash at closing, including
$726,000 in acquisition related costs, plus contingent consideration aggregating
a maximum of $6,000,000 payable over two years based on future attainment of
defined performance criteria. During 1998, Audio International attained the
required performance criteria and the Company increased the purchase price by
$3,000,000, resulting in a corresponding increase to goodwill. The acquisition
was funded with borrowings under the Company's revolving line of credit
facility.
The acquisition was accounted for as a purchase and the $20,110,000
difference between the purchase price, excluding the contingent consideration,
and the fair value of the net assets acquired was recorded as goodwill and is
being amortized over 30 years. The amount of contingent consideration paid in
the future, if any, will increase goodwill and will be amortized prospectively
over the remaining period of the initial 30-year term.
The consolidated results of operations for the year ended December 31, 1997
include the operating results of Audio International subsequent to November 13,
1997.
MINORITY STOCKHOLDER'S 25% INTEREST
On February 20, 1996, the Company purchased the remaining 25% of a
subsidiary's stock it did not already own from the subsidiary's minority
stockholder for a total purchase price of $5,748,000, including $334,000 of
acquisition related costs and expenses. The purchase price consisted of
$4,873,000 paid in cash at closing and a $600,000 non-interest bearing
obligation payable to the minority stockholder. The cash portion of the purchase
price was funded with the proceeds from the sale of preferred stock and
redeemable warrants.
The acquisition was accounted for as a purchase and the $5,498,000
difference between the purchase price and 25% of the fair value of the net
assets acquired was recorded as goodwill and is being amortized over 26 years,
representing the remaining useful life of the goodwill recorded upon the initial
75% acquisition in October 1991.
The consolidated results of operations for the year ended December 31, 1996
include 100% of the operating results of the subsidiary subsequent to February
20, 1996. For the periods prior to February 20, 1996, the consolidated results
of operations include a charge for the minority stockholder's 25% ownership
interest.
AEROSPACE DISPLAY SYSTEMS
On September 18, 1996, the Company purchased for cash substantially all of
the assets, subject to certain liabilities assumed, of the Aerospace Display
Systems division of Allard Industries, Inc.. The total purchase price was
$13,395,000, including $402,000 in acquisition related costs. ADS develops and
manufactures dichroic liquid crystal displays and modules for commercial and
military avionics systems.
The acquisition was funded with the proceeds from the sale of preferred
stock, convertible subordinated notes and redeemable warrants, borrowings under
the Company's revolving line of credit and a $2,000,000 non-interest bearing
obligation payable to certain Allard stockholders.
F-14
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - ACQUISITIONS (CONTINUED)
The acquisition was accounted for as a purchase and the $7,425,000
difference between the purchase price and the fair value of the net assets
acquired was recorded as goodwill and is being amortized over 30 years.
The consolidated results of operations for the year ended December 31, 1996
include the operating results of ADS subsequent to September 18, 1996.
ELSINORE
On December 5, 1996, the Company acquired Elsinore Aerospace Services, Inc.
and the Elsinore Engineering Services Division of Elsinore, L.P., collectively
referred to as Elsinore. Elsinore provides engineering services to the
commercial aircraft industry. The total purchase price was $2,443,000, including
$300,000 of acquisition related costs. The purchase price consisted of
$1,000,000 paid in cash at closing and a $1,250,000 15% promissory note payable
to the sellers.
The purchase agreement provided for an adjustment of the purchase price
should the amount of working capital decline as of the closing date. The
purchase price was allocated to the assets acquired and liabilities assumed
using estimated fair values and $2,585,000 was assigned to goodwill, subject to
final determination of the purchase price. During 1997, the Company and the
sellers agreed to reduce the purchase price by $155,000 to reflect the decline
in working capital as of the closing date and, as a result, goodwill was
decreased by a corresponding amount during 1997.
PATS
In January 1999, the Company acquired all of the outstanding stock of PATS,
Inc.'s for a purchase price of $41.5 million (including the assumption of debt)
subject to adjustments for changes to its net working capital, and reserves for
environmental and other indemnities made by the shareholders. PATS is a
Maryland-based designer, manufacturer and installer of aircraft and avionics
systems. Among other things, PATS is the principal supplier of auxiliary fuel
tank systems to the Boeing Business Jet program. The transaction will be
accounted for as a purchase and the difference between the purchase price and
the fair value of the net assets acquired will be recorded as goodwill and
amortized on a straight-line basis over thirty years.
NOTE 4 - PRO FORMA RESULTS OF OPERATIONS FOR THE DLJ AND OTHER ACQUISITIONS
Unaudited pro forma consolidated results of operations are presented in the
table below for the years ended December 31, 1997 and 1998 and are pro forma for
the DLJ and other acquisitions, excluding the 1999 PATS acquisition, as if they
were consummated at the beginning of each year.
<TABLE>
<CAPTION>
PRO FORMA FOR THE
YEAR ENDED DECEMBER
31,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Revenues............................................................................... $ 160,054 $ 173,297
Loss before extraordinary item......................................................... (10,091) (3,642)
</TABLE>
The above information reflects adjustments for inventory step-up,
depreciation, amortization, general and administrative expenses, and interest
expense based on the new cost basis and debt structure of the Company. In 1997
and 1998, income excludes the effect of a $2,078,000 and $2,229,000
extraordinary loss, respectively incurred in connection with the Company's debt
refinancings (Notes 2 and 14).
F-15
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - ACCOUNTS RECEIVABLE AND SIGNIFICANT CUSTOMERS
ACCOUNTS RECEIVABLE
Accounts receivable is net of an allowance for doubtful accounts of $487,000
and $581,000 at December 31, 1997 and 1998, respectively.
The Company is potentially subject to concentrations of credit risk as the
Company relies heavily on customers operating in the domestic and foreign
commercial and high-end corporate jet aircraft industries. Generally, the
Company does not require collateral or other security to support accounts
receivable subject to credit risk. Under certain circumstances, deposits or
cash-on-delivery terms are required. The Company maintains reserves for
potential credit losses and generally, such losses have been within management's
expectations.
SIGNIFICANT CUSTOMERS
Two customers each accounted for more than 10% of the Company's consolidated
revenues, as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31, EIGHT MONTHS FOUR MONTHS
-------------------- ENDED AUGUST ENDED
31, 1998 DECEMBER 31,
1996 1997 (PREDECESSOR) 1998
(PREDECESSOR)
<S> <C> <C> <C> <C>
--------- --------- ------------- -------------
Customer A.......................................... 15.8% 19.0% 17.3% 20.1%
Customer B.......................................... 7.2% 11.2% 7.6% 5.6%
</TABLE>
Complete loss of Customer A could have a significant adverse impact on the
results of operations expected in future periods. During the year ended December
31, 1997, Customer A acquired another customer of the Company. The above amounts
for Customer A include the Company's revenue from the acquired customer after
its acquisition. For the year ended December 31, 1997, revenue from Customer A
would have been 20.9% had the acquisition been consummated on January 1, 1997.
NOTE 6 - INVENTORIES
Inventories are comprised of the following as of December 31, 1997 and 1998
(amounts in thousands):
<TABLE>
<CAPTION>
1997
(PREDECESSOR) 1998
----------- -----------
<S> <C> <C>
Raw material........................................................ $ 14,224 $ 19,221
Work-in process..................................................... 4,655 7,231
Finished goods...................................................... 7,097 7,829
----------- -----------
Total inventories................................................. $ 25,976 $ 34,281
----------- -----------
----------- -----------
</TABLE>
Included above are costs relating to long-term contracts recognized on the
percentage of completion method of $125,000 and $897,000 at December 31, 1997
and 1998, respectively.
F-16
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment includes the following as of December 31, 1997 and
1998 (amounts in thousands):
<TABLE>
<CAPTION>
1997
(PREDECESSOR) 1998
----------- -----------
<S> <C> <C>
Machinery and equipment............................................. $ 18,151 $ 12,576
Tooling............................................................. 3,133 2,162
Computer equipment, furniture and fixtures.......................... 3,660 3,230
Land, buildings and leasehold improvements.......................... 3,580 11,967
----------- -----------
Total cost........................................................ 28,524 29,935
Accumulated depreciation and amortization......................... (14,470) (1,775)
----------- -----------
Net property and equipment...................................... $ 14,054 $ 28,160
----------- -----------
----------- -----------
</TABLE>
Property and equipment under capital leases included above consists of the
following as of December 31, 1997 and 1998 (amounts in thousands):
<TABLE>
<CAPTION>
1997
(PREDECESSOR) 1998
------------- -------------
<S> <C> <C>
Machinery and equipment............................................. $ 1,160 $ 693
Computer equipment, furniture and fixtures.......................... 455 243
------ -----
Total cost........................................................ 1,615 936
Accumulated depreciation and amortization......................... (523) (204)
------ -----
Net property and equipment...................................... $ 1,092 $ 732
------ -----
------ -----
</TABLE>
Depreciation of machinery and equipment under capital leases is included in
cost of sales in the consolidated financial statements.
NOTE 8 - OTHER ASSETS
Other assets includes the following as of December 31, 1997 and 1998 and is
net of accumulated amortization for the respective periods as parenthetically
noted (amounts in thousands):
<TABLE>
<CAPTION>
1997
(PREDECESSOR) 1998
----------- -----------
<S> <C> <C>
Goodwill (net of $1,682 and $1,839)................................. $ 38,592 $ 167,836
Deferred financing costs (net of $64 and $343)...................... 399 8,787
Other intangibles (net of $194 and $1,317).......................... 596 48,708
Other non-amortizable assets........................................ 380 647
----------- -----------
Other assets, net................................................. $ 39,967 $ 225,978
----------- -----------
----------- -----------
</TABLE>
F-17
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - ACCRUED EXPENSES
Accrued expenses are comprised of the following as of December 31, 1997 and
1998 (amounts in thousands):
<TABLE>
<CAPTION>
1997
(PREDECESSOR) 1998
------------- -----------
<S> <C> <C>
Salaries, wages, compensated absences and payroll related taxes..... $ 3,410 $ 6,147
Additional acquisition consideration................................ -- 3,000
Accrued interest.................................................... 152 2,946
Other accrued expenses.............................................. 3,349 6,179
------ -----------
Total accrued expenses............................................ $ 6,911 $ 18,272
------ -----------
------ -----------
</TABLE>
NOTE 10 - BORROWINGS
SHORT-TERM BORROWINGS--The Company's Swiss subsidiary has a short-term
revolving line of credit with a Swiss bank under which Swiss franc denominated
borrowings of $568,000 and $283,000 were outstanding at December 31, 1997 and
1998, respectively. Interest on the line accrues at the bank's prime rate (5.25%
and 4.875% at December 31, 1997 and 1998, respectively) plus 0.25%. The line of
credit is guaranteed by the Company.
LONG-TERM BORROWINGS--Long-term obligations outstanding include the
following as of December 31, 1997 and 1998 (amounts in thousands):
<TABLE>
<CAPTION>
1997
(PREDECESSOR) 1998
----------- -----------
<S> <C> <C>
Credit facilities
Revolving lines of credit......................................... $ 36,000 $ 5,800
Term debt......................................................... -- 79,888
12% Senior Subordinated Notes due 2008, with interest payable semi-
annually commencing on March 30, 1999............................. -- 100,000
Capital lease obligations and equipment term financing, with
interest at
4.34 % to 18.08%, secured by equipment............................ 547 367
Other............................................................... 1,723 427
----------- -----------
Total long-term obligations..................................... 38,270 186,482
Less current portion............................................ (858) (1,529)
----------- -----------
Long-term obligations, less current portion................... $ 37,412 $ 184,953
----------- -----------
----------- -----------
</TABLE>
PREDECESSOR CREDIT FACILITY
Prior to August 31, 1998, the Company had a credit facility with a group of
banks for a $105 million senior revolving line of credit. Borrowings under the
credit facility were secured by the Company's assets.
The Company, at its option, could elect to pay interest on the credit
facility borrowings based on either the prime rate or interbank offered rate
("IBOR") plus defined margins. The Company was required to pay a commitment fee,
up to a maximum 0.375%, on the unused portion of the credit facility. The
weighted-average interest rate on borrowings outstanding was 7.03% as of
December 31, 1997.
F-18
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - BORROWINGS (CONTINUED)
SUCCESSOR CREDIT FACILITY
In connection with the DLJ Acquisition, the Company was required to repay
all of its borrowings under the predecessor credit facility and entered into a
new credit facility. The new credit facility provides for term loan borrowings
in the aggregate principal amount of $80.0 million and revolving loan borrowings
up to an aggregate principal amount of $50.0 million. Principal payments under
the term loan borrowings are due in increasing amounts over the next seven years
and all borrowings under the revolving loan facility must be repaid within six
years. Loans under the new credit facility generally bear interest based on a
margin over, at the Company's option, the prime rate or the Euro-Dollar rate.
Currently, the applicable margins are 1.50%-1.75% for prime rate borrowings and
2.75%-3.00% for Euro-Dollar borrowings. Borrowings under the new credit facility
are secured by substantially all of the assets of the Company. The Company is
subject to certain commitment fees under the facility as well as the maintenance
of certain financial ratios, cash flow results and other restrictive covenants.
In January 1999, term loan borrowings were increased to $99.9 million to
fund the acquisition of PATS, Inc. (Note 3).
12% SENIOR SUBORDINATED NOTES
On October 5, 1998 (subsequent to the DLJ Acquisition and financing), the
Bridge Notes were repaid with the net proceeds from the Units offering. Each
Unit consists of $1,000 principal amount of the Notes and one warrant
(collectively, the "Warrants") to purchase shares of common stock of DeCrane
Holdings ("Holdings Common Stock"). The Notes will mature on September 30, 2008.
Interest on the Notes is payable semi-annually on March 30 and September 30 of
each year, commencing on March 30, 1999. The Notes are unsecured general
obligations of the Company and are subordinated in right of payment to all
existing and future senior indebtedness of the Company, including indebtedness
pursuant to the credit facility. Prior to the Notes maturing, the Company may
redeem all or some of the Notes at a redemption price which may include a
premium. In the event of a change in control, the holders may require the
Company to repurchase the Notes for a redemption price which may also include a
premium.
AGGREGATE MATURITIES
The aggregate maturities of long-term obligations are as follows as of
December 31, 1998 (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
1999................................................................................................ 1,529
2000................................................................................................ 2,722
2001................................................................................................ 4,866
2002................................................................................................ 7,905
2003................................................................................................ 10,522
Thereafter.......................................................................................... 158,938
----------
Total long-term obligations..................................................................... $ 186,482
----------
----------
</TABLE>
F-19
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - INCOME TAXES
Income (loss) before income taxes and extraordinary item was taxed under the
following jurisdictions (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER EIGHT MONTHS
31, ENDED FOUR MONTHS
-------------------- AUGUST 31, ENDED
1998 DECEMBER 31,
1996 1997 (PREDECESSOR) 1998
(PREDECESSOR)
<S> <C> <C> <C> <C>
--------- --------- ------------- ---------------
Domestic........................................ $ (855) $ 7,509 $ 5,637 $ (3,360)
Foreign......................................... 750 1,089 444 353
--------- --------- ------ -------
Total......................................... $ (105) $ 8,598 $ 6,081 $ (3,007)
--------- --------- ------ -------
--------- --------- ------ -------
</TABLE>
The provisions for income taxes (benefit) are as follows (amounts in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER EIGHT MONTHS
31, ENDED FOUR MONTHS
-------------------- AUGUST 31, ENDED
1998 DECEMBER 31,
1996 1997 (PREDECESSOR) 1998
(PREDECESSOR)
<S> <C> <C> <C> <C>
--------- --------- ------------- ---------------
Current
U.S. federal.................................. $ 269 $ 3,231 $ 3,835 $ 1,560
State and local............................... 194 968 1,275 699
Foreign....................................... 161 426 121 145
--------- --------- ------------- -------
Total current............................... 624 4,625 5,231 2,404
--------- --------- ------------- -------
Deferred
U.S. federal.................................. 70 (1,021) (1,932) (4,150)
State and local............................... 21 (279) (435) (816)
Foreign....................................... (3) 19 28 (106)
--------- --------- ------------- -------
Total deferred.............................. 88 (1,281) (2,339) (5,072)
--------- --------- ------------- -------
Total provision............................. $ 712 $ 3,344 $ 2,892 $ (2,668)
--------- --------- ------------- -------
--------- --------- ------------- -------
</TABLE>
F-20
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - INCOME TAXES (CONTINUED)
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal rate to the income
(loss) before income taxes and extraordinary item as a result of the following
differences (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31, EIGHT MONTHS
-------------------- ENDED AUGUST FOUR MONTHS
31, 1998 ENDED DECEMBER
1996 1997 (PREDECESSOR) 31, 1998
(PREDECESSOR)
<S> <C> <C> <C> <C>
--------- --------- ------------- ---------------
Income tax (benefit) at U.S. statutory rates.... $ (36) $ 2,923 $ 2,068 $ (1,022)
Increase (decrease) resulting from
Book benefit not provided for net operating
loss carryforwards.......................... 172 -- -- --
Amortization of assets and other expenses not
deductible for income tax purposes.......... 137 441 594 782
Decrease in deferred tax asset valuation
allowance................................... -- (488) -- (2,575)
State income taxes, net of federal benefit.... 157 482 550 (25)
Tax on earnings of subsidiary not consolidated
for tax purposes............................ 92 -- -- --
Lower tax rates on earnings of foreign
subsidiaries................................ (65) (116) (50) (36)
Other, net.................................... 255 102 (270) 208
--------- --------- ------ -------
Income tax (benefit) at effective rates..... $ 712 $ 3,344 $ 2,892 $ (2,668)
--------- --------- ------ -------
--------- --------- ------ -------
</TABLE>
Deferred tax liabilities (assets) are comprised of the following as of
December 31, 1997 and 1998 (amounts in thousands):
<TABLE>
<CAPTION>
1997
(PREDECESSOR) 1998
----------- -----------
<S> <C> <C>
Gross deferred tax liabilities
Intangible assets.................................................. $ 308 $ 18,320
Tax effect on earnings of subsidiary not consolidated for tax
purposes......................................................... 2,688 --
Property and equipment............................................. 688 4,531
Other.............................................................. 409 416
----------- -----------
Gross deferred tax liabilities................................... 4,093 23,267
----------- -----------
Gross deferred tax (assets)
Inventory.......................................................... (2,811) (2,396)
Loss carryforwards................................................. (865) (6,183)
Accrued expenses................................................... (697) (1,657)
Other.............................................................. (537) (341)
----------- -----------
Gross deferred tax (assets)...................................... (4,910) (10,577)
----------- -----------
Deferred tax assets valuation allowance.............................. 2,575 --
----------- -----------
Net deferred tax liability......................................... $ 1,758 $ 12,690
----------- -----------
----------- -----------
</TABLE>
F-21
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - INCOME TAXES (CONTINUED)
The balance sheet classification of the net deferred tax liabilities as of
December 31, 1997 and 1998 are as follows (amounts in thousands):
<TABLE>
<CAPTION>
1997
(PREDECESSOR) 1998
------------- -----------
Noncurrent deferred tax liability.................................... $ 1,758 $ 16,990
<S> <C> <C>
Current deferred tax asset........................................... -- (4,300)
------ -----------
Net deferred tax liability......................................... $ 1,758 $ 12,690
------ -----------
------ -----------
</TABLE>
Prior to 1997, the Company incurred losses and accordingly provided a
valuation allowance for its domestic deferred net tax assets. The deferred tax
asset valuation allowance was reduced in 1997 by $488,000 to reflect the amount
of federal and state tax loss carryforwards utilized to reduce 1997 current
income taxes.
During the eight months ended August 31, 1998 and the four months ended
December 31, 1998, the Company incurred net operating losses for tax purposes of
approximated $1,528,000 and $486,000, respectively. The losses were caused by an
$8,880,000 tax deduction for stock options exercised, $3,632,000 of nonrecurring
charges and a $3,724,000 pre-tax extraordinary charge. The net operating loss
tax benefits for both periods were carried back to 1997 for federal income tax
purposes and carried forward for state income tax purposes. The 1998 net
operating losses resulted in $2,545,000 of taxes being refundable as of December
31, 1998 and are included in prepaid expenses and other current assets. Even
though the Company incurred tax losses during 1998, management believes that it
is more likely than not that the Company will generate taxable income sufficient
to realize the tax benefit associated with the future deductible deferred tax
assets and loss carryforwards prior to their expiration. As a result, the
Company reduced the valuation allowance by $2,575,000 during the four months
ended December 31, 1998.
The Company has approximately $17,400,000 and $600,000 of total loss
carryforwards, which include net operating losses acquired in the Avtech
aquisition, available for federal and state income tax purposes, respectively.
In conjunction with the Avtech acquisition, the Company acquired federal loss
carryforwards of $13,700,000 that are subject to separate return limitation
rules, as defined in the Internal Revenue Code, and expire in 2018. The
remaining federal and state carryforwards expire in varying amounts through 2010
and 2018, respectively. The amount of federal loss carryforwards that may be
utilized in the future are subject to limitations because of the occurrence of
changes in control, as defined in the Internal Revenue Code.
Undistributed earnings of foreign subsidiaries are not material to the
consolidated financial statements. As such, foreign taxes that may be due, net
of U.S. foreign tax credits, have not been provided.
NOTE 12 - DERIVATIVE FINANCIAL INSTRUMENTS
The Company does not use derivative financial instruments for trading
purposes but only to manage well-defined foreign exchange rate risks.
The Company enters into Swiss franc ("CHF") forward exchange contracts to
purchase Swiss francs as a general economic hedge against foreign inventory
procurement and manufacturing costs. Market value gains and losses on forward
foreign exchange contracts are recognized in the consolidated statements of
operations and aggregated a realized net gain (loss) of ($316,000), ($487,000),
$323,000 and $146,000 for the years ended December 31, 1996 and 1997, the eight
months ended August 31, 1998 and the four months ended December 31, 1998,
respectively.
F-22
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 - DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
At December 31, 1998, the Company had no open forward exchange contracts.
The Company believes exposure to derivative credit losses is minimal in the
event of nonperformance by the senior lender because any amounts due, but not
paid, to the Company by the senior lender could be offset against the Company's
principal and interest payments to the lender.
NOTE 13 - DECRANE HOLDINGS CAPITAL STRUCTURE
MANDATORILY REDEEMABLE PREFERRED STOCK
The Company is authorized to issue a total of 2,500,000 shares of preferred
stock ($.01 par value) of which 1,360,000 shares have been designated as 14%
mandatorily redeemable preferred stock due 2009. Holders of the preferred stock
are entitled to receive, when, as and if declared, dividends at a rate equal to
14% per annum, subject to 0.25% increases for each quarter that no dividend is
paid (up to a maximum of an additional 5%). Prior to September 30, 2003,
dividends are not paid in cash but instead accrete in liquidation value. The
preferred stock has a $100.00 per share liquidation preference, subject to
increases through non-cash dividend accretion, plus accrued and unpaid cash
dividends. The preferred stock is mandatorily redeemable on August 28, 2009.
Upon the occurrence of a change in control, as defined, each holder has the
right to require the Company to redeem all or part of such holder's shares at a
price equal to 101% of the liquidation preference plus accrued and unpaid cash
dividends. The preferred stock is non-voting.
As part of the Company's initial capitalization, 340,000 shares of the 14%
mandatorily redeemable preferred stock and warrants to purchase 150,000 common
shares were sold for $34,000,000 and on December 8, 1998, an additional 2,417
shares were sold for $242,000 to a group of related party investors (Note 19).
As of December 31, 1998, there were 342,417 shares of the 14% mandatorily
redeemable preferred stock issued and outstanding with a total liquidation value
of $35,884,000, including $1,642,000 of non-cash dividend liquidation value
accretion.
COMMON STOCK AND WARRANTS
In connection with the DLJ Acquisition, all of DeCrane Aircraft's old
outstanding shares which were tendered were cancelled and non-tendering
shareholders were paid out. DeCrane Holdings was authorized to issue 3,500,000
new common shares ($.01 par value) of which 2,846,185 are issued and outstanding
at December 31, 1998.
In conjunction with the sale of the Units, the Company issued warrants to
purchase 155,000 shares of common stock. A portion of the proceeds from the
Units offering totaling $1,200,000 were allocated to the warrants and credited
to additional paid-in capital.
As of December 31, 1998, warrants to purchase a total of 305,000 shares of
common stock are issued and outstanding and an equivalent number of shares of
common stock are reserved for issuance upon exercise of the warrants. All
warrants are exercisable at any time up to their expiration date. Warrants to
purchase 155,000 shares are exercisable at $23.00 per share and expire on
September 30, 2008 and the remaining warrants are exercisable at $0.01 per share
and expire on August 28, 2009.
F-23
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 - DECRANE HOLDINGS CAPITAL STRUCTURE (CONTINUED)
NOTES RECEIVABLE FROM THE SALE OF STOCK
In December 1998, the Company sold preferred and common stock to a group of
investors for $704,000 of which half of the purchase price was loaned to the
investors by the Company (Note 19). The resulting notes receivable are
classified as a reduction of stockholders' equity in the consolidated statement
of financial position.
NOTE 14 - PREDECESSOR CAPITAL STRUCTURE AND TRANSACTIONS
REORGANIZATION AND REVERSE STOCK SPLIT
On February 19, 1997, the Company reorganized as a Delaware corporation. In
conjunction with the reorganization, the Company established a $.01 par value
for its cumulative convertible preferred stock and common stock and increased
the number of common shares and preferred shares authorized to 9,924,950 and
18,314,018 shares (which includes 10,000,000 shares of a newly designated series
of preferred stock), respectively.
Effective March 25, 1997, the Company effected a 3.53-for-1 reverse stock
split. All common share information set forth in the consolidated financial
statements and notes thereto has been restated to reflect the reverse stock
split.
RECAPITALIZATION AND CONSUMMATION OF INITIAL PUBLIC OFFERING
In January and March 1997, the holders of certain securities agreed to a
plan for the recapitalization of the Company. Completion of the recapitalization
was a condition to the consummation of the Company's initial public offering
(the "IPO") and, was effective concurrent therewith. The IPO was consummated on
April 16, 1997.
The recapitalization provided for: (i) the conversion of all 6,847,705
shares of issued and outstanding cumulative convertible preferred stock into
1,941,804 shares of common stock; (ii) the cashless exercise and conversion of
all 52,784 and 9,355 issued and outstanding preferred stock warrants and common
stock warrants, respectively, into a total of 16,585 shares of common stock;
(iii) the cashless exercise of 508,497 mandatorily redeemable common stock
warrants (the "Redeemable Warrants") into a total of 507,708 shares of common
stock; and (iv) the cancellation of 95,368 Redeemable Warrants.
Redeemable Warrants exercisable into 208,968 common shares remained after
the recapitalization. Of this amount, 138,075 Redeemable Warrants were cancelled
upon the consummation of the IPO and repayment of the Company's senior
subordinated debt and convertible notes in accordance with the terms of the
respective warrant agreements. Redeemable Warrants exercisable into 70,893
common shares remained after the recapitalization and the IPO and application of
the net proceeds therefrom. Concurrent with the consummation of the IPO, the
mandatory redemption feature of these warrants was terminated and, as a result,
the value ascribed thereto was reclassified to stockholders' equity as
additional paid-in capital.
On April 16, 1997, the Company completed the IPO and sold 2,700,000 shares
of common stock for $12.00 per share. Proceeds from the IPO of $30,132,000, net
of $2,268,000 for underwriting discounts and commissions, together with
approximately $12,775,000 of proceeds from borrowings under a new credit
facility were used to repay amounts due under the Company's senior revolving
line of credit, senior term notes, senior subordinated notes and convertible
notes.
F-24
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - PREDECESSOR CAPITAL STRUCTURE AND TRANSACTIONS (CONTINUED)
FOLLOW-ON EQUITY OFFERING
In April 1998, the Company sold 2,206,177 shares of common stock for $17.00
per share. Net proceeds from the offering of $34,815,000 were used to partially
repay borrowings outstanding under the Company's senior credit facility.
DEBT REPAID WITH IPO PROCEEDS
In April 1997, the Company used the net proceeds from the IPO, together with
approximately $12,775,000 of proceeds from borrowings under a credit facility,
to repay the following: (i) senior revolving line of credit borrowings of
$15,356,000; (ii) senior term notes aggregating $16,531,000; (iii) senior
subordinated notes payable to related parties aggregating $7,000,000; and (iv)
convertible notes payable to related parties aggregating $3,000,000. In
conjunction with the debt repayment, the Company incurred a $3,436,000
extraordinary charge, before an income tax benefit of $1,358,000, which is
comprised of: (i) a $1,943,000 write-off of deferred financing costs; (ii) a
$1,149,000 write-off of unamortized original issued discounts; and (iii) a
$344,000 charge for a prepayment penalty and other related expenses.
MANDATORILY REDEEMABLE COMMON STOCK WARRANTS
The table below summarizes Redeemable Warrant transactions during the years
ended December 31, 1996, and 1997 (amounts in thousands, except share data).
<TABLE>
<CAPTION>
REDEEMABLE WARRANTS
----------------------
NUMBER OF
COMMON
AMOUNT SHARES
--------- -----------
<S> <C> <C>
Balance, December 31, 1995................................................................. $ 1,633 446,296
Issued in conjunction with sale of Preferred Stock to finance Minority Interest
acquisition.............................................................................. 492 194,618
Issued in conjunction with sale of Convertible Notes and Preferred Stock to finance ADS
acquisition.............................................................................. 248 98,158
Issued pursuant to anti-dilution provisions upon the sale of Preferred Stock............... 7 2,868
Issued in conjunction with debt agreement amendment........................................ 179 70,893
Adjustment to estimated redemption value................................................... 4,320 --
--------- -----------
Balance, December 31, 1996................................................................. 6,879 812,833
Adjustment to redemption value to reflect the IPO per share price.......................... 2,203 --
Cashless exercise and conversion pursuant to the Recapitalization.......................... (6,103) (508,497)
Cancelled pursuant to the Recapitalization................................................. (1,143) (95,368)
Cancelled upon debt repayment with IPO proceeds............................................ (1,657) (138,075)
Reclassification of warrants no longer mandatorily redeemable to additional paid-in
capital.................................................................................. (179) (70,893)
--------- -----------
Balance, December 31, 1997................................................................. $ -- --
--------- -----------
--------- -----------
</TABLE>
Prior to the IPO, the warrant holders had the right, after various dates and
contingent upon certain events, to require the Company to redeem the warrants
and, in certain instances, to purchase the common stock issued upon exercise of
the warrants. In all instances, the redemption or purchase price, was equal to
the greater of either fair market value, book value, or a value based upon a
defined formula which
F-25
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - PREDECESSOR CAPITAL STRUCTURE AND TRANSACTIONS (CONTINUED)
included, in part, an earnings multiple. The Redeemable Warrants' value was
subsequently adjusted to reflect estimated redemption value. Concurrent with the
consummation of the recapitalization and IPO, the Company increased the
redemption value by $2,203,000 to reflect the $12.00 per share IPO price. The
adjustments to redemption value were charged (credited) to accumulated deficit.
CUMULATIVE CONVERTIBLE PREFERRED STOCK
On February 19, 1997, the Company reorganized as a Delaware corporation. In
conjunction with the reorganization, the Company established a $.01 par value
for its preferred stock and increased the number of preferred shares authorized
to 18,314,018 shares, which includes 10,000,000 shares of a newly designated
series of preferred stock. As part of the recapitalization, which occurred
concurrent with the IPO, all issued and outstanding shares of preferred stock
were converted into .28357 of a share of common stock. The recapitalization also
provided for the cashless exercise and conversion of all preferred stock
warrants into 10,206 common shares. There were no shares of preferred stock or
warrants to purchase preferred stock outstanding as of December 31, 1997.
On February 9, 1996, certain members of Company management purchased for
$112,000 an aggregate of 75,000 preferred shares. On February 20, 1996, the
Company sold 2,000,000 preferred shares at $3.25 per share and issued Redeemable
Warrants to purchase 194,618 common shares to a related party (Note 19).
Proceeds from the sale aggregating $492,000 were ascribed to the Redeemable
Warrants to reflect their estimated fair market value on the issuance date. The
proceeds from the sale, net of issuance costs of $558,000, were used to fund the
Minority Interest Acquisition.
On September 18, 1996, the Company sold 750,000 preferred shares at $4.00
per share and issued Redeemable Warrants to purchase 49,079 common shares to
related parties (Note 19). Proceeds from the sale aggregating $124,000 were
ascribed to the Redeemable Warrants to reflect their estimated fair market value
on the issuance date. The proceeds from the sale, net of issuance costs of
$137,000, were used to fund the ADS acquisition.
COMMON STOCK
On February 19, 1997, in conjunction with reorganizing as a Delaware
corporation, the Company established a $.01 par value for its common stock and
increased to 9,924,950 the number of common shares authorized. As of December
31, 1997, a total of 527,156 common shares were reserved for issuance upon
exercise of stock options outstanding under the Company's stock option plan.
As part of the recapitalization, the holders of the non-redeemable warrants
agreed to the cashless exercise and conversion of all warrants outstanding into
6,379 common shares. Redeemable Warrants to purchase 70,893 common shares at an
exercise price of $14.11 per share remained after the recapitalization.
Concurrent with the consummation of the IPO, the mandatory redemption feature of
these warrants was terminated and, consequently, became non-redeemable warrants.
In December 1997, the holders of these warrants elected to exercise all of the
warrants on a cashless basis and convert the warrants into 16,130 common shares.
No non-redeemable warrants were outstanding as of December 31, 1997.
During 1998 in connection with the DLJ Acquisition all stock options became
100% vested and were either exercised or cancelled as of August 31, 1998. The
following table summarizes the status of the
F-26
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - PREDECESSOR CAPITAL STRUCTURE AND TRANSACTIONS (CONTINUED)
Company's stock option plan at December 31, 1996, 1997, and 1998 and the
activity for the years ended December 31, 1996 and 1997, and the eight months
ended August 31, 1998:
<TABLE>
<CAPTION>
1996 1997 1998
---------------------- ---------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ----------- --------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of
year........................................ 208,423 $ 0.529 355,001 $ 1.724 501,260 $ 6.089
Granted...................................... 147,031 3.413 163,662 15.574 75,000 16.85
Exercised.................................... -- -- -- -- (575,692) 7.496
Cancelled.................................... (453) 0.529 (17,403) 6.228 (568) 1.234
--------- --------- ----------
Options outstanding at end of year........... 355,001 1.724 501,260 6.089 -- --
--------- --------- ---------- -----------
--------- --------- ---------- -----------
Options exercisable at end of year........... 141,845 0.633 200,444 0.921 -- --
--------- --------- ---------- -----------
--------- --------- ---------- -----------
</TABLE>
The Company believes the per share exercise price of options granted through
February 1996 and subsequent to January 1997 (through August 31, 1998)
approximated the fair market value of the underlying common stock on the grant
date. The exercise price of certain options granted from February 1996 to
January 1997 were deemed to be below the fair market value of the underlying
common stock on the grant date and such difference is being recognized as
additional compensation expense in the consolidated financial statements on a
straight line basis over the vesting period of the underlying options.
Compensation expense recognized was $158,000, $240,000 and $332,000 for the
years ended December 31, 1996 and 1997 and the eight months ended August 31,
1998, respectively.
The Company measures compensation expense related to its employee stock
option plan using the intrinsic value method as prescribed by APB Opinion No.
25. Had compensation cost for the Company's stock option plan been determined
based on the fair value of the options at the grant dates consistent with the
method of SFAS 123, the Company's net income (loss) would have been as follows
(amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, EIGHT MONTHS
------------------------ ENDED AUGUST
1996 1997 31, 1998
(PREDECESSOR) (PREDECESSOR)
------------------------ -------------
<S> <C> <C> <C>
Net income (loss)
As reported............................................................. $ (817) $ 3,176 $ 3,189
Pro forma............................................................... (822) 3,129 2,699
Weighted-average fair value of options granted
Compensatory stock options.............................................. 5.91 5.70 5.70
Non-compensatory stock options.......................................... 0.10 5.08 5.08
</TABLE>
For purposes of the pro forma presentation, the fair value for options
granted subsequent to the IPO (April 16, 1997) was estimated on the dates of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions: risk-free interest rate of 5.8%; expected dividend
yield of 0%;
F-27
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - PREDECESSOR CAPITAL STRUCTURE AND TRANSACTIONS (CONTINUED)
expected life of 2.5 years; and expected stock price volatility of 39.9%. The
fair value for options granted prior to the IPO was estimated on the dates of
grant using a minimum value method, assuming a risk-free interest rate of 5.5%
to 5.7% with no projected dividend yields. Unlike other permitted option pricing
models, the minimum value method excludes stock price volatility, which could
not be reasonably estimated for the Company prior to the IPO.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models, as well as the minimum value method, do not
necessarily provide a reliable single measure of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of options
granted in fiscal years after December 31, 1994 is amortized to expense over the
options' vesting period. The effects of applying SFAS 123 in providing the pro
forma disclosures are not likely to be representative of the effects on the
reported consolidated financial statements in future years.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
LITIGATION
Certain subsidiaries of the Company have recently been served in an action
filed in federal court by American International Airways, Inc., relating to the
conversion and modification of two Boeing 747 aircraft from passenger to
freighter configuration. No specific amount of damages is sought. The events in
question occurred prior to the Company's purchase of the relevant businesses
from its prior owner; the Company intends to deny any liability, and further
believes that it is indemnified with respect to any such liabilities. The
Company and two of its subsidiaries have confirmed that they are indemnified for
any liability in the action filed by American International Airways; and for the
further cost of defense of the action. A third subsidiary was named as a
defendant but has been dismissed from the case without prejudice.
On July 21, 1998, TAAM Associates, Inc. commenced an action in Delaware
Chancery Court on behalf of a purported class of stockholders of the Company
against the Company, its directors, Donaldson, Lufkin & Jenrette, Inc. and
certain of its affiliates ("DLJ"), alleging, among other things, that the
directors had breached their fiduciary duties by entering into the merger
agreement related to the DLJ Acquisition without engaging in an auction or
"active market check" and, therefore, agreed to terms that were unfair and
inadequate from the standpoint of the Company's stockholders. On July 24, 1998,
the plaintiffs amended the complaint by repeating the allegations in the initial
complaint and adding allegations that: (i) the Company's
Solicitation/Recommendation Statement on Schedule 14D-9 (the "14D-9") contained
material misstatements or omissions; (ii) the termination fees were
unreasonable; and (iii) the directors who approved the DLJ Acquisition had
conflicts of interest. The complaint sought a preliminary and permanent
injunction barring defendants from proceeding with the transaction or, if the
transaction is consummated, an order rescinding it or awarding damages, together
with interest, and an award of attorneys' fees and litigation expenses. Without
admitting any wrongdoing in the action, in order to avoid the burden and expense
of further litigation, the Company, DLJ, and the individual defendants reached
an
F-28
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
agreement in principle with the plaintiffs which contemplates settlement of the
action. The Company, DLJ and the individual defendants and the plaintiffs
entered into a memorandum of understanding (the "Memorandum of Understanding"),
pursuant to which the parties would, subject to certain facts being confirmed
through discovery which has not been completed, enter into a settlement
agreement which would be subject to approval by the Court of Chancery. The
Memorandum of Understanding required the Company to provide additional
disclosures in an amendment to the 14D-9 which has occurred, and for a complete
release and settlement of all claims, whether asserted directly, derivatively or
otherwise, against defendants, or any of their affiliates, directors, officers,
employees or agents arising out of the facts set forth in the complaint. The
Memorandum of Understanding contemplates that, in connection with the benefit
conferred, plaintiffs' counsel will apply to the Court of Chancery for an award
of attorney's fees and litigation expenses in an amount not exceeding $375,000,
which application, the defendants have agreed not to oppose.
On August 5, 1998, the Company and its chief executive officer were served
in an action filed in state court in California by the Company's chief financial
officer and secretary claiming that he is due additional compensation in the
form of stock options, and claiming fraud, negligent misrepresentation and
breach of contract in connection therewith. On September 22, 1998, the plaintiff
amended the compliant by repeating the allegations in the initial compliant and
adding allegations of fraudulent misrepresentation in violation of certain
provisions of the California Labor Code (for which doubled damages are sought),
promissory estoppel, and wrongful discharge as a violation of public policy (as
a result of allegations made by the plaintiff of improprieties in connection
with the fairness opinion with respect to the DLJ Acquisition). The action seeks
not less than $1.5 million plus punitive damages and costs. Discovery has not
been completed. The Company intends to vigorously defend against such claim. The
plaintiff's employment with the Company was terminated.
The Canadian Transportation Safety Board has notified the Company that as
part of its investigation of the crash of Swissair Flight 111 on September 2,
1998, burned wire was found which was attached to the in-flight entertainment
system installed on certain Swissair aircraft by a subsidiary of the Company.
The Canadian Transportation Safety Board has advised the Company that it does
not have evidence that the system the Company installed malfunctioned or failed
during the flight. The Company has been requested by attorneys for families of
persons who died aboard the flight to put its insurance carrier on notice of a
potential claim by such families.
The Company and its subsidiaries are also involved in other routine legal
and administrative proceedings incident to the normal conduct of business.
Management believes the ultimate disposition of these matters, as well as the
matters discussed in the preceding paragraphs, will not have a material adverse
effect on the Company's consolidated financial position, results of operations
or cash flows.
LEASE COMMITMENTS
The Company leases certain facilities and equipment under various capital
and operating leases. Certain leases require payment of property taxes and
include escalation clauses. Future minimum capital
F-29
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
and operating lease commitments under non-cancelable leases are as follows as of
December 31, 1998 (amounts in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- -----------
<S> <C> <C>
Year ending December 31,
1999....................................................................................... $ 230 $ 3,181
2000....................................................................................... 99 2,758
2001....................................................................................... 41 2,246
2002....................................................................................... 17 2,195
2003....................................................................................... 9 1,941
2004 and thereafter........................................................................ -- 4,811
----- -----------
Total minimum payments required............................................................ 396 $ 17,132
-----------
-----------
Less amount representing future interest cost.............................................. (29)
-----
Recorded obligation under capital leases................................................. $ 367
-----
-----
</TABLE>
Total rental expense charged to operations for the years ended December 31,
1996 and 1997, the eight months ended August 31, 1998 and the four months ended
December 31, 1998 was $1,614,000, $2,065,000, $2,303,000 and $1,095,000
respectively.
F-30
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 - CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS INFORMATION
The Company paid the following amounts in cash (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, EIGHT MONTHS FOUR MONTHS
---------------------------- ENDED AUGUST ENDED
1996 1997 31, 1998 DECEMBER
(PREDECESSOR) (PREDECESSOR) 31, 1998
---------------------------- ------------- -----------
Interest.................................... $ 2,983 $ 2,842 $ 2,227 $ 3,706
<S> <C> <C> <C> <C>
Income taxes................................ 132 300 4,825 1,328
</TABLE>
INFORMATION ON NONCASH INVESTING AND FINANCING ACTIVITIES
Certain noncash investing and financing transactions occurred as follows
(amounts in thousands):
<TABLE>
<CAPTION>
EIGHT
YEAR ENDED DECEMBER MONTHS
31, ENDED FOUR MONTHS
-------------------- AUGUST 31, ENDED
1996 1997 1998 DECEMBER
(PREDECESSOR) (PREDECESSOR) 31, 1998
-------------------- ----------- -----------
Refinancing of Bridge Notes with proceeds from
Units offering................................... $ -- $ -- $ -- $ 100,000
<S> <C> <C> <C> <C>
Additional acquisition consideration.............. -- -- -- 3,000
Debt incurred for the acquisition of machinery and
equipment........................................ 414 182 116 48
Financing provided by sellers in connection with
acquisitions..................................... 3,492 -- -- --
Detail of acquisitions:
Fair value of assets acquired, net of cash
acquired...................................... $ 20,887 $ 26,178 $ 90,377 $ 310,450
Liabilities assumed............................. (2,687) (2,581) (4,569) (119,585)
--------- --------- ----------- -----------
Cash paid for acquisition, net of cash
acquired.................................. $ 18,200 $ 23,597 $ 85,808 $ 190,865
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
F-31
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17 - FOREIGN OPERATIONS AND EXPORT REVENUES
FOREIGN OPERATIONS
The Company operates in one business segment - avionics components
manufacturing and integration services. Domestic and foreign operations consist
of the following (amounts in thousands):
<TABLE>
<CAPTION>
EIGHT
YEAR ENDED DECEMBER MONTHS FOUR MONTHS
31, ENDED ENDED
-------------------- AUGUST 31, DECEMBER
1996 1997 1998 31, 1998
--------- --------- ----------- -----------
(PREDECESSOR)
(PREDECESSOR)
<S> <C> <C> <C> <C>
Revenues
Gross revenues
United States................................ $ 64,383 $ 109,490 $ 89,619 $ 60,785
Western Europe............................... 10,882 12,240 7,940 4,510
--------- --------- ----------- -----------
Total gross revenues....................... 75,265 121,730 97,559 65,295
--------- --------- ----------- -----------
Less interarea transfers
United States................................ (1,496) (2,448) (1,744) (1,350)
Western Europe............................... (8,670) (10,379) (5,738) (3,589)
--------- --------- ----------- -----------
Total interarea transfers.................. (10,166) (12,827) (7,482) (4,939)
--------- --------- ----------- -----------
Net revenues
United States................................ 62,887 107,042 87,875 59,435
Western Europe............................... 2,212 1,861 2,202 921
--------- --------- ----------- -----------
Total net revenues......................... $ 65,099 $ 108,903 $ 90,077 $ 60,356
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Consolidated long-lived assets
United States.................................. $ 10,573 $ 13,230 $ 24,693 $ 26,455
Western Europe................................. 1,614 824 543 1,705
--------- --------- ----------- -----------
Total consolidated long-lived assets......... $ 12,187 $ 14,054 $ 25,236 $ 28,160
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
The Company allocates its revenues on the basis of the location in which the
sale originated. Revenues in Western Europe are primarily from Switzerland.
Interarea sales are accounted for at prices that the Company believes would be
equivalent to unaffiliated customer sales. Interarea transfers and eliminations
reflect the shipment of raw component parts between areas. Long-lived assets
consists of the Company's property and equipment. Corporate long-lived assets
are included with United States assets.
EXPORT REVENUES
Consolidated revenues include export revenues of $6,484,000, $12,430,000,
$11,804,000 and $9,983,000 for the years ended December 31, 1996 and 1997, the
eight months ended August 31, 1998 and the four months ended December 31, 1998,
respectively. Export revenues are primarily derived from sales to customers
located in Western Europe, the Far East and Canada.
NOTE 18 - EMPLOYEE BENEFIT PLANS
The Company's Swiss subsidiary sponsors a defined contribution pension plan
covering substantially all of its employees as required by Swiss law.
Contributions and costs, which are shared equally by the
F-32
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18 - EMPLOYEE BENEFIT PLANS (CONTINUED)
Company and the employees, are determined as a percentage of each covered
employees' salary. Company contributions and costs associated with the plan were
$151,000, $157,000, $102,000 and $51,000 for the years ended December 31, 1996
and 1997, the eight months ended August 31, 1998 and the four months ended
December 31, 1998, respectively.
Substantially all of the Company's domestic employees are eligible to
participate in a 401(k) defined contribution plan (the "Plan"). Participation in
the Plan is at the discretion of each individual employee who is eligible to
participate. Each participating employee is permitted to contribute up to a
maximum amount defined in the Plan. The Company and its subsidiaries may make
periodic discretionary matching contributions to the Plan. The Company made
matching contributions of $41,000, $128,000 and $95,000 during the year ended
December 31, 1997, the eight months ended August 31, 1998 and the four months
ended December 31, 1998, respectively. No matching contributions were made to
the plan during the year ended December 31, 1996. The costs associated with
administering the plan were not significant for any period presented.
F-33
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19 - RELATED PARTY TRANSACTIONS
The Company's transactions with related parties included in the consolidated
financial statements are summarized in the table below (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED FOUR MONTHS
DECEMBER 31, EIGHT MONTHS ENDED
-------------------- ENDED AUGUST DECEMBER
1996 1997 31, 1998 31, 1998
--------- --------- ------------- -----------
(PREDECESSOR)
(PREDECESSOR)
<S> <C> <C> <C> <C>
DLJ
Transaction financing fees........................ $ -- $ -- $ -- $ 12,000
Credit facility outstanding borrowings............ -- -- -- 4,800
Credit facility interest expense.................. -- -- -- 282
Bridge notes interest expense..................... -- -- -- 1,041
Global Technology Partners, LLC
Promissory notes receivable....................... -- -- -- 352
Senior Subordinated Lenders
Interest and advisory fees
Earned during the period........................ 983 358 -- --
Accrued and payable as of year end.............. 43 -- -- --
Purchase of Convertible Notes, Preferred Stock and
Redeemable Warrants in conjunction with ADS
acquisition..................................... 2,000 -- -- --
Fees and expenses earned.......................... 36 -- -- --
Debt repaid with IPO proceeds
Senior subordinated debt........................ -- 7,000 -- --
Convertible Notes............................... -- 1,000 -- --
Investors
Purchases of debt and equity securities
Preferred Stock and Redeemable Warrants in
conjunction with Minority Interest
acquisition................................... 6,500 -- -- --
Convertible Notes, Preferred Stock and
Redeemable Warrants in conjunction with ADS
acquisition................................... 4,000 -- -- --
Fees and expenses earned.......................... 74 -- -- --
Convertible Notes
Interest earned during the period............... 86 98 -- --
Interest accrued and payable as of year end..... 86 -- -- --
Repaid with IPO proceeds........................ -- 2,000 -- --
</TABLE>
Each related party is described below:
DLJ -- The Company and its affiliates incurred fees payable to DLJ related
entities of approximately $12.0 million in connection with the DLJ Acquisition.
The Bridge Notes issued to finance the DLJ acquisition were also purchased by a
DLJ entity. In addition, DLJ is involved in making a market for the Notes and
may hold such Notes from time to time. The Company's credit facility is also
provided by a syndicate of lenders led by DLJ related entities.
Global Technology Partners, LLC ("GTP") -- Two members of the Company's
Board of Directors are also members of GTP. In December 1998, GTP purchased
approximately $704,000 of shares of common
F-34
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19 - RELATED PARTY TRANSACTIONS (CONTINUED)
and preferred stock of DeCrane Holdings. The Company loaned half of the purchase
price for such shares to GTP at an interest rate equal to the interest rate on
the longest maturity senior bank debt of the Company in effect from time to
time, plus 1.0%. The loans are repayable out of the proceeds from the sale of
such stock, are secured by such stock, and are classified as a reduction in
stockholders' equity. Upon collection of the notes, funds will be advanced to
DeCrane Holdings.
Senior Subordinated Lenders - Own 8.9% of the Company's issued and
outstanding common stock at December 31, 1997, were represented on the Company's
Board of Directors in 1995 and 1996, and provided a portion of the Company's
Convertible Notes financing and the Subordinated Debt (Notes 10 and 14). The
ownership percentage reflects the cashless exercise and conversion of all
Preferred Stock, Preferred Stock warrants, common stock warrants and Redeemable
Warrants into 451,370 common shares in conjunction with the Recapitalization
(Note 14).
Investors - Own 16.4% of the Company's issued and outstanding common stock
at December 31, 1997, are represented on the Company's Board of Directors, and
provided a portion of the Company's Convertible Notes and Preferred Stock
financing (Notes 10 and 14). The ownership percentage reflects the cashless
exercise and conversion of all Preferred Stock and Redeemable Warrants into
840,808 common shares in conjunction with the Recapitalization (Note 14).
NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
In conjunction with the Notes, Bridge Notes and credit facility described in
Note 2, the following summarized condensed consolidating financial information
is presented for the Company, segregating guarantor subsidiaries and
non-guarantor subsidiaries. The accompanying financial information in the
"Guarantor Subsidiaries" column reflects the financial position, results of
operations and cash flows for those subsidiaries which guarantee the Notes and
credit facility. The accompanying financial information in the "DeCrane Holdings
Co." column reflects the financial position, results of operations and cash
flows for DeCrane Holdings and DeCrane Aircraft, the issuer. The guarantor
subsidiaries are wholly-owned subsidiaries of the Company and the guarantees are
full, unconditional, and joint and several. Separate financial statements of the
guarantor subsidiaries are not presented because management believes that such
financial statements would not be material to investors.
Investments in subsidiaries in the following condensed consolidating
financial information are accounted for under the equity method of accounting.
Consolidating adjustments include the following:
(1) Elimination of investments in subsidiaries.
(2) Elimination of intercompany accounts.
(3) Elimination of intercompany sales between guarantor and
non-guarantor subsidiaries.
(4) Elimination of equity in earnings of subsidiaries.
F-35
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
(CONTINUED)
BALANCE SHEETS (AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1997 (PREDECESSOR)
-----------------------------------------------------------------------------------
DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------------- ------------ ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........ $ 16 $ 109 $ 81 $ -- $ 206
Accounts receivable, net......... -- 17,101 1,051 -- 18,152
Inventories...................... -- 24,399 1,577 -- 25,976
Other current assets............. 98 505 179 -- 782
------- ------------ ------------- -------------- ------------
Total current assets........... 114 42,114 2,888 -- 45,116
Property and equipment, net........ 290 12,928 836 -- 14,054
Other assets, principally
intangibles, net.................. 472 39,257 238 -- 39,967
Investments in subsidiaries........ 20,414 3,378 -- (23,792)(1) --
Intercompany receivables........... 60,946 659 4,357 (65,962)(2) --
------- ------------ ------------- -------------- ------------
$82,236 $98,336 $ 8,319 $(89,754) $99,137
------- ------------ ------------- -------------- ------------
------- ------------ ------------- -------------- ------------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities
Short-term obligations........... $ 4 $ 801 $ 621 $ -- $ 1,426
Other current liabilities........ 4,333 12,780 1,805 -- 18,918
------- ------------ ------------- -------------- ------------
Total current liabilities...... 4,337 13,581 2,426 -- 20,344
------- ------------ ------------- -------------- ------------
Long-term liabilities
Long-term obligations............ 36,027 1,372 13 -- 37,412
Intercompany payable............. 873 64,430 659 (65,962)(2) --
Other long-term liabilities...... 1,333 96 425 -- 1,854
------- ------------ ------------- -------------- ------------
Total long-term liabilities.... 38,233 65,898 1,097 (65,962) 39,266
------- ------------ ------------- -------------- ------------
Stockholders' equity
Capital.......................... 51,110 12,418 1,194 (13,612)(1) 51,110
Retained earnings (deficit)...... (11,444) 6,439 3,741 (10,180)(1) (11,444)
Accumulated comprehensive income
(loss)......................... -- -- (139) -- (139)
------- ------------ ------------- -------------- ------------
Total stockholder's equity..... 39,666 18,857 4,796 (23,792) 39,527
------- ------------ ------------- -------------- ------------
$82,236 $98,336 $ 8,319 $(89,754) $99,137
------- ------------ ------------- -------------- ------------
------- ------------ ------------- -------------- ------------
</TABLE>
F-36
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
(CONTINUED)
BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------------------------------------------------------
DECRANE GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS CO. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------------- ------------ ------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........ $ 2,458 $ 762 $ 298 $ -- $ 3,518
Accounts receivable, net......... -- 28,917 1,524 -- 30,441
Inventories...................... -- 32,624 1,657 -- 34,281
Other current assets............. 7,066 894 237 -- 8,197
-------- ------------ ------------- --------------- ------------
Total current assets........... 9,524 63,197 3,716 -- 76,437
Property and equipment, net........ 272 26,170 1,718 -- 28,160
Other assets, principally
intangibles, net.................. 11,753 200,383 13,842 -- 225,978
Investments in subsidiaries........ 239,101 4,373 -- (243,474)(1) --
Intercompany receivables........... 45,710 693 3,567 (49,970)(2) --
-------- ------------ ------------- --------------- ------------
$306,360 $294,816 $22,843 $(293,444) $330,575
-------- ------------ ------------- --------------- ------------
-------- ------------ ------------- --------------- ------------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities
Short-term obligations........... $ 892 $ 628 $ 292 $ -- $ 1,812
Other current liabilities........ 10,573 16,651 1,174 -- 28,398
-------- ------------ ------------- --------------- ------------
Total current liabilities...... 11,465 17,279 1,466 -- 30,210
-------- ------------ ------------- --------------- ------------
Long-term liabilities
Long-term obligations............ 184,822 131 -- -- 184,953
Intercompany payables............ (3,694) 53,388 276 (49,970)(2) --
Other long-term liabilities...... 16,278 658 713 -- 17,649
-------- ------------ ------------- --------------- ------------
Total long-term liabilities.... 197,406 54,177 989 (49,970) 202,602
-------- ------------ ------------- --------------- ------------
Mandatorily redeemable preferred
stock............................. 35,884 -- -- -- 35,884
Stockholders' equity
Capital.......................... 64,173 214,823 15,440 (230,263)(1) 64,173
Retained earnings (deficit)...... (2,568) 8,537 4,674 (13,211)(1) (2,568)
Accumulated comprehensive income
(loss)......................... -- -- 274 -- 274
-------- ------------ ------------- --------------- ------------
Total stockholders' equity..... 61,605 223,360 20,388 (243,474) 61,879
-------- ------------ ------------- --------------- ------------
$306,360 $294,816 $22,843 (293,444) $330,575
-------- ------------ ------------- --------------- ------------
-------- ------------ ------------- --------------- ------------
</TABLE>
F-37
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
(CONTINUED)
STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31, 1996 (PREDECESSOR)
-----------------------------------------------------------------------------------
DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------------- ------------ ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues........................... $-- $61,835 $11,934 $ (8,670)(3) $65,099
Cost of sales...................... -- 48,542 9,520 (8,670)(3) 49,392
------- ------------ ------------- -------------- ------------
Gross profit..................... -- 13,293 2,414 -- 15,707
Selling, general and administrative
expenses.......................... 2,461 7,240 1,046 -- 10,747
Amortization of intangible
assets............................ -- 695 14 -- 709
Interest expense................... 4,032 129 87 -- 4,248
Intercompany charges............... (2,182) 2,002 180 -- --
Equity in earnings of
subsidiaries...................... (2,820) (594) -- 3,414(4) --
Other expenses (income)............ (3) 204 (93) -- 108
Provisions for income taxes........ (671) 1,225 158 -- 712
------- ------------ ------------- -------------- ------------
Net income (loss).................. $ (817) $ 2,392 $ 1,022 $ (3,414) $ (817)
------- ------------ ------------- -------------- ------------
------- ------------ ------------- -------------- ------------
</TABLE>
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31, 1997 (PREDECESSOR)
------------------------------------------------------------------------------------
DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------------- ------------ ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues........................... $-- $106,154 $13,128 $(10,379)(3) $108,903
Cost of sales...................... -- 81,115 9,511 (10,379)(3) 80,247
------- ------------ ------------- -------------- -------------
Gross profit..................... -- 25,039 3,617 -- 28,656
Selling, general and administrative
expenses.......................... 3,646 10,720 1,390 -- 15,756
Amortization of intangible
assets............................ -- 892 13 -- 905
Interest expense................... 2,888 220 46 -- 3,154
Intercompany charges............... (4,617) 4,432 185 -- --
Equity in earnings of
subsidiaries...................... (6,392) (999) -- 7,391(4) --
Other expenses..................... -- 161 82 -- 243
Provision (benefit) for income
taxes............................. (779) 3,678 445 -- 3,344
Extraordinary charge, net of tax... 2,078 -- -- -- 2,078
------- ------------ ------------- -------------- -------------
Net income......................... $ 3,176 $ 5,935 $ 1,456 $ (7,391) $ 3,176
------- ------------ ------------- -------------- -------------
------- ------------ ------------- -------------- -------------
</TABLE>
F-38
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
(CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED AUGUST 31, 1998 (PREDECESSOR)
------------------------------------------------------------------------------------
DECRANE AIRCRAFT GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS, INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------------- ------------ ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues........................... $-- $87,312 $ 8,503 $(5,738)(3) $90,077
Cost of sales...................... -- 59,252 6,587 (5,738)(3) 60,101
------- ------------ ------------- ------- -------------
Gross profit..................... -- 28,060 1,916 -- 29,976
Selling, general and administrative
expenses.......................... 3,949 11,041 729 -- 15,719
Nonrecurring charges............... 3,632 -- -- -- 3,632
Amortization of intangible
assets............................ -- 1,337 10 -- 1,347
Interest expense (income).......... 2,343 7 -- -- 2,350
Intercompany charges............... (4,357) 4,229 128 -- --
Equity in earnings of
subsidiaries...................... (6,824) (489) -- 7,313(4) --
Other expenses (income)............ 600 (164) 411 -- 847
Provision (benefit) for income
taxes............................. (2,532) 5,275 149 -- 2,892
------- ------------ ------------- ------- -------------
Net income......................... $ 3,189 $ 6,824 $ 489 $(7,313) $ 3,189
------- ------------ ------------- ------- -------------
------- ------------ ------------- ------- -------------
</TABLE>
<TABLE>
<CAPTION>
FOUR MONTHS ENDED DECEMBER 31, 1998
------------------------------------------------------------------------------------
DECRANE GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
HOLDINGS CO. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
---------------- ------------ ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues........................... $-- $58,904 $ 5,041 $(3,589) $60,356
Cost of sales...................... -- 42,691 3,637 (3,589) 42,739
------- ------------ ------------- ------- -------------
Gross profit....................... -- 16,213 1,404 -- 17,617
Selling, general and administrative
expenses.......................... 1,741 8,124 409 -- 10,274
Nonrecurring charges............... -- -- -- -- --
Amortization of intangible
assets............................ 102 2,868 178 -- 3,148
Interest expense (income).......... 6,769 92 6 -- 6,867
Intercompany charges............... (3,088) 3,025 63 -- --
Equity in earnings of
subsidiaries...................... (7,753) (506) -- 8,259(4) --
Other expenses (income)............ -- 132 203 -- 335
Provision for income taxes
(benefit)......................... 2,568 (5,275) 39 -- (2,668)
Extraordinary charge, net of tax... 2,229 -- -- -- 2,229
------- ------------ ------------- ------- -------------
Net income (loss).................. $(2,568) $ 7,753 $ 506 $(8,259) $(2,568)
------- ------------ ------------- ------- -------------
------- ------------ ------------- ------- -------------
</TABLE>
F-39
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
(CONTINUED)
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31, 1996 (PREDECESSOR)
-------------------------------------------------------------------
DECRANE
AIRCRAFT
HOLDINGS, GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
------------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities
Net income (loss).............. $ (817) $ 2,392 $ 1,022 $ (3,414) $ (817)
Adjustments to net income
(loss)
Non-cash adjustments to net
income (loss).............. 1,093 2,623 903 -- 4,619
Equity in earnings of
subsidiaries............... (2,820) (594) -- 3,414(4) --
Changes in working capital... (864) 1,525 (1,505) -- (844)
------------- ----------- ------------- ----------- -----------
Net cash provided by (used
for) operating
activities............... (3,408) 5,946 420 -- 2,958
------------- ----------- ------------- ----------- -----------
Cash flows from investing
activities
Acquisition of companies, net
of cash acquired............. (18,200) -- -- -- (18,200)
Capital expenditures and
other........................ (97) (5,353) (366) -- (5,816)
------------- ----------- ------------- ----------- -----------
Net cash used for investing
activities............... (18,297) (5,353) (366) -- (24,016)
------------- ----------- ------------- ----------- -----------
Cash flows from financing
activities
Net proceeds from sale of
equity....................... 8,240 -- -- -- 8,240
Debt financing for
acquisitions................. 13,548 -- -- -- 13,548
Principal payments on long-term
debt and leases.............. (1,500) (438) (63) -- (2,001)
Line of credit borrowings
(repayments)................. 1,280 -- (89) -- 1,191
Other, net..................... 158 (85) -- -- 73
------------- ----------- ------------- ----------- -----------
Net cash provided by (used
for) financing
activities............... 21,726 (523) (152) -- 21,051
------------- ----------- ------------- ----------- -----------
Effect of foreign currency
translation on cash............ -- -- 22 -- 22
------------- ----------- ------------- ----------- -----------
Net increase (decrease) in cash
and equivalents................ 21 70 (76) -- 15
Cash and equivalents at beginning
of period...................... 16 17 272 -- 305
------------- ----------- ------------- ----------- -----------
Cash and equivalents at end of
period......................... $ 37 $ 87 $ 196 $ -- $ 320
------------- ----------- ------------- ----------- -----------
------------- ----------- ------------- ----------- -----------
</TABLE>
F-40
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
(CONTINUED)
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31, 1997 (PREDECESSOR)
-------------------------------------------------------------------
DECRANE
AIRCRAFT
HOLDINGS, GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
------------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities
Net income..................... $ 3,176 $ 5,935 $ 1,456 $ (7,391) $ 3,176
Adjustments to net income
Non-cash adjustments to net
income..................... 1,307 4,687 829 -- 6,823
Equity in earnings of
subsidiaries............... (6,392) (999) -- 7,391(4) --
Changes in working capital... 1,374 (4,530) (2,202) -- (5,358)
------------- ----------- ------------- ----------- -----------
Net cash provided by (used
for) operating
activities............... (535) 5,093 83 -- 4,641
------------- ----------- ------------- ----------- -----------
Cash flows from investing
activities
Acquisition of companies, net
of cash acquired............. (23,597) -- -- -- (23,597)
Capital expenditures and
other........................ (244) (3,823) (145) -- (4,212)
------------- ----------- ------------- ----------- -----------
Net cash used for investing
activities............... (23,841) (3,823) (145) -- (27,809)
------------- ----------- ------------- ----------- -----------
Cash flows from financing
activities
Net proceeds from sale of
equity....................... 28,933 -- -- -- 28,933
Net debt repaid with equity
offering proceeds............ (29,848) -- -- -- (29,848)
Debt financing for
acquisitions................. 23,597 -- -- -- 23,597
Principal payments on long-term
debt and leases.............. (474) (1,147) (54) -- (1,675)
Line of credit borrowings
(repayments)................. 1,907 -- (96) -- 1,811
Other, net..................... 240 (101) -- -- 139
------------- ----------- ------------- ----------- -----------
Net cash provided by (used
for) financing
activities............... 24,355 (1,248) (150) -- 22,957
------------- ----------- ------------- ----------- -----------
Effect of foreign currency
translation on cash............ -- -- 97 -- 97
------------- ----------- ------------- ----------- -----------
Net increase (decrease) in cash
and equivalents................ (21) 22 (115) -- (114)
Cash and equivalents at beginning
of period...................... 37 87 196 -- 320
------------- ----------- ------------- ----------- -----------
Cash and equivalents at end of
period......................... $ 16 $ 109 $ 81 $ -- $ 206
------------- ----------- ------------- ----------- -----------
------------- ----------- ------------- ----------- -----------
</TABLE>
F-41
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
(CONTINUED)
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED AUGUST 31, 1998 (PREDECESSOR)
---------------------------------------------------------------------
DECRANE
AIRCRAFT
HOLDINGS, GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
INC. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
------------- ----------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities
Net income..................... $ 3,189 $ 6,824 $ 489 $ (7,313) $ 3,189
Adjustments to net income
Non-cash adjustments to net
income..................... (2,222) 3,420 557 -- 1,755
Equity in earnings of
subsidiaries............... (6,824) (489) -- 7,313(4) --
Changes in working capital... 5,492 (7,393) (29) -- (1,930)
------------- ----------- ----- ----------- -----------
Net cash provided by (used
for) operating
activities............... (365) 2,362 1,017 -- 3,014
------------- ----------- ----- ----------- -----------
Cash flows from investing
activities
Acquisition of companies, net
of cash acquired............. (87,071) 1,263 -- -- (85,808)
Capital expenditures and
other........................ (44) (1,306) (220) -- (1,570)
------------- ----------- ----- ----------- -----------
Net cash used for investing
activities............... (87,115) (43) (220) -- (87,378)
------------- ----------- ----- ----------- -----------
Cash flows from financing
activities
Net proceeds from sale of
equity....................... 34,815 -- -- -- 34,815
Net debt repaid with equity
offering proceeds............ (34,815) -- -- -- (34,815)
Debt financing for
acquisitions................. 85,808 -- -- -- 85,808
Principal payments on long-term
debt and leases.............. (3) (1,280) (34) -- (1,317)
Line of credit borrowings
(repayments)................. 6,007 -- (554) -- 5,453
Other, net..................... 23 (96) -- -- (73)
------------- ----------- ----- ----------- -----------
Net cash provided by (used
for) financing
activities............... 91,835 (1,376) (588) -- 89,871
------------- ----------- ----- ----------- -----------
Effect of foreign currency
translation on cash............ -- -- 26 -- 26
------------- ----------- ----- ----------- -----------
Net increase in cash and
equivalents.................... 4,355 943 235 -- 5,533
Cash and equivalents at beginning
of period...................... 16 109 81 -- 206
------------- ----------- ----- ----------- -----------
Cash and equivalents at end of
period......................... 4,371 $ 1,052 $ 316 $ -- $ 5,739
------------- ----------- ----- ----------- -----------
------------- ----------- ----- ----------- -----------
</TABLE>
F-42
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
FOUR MONTHS ENDED DECEMBER 31, 1998
-------------------------------------------------------------------
DECRANE
HOLDINGS GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED
CO. SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS TOTAL
----------- ----------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income.......................... $ (2,568) $ 7,753 $ 506 $ (8,259) $ (2,568)
Adjustments to net income
Non-cash adjustments to net
income.......................... (2,632) 4,964 (274) -- 2,058
Equity in earnings of
subsidiaries.................... (7,753) (506) -- 8,259(4) --
Changes in working capital........ 12,408 (10,272) (618) -- 1,518
----------- ----------- ----- ----------- -----------
Net cash provided by (used for)
operating activities.......... (545) 1,939 (386) -- 1,008
----------- ----------- ----- ----------- -----------
Cash flows from investing activities
Purchase of DeCrane Aircraft........ (190,865) -- -- -- (190,865)
Capital expenditures and other...... -- (1,746) (67) -- (1,813)
----------- ----------- ----- ----------- -----------
Net cash used for investing
activities.................... (190,865) (1,746) (67) -- (192,678)
----------- ----------- ----- ----------- -----------
Cash flows from financing activities
Financing of DeCrane Aircraft
acquisition....................... 190,865 -- -- -- 190,865
Net proceeds from sale of equity.... -- -- -- -- --
Net debt repaid with equity offering
proceeds.......................... -- -- -- -- --
Debt financing for acquisitions..... -- -- -- -- --
Principal payments on long-term debt
and leases........................ (1) (447) (10) -- (458)
Line of credit borrowings
(repayments)...................... (1,367) -- 264 -- (1,103)
Other, net.......................... -- (36) -- -- (36)
----------- ----------- ----- ----------- -----------
Net cash provided by (used for)
financing activities.......... 189,497 (483) 254 -- 189,268
----------- ----------- ----- ----------- -----------
Effect of foreign currency translation
on cash............................. -- -- 181 -- 181
----------- ----------- ----- ----------- -----------
Net increase (decrease) in cash and
equivalents......................... (1,913) (290) (18) -- (2,221)
Cash and equivalents at beginning of
period.............................. 4,371 1,052 316 -- 5,739
----------- ----------- ----- ----------- -----------
Cash and equivalents at end of
period.............................. $ 2,458 $ 762 $ 298 $ -- $ 3,518
----------- ----------- ----- ----------- -----------
----------- ----------- ----- ----------- -----------
</TABLE>
F-43
<PAGE>
DECRANE HOLDINGS CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21 - EVENT SUBSEQUENT TO DATE OF INDEPENDENT ACCOUNTANTS REPORT (UNAUDITED)
In April 1999, the Company purchased all of the outstanding stock of PPI
Holdings, Inc. PPI is a manufacturer of interior furniture components primarily
for middle- and high-end corporate aircraft.
The purchase price was $60.2 million, less debt acquired, in cash at closing
and is subject to adjustment for changes in working capital. Additional
contingent consideration totaling $19.5 million is payable over two years based
on future attainment of defined performance criteria. The acquisition will be
accounted for as a purchase and the difference between the purchase price and
the fair value of the net assets acquired will be recorded as goodwill and
amortized on a straight-line basis over thirty years.
NOTE 22 - CONDENSED QUARTERLY DATA FOR 1997 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1998
-------------------------------------------- -------------------------------------------------------------
(PREDECESSOR)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(TWO MONTHS (ONE MONTH
ENDED ENDED
AUGUST 31, SEPTEMBER 30,
1998) 1998)
1ST 2ND 3RD 4TH 1ST 2ND 3RD 3RD 4TH
--------- --------- --------- ----------- --------- --------- ----------- ------------- -----------
Revenues........... $ 26,118 $ 28,130 $ 26,639 $ 28,016 $ 29,128 $ 29,854 $ 31,095 $ 16,012 $ 44,344
Gross profit....... 6,011 7,214 6,998 8,433 8,987 9,720 11,269 4,932 12,685
Income (loss)
before
extraordinary
item.............. 629 1,454 1,481 1,690 1,688 1,672 (171) (484) 145
Extraordinary loss
from debt
refinancing....... -- (2,078) -- -- -- -- -- (296) (1,933)
Net income
(loss)............ 629 (624) 1,481 1,690 1,688 1,672 (171) (780) (1,788)
</TABLE>
F-44
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Avtech Corporation
In our opinion, the accompanying balance sheets and the related statements
of income, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Avtech Corporation at September 30,
1996 and 1997 and the results of its operations and its cash flows for each of
the three years in the period ended September 30, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
June 12, 1998
F-45
<PAGE>
AVTECH CORPORATION
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------
1996 1997 JUNE 25, 1998
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents....................... $ 1,052 $ 4,136 $ 1,093
Accounts receivable, net of allowance for
doubtful accounts of $20, $20 and $20 at
September 30, 1996 and 1997 and June 25, 1998,
respectively.................................. 7,398 4,928 5,321
Inventories..................................... 4,233 5,254 5,832
Prepaid expenses and other assets............... 69 183 57
Income taxes refundable......................... -- -- 4,368
Deferred income taxes........................... -- 247 1,613
------- ------- -------------
Total current assets.......................... 12,752 14,748 18,284
------- ------- -------------
Property, plant and equipment
Land............................................ 431 791 791
Buildings and improvements...................... 2,411 4,685 5,176
Machinery and equipment......................... 2,764 3,005 3,477
Furniture, computer and other equipment......... 3,216 3,426 3,555
------- ------- -------------
8,822 11,907 12,999
Less: Accumulated depreciation.................. (6,523) (7,050) (7,380)
------- ------- -------------
2,299 4,857 5,619
Other assets
Patents, net of amortization.................... 5 4 4
Deferred income taxes........................... -- 629 3,239
------- ------- -------------
Total assets.................................. $15,056 $20,238 $ 27,146
------- ------- -------------
------- ------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable................................ $ 768 $ 1,388 $ 1,396
Accrued expenses................................ 2,120 4,043 1,955
Deferred income taxes........................... 389 -- --
------- ------- -------------
Total current liabilities..................... 3,277 5,431 3,351
------- ------- -------------
Long-term liabilities
Deferred compensation........................... 1,229 1,385 --
Other........................................... 438 472 472
------- ------- -------------
1,667 1,857 472
------- ------- -------------
Commitments and contingencies (Note 8)............ -- -- --
------- ------- -------------
Stockholders' equity
Common stock, no par value, 1,500,000 shares
authorized; 323,541, 318,929 and 468,929
shares outstanding at September 30, 1996 and
1997 and June 25, 1998, respectively.......... 237 232 10,519
Retained earnings............................... 9,875 12,718 12,804
------- ------- -------------
10,112 12,950 23,323
------- ------- -------------
$15,056 $20,238 $ 27,146
------- ------- -------------
------- ------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE>
AVTECH CORPORATION
STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, --------------------
------------------------------- JUNE 30, JUNE 25,
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales...................................................... $ 21,020 $ 28,797 $ 32,619 $ 24,071 $ 30,634
Cost of sales.............................................. 12,333 15,967 20,422 14,667 19,643
--------- --------- --------- --------- ---------
Gross profit........................................... 8,687 12,830 12,197 9,404 10,991
--------- --------- --------- --------- ---------
Operating expenses
General and administrative............................... 1,991 1,992 2,758 1,915 2,448
Selling expenses......................................... 1,257 1,559 1,295 880 1,180
Research, development and engineering.................... 2,853 2,697 2,707 2,040 2,013
Employee stock ownership plan............................ 1,200 1,000 1,200 900 600
Nonrecurring bonus and employment contract termination
expenses............................................... -- -- -- -- 3,592
--------- --------- --------- --------- ---------
7,301 7,248 7,960 5,735 9,833
--------- --------- --------- --------- ---------
Income from operations..................................... 1,386 5,582 4,237 3,669 1,158
--------- --------- --------- --------- ---------
Other income (expense)
Interest expense......................................... (8) (8) (6) -- --
Gain on disposal of equipment............................ -- 14 -- -- --
Interest income.......................................... 46 30 269 197 169
Rental income, net....................................... -- -- 32 -- 62
Stockholder transaction expenses......................... -- -- -- -- (1,229)
--------- --------- --------- --------- ---------
38 36 295 197 (998)
--------- --------- --------- --------- ---------
Income before provision for federal income tax............. 1,424 5,618 4,532 3,866 160
Provision for federal income tax........................... 493 1,934 1,518 1,352 74
--------- --------- --------- --------- ---------
Net income................................................. $ 931 $ 3,684 $ 3,014 $ 2,514 $ 86
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-47
<PAGE>
AVTECH CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
STATED
NUMBER OF VALUE OF
SHARES COMMON RETAINED
OUTSTANDING STOCK EARNINGS
----------- --------- ---------
<S> <C> <C> <C>
Balance at September 30, 1994.................................................. 323,541 $ 237 $ 5,260
Net income..................................................................... -- -- 931
----------- --------- ---------
Balance at September 30, 1995.................................................. 323,541 237 6,191
Net income..................................................................... -- -- 3,684
----------- --------- ---------
Balance at September 30, 1996.................................................. 323,541 237 9,875
Stock redemption............................................................... (4,612) (5) (171)
Net income..................................................................... -- -- 3,014
----------- --------- ---------
Balance at September 30, 1997.................................................. 318,929 232 12,718
Exercise of stock options (Unaudited).......................................... 150,000 2,683 --
Tax benefit of stock options exercised (Unaudited)............................. -- 7,604 --
Net income (Unaudited)......................................................... -- -- 86
----------- --------- ---------
Balance at June 25, 1998 (Unaudited)........................................... 468,929 $ 10,519 $ 12,804
----------- --------- ---------
----------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-48
<PAGE>
AVTECH CORPORATION
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, --------------------
------------------------------- JUNE 30, JUNE 25,
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income................................................ $ 931 $ 3,684 $ 3,014 $ 2,514 $ 86
Adjustments to reconcile net income
to net cash provided by (used in) operating
activities
Depreciation and amortization........................... 587 582 528 363 405
Gain on sale of property and equipment.................. -- (14) -- -- --
Deferred income tax provision........................... 54 947 (1,265) (1,150) 334
Changes in assets and liabilities:
Accounts receivable................................... (1,797) (2,990) 2,470 2,899 (393)
Inventories........................................... (1,504) 198 (1,021) (1,216) (578)
Prepaid and other current assets...................... 63 (20) (114) (86) 126
Accounts payable...................................... 400 (152) 620 678 8
Accrued expenses...................................... 1,620 (872) 2,153 1,209 (2,977)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
operating activities.................................. 354 1,363 6,385 5,211 (2,989)
--------- --------- --------- --------- ---------
Cash flows from investing activities
Purchases of property and equipment....................... (735) (509) (3,085) (370) (1,167)
Proceeds from sale of assets.............................. -- 15 -- -- --
--------- --------- --------- --------- ---------
Net cash used in investing activities................... (735) (494) (3,085) (370) (1,167)
--------- --------- --------- --------- ---------
Cash flows from financing activities
Exercise of stock options................................. -- -- -- -- 1,143
Stock redemption.......................................... -- -- (176) (176) --
Capital lease obligations................................. (36) (36) (40) (27) (30)
--------- --------- --------- --------- ---------
Net cash used in
financing activities.................................. (36) (36) (216) (203) 1,113
--------- --------- --------- --------- ---------
Net (decrease) increase in cash and
equivalents............................................... (417) 833 3,084 4,638 (3,043)
Cash and equivalents at beginning
of the period............................................. 636 219 1,052 1,052 4,136
--------- --------- --------- --------- ---------
Cash and equivalents at end of
the period................................................ $ 219 $ 1,052 $ 4,136 $ 5,690 $ 1,093
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE>
AVTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE COMPANY
Avtech Corporation (the "Company") is a custom design and manufacturing firm
established in 1963 to produce high-quality equipment for the aircraft industry.
In 1970, the Company began to produce engineered products and has since focused
its engineering and product development efforts on responding to specifications
from original equipment aircraft manufacturers (OEMs). The Company's products
fall into five main categories:
1. Aircraft communication control equipment (including audio control units,
multiplexed audio systems and audio amplifiers).
2. Aircraft lighting controls (including ballasts, dimmers and flood lighting).
3. Power systems (including transformer rectifier units, power inverters and
battery chargers).
4. Airborne facsimile terminals (AvFax).
5. Special products (including PDX intercoms, liquid-gauging and fill control,
and frequency units).
FINANCIAL STATEMENT PRESENTATION
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
At September 30, 1996 and 1997, the Company maintained $549,000 and
$119,000, respectively, of its cash and cash equivalents balances at one bank.
At September 30, 1996 and 1997, the Company maintained $503,000 and $4,017,000,
respectively, in a money market funds and bankers' acceptances.
RECEIVABLES AND CONCENTRATIONS OF CREDIT RISK
Accounts receivable from trade customers are generally due within thirty
days. The Company performs periodic credit evaluations of its customers'
financial conditions and generally does not require collateral. All of the
Company's sales are to businesses directly associated with the aviation industry
(airlines, aircraft manufacturers, etc.). Approximately 70% of the Company's
sales are to customers based in the United States.
F-50
<PAGE>
AVTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
The cost of property, plant and equipment is depreciated over the estimated
useful lives of the related assets. Depreciation is computed using the
straight-line and accelerated methods over the following estimated lives:
<TABLE>
<CAPTION>
YEARS
---------
<S> <C>
Buildings............................................................................. 20-39
Building improvements................................................................. 10-39
Machinery and equipment............................................................... 5
Furniture, computer and other equipment............................................... 5-7
</TABLE>
Maintenance and repairs are charged to operations when incurred. Additions
and improvements are capitalized. When property, plant and equipment are sold or
otherwise disposed of, the asset account and related accumulated depreciation
account are relieved, and any gain or loss is included in operations.
INVENTORIES
Inventories are stated at the lower of cost (determined by the first-in,
first-out method) or market. Costs of manufactured inventories include all
direct materials, labor and an allocation of overhead. Market represents the
lower of replacement cost or estimated net realizable value.
REVENUE RECOGNITION
Revenues from the sale of manufactured products are recorded when shipped.
Reimbursements for nonrecurring engineering costs, which are expensed as
incurred, are included in revenues at the time a negotiated settlement is
reached with the customer. The Company's nonrecurring engineering revenues for
the years ended September 30, 1995, 1996 and 1997 were $1,257,000, $4,042,000
and $527,000, respectively. Included within accounts receivable at September 30,
1996 are $3,384,000 of unbilled receivables which were collected in fiscal year
1997.
INCOME TAXES
Deferred income taxes are determined using the liability method. A deferred
tax asset or liability is determined based on the difference between the
financial statement and tax basis of assets and liabilities as measured by the
enacted tax rates which will be in effect when these differences reverse.
Deferred tax expense is the result of changes in the asset and/or liability for
deferred taxes.
STOCK OPTION PLAN
As permitted under Statement of Financial Accounting Standards No., 123,
"Accounting for Stock-Based Compensation" (SFAS 123), the Company measures
compensation expense related to the employee stock option plan utilizing the
intrinsic value method as prescribed by Accounting Principles Board No. 25,
"Accounting for Stock Issued to Employees".
F-51
<PAGE>
AVTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCRUED WARRANTIES
The Company sells a majority of its products to customers along with various
repair or replacement warranties. The terms of the warranties vary according to
the customer and/or the product involved. The most common warranty period is the
earlier of:
a. 36 months from the date of delivery to the operator, or
b. 42 months from the date of manufacture.
Provisions for estimated future warranty costs are made in the period
corresponding to the sale of the product. Classification between short and
long-term warranty obligations is estimated based on historical trends.
UNAUDITED INTERIM RESULTS
The financial information as of June 25, 1998 and for the nine months ended
June 30, 1997 and June 25, 1998 is unaudited. In the opinion of the Company, the
unaudited financial information is presented on a basis consistent with the
audited financial statements and contains all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the results for
such interim period. The results of operations for the interim periods are not
necessarily indicative of results of operations for the full year.
NOTE 2 - INVENTORIES
Inventories at September 30, 1996 and 1997 and June 25, 1998 (unaudited)
consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------- JUNE 25,
1996 1997 1998
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials and components..................................... $ 2,488 $ 2,617 $ 3,218
Work in process.................................................. 1,285 2,014 1,912
Finished goods................................................... 460 623 702
--------- --------- -----------
$ 4,233 $ 5,254 $ 5,832
--------- --------- -----------
--------- --------- -----------
</TABLE>
NOTE 3 - PROPERTY AND EQUIPMENT
The Company owns property located immediately adjacent to its main facility.
The property is not currently used for any rental or productive activity. In
1990, the property was condemned by the local authorities and is considered
unsuitable for habitation in its current state. The current carrying value of
$62,000 represents the original cost of the land and is lower than its estimated
net realizable value.
In 1997, the Company purchased a 20,275 square foot office building and an
adjacent vacant lot for investment purposes. The net book value of the property
was $2,134,000 at September 30, 1997. The Company leases the office space to
tenants under one to three-year noncancelable operating leases. At
F-52
<PAGE>
AVTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - PROPERTY AND EQUIPMENT (CONTINUED)
March 31, 1998, the building was fully occupied. Minimum future rentals to be
received on noncancelable leases are as follows (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30,
- ------------------------------------------------------------------
<S> <C>
1998.............................................................. $ 128
1999.............................................................. $ 20
</TABLE>
The Company leases equipment under a five-year lease term. Based on the
provisions of Statement No. 13, issued by the Financial Accounting Standards
Board, these leases meet the criteria of capital leases and, accordingly, have
been recorded as such. These assets are stated on the balance sheet at their
capitalized cost of $194,000. Depreciation of $161,000 has been recognized
through September 30, 1997.
NOTE 4 - ACCRUED EXPENSES
Accrued expenses at September 30, 1996 and 1997 consist of the following
(amounts in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Employee compensation and related taxes........................................................ $ 875 $ 2,556
Employee stock option plan contribution........................................................ 1,000 1,200
Current portion of warranty reserve............................................................ 204 240
Other.......................................................................................... 41 47
--------- ---------
$ 2,120 $ 4,043
--------- ---------
--------- ---------
</TABLE>
NOTE 5 - DEFINED CONTRIBUTION PLANS
The Company sponsors an employee stock ownership plan (ESOP) for the benefit
of employees with twelve or more months of continuous service. Contributions are
made to the plan at the discretion of the Company's Board of Directors. The
Company's contributions for the years ended September 30, 1995, 1996 and 1997
were $1,200,000, $1,000,000 and $1,200,000, respectively.
The Company also sponsors a cash or deferred compensation (401k) plan for
the benefit of eligible employees. Under the plan, employees may elect to defer
a portion of their compensation (subject to statutory limitations).
Discretionary contributions by the Company may be made when authorized by the
Board of Directors. No such contributions were made during the years ended
September 30, 1995, 1996 and 1997.
NOTE 6 - FEDERAL INCOME TAXES
The provision (benefit) for federal income taxes is comprised of the
following (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Current................................................................................ $ 439 $ 987 $ 2,783
Deferred............................................................................... 54 947 (1,265)
--------- --------- ---------
$ 493 $ 1,934 $ 1,518
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-53
<PAGE>
AVTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - FEDERAL INCOME TAXES (CONTINUED)
The provision for federal income tax expense approximates the federal
statutory rate for all periods presented. The Company is not required to pay
state income taxes.
Deferred tax assets and liabilities at September 30, 1996 and 1997 include
the following (amounts in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
DEFERRED TAX ASSETS
Reserves........................................................................................ $ 335 $ 393
Compensatory stock options...................................................................... 416 471
Capitalized inventories......................................................................... 10 12
--------- ---------
761 876
DEFERRED TAX LIABILITIES
Deferred revenue................................................................................ (1,150) --
--------- ---------
$ (389) $ 876
--------- ---------
--------- ---------
</TABLE>
The classification in the balance sheet between current and noncurrent
deferred tax assets is based on the classification of the related asset that
gives rise to the temporary difference. A deferred tax asset that is not related
to an asset is classified according to the expected reversal date of the
temporary difference.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
The Company has commitments based on open purchase orders arising out of its
normal business operations. As of September 30, 1996 and 1997, these commitments
were $5,080,000 and $6,760,000, respectively.
TERMINATION FOR CONVENIENCE CLAUSES
The Company routinely enters into contractual commitments with customers to
design and manufacture parts. These contracts contain "termination for
convenience" clauses that permit recovery of costs incurred by the Company if
the customer terminates the contract prior to its completion. These recoveries
are included in sales when billed.
F-54
<PAGE>
AVTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASING ARRANGEMENTS
The Company leases a building under a five-year operating lease. The lease
calls for monthly payments of $5,000 plus utilities, taxes and maintenance and
expires in April 2001. The lessor has the right to terminate the lease at
anytime by giving the Company at least twelve months written notice. The Company
subleases a portion of its facilities under an operating lease that expires
December 1998. The following is net rental expense under operating leases for
the years ended September 30, 1995, 1996 and 1997 (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Rent expense.............................................................................. $ 60 $ 60 $ 60
Less: Sublease rentals.................................................................... (7) (11) (10)
--- --- ---
$ 53 $ 49 $ 50
--- --- ---
--- --- ---
</TABLE>
The following is a schedule by years of the future minimum rentals under
this lease (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30, LESSEE SUBLEASE NET
- ------------------------------------------------------------------- ----------- ----------- ---------
<S> <C> <C> <C>
1998........................................................... $ 60 $ 10 $ 50
1999........................................................... 60 11 49
2000........................................................... 60 11 49
2001........................................................... 60 11 49
----- --- ---------
$ 240 $ 43 $ 197
----- --- ---------
----- --- ---------
</TABLE>
NOTE 8 - ECONOMIC DEPENDENCE
A material part of the Company's business is dependent on one customer, the
loss of which could have a material effect on the Company. For the years ended
September 30, 1995, 1996 and 1997, approximately 29.5%, 24% and 46.9%,
respectively, of revenues were attributable to this customer. At September 30,
1996 and 1997, accounts receivable from this customer represented approximately
41.1% and 23.4%, respectively, of total accounts receivable.
NOTE 9 - STOCK OPTION PLANS
Prior to 1993, the Company implemented a nonqualified compensatory stock
option plan with the President. Under this Plan, options to purchase 90,000
shares of the Company's stock were granted at an option price of $2.70 per
share. These options are currently exercisable by the President.
During the year ended September 30, 1994, the Company and three key
employees entered into employment contracts which voided all prior compensatory
stock option plans other than that of the President's. Under these new
contracts, the Company granted 20,000 shares to each of the three employees at
an exercise price of $15 per share. Fair market value was $28 per share at the
date of the grant. Each employee still employed at September 30, 1998, is
entitled to exercise his option to purchase 20,000 fully
F-55
<PAGE>
AVTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - STOCK OPTION PLANS (CONTINUED)
vested shares. Accordingly, the Company has expensed $156,000 during each of the
years ended September 30, 1995, 1996 and 1997. These shares, when exercised,
cannot be sold until September 30, 2003. The Company has the first right to
purchase the shares upon exercise but is not obligated to do so.
The accumulated expense resulting from the difference between the exercise
prices and fair market values at the respective date of grant has been
classified as a long-term liability in deferred compensation.
NOTE 10 - ADDITIONAL CASH FLOW INFORMATION
Supplementary cash flow information for the years ended September 30, 1995,
1996 and 1997 is as follows (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Cash paid during the period for:
Capital leases.................................. $ 36 $ 36 $ 40
------ ------ ------
------ ------ ------
Interest........................................ $ 10 $ 7 $ 5
------ ------ ------
------ ------ ------
Income taxes.................................... $-- $1,449 $2,900
------ ------ ------
------ ------ ------
</TABLE>
NOTE 11 - SUBSEQUENT EVENT (UNAUDITED)
In May 1998, the Company signed a definitive purchase agreement whereby all
of the outstanding shares of the Company would be acquired by DeCrane Aircraft
Holdings, Inc. The transaction was consummated on June 26, 1998. Prior to
closing the transaction, all outstanding stock options were exercised and the
income tax benefit resulting from the tax deduction allowed for the difference
between the exercise price and the fair market value of the stock was recorded.
The $7,604,000 income tax benefit from the stock options exercised is a noncash
transaction for purposes of the statement of cash flows for the nine months
ended June 25, 1998. Additionally, certain members of management were paid a
one-time bonus at closing and the balance due pursuant to their employment
contracts that were terminated immediately prior to closing.
F-56
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
PATS, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
statements of operations, of stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of PATS, Inc. and
subsidiaries at June 30, 1997 and 1998 and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
January 25, 1999
F-57
<PAGE>
PATS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1998
--------- --------- DECEMBER 31,
------------
1998
------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.................................................. $ 401 $ 216 $ 2,504
Trade accounts receivable, net of allowance for doubtful accounts of $362,
$451 and $456, respectively.............................................. 2,192 1,347 3,273
Inventories................................................................ 6,586 6,582 7,146
Cost and estimated earnings in excess of billings.......................... -- 773 4,770
Prepaid expenses and other current assets.................................. 75 59 58
Deferred income taxes...................................................... 107 132 132
--------- --------- ------------
Total current assets................................................... 9,361 9,109 17,883
--------- --------- ------------
Property and equipment....................................................... 2,734 6,130 6,823
Less accumulated depreciation.............................................. (1,334) (1,745) (1,968)
--------- --------- ------------
1,400 4,385 4,855
--------- --------- ------------
Deferred income taxes, net................................................... 600 878 878
Notes receivable--stockholders............................................... 556 560 521
Other assets................................................................. 24 24 --
--------- --------- ------------
Total assets........................................................... $ 11,941 $ 14,956 $ 24,137
--------- --------- ------------
--------- --------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Borrowings from bank....................................................... $ 800 $ 1,000 $ 4,900
Notes and lease payable--current........................................... 205 386 1,326
Trade accounts payable..................................................... 1,106 2,468 2,559
Customer advances.......................................................... 3,668 1,792 2,943
Accrued expenses and other liabilities..................................... 1,329 1,880 2,690
Income taxes payable....................................................... 484 458 1,246
--------- --------- ------------
Total current liabilities.............................................. 7,592 7,984 15,664
--------- --------- ------------
Notes and lease payable--non-current......................................... 591 3,678 3,501
--------- --------- ------------
Commitments and contingencies (Note 11)...................................... -- -- --
--------- --------- ------------
Stockholders' equity
Common stock, $1 par value, 100,000 shares authorized, 18,000, 17,490 and
18,000 shares issued and outstanding at June 30, 1997 and 1998 and
December 31, 1998, respectively.......................................... 18 17 18
Additional paid-in capital................................................. 429 -- 207
Retained earnings.......................................................... 3,311 3,277 4,747
--------- --------- ------------
3,758 3,294 4,972
--------- --------- ------------
$ 11,941 $ 14,956 $ 24,137
--------- --------- ------------
--------- --------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-58
<PAGE>
PATS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, ---------------------------
-------------------- DECEMBER 31, DECEMBER 31,
1997 1998 1997 1998
--------- --------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Sales.......................................................... $ 21,726 $ 23,464 $ 9,496 $ 19,380
Cost of sales.................................................. 15,573 16,992 6,905 14,234
--------- --------- ------ ------------
Gross profit................................................. 6,153 6,472 2,591 5,146
Operating expenses
Selling, general, and administrative......................... 4,106 5,976 2,645 2,535
--------- --------- ------ ------------
Income from operations......................................... 2,047 496 (54) 2,611
--------- --------- ------ ------------
Other expenses
Interest expense, net........................................ (70) (166) (50) (180)
--------- --------- ------ ------------
Income before provision for income taxes....................... 1,977 330 (104) 2,431
Provision (benefit) for income taxes........................... 782 11 (41) 961
--------- --------- ------ ------------
Net income (loss).............................................. $ 1,195 $ 319 $ (63) $ 1,470
--------- --------- ------ ------------
--------- --------- ------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-59
<PAGE>
PATS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
NUMBER OF COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
----------- ------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance, July 1, 1996..................................... 14,616 $ 15 $ 55 $ 2,116 $ 2,186
Net income................................................ -- -- -- 1,195 1,195
Share issuance............................................ 3,000 3 514 -- 517
Share purchases........................................... (400) (1) (399) -- (400)
Shares issued under employee stock benefit plan........... 784 1 259 -- 260
----------- --- ----- ----------- ---------
Balance, June 30, 1997.................................... 18,000 18 429 3,311 3,758
Net income................................................ -- -- -- 319 319
Share purchases........................................... (510) (1) (429) (353) (783)
----------- --- ----- ----------- ---------
Balance, June 30, 1998.................................... 17,490 17 -- 3,277 3,294
Net income (unaudited).................................... -- -- -- 1,470 1,470
Shares issued under employee stock benefit plan
(unaudited)............................................... 510 1 207 -- 208
----------- --- ----- ----------- ---------
Balance, December 31, 1998 (unaudited).................... 18,000 $ 18 $ 207 $ 4,747 $ 4,972
----------- --- ----- ----------- ---------
----------- --- ----- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-60
<PAGE>
PATS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, --------------------------
-------------------- DECEMBER 31, DECEMBER 31,
1997 1998 1997 1998
--------- --------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss)............................................ $ 1,195 $ 319 $ (63) $ 1,470
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
Depreciation............................................... 306 411 155 223
Deferred tax (benefit) expense............................. 298 (303) -- --
Changes in operating assets and liabilities
Trade accounts receivable.................................. 604 845 (4,836) (1,926)
Inventories................................................ (1,042) 4 1,432 (564)
Cost and estimated earnings in excess of billings.......... -- (773) -- (3,997)
Prepaid expenses and other current assets.................. (18) 16 (44) 1
Other assets............................................... -- -- -- 24
Trade accounts payable..................................... 250 1,362 (848) 90
Customer advances.......................................... (3,684) (1,876) 2,938 1,151
Accrued expenses and other liabilities..................... 895 551 (915) 811
Income taxes payable....................................... 484 (26) (41) 788
--------- --------- ------------ ------------
Net cash provided by (used in) operating activities............ (712) 530 (2,222) (1,929)
--------- --------- ------------ ------------
Cash flows from investing activities
Decrease in investment securities available for sale......... 312 -- -- --
Purchases of property and equipment.......................... (248) (3,396) (2,482) (693)
--------- --------- ------------ ------------
Net cash provided by (used in) investing activities............ 64 (3,396) (2,482) (693)
--------- --------- ------------ ------------
Cash flows from financing activities
Advance to stockholders...................................... (342) (4) -- 39
Increase in line of credit borrowings........................ 800 200 1,700 3,900
Increase (decrease) in notes and lease payable............... (233) 3,268 3,113 763
Stock purchases.............................................. (400) (783) -- --
Proceeds from issuance of common stock....................... 777 -- -- 208
--------- --------- ------------ ------------
Net cash provided by financing activities...................... 602 2,681 4,813 4,910
--------- --------- ------------ ------------
Net decrease in cash........................................... (46) (185) 109 2,288
Cash at beginning of period.................................... 447 401 401 216
--------- --------- ------------ ------------
Cash at end of period........................................ $ 401 $ 216 $ 510 $ 2,504
--------- --------- ------------ ------------
--------- --------- ------------ ------------
Supplemental cash flow disclosures
Interest paid.............................................. $ 70 $ 195 $ 60 $ 189
Income taxes paid.......................................... $ 2 $ 376 $ -- $ 168
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-61
<PAGE>
PATS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
PATS, Inc. (the "Company"), and its wholly-owned subsidiaries, design,
manufacture and service a variety of components for auxiliary power, cooling
systems and fuel systems for the corporate aircraft market. The Company
primarily operates in the U.S. market and approximately 45% of the Company's
sales for fiscal 1998 are to Boeing of Washington. The Company's customers are
principally concentrated in the corporate aircraft industry.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and balances are
eliminated in consolidation.
REVENUE RECOGNITION
Revenue is recognized when products are shipped, except for products
manufactured under long-term contracts. Further, revenue associated with
manufactured products requiring customer acceptance is recognized only upon
receipt of such acceptance from the customer.
Revenue under long-term contracts is recognized under the percentage of
completion method. This method recognizes costs and estimated earnings as work
is performed. The basis used is the percentage of incurred costs to estimated
total costs after giving effect to management's most recent estimates. When
contract estimates indicate a loss, provision is made for the entire estimated
loss. Long-term contracts in progress are stated at cost plus estimated earnings
but not in excess of net realizable value.
INVENTORIES
Inventories are valued at the lower of cost or market, cost being determined
using the first-in, first-out (FIFO). Provision has been made for any obsolete
and/or slow-moving inventory.
PROPERTY, PLANT AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Major renewals and betterments are capitalized and ordinary repairs and
maintenance are charged against operations in the year incurred. Depreciation is
computed using the straight-line method for financial reporting purposes and
accelerated methods for income tax purposes. Estimated useful lives are 40 years
for buildings and 3 to 7 years for machinery, equipment and vehicles. Leasehold
improvements are depreciated over the lease term or the estimated useful life of
the improvement, whichever is shorter.
INCOME TAXES
The Company follows the practice of providing for income taxes using the
asset and liability method specified under Statement of Accounting Standards No.
109 (SFAS 109), "Accounting for Income Taxes." SFAS 109 requires the recognition
of deferred tax assets and liabilities for the expected future tax consequences
of events that have been recognized in the Company's financial statements and
tax returns. In estimating future tax consequences under SFAS 109, all expected
future events other than enactments of changes in the tax laws or rates are
generally considered.
F-62
<PAGE>
PATS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash, receivables,
accounts payable and debt do not significantly differ from fair values as of
June 30, 1997 and 1998.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
UNAUDITED INTERIM RESULTS
The financial information as of December 31, 1998 and for the six months
ended December 31, 1997 and 1998 is unaudited. In the opinion of the Company,
the unaudited financial information is presented on a basis consistent with the
audited financial statements and contains all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the results for
such interim period. The results of operations for the interim periods are not
necessarily indicative of results of operations for the full year.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (amounts in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
<S> <C> <C>
1997 1998
--------- ---------
Buildings...................................................................................... $ -- $ 2,972
Machinery and equipment........................................................................ 2,282 2,666
Leasehold improvements......................................................................... 452 492
--------- ---------
2,734 6,130
Less accumulated depreciation and amortization................................................. 1,334 1,745
--------- ---------
$ 1,400 $ 4,385
--------- ---------
--------- ---------
</TABLE>
Depreciation expense for the years ended June 30, 1997 and 1998 was $306,000
and $411,000, respectively.
NOTE 4 - INVENTORIES
Inventories consisted of the following (amounts in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
<S> <C> <C>
1997 1998
--------- ---------
Raw materials.................................................................................. $ 3,609 $ 4,055
Work-in-process................................................................................ 2,977 2,527
--------- ---------
$ 6,586 $ 6,582
--------- ---------
--------- ---------
</TABLE>
F-63
<PAGE>
PATS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - INVENTORIES (CONTINUED)
Inventories were pledged to the extent of amounts received as customer
advances.
NOTE 5 - LONG-TERM CONTRACT
During 1998, the Company entered into a long-term contract with Boeing of
Washington to produce fuel tanks. The Company's policy is to account for such
contracts using the percentage of completion method. Unbilled amounts related to
costs and estimated earnings in excess of billings are expected to be billed and
collected within one year (amounts in thousands).
<TABLE>
<CAPTION>
COSTS AND
ESTIMATED
EARNINGS IN
EXCESS OF BILLINGS
------------------
<S> <C>
Costs and estimated earnings.................................................................. $ 11,513
Less--progress billings....................................................................... 10,740
-------
$ 773
-------
-------
</TABLE>
NOTE 6 - DEBT AND LINES OF CREDIT
Long-term debt consisted of the following (amounts in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
<S> <C> <C>
1997 1998
--------- ---------
Variable rate borrowings under the revolving credit facility................................... $ 800 $ 1,000
Industrial revenue bonds variable rate borrowings at 3.75%..................................... -- 2,000
Fixed rates notes
11.00% note due through 1999................................................................. 79 44
10.00% note due through 2015................................................................. 385 379
8.51% note due through 1999.................................................................. 192 93
8.50% note due through 2001.................................................................. -- 237
8.35% note due through 2000.................................................................. 140 94
7.93% note due through 2002.................................................................. -- 344
6.00% note due through 2012.................................................................. -- 285
Other obligations (Grant Funds)................................................................ -- 588
--------- ---------
1,596 5,064
Less current portion........................................................................... 1,005 1,386
--------- ---------
$ 591 $ 3,678
--------- ---------
--------- ---------
</TABLE>
Other obligations include a $450,000 grant from the State of Delaware which
will be forgiven based on the satisfaction of certain employment and operational
requirements. At June 30, 1998, the Company has not met those objectives and,
accordingly, has reflected this amount as an obligation.
Aggregate principal payments applicable to long-term debt for the next five
fiscal years are as follows: 1999-$1,386,000; 2000-$341,000; 2001-$331,000;
2002-$307,000; 2003-$307,000; and 2004 and after-- $2,392,000.
F-64
<PAGE>
PATS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - DEBT AND LINES OF CREDIT (CONTINUED)
CREDIT ARRANGEMENTS
As of June 30, 1998, the Company had a $3,000,000 borrowing facility with a
bank that carried an interest rate of prime rate plus 25 basis points. On
October 5, 1998, the Company increased its credit facility by $2,000,000. The
facility requires an annual commitment fee of .25%. Certain of the Company's
equipment and inventories are pledged as collateral for the outstanding debt of
the Company.
NOTE 7 - OPERATING LEASES AND RELATED PARTY TRANSACTIONS
The Company is a counterparty to a non-cancelable lease of office space and
manufacturing facilities in Columbia, Maryland from a partnership in which two
stockholders of the Company have a financial interest. The lease extends through
June 2007, with an annual base rent amount of $405,000 and a CPI based
escalator. The Company is responsible for maintenance, insurance, and real
estate tax expense.
The Company has a land lease for its facility in Georgetown, Delaware. This
non-cancelable lease expires through December 31, 2041, with annual rental
approximating $6,000. The lessor is not a related party.
The total minimum rental commitment at June 30, 1998, under these leases is
$3,903,000 which is due as follows (amounts in thousands):
<TABLE>
<CAPTION>
SUSSEX
COLUMBIA, COUNTY,
MARYLAND DELAWARE
----------- -----------
<S> <C> <C>
Year ending June 30,
1999..................................................................................... $ 405 $ 6
2000..................................................................................... 405 6
2001..................................................................................... 405 6
2002..................................................................................... 405 6
2003..................................................................................... 405 6
2004 through 2007........................................................................ 1,620 24
After 2007............................................................................... -- 204
----------- -----
$ 3,645 $ 258
----------- -----
----------- -----
</TABLE>
NOTE 8 - COMMON STOCK AND EMPLOYEE STOCK PLAN
During 1997 and 1998, the Company's Board of Directors authorized the
purchase of 400 and 510 shares of the Company stock at $1,000 and $1,535 per
share, respectively. The purchases were acquired from certain existing and
former stockholders at prices believed to be fair value.
The Company has an Employee Stock Benefit Plan for employees to which
discretionary contributions are made from time to time. During 1997, the Board
of Directors authorized the issuance of 784 shares to this plan at a value of
$332 per share determined by an independent appraiser.
F-65
<PAGE>
PATS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - INCOME TAXES
The provision for income taxes is as follows (amounts in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Current income taxes
Federal...................................................................................... $ 398 $ 258
State........................................................................................ 86 56
--------- ---------
484 314
Deferred income taxes (benefit)................................................................ 298 (303)
--------- ---------
$ 782 $ 11
--------- ---------
--------- ---------
</TABLE>
The effective rate was 39.6% and 3.2% in 1997 and 1998, respectively. A
reconciliation of this rate to the U.S. Federal income tax rate is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------------------------
<S> <C> <C> <C> <C>
1997 1998
% OF PRETAX % OF PRETAX
------------------------ ------------------------
<CAPTION>
AMOUNT INCOME AMOUNT INCOME
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Computed expected tax expense............................................... $ 692 35.0% $ 116 35.0%
State income taxes, net of Federal income tax benefit....................... 90 4.6 15 4.6
Reduction of valuation allowance............................................ -- 0.0 (120) (36.4)
----- --- ----- -----
$ 782 39.6% $ 11 3.2%
----- --- ----- -----
----- --- ----- -----
</TABLE>
The significant components of deferred income taxes are temporary
differences arising from the following (amounts in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Deferred income tax assets (liabilities)
Accrued vacation............................................................................. $ 107 $ 132
Depreciation................................................................................. (198) 101
Research and development costs............................................................... 798 777
Research and development credits............................................................. 900 780
--------- ---------
Total.................................................................................... 1,607 1,790
Valuation allowance............................................................................ (900) (780)
--------- ---------
Deferred income tax assets............................................................... $ 707 $ 1,010
--------- ---------
--------- ---------
</TABLE>
The reduction in the valuation allowance relates to the utilization of a
portion of research and development credits.
NOTE 10 - EMPLOYEE BENEFIT PLANS
The Company has a savings and retirement plan which qualifies under Section
401(k) of the Internal Revenue Code in which all full-time employees are
eligible to participate. In accordance with the terms of
F-66
<PAGE>
PATS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - EMPLOYEE BENEFIT PLANS (CONTINUED)
the plan, employees may elect to contribute up to 15% of their annual
compensation to the plan, subject to certain limitations. The Board of Directors
may elect to declare a discretionary matching contribution to the Plan of 50% of
all contributions made up to 6% of each employee's salary. No matching
contributions were made by the Company for 1997 or 1998.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Lawsuits and claims are filed from time to time in the ordinary course of
business. For all outstanding claims, management, in consultation with legal
counsel, is of the opinion that the outcome of such matters will not have a
material effect on the financial position of the Company.
NOTE 12 - SUBSEQUENT EVENT
In January 1999, 100% of Company's shares were acquired by DeCrane Aircraft
Holdings, Inc. for a purchase price of $41.5 million (including the assumption
of debt), subject to adjustments for changes to its net working capital, and
reserves for certain environmental and other indemnities made by the Company's
shareholders.
F-67
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors of
PPI Holdings, Inc.
Wichita, Kansas
We have audited the accompanying consolidated balance sheets of PPI
Holdings, Inc. and Subsidiary as of December 31, 1997 and 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
period from June 12, 1997 to December 31, 1997 and the year ended December 31,
1998. We have also audited the statements of income, stockholders' equity, and
cash flows of Precision Pattern, Inc. (the predecessor to PPI Holdings, Inc.)
for the year ended December 31, 1996 and the period from January 1, 1997 to June
11, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of PPI Holdings,
Inc. and Subsidiary as of December 31, 1997 and 1998, the results of its
operations and its cash flows for the period from June 12, 1997 to December 31,
1997 and the year ended December 31, 1998, and the results of operations and
cash flows of Precision Pattern Inc. for the year ended December 31, 1996 and
the period from January 1, 1997 to June 11, 1997 in conformity with generally
accepted accounting principles.
BAIRD, KURTZ & DOBSON
Wichita, Kansas
January 28, 1999
F-68
<PAGE>
PPI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1997 1998
--------- ---------
(SUCCESSOR)
ASSETS
Current assets
Cash...................................................................................... $ 193 $ 1,872
Accounts receivable, less allowance for doubtful accounts of $54 and $340 for 1997 and
1998, respectively...................................................................... 4,847 6,230
Inventories............................................................................... 3,203 4,719
Deposits.................................................................................. 284 235
Prepaid expenses and other................................................................ 28 12
--------- ---------
Total current assets.................................................................... 8,555 13,068
--------- ---------
Property and equipment, net................................................................. 1,065 1,184
Goodwill net of accumulated amortization of $69 and $393 for 1997 and 1998, respectively.... 6,332 6,008
Other intangible assets, net of accumulated amortization of $28 and $77 for 1997 and 1998,
respectively.............................................................................. 219 170
--------- ---------
Total assets.......................................................................... $ 16,171 $ 20,430
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................................................... $ 1,032 $ 1,157
Revolving credit agreement................................................................ 626 --
Current maturities of long-term debt...................................................... 1,050 1,500
Accrued warranties........................................................................ 300 300
Accrued profit sharing.................................................................... 348 587
Accrued employee compensation............................................................. 360 271
Other accrued liabilities................................................................. 381 445
--------- ---------
Total current liabilities............................................................... 4,097 4,260
--------- ---------
Long-term debt.............................................................................. 8,850 6,050
--------- ---------
Stockholders' equity
Common stock, $1 stated value; authorized 10,000,000 shares; issued and outstanding
1,000,000 shares........................................................................ 1,000 1,000
Retained earnings......................................................................... 2,224 9,120
--------- ---------
Total stockholders' equity.............................................................. 3,224 10,120
--------- ---------
Total liabilities and stockholders' equity............................................ $ 16,171 $ 20,430
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-69
<PAGE>
PPI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM PERIOD FROM YEAR ENDED
DECEMBER JANUARY 1, JUNE 12, DECEMBER
31, 1996 1997 TO JUNE 1997 TO 31, 1998
----------- 11, 1997 DECEMBER -----------
------------- 31, 1997
(PREDECESSOR) ----------- (SUCCESSOR)
(PREDECESSOR)
(SUCCESSOR)
<S> <C> <C> <C> <C>
Net sales................................. $ 17,665 $ 10,400 $ 15,102 $ 37,714
Cost of goods sold
Direct material......................... 4,942 2,837 3,541 7,353
Direct labor............................ 4,125 2,403 3,283 7,534
Manufacturing expenses.................. 4,645 2,059 3,407 7,742
Outside processing...................... 546 376 912 1,747
----------- ------------- ----------- -----------
14,258 7,675 11,143 24,376
----------- ------------- ----------- -----------
Gross profit.............................. 3,407 2,725 3,959 13,338
----------- ------------- ----------- -----------
Operating expenses
General and administrative.............. 1,446 667 821 2,102
Engineering............................. 322 140 226 489
Bad debt provision...................... 75 -- -- --
----------- ------------- ----------- -----------
Income from operations.................... 1,564 1,918 2,912 10,747
----------- ------------- ----------- -----------
Other income (expense)
Interest income......................... 94 50 10 --
Interest expense........................ -- -- (732) (1,051)
Other revenue........................... 8 -- 39 14
Gain on sale of asset................... 42 -- 1 --
Other income (expense).................. (13) 8 (6) (19)
----------- ------------- ----------- -----------
131 58 (688) (1,056)
----------- ------------- ----------- -----------
Net income................................ $ 1,695 $ 1,976 $ 2,224 $ 9,691
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-70
<PAGE>
PPI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
PREDECESSOR:
Balance, December 31, 1995............................................ $ 40 $ 1 $ 7,311 $ 7,352
Net income............................................................ -- -- 1,695 1,695
Dividend on common stock
$220 per share...................................................... -- -- (880) (880)
----------- ----- ----------- ---------
Balance, December 31, 1996............................................ 40 1 8,126 8,167
Net Income............................................................ -- -- 1,976 1,976
Dividend on common stock
$862.50 per share................................................... -- -- (3,450) (3,450)
----------- ----- ----------- ---------
Balance, June 11, 1997................................................ $ 40 $ 1 $ 6,652 $ 6,693
----------- ----- ----------- ---------
----------- ----- ----------- ---------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
SUCCESSOR:
Balance, June 12, 1997................................................ $ 1,000 -- $ -- $ 1,000
Net income............................................................ -- -- 2,224 2,224
----------- ----- ----------- ---------
Balance, December 31, 1997............................................ 1,000 -- 2,224 3,224
Net income............................................................ -- -- 9,691 9,691
Dividends on common stock $2.80 per share............................. -- -- (2,795) (2,795)
----------- ----- ----------- ---------
Balance, December 31, 1998............................................ $ 1,000 -- $ 9,120 $ 10,120
----------- ----- ----------- ---------
----------- ----- ----------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-71
<PAGE>
PPI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM PERIOD FROM YEAR ENDED
DECEMBER 31, JANUARY 1, JUNE 12, 1997 DECEMBER 31,
1996 1997 TO TO 1998
--------------- JUNE 11, 1997 DECEMBER 31, ---------------
------------- 1997
(PREDECESSOR) --------------- (SUCCESSOR)
(PREDECESSOR)
(SUCCESSOR)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income........................ $ 1,695 $ 1,976 $ 2,224 $ 9,691
Items not requiring (providing)
cash:
Depreciation and amortization... 181 79 304 633
Gain on sale of property and
equipment..................... (42) -- (1) --
Changes in:
Accounts receivable............. (1,672) 1,048 (2,108) (1,383)
Inventories..................... (318) (43) (133) (1,515)
Prepaid expenses and other...... 35 51 (359) 65
Accounts payable and accrued
expenses...................... 94 (158) 1,020 338
------- ------------- ------- -------
Net cash provided by (used in)
operating activities........ (27) 2,953 947 7,829
------- ------------- ------- -------
Cash flows from investing activities
Purchase of property and
equipment....................... (151) (251) (96) (379)
Proceeds from sale of property and
equipment....................... 298 -- 17 --
Payments for organizational
costs........................... -- -- (247) --
Purchase of subsidiary............ -- -- (8,954) --
------- ------------- ------- -------
Net cash provided by (used in)
investing activities........ 147 (251) (9,280) (379)
------- ------------- ------- -------
Cash flows from financing activities
Net borrowings under revolving
credit agreement................ -- -- 626 (626)
Proceeds from issuance of
long-term debt.................. -- -- 7,500 3,000
Principal payments on long-term
debt............................ -- -- (600) (5,350)
Dividends paid.................... (880) (3,450) -- (2,795)
------- ------------- ------- -------
Net cash provided by (used in)
financing activities........ (880) (3,450) 7,526 (5,771)
------- ------------- ------- -------
Increase (decrease) in cash......... (760) (748) (807) 1,679
Cash, beginning of period........... 2,727 1,967 1,000 193
------- ------------- ------- -------
Cash, end of period................. $ 1,967 $ 1,219 $ 193 $ 1,872
------- ------------- ------- -------
------- ------------- ------- -------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-72
<PAGE>
PPI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
PPI Holdings, Inc. was incorporated under Kansas law on February 14, 1997,
and serves as the holding company for Precision Pattern, Inc. The Company began
operation on June 12, 1997, with the purchase of Precision Pattern, Inc. (Note
2)
The Company's revenues are predominately earned from sales of aircraft
interior components to aircraft manufacturers in Kansas. The Company extends
unsecured credit to customers, with credit extended to one customer exceeding
59% and 71% of accounts receivable at December 31, 1997 and 1998 respectively.
Over 97% of year end receivables are concentrated among three customers at
December 31, 1997 and 1998.
PRINCIPALS OF CONSOLIDATION
As a result of the business combination (Note 2) on June 11, 1997, the
Company has presented its financial position, results of operations, changes in
stockholders' equity and cash flows on a predecessor/ successor basis.
PPI Holdings, Inc. is a holding company, which has no material operations or
assets separate from its investment in Precision Pattern, Inc. The consolidated
financial statements as of December 31, 1997 and 1998 and for the period from
June 12, 1997 to December 31, 1997 and for the year ended December 31, 1998
include the accounts of PPI Holdings, Inc. and its subsidiary. The consolidated
financial statements of the predecessor include the accounts of Precision
Pattern, Inc. for the year ended December 31, 1996 and for the period from
January 1, 1997 to June 11, 1997. All significant intercompany accounts and
transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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 period. Actual results could differ from those estimates.
INVENTORY PRICING
Inventories are stated at lower of average cost or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. The assets are depreciated over
their estimated useful lives using straight-line and accelerated methods.
INTANGIBLE ASSETS
The Company is amortizing deferred charges consisting of loan costs, lease
costs and a noncompete agreement utilizing the straight-line method over five to
ten years. Goodwill is being amortized over twenty years also using the
straight-line method.
WARRANTY OBLIGATIONS
The Company generally provides its customers with a one to two year warranty
from the date of purchase. Estimated warranty costs are accrued at the time of
sale.
F-73
<PAGE>
PPI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INCOME TAXES
The Company elected to have its income taxed as an S corporation under
provisions of the Internal Revenue Code; therefore, taxable income or loss is
reported to the individual stockholders for inclusion in their tax returns, and
no provision for Federal and state income tax is included in these statements.
BUY/SELL AGREEMENT
On April 21, 1997, the Company and its shareholders entered into a buy/sell
agreement which restricts any sale or other transfer of shares of the Company.
The purpose of the agreement is to insure that all the shares of stock shall be
offered for sale to the Company and the other shareholders before disposition of
such shares to any other person or entity.
NOTE 2 - BUSINESS COMBINATION
On June 11, 1997, PPI Holdings, Inc. acquired 100% of the outstanding stock
of Precision Pattern, Inc. which consisted of 4,000 shares for $13,172,706 in
cash. This transaction was accounted for using the purchase method by recording
the assets and liabilities of the acquiree at their estimated market values at
the acquisition date. PPI Holdings, Inc. is owned by several members of the
Company's management. As part of the purchase transaction, Precision Pattern,
Inc. borrowed funds from a bank to fund the acquisition.
NOTE 3 - INVENTORIES
Inventories at December 31, 1997 and 1998, were as follows (amounts in
thousands):
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Raw material...................................................... $ 2,268 $ 3,205
Work in process................................................... 1,535 2,114
------------ ------------
3,803 5,319
Less reserve for obsolesce........................................ 600 600
------------ ------------
$ 3,203 $ 4,719
------------ ------------
------------ ------------
</TABLE>
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1998, were as follows
(amounts in thousands):
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Leasehold improvements..................................................... $ 1,065 $ 563
Machinery and equipment.................................................... 1,535 612
Furniture and fixtures..................................................... 827 343
Vehicles................................................................... 138 16
--------- ---------
3,565 1,534
Less accumulated depreciation.............................................. 2,500 350
--------- ---------
$ 1,065 $ 1,184
--------- ---------
--------- ---------
</TABLE>
F-74
<PAGE>
PPI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - PROFIT SHARING PLAN
The Company has a profit sharing plan covering substantially all employees.
The Company's contribution to the Plan is 6% of the compensation of all
participants under the Plan determined for the Company's taxable year for which
it makes the contribution. The Company must have current or accumulated net
profits exceeding 5% of the net sales in order to make the contributions.
Participant's interest is vested over a period of three to seven years of
service. The Company expensed contributions for the year ended December 31,
1996, the periods from January 1, 1997 to June 11, 1997, June 12, 1997 to
December 31, 1997 and the year ended December 31, 1998, in the amount of
$283,500, $141,352, $347,620 and $587,036 , respectively. Employees also have
the option to make elective deferrals to the Plan up to the limits set by the
Internal Revenue Service.
NOTE 6 - REVOLVING CREDIT AGREEMENT
At December 31, 1997 and 1998, the Company had $0 and $625,821 outstanding
borrowings under a $5,000,000 revolving credit agreement. The agreement is
secured by goods, equipment, accounts, inventory, instruments, documents,
chattel paper, general intangibles and other personal property of the Company.
Interest is calculated at prime rate plus various amounts up to 3/4% and is
payable monthly. Payments on principal are made daily, as cash is available,
from a lock box maintained by the lender. Final maturity is June 12, 2002.
F-75
<PAGE>
PPI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - LONG-TERM DEBT
<TABLE>
<CAPTION>
1997 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Note payable, bank; due June 12, 2002, payable in increasing quarterly
installments including interest at prime rate plus various amounts up to
1% secured by goods, equipment, accounts, inventory, instruments,
documents, chattel paper, general intangibles and other personal property
of the Company and its subsidiary........................................ $ 6,900 $ 4,550
Note payable, bank; payable in quarterly installments of $100,000 with the
balance due June 12, 2002. The note bears interest at prime plus 1% and
is secured by goods, equipment, accounts, inventory, instruments,
documents, chattel paper, general intangibles and other personal property
of the Company and its subsidiary........................................ -- 3,000
Note payable, other; due September 12, 2010, payable in quarterly
installments of $150,000 beginning on September 12, 2005. Interest is
accrued on the unpaid portion of the note at 15% and is payable in
bi-annual installments. None of the Company's assets are pledged as
collateral on this note and it is subordinate to the bank note. As part
of the purchase and note agreement, dividends are restricted to amounts
necessary to cover income taxes of the shareholders on income from the
Company. This restriction ended when the note was retired in 1998........ 3,000 --
--------- ---------
9,900 7,550
Less current maturities.................................................... 1,050 1,500
--------- ---------
$ 8,850 $ 6,050
--------- ---------
--------- ---------
</TABLE>
Aggregate annual maturities of long-term debt at December 31, 1998 are (amounts
in thousands):
<TABLE>
<S> <C>
1999................................................................ $ 1,500
2000................................................................ 1,550
2001................................................................ 1,600
2002................................................................ 2,900
---------
7,550
Less current maturities............................................. 1,500
---------
Noncurrent portion.................................................. $ 6,050
---------
---------
</TABLE>
F-76
<PAGE>
PPI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - SIGNIFICANT ESTIMATES AND CONCENTRATION
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain concentrations.
Those matters include the following:
ALLOWANCE FOR DOUBTFUL ACCOUNTS
An allowance for doubtful accounts has been established based on
management's estimate of the uncollectible portion. However, actual losses may
be materially different than the estimated amount.
RESERVE FOR OBSOLETE INVENTORY
The Company owns a significant amount of raw materials which were not used
in production during the year. A reserve for obsolete inventory has been
established for the estimated amount that is obsolete; however, actual losses
may be materially different than the estimated amount.
ACCRUED WARRANTIES
Each year, the Company does a significant amount of rework related to the
satisfaction of warranties. An amount has been included in accrued expenses for
estimated warranty expense related to current year sales; however, the actual
expenses to be incurred may be materially different than the estimated amounts
which have been accrued.
MAJOR CUSTOMERS
The Company sold approximately 49% and 35% in 1996, 56% and 35% from January
1, 1997 to June 11, 1997, 56% and 35% from June 12, 1997 to December 31, 1997
and 66% and 30% in 1998 of its primary product to two customers. There are a
limited number of buyers of the Company's products.
NOTE 9 - RELATED PARTY TRANSACTIONS
The Company rents its business facility from a property rental company which
is owned, in part, by one of the shareholders of the Company. For the year ended
December 31, 1996, the periods from January 1, 1997 to June 11, 1997, June 12,
1997 to December 31, 1997 and the year ended December 31, 1998, the Company made
payments totaling $250,000, $139,088, $174,950, and $355,500, respectively, for
rent to the related rental company.
NOTE 10 - ADDITIONAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1997 1998
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
ADDITIONAL CASH PAYMENT INFORMATION
Interest paid..................................................... $ 669 $ 987
ADDITIONAL INVESTING AND FINANCING ACTIVITIES
Long-term debt incurred for purchase of subsidiary................ $ 3,000 $ --
</TABLE>
NOTE 11 - YEAR 2000 ISSUE
Like all entities, the Company is exposed to risks associated with the Year
2000 Issue, which affects computer software and hardware; transactions with
customers, vendors and other entities; and equipment dependent on microchips.
The Company has begun but not yet completed the process of identifying and
remediating potential Year 2000 problems. It is not possible for any entity to
guarantee the results of its own remediation efforts or to accurately predict
the impact of the Year 2000 Issue on third parties with
F-77
<PAGE>
PPI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - YEAR 2000 ISSUE (CONTINUED)
which the Company does business. If remediation efforts of the Company or third
parties with which it does business are not successful, the Year 2000 problem
could have negative effects on the Company's financial condition and results of
operations in the near term.
NOTE 12 - SUBSEQUENT EVENT
In March 1999, the shareholders of the Company signed a definitive agreement
to sell all of the outstanding stock of the Company. The shareholders expect to
complete the sale during the second quarter of 1999.
F-78
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN
ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION IN THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT IS ACCURATE AS OF
ANY DATE OTHER THAN THE DATE ON THE FRONT OF THOSE DOCUMENTS.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................... 2
Summary Pro Forma Consolidated Financial Data............................. 5
Summary Historical Consolidated Financial Data............................ 7
Risk Factors.............................................................. 9
Recent Developments....................................................... 15
Use of Proceeds........................................................... 17
Capitalization............................................................ 18
Dividend Policy........................................................... 19
Unaudited Pro Forma Consolidated Financial Data........................... 20
Selected Consolidated Financial Data...................................... 28
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 30
Business.................................................................. 39
Management................................................................ 55
Security Ownership of Significant Beneficial Owners and Management........ 61
Related Party Transactions................................................ 63
Description of Warrants................................................... 65
Description of Capital Stock of Holdings.................................. 68
Federal Income Tax Consequences........................................... 71
Plan of Distribution...................................................... 74
Legal Matters............................................................. 75
Experts................................................................... 75
Index to Financial Statements............................................. F-1
</TABLE>
DeCrane Holdings Co.
COMMON STOCK, $0.01 PAR VALUE
WARRANTS TO PURCHASE COMMON STOCK
---------------------
PROSPECTUS
---------------------
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all estimated expenses we have incurred
or expect to incur in connection with the exchange offer for and registration of
the warrants.
<TABLE>
<CAPTION>
ITEM AMOUNT
- --------------------------------------------------------------- ---------------------------------------
<S> <C> <C>
SEC Registration Fee........................................... $ 1,023
Printing and Engraving Costs...................................
Transfer Agent Fees............................................
Legal Fees and Expenses........................................
Accounting Fees and Expenses...................................
Miscellaneous..................................................
Total........................................................
</TABLE>
All amounts are estimated except for the SEC registration fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation of DeCrane Holdings contains a provision
eliminating or limiting director liability to the company and its stockholders
for monetary damages arising from acts or omissions in the director's capacity
as a director. Those provisions may not, however, eliminate or limit the
personal liability of a director: (1) for any breach of such director's duty of
loyalty to the company or its stockholders; (2) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law; (3) under the Delaware statutory provision making directors personally
liable, under a negligence standard, for unlawful dividends or unlawful stock
purchases or redemptions; or (4) for any transaction from which the director
derived an improper personal benefit. As a result of this provision, the ability
of DeCrane Holdings, or a stockholder thereof, to successfully prosecute an
action against a director for breach of his duty of care is limited. However,
the provision does not affect the availability of equitable remedies such as an
injunction or recision based upon a director's breach of his duty of care. The
SEC has taken the position that the provision will have no effect on claims
arising under the Federal securities laws.
In addition, the Certificate of Incorporation and Bylaws for DeCrane
Holdings provide for mandatory indemnification rights, subject to limited
exceptions, to any director or executive officer of the company who (by reason
of the fact that he or she is a director or officer) is involved in a legal
proceeding of any nature. Such indemnification rights include reimbursement for
expenses incurred by such director or officer in advance of the final
disposition of such proceeding in accordance with the applicable corporate law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(1) As a part of the financing for DLJ acquisition of DeCrane Aircraft, DeCrane
Holdings sold all of the shares of its common stock to DLJ Merchant Banking
and several of its affiliates for $65.0 million in August 1998 on a private
placement in reliance on Section 4(2) of the Securities Act.
(2) As a part of the financing for the DLJ acquisition of DeCrane Aircraft,
DeCrane Holdings sold all of the shares of its Senior Redeemable
Exchangeable Preferred Stock due 2009 to DLJ Merchant Banking and several of
its affiliates for $34.0 million in August 1998 on a private placement in
reliance on Section 4(2) of the Securities Act.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES (CONTINUED)
(3) DeCrane Holdings issued warrants for 155,000 shares of its common stock to
the initial purchaser, Donaldson Lufkin & Jenrette Securities Corporation,
and issued warrants for another 155,000 shares of its common stock to DLJ
Merchant Banking and several of its affiliates, in October 1998 as an
inducement for the purchase of the $100.0 million of old notes by DeCrane
Aircraft. The transactions did not generate any proceeds for DeCrane
Holdings, in a private placement in reliance on Section 4(2) of the
Securities Act. The old notes and warrants were paired in units, and were
immediately resold by the initial purchaser in transactions not involving a
public offering.
(4) DeCrane Holdings sold 20,098 newly-issued shares of common stock for
$462,222 and 2,418 shares of newly-issued Senior Redeemable Exchangeable
Preferred Stock due 2009 for $241,778 to Dr. Robert Hermann, Dr. Paul
Kaminski and four other members of Global Technology Partners, LLC in
December, 1998, in reliance on Section 4(2) of the Securities Act. DeCrane
Aircraft loaned half of the aggregate $704,000 purchase price to the six
purchasers.
(5) DeCrane Holdings issued and sold 543,478 shares of its common stock to DLJ
Merchant Banking Partners II, L.P. and its affiliates on April 23, 1999 for
a purchase price of $23 per share. The issuance of such securities was
exempt from registration under Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------------------
<C> <S>
3.1.1 Bylaws of DeCrane Holdings Co. (formerly Delight Holdings Co.)*
3.1.2 Certificate of Incorporation of DeCrane Holdings Co. (formerly Delight Holdings Co.)*
3.2.1 Certificate of Incorporation of DeCrane Aircraft Holdings, Inc. (successor by merger to Delight
Acquisition Co. and DAHX, Inc.)*
3.2.2 Bylaws of DeCrane Aircraft Holdings, Inc. (successor by merger to Delight Acquisition Co. and DAHX,
Inc.)*
3.3.1 Certificate of Incorporation of Aerospace Display Systems, Inc. (formerly ADS Acquisition Inc.)*
3.3.2 Bylaws of Aerospace Display Systems, Inc.*
3.4.1 Articles of Incorporation of Audio International, Inc.*
3.4.2 Amended & Restated Bylaws of Audio International, Inc.*
3.5.1 Articles of Incorporation of Avtech Corporation*
3.5.2 Bylaws of Avtech Corporation*
3.6.1 Articles of Incorporation of Cory Components*
3.6.2 Bylaws of Cory Components, Inc.*
3.7.1 Certificate of Incorporation of Dettmers Industries, Inc. (formerly DAHX Acquisition, Inc.)*
3.7.2 Bylaws of Dettmers Industries, Inc.*
3.8.1 Restated Articles of Incorporation of Elsinore Aerospace Services, Inc.*
3.8.2 Bylaws of Elsinore Aerospace Services, Inc.*
3.9.1 Certificate of Incorporation of Elsinore Engineering Inc. (formerly EE Acquisition, Inc.)*
3.9.2 Bylaws of Elsinore Engineering Inc. (formerly EE Acquisition, Inc.)*
3.10.1 Articles of Incorporation of Hollingsead International, Inc.*
</TABLE>
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------------------
<C> <S>
3.10.2 Bylaws of Hollingsead International, Inc.*
3.11.1 Articles of Incorporation of Tri-Star Electronics International, Inc.*
3.11.2 Bylaws of Tri-Star Electronics International, Inc.*
3.12.1 Articles of Incorporation of PATS, Inc.*
3.12.2 Bylaws of PATS, Inc.*
3.12.3 Amendment to Articles of PATS, Inc.*
3.12.4 Amendment to Bylaws of PATS, Inc.*
3.13.1 Articles of Incorporation of Flight Refueling, Inc.*
3.13.2 Bylaws of Flight Refueling, Inc.*
3.14.1 Articles of Incorporation of Patrick Aircraft Tank Systems, Inc.*
3.14.2 Bylaws of Patrick Aircraft Tank Systems, Inc.*
3.15.1 Articles of Incorporation of PATS Aircraft and Engineering Corporation*
3.15.2 Bylaws of PATS Aircraft and Engineering Corporation*
3.16.1 Articles of Incorporation of PATS Support, Inc.*
3.16.2 Bylaws of PATS Support, Inc.*
3.17.1 Articles of Incorporation of PPI Holdings, Inc.
3.17.2 Bylaws of PPI Holdings, Inc.
3.18.1 Articles of Incorporation of Precision Pattern, Inc.
3.18.2 Bylaws of Precision Pattern, Inc.
4.1 Indenture dated October 5, 1998 between DeCrane Aircraft and State Street Bank and Trust Co. as
Trustee*
4.1.1 Supplemental Indenture dated January 22, 1999 among PATS, Inc. and its subsidiaries, the other
guarantors under the Indenture, and State Street Bank and Trust Co.*
4.1.2 Draft Supplemental Indenture to be dated April 23, 1999 among PPI Holdings, Inc., Precision Pattern,
Inc., the other guarantors under the Indenture, and State Street Bank and Trust Co.*
4.3 DeCrane Holdings Co., Warrants to Purchase 155,000 Shares of Common Stock*
4.4 Warrant Registration Rights Agreement--DeCrane Holdings Co.*
4.5 Certificate of Designations, Preferences and Rights of 14% Senior Redeemable Exchangeable Preferred
Stock Due 2008*
5.1 Opinion of Spolin & Silverman LLP
5.2 Opinion of special New York counsel+
10.2 Amended & Restated Investors' Agreement dated as of October 2, 1998*
10.5 Tax Sharing Agreement dated March 15, 1993 between the Company and several subsidiaries and
Hollingsead International, Inc.*
10.6 Employment Agreement dated July 17, 1998 between the Company and R. Jack DeCrane*
10.7 401(k) Salary Reduction Non-Standardized Adoption Agreement dated April 30, 1992 between the Company
and The Lincoln National Life Insurance Company*
10.8 Form of Subscription Agreement for DeCrane Holdings Co. common and preferred stock by certain members
of Global Technology Partners LLC*
</TABLE>
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------------------
<C> <S>
10.10 Credit Agreement dated August 28, 1998 by and among DeCrane Aircraft Holdings, Inc. (successor by
merger to DeCrane Finance Co.) and DLJ Capital Funding, Inc.*
10.10.1 First Amendment to Credit Agreement dated January 22, 1999*
10.10.2 Draft Amended and Restated Credit Agreement to be dated April 23, 1999*
10.11 Lease between Botzler-Emery Associates Guilford Ten Limited Partnership and PATS, Inc.*
10.12 Lease among Continental Development Corporation, Tri-Star Electronics International, Inc., and Cory
Components, Inc. for real property in El Segundo, CA*
10.13 Lease among Kilroy Realty, L.P., Kilroy Realty Corporation and Hollingsead International for real
property in Garden Grove, California*
10.14 Lease between Sussex County, MD and PATS, Inc.*
10.15 General Terms Agreement dated July 5, 1995 between the Boeing Company and Cory Components, Number
6-5752-0002*
10.15.1 Special Business Provisions dated November 30, 1995 between the Boeing Company and Cory Components,
Number 6-5752-0004*
10.15.2 Purchase Agreement 9423JC4548 between Boeing Defense & Space- Irving Co. and Cory Components, January
1, 1995 through December 31, 1999*
10.16 Purchase Agreement dated as of October 1, 1998 between Matsushita Electronic Industrial Co., Ltd. and
Cory Components Inc.*
10.17 1998 General Terms Agreement between the Boeing Company and Tri-Star Electronics International, Inc.
dated July 1, 1998, number BCA-6-5632-0032*
10.17.1 Special business provisions between the Boeing Company and Tri-Star Electronics International, Inc.
dated July 1, 1998, number STD-6-5632-0097*
10.18 General Terms Agreement between Boeing Company and PATS, Inc. dated February 17, 1998*
10.18.1 Special business provisions between the Boeing Company and PATS, Inc. dated February 17, 1998*
10.18.2 Letter Agreement dated January 15, 1999 between The Boeing Company and DeCrane Aircraft Holdings,
Inc.*
10.19 Management Incentive Plans adopted April 1999
12.2 DeCrane Holdings Co. Earnings to Fixed Charges Ratio*
21.1 List of Subsidiaries of Registrant*
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Baird, Kurtz & Dobson
23.3 Consent of Spolin & Silverman LLP (included in Exhibit 5.1)
23.4 Consent of special New York counsel (included in Exhibit 5.2)
24 Power of Attorney
27 Financial Data Schedule*
</TABLE>
- ------------------------
* Previously filed.
+ To be filed by amendment.
(B) FINANCIAL STATEMENT SCHEDULE:
II-4
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
Schedule II--Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
- To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
- To include any prospectus required by section 10(a)(3) of the
Securities Act;
- To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the
form of prospectus filed with the SEC pursuant to Rule 424(b) under the
Securities Act if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement;
- To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
- For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
- That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial
bona fide offering thereof.
- To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.
- To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement
when it became effective.
- In any registration hereunder of offered securities for sale in an
underwritten offering, to provide to the underwriter at the closing
specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter
to permit prompt delivery to each purchaser.
II-5
<PAGE>
ITEM 17. UNDERTAKINGS (CONTINUED)
- Insofar as indemnification for liabilities arising under the Securities
Act, may be permitted to directors, officers and controlling persons of
each registrant pursuant to the foregoing provisions, or otherwise, the
registrants have been advised that in the opinion of the SEC, such
indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. If a claim for indemnification
against such liabilities is asserted by such director, officer or
controlling person in connection with the securities being registered
(other than the payment by a registrant of expenses incurred or paid by a
director, officer or controlling person of a registrant in the successful
defense of any action, suit or proceeding), that registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed
in the Securities Act and will be governed by the final adjudication of
such issue.
II-6
<PAGE>
SIGNATURES
This registration statement, pursuant to the requirements of the Securities
Act of 1933, as amended, has been signed on its behalf by the undersigned,
thereunto duly authorized, in the State of New York, on this 6th day of May,
1999.
<TABLE>
<S> <C> <C>
DECRANE HOLDINGS CO.
By: /s/ TIMOTHY J. WHITE
-----------------------------------------
Timothy J. White
VICE PRESIDENT AND
SECRETARY
</TABLE>
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chairman of the Board of
* Directors, President and
- ------------------------------ Treasurer (principal May 6, 1999
Thompson Dean accounting officer)
/s/ R. JACK DECRANE
- ------------------------------ Director May 6, 1999
R. Jack DeCrane
*
- ------------------------------ Director May 6, 1999
John F. Fort, III
*
- ------------------------------ Director May 6, 1999
Dr. Robert J. Hermann
*
- ------------------------------ Director May 6, 1999
Dr. Paul Kaminski
*
- ------------------------------ Director May 6, 1999
Susan Schnabel
*
- ------------------------------ Vice President, Secretary May 6, 1999
Timothy J. White & Director
</TABLE>
<TABLE>
<S> <C> <C> <C>
/s/ R. JACK DECRANE
--------------------------------------
R. Jack DeCrane May 6, 1999
*By: ATTORNEY-IN-FACT
</TABLE>
II-7
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COST AND CHARGED TO END OF
CLASSIFICATION PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS PERIOD
- ------------------------------------------- ------------ ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
DECRANE AIRCRAFT HOLDINGS, INC.
(PREDECESSOR)
YEAR ENDED DECEMBER 31, 1996
Allowance for doubtful accounts............ $ 259 $ 68 $ 71(A) $ 19 $ 379
Reserve for excess, slow moving and
potentially obsolete material............ $ 1,154 $ 1,055 -- $ 116 $ 2,093
YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful accounts............ $ 379 $ 111 $ 174(B) $ 177 $ 487
Reserve for excess, slow moving and
potentially obsolete material............ $ 2,093 $ 1,374 $ 59(B) $ 162 $ 3,364
EIGHT MONTHS ENDED AUGUST 31, 1998
Allowance for doubtful accounts............ $ 487 $ 384 $ 32(B) $ 376 $ 527
Reserve for excess, slow moving and
potentially obsolete material............ $ 3,364 $ 760 $ 2,056(B) $ 311 $ 5,869
DECRANE HOLDINGS CO.
FOUR MONTHS ENDED DECEMBER 31, 1998
Allowance for doubtful accounts............ $ 527(B) $ 243 -- $ 189 $ 581
Reserve for excess, slow moving and
potentially obsolete material............ $ 5,869(B) $ 285 -- $ 452 $ 5,702
</TABLE>
- --------------------------
<TABLE>
<S> <C> <C>
(A) Comprised of the following:
Effect of foreign currency translation $ (4)
Recovery of amounts previously written off 20
Attributable to companies acquired 55
---------
$ 71
---------
---------
(B) Attributable to companies acquired. Reflects
historical amounts used to determine the fair
values of net assets acquired.
</TABLE>
S-1
<PAGE>
ARTICLES OF INCORPORATION
OF
PPI HOLDINGS, INC.
I, Tad Patton, the undersigned incorporator, hereby form and establish a
for profit corporation under the laws of the State of Kansas.
I
NAME
The name of the corporation is PPI Holdings, Inc.
II
PURPOSE
The purpose of the corporation is to engage in any lawful act or activity
for which corporations may be organized under the Kansas general corporation
code.
III
CAPITAL STOCK
The total number of shares of stock which the corporation shall have
authority to issue is 10,000,000 shares of common stock, and such shares are to
be without par value.
IV
BOARD OF DIRECTORS
The names and mailing addresses of the persons who are to serve as
directors of the corporation until the first annual meeting of stockholders or
until a successor or successors are elected and qualified are as follows:
NAME MAILING ADDRESS
---- ---------------
Bill L. Allen 1643 South Maize Road
Wichita, KS 67209-3998
Jack E. Argetsinger 1643 South Maize Road
Wichita, KS 67209-3998
Merle J. Harris 1643 South Maize Road
Wichita, KS 67209-3998
<PAGE>
Edward A. Markel 1643 South Maize Road
Wichita, KS 67209-3998
Donald G Zerbe 1643 South Maize Road
Wichita, KS 67209-3998
Directors need not be elected by written ballot unless required by the bylaws of
the corporation.
V
BYLAWS
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to adopt, amend or repeal bylaws
of the corporation.
VI
REGISTERED OFFICE AND RESIDENT AGENT
The name of the corporation's resident agent, and the address of its
registered office in Sedgwick County, Kansas is:
NAME ADDRESS
---- -------
Bill L. Allen 1643 South Maize Road
Wichita, KS 67209-3998
VII
LIMITATION OF DIRECTOR LIABILITY
No director of this corporation shall be personally liable to this
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that this provision shall not eliminate or limit
the liability of a director.
A. for any breach of the director's duty of loyalty to this corporation
or its stockholders;
B. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
C. under the provisions of K.S.A. 17-6424 and amendments thereto; or
D. for any transaction from which the director derived an improper
personal benefit.
2
<PAGE>
VIII
CUMULATIVE VOTING NOT PERMITTED
At all elections of directors of this corporation and for the purposes of
all other matters upon which stockholders are entitled to vote, each stockholder
shall be entitled to as many votes as shall equal the number of shares of stock
held by that stockholder. No cumulative voting shall be permitted.
IX
INCORPORATOR
The name and mailing address of the incorporator is:
NAME MAILING ADDRESS
---- ---------------
Tad Patton 151 North Main, Suite 800
Wichita, Kansas 67202-1409
IN WITNESS WHEREOF, I have hereunto set my name this 14th day of February,
1997
/s/ Tad Patton
------------------------
Tad Patton
STATE OF KANSAS )
)ss:
COUNTY OF SEDGWICK )
The foregoing instrument was acknowledged before me this 14th day of
February, 1997, by Tad Patton.
[SEAL] /s/ Darlene M. Mauldin
--------------------------
Notary Public, State of Kansas
My Appointment Expires: 10-11-97
---------------
3
<PAGE>
CERTIFICATE OF AMENDMENT
TO THE ARTICLES OF INCORPORATION OF
PPI HOLDINGS, INC.
------------------
I, Donald G. Zerbe, President of PPI Holdings, Inc., a Kansas Corporation
(the "Corporation"), do hereby certify that by unanimous consent in writing on
April 16, 1997, the Board of Directors of the Corporation adopted the following
resolution setting forth the proposed Amendment to the Articles of Incorporation
and declaring its advisability:
"RESOLVED, that Article VIII of the Articles of Incorporation of the
Corporation be amended by deleting the present Article VIII in its entirety
and substituting the following Article VIII in lieu thereof:
ARTICLE VII
CUMULATIVE VOTING
At all elections of directors of this corporation, each holder of
stock shall be entitled to as many votes as shall equal the number of
votes which such holder would be entitled to cast for the election of
directors with respect to such holder's shares, multiplied by the
number of directors to be elected. The holder of stock may cast all
such votes for a single director or may distribute them among two or
more directors as the stockholder sees fit. The candidates for
director receiving the highest number of votes, up to the number of
directors to be elected, shall be elected.
I further certify that, pursuant to the aforesaid resolutions and in
accordance with provisions of K.S.A. 17-6602, the shareholders of the
Corporation adopted such resolution by unanimous written consent.
IN WITNESS WHEREOF, I subscribe my name this 16th day of April, 1997.
/s/ Donald G. Zerbe
--------------------------------
Donald G. Zerbe, President
ATTEST:
/s/ Bill L. Allen
- --------------------------------
Bill L. Allen, Secretary
<PAGE>
STATE OF KANSAS )
)ss:
COUNTY OF SEDGWICK )
Personally appeared before me, a Notary Public in and for Sedgwick County,
Kansas, Donald G. Zerbe and Bill L. Allen, who are personally known to me to be
the same persons who executed the foregoing instrument in writing, and duly
acknowledged the execution of the same.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 16th day of
April, 1997.
/s/ Theron E. Fry
--------------------------------
Notary Public
My appointment expires:
--------------------
[SEAL]
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
PPI HOLDINGS, INC.
ARTICLE I
STOCKHOLDERS
Section 1.01. PLACE OF MEETING. All meetings of the stockholders shall
be held at the principal office of the corporation or at such other place
either within or without the State of Kansas as shall be designated from
time to time by the Board of Directors and stated in the notice of the
meeting.
Section 1.02. ANNUAL MEETINGS. Annual meetings of stockholders shall
be held at 10:00 o'clock a.m. on the third Tuesday of February in each year,
if not a legal holiday, and if a legal holiday, then at the same time and
place on the next succeeding business day, 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 such annual meeting, the stockholders shall
elect a Board of Directors and transact such other business as may properly
be brought before the meeting.
Section 1.03. SPECIAL MEETINGS. Special meetings of the stockholders,
for any purpose or purposes, unless otherwise prescribed by statute or by the
Articles of Incorporation, may be called by the President and shall be called
by the President or Secretary at the request of a majority of the Board of
Directors, or at the request in writing of stockholders owning a majority in
amount of the entire capital stock of the corporation issued and outstanding
and entitled to vote. Such request shall state the purpose or purposes of
the proposed meeting.
Section 1.04. NOTICE OF MEETINGS. Notice stating the place, day and
hour of the meeting, and in case of special meetings, the purpose or purposes
for which the meeting is called, shall be delivered not less than 10 nor more
than 60 days before the date of the meeting, by or at the direction of the
President, the Secretary or the officer or person calling the meeting, to
each stockholder of record entitled to vote at such meeting.
Section 1.05. QUORUM. The holders of a majority of the stock issued
and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business except as otherwise provided by
statute or by the Articles of Incorporation. If, however, such quorum shall
not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be
present or represented. At such
<PAGE>
adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. If the adjournment is for more than thirty (30) days,
or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder
of record entitled to vote at the meeting.
Section 1.06. VOTING. When a quorum is present at any meeting, the vote
of the holders of a majority of the stock having voting power present in
person or represented by proxy shall decide any question brought before such
meeting, unless the question is one upon which by express provision of the
statutes of Kansas or of the Articles of Incorporation a different vote is
required, in which case such express provision shall govern and control the
decision of such question. Unless otherwise provided in the Articles of
Incorporation or these bylaws, or by statute, each stockholder shall at every
meeting of the stockholders be entitled to one vote in person or by proxy for
each share of the capital stock having voting power held by such stockholder.
Section 1.07. ELECTION OF DIRECTORS. Unless the board of directors has
fixed in advance (pursuant to Section 4.05) a record date for purposes of
determining entitlement to vote at the meeting, the record date shall be as
of the close of business on the day next preceding the date on which the
meeting shall be held. If the Articles of Incorporation permit the election
of directors without written ballot, then such elections of directors shall
be without written ballot, unless requested by any shareholder, in which case
the election of directors shall be by written ballot. Every shareholder
entitled to vote at any election for directors shall have the right to cumulate
his votes and give one candidate a number of votes equal to the number of
directors to be elected multiplied by the number of votes to which his shares
are entitled, or to distribute his votes on the same principle among as many
candidates as he shall choose. The candidates receiving the highest number of
votes up to the number of directors to be elected shall be elected.
Section 1.08. PROXIES. No proxy shall be voted on after three years
from its date, unless the proxy provides for a longer period.
Section 1.09. ACTION BY WRITTEN CONSENT. Unless otherwise provided in
the Articles of Incorporation, any action required to be taken at any annual
or special meeting of stockholders of the corporation, or any action which
may be taken at any annual or special meeting of such stockholders, 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 entitled to vote thereon.
-2-
<PAGE>
ARTICLE II
DIRECTORS
Section 2.01. POWERS. The business of the corporation shall be managed
by its Board of Directors, which may exercise all such powers of the
corporation and do all such lawful acts and things as are not by statute or
by the Articles of Incorporation or by these bylaws directed or required to
be exercised or done by the stockholders.
Section 2.02. NUMBER AND QUALIFICATIONS. The number of directors shall
from time to time be fixed and determined by the Board; provided, however,
there shall at all times be five directors of the corporation. The number of
directors shall be set forth in the notice of any meeting of stockholders
held for the purpose of electing directors if such number is different than
last determined. No decrease in the number of directors shall have the
effect of shortening the term of any incumbent director. Directors need not
be stockholders nor be residents of the State of Kansas. The Board, in its
discretion, may elect a Chairman of the Board, who shall preside at Board
meetings and generally manage the affairs of the Board.
Section 2.03. ELECTION. Members of the initial Board of Directors
shall hold office until the first annual meeting of stockholders and until
their successors have been elected and qualified. At the first annual
meeting of stockholders, and at each annual meeting afterward, the
stockholders shall elect directors to hold office until the next succeeding
annual meeting. Each director shall hold office for the term for which he is
elected and until his successor shall be elected and qualified, unless sooner
removed by action of the stockholders.
Section 2.04. VACANCIES. Vacancies and newly created directorships
resulting from any increase in the authorized number of directors may be
filled by a majority of the directors then in office, though less than a
quorum, or by a sole remaining director, and the directors so chosen shall
hold office until the next annual election and until their successors are
duly elected and shall qualify, unless sooner displaced. If there are no
directors in office, then an election of directors may be held in the manner
provided by statute. Any director may be removed, either for or without
cause, at any special meeting of the stockholders duly called and held for
such purpose.
Section 2.05. PLACE OF MEETINGS. The Board of Directors of the
corporation may hold meetings, both regular and special, either within or
without the State of Kansas.
Section 2.06. ANNUAL AND REGULAR MEETINGS. The first meeting of each
newly elected Board of Directors shall be held at the place of, and
immediately following, the annual meeting of the stockholders, and no notice
of such meeting shall be necessary to the newly elected directors in order
legally to constitute the meeting, provided a quorum shall be present.
Regular meetings of the Board of Directors may be held, without notice, at
such time and at such place as shall from time to time be determined by the
Board, provided a quorum shall be present. In the event any such
-3-
<PAGE>
meeting is not held at such time and place, the meeting may be held at such time
and place as shall be specified in a notice given as hereinafter provided for
special meetings of the Board of Directors.
Section 2.07. SPECIAL MEETINGS. Special meetings of the Board may be
called by the President on 48 hours' notice to each director and shall be
called by the President or Secretary in like manner on the written request of
two directors. Neither the business to be transacted at, nor the purpose of,
any special meeting of the Board of Directors need be specified in the notice
of such meeting, except that notice shall be given of any proposed amendment
to these bylaws if it is to be adopted at any special meeting or with respect
to any other matter where notice is required by statute.
Section 2.08. QUORUM. At all meetings of the Board, a majority of the
directors shall constitute a quorum for the transaction of business, and the
act of a majority of the directors present at any meeting at which there is a
quorum shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute or by the Articles of Incorporation. If a
quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat nay adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be
present.
Section 2.09. WRITTEN CONSENT. Any action required or permitted to be
taken at any meeting of the Board of Directors or of any committee thereof may
be taken without a meeting if all members of the Board or committee, as the case
may be, consent thereto in writing, and the writing or writings are filed with
the minutes of proceedings of the Board or committee.
Section 2.10. TELEPHONIC MEETINGS. Members of the Board of Directors, or
any committee designated by the Board of Directors, may participate in a meeting
of the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
Section 2.11. APPOINTMENT OF COMMITTEES. The Board of Directors may,
by resolution passed by a majority of the whole Board, designate one or more
committees, each committee to consist of one or more of the directors of the
corporation. The Board may designate one or more directors as alternate
members, of any committee, who may replace any absent or disqualified member
at any meeting of the committee. Any such committee, to the extent provided
in the resolution of the Board of Directors, shall have and may exercise all
the powers and authority of the Board of Directors in the management of the
business and affairs of the corporation, and may authorize the seal of the
corporation to be affixed to all papers which may require it; but no such
committee shall have the power or authority in reference to amending the
Articles of Incorporation, adopting an agreement of merger or consolidation,
recommending to the stockholders the sale, lease or exchange of all or
substantially all property and assets of the corporation, recommending to the
stockholders a dissolution of the corporation or a revocation of a
dissolution, or amending the
-4-
<PAGE>
bylaws of the corporation; and, unless the resolution or the Articles of
Incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend or to authorize the issuance of stock. Such
committee or committees shall have such name or names as may be determined from
time to time by resolution adopted by the Board of Directors. Each committee
shall keep regular minutes of its meetings and report the same to the Board of
Directors when required.
Section 2.12. COMPENSATION. The Board of Directors shall have the
authority to fix the compensation of directors. The directors may be paid their
expenses, if any, of attendance at each meeting of the Board of Directors and
may be paid a fixed sum for attendance at each meeting of the Board of Directors
or a stated salary as director. No such payment shall preclude any director from
serving the corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed like
compensation for amending committee meetings.
ARTICLE III
OFFICERS
Section 3.01. OFFICERS. The officers of the corporation shall be chosen
by the Board of Directors and shall include a President, a Secretary and a
Treasurer. Any number of offices may be held by the same person. Such officers
shall be chosen by the Board of Directors at its first meeting after each
annual meeting of stockholders.
Section 3.02. SUBORDINATE OFFICERS AND AGENTS. The Board of Directors
may from time to time appoint such other officers and agents as it shall deem
necessary, who shall hold their offices for such terms and shall exercise
such powers and perform such duties as shall be determined from time to time
by the Board.
Section 3.03. COMPENSATION. The salaries of all officers and agents of
the corporation shall be fixed by the Board of Directors or pursuant to its
direction.
Section 3.04. ELECTION AND REMOVAL. The officers of the corporation
shall hold office until their successors are chosen and qualify. Any officer
elected or appointed by the Board of Directors may be removed at any time by
the affirmative vote of a majority of the Board of Directors. Any vacancy
occurring in any office of the corporation shall be filled by the Board of
Directors.
Section 3.05. CHAIRMAN OF THE BOARD. The Chairman of the Board, if
there shall be such an officer, shall, if present, preside at all meetings
of the Board of Directors, and exercise and perform such other powers and
duties as may be from time to time assigned to him by the Board of Directors
or prescribed by these bylaws.
-5-
<PAGE>
Section 3.06. PRESIDENT. Subject to such supervisory powers, if any,
as may be given by the Board of Directors to the Chairman of the Board, if
there be such an officer, the President shall be the chief executive officer
of the corporation, shall have general and active management of the business
of the corporation, and shall see that all orders and resolutions of the
Board of Directors are carried into effect. He shall preside at all meetings
of the stockholders and, in the absence of the Chairman of the Board, at all
meetings of the Board of Directors. He shall be an EX OFFICIO member of all
standing committees. He shall execute bonds, mortgages and other contracts
requiring a seal, under the seal of the corporation, except where required or
permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the Board of
Directors to some other officer or agent of the corporation.
Section 3.07. VICE PRESIDENT. In the absence of the President or in
the event of his inability or refusal to act, the Executive Vice President,
the Vice President or Vice Presidents, if there be such an officer or
officers, in order of their rank as fixed by the Board of Directors, or if
not ranked, the Vice President designated by the Board of Directors. shall
perform the duties of the President, and when so acting, shall have all the
powers of and be subject to all the restrictions upon the President. A Vice
President shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.
Section 3.08. SECRETARY. The Secretary shall attend all meetings of
the Board of Directors and all meetings of the stockholders and record all
the proceedings of the meetings of the corporation and of the Board of
Directors in a book to be kept for that Purpose and shall perform like
duties for the standing committees when required. He shall give, or cause to
be given, notice of all meetings of the stockholders and special meetings of
the Board of Directors, and shall perform such other duties as may be
prescribed by the Board of Directors or President. He shall have custody of
the corporate seal of the corporation and he, or an assistant Secretary,
shall have authority to affix the same to any instrument requiring it and
when so affixed, it may be attested by his signature or by the signature of
such assistant Secretary. The Board of Directors may give general authority
to any other officer to affix the seal of the corporation and to attest the
affixing by his signature.
Section 3.09. ASSISTANT SECRETARY. Any Assistant Secretary may, in the
absence of the Secretary or in the event of his inability or refusal to act,
perform the duties and exercise the powers of the Secretary and shall perform
such other duties and have such other powers as the Board of Directors may from
time to time prescribe.
Section 3.10. TREASURER. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the corporation in such depositories as may be designated by the Board of
Director. He shall disburse the funds of the corporation as may be ordered by
the Board of Directors, taking proper vouchers for such disbursements, and shall
render to the President and the
-6-
<PAGE>
Board of Directors, at its regular meetings, or when the Board of Directors so
requires, an account of all his transactions as Treasurer and of the financial
condition of the corporation. If required by the Board of Directors, he shall
give the corporation a bond, in such sum and with such sureties as shall be
satisfactory to the Board of Directors, for the faithful performance of the
duties of his office and for the restoration to the corporation, in case of his
death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the corporation.
Section 3.11. ASSISTANT TREASURER. Any Assistant Treasurer may, in the
absence of the Treasurer or in the event of his inability or refusal to act,
perform the duties and exercise the powers of the Treasurer, and shall perform
such other duties and have such other powers as the Board of Directors may from
time to time prescribe.
ARTICLE IV
CERTIFICATES OF STOCK
Section 4.01. CERTIFICATES. Every holder of stock in the corporation shall
be entitled to have a certificate, signed by the President or a Vice President,
and the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant
Secretary, of the corporation, certifying the number of shares owned by him in
the corporation. If the corporation shall be authorized to issue more than one
class of stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences or rights shall be set forth in full or
summarized on the face or back of the certificate which the corporation shall
issue to represent such class or series of stock; provided that, except as
otherwise provided by law, in lieu of the foregoing requirements, there may be
set forth on the face or back of the certificate which the corporation shall
issue to represent such class or series of stock, a statement that the
corporation will furnish without charge to each stockholder who so requests the
powers, designations, preferences and relative, participating, optional or other
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences or rights.
Section 4.02. FACSIMILE SIGNATURES. Any of or all the signatures on any
stock certificate issued by the corporation may be facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a 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 or it were such officer,
transfer agent or registrar at the date of issue.
Section 4.03. LOST CERTIFICATES. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that
-7-
<PAGE>
fact by the person claiming the certificate of stock to be lost, stolen or
destroyed. When authorizing such issue of a new certificate or certificates,
the Board of Directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen or destroyed
certificate or certificates, or his legal representative, to advertise the same
in such manner as it shall require and/or to give the corporation a bond in such
sum as it many direct as indemnity against any claim that may be made against
the corporation with respect to the certificate alleged to have been lost,
stolen or destroyed.
Section 4.04. TRANSFERS. Upon surrender to the corporation or the
transfer agent of the corporation of certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
Section 4.05. RECORD DATE. 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 changes, conversion or exchange of stock or for the purpose of
any lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than 60 nor less than 10 days before the date of such
meeting, nor more than 60 days prior to any other action. 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 4.06. REGISTERED OWNER. The corporation shall be entitled to
treat the registered owner of any share or shares of stock as the absolute owner
therof for all purposes and shall not be bound to recognize any equitable or
other claim to or interest in such share or shares on the part of any other
person, whether or not it shall have express or other notice thereof, except as
otherwise provided by the laws of Kansas.
-8-
<PAGE>
ARTICLE V
INDEMNIFICATION AND INSURANCE
Section 5.01. GENERAL. The corporation shall indemnify any person who was
or is a party or who was or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that he is or was a director,
advisory director, officer or employee of the corporation or of any entity a
majority of the voting stock of which is owned by the corporation, or is or was
serving at the request of the corporation as a director, advisory director,
officer or employee of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of NOLO CONTENDERE or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
Section 5.02. DERIVATIVE ACTION. The corporation shall indemnify any
person who was or is a party or who was or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, advisory director, officer or employee of the corporation or
of any entity a majority of the voting stock of which is owned by the
corporation, or is or was serving at the request of the corporation as a
director, adivsory director, officer or employee of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable for negligence or misconduct in the performance of
his duty to the corporation unless and only to the extent that the court in
which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all of the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which such court shall deem proper.
Section 5.03. COSTS INDEMNIFIED. To the extent that any person who is or
was a director, advisory director, officer or employee of the corporation or of
any entity a majority of the voting stock of which is owned by the corporation,
or who is or was serving at the request of the
-9-
<PAGE>
corporation as a director, advisory director, officer or employee of another
corporation, partnership, joint venture, trust or other enterprise, has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Sections 5.01 and 5.02, or in defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith. Any other indemnification under Sections 5.01 and 5.02 shall be made
by the corporation only as authorized in the specific case upon a determination
that indemnification is proper in the circumstances because the applicable
standard of conduct set forth therein has been met. Such determination shall be
made (a) by the Board of Directors of the corporation by a majority vote of a
quorum consisting of directors who were not parties to such action, suit or
proceeding, or (b) if such quorum is not obtainable, or, even if obtainable a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion, or (c)by the stockholders of the corporation.
Section 5.04. TIME OF INDEMNIFICATION. Expenses incurred by a director,
advisory director, officer or employee in defending a civil or criminal action,
suit or proceeding may be paid by the corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of such director, advisory director, officer or employee to repay
such amount if it is ultimately determined that he or she is not entitled to be
indemnified by the corporation pursuant to this Article V.
Section 5.05. NONEXCLUSIVE RIGHTS The indemnification and advancement of
expenses provided by, or granted pursuant to, the other subsections of this
Article V shall not be deemed exclusive of any other right to which those
seeking indemnification or advancement of expenses may be entitled from the
corporation or any other entity under any statute, other bylaw, agreement,
provision of the corporation's Articles of Incorporation, vote of stockholders
or disinterested directors or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office.
However, any amount actually received as the proceeds of any such other
indemnification shall be deducted from the amount, if any, which he may be
entitled to receive pursuant to this Article V.
Section 5.06. INSURANCE. By action of its Board of Directors,
notwithstanding any interest of the directors in the action, to the full extent
permitted by statute, the corporation may purchase and maintain insurance, in
such amounts and against such risks as the Board of Directors deems appropriate,
on behalf of any person who is or was a director, advisory director, officer,
employee or agent of the corporation, or of any entity a majority of the voting
stock of which is owned by the corporation, or who is or was serving at the
request of the corporation as a director, advisory director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against any liability asserted against him and incurred by him in
any such capacity, or arising out of his status as such, whether or not the
corporation would have the power or would be required to indemnify him against
such liability under the provisions of this Article V, or of the corporation's
Articles of Incorporation or the laws of Kansas.
-10-
<PAGE>
Section 5.07. SURVIVAL. The indemnification and advancement of expenses
provided by, or granted pursuant to this Article V shall, unless otherwise
provided when authorized or ratified, continue as to a person who has ceased to
be a director, advisory director, officer or employee and shall inure to the
benefit of the heirs, executors and administrators of such person.
ARTICLE VI
GENERAL PROVISIONS
Section 6.01. DIVIDENDS. Dividends upon the capital stock of the
corporation, subject to the provisions of the Articles of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property or in
shares of the capital stock, subject to the provisions of the Articles of
Incorporation.
Section 6.02. RESERVES. Before payment of any dividend, there may be set
aside out of any funds of the corporation available for dividends such sum or
sums as the directors from time to time, in their absolute discretion, think
proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the corporation, or
for such other purpose as the directors shall think conducive to the interest of
the corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
Section 6.03. CHECKS, DRAFTS, ETC. All checks, notes and contracts of the
corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
Section 6.04. FISCAL YEAR. The fiscal year of the corporation shall be
fixed by resolution of the Board of Directors, or, in the absence of such
resolution, by the President.
Section 6.05. SEAL. The corporation may, but shall not be required to,
have a corporate seal. The corporate seal, if any, shall have inscribed thereon
the name of the corporation, the year of its organization and the words
"Corporate Seal, Kansas." The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
Section 6.06. EXCESS PAYMENTS. Any payments made to an officer of the
corporation such as a salary, commission, bonus, interest, or rent, or
entertainment expenses incurred by him, which shall be disallowed in whole or in
part as a deductible expense by the Internal Revenue Service, shall be
reimbursed by such officer to the corporation to the full extent of such
disallowance. It shall be the duty of the directors, as a Board, to enforce
payment of each such amount disallowed.
Section 6.07. NOTICES. Whenever, under the provisions of the statutes of
Kansas or of the Articles of Incorporation or of these bylaws, notice is
required to be given to any stockholder, such notice shall be given in writing,
either personally, or by mail addressed to such stockholder at his
-11-
<PAGE>
address as it appears on the records of the corporation, with postage thereon
prepaid. Such notice shall be deemed to be given at the time when the same shall
be deposited in the United States mail. Notice to directors may also be given
personally or by telegram.
Section 6.08. WAIVER OF NOTICES. Whenever any notice is required to be
given under the provisions of the statutes or of the Articles of
incorporation or of these bylaws, a waiver thereof in writing, signed by the
person or persons entitled to such notice, whether before or after the time
stated therein, shall be deemed equivalent thereto. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
stockholders, directors or members of a committee of directors need be
specified in any written waiver of notice unless otherwise required by these
bylaws or by the Articles of Incorporation. The attendance of a person at any
meeting shall constitute a waiver of notice of such meeting, except where a
person attends a meeting for the sole purpose of objecting to the transaction
of any business because the meeting is not lawfully called or convened.
Section 6.09. EXECUTION OF DEEDS. Any deeds or other instruments conveying
lands or any interests therein shall be executed on behalf of the corporation by
the President, or Vice President if there be one, or by any agent or attorney so
authorized under letter of attorney or other written instrument containing a
power to convey real estate or any interest therein, which power was executed on
behalf of the corporation by the President or Vice President.
Section 6.10. AMENDMENTS. These bylaws may be altered, amended or repealed
or new bylaws may be adopted by the Board of Directors at any regular meeting of
the Board of Directors, or at any special meeting of the Board of Directors if
notice of such alteration, amendment, repeal or adoption of new bylaws is
contained in the notice of such special meeting, subject, however, to the right
of the stockholders to repeal or change any such action of the directors.
I, the undersigned, do hereby certify that I am the duly elected and acting
Secretary of the corporation; and that the foregoing Amended and Restated Bylaws
constitute the Bylaws of the corporation as duly adopted by the Board of
Directors on the 23rd day of April, 1997.
IN TESTIMONY WHEREOF, I have hereunto subscribed my name this 23rd day of
April, 1997.
/s/ Bill L. Allen
-----------------------------------
Bill L. Allen, Secretary
-12-
<PAGE>
NOTE-ARTICLES MAY BE PREPARED INDEPENDENTLY OF THIS FORM.
THIS FORM TO BE USED IF SPACE IS ADEQUATE.
ARTICLES OF INCORPORATION
We, the undersigned, incorporation, hereby associate ourselves together to
form and establish a corporation FOR profit under the laws of the State of
Kansas.
FIRST: The Name of the Corporation is Precision Pattern Incorporated
SECOND: The Location of its Principal Place of Business in this state is
607 South Tracy, Wichita, Kansas
*THIRD: The location of its Registered Office in this State is
607 South Tracy Wichita Sedgwick
- --------------------------------------------------------------------------------
(Number) (Street) (Town or City) (County)
*FOURTH: The Name and Address of its Resident Agent in this State is
H. Russell Bomhoff
- --------------------------------------------------------------------------------
(Individual or Corporation)
607 South Tracy Wichita Sedgwick
- --------------------------------------------------------------------------------
(Number) (Street) (Town or City) (County)
FIFTH: This Corporation is organized FOR profit and the nature of its
business is:
(a) To operate what is commonly known as a pattern shop connected with the
aircraft industry.
(b) To manufacture, buy, acquire, own, lease, sell, import, export, or
otherwise deal in, either at wholesale or retail, either upon consignment or
otherwise, generally, goods, wares, commodities, merchandise and property of
every kind and description.
(c) To enter into, maintain operate or carry on in all of its branches the
business of mining and of drilling, exploring for, producing, refining,
treating, distilling, manufacturing, handling, and dealing in, buying and
selling petroleum, oil, natural gas, and any and all other mineral and
hydrocarbon substances and any and all products or by-products which may be
derived therefrom.
(d) To transact a general investment business and without limiting the
generality of the foregoing, to buy, sell, lease, rent, subdivide, develop,
alter, improve, operate and manage real property, and to acquire by purchase or
otherwise, and to invest, receive, hold, own deal in, sell, exchange, assign,
transfer, mortgage, pledge or otherwise dispose of all forms of securities
including stocks, bonds, debentures, notes, evidences of indebtedness and other
similar instruments and rights issued or created by corporations, domestic
or foreign, associations, firms, trustees, syndicates and individuals, either as
principal, agent or factor.
(e) To buy, exchange, contract, lease, and in any and all other ways
acquire take, hold, own, and deal in, sell, mortgage, lease or otherwise dispose
of lands, mining claims, mineral rights, leasehold rights, oil wells, gas wells,
oil lands, gas lands and other real property and the rights and interests in and
to real property and to manage, operate, maintain, improve and develop the said
properties and each and all of them.
(f) To engage in and carry on and undertake any other lawful business
and to do any lawful act concerning any and all businesses for which
corporations may be organized for profit under the laws of the State of
Kansas; to contract accordingly and to exercise and have all powers conferred
upon corporations organized for profit under the laws of the State of Kansas,
now or hereafter in effect; provided, however, the corporation shall not in
any state, territory, district, possession or country, carry on any business,
or exercise any powers which a corporation organized under the laws thereof
could not carry on or exercise.
(g) To do everything necessary and proper, advisable, or convenient for
the accomplishment of the foregoing purposes, and to do all other things
incidental to them or connected with them that are not forbidden by the laws
of the State of Kansas or by these Articles of Incorporation.
- --------------------------------------------------------------------------------
Address of Resident Agent and Registered Office, as set forth in the
above THIRD and FOURTH paragraphs of Articles of Incorporation must be
the same. (Cla. 17, Art. 44. 1959 Supp.)
<PAGE>
SIXTH: The total amount of capital of this corporation is $300,000.00 and
the total number of shares into which it is divided is as follows: (Describe
fully the class or classes of stock and the value of each.)
30,000 shares of common stock, class_______par value of $10.00 dollars each
__________shares of__________stock, class_______par value of________dollars each
__________shares of__________stock, class_______without nominal or par value and
consideration thereof $_________________________________________________________
__________shares of__________stock, class_______without nominal or par value and
consideration thereof $_________________________________________________________
Statement of all or any of the designations and the powers, preferences and
rights and the qualifications, limitations or restrictions thereof, in respect
to any class____________________________________________________________________
Stockholders owning stock in this corporation after said stock has been
issued and fully paid for shall not be liable personally or individually for
the payment of corporate debts, stockholders shall have all powers and rights
that are available to stockholders under the laws of the State of Kansas.
There shall be reserved to the corporation the first right to purchase and
acquire the stock of a selling stockholder before sale to a stockholder or
non-stockholder of the corporation. If the corporation does not desire to
purchase stock then the stock shall be offered to existing stockholders on
pro-rata basis. Should any stockholder decide not to take any such stock
then the stock may be pro-rated between the stockholders desiring to purchase
the stock.
Statement of Grant of Authority, as may be desired to be given to the Board
of Directors, if given.
The Board of Directors shall have all the usual and customary powers of the
Board of Directors of a Kansas Corporation only as restricted and defined by the
By-laws of this Corporation.
SEVENTH: The Amount of Capital with which this Corporation will commence
business is
One Thousand ($1,000.00) Dollars
- --------------------------------------------------------------------------------
(Not less Than One Thousand Dollars ($1,000)
EIGHTH: The Names and Places of Residence (P.O. Address) of each of the
INCORPORATIONS:
H. Russell Bomhoff 607 S. Tracy Wichita, Kansas
- --------------------------------------------------------------------------------
Elgeva I. Bomhoff 607 S. Tracy Wichita, Kansas
- --------------------------------------------------------------------------------
Janice L. Bomhoff 607 S. Tracy Wichita, Kansas
- --------------------------------------------------------------------------------
<PAGE>
NINTH: The Term for which this Corporation is to exist is ONE HUNDRED
YEARS.
TENTH: The Number of Directors shall be not less than three nor more than
ten.
IN TESTIMONY WHEREOF, We have hereunto subscribed our names this 21st day
of October, A.D. 1968
/s/ H. Russell Bomhoff
-----------------------------
H. Russell Bomhoff
/s/ Elgeva I. Bomhoff
-----------------------------
Elgeva I. Bomhoff
/s/ Janice L. Bomhoff
-----------------------------
Janice L. Bomhoff
STATE OF KANSAS, )
)ss.
COUNTY OF SEDGWICK )
Personally appeared before me, a Notary Public in and for Sedgwick County,
Kansas, the above-named H. Russell Bomhoff, Elgeva I. Bomhoff and Janice L.
Bomhoff who are personally known to me to be the same persons who executed the
foregoing instrument of writing, and duly acknowledged the execution of the
same.
IN TESTIMONY WHEREOF, I have hereunto
subscribed my name and affixed my official
seal, this 21st day of October, A.D. 1968
/s/ Barbara Hanson
----------------------------------
Barbara Hanson Notary Public
My commission expires: October 20, 1970
---------------------
[SEAL]
<PAGE>
[SEAL]
OFFICE OF SECRETARY OF STATE
Received PRECISION PATTERN INCORPORATED and deposited in the State Treasury,
fees on these Articles of Incorporation as follows:
OCTOBER 25, 1968 Application fee..................$25.00
Filing and Recording Fee.........$ 2.50
Capitalization Fee...............$ 200.00
/s/ [Illegible]
---------------------------
Secretary of State
By: /s/ [Illegible]
----------------------------------
Assistant Secretary of State
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE ARTICLES OF INCORPORATION OF
PRECISION PATTERN INCORPORATED
------------------------------
I, Edward A. Markel, President of Precision Pattern Incorporated, a Kansas
corporation (the "Corporation"), do hereby certify that by unanimous consent in
writing on July 15, 1997, in accordance with the provisions of K.S.A. 17-6602,
the Board of Directors and the shareholders of the Corporation adopted the
following resolution setting forth the proposed Amendment to the Articles of
Incorporation and declaring its advisability:
"RESOLVED, that Articles of Incorporation of Precision Pattern Incorporated
be amended by amending the Article I to read as follows:
ARTICLE I
---------
NAME
----
The name of the Corporation is Precision Pattern, Inc.
IN WITNESS WHEREOF, I subscribe my name this 15th day of July, 1997.
/s/ Edward A. Markel
------------------------------
Edward A. Markel, President
ATTEST:
/s/ Bill L. Allen
- ---------------------------
Bill L. Allen, Secretary
<PAGE>
STATE OF KANSAS )
)ss:
COUNTY OF SEDGWICK )
Personally appeared before me, a Notary Public in and for Sedgwick County,
Kansas, Edward A. Markel, President, and Bill L. Allen, Secretary of Precision
Pattern Incorporated, who are personally known to me to be the same persons who
executed the foregoing instrument in writing, and duly acknowledged the
execution of the same.
/s/ Glenda Shank
------------------------------
Notary Public
My appointment expires: 7-23-2001
------------------
[SEAL]
<PAGE>
PRECISION PATTERN, INC.
BY-LAWS
ARTICLE I. GOVERNMENT
Section 1. The government and control of the corporation shall be
vested in a Board of Directors.
ARTICLE II. OFFICES
Section 1. The principal office of the corporation shall be at 607
South Tracy, Wichita, Kansas and the registered office of the corporation
shall be at 607 South Tracy, Wichita, Kansas. The name of the registered
agent in charge thereof from and after the effective date of these By-Laws
shall be H. RUSSELL BOMHOFF.
ARTICLE III. CORPORATE SEAL
Section 1. The corporate seal of the corporation shall contain the full
corporate name of the corporation, with the location of the principal office
in the outer circle and the word "Seal" across the center.
ARTICLE IV. CONVEYANCES
Section 1. Any and all instruments of conveyance, deeds, assignments,
mortgages, pledges, releases, trust indentures, or other instruments of
conveyance, transfer, mortgage or pledge, when approved by the Board of
Directors, shall be deemed to be valid and sufficient when the same are
signed and executed in the name of the corporation (and acknowledged where
required) by the Chief Executive Officer, the President, the Chief Financial
Officer or any Vice President.
<PAGE>
ARTICLE V. STOCKHOLDERS
Section 1. PLACE OF MEETING. All meetings of stockholders shall be
held at the principal office of the corporation or at the registered office
of the corporation in the State of Kansas or at such other places as may be
designated by the Board of Directors, either within or without the State of
Kansas.
Section 2. DATE OF ANNUAL MEETING. The annual meeting of the
stockholders after the year 1968, shall be held on the 4th Tuesday in
January, if not a legal holiday, and if a legal holiday, then on the second
secular day following at 10:30 a.m., when they shall elect a Board of
Directors and transact such other business as may properly be brought before
the meeting.
Section 3. QUORUM. The holders of a majority of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall be requisite, and shall constitute a quorum at all meetings of
the stockholders for the transaction of business, except as otherwise
provided by law, by the Articles of Incorporation, or by these By-Laws. If,
however, such majority shall not be personally present or represented at any
meeting of the stockholders, the stockholders entitled to vote thereat
present in person or by proxy shall have power to adjourn the meeting from
time to time, without notice other than announcement at the meeting, until
the requisite amount of voting stock shall be present at such adjourned
meeting, and any business may be transacted which might have been transacted
at the meeting as originally notified.
Section 4. VOTING POWER AND WHO MAY VOTE. At
<PAGE>
each meeting of the stockholders, each stockholder shall have the same voting
power in all corporate affairs, except as otherwise provided in the Articles
of Incorporation, and such shares may be voted in person or by proxy, but no
proxy shall be voted after three years from its date, unless such proxy
provides for a longer period. No shares of stock shall be voted at any
election for directors which shall have been transferred on the books of the
corporation within twenty (20) days next preceding such election of directors.
Section 5. VOTE BY FIDUCIARY AND PLEDGEE. Persons or corporations
holding stock in a fiduciary capacity shall be entitled to vote the shares so
held by them either in person or in the case of a corporation by an officer
thereof, or by proxy, and persons whose stock is pledged shall be entitled to
vote unless in the transfer by the pledgor on the books of the corporation he
shall have expressly empowered the pledgee to vote thereon, in which case only
the pledgee or his proxy shall represent the stock and vote thereon.
Section 6. CUMULATIVE VOTING. At all elections of directors, each
stockholder shall be entitled to as many votes as shall equal the number of
his shares of stock multiplied by the number of directors to be elected, and
he may cast all of such votes for a single director or he may distribute them
among the number to be voted for, or any two or more of them, as he may see
fit.
Section 7. VOTE TAKEN BY BALLOT, VIVA VOCE OR BY SHOWING OF HANDS. All
elections of directors, and the vote upon any other question, except as
otherwise provided by law, or unless otherwise provided by resolution by the
Board of Directors, may be had by
<PAGE>
ballot, viva voce, or by showing of hands, unless a stockholder at least five
(5) days prior to the date of any meeting, or the election of directors,
requests in writing a vote by ballot, and then the election of directors shall
be by ballot.
Section 8. NOTICE OF ANNUAL MEETING. Written notice of the annual meeting
shall be mailed by the Secretary, or an Assistant Secretary, to each stockholder
entitled to vote thereat, at such address as appears on the stockbook of the
corporation, at least ten (10) days prior to the date of meeting, unless such
notice is waived in writing.
Section 9. VOTING LIST OF STOCKHOLDERS, PREPARATION, INSPECTION. It
shall be the duty of the Secretary, who shall have charge of the stock ledger
of the corporation, to prepare and make, at least ten (10) days before every
election of directors, a complete list of the stockholders entitled to vote
at such election, arranged in alphabetical order. Such list shall be open at
the place where said election is to be held, for said ten (10) days to the
examination of any stockholders, and shall be produced and kept at the time
and place of election during the whole time thereof, and subject to the
inspection of any stockholder who may be present. The original or duplicate
stock ledger shall be the only evidence as to who are the stockholders
entitled to examine such list or the books of the corporation, or to vote in
person or by proxy at such election. The original or duplicate stock ledger
containing the names and addresses of the stockholders, and the number of
shares held by them respectively, shall, at all times during the usual hours
for business, be open to the examination of every stockholder, at its
principal place of business in the State of Kansas.
Section 10. SPECIAL MEETINGS. Special meetings
<PAGE>
of the stockholders for any purpose or purposes, unless otherwise prescribed by
statute, may be called by the President, or a majority of the Board of
Directors; and shall be called by the President or Secretary, at the request in
writing of the stockholders owning twenty percent (20%) in the amount of the
entire capital stock of the corporation issued and outstanding and entitled to
vote. Such request shall state the purpose or purposes of the proposed meeting.
Section 11. BUSINESS TRANSACTED. Business transacted at all special
meetings shall be confined to the object stated in the call.
Section 12. NOTICE OF SPECIAL MEETING. Written notice of all special
meetings of the stockholders, stating the time and place and object thereof,
shall be mailed, postage prepaid at least five (5) days before such meeting, to
each stockholder entitled to vote thereat, at such address as appears on the
books of the corporation, unless notice is waived in writing, or unless actually
present at such meeting.
Section 13. INSPECTION OF RECORDS. Every stockholder shall have the right
to examine in person, or by agent or attorney, at any reasonable time, for any
reasonable purposes, the By-Laws, stock register, books of account and records
of the proceedings of the stockholders and directors, and to make copies of, or
extracts of, the same, and at their sole expense.
ARTICLE IV. DIRECTORS.
Section 1. NUMBER AND QUALIFICATION. The number of Directors of the
corporation shall be not less than three and not more than seven, as the Board
of Directors may from time to time determine (and such directors need not be
<PAGE>
stockholders). The corporation shall initially have three directors which
number shall be maintained unless at an annual meeting of the stockholders of
the corporation, resolutions are adopted calling for the election of a
different number. Directors shall be elected at the annual meeting of the
stockholders and each director shall be elected to serve for one year and
until his successor shall be elected and qualified. A director shall be
deemed qualified as such when he shall have filed a written acceptance of his
election to the office.
Section 2. QUORUM. A majority of the directors shall constitute a quorum
for the transaction of business. The act of a majority of the directors present
at a meeting at which a quorum is present shall be the act of the Board of
Directors.
Section 3. PLACE OF MEETING. The directors may hold their meetings at
the principal office of the corporation or at the registered office of the
corporation, or at such other places as they may from time to time determine,
either within or without the State of Kansas.
Section 4. COMPENSATION OF DIRECTORS. Directors, as such shall not
receive any stated salary for their services, but by resolution of the Board of
Directors, a fixed sum and expenses of attendance, if any, may be allowed for
attendance at each regular or special meeting of the Board of Directors;
provided, that nothing herein shall be construed to preclude any director from
serving the corporation in any other capacity and receiving compensation
therefor.
Section 5. ANNUAL MEETING OF THE BOARD. The annual meeting of the Board
of Directors shall be held immediately following the annual stockholders'
meeting, or at such other time as may be fixed by the consent in writing of all
the directors and at such place as may
<PAGE>
be fixed by consent, in writing, of all the directors; provided, however, that
in the event the consent in writing is not obtained of all the directors, the
annual meeting shall be held at the same place as the annual meeting of the
stockholders, and immediately following the annual stockholders' meeting.
Section 6. REGULAR MEETINGS. Regular meetings of the Board of Directors
may be held without notice, at such time and place as shall from time to time be
determined by the Board of Directors.
Section 7. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by the president, or by a majority of the Board of Directors, on
three (3) days notice to each director, either personal, or by mail, or by
telegram.
Section 8. RESIGNATION OF DIRECTORS AND FILLING VACANCIES. Any director
or officer of the Corporation may resign upon filing a written resignation with
the secretary of the company, and such resignation shall become effective when
so filed, unless some other effective date is set forth in the resignation.
Vacancies in the Board of Directors shall be filled by a majority of the
remaining directors., though less than a quorum remains, and any directors so
chosen to fill vacancies shall hold office until the next annual election or
until successors have been duly elected and qualified, or unless their term of
office is terminated by resignation.
ARTICLE VII. OFFICERS.
Section 1. DESIGNATED OFFICERS. The officers of the corporation shall
be chosen by the Board of Directors, and shall be a Chief Executive Officer,
a President, a Chief Financial Officer, one or more Vice Presidents,
Secretary and Treasurer. The Secretary and Treasurer may or
<PAGE>
may not be the same person; and a Vice President may hold the office of Vice
President and Secretary, or Vice President and Treasurer, but not the offices of
vice President, Secretary and Treasurer.
Section 2. OTHER OFFICERS. The corporation may have such other officers
and agent as may, from time to time, be determined and appointed by the Board of
Directors and for such term as the Board of Directors may determine.
Section 3. TERM AND QUALIFICATION OF OFFICERS. The officers of the
corporation, except as provided in Section 2 of this Article, shall hold
their office until the next annual meeting of the Board of Directors or until
their successors are chosen and qualified, unless their respective terms of
office have been terminated by resignation in writing, duly filed in the
office of the Secretary of the corporation. The President, Vice Presidents,
Secretary and Treasurer shall be chosen from the members of the Board of
Directors.
Section 4. SALARIES. The salaries of the officers or agents of the
corporation shall be fixed by the Board of Directors.
Section 5. REMOVAL OF OFFICERS. Any officer elected or appointed by the
Board of Directors may be removed at any time by the affirmative vote of a
majority of the entire Board of Directors.
Section 6. PRESIDENT. The President shall be the chief executive
officer of the corporation; he shall preside at all meetings of the
stockholders and directors; he shall have general and active management of
the business of the corporation, and shall see that all orders and
resolutions of the Board of Directors are
<PAGE>
carried into effect. When authorized by the Board of Directors, he shall execute
contracts, bonds, mortgages, deeds and other instruments requiring the signature
of the corporation, and when the corporate seal is required, shall cause the
same to be affixed to any instrument requiring it, when so affixed, it shall be
attested by the signature of the secretary.
Section 7. VICE PRESIDENT. The Vice President shall, in the absence or
disability of the President, perform the duties and exercise the powers of the
President, and shall perform such other duties as the Board of Directors may
prescribe.
Section 8. SECRETARY. The Secretary shall attend all sessions of the
Board of Directors, and all meetings of the stockholders, and record all votes,
and the minutes of all proceedings in a book to be kept for that purpose; and
shall perform like duties for the Board of Directors. He shall give, or cause to
be given, notice of all meetings of the stockholders and of the Board of
Directors, and shall perform such other duties as may be prescribed by the Board
of Directors, under whose supervision he shall be.
Section 9. ASSISTANT SECRETARY. The Board of Directors may appoint an
Assistant Secretary for such term as the Board of Directors may desire, and such
Assistant Secretary may in the absence or disability of the Secretary, perform
the duties and exercise the powers of Secretary, and perform such other duties
as the Board of directors shall prescribe.
Section 10. TREASURER. The Treasurer shall have such duties as may be
prescribed by the Board of Directors.
Section 11. ASSISTANT TREASURER. The Board of
<PAGE>
Directors may appoint an Assistant Treasurer for such term as the Board of
Directors may desire, and such Assistant Treasurer may in the absence or
disability of the Treasurer, perform the duties and exercise the powers of
Treasurer, and perform such other duties as the Board of Directors shall
prescribe.
Section 12. VACANCIES WORK NO DISSOLUTION -- FILLING OF VACANCIES. The
failure to elect any officers or directors shall not dissolve the corporation.
In the event of the failure to elect annually any officers or directors, or in
the event of any vacancy occurring, either by death, resignation, removal or
otherwise, in the Board of Directors, or of any officer, the remaining directors
or officers shall have the power to act and carry on the business of the
corporation until such time as the vacancy is filled as provided in Section 8 of
Article VI as pertains to vacancies in the Board of Directors. In the event of
vacancies occurring as to any officer, or registered agent, one or more, by
reason of death, resignation, retirement, disqualification, removal from office
or otherwise, the remaining members of the Board of Directors, by a majority
vote, may choose a successor, or successors, who shall hold office for the
unexpired term in respect to which such vacancy occurred.
ARTICLE VIII. CAPITAL STOCK.
Section 1. CERTIFICATES. The certificates of stock of the corporation shall
have the name of the company, the authorized capital stock, the principal place
of business of the corporation thereon, shall be numbered consecutively, and
shall be entered on the books of the corporation as they are issued. They shall
exhibit the holder's name, the number of shares, and shall be signed by
<PAGE>
the President, or a Vice President, and by the Secretary and under the seal of
the corporation.
Section 2. TRANSFER OF STOCK. The shares of stock shall be deemed
personal property and transferrable on the books of the corporation only by
the person named in the certificate, or by an attorney lawfully constituted
in writing, and upon surrender of the certificate therefor. Whenever any
transfer of shares shall be made for collateral security and not absolutely,
it shall be so expressed in the entry of the transfer.
Section 3. CLOSING OF TRANSFER BOOKS. The Board of Directors may close
the stock transfer books of the corporation for a period not exceeding fifty
(50) days preceding the effective date of (a) any meeting of the
stockholders, or (b) any payment of any dividends, or (c) any allotment of
rights, or (d) any change or conversion or exchange of capital stock;
provided, however, that in lieu of closing the transfer books the Board of
Directors are authorized to fix in advance a date not exceeding fifty (50)
days preceding the effective date of any of the above enumerated
transactions, and in such case, such stockholders, and only such stockholders
as shall be stockholders of record on the date so fixed, shall be entitled to
receive notice of any such transactions, or to participate in any such
transactions, notwithstanding any transfer of any stock on the books of the
corporation after such record date fixed as aforesaid.
Section 4. LOST OR DESTROYED STOCK CERTIFICATES. A new certificate of
stock may be issued in the place of any certificate heretofore issued by it,
alleged to have been lost or destroyed, upon the holder thereof, or his legal
representative, giving the corporation a bond sufficient to indemnify the
corporation against any
<PAGE>
claim that may be made against it on account of the alleged loss of any such
certificates; such bond to be in the amount as may be authorized and approved by
the Board of Directors; provided, however, that such new certificate may be
issued without requiring any bond when in the judgment of the directors it is
proper to so do.
ARTICLE IX. MISCELLANEOUS.
Section 1. ORDER OF BUSINESS AT STOCKHOLDERS' MEETING. At any and all
meetings of stockholders, whether annual or special, the following order of
business shall be substantially observed so far as consistent with the purposes
of the meeting:
(a) Proof of Notice of
Meeting
(b) Report as to Quorum
(c) Reading of minutes of
Preceding Meeting
(d) Report of President
(e) Report of Treasurer
(f) Election of Directors
(g) Unfinished Business
(h) New Business
Provided, however, that the order of business may be changed by an affirmative
vote of a majority of the stockholders present.
Section 2. ORDER OF BUSINESS AT BOARD OF DIRECTORS' MEETING. The order of
business at any meeting of the Board of Directors shall be substantially as
follows, so far as is consistent with the purposes of the meeting, to-wit:
<PAGE>
(a) Proof of Notice (if
a special meeting)
(b) Reading of Minutes of
last meeting
(c) Report of Officers or
Committees
(d) Election of Officers
(e) Unfinished Business
(f) New business
Provided, however, that the order of business may be changed by an
affirmative vote of a majority of the directors present.
Section 3. EXECUTION OF CHECKS, DEMANDS FOR MONEY OR NOTES. All
funds of the company shall be deposited in a bank or financial institution
designated by the Board of Directors and all checks or demands for money or
notes of the corporation shall be signed by such officer or officers of the
corporation as the Board of Directors may from time to time designate.
Section 4. FISCAL YEAR. The fiscal year of the corporation shall be
such as may from time to time be determine by the Board of Directors.
Section 5. DIVIDENDS. Dividends upon the capital stock of the
corporation when earned may be declared by the Board of Directors at any
regular or special meeting out of (a) net assets in excess of its capital as
computed in accordance with the provisions of the general corporation code of
Kansas, or (b) net profits for the fiscal year then current, or the preceding
fiscal year in case there be no such excess as mentioned in (a) above.
Section 6. NOTICES. Whenever under the provisions of these By-Laws
notice is required to be given any director,
<PAGE>
officer or stockholder, it shall not be construed to mean personal notice,
but such notice may be given in writing, by mail, by depositing the same in
the post office in a postpaid sealed wrapper, addressed to such stockholder,
officer or director, at such address as appears on the books of the
corporation, or in default of other address, to such director, officer or
stockholder at the general post office in the City of Wichita, Kansas, and
such notice shall be deemed to be given at the time when the same shall be
thus mailed. Notice to be given to directors may likewise be given as
otherwise provided by the By-Laws.
Any stockholder, director or officer may waive any notice required to be
given under these By-Laws.
Section 7. There shall be reserved to the corporation the first
right to purchase and acquire the stock of a selling stockholder before sale
to a stockholder or non-stockholder of the corporation. If the corporation
does not desire to purchase the stock then the stock shall be offered to
existing stockholders on a pro rata basis. Should any stockholder decide not
to take any such stock, then the stock may be pro-rated between the
stockholders desiring to purchase the stock.
If any stock is issued other than in the original issue of stock from
the authorized capital of the corporation that stock shall first be offered
to existing stockholders on a pro-rata basis under the same terms as for
stock being sold by a stockholder of the corporation.
ARTICLE X. AMENDMENTS.
Section 1. These By-Laws may be altered, repealed or amended by the
Board of Directors, subject to the power of the stockholders to amend, alter
or repeal the
<PAGE>
By-Laws; provided, however, that notice of any such amendment of the By-Laws
by the Board shall be given to each stockholder having voting rights within
ten (10) days after the date of such amendment by the Board; provided,
however, that the failure to give notice shall not invalidate any such
amendment, alteration or repeal of the By-Laws.
Adopted by the incorporators at the first meeting of the incorporators
duly held on 1st day of November, 1968.
/s/ Elgeva I. Bomhoff
-------------------------------
Secretary
<PAGE>
Attachment to Letter dated April 23, 1999
[EXHIBIT 5.1 TO DECRANE HOLDINGS EQUITY FORM S-1]
[OPINION OF SPOLIN & SILVERMAN LLP]
[Date of Issuance]
DeCrane Holdings Co.
c/o DeCrane Aircraft Holdings, Inc.
2361 Rosecrans Avenue, Suite 180
El Segundo, California 90245
Ladies and Gentlemen:
The undersigned has acted as special counsel to DeCrane Holdings Co., a
Delaware corporation (the "Company"), in connection with the preparation and
filing by the Company of a Registration Statement on Form S-1 (the
"Registration Statement") under the Securities Act of 1933, for the
registration of 100,000 warrants each for 1.55 shares of common stock, $0.01
par value per share, of the Company, and such common stock as may be issued
upon the exercise thereof. We have examined and are familiar with originals
or copies, certified or otherwise identified to our satisfaction, of such
documents, corporate records, certificates of public officials and officers
of the Company and such other instruments as we have deemed necessary or
appropriate as a basis for the opinions expressed below, including the
Registration Statement, the Certificate of Incorporation of the Company and
the By-laws of the Company.
Based on the foregoing, we are of the opinion that the warrants are duly
authorized and delivered; and that the common stock issuable upon the
exercise of the warrants is authorized and reserved for issuance and, when
duly issued and delivered, will be validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the reference to us under the
caption "Legal Matters" in the prospectus contained in such Registration
Statement. We are members of the bar of the State of California and express
no opinion as to the laws of any jurisdiction other than the State of
California, the general corporation law of the State of Delaware and the
federal law of the United States of America.
The foregoing opinion is rendered as of the date hereof, and we assume no
obligation to update such opinion to reflect any facts or circumstances
which may hereafter come to my attention or any changes in the law which may
hereafter occur. This opinion is rendered solely to you in connection with
the above matter. This opinion may not be relied upon by you for any other
purpose or relied upon by or furnished to any other person without our prior
written consent.
Very truly yours,
/s/ Spolin & Silverman LLP
<PAGE>
Attachment to Letter dated April 23, 1999
[EXHIBIT 5.1 TO DECRANE AIRCRAFT EQUITY FORM S-1]
[OPINION OF SPOLIN & SILVERMAN LLP]
[Date of Issuance]
DeCrane Aircraft Holdings, Inc.
2361 Rosecrans Avenue, Suite 180
El Segundo, California 90245
Ladies and Gentlemen:
We have acted as counsel to DeCrane Aircraft Holdings, Inc., a Delaware
corporation (the "Company"), in connection with the Company's offer to
exchange its 12% Series B Senior Subordinated Notes due 2008 for any and all
of its outstanding 12% Series A Senior Subordinated Notes due 2008, and the
preparation and filing by the Company of a Registration Statement on Form S-1
(the "Registration Statement") under the Securities Act of 1933, for the
registration of the Series B notes, which are guaranteed by certain of the
Company's subsidiaries. We have examined and are familiar with originals or
copies, certified or otherwise identified to our satisfaction, of such
documents, corporate records, certificates of public officials and officers
of the Company and such other instruments as we have deemed necessary or
appropriate as a basis for the opinions expressed below, including the
Registration Statement, the Certificate of Incorporation of the Company and
the By-laws of the Company.
Based on the foregoing and assuming the due execution and delivery of the
Series B notes and guarantees, we are of the opinion that, when the Series B
notes and guarantees are executed, authenticated and delivered in exchange
for the Series A notes in accordance with the above exchange offer, the
Series B notes will be valid and binding obligations of the Company
enforceable in accordance with their terms, and the guarantees of the
subsidiary guarantors contained therein will be valid and binding obligations
of such guarantors enforceable in accordance with their terms, in each case
except (1) as such enforcement may be limited by bankruptcy, insolvency,
fraudulent conveyance or similar laws affecting creditors' rights generally,
(2) as such enforcement may be limited by general principles of equity,
regardless of whether enforcement is sought in a proceeding at law or in
equity and (3) to the extent that a waiver of rights under any usury or stay
law may be unenforceable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the reference to us under the
caption "Legal Matters" in the prospectus contained in such Registration
Statement. We are members of the bar of the State of California and express
no opinion as to the laws of any jurisdiction other than the State of
California, the general corporation law of the State of Delaware and the
federal law of the United States of America. We have in any cases where
agreements or instruments are governed by other laws assumed that the
applicable laws are in all pertinent respects identical to that of the State
of California.
<PAGE>
The foregoing opinion is rendered as of the date hereof, and we assume no
obligation to update such opinion to reflect any facts or circumstances
which may hereafter come to my attention or any changes in the law which may
hereafter occur. This opinion is rendered solely to you in connection with
the above matter. This opinion may not be relied upon by you for any other
purpose or relied upon by or furnished to any other person without our prior
written consent, except that State Street Bank and Trust Co., as trustee for
the notes and exchange agent, may rely on this opinion as if addressed to it
directly.
Very truly yours,
/s/ Spolin & Silverman LLP
<PAGE>
DeCrane Holdings Co.,
[Date]
Ladies and Gentlemen:
The undersigned has acted as counsel to DeCrane Holdings Co., a Delaware
corporation (the "Company"), in connection with the preparation and filing by
the Company of a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Act"), for the
registration of 100,000 warrants for the issuance of 155,000 shares of common
stock, $.01 par value per share (the "Common Stock"), of the Company which
may be issued, and the shares of common stock issued upon such exercise.
We have examined and am familiar with originals or copies, certified or
otherwise identified to our satisfaction, of such documents, corporate
records, certificates of public officials and officers of the Company and
such other instruments as we have deemed necessary or appropriate as a basis
for the opinions expressed below, including the Registration Statement, the
Restated Certificate of Incorporation of the Company and the By-laws of the
Company.
Based on the foregoing, we are of the opinion that the Common Stock issuable
pursuant to the registration statement authorized and reserved for issuance
and, when duly issued and delivered, will be validly issued, fully paid and
nonassessable. We hereby consent to the filing of this opinion as Exhibit 5.1
to the Registration Statement, and that the Warrant Agreement under which
such warrants were issued is the legal and valid binding obligation of the
Company, enforceable according to its terms. In giving such consent, we do
not thereby admit that we come within the category of persons whose consent
is required under Section 7 of the Act or the rules and regulations of the
Securities and Exchange Commission thereunder.
We express no opinion as to the laws of any jurisdiction other than the laws
of the State of New York, the general corporate laws of the State of Delaware
and the federal law of the United States of America. The foregoing opinion is
rendered as of the date hereof, and we assume no obligation to update such
opinion to reflect any facts or circumstances which may hereafter come to my
attention or any changes in the law which may hereafter occur.
Very truly yours,
<PAGE>
DeCRANE HOLDINGS CO.
and DeCRANE AIRCRAFT HOLDINGS, INC.
MANAGEMENT INCENTIVE PLANS
1. STOCK OPTION INCENTIVE PLAN
SECTION 1. PURPOSE. The purposes of the DeCrane Holdings Co. Management
Incentive Plan are to promote the interests of DeCrane Holdings Co. (the
"COMPANY") and its stockholders by (i) attracting and retaining exceptional
executive personnel and other key employees of the Company and its Subsidiaries,
as defined below; (ii) motivating such employees by means of performance-related
incentives to achieve longer-range performance goals; and (iii) enabling such
employees to participate in the long-term growth and financial success of the
Company.
SECTION 2. DEFINITIONS. As used in the Plan, the following terms shall
have the meanings set forth below:
"AFFILIATE" means, with respect to any Person, any other Person directly or
indirectly controlling, controlled by or under common control with such Person.
For purposes of this definition, the terms "control" (including with correlative
meanings, the terms "controlling", "controlled by" and "under common control
with"), when used with respect to any Person, means the possession, directly or
indirectly of the power to direct or cause the direction of the management and
policies of such Person, whether through the ownership of voting securities, by
contract or otherwise.
"AWARD" means any Option.
"AWARD AGREEMENT" means an agreement in substantially the Form attached
hereto as Exhibit A, or any other written agreement, contract, or other
instrument or document, designated by the Committee, evidencing any Award which
may, but need not, be executed or acknowledged by a Participant.
"BOARD" means the Board of Directors of the Company.
"CAUSE" means (i) dishonesty by a Participant that results in substantial
personal enrichment at the expense of the Company; (ii) willful violations of a
Participant's obligations to the Company (including under any employment
agreement between the Participant and the Company) which result in material
injury to the Company; (iii) a Participant's conviction of any felony involving
the personal dishonesty of the Participant; or (iv) a Participant's chronic
alcoholism or abuse of controlled substances.
<PAGE>
"CHANGE OF CONTROL" means:
(a) any "person" (as such term is used in Section 3(a)(9) and 13(d)(3)
of the Exchange Act) other than (A) the DLJ Entities and/or their
respective Permitted Transferees (as defined in the Investors'
Agreement) or (B) any "group" (within the meaning of such
Section 13(d)(3)) of which the DLJ Entities constitute a majority
(on the basis of ownership interest), acquires, directly or indirectly,
by virtue of the consummation of any purchase, merger or other
combination, securities of the Company representing more than 51% of the
combined voting power of the Company's then outstanding voting securities
with respect to matters submitted to a vote of the stockholders generally;
or
(b) a sale or transfer by the Company or any of its Subsidiaries of
substantially all of the consolidated assets of the Company and its
Subsidiaries to an entity which is not an Affiliate of the Company prior to
such sale or transfer.
"CODE" means the Internal Revenue Code of 1986, as amended from time to
time.
"COMMITTEE" means a committee of the Board designated by the Board to
administer the Plan. Until otherwise determined by the Board, the full Board
shall be the Committee under the Plan.
"DISABILITY" shall mean a Participant's inability to perform the duties of
his or her employment due to mental or physical incapacity for a period of six
consecutive months.
"EMPLOYEE" means an employee of the Company or any Subsidiary.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"FAIR MARKET VALUE" means with respect to the Shares, as of any given date
or dates, the average reported closing price of a share of such class of common
stock on such exchange or market as is the principal trading market for such
class of common stock for the three trading days immediately preceding such date
or dates. If such class of common stock is not traded on an exchange or
principal trading market on such date, the fair market value of a Share shall be
determined by the Committee in good faith taking into account as appropriate
recent sales of the Shares, recent valuations of the Shares and such other
factors as the Committee shall in its discretion deem relevant or appropriate.
2
<PAGE>
"INVESTORS' AGREEMENT" means the Amended and Restated Investors' Agreement
dated as of October 2, 1998 among (i) the Company, (ii) DLJ Merchant Banking
Partners II, L.P., DLJ Merchant Banking Partners II-A, L.P., DLJ Offshore
Partners II, C.V., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A,
L.P., DLJ Millennium Partners, L.P., DLJ Millennium Partners-A, L.P., DLJMB
Funding II, Inc., UK Investment Plan 1997 Partners, DLJ EAB Partners, DLJ First
ESC, L.P. and DLJ ESC II, L.P. (collectively, the "DLJ ENTITIES") and (iii)
certain other Persons listed on the signature pages thereof.
"OPTION" means a right to purchase Shares from the Company granted under
Section 6 of the Plan.
"PARTICIPANT" means any Employee selected by the Committee to receive an
Award under the Plan (and to the extent applicable, any heirs or legal
representatives thereof).
"PERMITTED TRANSFEREE" shall have the meaning assigned to it in the
Investors' Agreement.
"PERSON" means any individual, corporation, limited liability company,
partnership, association, joint-stock company, trust, unincorporated
organization, government or political subdivision thereof or other entity.
"PLAN" means this DeCrane Holdings Co. Management Incentive Plan.
"SEC" means the Securities and Exchange Commission or any successor
thereto.
"SHARES" means shares of common stock, $0.01 par value, of the Company or
such other securities as may be designated by the Committee from time to time.
"SUBSIDIARY" shall mean, with respect to any Person, any corporation or
other entity of which securities or other ownership interests having ordinary
voting power to elect a majority of the board of directors or other Persons
performing similar functions are at the time directly or indirectly owned by
such Person.
"SUBSTITUTE AWARDS" means Awards granted in assumption of, or in
substitution for, outstanding awards previously granted by a company acquired by
the Company or with which the Company combines.
3
<PAGE>
SECTION 3. ADMINISTRATION.
(a) AUTHORITY OF COMMITTEE. The Plan shall be administered by the
Committee. Subject to the terms of the Plan, applicable law and contractual
restrictions affecting the Company, and in addition to other express powers and
authorizations conferred on the Committee by the Plan, the Committee shall have
full power and authority to: (i) designate Participants; (ii) determine the type
or types of Awards to be granted to a Participant; (iii) determine the number of
Shares to be covered by, or with respect to which payments, rights, or other
matters are to be calculated in connection with, Awards; (iv) determine the
terms and conditions of any Award and Award Agreement; (v) determine whether, to
what extent, and under what circumstances Awards may be settled or exercised in
case, Shares, other securities, other Awards or other property, or canceled,
forfeited, or suspended and the method or methods by which Awards may be
settled, exercised, canceled, forfeited, or suspended; (vi) determine whether,
to what extent, and under what circumstances cash, Shares, other securities,
other Awards, other property, and other amounts payable with respect to an Award
shall be deferred either automatically or at the election of the holder thereof
or of the Committee; (vii) interpret and administer the Plan and any instrument
or agreement relating to, or Award made under, the Plan; (viii) establish,
amend, suspend, or waive such rules and regulations and appoint such agents as
it shall deem appropriate for the proper administration of the Plan; and (ix)
make any other determination and take any other action that the Committee deems
necessary or desirable for the administration of the Plan.
(b) COMMITTEE DISCRETION BINDING. Unless otherwise expressly provided in
the Plan, all designations, determinations, interpretations, and other decisions
under or with respect to the Plan or any Award shall be within the sole
discretion of the Committee, may be made at any time and shall be final,
conclusive and binding upon all Persons, including the Company, any Subsidiary,
any Participant, any holder or beneficiary of any Award, any shareholder and any
Employee.
SECTION 4. SHARES AVAILABLE FOR AWARDS.
(a) SHARES AVAILABLE. Subject to adjustment as provided in Section 4(b)
and 4(c), the number of Shares with respect to which Awards may be granted
under the Plan shall be approved by resolution of the Board. If, after the
effective date of the Plan, any Shares covered by an Award granted under the
Plan or to which such an Award relates are forfeited, or if such an Award is
settled for cash or otherwise terminates or is canceled without the delivery
of Shares, then the Shares covered by such Award, or to which such Award
relates, or the number of Shares otherwise counted against the aggregate
number of Shares with respect to which Awards
4
<PAGE>
may be granted, to the extent of any such settlement, forfeiture, termination
or cancellation, shall, in the calendar year in which such settlement,
forfeiture, termination or cancellation occurs, again become Shares with
respect to which Awards may be granted unless any dividends have been paid
thereon prior to such settlement, forfeiture, termination or cancellation.
In addition, Shares tendered in satisfaction or partial satisfaction of the
exercise price of any Award or any tax withholding obligations will again
become Shares with respect to which Awards may be granted. Notwithstanding
the foregoing and subject to adjustment as provided in Section 4(b), no
Employee of the Company may receive Options in any calendar year that relate
to more than a number of Shares, if any, fixed by resolution of the Board
from time to time.
(b) ADJUSTMENTS. In the event that the Committee determines that any
dividend or other distribution (whether in the form of cash, Shares, other
securities or other property), recapitalization, stock split, reverse stock
split, reorganization, reclassification, merger, consolidation, split-up,
spin-off, combination, repurchase, or exchange of Shares or other securities of
the Company, issuance of warrants or other rights to purchase Shares or other
securities of the Company, or other similar corporate transaction or event
affects the Shares such that an adjustment is determined by the Committee to be
appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan, then the
Committee shall, in such manner as it may deem equitable, adjust any or all of
(i) the number of Shares of the Company (or number and kind of other securities
or property) with respect to which Awards may thereafter be granted, (ii) the
number of Shares or other securities of the Company (or number and kind of other
securities or property) subject to outstanding Awards, and (iii) the grant or
exercise price with respect to any Award, or, if deemed appropriate, make
provision for a cash payment to the holder of an outstanding Award.
(c) SUBSTITUTE AWARDS. Any Shares underlying Substitute Awards shall not
be counted against the Shares available for Awards under the Plan.
(d) SOURCES OF SHARES DELIVERABLE UNDER AWARDS. Any Shares delivered
pursuant to an Award may consist, in whole or in part, of authorized and
unissued Shares or of treasury Shares.
SECTION 5. ELIGIBILITY. Any Employee, including any officer or
employee-director of the Company or any Subsidiary, shall be eligible to be
designated a Participant.
5
<PAGE>
SECTION 6. STOCK OPTIONS.
(a) GRANT. Subject to the provisions of the Plan and contractual
restrictions affecting the Company, the Committee shall have sole and complete
authority to determine the Employees to whom Options shall be granted, the
number of Shares to be covered by each Option, the exercise price therefor
and the conditions and limitations applicable to the exercise of the Option.
(b) EXERCISE PRICE. The Committee in its sole discretion shall establish
the exercise price at the time each Option is granted; PROVIDED, that in no
event shall the exercise price per Share be less than the Fair Market Value of a
Share on the date of grant.
(c) EXERCISE. Each Option shall be exercisable at such times and subject
to such terms and conditions as the Committee may, in its sole discretion,
specify in the applicable Award Agreement or thereafter. The Committee may
impose such conditions with respect to the exercise of Options, including
without limitation, any relating to the application of Federal or state
securities laws, as it may deem necessary or advisable.
(d) PAYMENT. No Shares shall be delivered pursuant to any exercise of an
Option until payment in full of the exercise price, or adequate provision
therefor, is received by the Company. Such payment may be made: (i) in cash;
(ii) in Shares owned by the Participant for at least six months (the value of
such Shares shall be their Fair Market Value on the date of exercise); (iii) by
a combination of cash and Shares; or (iv) in such other manner as permitted by
the Committee at the time of grant or thereafter.
SECTION 7. VESTING; TERMINATION OF EMPLOYMENT. Each Award Agreement shall
contain such terms as the Committee may in its sole discretion determine
concerning vesting, forfeiture, the Company's rights of repurchase of Shares
acquired upon exercise of an Option, and/or the effects of termination or
suspension of a Participant's employment upon the exercisability of any Option
granted thereunder.
SECTION 8. CHANGE OF CONTROL. The Committee, in its sole discretion, may
provide in an Award Agreement for the accelerated vesting of an Award in the
event of a Change of Control.
SECTION 9. AMENDMENT AND TERMINATION.
(a) AMENDMENTS TO THE PLAN. The Board may amend, alter, suspend,
discontinue, or terminate the Plan or any portion thereof at any time; provided
that
6
<PAGE>
no such amendment, alteration, suspension, discontinuation or termination shall
be made without shareholder approval if such approval is necessary to comply
with any tax or regulatory requirement, including for these purposes any
approval requirement which is a prerequisite for exemptive relief from Section
16(b) of the Exchange Act, for which or with which the Board deems it necessary
or desirable to qualify or comply. Notwithstanding anything to the contrary
herein, the Committee may amend the Plan in such manner as may be necessary so
as to have the Plan conform with local rules and regulations in any jurisdiction
outside the United States.
(b) AMENDMENTS TO AWARDS. Subject to the terms of the Plan and applicable
law, the Committee may waive any conditions or rights under, amend any terms of,
or alter, suspend, discontinue, cancel or terminate, any Award theretofore
granted, prospectively or retroactively; provided that any such waiver,
amendment, alteration, suspension, discontinuance, cancellation or termination
that would adversely affect the rights Participant or any holder or beneficiary
of any Award theretofore granted shall not to that extent be effective without
the consent of the affected Participant, holder or beneficiary.
(c) CANCELLATION. Any provision of this Plan or any Award Agreement to
the contrary notwithstanding, in the event of a Change of Control or an offer to
Participants generally relating to the acquisition of Shares, including through
purchase, merger or otherwise, the Committee may cause any Award granted
hereunder to be canceled in consideration of a cash payment or alternative Award
made to the holder of such canceled Award equal in value to the Fair Market
Value of such canceled Award.
SECTION 10. GENERAL PROVISIONS.
(a) DIVIDEND EQUIVALENTS. In the sole and complete discretion of the
Committee, an Award may provide the Participant with dividends or dividend
equivalents, payable in cash, Shares, other securities or other property on a
current or deferred basis.
(b) NONTRANSFERABILITY. Except to the extent otherwise provided in an
Award Agreement, no Award shall be assigned, alienated, pledged, attached, sold
or otherwise transferred or encumbered by a Participant, except by will or the
laws of descent and distribution.
(c) NO RIGHTS TO AWARDS. No Employee, Participant or other Person shall
have any claim to be granted any Award, and there is no obligation for
uniformity of treatment of Employees, Participants, or holders or beneficiaries
of
7
<PAGE>
Awards. The terms and conditions of Awards need not be the same with respect to
each recipient.
(d) SHARE CERTIFICATES. Certificates issued in respect of Shares shall,
unless the Committee otherwise determines, be registered in the name of the
Participant or its Permitted Transferees and shall be deposited by such
Participant or Permitted Transferee, together with a stock power endorsed in
blank, with the Company. When the Participant ceases to be bound by any
transfer restrictions set forth herein or in the Investors' Agreement, the
Company shall deliver such certificates to the Participant upon request. Such
stock certificate shall carry such appropriate legends, and such written
instructions shall be given to the Company's transfer agent, as any be deemed
necessary or advisable by counsel to the Company in order to comply with the
requirements of the Securities Act of 1933, any state securities laws or any
other applicable laws and the Investor's Agreement. Subject to the provisions
of the Investors' Agreement, all certificates for Shares or other securities of
the Company or any Subsidiary delivered under the Plan pursuant to any Award or
the exercise thereof shall be subject to such stop transfer orders and other
restrictions as the Committee may deem advisable under the Plan or the rules,
regulations and other requirements of the Securities and Exchange Commission or
any stock exchange upon which such Shares or other securities are then listed
and any applicable laws or rules or regulations, and the Committee may cause a
legend or legends to be put on any such certificates to make appropriate
reference to such restrictions.
(e) WITHHOLDING. A Participant may be required to pay to the Company or
any Subsidiary, and the Company or any Subsidiary shall have the right and is
hereby authorized to withhold from any Award, from any payment due or transfer
made under any Award or under the Plan or from any compensation or other amount
owing to a Participant the amount (in cash, Shares, other securities, other
Awards or other property) of any applicable withholding taxes in respect of an
Award, its exercise, or any payment or transfer under an Award or under the Plan
and to take such other action as may be necessary in the opinion of the Company
to satisfy all obligations for the payment of such taxes. The Committee may
provide for additional cash payments to holders of Awards to defray or offset
any tax arising from any such grant, lapse, vesting, or exercise of any Award.
(f) AWARD AGREEMENTS. Each Award hereunder shall be evidenced by an Award
Agreement which shall be delivered to the Participant and shall specify the
terms and conditions of the Award and any rules applicable thereto.
(g) NO LIMIT ON OTHER COMPENSATION ARRANGEMENTS. Nothing contained in the
Plan shall prevent the Company or any Subsidiary from adopting or continuing in
effect other compensation arrangements, which may, but need not,
8
<PAGE>
provide for the grant of options, restricted stock, Shares and other types of
Awards provided for hereunder (subject to shareholder approval if such approval
is required), and such arrangements may be either generally applicable or
applicable only in specific cases.
(h) NO RIGHT TO EMPLOYMENT. The grant of an Award shall not be construed
as giving a Participant the right to be retained in the employ or service of the
Company or any Subsidiary. Further, the Company or an Subsidiary may at any
time dismiss a Participant from employment or service, free from any liability
or any claim under the Plan, unless otherwise expressly provided in the Plan or
in any Award Agreement.
(i) RIGHTS AS A STOCKHOLDER. Subject to the provisions of the applicable
Award, no Participant or holder or beneficiary of any Award shall have any
rights as a stockholder with respect to any Shares to be issued under the Plan
until he or she has become the holder of such Shares.
(j) GOVERNING LAW. The validity, construction, and effect of the Plan and
any rules and regulations relating to the Plan and any Award Agreement shall be
determined in accordance with the laws of the State of Delaware.
(k) SEVERABILITY. If any provision of the Plan or any Award is or becomes
or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as
to any Person or Award, or would disqualify the Plan or any Award under any law
deemed applicable by the Committee, such provision shall be construed or deemed
amended to conform to the applicable laws, or if it cannot be construed or
deemed amended without, in the determination of the Committee, materially
altering the intent of the Plan or the Award, such provision shall be stricken
as to such jurisdiction, Person or Award and the remainder of the Plan and any
such Award shall remain in full force and effect.
(l) OTHER LAWS. The Committee may refuse to issue or transfer any Shares
or other consideration under an Award if, acting in its sole discretion, it
determines that the issuance or transfer of such Shares or such other
consideration might violate any applicable law or regulation or entitle the
Company to recover the same under Section 16(b) of the Exchange Act, and any
payment tendered to the Company by a Participant in connection therewith shall
be promptly refunded to the relevant Participant, holder or beneficiary.
Without limiting the generality of the foregoing, no Award granted hereunder
shall be construed as an offer to sell securities of the Company, and no such
offer shall be outstanding, unless and until the Committee in its sole
discretion has determined that any such offer, if made, would be in compliance
with all applicable requirements of the U.S. federal securities laws and any
other laws to which such offer, if made, would be subject.
9
<PAGE>
(m) NO TRUST OR FUND CREATED. Neither the Plan nor any Award shall create
or be construed to create a trust or separate fund of any kind or a fiduciary
relationship between the Company or any Subsidiary and a Participant or any
other Person. To the extent that any Person acquires a right to receive
payments from the Company or any Subsidiary pursuant to an Award, such right
shall be no greater than the right of any unsecured general creditor of the
Company or any Subsidiary.
(n) NO FRACTIONAL SHARES. No fractional Shares shall be issued or
delivered pursuant to the Plan or any Award, and the Committee shall determine
whether cash or other securities or other property shall be paid or transferred
in lieu of any fractional Shares or whether such fractional Shares or any rights
thereto shall be canceled, terminated, or otherwise eliminated.
(o) TRANSFER RESTRICTIONS. Shares acquired hereunder may not be sold,
assigned, transferred, pledged or otherwise disposed of, except as provided in
the Plan, the applicable Award Agreement and the Investors' Agreement.
(p) HEADINGS. Headings are given to the Sections and subsections of the
Plan solely as a convenience to facilitate reference. Such headings shall not
be deemed in any way material or relevant to the construction or interpretation
of the Plan or any provision thereof.
SECTION 11. TERM OF THE PLAN.
(a) EFFECTIVE DATE. The Plan shall be effective as of April 30, 1999,
subject to approval by the shareholders of the Company. Awards may be granted
hereunder prior to such shareholder approval subject in all cases, however, to
such approval.
(b) EXPIRATION DATE. The Board and the Committee's authority to grant
Awards under the Plan shall terminate on the tenth anniversary of the Plan's
effective date. Unless otherwise expressly provided in the Plan or in an
applicable Award Agreement, any Award granted hereunder may, and the authority
of the Board or the Committee to amend, alter, adjust, suspend, discontinue, or
terminate any such Award or to waive any conditions or rights under any such
Award shall, continue after the authority for grant of new Awards hereunder has
been exhausted.
10
<PAGE>
EXHIBIT A
Form of
Award Agreement
under the
DeCrane Holdings Co.
Management Incentive Plan
<TABLE>
<S> <C>
Date of Grant: _________________, 1998
Name of Optionee: _______________________
Number of Shares: ______________
Exercise Price: $__________/share
Expiration Date: ________________, 2008
Operating Unit: _______________________
</TABLE>
DeCrane Holdings Co., a Delaware corporation (the "COMPANY"), hereby grants
to the above named optionee (the "OPTIONEE") a performance-based vesting option
(the "OPTION") to purchase from the Company, for the price per share set forth
above, the number of shares of Common Stock, $0.01 par value (the "SHARES"), of
the Company set forth above pursuant to the DeCrane Holdings Co. Management
Incentive Plan (the "PLAN"). The Options are not intended to be treated as
incentive stock options under the Code.
Capitalized terms not otherwise defined herein shall have the same meanings
as in the Plan. The terms and conditions of the Option granted hereby, to the
extent not controlled by the terms and conditions contained in the Plan, are as
follows:
1. EXERCISE PRICE. The price at which each Share subject to this Option
may be purchased shall be the price set forth above.
2. NUMBER OF SHARES: EXERCISE. The number of Shares for which the Option
may be exercised are set forth above. To the extent this Option has become
vested in accordance with Section 3 below, the Option may be exercised at any
time until the Expiration Date, subject to the terms of the Plan and of Section
7 below.
11
<PAGE>
3. VESTING.
(a) To the extent not previously vested in accordance with paragraph (b)
below or Section 8, the Option shall become fully vested and exercisable on the
eighth anniversary of the Date of Grant, provided the Optionee is then in the
employ of the Company or a Subsidiary.
(b) (i) The Option shall become vested and exercisable with respect to
up to 25% of the Shares subject thereto on the thirtieth day following the
availability of audited financial statements for each of the four fiscal
years of the Company commencing with the fiscal year ending December 31, 1999
(each such day a "VESTING DATE"), provided the EBITDA of the operating unit
of the Company to which the Optionee is assigned on the first page hereof as
of the end of such fiscal year, calculated in accordance with Schedule A
hereto, is at least equal to the EBITDA target values for such fiscal year
set forth in such Schedule A, and provided further that the Optionee is in
the employ of the Company or a Subsidiary on such Vesting Date. (ii) If any
EBITDA target value set forth in Schedule A for any of the first three fiscal
years referred to above is not attained, the portion of the Option that would
otherwise have vested for such fiscal year shall be treated as vested and
exercisable as of the Vesting Date for any subsequent fiscal year ending on
or before December 31, 2002 for which the maximum EBITDA target value for
such subsequent year is attained, provided, the Optionee is in the employ of
the Company or a Subsidiary on such Vesting Date.
4. MANNER OF EXERCISE. The Optionee (or his representative, devisee or
heir, as applicable) may exercise any portion of this Option which has become
exercisable in accordance with the terms hereof as to all or any of the Shares
then available for purchase by delivering to the Company written notice
specifying:
(i) the number of whole Shares to be purchased together with
payment in full of the aggregate Exercise Price of such shares;
(ii) the address to which dividends, notices, reports, etc. are to
be sent; and
(iii) the Optionee's social security number.
Payment shall be in cash, by certified or bank cashier's check payable to the
order of the Company, free from all collection charges, or in unencumbered
Shares) provided such shares shall have been held by the Optionee for at least
six months unless the Committee determines in its sole discretion that such
six-month holding period is not necessary to comply with any accounting,
legal or regulatory requirement) having a Fair Market Value equal to the full
amount of the Exercise Price therefor, or such other form as may permitted by
the Committee. Only one
12
<PAGE>
stock certificate will be issued unless the Optionee otherwise requests in
writing. Shares purchased upon exercise of the Option will be issued in the
name of the Optionee or the Optionee's Permitted Transferee. No Shares shall
be issued hereunder unless and until the Optionee (or his representative,
devisee or heir, as applicable) executes and agrees to be bound by the
Investors' Agreement. The Optionee shall not be entitled to any rights as a
stockholder of the Company in respect of any Shares covered by this Option
until such Shares shall have been paid for in full and issued to the Optionee.
5. CERTIFICATES. Certificates issued in respect of Shares acquired upon
exercise of the Option shall, unless the Committee otherwise determines, be
registered in the name of the Optionee or its Permitted Transferee. When the
Optionee ceases to be bound by the provisions of the Investors' Agreement, the
Company shall deliver such certificates to the Optionee or its Permitted
Transferee upon request. Such stock certificate shall carry such appropriate
legends, and such written instructions shall be given to the Company's transfer
agent, as may be deemed necessary or advisable by counsel to the Company in
order to comply with the requirements of the Securities Act of 1933, any state
securities laws or any other applicable laws or the Investors' Agreement.
6. NONTRANSFERABILTY. This Option is personal to the Optionee and may be
exercised only by the Optionee or his or her representative in the event of the
Optionee's Disability or death. This Option shall not be transferable other
than by will or the laws of descent and distribution. Notwithstanding the
foregoing, this Option may be transferred to a trust solely for the benefit of
the Optionee or the Optionee's immediate family (which shall be deemed to
include the Optionee's spouse, parents, siblings, children, stepchildren and
grandchildren).
7. FORFEITURE OF OPTION: RIGHT OF REPURCHASE.
(a) If the Optionee's employment with the Company and its Subsidiaries
shall terminate for any reason other than by the Company or its Subsidiary for
Cause, then (i) to the extent not yet vested as of the date of termination of
employment, the Option shall immediately be forfeited; and (ii) to the extent
vested as of the date of termination of employment, the Option may be retained
and exercised, in accordance with the terms of the Plan and this Award
Agreement, [DURING THE SIX MONTH PERIOD FOLLOWING SUCH TERMINATION].
(b) If the Optionee's employment with the Company and its Subsidiaries
shall be terminated by the Company or its Subsidiary for Cause, then the entire
Option shall immediately be forfeited, ans all Shares previously acquired upon
exercise of the Option shall be subject to a right of repurchase by the Company
13
<PAGE>
from the Participant or his or her Permitted Transferee at a price equal to the
Exercise Price.
8. CHANGE OF CONTROL. Upon a Change of Control, the Option shall vest in
its entirety and become immediately exercisable.
9. SALE OF UNDERLYING SHARES. The Optionee's right to sell any Shares
acquired upon exercise of the Option (in the case of Optionees who are party
thereto) shall be subject to the terms of the Investors' Agreement.
10. EMPLOYMENT RIGHTS. This Option does not confer on the Optionee any
right to continue in the employ of the Company or any Subsidiary or interfere in
any way with the right of the Company or any Subsidiary to determine the terms
of the Optionee's employment.
11. TERMS OF PLAN; INTERPRETATIONS. This Option and the terms and
conditions herein set forth are subject in all respects to the terms and
conditions of the Plan, which shall be controlling. All interpretations or
determinations of the Committee and/or the Board shall be binding and conclusive
upon the Optionee and his legal representatives on any question arising
hereunder. The Optionee acknowledges that he has received and reviewed a copy
of the Plan.
12. DELEGATION. Optionee acknowledges that any powers, rights or
responsibilities of the Board and/or the Committee set forth herein may be
delegated to and exercised by any subcommittee thereof as permitted under the
Plan.
13. NOTICES. All notices hereunder to the party shall be delivered or
mailed to the following addresses:
If to the Company:
DeCrane Holdings Co.
c/o DLJ Merchant Banking Partners II, L.P.
277 Park Avenue
New York, New York 10172
Attention: Thompson Dean
Fax: (212) 892-7272
and
14
<PAGE>
DeCrane Holdings Co.
2361 Rosecrans Avenue
Suite 180
El Segundo, CA 90245
Attention: R. Jack DeCrane
Fax: (310) 643-0746
with a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: George R. Bason, Jr., Esq.
Fax: (212) 450-4800
If to the Optionee:
To the person and at the address specified on the signature page.
Such addresses for the service of notices may be changed at any time provided
notice of such change is furnished in advance to the other party.
14. ENTIRE AGREEMENT. This Agreement, together with the Plan and (in the
case of Optionees who are party thereto) the Investors Agreement, contains the
entire understanding of the parties hereto in respect of the subject matter
contained herein. This Agreement, the Plan and the Investors' Agreement
supersede all prior agreements and understandings between the parties hereto
with respect to the subject matter hereof.
15. GOVERNING LAW. This Award Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware, without application of the
conflict of laws principles thereof.
16. COUNTERPARTS. This Award Agreement may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
15
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Award Agreement to be
duly executed as of the date first above written.
DECRANE HOLDINGS CO.
By:
----------------------
Name:
Title:
OPTIONEE:
-------------------------
Name:
Address: c/o DeCrane Holdings Co.
2361 Rosecrans Avenue
Suite 180
El Segundo, CA 90245
16
<PAGE>
2. STOCK PURCHASE PLAN
DeCrane Holdings Co. (the "Company") has adopted a management stock
purchase plan ("Stock Purchase Plan") providing for the purchase of shares of
common stock of the Company as incentive compensation to designated executive
personnel and other key employees of the Company and its subsidiaries, with a
portion of the purchase price to be loaned to the participants by the
Company's subsidiary DeCrane Aircraft Holdings, Inc., available to persons
and in amounts determined by the compensation committee of the Board from
time to time, employing the attached forms of Subscription Agreement and
Promissory Note and Pledge to be entered into by individual participants.
The compensation committee of the Board has approved a one-time offer of
loans under that plan, for the purchase of up to 173,913 shares in the
aggregate (calculated on the basis of $4,000,000 divided by $23.00 per share)
at the price of $23.00 per share.
<PAGE>
3. CASH INCENTIVE BONUS PLAN
The Company has approved a cash incentive bonus plan ("Incentive Bonus
Plan") providing for the allocation of a bonus pool each year for incentive
compensation to designated executive personnel and other key employees of the
Company and its subsidiaries, as the exclusive sources of elective merit
raises by the Company during the next four years, to persons and in amounts
determined by the compensation committee of the Board from time to time; with
the bonus pool for participants for the next four years to be based on EBITDA
and cash flow changes from year to year at the relevant participant's
operating unit; and in the case of the designated senior executives of
DeCrane Aircraft Holdings, Inc., from a pool adjusted for each performance
year by 5% of the change in consolidated EBITDA due to acquisitions during
the year (plus 3% of EBITDA of PATS, only for performance year 1999) and by
5% of 15% (representing cost of capital) of the EBITDA generated from
existing operations during the year, net of consolidated capital expenditures
and plus (or minus) consolidated working capital for such periods. For the
1999 performance year only, such awards to participants who have become
executives of the Company on after January 1, 1999, are limited to a maximum
of 100% of their base salary for 1999.
The Company additionally has adopted a 3% cost of living increase per
year to base salaries for participants in the foregoing plan.
17
<PAGE>
FORM OF SUBSCRIPTION AGREEMENT
SUBSCRIPTION AGREEMENT (this "AGREEMENT") dated as of October __, 1998, by
and among DeCrane Holdings Co., a Delaware corporation (the "COMPANY" and
___________ (the "INVESTOR").
WHEREAS, the Investor desires to subscribe for, and the Company desires to
issue to the Investor, the number of shares of common stock, par value $0.01 per
share (the "COMMON STOCK"), of the Company set forth on Exhibit A hereto (such
shares of Common Stock to be subscribed for by the Investor and issued to the
Investor by the Company, the "SHARES").
NOW, THEREFORE, IT IS AGREED:
ARTICLE I
ISSUANCE OF SHARES; CONSIDERATION
Section 1.01. ISSUANCE OF SHARES. Upon the terms set forth in this
Agreement, the Company hereby agrees to issue to the Investor, and the Investor
hereby subscribes for, the Shares.
Section 1.02. SUBSCRIPTION. In consideration for the issuance by the
Company of the Shares, the Investor shall:
(a) pay to the Company, by wire transfer of immediately available
funds to an account specified by the Company, an amount equal to 50% of the
aggregate subscription price set forth on Exhibit A hereto; and
(b) execute and deliver to the Company a Promissory Note and Pledge
Agreement (the "PROMISSORY NOTE AND PLEDGE") in the form of Exhibit C
hereto in a principal amount equal to 50% of the aggregate subscription
price set forth on Exhibit A hereto.
Section 1.03. INVESTORS' AGREEMENT. As a condition to the issuance of the
Shares, the Investor shall execute and deliver to the Company an agreement in
the form of Exhibit B hereto, pursuant to which the Investor agrees to be bound
by the terms of the Amended and Restated Investors' Agreement, dated as of
October
<PAGE>
2, 1998, by and among the Company and the stockholders of the Company named
therein (the "DLJ ENTITIES").
ARTICLE II
REPRESENTATIONS OF THE COMPANY
Section 2.01. CORPORATE EXISTENCE AND POWER. The Company is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of Delaware. The Company has all corporate power to own its properties
and to carry on its business as now conducted.
Section 2.02. AUTHORITY AND APPROVAL. The execution and delivery of this
Agreement are within the corporate powers of the Company and have been duly
authorized by all necessary corporate action on the part of the Company. This
Agreement constitutes a legal, valid and binding agreement of the Company,
enforceable against it in accordance with its terms, except to the extent that
its enforceability may be subject to applicable bankruptcy, insolvency,
reorganization, moratorium and other similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles.
Section 2.03. SHARES. When issued to the Investor in accordance with the
terms hereof, the Shares will be duly authorized, validly issued, fully paid and
non-assessable.
Section 2.04. CAPITALIZATION. The authorized capital stock of the Company
(prior to giving effect to the issuance of the Shares) consists of (i) 3,500,000
shares of Common Stock, of which 2,826,087 shares are issued and outstanding as
of the date hereof, and (ii) 2,500,000 shares of Preferred Stock, of which
340,000 shares are issued and outstanding as of the date hereof. Except for (i)
the Preferred Stock, and (ii) warrants to purchase an aggregate of 155,000
shares of Common Stock issued to the DLJ Entities on October 2, 1998 and
warrants to purchase an aggregate of 155,000 shares of Common Stock issued in
connection with the Company's 12% Senior Subordinated Notes due 2008 on October
5, 1998, there are no outstanding securities convertible into or exchangeable
for the capital stock of the Company and no outstanding options, rights or
warrants to purchase or subscribe for any shares of the capital stock of the
Company.
2
<PAGE>
ARTICLE III
REPRESENTATIONS OF THE INVESTOR
Section 3.01. AUTHORIZATION. The Investor has full power and authority to
enter into this Agreement and the Promissory Note and Pledge and to perform his
obligations hereunder and thereunder.
Section 3.02. ENFORCEABILITY. Each of this Agreement and the Promissory
Note and Pledge has been duly executed and delivered by the Investor and
constitutes a legal, valid and binding obligation of the Investor, enforceable
against the Investor in accordance with its terms, except to the extent that its
enforceability may be subject to applicable bankruptcy, insolvency or similar
laws affecting the enforcement of creditors' rights generally and by general
equitable principles.
Section 3.03. PRIVATE PLACEMENT. (a) The Investor understands that the
offering and sale of the Shares to the Investor as contemplated hereby is
intended to be exempt from registration under the Securities Act of 1933, as
amended (the "1933 ACT") pursuant to Regulation D and Section 4(2) thereunder.
(b) The Shares to be acquired by the Investor pursuant to this
Agreement are being acquired for his own account for investment and without
a view to the public distribution of the Shares or any interest therein.
The Investor understands that the Shares may not be transferred or sold
unless registered under the 1933 Act or an exemption from such registration
becomes available.
(c) The Investor has sufficient knowledge and experience in financial
and business matters so as to be capable of evaluating the merits and risks
of his investment in the Shares and the Investor is capable of bearing the
economic risks of such investment, including a complete loss of his
investment in the Shares.
(d) The Investor has been given the opportunity to ask questions of
and receive answers from the Company concerning the Company, the Shares and
other related matters. The Investor further represents and warrants to the
Company that he has been furnished with all information he deems necessary
or desirable to evaluate the merits and risks of the acquisition of the
Shares and that the Company has made available to the Investor or his
agents all documents and information relating to an investment in the
Shares requested by or on behalf of the Investor. In evaluating the
suitability of an investment in the Shares, the Investor has
3
<PAGE>
not relied upon any other representations or other information (other than
as contemplated by the preceding sentences) whether oral or written made by
or on behalf of the Company.
(e) The Investor is an "Accredited Investor" as such term is defined
in Regulation D under the 1933 Act.
ARTICLE IV
MISCELLANEOUS
Section 4.01. NOTICES. All notices, requests and other communications to
any party hereunder shall be in writing (including facsimile transmission to the
recipient's then current facsimile number) and shall be given,
if to the Investor, to the address set forth on the signature page, and
if to the Company, to:
DeCrane Holdings Co.
2361 Rosecrans Avenue
Suite 180
El Segundo, Ca 90245
Attn: R. Jack DeCrane
Fax: (310) 643-0746
Section 4.02. AMENDMENTS AND WAIVERS. Any provision of this Agreement may
be amended modified, supplemented or waived if, but only if, such amendment or
waiver is in writing and is signed, in the case of an amendment, by each party
to this Agreement, or in the case of a waiver, by the party against whom the
waiver is to be effective.
Section 4.03. SUCCESSORS AND ASSIGNS. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; PROVIDED that no party may assign, delegate
or otherwise transfer any of its rights or obligations under this Agreement
without the consent of each other party hereto.
Section 4.05. COUNTERPARTS; THIRD PARTY BENEFICIARIES. This Agreement may
be signed in any number of counterparts, each of which shall be an original,
with the same effect as if the signatures thereto and hereto were upon the same
instrument. This Agreement shall become effective when each party hereto shall
have received a counterpart hereof signed by the other party hereto. No
provision
4
<PAGE>
of this Agreement is intended to confer upon any person other than the parties
hereto any rights or remedies hereunder.
Section 4.06. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter of this
Agreement and supersedes all prior agreements and understandings, both oral and
written, between the parties with respect to the subject matter of this
Agreement.
Section 4.07. CAPTIONS. The captions herein are included for convenience
of reference only and shall be ignored in the construction or interpretation
hereof.
Section 4.08. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with laws of the State of New York.
5
<PAGE>
IN WITNESS WHEREOF, the Investor has executed this Agreement and the
Company has caused its corporate name to be hereunto subscribed by its officers
thereunto duly authorized, all as of the day and year first above written.
DECRANE HOLDINGS CO.
By:
---------------------------------
Name:
Title:
INVESTOR
By:
---------------------------------
Name:
Title:
Address:
Fax:
6
<PAGE>
EXHIBIT A
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NUMBER OF AMOUNT OF
SHARES OF SUBSCRIPTION PRICE
SUBSCRIBED FOR
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK - $ -
- --------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
EXHIBIT B
FORM OF AGREEMENT TO BE BOUND
October ___, 1998
To the Parties to the Amended and Restated Investors'
Agreement dated as of October 2, 1998
Ladies and Gentlemen:
Reference is made to the Amended and Restated Investors' Agreement dated as
of October 2, 1998 (the "INVESTORS' AGREEMENT") among DeCrane Holdings Co. and
the other Persons listed on the signature pages thereof and each other Person
who has or shall become a party to the Investors' Agreement as provided therein.
Capitalized terms used herein and not defined have the meanings ascribed to them
in the Investors' Agreement.
In consideration of the covenants and agreements contained in the
Investors' Agreement, the undersigned hereby confirms and agrees that it shall
be bound as a "Stockholder" by all of the provisions thereof.
This letter shall be construed and enforced in accordance with the internal
laws of the State of Delaware.
Very truly yours,
8
<PAGE>
FORM OF PROMISSORY NOTE AND PLEDGE
New York, New York
October ___, 1998
For value received, _________________ (the "INVESTOR") promises to pay to
the order of DeCrane Holdings Co., a Delaware corporation (the "COMPANY", also
referred to herein as the "LENDER"). $__________ (the "LOAN") the principal
amount of which will be repayable in full on the eighth anniversary of the date
hereof (the "PAYMENT DATE") subject to prepayment as set forth below; PROVIDED
that if at any time the Investor disposes of any shares of Common Stock, par
value $0.01 per share, of the Company (the "COMMON SHARES") pledged hereunder,
the proceeds of any such sale shall be used by the Investor as follows: first to
pay any accrued but unpaid interest on the Loan, and second to repay the
principal amount of the Loan (or portion thereof), promptly upon receipt of such
proceeds. The Investor promises to pay on the Payment Date, all accrued and
unpaid interest on the Loan on such date as well as all outstanding principal on
such date. Interest will accrue on the outstanding principal amount of the Loan,
and will be compounded annually, at a rate equal to the applicable federal rate
as published by the Treasury Department of the United States of America on
October ___, 1998. All payments of principal and interest shall be made in
lawful money of the United States in Federal or other immediately available
funds at the office of the Company c/o DLJ Merchant Banking Partners IL, L.P.,
277 Park Avenue, New York, New York 10172, or as otherwise notified to the
Investor by the Company. The Investor may pay the Loan without penalty in whole
at any time, or from time to time in part, by paying the principal amount to be
paid at such time, together with all accrued interest to the date of payment.
To secure payment of the principal of and all interest on the Loan, the
Investor hereby assigns, pledges and grants to DLJ Merchant Banking II, Inc.
(the "AGENT") for the ratable benefit of the Lender a security interest in and,
to the extent not previously delivered, delivers to the Agent (i) - Common
Shares acquired by the Investor from the Company as of the date hereof and all
other shares of capital stock acquired by the Investor from the Lender
(collectively, the "PLEDGED SHARES"), (ii) all rights and privileges with
respect to the Pledged Shares, (iii) all income and profits thereon, (iv) all
dividends, payments and other distributions with respect thereto, and (v) all
proceeds thereof and substitutions therefor other than any cash income, profits,
dividends, payments, distributions or proceeds so long as the Investor is not in
default hereunder (collectively, the "COLLATERAL"). The Investor is delivering
to the Agent certificates representing the Shares in pledge hereunder.
The Company's recourse under this Promissory Note and Pledge is limited
solely to the Collateral.
<PAGE>
Certificates evidencing the Pledged Shares shall remain in the physical
custody of the Agent at all times until the Investor has made payment in full of
all principal of and interest on the Loan, except for transfers permitted
hereunder so long as the proceeds of such sale are applied as provided herein
and, in its reasonable discretion, the Agent determines that the remaining
Collateral is sufficient.
This Promissory Note and Pledge constitutes a security agreement for
purposes of the Uniform Commercial Code in all relevant jurisdictions. Upon the
nonpayment of principal or interest when due hereunder or under any other note
issued in connection with any other Loan (a "DEFAULT"), the Agent (i) may, by
notice to the Investor, declare the Loan (together with accrued and unpaid
interest thereon) to be, and the Loan shall thereupon become, immediately due
and payable without presentment, demand, protest or other notice of any kind,
all of which are hereby waived by the Investor, and (ii) shall have all the
rights and remedies of a secured party provided in the Uniform Commercial Code
in force in New York.
The Pledged Shares are granted as security only and shall not subject the
Agent or the Company to, or in any way affect or modify, any obligation or
liability of the Investor with respect to any of its Collateral or any
transaction in connection therewith.
The Investor agrees that it will, at the Company's expense and in such
manner and from as the Agent may reasonably require, execute, deliver, file and
record any financing statement, specific assignment or other paper and take any
other action that may be reasonably necessary or desirable, or that the Agent
may reasonably request, in order to create, preserve, perfect or validate any
security interest or to enable the Agent to exercise and enforce its rights
hereunder with respect to any of the Collateral. To the extent permitted by
applicable law, the Investor hereby authorizes the Agent to execute and file, in
the name of the Investor or otherwise, Uniform Commercial Code financing
statements (which may be carbon, photographic, photostatic or other
reproductions of this Promissory Note and Pledge or of a financing statement
relating to this Promissory Note and Pledge) which the Agent in its sole
discretion may deem necessary or appropriate to further perfect its security
interest in the Collateral.
To the extent a Default shall have occurred and be continuing, the Agent
may cause any or all of the Pledged Shares to be transferred of record into the
name of the Agent or its nominee. The Investor will promptly give to the Agent
copies of any notices or other communications received by him with respect to
Pledged Shares registered in the name of the Investor, and the Agent will
promptly give to the Investor copies of any notices and communications received
by the Agent with respect to Pledged Shares registered in the name of the Agent
or its nominee.
If a Default shall have occurred and be continuing, the Agent shall have
the right to receive and to retain as Collateral hereunder for the benefit of
the Company all
2
<PAGE>
dividends, interest and other payments and distributions made upon or with
respect to the Collateral, and the Investor shall take all such action as the
Agent may deem necessary or appropriate to give effect to such right.
Unless a Default shall have occurred and be continuing, the Investor shall
have the right, from time to time, to receive and retain all cash dividends,
interest and other payments and distributions made upon or with respect to the
Collateral and to vote and to give consents, ratifications and waivers with
respect to the Pledged Shares, and the Agent shall deliver to the Investor such
proxies, powers of attorney, consents, ratifications and waivers in respect of
any of the Pledged Shares which are registered in the name of the Agent or its
nominee as the Investor shall request.
If a Default shall have occurred and be continuing, the Agent shall have
the right to the extent permitted by law and the Investor shall take all such
action as may be necessary or appropriate to give effect to such right, to vote
and to give consents, ratifications and waivers, and take any other action with
respect to any or all of the Pledged Shares with the same force and effect as if
the Agent were the absolute and sole owner thereof.
The Investor hereby irrevocably appoints the Agent its true and lawful
attorney, with full power of substitution, in the name of the Investor, the
Agent or otherwise, for the sole use and benefit of the Agent, but at the
expense of the Agent, to the extent permitted by law, to exercise, at any time
and from time to time while a Default has occurred and is continuing, all or any
of the following powers with respect to all or any of the Collateral:
(i) to demand, sue for, collect, receive and give acquittance for any
and all monies due to become due upon or by virtue thereof;
(ii) to settle, compromise, compound, prosecute or defend any action or
proceeding with respect thereto;
(iii) to sell, transfer, assign or otherwise deal in or with the same or
the proceeds or avails thereof, as fully and effectually as if the Agent
were the absolute owner thereof; and
(iv) to extent the time of payment of any or all thereof and to make
any allowance and other adjustments with reference thereto;
PROVIDED that the Agent shall give the Investor not less than ten days' prior
written notice of the time and place of any sale or other intended disposition
of any of the Collateral. The Agent and the Investor agree that such notice
constitutes "reasonable notification" within the meaning of Section 9-504(3) of
the Uniform Commercial Code.
3
<PAGE>
The Investor covenants and agrees that in the event that any of the
Collateral shall become subject to any lien or security interest other than
the liens and security interests in favor of the Agent created hereunder, or
the lien on and security interest in the Collateral in favor of the Agent
shall cease to be a first priority perfected security interest in and lien on
any of such Collateral except pursuant to a release herein contemplated, the
Investor will promptly take whatever reasonable action may be necessary to
release such other liens or security interests or to restore the Agent's lien
on and security interest in the Collateral as a first priority perfected
security interest or lien, as the case may be. The Investor acknowledges
that money damages would not be a sufficient remedy for the breach of the
Investor's covenant in this paragraph and that, in addition to all other
remedies that may be available, the Agent shall be entitled to specific
performance as a remedy for any such breach.
The Investor agrees that it will forthwith upon demand pay to the Agent and
the Company, as the case may be, the amount of any and all reasonable
out-of-pocket expenses, including the reasonable fees and disbursements of
counsel and of any other experts, which the Agent or the Company may incur in
connection with (w) the enforcement of this Promissory Note and Pledge,
including such expenses as are incurred to preserve the value of the Collateral
and the validity, perfection, rank and value of any security interest, (x) the
collection, sale or other disposition of any of the Collateral, (y) the exercise
by the Agent of any of the rights conferred upon its hereunder or (z) any
Default; PROVIDED, HOWEVER, that in no event shall the total amount collected
pursuant to this paragraph exceed the value of the Collateral.
For the purpose of this Promissory Note and Pledge, notices and all other
communications provided for in this Promissory Note and Pledge shall be in
writing and shall be given to the respective addresses or telecopy numbers set
forth below:
if to the Investor, to the address set forth on the signature page hereof;
if to the Company, to: DeCrane Holdings Co.
2361 Rosecrans Avenue
Suite 180
El Segundo, CA 90245
Telefax: (310) 643-0746
if to the Agent, to: DLJ Merchant Banking Partners II, L.P.
277 Park Avenue
New York, NY 10172
Attention: Thompson Dean
Telefax: (212) 892-7272
4
<PAGE>
PROVIDED, that all notices to the Company shall be directed to the attention of
the Board with a copy to the Secretary of the Company, or to such other address
as either party may have furnished to the other in writing in accordance
herewith. Each such notice or other communication shall be effective (i) if
given by telecopy, when such telecopy is transmitted to the telecopy number
specified in this paragraph and telephonic confirmation of receipt thereof is
obtained, (ii) if given by prepaid overnight courier, one business day after
deposit with such courier or (iii) if given by United States certified or
registered mail, postage prepaid, three business days after deposit with the
United States postal service; PROVIDED that notice of change of address shall be
effective only upon receipt.
No failure or delay by the Agent in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
Any provision of this Promissory Note and Pledge may be amended or waived
if, and only if, such amendment or waiver is in writing and is signed by the
Investor, the Company and the Agent. The provisions of this Promissory Note and
Pledge shall be binding upon the Investor and its successors, assigns, personal
representatives, estate and heirs and shall inure to the benefit of the Company
and its successors and assigns.
This Promissory Note and Pledge shall be governed by and construed in
accordance with the laws of the State of New York.
Upon the repayment in full of the principal of and interest on the Loan,
the security interest shall terminate and all rights to the Collateral shall
revert to the Investor, and the Agent shall take all actions which may
reasonably be requested by the Investor to reflect the termination of such
security interest. In addition, in the case of a transfer of the Collateral
permitted hereunder in which the proceeds are applied as provided herein, the
security interest in the Collateral so transferred shall terminate and the Agent
shall take all actions which may reasonably be requested by the Investor to
reflect the termination of such security interest.
5
<PAGE>
This Promissory Note and Pledge constitutes the entire agreement and
understanding among the parties hereto and supersedes any and all prior
agreements and understandings, oral or written, relating to the subject matter
hereof.
By:
------------------------------
Name:
Address:
Fax:
Agreed and Acknowledged:
DECRANE HOLDINGS CO.
By:
----------------------------
Name:
Title:
DLJ MERCHANT BANKING II, INC.
By:
----------------------------
Name:
Title:
6
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of
Amendment No. 3 of this Registration Statement on Form S-1 of our reports dated
February 19, 1999 relating to the consolidated financial statements of DeCrane
Holdings Co. and DeCrane Aircraft Holdings, Inc., our report dated June 12, 1998
relating to the financial statements of Avtech Corporation, and our report dated
January 25, 1999 relating to the consolidated financial statements of PATS,
Inc., which appear in such Prospectus. We also consent to the application of our
report dated February 19, 1999 to the Financial Statement Schedule of DeCrane
Holdings Co. for the four months ended December 31, 1998 and the application of
our report dated February 19, 1999 to the Financial Statement Schedule of
DeCrane Aircraft Holdings, Inc. for the years ended December 31, 1996 and 1997
and the eight months ended August 31, 1998 listed under Item 16(b) of this
Registration Statement when such schedule is read in conjunction with the
corresponding financial statements referred to in our respective reports. The
audits referred to in our reports dated February 19, 1999 also included this
schedule. We also consent to the reference to us under the heading "Experts" in
such Prospectus.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
May 6, 1999
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use, in the Prospectus constituting part of this
Registration Statement on Form S-1, of our report dated January 28, 1999,
relating to the consolidated financial statements of PPI Holdings, Inc. and
subsidiary, and the financial statements of Precision Pattern, Inc. (the
predecessor to PPI Holdings, Inc.) which appear in such Prospectus. We also
consent to the reference to us under the heading "Experts" in such Prospectus.
BAIRD, KURTZ & DOBSON
Wichita, Kansas
May 6, 1999
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints R. Jack
DeCrane and John R. Hinson, and each of them, his true and lawful
attorneys-in-fact and agents, with the full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, and to take such actions in, and file with the appropriate
authorities in, whatever states said attorneys-in-fact and agents, and each of
them, shall determine, such applications, statements, consents and other
documents as may be necessary or expedient to register securities of the Company
for sale, granting unto said attorneys-in-fact and agents full power and
authority to do so and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agents or any of them, or their or his substitute
or substitutes, may lawfully do or cause to be done by virtue hereof and the
registrant hereby confers like authority on its behalf. This Registration
Statement and Power of Attorney, pursuant to the requirement of the Securities
Act of 1933, as amended, have been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chairman of the Board of
/s/ THOMPSON DEAN Directors, President and
- ------------------------------ Treasurer (principal January , 1999
Thompson Dean accounting officer)
/s/ R. JACK DECRANE
- ------------------------------ Director January , 1999
R. Jack DeCrane
/s/ JOHN F. FORT, III
- ------------------------------ Director January , 1999
John F. Fort, III
/s/ DR. ROBERT J. HERMANN
- ------------------------------ Director January , 1999
Dr. Robert J. Hermann
/s/ DR. PAUL KAMINSKI
- ------------------------------ Director January , 1999
Dr. Paul Kaminski
/s/ SUSAN SCHNABEL
- ------------------------------ Director January , 1999
Susan Schnabel
/s/ TIMOTHY J. WHITE
- ------------------------------ Vice President, Secretary January , 1999
Timothy J. White & Director
</TABLE>
<PAGE>
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY
For Tender Of
12% Senior Subordinated Notes due 2008
of
DECRANE AIRCRAFT HOLDINGS, INC.
This Notice of Guaranteed Delivery or one substantially equivalent
hereto must be used to accept the Exchange Offer (as defined below) if (i)
certificates for the Company's (as defined below) 12% Series A Senior
Subordinated Notes due 2008 (the "Old Notes") are not immediately available,
(ii) Old Notes, the Letter of Transmittal and any other documents required by
the Letter of Transmittal cannot be delivered to State Street Bank and Trust
Company (the "Exchange Agent") on or prior to the Expiration Date (as defined
in the Prospectus referred to below) or (iii) the procedures for book-entry
transfer cannot be completed on a timely basis. This Notice of Guaranteed
Delivery may be delivered by hand or sent by facsimile transmission,
overnight courier, telex, telegram or mail to the Exchange Agent. See "The
Exchange Offer - Guaranteed Delivery Procedures" in the Prospectus dated
____________, 1999 (which, together with the related Letter of Transmittal,
constitutes the "Exchange Offer") of DeCrane Aircraft Holdings, Inc., a
Delaware corporation (the "Company").
The Exchange Agent for the Exchange Offer is:
STATE STREET BANK AND TRUST COMPANY, EXCHANGE AGENT
BY REGISTERED OR CERTIFIED MAIL: BY OVERNIGHT COURIER:
State Street Bank and Trust Company State Street Bank and Trust Company
P.O. Box 778 Two International Place
Boston, Massachusetts 02102 Boston, Massachusetts 02110
ATTENTION: Corporate Trust Department ATTENTION: Corporate Trust
Kellie Mullen Department
Kellie Mullen
BY HAND in New York to 4:30 p.m. BY HAND in Boston to 4:30 p.m.:
(as drop agent): State Street Bank and Trust Company
State Street Bank and Trust Company Two International Place
61 Broadway Fourth Floor
15th Floor Boston, Massachusetts 02110
Corporate Trust Window Attention: Corporate Trust Department
New York, NY 10006
FOR INFORMATION CALL:
Kellie Mullen
617-664-5587
Reference: DeCrane Aircraft
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER
THAN AS SET FORTH ABOVE OR TRANSMISSION OF THIS NOTICE OF GUARANTEED DELIVERY
BY ANY MANNER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID
DELIVERY.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE
<PAGE>
SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE
GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED ON THE LETTER
OF TRANSMITTAL.
THE FOLLOWING GUARANTEE MUST BE COMPLETED
GUARANTEE OF DELIVERY
(Not to be used for Signature Guarantee)
The undersigned, a firm which is a member of a registered national
securities exchange or a member of the National Association of Securities
Dealers, Inc. or a commercial bank or trust company having an office or
correspondent in the United States, hereby guarantees to deliver to the Exchange
Agent, at one of its addresses set forth above, either the certificates for all
physically tendered Old Notes, in proper form for transfer, or confirmation of
the book-entry transfer of such Old Notes to the Exchange Agent's account at The
Depository Trust Company ("DTC"), pursuant to the procedures for book-entry
transfer set forth in the Prospectus, in either case together with one or more
properly completed and duly executed Letter(s) of Transmittal (or facsimile
thereof) and any other documents required by such Letter of Transmittal, within
five New York Stock Exchange trading days after the date of execution of this
Notice of Guaranteed Delivery.
The undersigned acknowledges that it must deliver the Letter(s) of
Transmittal and the Old Notes tendered hereby to the Exchange Agent within the
time period set forth above and that failure to do so could result in a
financial loss to the undersigned.
Name of Firm:
--------------------- ------------------------------
(Authorized Signature)
Address: Title:
--------------------------- ------------------------
Name:
- ----------------------------------- -------------------------
(Zip Code) (Please type or print)
Area Code and Telephone Number: Date:
------------------------
- -----------------------------------
NOTE: DO NOT SEND OLD NOTES WITH THIS NOTICE OF
<PAGE>
GUARANTEED DELIVERY. ACTUAL SURRENDER OF OLD NOTES MUST BE MADE PURSUANT TO,
AND BE ACCOMPANIED BY, A PROPERLY COMPLETED AND FULLY EXECUTED LETTER OF
TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS.
