<PAGE>
[LOGO]
2,797,423 SHARES
DECRANE AIRCRAFT HOLDINGS, INC.
COMMON STOCK
($.01 PAR VALUE)
Of the 2,797,423 shares of Common Stock of DeCrane Aircraft Holdings, Inc.
offered hereby, 2,700,000 shares are being sold by the Company and 97,423 shares
are being sold by a Selling Stockholder. The Company will not receive any
proceeds from the sale of shares by the Selling Stockholder. Prior to this
offering, there has been no public market for the Common Stock of the Company.
See "Underwriting" for information relating to the factors considered in
determining the initial public offering price. Approximately $10 million of the
proceeds of this offering will be used to repay indebtedness owed to certain
affiliates and principal stockholders of the Company. Following this offering,
affiliates and certain principal stockholders of the Company will beneficially
own approximately 46.5% of the Common Stock.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "DAHX."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO THE SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) STOCKHOLDER
<S> <C> <C> <C> <C>
Per Share..................... $12.00 $0.84 $11.16 $11.16
Total (3)..................... $33,569,076 $2,349,835 $30,132,000 $1,087,241
</TABLE>
(1) See "Underwriting" for indemnification arrangements.
(2) Before deducting estimated expenses of $1,387,500 payable by the Company.
(3) The Company and certain Selling Stockholders have granted the Underwriters a
30-day option to purchase up to an additional 419,613 shares of Common Stock
at the Price to Public, less Underwriting Discounts and Commissions shown
above, solely to cover over-allotments, if any. If the Underwriters exercise
only a portion of the over-allotment option, the first 84,535 shares will be
purchased from such Selling Stockholders and any remaining shares will be
purchased from the Company. If this option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions, Proceeds to Company
and Proceeds to the Selling Stockholders will be $38,604,432, $2,702,310,
$33,871,470 and $2,030,651, respectively. See "Underwriting."
The shares of Common Stock offered hereby are being offered by the several
Underwriters named herein, subject to prior sale and acceptance by the
Underwriters and subject to their right to reject any order in whole or in part.
It is expected that the Common Stock will be available for delivery on or about
April 21, 1997 at the offices of Schroder Wertheim & Co. Incorporated, New York,
New York.
SCHRODER WERTHEIM & CO. DILLON, READ & CO. INC.
ING BARINGS
April 16, 1997
<PAGE>
[PHOTOGRAPH OF SILHOUETTE OF AN AIRPLANE FLYING]
[PHOTOGRAPH OF AN AIRPLANE FLIGHT DECK]
[COMPANY LOGO]
The Company is a
manufacturer of products and
a provider of services for
certain niche markets of the
commercial aircraft
industry. The Company's
products and services
typically are utilized to
provide an interface between
an aircraft and its avionics
systems, such as those
pictured here.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
<TABLE>
<S> <C>
[PHOTOGRAPH OF CONTACTS] [PHOTOGRAPH OF CONNECTORS]
[PHOTOGRAPH OF BINS OF CONTACTS]
The variety of contacts manufactured by the The Company manufactures specialty connectors which
Company conduct electronic signals or are used within an aircraft to provide an electronic
electricity within an aircraft and conform or electrical link between discrete wires or devices.
to strict design tolerances. The Company Many of the connectors manufactured by the Company
manufactures millions of contacts each utilize the Company's contacts.
month.
</TABLE>
<TABLE>
<S> <C>
[PHOTOGRAPH OF HARNESS ASSEMBLIES] [PHOTOGRAPH OF INSTALLATION KITS]
The Company manufactures harness assemblies The Company manufactures avionics
for use with aircraft avionics systems. The support structures used to secure
harness assemblies depicted utilize contacts avionics systems within an
and connectors manufactured by the Company. aircraft. These support structures,
together with the connectors and
harness assemblies manufactured by
the Company, form the foundation of
the installation kits shown above,
which are used in the Company's
systems integration projects.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
[PHOTOGRAPH OF MAN AT A CAD STATION] [PHOTOGRAPH OF WOMAN SITTING IN AIRPLANE
SEAT WATCHING A VIDEO MONITOR]
The Company employs more than 90 engineers, many Many of the Company's products and services
of whom design, engineer and certify modifications involve in-flight entertainment and
to existing aircraft as part of the Company's passenger telecommunication systems.
systems integration efforts.
</TABLE>
[PHOTOGRAPH OF MEN INSTALLING A SYSTEM ONTO AN AIRCRAFT]
The Company-employed, FAA-certified mechanics shown above are installing an
installation kit for a flight deck avionics system.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. REFERENCES
IN THIS PROSPECTUS TO THE "COMPANY" MEAN DECRANE AIRCRAFT HOLDINGS, INC., A
DELAWARE CORPORATION, AND ITS PREDECESSORS AND SUBSIDIARIES, AND WITH RESPECT TO
AVIATION REGULATORY ISSUES, ONE OR MORE, BUT NOT NECESSARILY ALL, OF THESE
ENTITIES. EXCEPT AS OTHERWISE INDICATED, ALL OF THE INFORMATION IN THIS
PROSPECTUS WITH REGARD TO SHARES AND PER SHARE AMOUNTS PERTAINING TO THE
COMPANY'S COMMON STOCK, PAR VALUE $.01 PER SHARE (THE "COMMON STOCK"), HAS BEEN
ADJUSTED TO GIVE EFFECT TO A REVERSE STOCK SPLIT WHICH IS PART OF THE
RECAPITALIZATION OF THE COMPANY (THE "RECAPITALIZATION") DESCRIBED UNDER
"DESCRIPTION OF CAPITAL STOCK--THE RECAPITALIZATION." UNLESS OTHERWISE
INDICATED, THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS HAVE NOT EXERCISED
THEIR OVER-ALLOTMENT OPTION.
THE COMPANY
The Company is a manufacturer of avionics components and a provider of
avionics systems integration services in certain niche markets of the commercial
aircraft industry. The products and services offered by the Company are utilized
primarily in commercial aircraft to connect, support and/or integrate various
avionics systems, including cabin management, in-flight entertainment and
passenger telecommunications systems ("cabin avionics systems") and navigation
and safety systems ("flight deck avionics systems"). The Company's targeted
markets consist of commercial aircraft and avionics original equipment
manufacturers ("OEMs"), the commercial aircraft retrofit market and the
commercial aircraft aftermarket. The Company also sells products and services to
the military aircraft market.
The Company seeks to maximize its sales by emphasizing the complementary
nature of its products and services. Components manufactured by the Company
include: (i) contacts (of which the Company believes it is the largest supplier
of bulk contacts to the commercial aircraft OEMs); (ii) connectors (which often
utilize the contacts manufactured by the Company); (iii) harness assemblies
(which often utilize the connectors manufactured by the Company); and (iv)
avionics support structures (which often are packaged with the Company's
connectors and harness assemblies in installation kits). In addition, the
Company manufactures dichroic liquid crystal display ("LCD") devices, which are
used with flight deck avionics, and believes it is the largest supplier of such
devices to the commercial aircraft OEMs. The systems integration services
provided by the Company include design and engineering, Federal Aviation
Administration ("FAA") certification, manufacture of installation kits and
systems installation. The Company manufactures many of the components required
to complete a systems integration project, which it believes provides it a
critical competitive advantage.
The Company believes that every commercial aircraft currently produced by
the Boeing Company ("Boeing"), Airbus Industrie ("Airbus") and McDonnell Douglas
Corporation ("McDonnell Douglas") contains components manufactured by the
Company. In addition, the Company has entered into supply agreements with
Boeing, pursuant to which the Company believes that it is the supplier of a
substantial majority of the bulk contacts for all aircraft currently
manufactured by Boeing and is the sole-source supplier of certain connectors for
in-flight entertainment systems installed by Boeing on its 777 aircraft. As a
result, the Company expects to benefit from the continuing recovery of the
commercial aircraft industry, although there can be no assurances in this
regard. According to the 1996 AND 1997 CURRENT MARKET OUTLOOK (collectively, the
"Boeing Report") published by the Boeing Commercial Airplane Group, expenditures
for new aircraft production are expected to total approximately $230 billion for
the period from 1996 through 2000. This compares to expenditures for new
aircraft of approximately $170 billion for the period from 1991 through 1995.
The Boeing Report also estimates that annual deliveries of commercial aircraft
will increase from approximately 400 in 1996 to more than 600 in 1997 and will
be between 700 and 800 in 1998. In addition, for the period from 1996 through
2000, revenue passenger miles will increase from 1.6 trillion to 2.1 trillion
and the worldwide fleet of aircraft will increase from 11,500 at the end of 1996
to approximately 14,000 at the end of 2001 (net of approximately 1,375
retirements). The
3
<PAGE>
Company believes that the increase in new aircraft production is being driven by
numerous factors, including: (i) a general increase in demand for air travel;
(ii) an increase in the capacity utilization (load factor) of aircraft currently
in service; (iii) an increase in the average age of the worldwide aircraft
fleet; (iv) the cost-effectiveness of using new aircraft versus old aircraft;
and (v) a general improvement in the financial condition of the airline
industry.
The Company believes that its position as a primary supplier of products and
services to manufacturers of cabin avionics systems and flight deck avionics
systems provides the Company with opportunities for growth independent of the
aircraft OEM market upturn because such systems typically are installed on a
retrofit basis by purchasers of aircraft and not by aircraft OEMs. The Company's
customers in these markets include AT&T Wireless Services, Inc. ("AT&T") for
passenger telecommunications systems, Interactive Flight Technologies, Inc.
("IFT") for in-flight casino-style gaming and video-on-demand systems,
Matsushita Avionics Systems ("Matsushita") for in-flight entertainment systems
and the Rockwell Collins Division ("Rockwell Collins") of Rockwell International
Corp. for flight deck avionics systems. The Company believes that demand for
cabin avionics systems and flight deck avionics systems is increasing, primarily
as a result of: (i) a desire by airlines for additional revenue-producing
services; (ii) longer flights combined with a demand by airline passengers for
more sophisticated forms of in-flight services; and (iii) the advent of new
technologies and FAA mandates related to aircraft safety and navigation.
The Company's principal strategy is to establish and expand leading
positions in high-margin, niche markets within the commercial aircraft industry,
with a focus on the manufacture of avionics components and the integration of
avionics systems. Historically, the Company has demonstrated an ability to
increase revenues during times of industry decline which it attributes to
several actions, including: (i) the establishment of a balanced offering of
products and services for the OEM market, the retrofit market and the
aftermarket; (ii) the initiation of private labeling programs pursuant to which
the Company manufactures contacts for other connector manufacturers, including
certain of the Company's competitors; (iii) the development of new products such
as specialty connectors for Boeing's 777 aircraft; and (iv) the diversification
into new services such as the integration of in-flight entertainment systems. In
the future, the Company will seek to grow by: (i) capitalizing on growth in
commercial aircraft production; (ii) exploiting increased demand for cabin
avionics systems; (iii) expanding and diversifying the Company's systems
integration services; (iv) completing additional strategic acquisitions; and (v)
capitalizing on the Company's complementary products and services.
RECENT ACQUISITION ACTIVITY
The Company was formed in 1989 to capitalize on emerging trends in the
aircraft market through acquisitions. Since its formation, the Company has
completed eight acquisitions of businesses or assets, three of which were
completed in 1996.
- In December 1996, the Company expanded its contact manufacturing
capability and capacity by purchasing certain manufacturing assets
(collectively, the "AMP Facility") from AMP, Inc. ("AMP"). The AMP
Facility enables the Company to produce contact blanks (unfinished
contacts) using a cold-heading manufacturing process which, when used for
high volume production, is more cost-effective than the Company's existing
screw machine operations. Therefore, the Company is seeking to optimize
its contact production by converting a portion of its existing high volume
manufacturing runs to the cold-heading process. The plating and finishing
of contact blanks produced at the AMP Facility will be conducted at the
existing facilities of the Company.
- In December 1996, the Company acquired Elsinore Aerospace Services, Inc.
and the Elsinore Engineering Services division (collectively, "Elsinore")
of Elsinore, L.P. The acquisition of Elsinore provided the Company with
the ability to issue certain FAA design approvals for modification to
designated aircraft through Elsinore's FAA-issued Designated Alteration
Station
4
<PAGE>
("DAS") approval. As a systems integrator, the Company regularly seeks
such FAA approvals on behalf of its customers when it integrates a system
onto an aircraft. The ability to issue FAA approvals through Elsinore
eliminates the need, in most instances, for the Company to apply to the
FAA for such approvals, thereby expediting the approval process. In
addition, the acquisition of Elsinore increased by approximately 50% the
number of the Company's engineering professionals dedicated to systems
integration functions.
- In September 1996, the Company acquired the Aerospace Display Systems
division ("ADS") of Allard Industries, Inc. ADS is a manufacturer of
dichroic LCD devices for use with flight deck avionics systems. The
Company believes that ADS is the largest supplier of such devices to the
commercial aircraft industry. The acquisition of ADS expanded the
Company's offering of components used in flight deck avionics systems and
strengthened its position as a leading supplier of niche avionics
components.
In addition, in February 1996, the Company acquired the remaining 25%
interest in Cory Components, Inc. ("Cory Components") which it did not already
own (the "Minority Interest Acquisition").
The Company believes that the fragmented nature of the market for aircraft
components and systems integration services will provide it with additional
opportunities to exploit industry consolidation trends.
* * * *
The Company's corporate office is located at 155 Montrose West Avenue, Suite
210, Copley, OH 44321. The Company's telephone number is (330) 668-3061. All
inquiries or notices should be directed to the attention of R. Jack DeCrane,
Chairman of the Board and Chief Executive Officer of the Company.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by:
The Company.......................... 2,700,000 shares
The Selling Stockholder.............. 97,423 shares (1)
Total.............................. 2,797,423 shares
Common Stock to be Outstanding after
the Offering......................... 5,251,690 shares (2)
Use of Proceeds........................ To repay certain indebtedness. See "Use of
Proceeds."(3)
Nasdaq National Market Symbol.......... DAHX
</TABLE>
- ------------------------------
(1) Does not include up to 84,535 shares which may be sold by certain Selling
Stockholders pursuant to the Underwriters' over-allotment option. See
"Principal and Selling Stockholders" and "Underwriting."
(2) Does not include: (i) 527,156 shares of Common Stock reserved for issuance
pursuant to the Company's Amended and Restated 1993 Share Incentive Plan
(the "Share Incentive Plan"), of which options to purchase 355,001 shares
have been granted (see "Management--Executive Compensation--Share Incentive
Plan"); and (ii) 70,893 shares reserved for issuance upon exercise of
certain warrants (the "Lender Warrants") (see "Description of Capital
Stock--Warrants").
(3) Approximately $10 million of the net proceeds will be used to repay
indebtedness held by Electra Investment Trust P.L.C. and Electra Associates,
Inc. (collectively, "Electra") and Nassau Capital Partners L.P. and NAS
Partners I L.L.C. (collectively, "Nassau"), which are affiliates and
principal stockholders of the Company. See "Certain Transactions."
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
PRO FORMA
AS
ADJUSTED(2)
---------
YEAR
ENDED
DECEMBER
YEAR ENDED DECEMBER 31, 31,
--------------------------------- ---------
1994 1995 1996(1) 1996
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.......................................... $ 47,092 $ 55,839 $ 65,099 $ 72,805
Gross Profit...................................... 10,685 12,376 15,707 18,274
Operating income.................................. 1,760 1,835 4,251 5,321
Income (loss) before provision for income taxes
and extraordinary item.......................... (1,816) (2,368) (105) 4,516
Net income (loss)................................. (2,693) (3,446) (817) 3,448
Net income (loss) applicable to common
stockholders.................................... (2,891) (3,307) (6,357) 3,448
Income (loss) per common share:
Pro forma for the Recapitalization.....................................
$ (.31)
Pro forma as adjusted (3)..............................................
$ .62
Weighted average number of common shares
outstanding:
Pro forma for the Recapitalization.....................................
2,659
Pro forma as adjusted (4)..............................................
5,563
OTHER FINANCIAL DATA:
Depreciation and amortization (5)................. $ 3,868 $ 4,244 $ 4,012
Bookings (6)...................................... 47,896 50,785 81,914
Backlog at end of period (7)...................... 24,493 19,761 44,433
<CAPTION>
DECEMBER 31, 1996
---------------------
PRO FORMA
AS
ACTUAL ADJUSTED(8)
--------- ---------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.......................................................... $ 10,486 $ 15,673
Total assets............................................................. 69,266 66,707
Total debt............................................................... 42,250 15,324
Mandatorily redeemable common stock warrants............................. 6,879 --
Stockholders' equity..................................................... 1,236 32,945
</TABLE>
- ------------------------------
(1) Includes the effect of the Minority Interest Acquisition beginning February
20, 1996, the date on which the transaction occurred, and the results of ADS
and Elsinore beginning September 18, 1996 and December 5, 1996,
respectively, the dates on which they were acquired.
(2) Pro forma for the Minority Interest Acquisition and the acquisition of ADS
as if they had occurred on January 1, 1996. Adjusted to reflect the sale by
the Company of 2,700,000 shares of Common Stock in this offering (the
"Offering") and the application of the net proceeds therefrom as set forth
under "Use of Proceeds." Excludes an extraordinary charge of $3.9 million to
be incurred as a result of the repayment of debt with the net proceeds from
the Offering.
(3) Reflects the Recapitalization as well as the acquisitions and the Offering,
as described in Note (2) above.
(4) Pro forma for the Recapitalization and adjusted for the 2,700,000 shares of
Common Stock offered hereby by the Company. Includes shares of Common Stock
related to outstanding management options issued pursuant to the Share
Incentive Plan. Does not include 70,893 shares of Common Stock issuable upon
exercise of the Lender Warrants.
(5) Includes deferred financing cost amortization included in interest expense
of $432,000, $608,000 and $661,000 in 1994, 1995 and 1996, respectively.
(6) Bookings represent the total invoice value of purchase orders received
during the period. See "Business--Backlog."
(7) 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. See "Business--Backlog."
(8) Reflects: (i) the Recapitalization; and (ii) the sale by the Company of
2,700,000 shares of Common Stock in the Offering and the application of the
net proceeds therefrom as set forth under "Use of Proceeds."
6
<PAGE>
RISK FACTORS
POTENTIAL PURCHASERS OF THE COMMON STOCK SHOULD CONSIDER CAREFULLY THE
FOLLOWING RISK FACTORS, AS WELL AS THE OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS, BEFORE DECIDING TO PURCHASE SHARES OF COMMON STOCK OFFERED HEREBY.
COMMERCIAL AIRCRAFT INDUSTRY RISKS
Among the Company's principal customers are the world's commercial aircraft
and avionics OEMs. The principal market for such OEMs is the commercial airline
industry, which is cyclical and has been adversely affected by a number of
factors, including, but not limited to, increased fuel and labor costs and
intense price competition. The commercial airline industry may be adversely
affected by increased regulatory scrutiny in the wake of several major airline
disasters and threats of terrorism. Several domestic and foreign commercial
airlines have encountered significant financial difficulties, resulting in
certain of such airlines ceasing to conduct business or seeking protection from
creditors. These financial difficulties, as well as certain other factors,
caused new commercial aircraft deliveries to decline from a peak of
approximately 770 aircraft in 1991 to approximately 370 aircraft in 1995
according to AEROSPACE AND AIRTRANSPORT CURRENT ANALYSIS published by Standard
and Poor's Industry Surveys (the "S&P Report"). Another industry downturn could
adversely affect the Company's business. See "Business--Industry Overview and
Trends."
SUBSTANTIAL LEVERAGE; HISTORY OF NET LOSSES AND DEFAULTS
The Company has operated with substantial leverage and debt service
requirements since its first acquisition in 1990. As a result, since 1990, the
Company has experienced net losses in each year through 1996, despite positive
operating income. In addition, the Company was not in compliance with certain
financial covenants contained in its debt agreements at various times since its
inception. In each case such non-compliance was waived by the lenders. Since
March 1996, the Company has been in compliance with all financial covenants
contained in its existing debt agreements. Although the Company intends to use
the net proceeds of this Offering to repay a significant portion of its
outstanding indebtedness, there can be no assurance as to the future
profitability of the Company nor can there be assurance that the Company will
remain in compliance with the covenants contained in its debt agreements. The
Company's New Credit Facility (as defined in "Use of Proceeds") is guaranteed by
each of the Company's subsidiaries and is secured by substantially all the
assets of the Company and its subsidiaries. In the event that the Company is
unable to remain in compliance with the covenants contained in its debt
agreements, the lenders could declare all amounts owed under such debt
agreements to be immediately due and payable, which could have a material
adverse effect on the Company. See "Use of Proceeds," "Selected Consolidated
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Notes to Consolidated Financial Statements."
FLUCTUATIONS IN QUARTERLY AND YEARLY RESULTS
The Company's business is subject to quarterly and yearly fluctuations.
Specifically, the magnitude of certain systems integration programs relative to
the Company's overall business has the potential to expose the Company's results
of operations to fluctuations in quarterly and yearly results. In addition,
irregular timing of awards or cancellations of systems integration contracts, as
well as development and technology delays by OEMs or their suppliers, could
further exacerbate such fluctuations in quarterly and yearly operations. If such
events occur, the results of operations of the Company may be adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
7
<PAGE>
DEPENDENCE ON KEY CUSTOMERS
The Company's three largest customers are Boeing, Matsushita and AT&T, which
accounted for approximately 14.8%, 9.6% and 6.9%, respectively, of the Company's
consolidated revenues (pro forma for the acquisition of ADS) for the fiscal year
ended December 31, 1996. In addition, a significant portion of the Company's
sales of components are sold to Boeing indirectly through sales to suppliers of
Boeing. Most of the Company's sales to Boeing are pursuant to contracts which
may be terminated by Boeing at any time. In addition, under certain
circumstances, Boeing may enforce alternative economic terms pursuant to such
contracts in which case the contracts could become less commercially favorable
to the Company or the Company may elect to terminate the applicable portion of
such contracts. There can be no assurance that Boeing will not terminate any of
its contracts with the Company. The Company generally sells components and
services to Matsushita and AT&T pursuant to purchase orders, but does not have
any supply contracts with either company.
The Company has entered into a contract to provide systems integration
services for IFT's new in-flight entertainment system (the "IFT System") on 21
wide-body aircraft for Swiss Air Transport Co. Ltd. ("Swissair"). The Company's
contract with IFT provides for monthly progress payments and the Company will
account for revenues generated under the IFT contract using the percentage of
completion method of accounting. As of April 15, 1997, the Company had
integrated the IFT System onto three of Swissair's aircraft; the IFT System
operates in all classes of service (first, business and economy) on two aircraft
and in first and business class on one aircraft. The Company continues to
integrate the IFT System onto additional Swissair aircraft. Under IFT's contract
with Swissair, IFT agreed to finance the purchase price of the IFT System in
exchange for a substantial share of potential future gaming revenues. However,
based on IFT's limited experience with the IFT System on Swissair's aircraft, in
March IFT indicated that revenues from gaming are significantly below its
expectations. IFT has since announced a change in corporate strategy whereby it
will no longer finance the substantial majority of the purchase price of the IFT
System. Consistent with this new strategy, IFT also announced that it was
exercising its contractual right to renegotiate its contract with Swissair in
order to shift a greater portion of the purchase price of the IFT System to
Swissair. On April 14, 1997 IFT announced that it had entered into a memorandum
of understanding with Swissair regarding the purchase by Swissair of the IFT
System, which announcement states that Swissair expects to purchase the IFT
System for installation in the first and business class sections of up to 18
aircraft. IFT currently is in an evaluation period provided for under its
contract with Swissair, during which IFT and Swissair are working together to
optimize the operations and functionality of the IFT System. IFT has indicated
that it is working to improve the reliability of the IFT System through software
revisions and through design improvements to the tray tables used in the economy
section of the aircraft. While the Company expects that it will continue to
provide systems integration services to IFT for Swissair's 21 wide-body
aircraft, there can be no assurance that: (i) IFT and Swissair will successfully
renegotiate their contract or that such renegotiation will not result in a
materially reduced scope of work for the Company; or (ii) that any existing or
future technical or design issues will be resolved. Termination of the contract
between Swissair and IFT, a material change in the scope of work for the
Company, or any general delays or problems with implementation of the IFT System
could have a material adverse effect on the Company.
The loss of any one or more of the Company's key customers could have a
material adverse effect on the Company. See "Business--Customers" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
REGULATION
The FAA prescribes standards and licensing requirements for aircraft
components, licenses private repair stations and issues DAS approvals giving the
holder the right to certify aircraft design modifications on behalf of the FAA.
The ability of the Company to arrange for rapid government certification of its
systems integration services is essential to the Company's business and depends
on its continuing
8
<PAGE>
access to or use of private repair stations, DASs, and FAA-designated and
FAA-certified engineering professionals. There can be no assurance that: (i) the
Company will continue to have adequate access to such stations and
professionals; or (ii) the current public and congressional scrutiny of the
FAA's inspection philosophy and mechanisms will not result in the restriction or
elimination of the use of such private repair stations or DASs, either of which
could have a material adverse effect on the Company. In addition, although the
Company believes that it possesses all required domestic and foreign
governmental licenses and certificates, including without limitation Parts
Manufacturer Approvals ("PMAs") and Supplemental Type Certificates ("STCs"), any
delay in obtaining or failure to obtain a required license or certificate, or
the revocation or limitation of such licenses or certificates, could have a
material adverse effect on the Company's operations. See "Business--Industry
Regulation and Approvals."
RISKS ASSOCIATED WITH ACQUISITIONS
The Company's ability to grow by acquisition is dependent upon, and may be
limited by, the availability of suitable acquisition candidates and capital, and
by restrictions contained in the Company's debt agreements. In addition, growth
by acquisition involves risks that could adversely affect the Company's results
of operations, including difficulties in integrating the operations and
personnel of acquired companies, the amortization of acquired intangible assets
and the potential loss of key employees of acquired companies. In the past,
acquisitions by the Company have resulted in increased indebtedness and interest
expense which has caused the Company to incur net losses in each year since its
inception despite positive operating income. There can be no assurance that the
Company will be able to identify suitable acquisition candidates, obtain the
capital necessary to pursue its acquisition strategy, consummate acquisitions on
satisfactory terms or, if any acquisitions are consummated, satisfactorily
integrate such acquired businesses into the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business--General" and "Business-- Growth Strategy."
COMPETITION
The Company operates in a highly competitive industry and competes against a
number of companies, some of which have significantly greater financial,
technological and marketing resources than the Company. The Company believes
that its ability to compete depends on high product performance, short lead-time
and timely delivery, competitive price, and superior customer service and
support. There can be no assurance that the Company will be able to compete
successfully with respect to these or other factors. See
"Business--Competition."
GOLD AND COPPER
A significant portion of the cost of the materials used in the contacts
manufactured by the Company 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 have a material adverse effect on the Company's results of
operations. The Company has not purchased commodities contracts for gold or
copper and does not anticipate doing so in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
FOREIGN CURRENCY
The Company has a manufacturing facility in Switzerland and incurs in Swiss
Francs a significant percentage of the cost of the contacts it manufactures in
Switzerland. Therefore the Company's financial results are subject to
fluctuations of the Swiss Franc in relation to the U.S. Dollar. In 1996, solely
in an effort to mitigate the effects of currency fluctuations, the Company began
to enter into forward exchange contracts to purchase Swiss Francs and it expects
to engage in such hedging transactions in the future. However, there can be no
assurance that such transactions will prevent currency fluctuations from
9
<PAGE>
adversely affecting the Company's results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Notes to Consolidated Financial Statements."
SUPPLY OF QUALIFIED ENGINEERING PERSONNEL
The Company's ability to attract and retain a high-quality engineering staff
is important to its business. Competition for qualified avionics engineers is
intense. There can be no assurance that the Company will be able to retain its
existing engineering staff or fill new positions or vacancies created by
expansion or turnover. See "Business--Products and Services" and
"Business--Employees."
CONTROL OF COMPANY BY PRINCIPAL STOCKHOLDERS
Following the completion of the Offering and giving effect to the
Recapitalization, (i) Nassau, (ii) DSV Partners, IV ("DSV"), (iii) Electra and
(iv) Brantley Venture Partners, II, L.P. ("Brantley") will beneficially own
16.0%, 9.4%, 8.7% and 9.3%, respectively, of the issued and outstanding Common
Stock. By virtue of their stockholdings, such beneficial owners, if they act
together, will be able to elect the entire Board of Directors and exercise
significant control over the Company's business, policies and affairs and,
together, could cause the Company to take actions that may be adverse to the
Company's other stockholders. See "Principal and Selling Stockholders." Also,
Nassau, DSV, Brantley and the Company are parties to a shareholders agreement
which requires the Company for so long as the applicable stockholder owns at
least 5% of the Common Stock (including shares which may be acquired upon
exercise of warrants) to include on the Company's slate of nominees for director
a person designated by the applicable stockholder. See "Certain
Transactions--Shareholders Agreement."
EXCESS LOSS RISKS
The Company currently has in force aviation products insurance. To date, the
Company has not experienced any significant uninsured or insured
aviation-related claims or any material product liability claims. However, there
can be no assurance that the Company's existing insurance coverage will be
adequate to cover future claims that may arise or that such coverage can be
renewed at commercially reasonable rates.
ENVIRONMENTAL RISKS; ENVIRONMENTAL REGULATION
The Company's business operations and facilities are subject to a number of
federal, state, local and foreign environmental laws and regulations. In
addition, certain environmental laws such as the Comprehensive Environmental
Response, Compensation and Liability Act, as amended ("CERCLA"), and similar
state laws impose strict, retroactive and joint and several liability upon
persons responsible for releases or potential releases of hazardous substances.
The Company has sent waste to treatment, storage or disposal facilities that
have been designated as National Priority List sites under CERCLA or equivalent
listings under state laws. The Company has received CERCLA requests for
information or allegations of potential responsibility from the Environmental
Protection Agency ("EPA") as to the Company's use of certain such sites. It is
possible, given the retroactive nature of CERCLA liability, that the Company
will, from time to time, receive additional notices of potential liability
relating to current or former activities. There can be no assurance that the
Company will not incur significant costs for prior waste disposal by the Company
or its predecessors. In addition, some of the Company's operations are located
on properties which are contaminated to varying degrees. Although the Company
has not incurred, nor does it expect to incur, significant costs to address such
contamination, there can be no assurance that the Company will not incur
significant costs in the future to address contamination.
Although the Company believes that its operations and facilities are in
material compliance with all federal, state, local and foreign environmental
laws and regulations, there can be no assurance that the Company will not incur
significant costs in the future due to current or former operations and waste
10
<PAGE>
disposal practices or changing environmental compliance requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Environmental Matters," "Business--Environmental Matters" and
"Business--Legal Proceedings."
DISRUPTIONS AT THE COMPANY'S FACILITIES
A significant portion of the Company's manufacturing and administrative
operations are currently located in the greater Los Angeles, California area, an
area that may be subject to earthquakes or other natural disasters. Although the
Company maintains standard property and business interruption insurance, as well
as earthquake insurance on its primary manufacturing facility, an earthquake or
other natural disaster could have a material adverse effect on its business and
operating results. See "Business--Facilities."
ABSENCE OF PRIOR PUBLIC MARKET; VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock
and there can be no assurance that an active public market will develop or, if
developed, will be sustained after the completion of the Offering. The initial
public offering price of the Common Stock offered hereby has been determined
through negotiations between the Company and the representatives of the
Underwriters and may not be indicative of future market prices. See
"Underwriting" for information relating to the factors considered in determining
the initial public offering price of the Common Stock. Factors such as
announcements concerning the Company or its competitors, investor perception of
the Company, fluctuations in the Company's operating results and general market
conditions may cause the market price of the Common Stock to fluctuate
significantly.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of a substantial number of shares of Common Stock in the public market
after the Offering, or the expectation that such sales could occur, could
adversely affect the market price of the Common Stock and the Company's ability
to raise capital through a subsequent offering of securities. Of the 5,251,690
shares of Common Stock to be outstanding after the Offering and the
Recapitalization, 3,338,948 shares will be available for resale in the public
market without restriction immediately following the Offering if held by holders
who are not "affiliates" of the Company (as defined in the Securities Act of
1933, as amended (the "Securities Act")). All of the remaining shares are
"restricted securities" within the meaning of Rule 144 adopted under the
Securities Act. These restricted securities were issued and sold by the Company
in private transactions in reliance upon exemptions from registration under the
Securities Act. After expiration of the 180-day lock-up period following the
Offering, pursuant to agreements with the Underwriters: (i) all restricted
securities will be available for resale pursuant to the limitations of Rule 144;
and (ii) the Company, pursuant to its certificate of incorporation (the
"Certificate"), may authorize the issuance of additional shares of Common Stock
and shares of one or more series of voting preferred stock. The issuance of
additional shares of capital stock could result in the dilution of the voting
power of the shares of Common Stock purchased in the Offering. In addition,
following the expiration of the 180-day lock-up period, certain stockholders
have the right, pursuant to the terms and conditions of a registration rights
agreement (the "Registration Rights Agreement"), to require the Company to: (i)
effect (in the aggregate) up to four registrations under the Securities Act
covering all or any portion of the shares of Common Stock held by such
stockholders, provided that if the Company effects a registration at the request
of a stockholder, no further demand may be made for a period of at least nine
months; and (ii) include all or any portion of such stockholders' shares of
Common Stock in any proposed registration by the Company of shares of Common
Stock (subject to reduction to the extent that the managing underwriter, if any,
is of the opinion that such inclusion would adversely affect the marketing of
the securities to be sold therein). See "Description of Capital Stock," "Shares
Eligible for Future Sale" and "Underwriting."
11
<PAGE>
ANTI-TAKEOVER PROVISIONS
The Board of Directors has the authority to issue up to 10,000,000
additional shares of Preferred Stock (the "Undesignated Preferred Stock") and to
determine the terms and number of shares constituting any wholly unissued series
of Undesignated Preferred Stock. The Board, without further approval of the
holders of Common Stock, may issue shares of Undesignated Preferred Stock with
rights that could adversely affect the rights of the holders of Common Stock.
The issuance of shares of Undesignated Preferred Stock under certain
circumstances could have the effect of delaying or preventing a change of
control of the Company or other corporate actions. In addition, certain
provisions of the Certificate and the Company's bylaws (the "Bylaws") and of
Delaware law could have the effect of making it more difficult for a third party
to acquire, or discouraging a third party from attempting to acquire, control of
the Company. These provisions could limit the price that certain investors might
be willing to pay in the future for shares of the Common Stock. See "Description
of Capital Stock--Preferred Stock" and "Description of Capital Stock--Certain
Certificate and Bylaw Provisions and Delaware General Corporation Law Section
203."
DILUTION
Purchasers in the Offering will incur an immediate and substantial dilution
of approximately $9.54 in the net tangible book value per share and existing
stockholders will receive the benefit of an immediate increase in the net
tangible book value per share of approximately $7.69. Purchasers in the Offering
will pay approximately 63.5% of the total consideration paid by all stockholders
of the Company. The shares of Common Stock sold by the Company in the Offering
represent approximately 51.4% of the Common Stock which will be outstanding
following the Offering. See "Dilution."
12
<PAGE>
RECENT DEVELOPMENTS
PURCHASE OF AMP FACILITY
On December 12, 1996, the Company expanded its contact manufacturing
capability and capacity by purchasing the AMP Facility. The AMP Facility enables
the Company to produce contact blanks using a cold-heading manufacturing process
which, when used for high volume production, is more cost-effective than the
Company's existing screw machine operations. Therefore, the Company is seeking
to optimize its contact production by converting a portion of its existing high
volume manufacturing runs to the cold-heading process. The plating and finishing
of contact blanks produced at the AMP Facility will be conducted at the existing
facilities of the Company.
The purchase price of the AMP Facility (including related fees and expenses
and post-closing adjustments) was $6.8 million, $5.4 million of which was paid
at the closing. The Company financed the portion of the purchase price paid at
closing through the issuance of $5.0 million principal amount of the Senior Term
Notes (as defined in "Use of Proceeds") and a $.4 million drawdown under the
Senior Revolver (as defined in "Use of Proceeds"). The balance of the purchase
price was paid in early 1997 through a drawdown of the Senior Revolver. The
Company has entered into agreements to supply AMP with a portion of its contact
requirements for up to two years. In addition, as a result of the purchase of
the AMP Facility, the Company will have the opportunity to make increased sales
to certain distributors that formerly purchased contacts from other entities
within AMP. The AMP Facility was not purchased as
a separate, stand-alone business and no meaningful historical financial data is
available.
ACQUISITION OF ELSINORE
On December 5, 1996, the Company expanded its systems integration
capabilities with the acquisition of Elsinore. Elsinore provides the Company
with the ability to issue certain FAA design approvals for modifications to
designated aircraft, which the Company believes is a key competitive advantage
for winning systems integration contracts. By acquiring Elsinore, the Company is
seeking to capitalize on increased outsourcing trends by aircraft OEMs, avionics
OEMs and airlines. By integrating the employees of Elsinore into its existing
operations, the Company increased by approximately 50% the number of the
Company's engineering professionals dedicated to its systems integration
functions. The acquisition of Elsinore also provided the Company with an
important new customer in the aircraft industry, Daimler Benz Aerospace Airbus
GmbH ("Daimler Benz Aerospace"), and the opportunity to obtain additional new
customers.
The purchase price of Elsinore (including related fees and expenses) was
$2.6 million, which the Company financed through (i) a drawdown under the Senior
Revolver of $1.3 million and (ii) the issuance to the seller of a note (the
"Seller Note") in a maximum principal amount of $1.3 million and bearing
interest at a rate of 15% per annum. The Seller Note was subject to reduction
based on certain working capital adjustments. In February 1997 the Company paid
$956,000 with respect to the Seller Note through a drawdown under the Senior
Revolver. The Company and the seller disagree as to the amount of the working
capital adjustments. See "Notes to Consolidated Financial Statements." In 1996,
Elsinore generated revenues of approximately $3.2 million.
ACQUISITION OF ADS
On September 18, 1996, the Company expanded its presence in flight deck
avionics components with the acquisition of ADS, a manufacturer of dichroic LCD
devices for use with flight deck avionics systems. The acquisition of ADS, which
the Company believes is the largest supplier of dichroic LCD devices to the
commercial aircraft OEMs, is consistent with the Company's strategy to achieve
growth in operations and market share through strategic acquisitions. The
Company believes that the acquisition of ADS will allow it to capitalize on the
upturn in aircraft OEM production by increasing its revenue content per aircraft
as well as by enhancing the Company's position with its major customers.
13
<PAGE>
The purchase price of ADS (including related fees and expenses and
post-closing adjustments) was $13.4 million, including $2.0 million which the
Company is obligated to pay over the next three years. The Company financed the
cash portion of the purchase price through: (i) the issuance of $3.0 million of
Series E Preferred Stock and warrants to purchase 49,079 shares of Common Stock;
(ii) the issuance of $3.0 million of Convertible Notes (as defined in "Use of
Proceeds"), together with warrants to purchase 49,079 shares of Common Stock;
and (iii) an increase in and subsequent drawdown under the Company's Senior
Revolver of $5.4 million. In 1996, ADS generated revenues of $10.5 million (or
approximately 14.4% of the Company's pro forma revenues for 1996). See
"Unaudited Pro Forma Consolidated Financial Data."
IFT CONTRACT
On July 30, 1996, the Company entered into an agreement with IFT to
integrate the IFT System into 21 wide-body Swissair aircraft. The first
installation of the IFT System onto a Swissair aircraft was certified in January
1997. As of April 15, 1997, the Company had integrated the IFT System onto three
of the 21 aircraft. The Swissair project represents the first broad-based
installation of an interactive in-flight casino-style gaming and video-on-demand
system in a commercial aircraft fleet. The Company will account for revenues
generated under the IFT contract using the percentage of completion method of
accounting. For a discussion of certain issues relating to the IFT System see
"Risk Factors--Dependence on Key Customers."
14
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
2,700,000 shares of Common Stock being offered hereby by the Company are
estimated to be $28.7 million after deducting underwriting discounts and
commissions and estimated expenses of the Offering. The Company estimates that
it will use such net proceeds, together with approximately $12.6 million of the
proceeds from its new credit facility (the "New Credit Facility") which the
Company has entered into in conjunction with this Offering (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Description of New Credit Facility"), to repay amounts due under the Company's
revolving line of credit (the "Senior Revolver"), the Company's senior term
notes (the "Senior Term Notes"), the Company's 15% Convertible Notes due 1997
(the "Convertible Notes") and the Company's 12% Senior Subordinated Notes due
2001 (the "Senior Subordinated Notes"), as described below. The Company will not
receive any of the proceeds from shares sold by the Selling Stockholders.
The Company will use approximately $14.6 million to repay in full amounts
due under the Senior Revolver, including accrued interest. Of the amounts
outstanding under the Senior Revolver, $8.0 million bears interest at the
Eurodollar Rate plus 4.5% per annum (10.0% as of December 31, 1996), with the
remainder bearing interest at the lender's prime rate plus 3.25% per annum
(11.5% as of December 31, 1996). Amounts outstanding under the Senior Revolver
become due on September 18, 1999. In September 1996, the Company borrowed $5.4
million under the Senior Revolver to fund a portion of the ADS purchase price.
In December 1996, the Company borrowed $1.3 million and $.4 million under the
Senior Revolver to fund a portion of the purchase prices of Elsinore and the AMP
Facility, respectively. Of amounts used to repay the Senior Revolver, $10.9
million will be paid to ING (U.S.) Capital Corporation ("ING") and $3.7 million
will be paid to The Provident Bank ("Provident"). In addition, pursuant to the
terms of an agreement entered into among the Company, ING and Provident, the
Company will pay ING and Provident $188,000 and $62,000, respectively, upon
consummation of the Offering (the "Success Fee"). ING Baring (U.S.) Securities,
Inc. is an affiliate of ING.
The Company will use approximately $16.5 million to repay in full amounts
outstanding under the Senior Term Notes, including accrued interest. Of the
amounts outstanding under the Senior Term Notes, $12.0 million bears interest at
the Eurodollar Rate plus 5.0% (10.5% as of December 31, 1996) and the remaining
portion bears interest at a rate equal to 3.5% above the greater of (i) the
lender's prime rate or (ii) the federal funds rate plus 1.5% (11.8% as of
December 31, 1996). The Senior Term Notes mature on September 30, 2001 and
require quarterly payments of principal in varying amounts. The Company issued
$5.0 million of Senior Term Notes in December 1996 to fund a portion of the
purchase price of the AMP Facility. Of amounts used to repay the Senior Term
Notes, $12.4 million will be paid to ING and $4.1 million will be paid to
Provident.
The Company will use approximately $3.0 million to repay in full amounts
outstanding under the Convertible Notes, including accrued interest. The
Convertible Notes bear interest at a rate of 15.0% per annum, which is payable
quarterly. The Company has certain rights to defer cash interest payments. The
Convertible Notes mature on the earlier of June 30, 1997 or the consummation of
the Offering. The Company issued the Convertible Notes in September 1996 to fund
a portion of the purchase price of ADS. The Convertible Notes are held by Nassau
and Electra. See "Certain Transactions."
The Company will use approximately $7.0 million to repay in full the Senior
Subordinated Notes, including accrued interest. The Senior Subordinated Notes
bear interest at a rate of 12.0% per annum and mature on December 31, 2001. The
Senior Subordinated Notes are held by Electra. See "Certain Transactions."
Pending the use of the net proceeds for the purposes described above, the
Company will invest such net proceeds in short-term, investment-grade,
interest-bearing securities.
15
<PAGE>
DIVIDEND POLICY
The Company has never paid cash dividends on the Common Stock and does not
anticipate paying any cash dividends in the foreseeable future. The Company
currently intends to retain future earnings to finance operations and the
expansion of its business. Any future determination to pay cash dividends will
be made at the discretion of the Company's board of directors (the "Board") and
will be dependent upon the Company's financial condition, operating results,
capital requirements and such other factors as the Board deems relevant.
Further, the Company's debt agreements prohibit payment of dividends, and the
Company expects that any future debt agreements also will include such
prohibitions.
16
<PAGE>
CAPITALIZATION
The following table sets forth as of December 31, 1996: (i) the consolidated
capitalization of the Company; (ii) the consolidated capitalization of the
Company pro forma for the Recapitalization; and (iii) the consolidated
capitalization of the Company pro forma for the Recapitalization as adjusted for
the sale by the Company of 2,700,000 shares of Common Stock offered hereby and
the application of the net proceeds therefrom as described in "Use of Proceeds,"
as if these transactions had occurred on December 31, 1996. This table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Description of Capital Stock--The
Recapitalization" and the Consolidated Financial Statements and related notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------
PRO FORMA FOR PRO FORMA
ACTUAL RECAPITALIZATION AS ADJUSTED
--------- ----------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt:
Short-term borrowings (1).......................................... $ 1,974 $ 1,974 $ 1,974
Current portion of long-term debt
Senior Term Notes................................................ 1,849 1,849 --
Other (2)........................................................ 1,155 1,155 1,155
Convertible Notes.................................................. 2,922 2,922 --
--------- -------- ---------------
Total short-term debt............................................ $ 7,900 $ 7,900 $ 3,129
--------- -------- ---------------
--------- -------- ---------------
Long-term debt:
Senior Revolver.................................................... $ 11,982 $ 11,982 $ --
Senior Term Notes.................................................. 14,920 14,920 --
New Credit Facility (3)............................................ -- -- 10,774
Senior Subordinated Notes.......................................... 6,027 6,027 --
Other (2).......................................................... 1,421 1,421 1,421
--------- -------- ---------------
Total long-term debt............................................. 34,350 34,350 12,195
--------- -------- ---------------
Mandatorily redeemable common stock warrants......................... 6,879 1,426 --
--------- -------- ---------------
Stockholders' equity:
Cumulative convertible preferred stock, $.01 par value............. 13,850 -- --
Common stock, no par value, 4,253,550 shares authorized;
85,593 shares issued and outstanding............................. 216 -- --
Common Stock, $.01 par value, 9,924,950 shares authorized;
2,551,690 shares issued and outstanding Pro Forma for
Recapitalization and 5,251,690 shares Pro Forma as Adjusted
(4).............................................................. -- 26 53
Additional paid-in capital (5)..................................... -- 18,632 48,775
Accumulated deficit (6)............................................ (12,951) (12,090) (16,004)
Foreign currency translation adjustment............................ 121 121 121
--------- -------- ---------------
Total stockholders' equity....................................... 1,236 6,689 32,945
--------- -------- ---------------
Total capitalization (7)............................................. $ 42,465 $ 42,465 $ 45,140
--------- -------- ---------------
--------- -------- ---------------
</TABLE>
- ------------------------------
(1) Includes a $1.3 million promissory note payable to sellers in conjunction
with the acquisition of Elsinore. In February 1997, $1.0 million of this
note was repaid with Senior Revolver borrowings.
(2) Includes capital lease obligations and acquisition financing payable to the
sellers in conjunction with the Minority Interest Acquisition and the
acquisition of ADS.
(3) Reflects New Credit Facility borrowings which, together with the net
proceeds to the Company from the Offering, will be used to repay the debt
outstanding as presented in the table above as of December 31, 1996. See
"Use of Proceeds." Does not reflect borrowings of: (i) $1.0 million used to
fund partial payment of the Elsinore promissory note which occurred
subsequent to December 31, 1996, as discussed in Note (1) above (see "Recent
Developments"); and (ii) $1.4 million to fund the balance of the purchase
price of the AMP Facility and related expenses.
(4) Pro forma as adjusted includes 2,700,000 shares of Common Stock offered by
the Company hereby. Does not include: (i) 527,156 shares of Common Stock
reserved for issuance pursuant to the Share Incentive Plan; and (ii) 70,893
shares of Common Stock issuable upon exercise of the Lender Warrants.
(5) Pro forma as adjusted includes $179,000 attributable to the Lender Warrants
exercisable into 70,893 shares of Common Stock.
(6) Pro forma as adjusted reflects an extraordinary charge of $3.9 million to be
incurred as a result of the debt repayment with the net proceeds to the
Company from the Offering. The extraordinary charge is comprised of: (i)
$2.3 million for unamortized deferred financing costs; (ii) $1.4 million for
unamortized original issue discounts; and (iii) $.2 million for the Success
Fee.
(7) Total capitalization consists of long-term debt, mandatorily redeemable
common stock warrants and stockholders' equity.
17
<PAGE>
DILUTION
As of December 31, 1996, giving effect to the Recapitalization, the
Company's net tangible book value (deficit) was $(13.3) million, or $(5.23) per
share of Common Stock. Net tangible book value per share represents the amount
of the Company's total tangible assets reduced by the amount of its total
liabilities, divided by the number of shares of Common Stock outstanding. After
giving effect to the sale by the Company of 2,700,000 shares of Common Stock in
the Offering and the application of the net proceeds therefrom as described in
"Use of Proceeds," the Company's net tangible book value as of December 31, 1996
would have been $12.9 million, or $2.46 per share. This represents an immediate
increase in net tangible book value of $7.69 per share to existing shareholders
and an immediate dilution of $9.54 per share to purchasers of shares of Common
Stock in the Offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share............................ $ 12.00
Net tangible book value per share before the Offering (1)........ $ (5.23)
Increase per share attributable to new investors................. 7.69
---------
Net tangible book value per share after the Offering............... 2.46
---------
Dilution per share to new investors................................ $ 9.54
---------
---------
</TABLE>
- ------------------------------
(1) Does not include: (i) 527,156 shares of Common Stock reserved for issuance
pursuant to the Share Incentive Plan; and (ii) 70,893 shares of Common Stock
reserved for issuance upon exercise of the Lender Warrants.
The following table sets forth the total consideration and the average price
per share to be paid by the purchasers of the Common Stock offered hereby and
the total consideration paid and average price per share paid by existing
stockholders (at the initial public offering price before deducting underwriting
discounts and expenses of the Offering).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------ --------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................. 2,551,690 48.6% $ 18,658,000 36.5% $ 7.31
New investors.......................... 2,700,000 51.4 32,400,000 63.5 12.00
----------- ----- -------------- -----
Total................................ 5,251,690 100.0% $ 51,058,000 100.0%
----------- ----- -------------- -----
----------- ----- -------------- -----
</TABLE>
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated statement of operations and balance
sheet data for the Company as of and for the years ended December 31, 1992,
1993, 1994, 1995 and 1996 have been derived from the Company's audited
consolidated financial statements. All of the information should be read in
conjunction with the Consolidated Financial Statements and related notes thereto
included elsewhere in this Prospectus. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1992 1993 1994 1995 1996(1)
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................ $ 42,620 $ 48,197 $ 47,092 $ 55,839 $ 65,099
Cost of sales........................... 32,470 36,258 36,407 43,463 49,392
----------- ----------- ----------- ----------- -----------
Gross profit............................ 10,150 11,939 10,685 12,376 15,707
Selling, general and administrative
expenses.............................. 6,851 7,953 7,716 9,426 10,747
Amortization of intangible assets....... 1,209 1,210 1,209 1,115 709
----------- ----------- ----------- ----------- -----------
Operating income........................ 2,090 2,776 1,760 1,835 4,251
Interest expense........................ 2,779 2,940 3,244 3,821 4,248
Other (income) expense, net............. (213) (148) 332 382 108
----------- ----------- ----------- ----------- -----------
Loss before provision for income taxes,
cumulative effect of accounting change
and extraordinary item................ (476) (16) (1,816) (2,368) (105)
Provision for income taxes (2).......... (299) (620) (613) (1,078) (712)
----------- ----------- ----------- ----------- -----------
Loss before cumulative effect of
accounting change and extraordinary
item.................................. (775) (636) (2,429) (3,446) (817)
Cumulative effect of accounting change
(3)................................... -- (121) -- -- --
Extraordinary loss from debt refinancing
(4)................................... -- -- (264) -- --
----------- ----------- ----------- ----------- -----------
Net loss................................ $ (775) $ (757) $ (2,693) $ (3,446) $ (817)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net loss applicable to common
stockholders.......................... $ (938) $ (972) $ (2,891) $ (3,307) $ (6,357)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Income (loss) per common share:
Pro forma for the Recapitalization........................................................... $ (.31)
Pro forma as adjusted (5)....................................................................
$ .62
Weighted average number of common shares
outstanding:
Pro forma for the Recapitalization........................................................... 2,659
Pro forma as adjusted (6).................................................................... 5,563
OTHER FINANCIAL DATA:
Depreciation and amortization (7)....... $ 3,146 $ 3,553 $ 3,868 $ 4,244 $ 4,012
Bookings (8)............................ 50,325 46,830 47,896 50,785 81,914
Backlog at end of period (9)............ 25,330 23,933 24,493 19,761 44,433
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......................... $ 5,091 $ (637) $ 11,459 $ 12,583 $ 10,486
Total assets............................ 33,911 34,653 37,685 36,329 69,266
Total debt.............................. 20,604 19,653 23,874 24,672 42,250
Mandatorily redeemable preferred stock
and common stock warrants............. 5,711 5,818 2,329 1,633 6,879
Stockholders' equity (deficit).......... (1,679) (2,618) 766 (1,697) 1,236
</TABLE>
See accompanying notes to the Selected Consolidated Financial Data.
19
<PAGE>
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
(1) Includes the effect of the Minority Interest Acquisition beginning February
20, 1996, the date on which the transaction occurred, and the results of ADS
and Elsinore beginning September 18, 1996 and December 5, 1996,
respectively, the dates on which they were acquired.
(2) Prior to the Minority Interest Acquisition in 1996, the Company did not
consolidate the earnings of its Cory Components subsidiary for tax purposes.
As such, despite a consolidated pre-tax loss in each of the years, the
Company recorded a provision for income taxes from 1992 up to the date of
the Minority Interest Acquisition in 1996 which primarily relates to Cory
Components.
(3) Represents the adoption, as of January 1, 1993, of SFAS 109, "Accounting
for Income Taxes."
(4) Represents the write-off of unamortized deferred financing costs, a charge
for unamortized debt discounts and a prepayment penalty incurred as result
of the refinancing by the Company of a substantial portion of its debt in
November 1994 (the "1994 Refinancing").
(5) Pro forma for the Minority Interest Acquisition and the acquisition of ADS
as if they had occurred on January 1, 1996. Adjusted to reflect the sale by
the Company of 2,700,000 shares of Common Stock in the Offering and the
application of the net proceeds therefrom as set forth under "Use of
Proceeds." Excludes a $3.9 million extraordinary charge to be incurred as a
result of the debt repayment with the net proceeds to the Company from the
Offering.
(6) Pro forma for the Recapitalization and adjusted for the 2,700,000 shares of
Common Stock offered hereby by the Company. Includes shares of Common Stock
related to outstanding management options issued pursuant to the Share
Incentive Plan. Does not include 70,893 shares of Common Stock issuable upon
exercise of the Lender Warrants.
(7) Includes deferred financing cost amortization included in interest expense
of $272,000, $295,000, $432,000, $608,000 and $661,000 in 1992, 1993, 1994,
1995 and 1996, respectively.
(8) Bookings represent the total invoice value of purchase orders received
during the period. See "The Company--Backlog."
(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. See "The
Company--Backlog."
20
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following Unaudited Pro Forma Consolidated Financial Data presents the
results of operations of the Company as if the following transactions had
occurred on January 1, 1996: (i) the Minority Interest Acquisition; (ii) the
acquisition of ADS; (iii) the Recapitalization; and (iv) the sale by the Company
of 2,700,000 shares of Common Stock in the Offering and the application of the
net proceeds therefrom as set forth under "Use of Proceeds." The Unaudited Pro
Forma Consolidated Financial Data does not include the acquisition of Elsinore
because such inclusion would not have had a material effect on such data.
The Unaudited Pro Forma Consolidated Financial Data for the year ended
December 31, 1996 reflects the combination, with appropriate adjustments, of the
consolidated financial statements of the Company for the year ended December 31,
1996 and the unaudited financial statements of ADS for the period from January 1
through September 18, 1996, the date on which it was acquired.
The Unaudited Pro Forma Consolidated Financial Data is not necessarily
indicative of the results of operations that actually would have occurred had
the transactions referenced above been consummated on the dates indicated, or
that may be obtained in the future. The Unaudited Pro Forma Consolidated
Financial Data should be read in conjunction with the Consolidated Financial
Statements and related notes thereto included elsewhere in this Prospectus.
21
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
DECRANE
AIRCRAFT AEROSPACE
HOLDINGS, DISPLAY ACQUISITION PRO
INC. SYSTEMS ADJUSTMENTS FORMA
------------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues................................ $ 65,099 $ 7,706 $ -- $ 72,805
Cost of sales........................... 49,392 4,855 284(1) 54,531
------------- ----------- ----------- -----------
Gross profit............................ 15,707 2,851 (284) 18,274
Selling, general and administrative
expenses.............................. 10,904 1,286 (203)(2) 11,987
Amortization of intangible assets....... 709 -- 214(3) 923
Gain on litigation settlement........... (157) -- -- (157)
------------- ----------- ----------- -----------
Operating income........................ 4,251 1,565 (295) 5,521
Interest expense........................ 4,248 52 1,125(4) 5,425
Other expenses.......................... 108 -- (89)(5) 19
------------- ----------- ----------- -----------
Income (loss) before (provision) benefit
for income taxes...................... (105) 1,513 (1,331) 77
(Provision) benefit for income taxes.... (712) (615) 777(6) (550)
------------- ----------- ----------- -----------
Income (loss)........................... $ (817) $ 898 $ (554) $ (473)
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
Income (loss) applicable to common
stockholders.......................... $ (6,357) $ 898 $ (554) $ (6,013)
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
Income (loss) per common share:
Pro forma for the Recapitalization.... $ (.31)(11)
Pro forma as adjusted.................
Weighted average number of common shares
outstanding:
Pro forma for the Recapitalization.... 2,659(11)
Pro forma as adjusted.................
<CAPTION>
OFFERING PRO FORMA
ADJUSTMENTS AS ADJUSTED
----------- -------------
<S> <C> <C>
Revenues................................ $ -- $ 72,805
Cost of sales........................... -- 54,531
----------- -------------
Gross profit............................ -- 18,274
Selling, general and administrative
expenses.............................. 200(7) 12,187
Amortization of intangible assets....... -- 923
Gain on litigation settlement........... -- (157)
----------- -------------
Operating income........................ (200) 5,321
Interest expense........................ (4,639)(8) 786
Other expenses.......................... -- 19
----------- -------------
Income (loss) before (provision) benefit
for income taxes...................... 4,439 4,516
(Provision) benefit for income taxes.... (518)(9) (1,068)
----------- -------------
Income (loss)........................... $ 3,921 $ 3,448
----------- -------------
----------- -------------
Income (loss) applicable to common
stockholders.......................... $ 9,461(10) $ 3,448
----------- -------------
----------- -------------
Income (loss) per common share:
Pro forma for the Recapitalization....
Pro forma as adjusted................. $ .62(12)
Weighted average number of common shares
outstanding:
Pro forma for the Recapitalization....
Pro forma as adjusted................. 5,563(13)
</TABLE>
See accompanying notes to the Unaudited Pro Forma Consolidated Financial Data.
22
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(1) Represents an increase in depreciation expense to reflect a $1.7 million
increase in the fair value of assets acquired in the acquisition of ADS. The
acquired assets are being depreciated using the straight-line method over
their remaining estimated useful lives, ranging from two to five years.
(2) Represents: (i) an increase in depreciation expense of $54,000 to reflect
an increase in the fair value and useful lives of assets acquired in the
acquisition of ADS; and (ii) a decrease in selling, general and
administrative expenses of $257,000 reflecting a reversal of corporate
expenses allocated to ADS by its former owner, net of estimated incremental
corporate expenses of ADS to the Company.
(3) Represents an increase in amortization expense of: (i) $26,000 pertaining
to the amortization on a straight-line basis over 26 years of $5.5 million
of goodwill related to the Minority Interest Acquisition; and (ii) $188,000
pertaining to the amortization on a straight-line basis over 30 years of
$7.7 million of goodwill related to the ADS acquisition.
(4) Represents: (i) additional interest expense for indebtedness incurred to
finance the acquisition of ADS and the Minority Interest Acquisition of $1.1
million; and (ii) a reversal of interest expense allocated to ADS by its
former owner of $52,000 for debt obligations not assumed by the Company.
(5) Represents the reversal of the minority stockholder's 25% equity in the
earnings of a consolidated subsidiary prior to the Minority Interest
Acquisition.
(6) Represents a reduction in the provision for income taxes assuming the
taxable income of ADS and the Company's Cory Components subsidiary, which
was formerly 75% owned, was included in the Company's consolidated federal
and state income tax returns and offset against the net operating losses
incurred by the Company's other operations.
(7) Represents incremental general and administrative expenses associated with
regulatory compliance requirements including listing, registrar and transfer
agent fees, quarterly and annual report and proxy statement preparation and
distribution expenses, legal and accounting fees and directors' and
officers' liability insurance premiums.
(8) Represents a decrease in interest expense to reflect the sale by the
Company of 2,700,000 shares of Common Stock in the Offering and the
application of the net proceeds therefrom as set forth under "Use of
Proceeds."
(9) Represents an increase in the provision for income taxes as a result of
increases in pro forma taxable income, net of utilization of net operating
loss carryforwards.
(10) Reflects the elimination of preferred stock dividends and adjustment of
redemption value of the mandatorily redeemable common stock warrants as a
result of the Recapitalization. All of the preferred stock will be converted
into Common Stock and substantially all warrants will be exchanged for
Common Stock in the Recapitalization. See "Description of Capital Stock--The
Recapitalization."
(11) Reflects the Recapitalization. See the Consolidated Financial Statements
and related notes thereto included elsewhere in this Prospectus.
(12) Reflects the Recapitalization, the acquisition of ADS, the Minority
Interest Acquisition and the Offering.
(13) Reflects the shares resulting from the Recapitalization and the Offering.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's results of operations have been affected by its history of
acquisitions. The Company commenced operations in October 1990 with the
acquisition of Hollingsead International, Inc. ("Hollingsead"), a manufacturer
of avionics support structures at the time of the acquisition. In October 1991,
the Company acquired Tri-Star Electronics International, Inc. ("Tri-Star"),
Tri-Star Electronics Europe, S.A. ("Tri-Star Europe"), 75% of Cory Components,
and 74.5% of Tri-Star Technologies ("TST") (collectively, the "Tri-Star
Companies") which primarily manufacture contacts, connectors and harness
assemblies for the commercial aircraft industry. In February 1996, the Company
completed the Minority Interest Acquisition. In September 1996, the Company
acquired ADS, a manufacturer of dichroic LCD devices, and in December 1996, the
Company acquired Elsinore and purchased the AMP Facility.
From 1991 to 1995, a period of declining demand for new aircraft, the
Company's management refocused and expanded the businesses the Company acquired
in the Hollingsead and Tri-Star Companies transactions. The Company has
established Hollingsead, which was solely a manufacturing company when acquired,
as a full-service systems integrator concentrated in the retrofit market.
Concurrently, the Company has enhanced the market positions of the Tri-Star
Companies as a leading supplier of certain avionics components in the OEM
market. The Company's ability to improve the performance of its acquired
businesses is reflected in the revenue growth of Hollingsead and the Tri-Star
Companies, which increased 31% on a consolidated basis between 1992 and 1995 and
another 11% from 1995 to 1996. This growth occurred despite a steep decline in
new aircraft deliveries from a peak of approximately 770 in 1991 to a low of
approximately 370 in 1995, according to the S&P Report. Specific contributors to
the Company's growth during this period of decline included: (i) the
establishment of a balanced offering of products and services for the OEM
market, the retrofit market and the aftermarket; (ii) the initiation of private
labeling programs pursuant to which the Company manufactures contacts for other
connector manufacturers, including certain of the Company's competitors; (iii)
the development of new products such as speciality connectors for Boeing's 777
aircraft; and (iv) the diversification into new services such as the integration
of in-flight entertainment systems.
Historically, the Company's 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. Specifically, the
Company's systems integration operations have been dominated in recent years by
sales to AT&T relating to the integration of AT&T's in-flight passenger
telecommunications systems. The Company believes it has lessened its exposure to
these fluctuations by developing capabilities in three additional major systems
integration areas: in-flight entertainment systems, satellite communication and
navigation systems, and safety systems. The Company has secured orders for
integration services in each of these targeted areas: in-flight entertainment
systems for Swissair (through IFT), satellite communication systems for American
Airlines, Inc. ("American Airlines") (through Rockwell Collins and Triad
International Maintenance Corporation ("TIMCO")), and safety systems for United
Parcel Service, Inc. ("UPS"). In addition, the Company continues to provide
systems integration services to AT&T.
Certain of the contact blanks used by the Company in the production of its
contacts are manufactured at the Company's Swiss facility and shipped to its El
Segundo, California facility for plating and assembly. Accordingly, the Company
has been, and will continue to be, exposed to fluctuations in the currency
exchange rate between the U.S. Dollar and the Swiss Franc. Due to the weakening
of the U.S. Dollar against the Swiss Franc in 1995, the cost of contact blanks
in U.S. Dollars increased by $.9 million over 1994 levels. In 1996 and 1997,
solely in an effort to mitigate the effects of currency fluctuations, the
Company entered into forward exchange contracts at fixed rates and plans to
continue this forward exchange program in the future. In 1996, the Company did
not experience any material changes in the cost of contact blanks resulting from
currency fluctuations.
24
<PAGE>
Materials constitute approximately 45% of the cost of a finished contact.
The most significant portion of the material cost is gold, although the use of
copper is also substantial. The Company is and will continue to be exposed to
fluctuations in gold and copper prices. The Company has undertaken programs to
reduce the use of gold in the Company's plating operations. These programs, on a
comparable basis, have saved the Company an estimated $1.3 million in 1996
compared to 1995. In addition to providing cost savings, the Company believes
that these programs reduced its exposure to gold price fluctuations.
Prior to the Minority Interest Acquisition in 1996, the Company did not
consolidate the earnings of its Cory Components subsidiary for tax purposes. As
such, despite a consolidated pre-tax loss in each of the years, the Company
recorded a provision for income taxes from 1992 to 1996 which primarily relates
to Cory Components. Separately, as of December 31, 1996, the Company had net
operating loss carry-forwards ("NOLs") of approximately $3.4 million and $1.4
million for federal and state income tax purposes, respectively. These NOLs
expire in varying amounts through 2011. The amount of NOLs that may be utilized
in the future may be subject to limitations due to a change in control of the
Company.
RESULTS OF OPERATIONS
The following table sets forth the items in the Company's consolidated
statements of operations as percentages of its revenues for the periods
indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues......................................................................... 100.0% 100.0% 100.0%
Cost of sales.................................................................... 77.3 77.8 75.9
----- ----- -----
Gross profit..................................................................... 22.7 22.2 24.1
Selling, general and administrative expenses..................................... 16.4 16.9 16.7
Amortization of intangible assets................................................ 2.6 2.0 1.1
Gain on litigation settlement, net............................................... -- -- (.2)
----- ----- -----
Operating income................................................................. 3.7 3.3 6.5
Interest expense................................................................. 6.9 6.8 6.5
Other expense, net............................................................... .7 .7 .2
----- ----- -----
Loss before provision for income taxes, and extraordinary item................... (3.9) (4.2) (.2)
Provision for income taxes....................................................... (1.3) (2.0) (1.1)
----- ----- -----
Loss before extraordinary item................................................... (5.2) (6.2) (1.3)
Extraordinary loss from debt refinancing......................................... (.5) -- --
----- ----- -----
Net loss......................................................................... (5.7) (6.2) (1.3)
----- ----- -----
----- ----- -----
Net loss applicable to common stockholders....................................... (6.1) (5.9) (9.8)
----- ----- -----
----- ----- -----
</TABLE>
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1995
REVENUES. Revenues increased $9.3 million, or 16.6%, to $65.1 million for
1996 from $55.8 million for 1995. Revenues increased primarily due to the
following: (i) growth in contact sales driven by new aircraft production rate
increases and growth in the Company's private labeling programs of $6.4 million;
(ii) an increase of sales to IFT of $3.0 million in 1996 relating to a major
systems integration program for Swissair; (iii) the inclusion of $2.8 million of
revenues from ADS which was acquired on September 18, 1996; (iv) an increase in
sales of specialty connectors for cabin management and in-flight entertainment
systems on Boeing's 777 aircraft of $2.4 million; and (v) an increase in sales
of harness assemblies for in-flight entertainment systems of $2.4 million.
Partially offsetting this increase was a decline in sales to AT&T of $9.2
million, reflecting the completion in 1995 of a major systems integration
program primarily for American Airlines.
25
<PAGE>
GROSS PROFIT. Gross profit increased $3.3 million, or 26.9%, to $15.7
million for 1996 from $12.4 million for 1995. Gross profit as a percent of
revenues increased to 24.1% for 1996 from 22.2% for 1995. This increase was
attributable to an improvement in gross profit as a percent of revenues from the
sale of contacts for 1996, partially offset by a decline in higher margin sales
to AT&T. This improvement resulted from sustained price increases, increased
sales volume, lower wage-related expenses and lower material costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses increased $1.5 million, or 15.7%, to $10.9
million for 1996 from $9.4 million for 1995. SG&A expenses as a percent of
revenues decreased to 16.7% for 1996 from 16.9% for 1995. SG&A expenses
increased primarily due to the following: (i) the Company added staff to pursue
higher sales to OEMs and to develop capabilities for in-flight entertainment,
navigation and satellite communication and safety systems integration services;
and (ii) the inclusion of SG&A expenses from ADS and Elsinore which were
acquired in 1996. This increase in SG&A expenses was offset partially by the
elimination of $.7 million of expenses of the Minority Interest Acquisition.
OPERATING INCOME. Operating income increased $2.4 million, or 131.7%, to
$4.3 million for 1996 from $1.8 million for 1995. The increase in operating
income resulted from the factors described above and a decline of $.4 million in
amortization of intangible assets as a result of the termination of certain
non-compete agreements.
INTEREST EXPENSE. Interest expense increased $.4 million, or 11.2%, to $4.2
million for 1996 from $3.8 million for 1995. This increase resulted from higher
outstanding indebtedness attributed to the funding of the acquisitions of ADS
and Elsinore and the purchase of the AMP Facility.
NET LOSS. Net loss decreased $2.6 million, or 76.3%, to $.8 million for
1996 from a net loss of $3.4 million for 1995. The decrease in net loss resulted
from the factors described above and a lower tax provision resulting from the
Minority Interest Acquisition in February 1996.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. Net loss applicable to common
stockholders increased $3.1 million, or 92.2%, to $6.4 million for 1996 from a
net loss applicable to common stockholders of $3.3 million for 1995. The
increase resulted from the change in redemption value of mandatorily redeemable
common stock warrants of $5.0 million (resulting from an increase in the value
of the warrants due to the Company's improved results from operations and the
anticipated price of the Common Stock as a result of the Offering) and the
increase in cumulative convertible preferred stock dividends of $.7 million
(resulting from new issuances of preferred stock), which were offset in part by
the decrease in net loss of $2.6 million. As a result of the Recapitalization,
substantially all warrants will be exchanged for Common Stock and all preferred
stock will be converted into Common Stock. See "Description of Common Stock--The
Recapitalization."
FISCAL YEAR ENDED DECEMBER 31, 1995 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1994
REVENUES. Revenues increased $8.7 million, or 18.6%, to $55.8 million for
1995 from $47.1 million for 1994. This increase was attributable to an
additional $6.8 million in sales to AT&T in 1995 relating to a major systems
integration program primarily for American Airlines, as well as increased sales
of: (i) products and services for in-flight entertainment systems of $1.5
million; and (ii) contacts through the Company's private labeling program of
$1.2 million. Partially offsetting this increase was a decline in sales of
contacts to aircraft OEMs of $.5 million in 1995 due to lower production rates
for new aircraft and a decline in systems integration revenues of $.9 million
reflecting the completion of two systems integration programs in early 1995.
GROSS PROFIT. Gross profit increased $1.7 million, or 15.8%, to $12.4
million for 1995 from $10.7 million for 1994. Gross profit as a percent of
revenues decreased marginally to 22.2% for 1995 from 22.7% for 1994. The
decrease in gross profit as a percent of revenues primarily resulted from
increased material cost of approximately $.9 million caused by the weakness of
the U.S. Dollar relative to the Swiss Franc.
26
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased $1.7
million, or 22.2%, to $9.4 million for 1995 from $7.7 million for 1994. SG&A
expenses as a percent of revenues increased marginally to 16.9% for 1995 from
16.4% for 1994. This increase resulted from an effort to develop further the
sales, accounting and senior management functions of the Company's operating
subsidiaries in anticipation of continued revenue growth.
OPERATING INCOME. Operating income remained essentially unchanged from 1994
at $1.8 million for 1995 as a result of the factors discussed above and a
marginal decrease in amortization of intangible assets.
INTEREST EXPENSE. Interest expense increased $.6 million, or 17.8%, to $3.8
million for 1995 from $3.2 million for 1994 due to higher outstanding
indebtedness. The 1994 Refinancing resulted in lower effective interest rates
and higher outstanding indebtedness.
NET LOSS. Net loss increased $.8 million, or 28.0%, to $3.4 million for
1995 from a net loss of $2.7 million for 1994 as a result of the factors
described above and a higher tax provision for Cory Components, which was not
consolidated for income tax purposes.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. Net loss applicable to common
stockholders increased $.4 million, or 14.4%, to $3.3 million for 1995 from a
net loss applicable to common stockholders of $2.9 million for 1994. The
increase resulted from the increase in net loss of $.8 million and the increase
in the cumulative convertible preferred stock dividends of $.2 million resulting
from new issuances of preferred stock, which was offset in part by a $.5 million
adjustment to the redemption value of mandatory redeemable common stock warrants
(resulting from an increase in the value of the warrants due to the Company's
improved results from operations). As a result of the Recapitalization,
substantially all of the warrants will be exchanged for Common Stock and all
preferred stock will be converted into Common Stock. See "Description of Common
Stock--The Recapitalization."
LIQUIDITY AND CAPITAL RESOURCES
The Company has required cash primarily to fund acquisitions and, to a
lesser extent, to fund capital expenditures and for working capital.
In 1996 and 1995, the Company generated cash from operating activities of
$3.0 million and $1.5 million, respectively. Cash from operating activities is
net of interest payments of $3.0 million and $3.3 million for 1996 and 1995,
respectively. With the net proceeds of the Offering to be received by the
Company, the Company estimates that it will repay a significant portion of its
debt. As a result, the related interest payments will decrease substantially.
See "Use of Proceeds."
In 1996 and 1995, the Company used $1.5 million and $1.0 million,
respectively, in cash for working capital. The Company's accounts receivable
consist of trade receivables and unbilled receivables which are recognized
pursuant to the percentage of completion method of accounting. Trade receivables
increased $2.7 million and $1.6 million in 1996 and 1995, respectively, due to
higher sales. Unbilled receivables increased $.4 million in 1996 as a result of
the systems integration program for Swissair (through IFT) that began in
mid-1996. Unbilled receivables decreased by $3.9 million in 1995 as a result of
the completion of a systems integration program for AT&T in 1995. See "Notes to
Consolidated Financial Statements." Inventories increased by $2.7 million and
$3.0 million in 1996 and 1995, respectively, in support of sales growth.
Accounts payable increased by $1.9 million in 1996 primarily as a result of the
increase of inventory in 1996. Accounts payable decreased by $1.0 million in
1995 due to the application of cash made available by the 1994 Refinancing. The
foregoing amounts for accounts receivable and accounts payable are consistent
with the amounts set forth in the Consolidated Statements of Cash Flow contained
herein. However, due to foreign currency translations, such amounts differ from
the amounts set forth in the Consolidated Balance Sheet.
27
<PAGE>
Net cash used in investing activities was $24.0 million for 1996 and $1.5
million for 1995. Of the $24.0 million used in 1996, $22.6 million related to
the Minority Interest Acquisition in February 1996, the acquisition of ADS in
September 1996 and the acquisition of Elsinore and the purchase of the AMP
Facility in December 1996. Capital expenditures of $1.5 million and $1.2 million
were made in 1996 and in 1995, respectively. Capital expenditures were incurred
to: (i) purchase tooling in support of proprietary products; (ii) upgrade
machinery and equipment; and (iii) increase manufacturing capacity in support of
sales growth. The Company anticipates capital expenditures of approximately $3.2
million in 1997, including $1.0 million for a new management information system,
$.6 million for improved plating controls, and $.4 million for new selective
plating machines. The Company intends to finance such capital expenditures from
working capital and the New Credit Facility.
Net cash provided by financing activities in 1996, was $21.1 million.
Specifically, the Company financed the Minority Interest Acquisition (including
the related fees and expenses) in February 1996 through the sale of its Series D
Convertible Preferred Stock and warrants to Nassau for $6.5 million. In
September 1996 the Company financed the acquisition of ADS (including the
related fees and expenses) through the sale of its Series E Convertible
Preferred Stock and warrants for $3.0 million, the issuance of the Convertible
Notes and warrants for $3.0 million, the issuance of an additional $5.0 million
of Senior Term Notes and an increase and a drawdown under the Senior Revolver of
$.4 million. The Series E Convertible Preferred Stock, Convertible Notes and
related warrants were issued to Nassau and Electra. At the time of the ADS
acquisition, availability under the Senior Revolver was increased by an
additional $1.5 million to fund potential future working capital and capital
expenditure requirements. In December 1996, the Company acquired Elsinore and
purchased the AMP Facility. The acquisition of Elsinore was financed by the
Seller Note and $1.3 million borrowed under the Senior Revolver. The initial
cash portion of the purchase price of the AMP Facility was financed through an
increase of $5.0 million in the Senior Term Notes and the balance of $.4 million
through a drawdown under the Senior Revolver. In 1995, repayments of senior debt
and capital lease obligations were offset by increased borrowings under the
Senior Revolver, resulting in DE MINIMIS net cash provided by financing
activities.
Cash remained unchanged in 1996 and increased $.1 million in 1995 due to the
factors described above. Availability under the Senior Revolver as of December
31, 1996 was $3.8 million versus $.7 million as of December 31, 1995. Such
increase in availability was a result of a $3.1 million increase in the maximum
borrowings permitted under the Senior Revolver, net of the financing for the
acquisitions of ADS and Elsinore and the purchase of the AMP Facility, as
discussed above.
As of December 31, 1996, the maximum amount which the Company could borrow
under the Senior Revolver was $15.8 million and the principal amount outstanding
was $12.0 million. Of the amounts outstanding under the Senior Revolver, $8.0
million bear interest at the Eurodollar Rate plus 4.5% per annum (10.0% as of
December 31, 1996) with the remainder bearing interest at the lender's prime
rate plus 3.25% per annum (11.5% as of December 31, 1996). The Senior Revolver
becomes due on September 18, 1999. The Company has entered into the New Credit
Facility, as described below.
The Company believes that the current levels of working capital and amounts
available under the New Credit Facility will enable it to meet its liquidity
requirements for 1997.
DESCRIPTION OF NEW CREDIT FACILITY
The Company has entered into the New Credit Facility which provides for a
$40.0 million senior revolving credit facility and matures in 2002. The interest
rate under the New Credit Facility initially is, at the option of the Company,
either the prime rate or 1% above the LIBOR rate. The interest rate will be
reset quarterly based upon a ratio of debt to the Company's earnings before
interest, taxes, depreciation and amortization ("EBITDA"), pro forma (for
acquisitions) for the 12 month period ending on such date. The maximum interest
rate under the New Credit Facility is either .75% above the prime rate or 2.0%
above the LIBOR rate. Following the Offering the Company anticipates it will
have availability under the
28
<PAGE>
New Credit Facility of approximately $27.4 million. The New Credit Facility
contains restrictive and financial covenants, including a restriction on
acquisitions having a purchase price in excess of $10 million. The financial
covenants include: (i) a minimum interest coverage ratio of 3.0 to 1.0 in the
first and second years, 4.0 to 1.0 in the third and fourth years, and 5.0 to 1.0
in the fifth year of the New Credit Facility; (ii) a maximum senior debt to
EBITDA ratio of 3.0 to 1.0 in the first and second years, 2.75 to 1.0 in the
third and fourth years, and 2.50 to 1.0 in the fifth year of the New Credit
Facility; (iii) a minimum net worth; and (iv) a minimum working capital ratio of
0.33 (defined as current assets (less inventory) divided by the sum of current
liabilities plus amounts outstanding under the New Credit Facility). The New
Credit Facility is guaranteed by each of the Company's subsidiaries and is
secured by substantially all the assets of the Company and its subsidiaries.
At various times since its inception, the Company was not in compliance with
certain financial covenants contained in its debt agreements. In each instance
such non-compliance was waived by the lenders. Since March 1996, the Company has
been in compliance with all financial covenants contained in its existing debt
agreements. In the event that the Company is unable to remain in compliance with
the covenants contained in the New Credit Facility, the lender could declare all
amounts owed under such facility to be immediately due and payable, which could
have a material adverse effect on the Company.
ENVIRONMENTAL MATTERS
The Company is 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 or properties affected by hazardous substances. In addition, certain
environmental laws, such as CERCLA, and similar state laws impose strict,
retroactive, and joint and several liability upon persons responsible for
releases or potential releases of hazardous substances. Some risk of
environmental liability is inherent in the nature of the Company's business, and
the Company might in the future incur material costs to meet current or more
stringent compliance, cleanup, or other obligations pursuant to environmental
requirements. See "Risk Factors--Environmental Regulation,"
"Business--Environmental Regulation" and "Business--Legal Proceedings."
FORWARD-LOOKING STATEMENTS
This Prospectus, particularly the sections entitled "Prospectus Summary,"
"Use of Proceeds," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," contains certain
forward-looking statements and other statements that are not historical facts
concerning, among other things, market conditions of the aircraft industry, the
demand for avionics components and systems and future strategic acquisitions.
There can be no assurance that the Company has accurately identified and
properly weighed all of the factors which affect market conditions and demand
for the Company's products and services, that the public information upon which
the Company has relied is accurate or complete or that the Company's analysis of
the market and demand for its products and services is correct and, as a result,
the strategy based on such analysis will be successful. See "Risk Factors" for a
more detailed summary of factors which could affect future results.
29
<PAGE>
BUSINESS
GENERAL
The Company is a manufacturer of avionics components and a provider of
avionics systems integration services in certain niche markets of the commercial
aircraft industry. The products and services offered by the Company are utilized
primarily in commercial aircraft to connect, support and/or integrate various
avionics systems, including cabin avionics systems and flight deck avionics
systems. The Company's targeted markets consist of commercial aircraft and
avionics OEMs, the commercial aircraft retrofit market and the commercial
aircraft aftermarket. The Company also sells products and services to the
military aircraft market.
The Company seeks to maximize its sales by emphasizing the complementary
nature of its products and services. Components manufactured by the Company
include: (i) contacts (of which the Company believes it is the largest supplier
of bulk contacts to the commercial aircraft OEMs); (ii) connectors (which often
utilize the contacts manufactured by the Company); (iii) harness assemblies
(which often utilize the connectors manufactured by the Company); and (iv)
avionics support structures (which often are packaged with the Company's
connectors and harness assemblies in installation kits). In addition, the
Company manufactures dichroic LCD devices, which are used with flight deck
avionics, and believes it is the largest supplier of such devices to the
commercial aircraft OEMs. The systems integration services provided by the
Company include design and engineering, FAA certification, manufacture of
installation kits and systems installation. The Company manufactures many of the
components required to complete a systems integration project, which it believes
provides it a critical competitive advantage.
The Company was formed in 1989 to capitalize on emerging trends in the
aircraft market through acquisitions. Since its formation, the Company has
completed eight acquisitions of businesses or assets. A summary of these
transactions follows:
<TABLE>
<CAPTION>
YEAR OF APPROXIMATE
TRANSACTION TARGET PRINCIPAL PRODUCTS AND SERVICES(1) PURCHASE PRICE(2)
- ------------- -------------------- ---------------------------------- -----------------
(IN MILLIONS)
<C> <S> <C> <C>
1990 Hollingsead Avionics support structures $ 9.1
1991 Tri-Star Contacts and connectors *(3)
1991 Tri-Star Europe Contact blanks *(3)
1991 TST Wire marking equipment *(3)
1991 Cory Components Connectors and harness assemblies 7.7(4)
1996 ADS Dichroic LCD devices 13.4
1996 Elsinore Engineering services 2.6
1996 AMP Facility Contact blanks 6.8
</TABLE>
- ------------------------
(1) At the time of the transaction.
(2) Includes, where applicable, related fees and expenses and post closing
adjustments.
(3) Although each of Tri-Star, Tri-Star Europe and TST was acquired pursuant to
a separate agreement, the purchase price, which was $10.4 million for all
three entities, was determined in the aggregate.
(4) The Company acquired 75% of Cory Components in 1991 for approximately $2.0
million. In February 1996, the Company acquired the 25% which it did not
already own for approximately $5.7 million.
The Company commenced its operations in October 1990 with the acquisition of
Hollingsead, which, at the time of the acquisition, was solely a manufacturer of
avionics support structures. The Company expanded its manufacturing operations
with the 1991 acquisition of the Tri-Star Companies.
30
<PAGE>
The Company's management has refocused and expanded the businesses which were
acquired in the Hollingsead and Tri-Star Companies transactions. By capitalizing
on Hollingsead's manufacturing strength in avionics support structures, which
are used extensively in the systems integration process, the Company has
expanded Hollingsead into a full-service systems integrator concentrated in the
retrofit market. Concurrently, the Company has enhanced the market positions of
the Tri-Star Companies as a leading supplier of certain low-cost, high-quality
avionics components. Management has focused on reducing costs, improving quality
and increasing the market penetration of the components manufactured by the
Tri-Star Companies.
In 1996, the Company completed: (i) the acquisitions of ADS and Elsinore;
(ii) the purchase of the AMP Facility; and (iii) the Minority Interest
Acquisition. The acquisition of ADS, a manufacturer of dichroic LCD devices,
which the Company believes is the largest supplier of such products to the
commercial aircraft OEMs, expanded the Company's offering of components used in
flight deck avionics systems. The Company believes that the acquisition of ADS
will allow it to capitalize on the upturn in aircraft OEM production by
increasing its revenue content per aircraft as well as enhancing the Company's
position with its major customers. The acquisition of Elsinore, with its DAS
approval, permits the Company to issue, through Elsinore, on behalf of the FAA,
certification that the designs of aircraft modifications performed in connection
with systems integration work conform to all pertinent FAA requirements. Such
certifications are issued as FAA-approved STCs, which constitute, in effect,
specific FAA design approval for each modification. In addition, the acquisition
of Elsinore enhanced the Company's systems integration capabilities and
increased the number of engineering professionals dedicated to the Company's
systems integration effort by approximately 50%. The acquisition of Elsinore
also provided the Company with an important new customer in the aircraft
industry, Daimler Benz Aerospace, and the opportunity to obtain additional
customers. The Company's purchase of the AMP Facility added contact capability
and capacity which will enable the Company to optimize and expand its contact
manufacturing operations. The AMP Facility enables the Company to produce
contact blanks using a cold-heading manufacturing process which, when used for
high volume production, is more cost effective than the Company's existing screw
machine operations. As a result of the purchase of the AMP Facility the Company
will have the opportunity to make increased sales to certain distributors that
formerly purchased contacts from other entities within AMP.
INDUSTRY OVERVIEW AND TRENDS
The Company participates in the commercial and military segments of the
aircraft industry. Within these segments, the Company sells to commercial and
military aircraft OEMs and major avionics equipment OEMs as well as to the
aircraft retrofit market and aircraft aftermarket.
On December 15, 1996, Boeing and McDonnell Douglas announced that they had
agreed to merge. The merger is subject to certain conditions, including the
receipt of regulatory approvals. Neither Boeing nor McDonnell Douglas has made
any announcements of any changes to their respective businesses following the
merger. The Company is unable to determine at this time the effect, positive or
negative, of the merger should it be consummated.
Prior to the announcement of the merger, the market for commercial aircraft
designed to carry 100 or more passengers was served principally by Boeing,
Airbus and McDonnell Douglas. The market for commercial aircraft designed to
carry fewer than 100 passengers is served by more than a half dozen other
manufacturers. The major systems installed on new commercial and military
aircraft, such as flight deck avionics systems, are produced by a limited number
of OEMs, including AlliedSignal Inc., Rockwell Collins, General Electric
Company, Honeywell, Inc. ("Honeywell"), Raytheon Co. and Sextant Avionique, Inc.
Components and sub-systems for new aircraft are provided by a much more
fragmented group of companies, consisting of numerous smaller, specialized
companies, such as the Company.
31
<PAGE>
The aircraft retrofit market (the integration of new systems into existing
aircraft) and the aircraft aftermarket (the manufacture and sale of replacement
products for existing aircraft) are served by a highly fragmented group of
companies. Many of these companies were formed primarily in response to
increased outsourcing by airlines of internal engineering capabilities. Products
and services provided within the aircraft aftermarket and aircraft retrofit
market include aircraft replacement components and systems and aircraft repair,
maintenance, overhaul and systems integration services.
The Company believes that there are numerous barriers to entry which limit
access to the aircraft industry. These barriers include: (i) general FAA
certification requirements, including those necessary to perform aircraft
modifications or maintenance; (ii) required compliance with military
specifications for certain products sold to commercial and military markets;
(iii) required compliance with qualification and approval standards imposed by
aircraft and avionics systems OEMs in addition to FAA aircraft manufacturing and
aircraft modification design and installation standards; (iv) reluctance of OEMs
to list new companies as approved vendors on the engineering drawings of the
OEMs (referred to as "print position"); and (v) significant initial capital
investment and tooling requirements necessary for the manufacture of certain
aircraft components and systems.
The Company believes the following trends are affecting the commercial
aircraft industry:
INCREASED DEMAND FOR NEW AIRCRAFT. According to the Boeing Report,
expenditures on new aircraft production are expected to increase from an average
of approximately $34 billion per year for the period 1991 through 1995 to
approximately $46 billion per year for the period 1996 through 2000. There can
be no assurances that the Company will benefit from such increase in aircraft
expenditures. The Boeing Report also estimates that annual deliveries of
commercial aircraft will increase from approximately 400 in 1996 to more than
600 in 1997 and will be between 700 and 800 in 1998. In addition, for the period
1996 through 2000, revenue passenger miles will increase from 1.6 trillion to
2.1 trillion and the worldwide fleet of aircraft will increase from 11,500 at
the end of 1996 to approximately 14,000 at the end of 2001 (net of approximately
1,375 retirements). The Company believes that the following factors, among
others, are causing this increase in new aircraft orders: (i) projected
worldwide airline traffic growth of 5.5% per year over the next decade
(including growth of 6.7% per year in the Southeast Asia region and 11.8% per
year in China); (ii) projected cargo traffic growth of 6.6% per year; (iii)
projected increase in the load factor of aircraft currently in service; (iv)
increases in the average age of commercial aircraft; (v) the cost effectiveness
of using new aircraft versus old aircraft; and (vi) a turnaround in worldwide
airline operating performance (from substantial operating losses in 1992 to
approximately $12 billion in operating profit in 1995).
DOWNSIZING AND OUTSOURCING. Airlines have come under increasing pressure to
reduce operating and capital costs associated with providing services. In
response, airlines have increased purchases of certain components from third
parties and have outsourced certain repair, overhaul and retrofit functions.
Similarly, aircraft and avionics OEMs increasingly are reducing their level of
vertical integration by outsourcing more manufacturing, repair and retrofit
functions to third parties. The Company believes that these trends are creating
increased demand for low-cost, high-quality component manufacturers and systems
integrators, such as the Company.
INDUSTRY CONSOLIDATION IN CERTAIN SEGMENTS. Certain segments of the
commercial aircraft industry, such as those that include manufacturers of
components and providers of aircraft retrofit, overhaul and repair services,
have been undergoing consolidation. The Company believes that several factors
are contributing to this consolidation, including: (i) the high level of
fragmentation within these segments; (ii) the continuing efforts by OEMs to
minimize purchasing costs, streamline operations and achieve greater control of
quality through a rationalization of their supplier bases; and (iii) the
increased demands placed on suppliers due to the just-in-time requirements of
their customers.
INCREASED DEMAND FOR CABIN AVIONICS SYSTEMS. In recent years, there has
been an increase in demand for cabin avionics systems, which include in-flight
passenger telecommunications systems as
32
<PAGE>
well as in-flight entertainment systems, such as video, video-on-demand and
casino-style electronic gaming. In-flight passenger telecommunications systems
primarily are produced by major providers of terrestrial and satellite-based
communication services and in-flight entertainment systems primarily are
produced by a diverse group of companies, ranging from small entrepreneurial
start-ups to large electronics and media companies. In-flight entertainment and
passenger telecommunications systems generally are integrated onto aircraft by
third parties, such as the Company, as well as by airlines and avionics OEMs.
The Company believes that the increased demand primarily has resulted from: (i)
a desire by airlines for additional revenue-producing services; and (ii) longer
flights combined with a demand by airline passengers for more sophisticated
forms of in-flight services.
PROLIFERATION OF NEW AVIONICS TECHNOLOGIES FOR FLIGHT DECKS. The prevalence
of older generation avionics equipment is a primary limiting factor in
establishing a more efficient air traffic management system. The commercial
aircraft industry, including the world's airlines, aircraft and avionics OEMs
and regulatory agencies, have organized to develop the necessary industry
standards, regulations and system requirements for future air navigation systems
("FANS"). Through the implementation of FANS, a complete modernization of both
airborne and ground-based air traffic management systems is expected to be
introduced and to result in significant improvements over existing systems.
Anticipated benefits of FANS include cost savings and enhanced safety. As
overall navigation system accuracy is improved, new navigation systems, such as
satellite communication ("SATCOM") systems and global positioning systems
("GPS"), will be required which the Company believes will present numerous
aircraft avionics retrofit opportunities.
There also has been a proliferation of new safety systems for flight decks
driven by the advent of new technologies and FAA mandates. For example, traffic
collision avoidance systems ("TCAS") and windshear detection systems are now
required for passenger aircraft operating in the U.S. The Company believes that
these safety systems may be mandated for all cargo carriers and flights outside
the U.S. In addition, the Company believes that the FAA will recommend or
mandate additional safety systems such as an enhanced ground proximity warning
system, a predictive (forward-looking) windshear detection system and an
enhanced digital flight data recorder.
COMPETITIVE STRENGTHS
The Company believes that it is well-positioned to take advantage of the
current trends and expected growth in the commercial aircraft industry as a
result of the following competitive strengths:
LEADING POSITIONS IN NICHE MARKETS. The Company successfully has
established strong positions in several specialized niches within the commercial
aircraft industry. The Company believes that it is the largest supplier of bulk
contacts to the commercial aircraft OEMs. The Company also believes it is the
largest supplier of dichroic LCD devices for use by commercial aircraft OEMs and
a major supplier of harness assemblies for use in in-flight entertainment
systems. The Company seeks to utilize its strong market positions to compete
more effectively as well as to capitalize on industry consolidation trends.
RECORD OF SUCCESSFUL ACQUISITIONS. Since its formation in 1989, the Company
has completed eight acquisitions of businesses or assets, including, in 1996,
acquisitions of ADS and Elsinore and the purchase of the AMP Facility. The
Company has demonstrated its ability to: (i) identify strategic acquisition
targets; (ii) complete the acquisition of identified targets; and (iii) increase
revenues of an acquired company, often while refocusing that company's business
strategy. The Company believes that its acquisition success has resulted from
its ability to identify and screen acquisition candidates, implement an
effective cost reduction program and expand and diversify the products and
services provided by an acquired company. In the past, acquisitions by the
Company have resulted in increased indebtedness and interest expense which has
caused the Company to incur net losses in each year since its inception despite
positive operating income. See "Risk Factors--Risks Associated with
Acquisitions."
33
<PAGE>
ALIGNMENT WITH LEADING AVIONICS AND AIRCRAFT OEMS AND SUPPLIERS. The
Company seeks to maximize its growth by establishing long-term relationships
with leaders in the Company's primary markets. For example, the Company has
entered into supply agreements with Boeing. The Company believes that through
these agreements it is the supplier of a substantial majority of the bulk
contacts for all aircraft currently manufactured by Boeing and the sole source
supplier of certain connectors for in-flight entertainment systems installed by
Boeing on its 777 aircraft. The Company is also: (i) a primary supplier of
harness assemblies to Matsushita for its in-flight entertainment systems; (ii)
the preferred integrator for the in-flight casino-style electronic gaming and
video-on-demand systems of IFT; and (iii) a preferred systems integrator for the
passenger telecommunications systems of AT&T.
NUMEROUS INDUSTRY AND REGULATORY APPROVALS. The Company's subsidiaries hold
four PMAs from the FAA and 64 supplements to its PMA's authorizing such
subsidiaries to manufacture and install numerous parts in many different
aircraft (as of December 31, 1996). The Company's subsidiaries also have three
FAA domestic repair station certificates which authorize them to perform certain
aircraft modifications. The Company employs FAA-certified airframe and
power-plant mechanics who are authorized to perform certain aircraft
modification functions. In addition, through its acquisition of Elsinore, the
Company is one of only 26 DASs worldwide (as of January 22, 1997) which are
authorized by the FAA to provide FAA approval of aircraft modifications. The DAS
approval enables the Company, through Elsinore, to act as a designee of the FAA
in issuing certain STCs. The FAA approvals obtained by the Company's
subsidiaries are owned, and may only be used by, the subsidiary obtaining such
approval.
LOW-COST, HIGH-QUALITY OPERATIONS. The Company believes that it has
established low-cost operations through well-defined cost reduction programs,
technological development and the use of vertical integration, where
appropriate. The Company's low-cost operations are demonstrated, for example, by
the growth of the Company's contact private labeling programs under which the
Company supplies contacts to many of its competitors.
The Company uses sophisticated procedures and processes to ensure its
products meet or exceed industry and customer quality requirements. Many
customers formally have recognized the effectiveness of the Company's quality
programs by issuing quality approval letters, awarding quality compliance
certificates and authorizing the Company's inspection personnel to act as the
authorized quality representative of the customer. For example, in February
1996, the Company became the 13th Boeing supplier to receive its D1-9000
Advanced Quality System award.
ENGINEERING AND RELATED TECHNICAL CAPACITY. Approximately 10% of the
Company's employees are engineering professionals, providing the Company with
significant in-house engineering capability and key technical expertise. For
example, the Company believes that it is one of a few companies with the
capability to perform full-service systems integration functions (design and
engineering, FAA certification, installation kit manufacturing and installation
of cabin avionics and flight deck avionics systems on aircraft). This level of
expertise enables the Company to respond rapidly and effectively to the
technical requirements of its customers as well as to capitalize on the
outsourcing trends in the commercial aircraft industry.
MANAGEMENT DEPTH AND EXPERIENCE. The Company has assembled a team of
executives, program managers and engineers from many of the major manufacturers
and suppliers to the aircraft industry. Key management and professional
employees of the Company bring experience with them from such companies as The
B.F. Goodrich Co. ("B.F. Goodrich"), B/E Aerospace, Inc., COMSAT Corp.,
Honeywell, Hughes-Avicom International, Inc., Litton Industries, Inc.,
Matsushita and McDonnell Douglas, providing the Company with a diversity of
commercial aircraft industry expertise. On average, the Company's executive
management has approximately 17 years of related industry experience.
34
<PAGE>
GROWTH STRATEGY
The Company's principal strategy is to establish and expand leading
positions in high-margin, niche markets within the commercial aircraft industry,
with a focus on the manufacture of avionics components and the integration of
avionics systems. The Company seeks to achieve these leading positions while
maintaining a balance of revenues among the OEM market, the retrofit market and
the aftermarket. The Company believes that such a strategy will position it for
growth over an entire commercial aircraft industry economic cycle. Specifically,
the Company seeks to:
CAPITALIZE ON GROWTH IN COMMERCIAL AIRCRAFT PRODUCTION. The Company
believes its strong market positions and alignment with many of the leading
commercial aircraft industry participants will enable it to capitalize on the
projected increase in commercial aircraft production. The Company believes that
every aircraft currently produced by Boeing, Airbus and McDonnell Douglas
includes components manufactured by the Company. As orders for the Company's
aircraft components have increased, the Company has worked closely with OEMs to
meet their delivery and scheduling requirements. In addition, the Company seeks
to increase its revenue content per plane by introducing new products, expanding
the use of existing products and through strategic acquisitions of companies
which supply components to the OEMs.
EXPLOIT INCREASED DEMAND FOR CABIN AVIONICS SYSTEMS. The Company believes
that the demand for cabin avionics systems is increasing, primarily as a result
of: (i) a desire by airlines for additional revenue-producing services; and (ii)
longer flights combined with a demand by airline passengers for more
sophisticated forms of in-flights services. The Company manufactures components
(contacts, connectors, harness assemblies and avionics support structures) which
are used with cabin avionics systems, as well as provides the systems
integration services necessary to install such systems on aircraft. The Company
believes that it competes effectively in the cabin avionics market by offering
to its customers a full-service organization, capable of providing interconnect
hardware and support structures for cabin avionics systems combined with the
design and engineering, FAA certification and installation services required to
integrate such systems.
EXPAND AND DIVERSIFY SYSTEMS INTEGRATION SERVICES. Historically, the
Company's systems integration services have been concentrated in the in-flight
passenger telecommunications market. In 1995, the Company commenced an effort to
diversify the types of systems which it retrofits onto aircraft by expanding its
expertise and sales efforts to include navigation and satellite communication,
safety, and in-flight entertainment systems. As of December 31, 1996, the
Company had contracted to provide systems integration services for SATCOM
systems (American Airlines through Rockwell Collins and TIMCO), safety systems
(UPS), and in-flight entertainment systems (Swissair through IFT). In addition,
as of December 31, 1996, the Company had drafted proposals in response to more
than 35 active requests for proposals for these and other types of systems.
COMPLETE ADDITIONAL STRATEGIC ACQUISITIONS. The Company seeks to identify
and pursue complementary acquisitions at attractive prices in the aircraft
industry that offer strategic value, such as cost savings, product line
extensions, increased manufacturing capacity or new customer relationships. The
Company initiated discussions with all three of the sellers in its recent
transactions (ADS, Elsinore and the AMP Facility), each of which is of
significant strategic value to the Company. ADS expands the Company's presence
on the flight deck with a product that has a leading niche market position.
Elsinore provides the Company with a DAS approval, increases its engineering
expertise and expands its customer base. The AMP Facility expands the Company's
manufacturing capacity and provides it with new low-cost manufacturing
techniques. While there can be no assurance that the Company will complete
additional acquisitions, the Company believes that the fragmented nature of the
market for aircraft components and systems integration services will provide the
Company with additional opportunities to exploit industry consolidation trends.
See "Risk Factors--Risks Associated with Acquisitions."
35
<PAGE>
CAPITALIZE ON COMPLEMENTARY PRODUCTS AND SERVICES. The majority of the
Company's products and services are utilized to provide an interface between an
aircraft and its avionics systems. Over the past several years, the Company
increasingly has combined certain of the components which it manufactures to
create higher value-added products. For example, the contacts manufactured by
the Company often are utilized as an integral component of the Company's
connectors. In turn, the connectors manufactured by the Company often are
utilized as primary components of the Company's harness assemblies.
Additionally, in support of the systems integration services provided by the
Company, the Company's harness assemblies often are packaged with its avionics
support structures to form the foundation for the installation kits which are
then sold to the Company's systems integration customers. By emphasizing the
complementary nature of its products and services, the Company seeks to maximize
penetration with existing customers and compete more effectively for new
customers.
PRODUCTS AND SERVICES
The Company's principal products and services are: contacts; connectors;
harness assemblies; avionics support structures; dichroic LCD devices and the
integration of certain cabin and flight deck avionics systems into different
aircraft models. The Company believes that its products are used in each of the
commercial aircraft models currently produced by Boeing, Airbus and McDonnell
Douglas, the three largest commercial aircraft OEMs. In 1996, sales of contacts,
connectors, dichroic LCD devices and systems integration accounted for
approximately 33%, 25%, 14% and 12%, respectively, of the
Company's revenues (pro forma for the acquisition of ADS). No other product or
service accounted for more than 10% of the Company's pro forma revenues in 1996.
CONTACTS. The Company produces precision-machined contacts for use in
commercial aircraft. Contacts conduct electronic signals or electricity and are
installed at the terminus of a wire or an electronic or electrical device. The
Company supplies contacts for use in connectors found in virtually every
electronic and electrical system on the aircraft. Over the last three years the
Company has successfully initiated private labeling programs whereby the Company
manufactures contacts for several of the major connector manufacturers. The
Company sells contacts directly to aircraft and avionics OEMs and, through its
private labeling programs, to connector manufacturers who sell connectors to the
aircraft and avionics OEMs under their brand name. The Company believes that it
is able to sell contacts on a private label basis because of its reputation for
high-quality, its levels of service and its low-cost manufacturing operations.
The Company believes that it is the supplier of a substantial majority of the
bulk contact requirements for all aircraft currently manufactured by Boeing.
CONNECTORS. The Company manufactures and sells to the commercial aircraft
industry electronic and electrical connectors, which provide the electronic or
electrical link between discrete wires and devices. Connectors also serve as a
separable interface that facilitates assembly, installation, repair and removal
of wires or equipment. The Company manufactures a narrow range of electrical and
electronic connectors that are designed and manufactured specifically to operate
in the harsh airborne environment of an aircraft and to meet the critical
performance requirements demanded by the commercial aircraft market. The Company
produces connectors that are used in aircraft galleys, flight decks and control
panels in the passenger cabin. The Company is the sole-source supplier of
certain connectors for in-flight entertainment systems installed by Boeing on
its 777 aircraft.
The Company characterizes its connectors as follows: (i) application
specific--designed and developed by the Company for a specific application,
usually for a single customer; (ii) proprietary--Company-designed connectors
which are sold to the broad market for a variety of applications, often evolving
over time from an application specific product; and (iii) industry
standard--produced in accordance with an industry or military controlled design
or specification and sold to the broad market to
36
<PAGE>
which the design or specification relates. Examples of the Company's application
specific, proprietary and industry standard connectors are as follows:
APPLICATION SPECIFIC. The Company manufactures a connector used as an
electrical distribution block for Boeing's 777 aircraft. Currently, this
product is used solely for this application; however, in the future, it
could be used in similar applications on other aircraft.
PROPRIETARY. The CQ connector family was originally an application specific
product designed by the Company for use with in-flight entertainment and
cabin management systems on Boeing's 777 aircraft. The CQ connector is now
sold to other customers for other applications.
INDUSTRY STANDARD. The Company sells standard connectors, built to ARINC
specifications, which can be used in many applications without further
testing or certification.
HARNESS ASSEMBLIES. The Company produces harness assemblies for use in
cabin avionics systems, primarily in-flight entertainment systems. A harness
assembly is made from wire, which the Company buys from its vendors, and
connectors, contacts and hardware, which the Company manufactures. The Company
sells its harness assemblies to avionics OEMs. In addition, the Company uses
harness assemblies in its systems integration activities. The Company is
currently a primary supplier of harness assemblies to Matsushita, one of the
largest manufacturers of in-flight entertainment systems.
AVIONICS SUPPORT STRUCTURES. The Company has designed, patented and
produced a wide range of avionics support structures for use on commercial
aircraft. Avionics support structures are typically comprised of trays,
shelving, racks, mounts, and insertion and extraction devices which are combined
with other components to form the installation kit that securely holds and
connects avionics equipment to the aircraft and other systems or devices such as
antennae, flight instruments and power supplies. Avionics support structures are
used to support and environmentally cool (using fans and air chambers) the
avionics equipment, including navigation, communication and flight control
equipment. Avionics support structures are generally located in the avionics bay
of an aircraft and are secured to the frame of the aircraft. The Company's
avionics support structures are recognized by its customers under the Box-
Mount-TM- name which the Company believes is highly respected in the
marketplace. The Company sells its avionics support structures to aircraft and
avionics OEMs, airlines, and major modification centers. In addition, these
products are essential components included in the installation kits which are
used in the Company's systems integration operations.
DICHROIC LCD DEVICES. Through its recent acquisition of ADS, the Company
became a leading manufacturer of dichroic LCDs and modules (which are LCDs
packaged with a backlight source and direct drive electronics) used in
commercial and military aircraft. The Company also manufactures avionics
electronic clocks which utilize its dichroic LCD devices. The Company believes
it is the leading (and often sole-source) supplier of dichroic LCD devices to
aircraft and avionics OEMs and the U.S. military.
The Company's dichroic LCD products, which provide output information to the
flight crew, are used in a variety of flight deck applications, including flight
control systems, fuel quantity indicators, airborne communications and safety
systems. Dichroic LCD products are widely used in the aerospace industry because
of their high performance characteristics and custom design. Key performance
characteristics of dichroic LCD devices include high readability in sunlight and
darkness, ability to withstand wide temperature fluctuations and readability
from extreme viewing angles. During the development phase of flight deck
avionics, the Company works closely with its customers to develop products that
meet the customer's requirements which are subsequently incorporated into new or
modified flight decks.
The Company's clocks utilize its dichroic LCD technology and are suitable
for use in general aviation, business, commercial and military aircraft. The
Company believes that it is the only clock manufacturer which has designed a
line of clocks capable of serving all types of aircraft.
37
<PAGE>
SYSTEMS INTEGRATION. The Company performs all of the functions necessary to
retrofit an existing aircraft with an avionics system that previously did not
exist on the aircraft. As a full-service systems integrator, the Company
provides design and engineering, FAA certification, installation kit
manufacturing and systems installation services required to retrofit an aircraft
with a new system. A summary of these functions follows:
DESIGN AND ENGINEERING. The Company provides a full range of systems,
electrical and mechanical engineering services to its customers through its
staff of qualified and experienced engineers and program management
personnel. The Company's engineers work proactively with its customers in
all phases of the systems integration effort to achieve an engineering
design data package. This engineering design data package provides
information to: (i) certify product compliance with applicable industry and
FAA standards and regulations; (ii) define the manufacturing requirements
for kit implementation; and (iii) provide installation definition for actual
installation of the system onto aircraft.
FAA CERTIFICATION. The Company employs on a full-time basis or contracts
for FAA-certified designated engineering representatives ("DERs") to
evaluate the engineering design data package, coordinate compliance testing
to applicable FAA regulations and obtain formal FAA approval of the
engineering design data package. These DERs facilitate FAA approval of the
Company's products and services. In general, DERs evaluate the design of an
aircraft modification, part or system, ensure compliance with the applicable
Federal Aviation Regulations and oversee product testing to ensure the
airworthiness of the aircraft as modified. DERs also either issue, on behalf
of the FAA, certain approvals, or work with the FAA to obtain certain
approvals directly from the FAA. Significant aircraft modifications by
anyone other than the aircraft manufacturer require the issuance of an STC,
which constitutes an FAA determination that the design of the modification
meets all pertinent FAA requirements. STCs may be issued directly by the FAA
or on behalf of the FAA by an approved DAS. The acquisition of Elsinore and
its DAS approval enables the Company to issue STCs for certain modifications
without applying directly to the FAA for such certifications.
INSTALLATION KIT MANUFACTURE. The Company ordinarily applies for and
receives multi-aircraft STCs which constitute design approval for a
modification which may be applied to any aircraft of a particular type. The
approved modifications commonly are referred to as "installation kits." Such
installation kits generally include: (i) parts, components, and
sub-assemblies; and (ii) detailed instructions on approved installation. The
installation kit and all of its elements are defined in the STC in a Master
Data List. Once the Company has an STC, issued directly by the FAA or by the
Company's DAS through Elsinore, the Company applies to the FAA for a PMA or
a supplement to an existing PMA, which allows the Company to manufacture the
installation kit in accordance with the approved design and data package.
SYSTEMS INSTALLATION. The Company employs a dedicated team of FAA-certified
mechanics and repairmen to ensure proper installation of the installation
kits and associated avionics systems. These mechanics and repairmen, who
have extensive installation experience over a broad range of commercial
aircraft models, operate within the provisions and limitations of the FAA
repair station certificates which cover the Company's three repair stations.
The Company believes that its staff of kit installation personnel is
sufficiently large and diverse in talent to complete multiple installation
projects simultaneously at different locations.
The Company has focused its systems integration efforts on the following
four general categories of systems: (i) in-flight passenger telecommunications
systems; (ii) in-flight entertainment systems; (iii) SATCOM and navigation
systems; and (iv) safety systems. The Company has targeted these four areas
because it believes significant retrofit opportunities exist due to the advent
of new technologies and the need for the airlines to: (i) capture incremental
revenues without increased capital investment (in-flight passenger
telecommunications and in-flight entertainment); (ii) satisfy increased safety
and
38
<PAGE>
regulatory requirements; and (iii) reduce operating expenses (SATCOM). A summary
of recent Company activity in each of these categories follows:
IN-FLIGHT PASSENGER TELECOMMUNICATIONS SYSTEMS. The Company is a systems
integrator of in-flight passenger telecommunications systems for AT&T. The
Company has provided installation kits to AT&T for telephones on over 1,000
aircraft, as well as design and engineering and certification services for
certain of these aircraft. The Company is currently involved in proposals to
other in-flight passenger telecommunications systems providers.
IN-FLIGHT ENTERTAINMENT SYSTEMS. The Company is the preferred systems
integrator for IFT. IFT is a publicly traded company which has designed a
digital interactive passenger entertainment system which provides for
video-on-demand, video games, and casino-style electronic gaming in which
the aircraft passenger can gamble using a credit card. In July 1996, the
Company entered into an agreement with IFT to fully integrate the IFT System
into 21 wide-body aircraft for Swissair. The Swissair contract is the first
large-scale commercial application of the IFT System. Delays in installation
or problems in implementation of the IFT System may result in the deferral
or loss of potential revenues from IFT. For a discussion of certain issues
relating to the IFT System, see "Risk Factors--Dependence on Key Customers."
SATCOM AND NAVIGATION SYSTEMS. The Company presently is providing systems
integration services in support of SATCOM systems. The Company recently
completed efforts as a systems integrator for SATCOM systems on certain U.S.
Government aircraft and has subsequently been awarded another contract.
Presently, the Company is providing the systems integration services for
SATCOM systems on 10 Airbus A300 for American Airlines (through Rockwell
Collins and TIMCO). The Company has also entered into agreements to provide
systems integration services for GPS on 13 747-200/300 aircraft and one
MD-82 aircraft. The Company believes that GPS and SATCOM systems (consistent
with the FANS initiative) will be retrofitted into numerous aircraft over
the next few years. In many cases, the airlines are electing to replace
older navigation systems with newer GPS technology due to avionics
obsolescence and significantly increased maintenance costs.
SAFETY SYSTEMS. The Company is an integrator of safety systems which are
required by the FAA, or voluntarily adopted by airlines. The Company
recently was selected to integrate TCAS and heads-up guidance systems
("HGS") on aircraft for UPS. Currently, several major carriers in Europe and
Asia actively are evaluating TCAS. In addition, the Company believes that a
new "forward-looking" windshear detection system will be available by the
end of 1997. The Company believes significant opportunity exists for the
integration of these types of safety systems onto aircraft worldwide.
OTHER. The Company has designed, developed and applied for a patent on an
electrical retract mechanism to support in-flight video systems on McDonnell
Douglas narrow-body aircraft. Due to space constraints, in-flight video systems
generally are not available on McDonnell Douglas narrow-body aircraft. The
Company's retract mechanism is configured to fit in the available space. The
Company actively is marketing the system which management believes is the only
video system available for these narrow-body aircraft. The Company believes that
there are over 500 aircraft in the market which potentially could use such a
system.
INDUSTRY REGULATION AND APPROVALS
The aviation industry is highly regulated in the U.S. by the FAA and is
regulated in other countries by similar agencies to ensure that aviation
products and services meet stringent safety and performance standards. The
Company and its customers are subject to these regulations. In addition, many of
these customers impose their own compliance and quality requirements on the
Company.
The FAA prescribes standards and licensing requirements for aircraft
components, licenses private repair stations and issues DAS approvals giving the
holder the right to certify the design of aircraft
39
<PAGE>
modifications on behalf of the FAA. As a result of the FAA's oversight of the
Company, the FAA can authorize or deny authorization of many of the services and
products provided by the Company. Any FAA denial of such required authorizations
would preclude the ability of the Company to provide the pertinent service or
product. Should the Company fail to comply with the applicable FAA standards or
regulations, the FAA would have available to it a wide-range of enforcement
options. Such enforcement options include: (i) issuance of a warning letter or a
letter of correction to the Company; (ii) initiation of a civil penalty action
against the Company; (iii) suspension or emergency suspension of a Company
certificate or approval; or (iv) the revocation or emergency revocation of a
Company certificate or approval. The FAA also has the power to issue cease and
desist orders and orders of compliance and to initiate court action for
injunctive relief in support of its enforcement powers. In the event the FAA
were to suspend or revoke a Company certificate or approval on an emergency
basis, the Company would be obliged to cease immediately the manufacture of
products and the delivery of services which require such certificate or
approval. In the event the FAA were to suspend or revoke a Company certificate
or approval on other than an emergency basis, the Company would be permitted to
continue the manufacture of products and the delivery of services which require
such certificate or approval pending any available appeals. However, if the FAA
were to prevail in any such appeal, upon the completion of the appeal process
the Company would be obliged to cease the manufacture of such products and the
delivery of such services. In addition, in the event the FAA were to determine
that the Company's noncompliance with the applicable FAA standards or
regulations created a safety hazard, the FAA could order that the pertinent
component or aircraft immediately cease to be operated until appropriate
corrective action is taken. This could require the grounding of aircraft and/or
the removal of affected components from aircraft already returned to service.
The Company's FAA approvals are owned, and may only be used by, the subsidiary
obtaining such approval.
All aircraft operated by airlines in the United States must be of a type
which has received an FAA type certificate ("TC"). A TC is issued by the FAA
after the FAA determines that the aircraft type design meets the applicable FAA
airworthiness standards. After a type design has been approved through the
issuance of a TC by the FAA, a manufacturer with rights to the TC can apply for
FAA approval to produce the aircraft. This approval is a "production
certificate." Any major change in design of a type certificated aircraft which
is not significant enough to require a new application for a TC under the FAA's
rules must still be approved by the FAA. FAA approval of such a design change
developed by an entity other than the TC holder is issued under an STC. There
are two types of STCs: a "single-aircraft" STC, which may be applied to a single
aircraft, and a "multi-aircraft" STC, which may be applied to all aircraft of a
particular type design, for example, all Boeing 747-400s.
As of December 31, 1996, the Company had obtained 83 STCs, most of which
were obtained on behalf of its customers in connection with the Company's
systems integration services, and substantially all of which are multi-aircraft
STCs. The Company foresees the need to obtain additional STCs so that it can
expand the services it provides and the customers it serves.
Proposed aircraft modifications can be tested and approved and STCs issued
directly by the FAA or on behalf of the FAA by holders of DAS approvals. DAS
approvals are granted to domestic repair stations, air carriers, commercial
operators of large aircraft, and manufacturers which demonstrate their ability
to provide the personnel and follow specific procedures to ensure the issuance
of STCs only for appropriate design modifications. Each DAS approval holder is
specifically limited by the FAA as to the type of STCs which it can issue. The
Company, which holds a DAS approval through Elsinore, can now issue many of the
STCs (both single and multi-aircraft) it requires in connection with its systems
integration operations. This has eliminated the need for the Company, in most
instances, to apply to the FAA for STC approvals, enabling the Company to obtain
STCs more quickly than in the past.
After obtaining an STC, the Company must apply for a PMA or a PMA supplement
to produce the modification installation kit covered by the STC. The Company has
four PMAs and 64 supplements to its PMAs (as of December 31, 1996). Each initial
PMA is, in general, an approval of the manufacturing or
40
<PAGE>
modification facility's production quality control system. Each supplement
authorizes the manufacture of a particular part in accordance with the
requirements of the corresponding STC. The Company routinely applies for and
receives PMA supplements. The Company also is required to have FAA authority to
perform the installation of a modification kit. This authority is provided
either by the Company's PMAs and supplements or its repair station certificates.
In order for a company to perform certain repair, engineering, installation or
other services on aircraft, its facility must be designated as an FAA-authorized
repair station. The Company has three such repair stations.
In addition to FAA approval of the design, production, and installation of
modifications, the FAA certifies personnel. Selected Company personnel have been
certified by the FAA to perform certain tasks related to the design, production,
and performance of aircraft modifications. Such certified personnel include
mechanics and repairmen. In addition, the FAA delegates some of its oversight
responsibilities, such as testing and inspection responsibilities, to
FAA-certified designees. The Company employs FAA designees on a full-time basis
to facilitate FAA approval and oversight of the Company's activities. In
addition, the Company contracts with additional FAA designees as they are
needed.
Mil-specs are frequently used by both military and commercial customers in
the aerospace industry to define and control characteristics of a product.
Through the use of a government Qualified Parts List ("QPL") and Qualified
Vendor's List ("QVL"), the customer is assured that a product or service has met
all of the requirements set forth in the mil-specs. Parts listed with a QPL
allow others to reliably design parts to interface with such parts as a result
of the mil-spec standards used. The Company believes that it holds more QPLs for
its contact product line than any other manufacturer.
SALES AND MARKETING
The Company's products are sold through a group of geographically assigned
direct sales personnel and agents. Technical product sales support for these
sales personnel is provided through product line managers and the Company's
product engineering personnel. Customer service communication is provided by
geographically assigned sales correspondents located in the Company's
manufacturing facilities. The Company may also assign responsibility for
marketing, sales and/or services for certain key customers to one of the
Company's executives. The Company has five authorized distributors who purchase,
stock and resell certain of the Company's product lines.
The Company's systems integration services are sold by sales managers
employed by the Company who are assigned to geographic territories. Because of
the significant amount of technical engineering work required in the sales
process, these sales managers are generally assisted by a support team which
includes program management, installation and engineering personnel. The support
team specializes in one of: (i) in-flight passenger telecommunications; (ii)
in-flight entertainment; (iii) SATCOM and navigation; or (iv) safety systems. At
such time as the Company obtains a contract for the system proposed by the sales
manager, the support teams continue to manage the project throughout the entire
integration process.
CUSTOMERS
In 1996, the Company sold its products and services to more than 500
customers. The Company's primary customers include aircraft and avionics OEMs,
airlines, aircraft component manufacturers and distributors, and aircraft repair
and modification companies. The Company's three largest customers are Boeing,
Matsushita and AT&T, which accounted for approximately 14.8%, 9.6% and 6.9%,
respectively, of the Company's consolidated revenues (pro forma for the ADS
acquisition) for the fiscal year ended December 31, 1996. In addition, a
significant portion of the Company's sales of components are sold to Boeing
indirectly through sales to suppliers of Boeing.
The Company has entered into a contract to provide systems integration
services for the IFT System on 21 wide-body aircraft for Swissair. The Company's
contract with IFT provides for monthly progress
41
<PAGE>
payments and the Company will account for revenues generated under the IFT
contract using the percentage of completion method of accounting. As of April
15, 1997, the Company had integrated the IFT System onto three of Swissair's
aircraft; the IFT System operates in all classes of service (first, business and
economy) on two aircraft and in first and business class on one aircraft. The
Company continues to integrate the IFT System onto additional Swissair aircraft.
Under IFT's contract with Swissair, IFT agreed to finance the purchase price of
the IFT System in exchange for a substantial share of potential future gaming
revenues. However, based on IFT's limited experience with the IFT System on
Swissair's aircraft, in March IFT indicated that revenues from gaming are
significantly below its expectations. IFT has since announced a change in
corporate strategy whereby it will no longer finance the substantial majority of
the purchase price of the IFT System. Consistent with this new strategy, IFT
also announced that it was exercising its contractual right to renegotiate its
contract with Swissair in order to shift a greater portion of the purchase price
of the IFT System to Swissair. On April 14, 1997 IFT announced that it had
entered into a memorandum of understanding with Swissair regarding the purchase
by Swissair of the IFT System, which announcement states that Swissair expects
to purchase the IFT System for installation in the first and business class
sections of up to 18 aircraft. IFT currently is in an evaluation period provided
for under its contract with Swissair, during which IFT and Swissair are working
together to optimize the operations and functionality of the IFT System. IFT has
indicated that it is working to improve the reliability of the IFT System
through software revisions and through design improvements to the tray tables
used in the economy section of the aircraft. While the Company expects that it
will continue to provide system integration services to IFT for Swissair's 21
wide-body aircraft, there can be no assurance that: (i) IFT and Swissair will
successfully renegotiate their contract or that such renegotiation will not
result in a materially reduced scope of work for the Company; or (ii) that any
existing or future technical or design issues will be resolved. Termination of
the contract between Swissair and IFT, a material change in the scope of work
for the Company, or any general delays or problems with implementation of the
IFT System could have a material adverse effect on the Company.
Most of the Company's sales to Boeing are pursuant to contracts which may be
terminated by Boeing at any time. One contract provides that: (i) if the Company
reduces its prices or leadtimes of like quantity of comparable items to
customers other than Boeing, then the Company must sell on the same terms to
Boeing; and (ii) if other Boeing suppliers offer to sell to Boeing products
comparable to those of the Company at prices more than 5% lower than the prices
specified in such contract, the Company must either similarly reduce its prices
or permit Boeing to delete the affected products from the contract. Another
contract provides that Boeing is not obligated to order any products covered by
the agreement if: (i) Boeing's customers specify an alternate product; (ii) the
product in Boeing's judgement is not technologically competitive at the time;
(iii) Boeing changes the design of an aircraft such that the Company's products
are no longer required for such aircraft; or (iv) Boeing reasonably determines
that the Company cannot support Boeing's requirements for products in the
amounts and within the delivery schedules Boeing requires. The Company's
contracts with Boeing grant Boeing an irrevocable non-exclusive worldwide
license to use the Company's patents, designs, trade secrets, semiconductor mask
works and tooling related to the development, production and maintenance or
repair of products sold to Boeing upon the occurrence of certain events,
including: (i) the acquisition by or transfer to a third party of any of the
Company's rights to manufacture products for Boeing; (ii) upon various defaults
by the Company; and (iii) the bankruptcy of the Company. The Company generally
sells components and services to Matsushita and AT&T pursuant to purchase
orders, but does not have any supply contracts with either company.
MANUFACTURING AND QUALITY CONTROL
The Company manufactures contacts, connectors, harness assemblies, dichroic
LCD devices and avionics support structures. Many of these products involve
similar manufacturing processes which have become core competencies of the
Company. The Company manufactures these products using process-specific
equipment and procedures that have been custom-designed or fabricated to provide
42
<PAGE>
high-quality products at the lowest possible cost to the Company. The Company is
vertically integrated from concept and design through final assembly, testing
and certification for these production processes. The Company believes this
vertical integration is critical to assuring product performance, customer
service and competitive pricing.
The Company has implemented programs to reduce costs, including overhead
expenses, and maximize return on capital. In some cases these programs have
involved the use of proprietary equipment or processes which have enabled the
Company to reduce costs while maintaining high quality levels. For example, the
Company uses a proprietary selective plating process which allows the Company to
minimize the usage of gold when plating contacts. The Company has enhanced and
expanded the use of this process, as well as other plating processes, which has
enabled it to realize estimated cost savings, on a comparable basis, of
approximately $1.3 million in 1996.
Certain of the Company's customers have developed their own design, product
performance, manufacturing process and quality system standards and require
their suppliers, including the Company, to comply with such standards. As a
result, the Company has developed and implemented comprehensive quality system
policies and procedures which meet or exceed the requirements of its customers.
Many of the Company's customers have recognized formally the effectiveness of
the Company's quality programs by issuing quality approval letters and awarding
quality compliance certificates. In addition, certain customers have authorized
the Company's inspection personnel to act as the authorized quality
representative of the customer. This authorization enables the Company to ship
directly into the inventory stockrooms of these customers, eliminating the need
for receiving inspection activities by these customers.
The Company uses sophisticated equipment and procedures to ensure the
quality of its products and to comply with mil-specs and FAA certification
requirements. The Company performs a variety of testing procedures, including
environmental testing under different temperature, humidity and altitude levels,
shock and vibration testing and X-ray fluorescent measurement. These procedures,
together with other customer approved techniques for document, process and
quality control, are used throughout the Company's manufacturing facilities.
RAW MATERIALS AND COMPONENT PARTS
The components which the Company manufactures require the use of various raw
materials including gold, aluminum, copper, rhodium, plating chemicals and
plastics, the availability and prices of which may fluctuate. The price of raw
materials represents a significant portion of the sales price of many of the
Company's products. Although some of the Company's contracts have prices tied to
the price of raw materials, increases in raw materials prices cannot always be
recovered in product sale prices. The Company also purchases 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 the Company's ability to obtain necessary raw materials
and component parts may affect its ability to meet customer production needs.
PATENTS AND PROPRIETARY INFORMATION
The Company has various trade secrets, proprietary information, trademarks,
trade names, patents, copyrights and other intellectual property rights which
the Company believes, in the aggregate (but not individually), are important to
its business.
COMPETITION
The Company competes with a number of established companies that have
significantly greater financial, technological and marketing resources than the
Company. The Company believes that its ability to compete depends on high
product performance, short lead-time and timely delivery, competitive price, and
superior customer service and support.
43
<PAGE>
The niche markets within the aircraft industry served by the Company are
relatively fragmented with several competitors for each of the products and
services provided by the Company. Due to the global nature of the commercial
airline industry, competition in these categories comes from both U.S. and
foreign companies. However, the Company knows of no single competitor that
provides the same range of products and services as those provided by the
Company.
The Company's principal competitors in contacts and connectors are large and
diversified corporations which produce a broad range of products. The Company's
principal competitor in the contact market is Deutch Engineered Connecting
Devices, a division of the Deutch Co. In the connector market, the Company's
principal competitors include ITT Canon (a division of ITT Corporation), AMP and
Radiall S.A. Several of these companies are also customers of the Company. The
Company's principal competitors for avionics support structures include smaller
companies such as Barry Controls, Inc., Electronic Cable Specialists ("ECS") and
Vibrachoc, a subsidiary of Compagnie Generale d'Electricite. The main competitor
for dichroic LCD devices is Cristalloid, Inc. Competitors which provide systems
integration services include ECS, the engineering departments of certain
airlines and numerous independent airframe maintenance and modification
companies.
BACKLOG
As of December 31, 1996, the Company had outstanding purchase orders
representing an aggregate invoice price of approximately $44.5 million,
including $7.5 million for ADS, which was acquired on September 18, 1996.
Approximately $6.8 million of such outstanding purchase orders were attributable
to IFT. See "Risk Factors--Dependence on Key Customers." As of December 31,
1995, the Company had outstanding purchase orders representing an aggregate
invoice price of approximately $19.8 million. The Company expects that
approximately 12% of the outstanding purchase orders will not be filled in 1997.
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. Accordingly, the Company's backlog at
December 31, 1996 is not necessarily indicative of actual shipments or sales for
any future period, and period-to-period comparisons from 1995 to 1996 may not be
meaningful.
EMPLOYEES
As of December 31, 1996, the Company had 927 employees (including 128
temporary employees), of whom 94 were engineers (including 1 temporary
employee), 24 were in sales, 716 were in manufacturing operations (including 124
temporary employees) and 93 were in finance and administration (including 3
temporary employees). None of the Company's employees is subject to a collective
bargaining agreement, and the Company has not experienced any material business
interruption as a result of labor disputes since it was formed. The Company
believes that it has a good relationship with its employees.
44
<PAGE>
FACILITIES
The Company leases all of its facilities with terms ranging from one to nine
years as reflected in the following table.
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE LEASE
LOCATION DESCRIPTION FOOTAGE EXPIRATION
- ------------------------------ -------------------------------------------- ------------- ----------
<S> <C> <C> <C>
El Segundo, CA Manufacturing and engineering facility 81,300 2005
Santa Fe Springs, CA Manufacturing and engineering facility 52,000 2000
Hatfield, PA Manufacturing and engineering facility 27,500 1999
Lugano, Switzerland Manufacturing facility 21,000 2001
Irvine, CA Manufacturing facility 16,400 1999
Wiltshire, United Kingdom Manufacturing facility 5,700 1998
El Segundo, CA Executive offices 5,000 2007
Santa Barbara, CA Engineering facility 3,500 1997
Seattle, WA Engineering facility 3,200 1999
Phoenix, AZ Engineering facility 3,000 1997
Copley, OH Executive offices 2,200 1997
Santa Ana, CA Engineering facility 1,000 1999
</TABLE>
The Company believes its properties are in good condition and are adequate
to support its operations for the foreseeable future.
ENVIRONMENTAL MATTERS
The Company is 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, certain
environmental laws, such as CERCLA and similar state laws, impose strict,
retroactive, and joint and several liability upon persons responsible for
releases or potential releases of hazardous substances. The Company has sent
waste to treatment, storage, or disposal facilities that have been designated as
National Priority List sites under CERCLA or equivalent listings under state
laws. The Company has received CERCLA requests for information or allegations of
potential responsibility from the Environmental Protection Agency as to the
Company's use of certain such sites. In addition, some of the Company's
operations are located on properties which are contaminated to varying degrees.
However, the Company has not incurred, nor does it expect to incur, significant
costs to address such contamination because entities other than the Company have
been held primarily responsible for such contamination, the levels of
contamination are sufficiently low so as not to require remediation or the
Company is indemnified against such costs. In most cases the Company does not
believe that its liability for past waste disposal is material. However, in a
limited number of cases the Company does not have sufficient information to
assess its potential liability, if any. It is possible, given the retroactive
nature of CERCLA liability, that the Company will from time to time receive
additional notices of potential liability, relating to current or former
activities.
The Company has been and is in substantial compliance with environmental
requirements and believes it has no liabilities under environmental
requirements, except those which would not be expected to have a material
adverse effect on the Company's business, results of operations, or financial
condition. However, some risk of environmental liability is inherent in the
nature of the Company's business and the Company might in the future incur
material costs to meet current or more stringent compliance, cleanup, or other
obligations pursuant to environmental requirements. See "Risk Factors--
Environmental Regulation," "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Environmental Matters" and "Business--Legal
Proceedings."
45
<PAGE>
LEGAL PROCEEDINGS
The Company's manufacturing facility in El Segundo, California, has received
several notices of violation ("NOV") related to its wastewater discharge permit.
The Company has taken various corrective measures. However, the Company
continues to experience difficulty in meeting the wastewater flow limitations
contained in its discharge permit and is evaluating additional measures,
including seeking modification to its permit. If the Company is not able to
resolve these issues, it may be required to install new treatment equipment.
However, the cost for such installation is not expected to be material, and the
Company does not believe that the NOVs will result in any material sanctions.
See "Risk Factors-- Environmental Regulation," "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Environmental
Matters" and "Business--Environmental Matters."
The Company is a party to a license agreement with McDonnell Douglas
pursuant to which the Company may request certain data in order to design and
market modifications to aircraft manufactured by McDonnell Douglas. The
agreement provides that the Company will pay McDonnell Douglas a royalty of five
percent of the net sales price of all modifications sold by the Company for
which the Company has requested data from McDonnell Douglas. The Company has
requested data for a single modification, which modification the Company
believes is exempt from the obligation to pay royalties under the agreement.
McDonnell Douglas has made a demand for $650,000 for royalties. The Company does
not believe that it is obligated to McDonnell Douglas in any amount. However,
there can be no assurance that the Company will not be required to pay royalties
to McDonnell Douglas.
46
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information regarding the directors and
executive officers of the Company as of December 31, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- ----------------------------------------------------------
<S> <C> <C>
R. Jack DeCrane 50 Chairman of the Board and Chief Executive Officer
R. G. MacDonald 66 Vice Chairman of the Board
Robert A. Rankin 44 Chief Financial Officer and Secretary
Roger L. Keller 52 Group Vice President of Systems
Charles H. Becker 50 Group Vice President of Components
James R. Bergman (a) 54 Director
Paul H. Cascio (b) 35 Director
Jonathan A. Sweemer (a)(b) 41 Director
</TABLE>
- ------------------------
(a) Member of the Compensation Committee.
(b) Member of the Audit Committee.
The Company is currently evaluating other director candidates and
anticipates that two additional independent, non-management directors will be
added to the Board upon the closing of the Offering or as soon thereafter as
practicable. Upon completion of the Offering, the Company's independent, non-
management directors will continue to represent a majority on each of the
Company's Audit Committee and Compensation Committee.
The Company's Board is divided into three classes. Directors of each class
will be elected at the annual meeting of stockholders of the Company (the
"Annual Meeting") held in the year in which the term of such class expires and
will serve thereafter for three years. Mr. MacDonald serves as a class I
director for a term expiring as of the Annual Meeting in 1998. Messrs. Cascio
and Bergman serve as class II directors for a term expiring as of the Annual
Meeting in 1999. Messrs. DeCrane and Sweemer serve as class III directors for a
term expiring as of the Annual Meeting in 2000.
R. Jack DeCrane is the founder of the Company and has been Chairman of the
Board of Directors of the Company since it was founded in December 1989. Mr.
DeCrane served as President of the Company, which office then included the
duties of chief executive officer, until April 1993 when he was elected to the
newly-created office of Chief Executive Officer. Prior to founding the 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. Mr. DeCrane is his own appointee to the Board under the terms of an
agreement between the Company and certain of its shareholders and lenders. See
"Certain Transactions--Shareholders Agreement."
R. G. MacDonald has been Vice Chairman of the Company since December 1996.
Mr. MacDonald has been a member of the Board since December 1994, and was
President of the Company from April 1993 until December 1996. The office of
President of the Company included the duties of chief operating officer. Mr.
MacDonald was a consultant to the Company from February 1993 to April 1993.
Prior to joining the Company, he served as President and Chief Executive Officer
of MDB Systems, Inc., a manufacturer of ruggedized computer disk systems, from
1990 to 1993.
47
<PAGE>
Robert A. Rankin has been Chief Financial Officer and Secretary of the
Company since November 1993. Mr. Rankin joined the Company in 1992 as Senior
Vice President of Tri-Star, which office then included the duties of chief
financial officer of the Company. Prior to joining the Company, he was Vice
President of Finance for the Chandler Evans Control Systems subsidiary of Coltec
Industries, Inc., an aerospace company, from 1990 to 1992. He was employed by
the aerospace division of B.F. Goodrich from 1977 to 1989 in various capacities,
the most recent of which was as Controller of the aircraft wheel and brake
business unit of B.F. Goodrich.
Roger L. Keller has been Group Vice President of Systems of the Company
since December 1996. Mr. Keller was President of Hollingsead from December 1995
until December 1996, and was employed by the Company as Vice President of
Engineering, Sales and Program Management from May 1994 through November 1995.
Prior to joining the Company, he was Vice President of Engineering for Active
Noise and Vibration Technologies, Inc. from 1992 to 1994, and Vice President of
Sales, Marketing and Program Management for the Airtransport Services division
of Honeywell from 1986 to 1992.
Charles H. Becker has been Group Vice President of Components of the Company
since December 1996. Mr. Becker was President of Tri-Star, from December 1994 to
December 1996. Prior to joining the Company, he was President of the
Interconnect Systems Division of Microdot, Inc. from 1984 to 1994.
James R. Bergman has been a member of the Board since October 1991. He is a
founder and, since 1974, has been a general partner of DSV Associates, DSV
Partners III and DSV Partners IV. Mr. Bergman is DSV's appointee to the Board
under the terms of an agreement between the Company and certain of its
shareholders and lenders. See "Certain Transactions--Shareholders Agreement." In
August 1996, Mr. Bergman became a general partner of Brantley Venture Partners
III, L.P. He is also a director of Maxim Integrated Products, Inc. and Quad
Systems Corporation.
Paul H. Cascio has been a member of the Board since September 1996. He is a
general partner of Brantley Venture Partners. Mr. Cascio also serves as Vice
President and Secretary of Brantley Capital Corporation. Mr. Cascio is
Brantley's appointee to the Board under the terms of an agreement between the
Company and certain of its shareholders and lenders. See "Certain
Transactions--Shareholders Agreement." From December 1987 through May 1996, when
he became a general partner of Brantley Venture Partners, Mr. Cascio was a
managing director and head of the Industrial Manufacturing and Services Group in
the corporate finance department at Dean Witter Reynolds Inc.
Jonathan A. Sweemer has been a member of the Board since February 1996. He
has been a member of Nassau Capital Partners, L.P. since January 1995. From May
1992 to December 1994, Mr. Sweemer was a Vice President for Princeton University
Investment Co. Mr. Sweemer is Nassau's appointee to the Board under the terms of
an agreement between the Company and certain of its shareholders and lenders.
See "Certain Transactions--Shareholders Agreement."
48
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table describes all annual compensation awarded to, earned by
or paid to the Company's Chief Executive Officer and the four-most highly
compensated executive officers other than the Chief Executive Officer
(collectively the "Named Executive Officers") for the fiscal year ended December
31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
-------------------------------------------- COMPENSATION
OTHER ANNUAL -------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION (1) OPTIONS (2) COMPENSATION
- ----------------------------- ----------- ----------- ------------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
R. Jack DeCrane $ 206,600 $ 146,000 $ 7,813 34,028 $ --
Chief Executive Officer
R. G. MacDonald 177,437 82,000 13,200 -- --
President and Vice Chairman
of the Board (3)
Robert A. Rankin 139,375 65,000 12,838 19,850 --
Chief Financial Officer and
Secretary
Roger L. Keller 150,000 -- 2,083 19,850 --
President of Hollingsead
and
Group Vice President
of Systems (4)
Charles H. Becker 148,750 65,000 9,103 19,850 30,586(6)
President of Tri-Star and
Group Vice President of
Components (5)
</TABLE>
- ------------------------
(1) Amounts paid by the Company for premiums on health, life and long-term
disability insurance and automobile leases provided by the Company 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) Mr. MacDonald served as President of the Company through December 1996. Mr.
MacDonald became Vice Chairman of the Board in December 1996.
(4) Mr. Keller served as President of Hollingsead through December 1996. Mr.
Keller became Group Vice President of Systems in December 1996.
(5) Mr. Becker served as President of Tri-Star through December 1996. Mr. Becker
became Group Vice President of Components in December 1996.
(6) Relocation costs.
49
<PAGE>
STOCK OPTIONS GRANTED IN LAST FISCAL YEAR
The following table sets forth individual grants of stock options granted to
the Named Executive Officers during the fiscal year ended December 31, 1996.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
NUMBER OF % OF TOTAL AT ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS/SARS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(1)
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION -------------------------------------
NAME GRANTED FISCAL YEAR PER SHARE DATE 0% 5% 10%
- ------------------------ -------------- ----------------- ------------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
R. Jack DeCrane......... 34,028 23.1% $ 3.66 2006 $ 120,300 $ 274,253 $ 510,448
Robert A. Rankin........ 19,850 13.5% 2.89 2006 85,300 175,106 312,886
Roger L. Keller......... 19,850 13.5% 2.89 2006 85,300 175,106 312,886
Charles H. Becker....... 19,850 13.5% 2.89 2006 85,300 175,106 312,886
</TABLE>
- ------------------------
(1) The potential realizable value assumes a rate of annual compound stock
price appreciation of 0%, 5% and 10% from the date the option was granted
over the full option term. These assumed annual compound rates of stock
price appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of
future prices of the Common Stock
STOCK OPTIONS EXERCISED DURING FISCAL YEAR AND YEAR END VALUES OF
UNEXERCISED OPTIONS
The following table sets forth information about the stock options exercised
by the Named Executive Officers of the Company during the fiscal year ended
December 31, 1996.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/ SARS
ACQUIRED OPTIONS/SARS AT FY-END AT FY-END(1)
ON VALUE -------------------------- --------------------------
NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---------------------------------- ---------- --------- -------------------------- --------------------------
<S> <C> <C> <C> <C>
R. Jack DeCrane................... -- -- 65,221/60,968 $ 434,091/301,220
R. G. MacDonald................... -- -- 34,028/22,686 227,002/151,339
Robert A. Rankin.................. -- -- 12,832/21,197 84,803/ 95,206
Roger L. Keller................... -- -- 5,671/28,357 35,831/144,170
Charles H. Becker................. -- -- 8,507/25,521 54,750/125,251
</TABLE>
- ------------------------
(1) Based on an initial public offering price of $12.00 per share as of December
31, 1996, the measuring date, less a liquidity discount of 40%.
EMPLOYMENT AGREEMENTS AND COMPENSATION ARRANGEMENTS
R. Jack DeCrane and the Company have entered into an employment agreement
pursuant to which Mr. DeCrane is to serve as Chief Executive Officer for a term
of four years, effective September 1, 1994. The agreement requires Mr. DeCrane
to devote his full business time to the Company and contains a covenant not to
compete with the Company for a period of 12 months following termination of the
agreement. The agreement provides for various benefits including (i) an annual
salary of $180,000, which is subject to annual review and increase, but not
decrease; (ii) an annual bonus ranging from 30% to 70% of Mr. DeCrane's annual
base salary depending on the level of the Company's achievement of certain
performance goals; and (iii) vested stock options to purchase 77,982 shares of
Common Stock at an exercise price of $.53 per share. Additionally, Mr. DeCrane
is also entitled to life insurance (in an amount at least equal to $1,000,000),
and health care benefits generally provided by the Company to other senior
executives. The agreement also provides for various payments to Mr. DeCrane or
his
50
<PAGE>
beneficiaries in the event of his death, disability, or termination without
cause. In the event of his death, Mr. DeCrane's beneficiaries would be entitled
to: (i) a payment equal to Mr. DeCrane's then current salary for one year plus
his remaining bonus through year-end; and (ii) continuation of certain insurance
benefits for one year. Upon termination due to disability, Mr. DeCrane would be
entitled to: (i) receive the sum of his then current base salary for one year
plus his bonus through year end; and (ii) continuation of certain health
benefits for one year. In the event of a termination without cause by the
Company or Mr. DeCrane's resignation due to a material breach of the agreement
by the Company or the Company's request that he resign or retire, Mr. DeCrane
would be entitled to: (i) his then current base salary for one year and his
remaining bonus through the end of the year of termination plus an amount equal
to the amount earned in the immediately preceding year; (ii) continuation of
certain health benefits for a one year period; and (iii) reimbursement of
certain relocation and outplacement expenses.
R. G. MacDonald and the Company entered into a letter agreement, dated June
28, 1993, pursuant to which Mr. MacDonald is to receive for an unspecified term:
(i) an annual base salary of $150,000; (ii) an annual bonus ranging from 20% to
50% of his annual base salary depending on the Company's level of achievement of
certain performance goals; and (iii) the Company's standard benefit package with
the addition of an executive term life insurance policy in the amount of
$200,000. Under the agreement, Mr. MacDonald received options to purchase 56,714
shares of the Company's Common Stock at an exercise price of $.53 per share.
Charles H. Becker and Tri-Star entered into a letter agreement, dated
November 28, 1994, pursuant to which Mr. Becker is to receive for an unspecified
term: (i) an annual base salary of $140,000; (ii) an annual bonus ranging from
10% to 40% of his annual base salary depending on Tri-Star's level of
achievement of certain performance goals; and (iii) other benefits available
under the Company's executive benefits program. Under the agreement, Mr. Becker
received options to purchase 14,179 shares of the Company's Common Stock at an
exercise price of $.53 per share.
SHARE INCENTIVE PLAN
Under the Share Incentive Plan, the Company may grant to its eligible
employees: (i) options ("Options") to purchase shares of Common Stock; (ii)
shares of Common Stock that vest upon the achievement of specified service or
performance conditions within a specified period of time (the "Restricted
Shares"); and (iii) options to receive payments based on the appreciation of
Common Stock ("SARs"). Options, Restricted Shares and SARs are collectively
referred to as "Grants."
Under the Share Incentive Plan, the Company may grant Options that qualify
as "incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or Options that do not so
qualify. The Share Incentive Plan is to be administered by a committee selected
by the Company's Board and composed of at least two members of the Board (the
"Administrator"). The current members of the Administrator are Messrs. Bergman
and Sweemer. Restricted Shares may be granted to key employees of the Company at
the sole discretion of the Administrator. SARs may be specifically granted upon
the terms and conditions specified by the Administrator.
Grants are to be made to key employees of the Company designated by the
Administrator at its sole discretion. The Company has reserved 527,156 shares of
Common Stock for issuance under the Share Incentive Plan. The Share Incentive
Plan terminates on February 1, 2003, and thereafter no Grants may be made.
The exercise price of any Option may not be less than 100% (or 110% in the
case of an Option granted to a person owning (within the meaning of Section
424(d) of the Code) more than 10% of the total combined voting power of all
classes of stock of the Company) of the fair market value of the Common Stock at
the time of the grant of the Option. No Option may be exercised after the
expiration of ten years from the date of grant of such Option. No Option may be
sold, pledged, assigned or
51
<PAGE>
transferred in any manner otherwise than by will or the laws of descent or
distribution. The purchase price of any shares of Common Stock purchased under
an Option must be paid in full at the time of the exercise of an Option in cash,
by check or, if permitted by the Administrator, by shares of Common Stock having
a fair market value on the date of the exercise equal to the purchase price or a
combination thereof.
In the event that a holder of a Grant (a "Grantee") ceases to be employed by
the Company for any reason other than death, retirement or disability or such
employee is terminated without cause, such Grants shall terminate upon the
termination of his employment, unless extended by the Administrator. In the
event of termination of employment due to death, retirement or disability of a
Grantee or in the event such termination is without cause, the Administrator may
allow the Grantee (or his estate) to exercise Options and SARs (to the extent
exercisable on the date of termination of employment) at any time within one
year after the date of such termination of employment. Restricted Shares held by
a Grantee will vest upon the Grantee's death and all restrictions will thereupon
lapse.
1996 INCENTIVE PLAN
In 1996 the Company introduced an incentive plan (the "1996 Incentive Plan")
for its management personnel tied to the Company's and each operating unit's
annual budget as approved each year by the Compensation Committee of the Board.
The 1996 Incentive Plan matrix provides for an annual bonus of up to 70% of the
employee's base salary if the Company or its relevant operating unit achieves
110% of budget. Fifty percent of the bonus is payable solely based on
performance of the Company or the relevant operating unit and the remainder is
payable upon the achievement by the employee of his or her individual objectives
in the discretion of the Chief Executive Officer of the Company or the President
of the relevant operating unit.
401(k) RETIREMENT PLAN
Effective April 1992, the Company adopted the Lincoln National Life
Insurance Company Non-Standardized 401(k) Salary Reduction Plan and Trust
Prototype Plan (the "401(k)"). 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. There may be employer matching
contributions made under this 401(k) which vest according to a specified
schedule, within six years of service. 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.
DIRECTORS' COMPENSATION
The directors of the Company do not receive annual fees or fees for
attending meetings of the Board of Directors or committees thereof. However,
they are reimbursed for out-of-pocket expenses.
LIMITATION ON DIRECTOR LIABILITY AND INDEMNIFICATION
Pursuant to the Certificate, and as permitted by Delaware law, directors of
the Company are not liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty, except for liability in connection with a
breach of duty of loyalty, for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, for dividend
payments or stock repurchases unlawful under Delaware law or any transaction in
which a director has derived an improper personal benefit. Such limitation of
liability has no effect on the availability of equitable remedies, such as
injunctive relief or rescission.
52
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following chart provides information as to the beneficial ownership of
Common Stock as of March 31, 1997, as adjusted to give effect to the
Recapitalization (see "Description of Capital Stock--The Recapitalization") and
the application of the proceeds of the Offering, by: (i) each director and Named
Executive Officer; (ii) directors and executive officers of the Company as a
group; and (iii) each person known to the Company to be the beneficial owner of
5% or more of Common Stock.
<TABLE>
<CAPTION>
PERCENTAGE OF CLASS
NAME AND ADDRESS OF BENEFICIAL OWNER AMOUNT BEFORE OFFERING
- ----------------------------------------------------------------- ------------------ -----------------------
<S> <C> <C>
Nassau Capital Partners L.P...................................... 840,808(1) 33.0%
22 Chambers Street
Princeton, NJ 08542
Jonathan A. Sweemer.............................................. 840,808(2) 33.0%
22 Chambers Street
Princeton, NJ 08542
DSV Partners, IV................................................. 493,440 19.3%
1920 Main St., Suite 820
Irvine, CA 92614
James R. Bergman................................................. 493,440(3) 19.3%
1920 Main St., Suite 820
Irvine, CA 92614
Brantley Venture Partners II, L.P................................ 490,926 19.2%
20600 Chagrin Blvd., Suite 1150
Cleveland, Ohio 44122
Paul H. Cascio................................................... 490,926(4) 19.2%
20600 Chagrin Blvd., Suite 1150
Cleveland, OH 44122
Electra Investment Trust P.L.C................................... 454,721(5) 17.8%
65 Kings Way
London, England WC2B6QT
R. Jack DeCrane.................................................. 131,521(6) 5.0%
155 Montrose West Avenue, Suite 210
Copley, Ohio 44321
R. G. MacDonald.................................................. 53,878(7) 2.1%
2361 Rosecrans Avenue, Suite 180
El Segundo, California 90245
Robert A. Rankin................................................. 18,220(8) *
2361 Rosecrans Avenue, Suite 180
El Segundo, California 90245
Charles H. Becker................................................ 14,178(9) *
2201 Rosecrans Avenue
El Segundo, California 90245
Roger L. Keller.................................................. 8,507(10) *
13701 Excelsior Drive
Santa Fe Springs, California 90670-5176
All directors and executive officers as a group (eight
persons)....................................................... 2,051,478(11) 76.2%
<CAPTION>
PERCENTAGE OF CLASS
NAME AND ADDRESS OF BENEFICIAL OWNER AFTER OFFERING
- ----------------------------------------------------------------- -----------------------
<S> <C>
Nassau Capital Partners L.P...................................... 16.0%
22 Chambers Street
Princeton, NJ 08542
Jonathan A. Sweemer.............................................. 16.0%
22 Chambers Street
Princeton, NJ 08542
DSV Partners, IV................................................. 9.4%
1920 Main St., Suite 820
Irvine, CA 92614
James R. Bergman................................................. 9.4%
1920 Main St., Suite 820
Irvine, CA 92614
Brantley Venture Partners II, L.P................................ 9.3%
20600 Chagrin Blvd., Suite 1150
Cleveland, Ohio 44122
Paul H. Cascio................................................... 9.3%
20600 Chagrin Blvd., Suite 1150
Cleveland, OH 44122
Electra Investment Trust P.L.C................................... 8.7%
65 Kings Way
London, England WC2B6QT
R. Jack DeCrane.................................................. 2.5%
155 Montrose West Avenue, Suite 210
Copley, Ohio 44321
R. G. MacDonald.................................................. 1.0%
2361 Rosecrans Avenue, Suite 180
El Segundo, California 90245
Robert A. Rankin................................................. *
2361 Rosecrans Avenue, Suite 180
El Segundo, California 90245
Charles H. Becker................................................ *
2201 Rosecrans Avenue
El Segundo, California 90245
Roger L. Keller.................................................. *
13701 Excelsior Drive
Santa Fe Springs, California 90670-5176
All directors and executive officers as a group (eight
persons)....................................................... 38.0%
</TABLE>
- ------------------------
* Less than 1%
(1) Includes 5,174 shares held by NAS Partners I L.L.C., an affiliate of Nassau
Capital Partners, L.P.
(2) Represents 835,634 shares held by Nassau Capital Partners, L.P. and 5,174
shares held by NAS Partners I L.L.C., affiliates of Mr. Sweemer.
(3) Represents shares held by DSV of which Mr. Bergman is a general partner.
(4) Represents shares held by Brantley of which Mr. Cascio is a general partner
of the general partner.
(5) Includes 46,412 shares held by Electra Associates, Inc., an affiliate of
Electra Investment Trust P.L.C.
(6) Includes 65,221 shares which may be acquired upon the exercise of stock
options which are exercisable or will be exercisable prior to 60 days from
March 31, 1997.
(7) Includes 45,371 shares which may be acquired upon the exercise of stock
options which are exercisable or will be exercisable prior to 60 days from
March 31, 1997.
(8) Includes 13,966 shares which may be acquired upon the exercise of stock
options which are exercisable or will be exercisable prior to 60 days from
March 31, 1997.
(9) Includes 8,507 shares which may be acquired upon the exercise of stock
options which are exercisable or will be exercisable prior to 60 days from
March 31, 1997.
(10) Includes 8,507 shares which may be acquired upon the exercise of stock
options which are exercisable or will be exercisable prior to 60 days from
March 31, 1997.
(11) Includes 141,572 shares which may be acquired upon the exercise of stock
options which are exercisable or will be exercisable prior to 60 days from
March 31, 1997.
53
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth information regarding the stockholder selling
shares of Common Stock as part of the Offering (the "Selling Stockholder").
These shares will be acquired by the exercise of outstanding warrants to
purchase Common Stock prior to the consummation of the Offering as part of the
Recapitalization. See "Description of Capital Stock--The Recapitalization."
<TABLE>
<CAPTION>
OWNERSHIP OF
COMMON STOCK
OWNERSHIP OF COMMON STOCK PRIOR TO AFTER THE
THE OFFERING NUMBER OF OFFERING
---------------------------------- SHARES ---------------
NUMBER OF PERCENTAGE OF OFFERED NUMBER OF
NAME SHARES OWNERSHIP HEREBY SHARES
- --------------------------------------------------- --------------- ----------------- ----------- ---------------
<S> <C> <C> <C> <C>
Banc One Capital Partners, L.P..................... 97,423 3.8% 97,423 --
<CAPTION>
PERCENTAGE OF
NAME OWNERSHIP
- --------------------------------------------------- -----------------
<S> <C>
Banc One Capital Partners, L.P..................... --
</TABLE>
ING and Provident have granted the underwriters a 30-day option to purchase
up to 84,535 shares solely to cover over-allotments. Prior to the consummation
of the Offering, ING and Provident beneficially owned 116,571 shares (4.4%) and
38,857 shares (1.5%), respectively, of the Common Stock (including shares which
may be acquired upon exercise of the Lender Warrants). If the over-allotment
option is exercised in full, ING and Provident will sell 63,401 and 21,134
shares, respectively, and will beneficially own 53,170 (1.0%) and 17,723 (.3%),
respectively, of the Common Stock (including shares which may be acquired upon
exercise of the Lender Warrants).
54
<PAGE>
CERTAIN TRANSACTIONS
SHAREHOLDERS AGREEMENT
Pursuant to the Fourth Amended and Restated Shareholders Agreement dated
September 18, 1996, as amended on January 10, 1997 (as amended, the
"Shareholders Agreement") among the Company, Nassau, Electra, Brantley, DSV and
certain other parties and subject to election by the Company's stockholders,
Nassau, Brantley and DSV each have the right to nominate a representative to
serve as a director so long as the relevant stockholder owns at least 5% of the
Common Stock (including Common Stock which may be acquired upon exercise of
warrants). Following completion of the Offering, Nassau, Brantley and DSV will
beneficially own 16.0%, 9.3% and 9.4%, respectively, of the issued and
outstanding Common Stock. The Shareholders Agreement also provides that Mr.
DeCrane may nominate a director for election by the Company's stockholders for
so long as he is the Chief Executive Officer of the Company.
ELECTRA SECURITIES PURCHASE AGREEMENT
Pursuant to a Securities Purchase Agreement dated November 2, 1994 (the
"Electra Securities Purchase Agreement") between the Company and Electra, the
Company issued the Senior Subordinated Notes in the principal amount of $7.0
million and warrants to purchase 266,990 shares of Common Stock for $.035 per
share. Such warrants expire on December 31, 2004 and contain certain rights to
require the Company to repurchase them. Such warrants will be exercised in
connection with the Recapitalization. See "Description of Capital Stock--The
Recapitalization." In addition, the Electra Securities Purchase Agreement
provided that Electra was to receive an advisory fee of $72,000 per annum.
Electra was not a stockholder of the Company at the time it entered into the
Electra Securities Purchase Agreement. In February 1996 the Electra Securities
Purchase Agreement was amended to, among other things, waive certain covenants
relating to the Senior Subordinated Notes, amend certain of Electra's rights to
require the Company to repurchase the warrants held by it and increase Electra's
advisory fee to $25,000 each calendar quarter.
SALES OF SECURITIES
Pursuant to a Securities Purchase Agreement and related Warrant Agreement
dated September 18, 1996 among the Company, Nassau and Electra, the Company
issued to Nassau and Electra the Convertible Notes and warrants to purchase an
aggregate of 49,079 shares of Common Stock (the "Note Warrants") for an
aggregate purchase price of $3.0 million. The Company also sold to Nassau and
Electra an aggregate of 750,000 shares of Series E Preferred Stock and issued
warrants (the "Preferred Stock Warrants") to purchase an additional 49,079
shares of Common Stock for a purchase price of $3.0 million. Each share of
Series E Preferred Stock has a liquidation preference of $4.00, provides for
annual dividends of $.40 and is convertible into approximately .28357 shares of
Common Stock. The Note Warrants and Preferred Stock Warrants are exercisable at
$.035 per share and contain certain rights to require the Company to repurchase
such warrants. All accrued but unpaid dividends will be cancelled and eliminated
if the Offering is consummated by May 5, 1997. The Note Warrants and Preferred
Stock Warrants expire on December 31, 2006. The Series E Preferred Stock will be
exchanged for 212,678 shares of Common Stock in the Recapitalization. The
Preferred Stock Warrants will be exercised in connection with the
Recapitalization and the Note Warrants will be terminated in accordance with
their terms. Prior to entering into the agreements to sell the Convertible
Notes, the Note Warrants, the Series E Preferred Stock and the Preferred Stock
Warrants to Nassau and Electra, the Company sought to obtain investments from
unaffiliated third parties. The Company believes the transaction proposed by
Nassau and Electra contained the most favorable terms available to it at the
time. See "Description of Capital Stock--The Recapitalization."
55
<PAGE>
Pursuant to a Securities Purchase Agreement and related Warrant Agreements
dated February 20, 1996 between the Company and Nassau, the Company issued to
Nassau an aggregate of 2,000,000 shares of Series D Preferred Stock and certain
warrants (the "Nassau Warrants") for an aggregate purchase price of $6.5
million. Each share of Series D Preferred Stock has a liquidation preference of
$3.25, provides for annual dividends of $.325 and is convertible into
approximately .28357 shares of Common Stock. All accrued but unpaid dividends
will be cancelled and eliminated if the Offering is consummated by May 5, 1997.
The Series D Preferred Stock will be exchanged for 567,140 shares of Common
Stock in the Recapitalization. Nassau was not a stockholder of the Company at
the time it purchased the Series D Preferred Stock and Nassau Warrants. See
"Description of Capital Stock--The Recapitalization." The Company has agreed to
exchange the Nassau Warrants for 99,250 shares of Common Stock in the
Recapitalization. The Nassau Warrants entitle the holders to purchase until
December 31, 2003 for $.035 per share (i) up to 55,605 shares of Common Stock
commencing December 31, 1997, (ii) an additional 55,605 shares of Common Stock
commencing December 31, 1998, and (iii) an additional 83,408 shares of Common
Stock commencing December 31, 1999; provided, however, that if the Company
consummates a registered underwritten public offering pursuant to which the
fully diluted common equity of the Company has a value in excess of certain
specified amounts, the Nassau Warrants which become exercisable after the
consummation of such public offering terminate. The Nassau Warrants further
provide that commencing on December 31, 2000 the holders can require the Company
to repurchase the Nassau Warrants for a price based upon a formula.
Pursuant to a Securities Purchase Agreement dated February 9, 1996 among the
Company, R.G. MacDonald, Charles H. Becker, Robert A. Rankin and John Hinson, an
officer of the Company, the Company sold an aggregate of 75,000 shares of Series
C Preferred Stock for a purchase price of $1.50 per share. Each share of Series
C Preferred Stock has a liquidation preference of $1.50, provides for annual
dividends of $.15 and is convertible into approximately .28357 shares of Common
Stock. All accrued but unpaid dividends will be cancelled and eliminated if the
Offering is consummated by May 5, 1997. Such Series C Preferred Stock will be
exchanged for 21,268 shares of Common Stock in the Recapitalization. See
"Description of Capital Stock--The Recapitalization."
Pursuant to a Share Purchase Agreement dated November 2, 1994 among the
Company and Electra, DSV, Brantley and certain other parties the Company issued
an aggregate of 271,471 shares of Series C Preferred Stock for $1.50 per share.
All accrued but unpaid dividends will be cancelled and eliminated if the
Offering is consummated by May 5, 1997. The Series C Preferred Stock will be
exchanged for 76,981 shares of Common Stock in the Recapitalization. See
"Description of Capital Stock--The Recapitalization."
56
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 35,000,000 shares of
Common Stock, par value $.01 per share, and 10,000,000 shares of preferred
stock, par value $.01 per share.
THE RECAPITALIZATION
On February 19, 1997, the Company, formerly an Ohio corporation, was
incorporated in the State of Delaware. Each outstanding share of common stock
and preferred stock, as well as all warrants and options, were exchanged for
substantially similar securities of the Delaware corporation.
All of the Company's existing stockholders have approved a Recapitalization
of the Company, effective concurrently with the consummation of the Offering,
which includes: (i) the conversion of all outstanding shares of Series A, B, C,
D and E Convertible Preferred Stock (the "Existing Preferred Stock") into Common
Stock; and (ii) the exercise or exchange of all warrants, other than the Lender
Warrants and those which are cancelled pursuant to their terms by the Offering.
In addition, as part of the Recapitalization the Company has effected a 3.53 for
one reverse stock split.
The following table sets forth each of the securities of the Company
outstanding prior to the Recapitalization and the securities into which they
will be converted in the Recapitalization.
<TABLE>
<CAPTION>
PRE-RECAPITALIZATION (1) POST-RECAPITALIZATION (2)
- --------------------------------------------------- ---------------------------------------------------
NUMBER OF NUMBER OF
SHARES OR SHARES OR
SECURITY WARRANTS SECURITY WARRANTS
- -------------------------------------- ----------- -------------------------------------- -----------
<S> <C> <C> <C>
Common Stock.......................... 301,840 Common Stock.......................... 85,593
Series A-E Preferred Stock............ 6,847,705 Common Stock.......................... 1,941,804
Warrants to Purchase Preferred
Stock............................... 52,784 Common Stock.......................... 10,206
Warrants to Purchase
Common Stock(3)................... 2,649,419 Common Stock.......................... 514,087
Lender Warrants....................... 250,000 Lender Warrants....................... 70,893
</TABLE>
- ------------------------------
(1) Prior to a 3.53 to 1 reverse stock split which was effective March 25, 1997.
(2) Reflects the cancellation of certain warrants which will be cancelled upon
consumation of the Offering, but does not give effect to the sale of Common
Stock by the Company in the Offering.
(3) Excludes the Lender Warrants.
Following the Recapitalization, and giving effect to the cancellation of
warrants which will be cancelled upon consummation of the Offering but not
giving effect to the sale of Common Stock by the Company, there will be
2,551,690 shares of Common Stock, warrants to purchase 70,893 shares of Common
Stock and no shares of preferred stock outstanding. In connection with the
Recapitalization, certain of the Company's existing shareholders and the holders
of the warrants have agreed, effective immediately prior to the effectiveness of
the Offering, to waive a number of rights under the agreements by which such
shareholders and holders of the warrants acquired such rights from the Company.
The effect of such waivers would be to release the Company from certain dividend
payment requirements, voting requirements and certain other rights granted to
such shareholders and such holders of the warrants pursuant to their respective
agreements with the Company, as well as eliminating certain negative and
affirmative covenants contained therein. In connection with the
Recapitalization, the Company entered into the Registration Rights Agreement
with such shareholders and warrant holders providing such shareholders and
warrant holders with certain demand and piggyback registration rights with
respect to the Common Stock. See "Description of Capital Stock--Registration
Rights."
57
<PAGE>
COMMON STOCK
As of March 31, 1997, after giving effect to the Recapitalization and giving
effect to the cancellation of warrants which will be cancelled upon consummation
of the Offering but not giving effect to the sale of Common Stock by the Company
in the Offering, there were 2,551,690 shares of Common Stock outstanding and
held of record by 15 stockholders. An additional 425,894 shares were reserved
for issuance upon exercise of all outstanding options and warrants. Each holder
of Common Stock is entitled to one vote for each share held and does not have
cumulative voting rights. See "Description of Capital Stock--Warrants."
The holders of the Common Stock are entitled to elect all of the directors,
subject to the rights of certain stockholders and lenders under the Shareholders
Agreement to nominate candidates and subject to relevant rights (if any) of the
holders of any outstanding Undesignated Preferred Stock. The Common Stock is not
convertible into any other security. See "Certain Transactions--Shareholders
Agreement."
Subject to preferences that may be applicable to any then outstanding
Preferred Stock and to the restrictions on payments of dividends imposed by the
Company's debt agreements, holders of Common Stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of funds
legally available therefor. In the event of a liquidation, dissolution or
winding up of the Company, holders of Common Stock would be entitled to share in
the Company's assets remaining after the payment of liabilities and the
satisfaction of any liquidation preference granted the holders of any then
outstanding shares of preferred stock. The Common Stock has no preemptive or
other subscription rights. The outstanding shares of Common Stock are fully paid
and nonassessable.
PREFERRED STOCK
The Company is authorized to issue up to 10,000,000 shares of Undesignated
Preferred Stock, none of which was issued as of March 31, 1997. The Board,
without further action by the holders of Common Stock, may issue shares of
Undesignated Preferred Stock in one or more series and may fix or alter the
rights, preferences, privileges and restrictions, including the voting rights,
redemption provisions (including sinking fund provisions), dividend rights,
dividend rates, liquidation rates, liquidation preferences, conversion rights
and the description and number of shares constituting any wholly unissued series
of Undesignated Preferred Stock. The Board, without further approval of the
holders of Common Stock, may issue shares of Undesignated Preferred Stock with
rights that could adversely affect the rights of the holders of Common Stock.
The issuance of shares of Undesignated Preferred Stock under certain
circumstances could have the effect of delaying or preventing a change of
control of the Company or other corporate action.
WARRANTS
Pursuant to Warrant Agreements dated September 18, 1996 the Company issued
the Lender Warrants. The Lender Warrants entitle the holders to purchase 70,893
shares of Common Stock for $14.11 per share and expire on September 18, 2006. In
the event the Company pays a dividend or makes a distribution on the Common
Stock, the holders of the Lender Warrants will be entitled to participate in
such dividend or distribution as if they had exercised the Lender Warrants
immediately prior thereto. The holders of the Lender Warrants have certain
rights to require the Company to redeem the Lender Warrants or repurchase the
Common Stock issued upon exercise thereof and the Company has certain rights to
redeem the Lender Warrants or repurchase the Common Stock issued upon exercise
thereof. The holder's rights to require the Company to redeem such warrants and
the Company's rights to redeem such warrants will expire upon the consummation
of this Offering (although such rights may revive under certain limited
circumstances).
58
<PAGE>
REGISTRATION RIGHTS
Pursuant to the Registration Rights Agreement certain stockholders may,
following the expiration of a 180-day lock-up period, require the Company to use
its best efforts to register such holders' Company securities (including the
Common Stock) under the Securities Act, in each case pursuant to the procedures
and subject to restrictions specified in the Registration Rights Agreement.
Each party to the Registration Rights Agreement may require the Company to
file one registration statement to register securities owned by it for a
four-year period (subject to extension under certain limited circumstances). In
general, the Company is not required to effect the registrations described above
more than once in any 12 month period or, if the Company intends in good faith
to file a registration statement pertaining to an underwritten public offering
by the Company, within 90 days. Also, the Company is not obligated to file more
than four registration statements, provided that if the Company effects a
registration at the request of a stockholder, no further demand by any other
party to such agreement may be made for a period of at least nine months.
In addition to the registration rights described above, following the
expiration of the 180-day lock-up period, each holder which is a party to the
Registration Rights Agreement may cause the Company to use its best efforts to
include such holder's Common Stock in any of the Company's registered offerings
("piggyback offerings") of its Common Stock (other than under Forms S-4 and S-8
of the Securities Act, or under other forms not available for registering sales
to the public) (subject to reduction to the extent that the managing
underwriter, if any, is of the opinion that such inclusion would adversely
affect the marketing of the securities to be sold therein). The Registration
Rights Agreement provides that the Company is to bear the expenses of
registrations described above, other than expenses consisting of underwriting
discounts and commissions applicable to securities sold by holders.
The Registration Rights Agreement also restricts the transfer of certain
shares of Common Stock held by the stockholders party to such agreement prior to
the registration and sale (or other registered disposition) of such Common Stock
under the Securities Act.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is The First National
Bank of Boston.
CERTAIN CERTIFICATE AND BYLAW PROVISIONS AND DELAWARE GENERAL CORPORATION LAW
SECTION 203
The provisions of the Company's Certificate and the Bylaws and the
provisions of Delaware law summarized in the succeeding paragraphs may be deemed
to have anti-takeover effects and may delay, defer or prevent a tender offer or
takeover attempt that a stockholder might consider to be in such stockholder's
best interest, including those attempts that might result in a premium over the
market price for the shares held by stockholders.
CLASSIFIED BOARD. The Certificate provides that the Board will be divided
into three classes of directors serving staggered three-year terms. As a result,
approximately one-third of the Board will be elected each year. Currently, the
size of the Board is fixed at five members, who are divided into three classes
serving staggered three-year terms. However, the Company is presently evaluating
other director candidates and anticipates that two additional independent,
non-management directors will be added to the Board upon the closing of the
Offering or as soon thereafter as practicable. The classified board provisions
could have the effect of discouraging a third party from making a tender offer
or otherwise attempting to obtain control of the Company, even though such an
attempt might be beneficial to the Company and the stockholders. The Certificate
also provides that a director may not be removed from office unless for cause
and the affirmative vote of the holders of at least 66 2/3% of the outstanding
shares of capital stock (including any warrants with voting rights) entitled to
vote.
59
<PAGE>
MERGERS AND SALES OF ASSETS. The Certificate provides that except as
provided in Section 203 of the General Corporation Law of the State of Delaware
(the "GCLSD") any merger or sale of substantially all of the assets of the
Company which has not been approved by at least two-thirds of the Board must be
approved by the affirmative vote of the holders of at least 66 2/3% of the
outstanding shares of capital stock (including any warrants with voting rights)
entitled to vote. Such provision may have the effect of preventing a merger or
sale of substantially all the Company's assets that a stockholder might consider
to be in such stockholder's best interest, including those which might result in
a premium over the market price for the shares held by stockholders.
LIMITATIONS ON STOCKHOLDER ACTION BY WRITTEN CONSENT. Effective upon
consummation of the Offering the Certificate will prohibit stockholder action by
written consent in lieu of a meeting, and will provide that stockholder action
can be taken only at an annual or special meeting of stockholders. Such
provision may have the effect of delaying consideration of a stockholder
proposal until the next annual meeting, unless a special meeting is called by
the Board, the Chairman of the Board, the Chief Executive Officer or President
of the Company.
ADVANCED NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. Subject to the rules and regulations of the Securities and
Exchange Commission regarding the solicitation of proxies, the Bylaws establish
certain advance notice procedures with regard to stockholder proposals and the
nomination, other than by the direction of the Board or a committee thereof, of
candidates for election as directors. The Company may reject a stockholder
proposal or nomination that is not made in accordance with such procedures.
AMENDMENT OF CERTAIN PROVISIONS OF THE CERTIFICATE AND BYLAWS. The
Certificate provides that the affirmative vote of the holders of at least
66 2/3% of the outstanding shares of capital stock of the Company (including any
warrants with voting rights) then entitled to vote on the matter is required to
amend certain provisions of the Certificate, including those provisions relating
to the classification of the Board of Directors; the filling of vacancies on the
Board; removal of directors; the calling of special meetings of stockholders;
the prohibition of stockholder action without a meeting; indemnification of
directors, officers and others; the limitation on liability of directors; the
approval of any merger or sale of substantially all of the assets of the Company
which has not been approved by at least two-thirds of the Board; the Amendment
of the Bylaws; and the supermajority voting requirements in the Certificate. The
Certificate further provides that the Bylaws may be amended by the Board, except
with respect to the authorized number of directors, or by an affirmative vote of
the holders of not less than 66 2/3% of the total voting power of all
outstanding shares of capital stock of the Company (including any warrants with
voting rights) then entitled to vote on the matter. These voting requirements
will have the effect of making more difficult any amendment by stockholders,
even if a majority of the Company's stockholders believe that such amendment
would be in its best interests.
DELAWARE GENERAL CORPORATION LAW SECTION 203. The Company is subject to
Section 203 of the GCLSD, which imposes restrictions on "business combinations"
(as defined therein) with interested stockholders (being any person who acquired
15% or more of the Company's outstanding voting stock). In general, the Company
is prohibited from engaging in business combinations with an interested
stockholder, unless: (i) before such person became an interested stockholder,
the Board approved the transaction in which the interested stockholder became an
interested stockholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the Company outstanding at the time the transaction commenced
(excluding for purposes of determining the number of shares outstanding stock
held by directors who are also officers of the Company and by employee stock
plans that do not provide employees with the rights to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer); or (iii) on or subsequent to the date on which such person became an
interested stockholder, the business combination is approved by the Board and
authorized at a meeting of stockholders by the affirmative vote of the holders
of two-thirds of the outstanding voting stock of the Company not owned by the
interested
60
<PAGE>
stockholder. Under Section 203, the restrictions described above also do not
apply to certain business combinations proposed by an interested stockholder
following the earlier of the announcement of certain extraordinary transactions
involving the Company and a person who had not been an interested stockholder
during the previous three years or who became an interested stockholder with the
approval of the Company's directors, if such extraordinary transaction is
approved or not opposed by a majority of the directors who were directors prior
to any person becoming an interested stockholder during the previous three years
or who were recommended for election or elected to succeed such directors by a
majority of such directors. By restricting the ability of the Company to engage
in business combinations with an interested person, the application of Section
203 to the Company may provide a barrier to hostile or unwanted takeovers.
VESTING OF MANAGEMENT RIGHTS UPON CERTAIN ACQUISITIONS. The terms of stock
option agreements between the Company and certain members of management provide
that all unvested options granted thereunder will vest upon either: (i) the
acquisition by any one purchaser or group of more than 50% of the voting power
of the stock of the Company; (ii) a replacement during any 12 month period of a
majority of the Board (whose appointment is not endorsed by a majority of the
Board prior to the date of such appointment); or (iii) the acquisition of assets
having more than one-third of the total fair market value of the assets of the
Company by any person or group of persons (a "Change of Control"). As of March
31, 1997, options to purchase an aggregate of 220,529 shares of Common Stock
were unvested and subject to vesting upon a Change of Control, including options
to purchase 60,968, 22,686, 21,197, 26,656 and 25,521 shares of Common Stock, by
Messrs. DeCrane, MacDonald, Rankin, Keller and Becker, respectively.
61
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Of the 5,251,690 shares of Common Stock to be outstanding after the
Offering, 3,338,948 shares will be available for resale in the public market
without restriction immediately following the Offering if held by holders who
are not "affiliates" of the Company (as defined in the Securities Act). All of
the remaining shares are "restricted securities" within the meaning of Rule 144
adopted under the Securities Act. These restricted securities were issued and
sold by the Company in private transactions in reliance upon exemptions from
registration under the Securities Act. After expiration of the 180-day lock-up
period following the Offering pursuant to agreements with the Underwriters: (i)
all restricted securities will be available for resale pursuant to limitations
of Rule 144; and (ii) the Company, pursuant to its Certificate, may authorize
the issuance of additional shares of Common Stock and shares of one or more
series of voting preferred stock. The issuance of additional shares of capital
stock could result in the dilution of the voting power of the shares of Common
Stock purchased in the Offering. In addition, following the expiration of the
180-day lock-up period, pursuant to the Registration Rights Agreement, certain
stockholders have the right, subject to the terms and conditions of the
Registration Rights Agreement, to require the Company to: (i) effect (in the
aggregate) up to four registrations under the Securities Act covering all or any
portion of the shares of Common Stock held by such stockholders, provided that
if the Company effects a registration at the request of a stockholder, no
further demand may be made by any stockholder for a period of at least nine
months; and (ii) include all or any portion of such stockholders' shares of
Common Stock in any proposed registration by the Company of shares of Common
Stock (subject to reduction to the extent that the managing underwriter, if any,
is of the opinion that such inclusion would adversely affect the marketing of
the securities to be sold therein).
Prior to the Offering, there has been no public market for the Common Stock,
and there can be no assurance that an active public market will develop, or if
developed, will be sustained after the completion of the Offering. Factors such
as announcements concerning the Company or its competitors, investor perception
of the Company, fluctuations in the Company's operating results and general
market conditions may cause the market price of the Common Stock to fluctuate
significantly. Sales of a substantial number of shares of Common Stock in the
public market after the Offering, or the expectation that such sales could
occur, could adversely affect the market price of the Common Stock and the
Company's ability to raise capital through a subsequent offering of securities.
62
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the Underwriters
named below (the "Underwriters") have severally agreed to purchase and the
Company has agreed to sell to them, severally, the aggregate number of shares of
Common Stock set forth opposite their respective names.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------------------------------ -----------
<S> <C>
Schroder Wertheim & Co. Incorporated........................ 858,712
Dillon, Read & Co. Inc...................................... 858,711
Bear, Stearns & Co. Inc..................................... 60,000
Alex. Brown & Sons Incorporated............................. 60,000
BT Securities Corporation................................... 60,000
Donaldson, Lufkin & Jenrette Securities Corporation......... 60,000
A. G. Edwards & Sons, Inc................................... 60,000
Goldman, Sachs & Co......................................... 60,000
Lazard Freres & Co. LLC..................................... 60,000
Lehman Brothers Inc......................................... 60,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... 60,000
Oppenheimer & Co. Inc....................................... 60,000
Prudential Securities Incorporated.......................... 60,000
Smith Barney Inc............................................ 60,000
Arnhold and S. Bleichroeder, Inc............................ 30,000
Cowen & Company............................................. 30,000
Gabelli & Company, Inc...................................... 30,000
Gruntal & Co., Incorporated................................. 30,000
Janney Montgomery Scott Inc................................. 30,000
C.L. King & Associates, Inc................................. 30,000
The Ohio Company............................................ 30,000
Ragen Mackenzie Incorporated................................ 30,000
The Robinson-Humphrey Company, Inc.......................... 30,000
Sanders Morris Mundy Inc.................................... 30,000
Scott & Stringfellow, Inc................................... 30,000
Wheat, First Securities, Inc................................ 30,000
-----------
Total................................................... 2,797,423
-----------
-----------
</TABLE>
The Underwriting Agreement provides that the several Underwriters are
obligated, subject to the approval of certain legal matters by their counsel and
certain other conditions, to purchase all the shares of Common Stock offered
hereby (other than those covered by the Underwriters' over-allotment option
described below), if any are purchased. Schroder Wertheim & Co. Incorporated and
Dillon, Read & Co. Inc., as representatives of the several Underwriters (the
"Representatives"), have advised the Company that the Underwriters propose to
offer the shares to the public at the initial public offering price set forth on
the cover page of this Prospectus; that the Underwriters propose initially to
allow a concession not in excess of $0.47 per share to certain dealers,
including the Underwriters; that the Underwriters and such dealers may initially
allow a discount of not in excess of $0.10 per share to other dealers; and that
the initial public offering price and the concession and discount to dealers may
be changed by the Representatives after the initial public offering.
The Company and certain Selling Stockholders, including ING, have granted to
the Underwriters an option, expiring at the close of business on the 30th day
after the date of the Underwriting Agreement, to purchase up to an additional
419,613 shares of Common Stock, at the initial public offering price set
63
<PAGE>
forth on the cover page of this Prospectus, less underwriting discounts and
commissions. The Underwriters may exercise the option only to cover
over-allotments, if any, in the sale of shares of Common Stock in the Offering.
To the extent that the Underwriters exercise this option, each Underwriter shall
be committed, subject to certain conditions, to purchase a number of additional
shares proportionate to such Underwriter's initial commitment. If the option is
exercised, the first 84,535 shares will be purchased from certain Selling
Stockholders and the remaining shares will be purchased from the Company. The
Representatives have also agreed to pay a fee of $23,498 to ING Baring (U.S.)
Securities, Inc., an affiliate of ING.
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Company, certain management stockholders, directors and certain other
stockholders (including ING and Provident in the event the over-allotment option
is not exercised with respect to their shares) have agreed not to offer to sell,
sell, grant any option to purchase or otherwise dispose of any shares of Common
Stock, subject to certain exceptions, for a period of 180 days after the date of
this Prospectus without the prior written consent of Schroder Wertheim & Co.
Incorporated.
Prior to the Offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price of the Common Stock has been
determined by negotiations between the Company and the Representatives. Among
the factors considered in such negotiations were the Company's results of
operations and financial condition, the prospects for the Company and for the
industry in which the Company operates, the Company's capital structure and
prevailing conditions in the securities market.
The Representatives have informed the Company that the Underwriters do not
intend to confirm shares to accounts over which they exercise discretionary
authority in excess of 5% of the total number of shares offered hereby.
In order to facilitate the Offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may overallot in
connection with the Offering, creating a short position in the Common Stock for
their own account. In addition, to cover overallotments or to stabilize the
price of the Common Stock, the Underwriters may bid for, and purchase, shares of
Common Stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
Common Stock in the Offering, if the syndicate repurchases previously
distributed Common Stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Common Stock above independent market
levels. The Underwriters are not required to engage in these activities, and may
end any of these activities at any time.
The shares of Common Stock are being offered in accordance with the
provisions of the National Association of Securities Dealers, Inc. Conduct
Rules, Rule 2710, paragraph (c)(8). Certain proceeds of the Offering will be
used to repay amounts owing under the Senior Revolver and the Senior Notes, for
which ING acts as managing agent and as a lender. ING, which is an affiliate of
ING Baring (U.S.) Securities, Inc. (and also may be deemed to be an affiliate of
Dillon, Read & Co. Inc.), will receive approximately $24.3 million of the net
proceeds of the Offering (giving effect to the Underwriters' overallotment
option) as a result of: (i) being a lender under the Senior Revolver; (ii) being
a holder of Senior Notes; (iii) being a Selling Stockholder; and (iv) the
Success Fee. Schroder Wertheim & Co. Incorporated has agreed to act as a
qualified independent underwriter (as defined in the National Association of
Securities Dealers, Inc. Conduct Rules) for the Offering and has agreed to
assume the responsibilities of acting as a qualified independent underwriter in
pricing the Offering and in conducting due diligence.
64
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered by this Prospectus and certain
other legal matters is being passed on for the Company by Spolin & Silverman,
Santa Monica, California. Certain legal matters will be passed upon for the
Underwriters by Milbank, Tweed, Hadley & McCloy, Los Angeles, California.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1996
and 1995 and for each of the three years in the period ended December 31, 1996
and the financial statements of Aerospace Display Systems as of December 31,
1995 and 1994 and for each of the three years in the period ended December 31,
1995 included in this Prospectus have been so included in reliance on the
reports of Price Waterhouse LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company intends to furnish to its stockholders annual reports containing
consolidated financial statements audited by its independent auditors and
quarterly reports containing unaudited interim financial information for the
first three quarters of each year.
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 under the Act for registration of the shares
of Common Stock offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits and
schedules thereto, to which reference is hereby made. Statements made in this
Prospectus as to the contents of any contract, agreement or other document
referred to do not purport to be complete; with respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved and each statement shall be deemed qualified by this reference. The
Registration Statement and the exhibits and schedules thereto may be inspected
and copied at the public reference facilities maintained by the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the public reference facilities of the Commission's Regional Offices: New
York Regional Office, Seven World Trade Center, Suite 1300, New York, New York
10048; and Chicago Regional Office, Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60661. Copies of such material may also be obtained from the
Public Reference Section of the Securities and Exchange Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission also
maintains a site on the World Wide Web (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.
65
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
Report of Independent Accountants....................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996............ F-3
Consolidated Statements of Operations for the years ended December 31,
1994, 1995 and 1996................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1994, 1995 and 1996................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
AEROSPACE DISPLAY SYSTEMS (A DIVISION OF ALLARD INDUSTRIES, INC.)
Report of Independent Accountants....................................... F-43
Balance Sheets as of December 31, 1994 and 1995 and September 18, 1996
(Unaudited)........................................................... F-44
Statements of Income for the years ended December 31, 1993, 1994 and
1995, the nine months ended September 30, 1995 (Unaudited) and the
period from January 1 to September 18, 1996 (Unaudited)............... F-45
Statements of Changes in Owner's Net Investment for the years ended
December 31, 1993, 1994 and 1995 and the period from January 1 to
September 18, 1996 (Unaudited)........................................ F-46
Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995, the nine months ended September 30, 1995 (Unaudited), and the
period from January 1 to September 18, 1996 (Unaudited)............... F-47
Notes to Financial Statements........................................... F-48
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
DeCrane Aircraft Holdings, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
DeCrane Aircraft Holdings, Inc. and its subsidiaries at December 31, 1995 and
1996 and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, 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.
PRICE WATERHOUSE LLP
Cleveland, Ohio
March 7, 1997, except for the
reverse stock split described
in Note 1, which is as of
March 25, 1997
F-2
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, 1996
-------------------- PRO FORMA FOR
1995 1996 RECAPITALIZATION
--------- --------- -------------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 305 $ 320 $ 320
Accounts receivable, net.................................. 8,792 13,185 13,185
Inventories............................................... 14,116 19,573 19,573
Prepaid expenses and other current assets................. 362 812 812
--------- --------- --------
Total current assets.................................... 23,575 33,890 33,890
Property and equipment, net................................. 7,387 12,187 12,187
Other assets, principally intangibles, net.................. 5,367 23,189 23,189
--------- --------- --------
Total assets............................................ $ 36,329 $ 69,266 $ 69,266
--------- --------- --------
--------- --------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Short-term borrowings..................................... $ 911 $ 1,974 $ 1,974
Current portion of long-term obligations to unaffiliated
lenders................................................. 1,612 3,004 3,004
Convertible subordinated notes payable to related
parties................................................. -- 2,922 2,922
Accounts payable.......................................... 5,079 7,420 7,420
Accrued expenses.......................................... 3,046 7,241 7,241
Income taxes payable...................................... 344 843 843
--------- --------- --------
Total current liabilities............................... 10,992 23,404 23,404
--------- --------- --------
Long-term liabilities
Long-term obligations
Unaffiliated lenders.................................... 16,316 28,323 28,323
Related parties......................................... 5,833 6,027 6,027
Deferred income taxes..................................... 3,110 3,312 3,312
Minority interests........................................ 142 85 85
--------- --------- --------
Total long-term liabilities............................. 25,401 37,747 37,747
--------- --------- --------
Commitments and contingencies (Note 17)
Mandatorily redeemable common stock warrants................ 1,633 6,879 1,426
--------- --------- --------
Stockholders' equity (deficit)
Cumulative convertible preferred stock, no par value ($.01
par value as of February 19, 1997); 4,804,018 shares
authorized as of December 31, 1995, 8,304,018 shares as
of December 31, 1996; 4,022,705 shares issued and
outstanding as of December 31, 1995 and 6,847,705 shares
as of December 31, 1996 (none on a pro forma basis)..... 5,549 13,850 --
Undesignated preferred stock, $.01 par value, 10,000,000
shares initially authorized as of February 19, 1997;
none issued and outstanding............................. -- -- --
Common stock, no par value; 2,268,560 shares authorized as
of December 31, 1995 and 4,253,550 shares as of December
31, 1996; 85,593 shares issued and outstanding as of
December 31, 1995 and December 31, 1996 (none on a pro
forma basis)............................................ 58 216 --
Common stock, $.01 par value; 9,924,950 shares authorized
as of February 19, 1997; 2,551,690 shares issued and
outstanding............................................. -- -- 26
Additional paid-in capital................................ -- -- 18,632
Accumulated deficit....................................... (7,807) (12,951) (12,090)
Foreign currency translation adjustment................... 503 121 121
--------- --------- --------
Total stockholders' equity (deficit).................... (1,697) 1,236 6,689
--------- --------- --------
Total liabilities and stockholders' equity
(deficit)........................................... $ 36,329 $ 69,266 $ 69,266
--------- --------- --------
--------- --------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues....................................................................... $ 47,092 $ 55,839 $ 65,099
Cost of sales.................................................................. 36,407 43,463 49,392
--------- --------- ---------
Gross profit............................................................... 10,685 12,376 15,707
--------- --------- ---------
Operating expenses
Selling, general and administrative expenses................................. 7,716 9,426 10,904
Amortization of intangible assets............................................ 1,209 1,115 709
Gain on litigation settlement, net........................................... -- -- (157)
--------- --------- ---------
Total operating expenses................................................... 8,925 10,541 11,456
--------- --------- ---------
Income from operations......................................................... 1,760 1,835 4,251
Other expenses (income)
Interest expense
Unaffiliated lenders....................................................... 2,947 2,628 2,807
Related parties............................................................ 297 1,193 1,441
Other expenses (income)...................................................... 324 297 (85)
Minority interests........................................................... 8 85 193
--------- --------- ---------
Loss before provision for income taxes and extraordinary item.................. (1,816) (2,368) (105)
Provision for income taxes..................................................... (613) (1,078) (712)
--------- --------- ---------
Loss before extraordinary item................................................. (2,429) (3,446) (817)
Extraordinary loss from debt refinancing....................................... (264) -- --
--------- --------- ---------
Net loss....................................................................... (2,693) (3,446) (817)
Adjustment to redemption value of mandatorily redeemable common stock
warrants..................................................................... 189 696 (4,320)
Cumulative convertible preferred stock dividends............................... (387) (557) (1,220)
--------- --------- ---------
Net loss applicable to common stockholders..................................... $ (2,891) $ (3,307) $ (6,357)
--------- --------- ---------
--------- --------- ---------
Pro forma net loss per common share (Unaudited)................................ $ (.31)
---------
---------
Pro forma weighted average number of common shares outstanding (Unaudited)..... 2,659
---------
---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CUMULATIVE COMMON STOCK FOREIGN
CONVERTIBLE ------------------------ CURRENCY
PREFERRED NUMBER OF ACCUMULATED TRANSLATION
STOCK SHARES AMOUNT DEFICIT ADJUSTMENT TOTAL
----------- ----------- ----------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993........................ $ -- 83,324 $ 57 $ (2,520) $ (155) $ (2,618)
Reclassification of mandatorily redeemable
cumulative convertible preferred stock.......... 5,168 -- -- -- -- 5,168
Net loss.......................................... -- -- -- (2,693) -- (2,693)
Adjustment to redemption value of mandatorily
redeemable common stock warrants................ -- -- -- 189 -- 189
Issuance of cumulative convertible preferred
stock, net...................................... 381 -- -- -- -- 381
Mandatorily redeemable common stock warrants
issued pursuant to anti-dilution provisions..... -- -- -- (33) -- (33)
Stock option exercised............................ -- 2,269 1 -- -- 1
Translation adjustment............................ -- -- -- -- 371 371
----------- ----------- ----- ------------- ------ ---------
Balance, December 31, 1994........................ 5,549 85,593 58 (5,057) 216 766
Net loss.......................................... -- -- -- (3,446) -- (3,446)
Adjustment to redemption value of mandatorily
redeemable common stock warrants................ -- -- -- 696 -- 696
Translation adjustment............................ -- -- -- -- 287 287
----------- ----------- ----- ------------- ------ ---------
Balance, December 31, 1995........................ 5,549 85,593 58 (7,807) 503 (1,697)
Net loss.......................................... -- -- -- (817) -- (817)
Adjustment to redemption value of mandatorily
redeemable common stock warrants................ -- -- -- (4,320) -- (4,320)
Issuance of cumulative convertible preferred
stock, net...................................... 8,301 -- -- -- -- 8,301
Mandatorily redeemable common stock warrants
issued pursuant to anti-dilution provisions..... -- -- -- (7) -- (7)
Stock option compensation expense................. -- -- 158 -- -- 158
Translation adjustment............................ -- -- -- -- (382) (382)
----------- ----------- ----- ------------- ------ ---------
Balance, December 31, 1996........................ $ 13,850 85,593 $ 216 $ (12,951) $ 121 $ 1,236
----------- ----------- ----- ------------- ------ ---------
----------- ----------- ----- ------------- ------ ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss..................................................................................... $ (2,693) $ (3,446) $ (817)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities
Depreciation and amortization.............................................................. 3,868 4,244 4,012
Amortization of debt discount.............................................................. 121 298 331
Deferred income taxes...................................................................... 521 867 88
Minority interests in earnings of subsidiaries............................................. 8 85 193
Extraordinary loss from debt refinancing................................................... 264 -- --
Gain on sale of equipment.................................................................. (37) (15) (5)
Changes in assets and liabilities
Accounts receivable...................................................................... (1,549) 2,256 (3,069)
Inventories.............................................................................. (1,381) (2,962) (2,665)
Prepaid expenses and other assets........................................................ 390 274 (3)
Accounts payable......................................................................... (973) (1,004) 1,891
Accrued expenses......................................................................... (920) 682 2,477
Income taxes payable..................................................................... 59 178 525
--------- --------- ---------
Net cash provided by (used for) operating activities................................. (2,322) 1,457 2,958
--------- --------- ---------
Cash flows from investing activities
Purchase of net assets of Aerospace Display Systems.......................................... -- -- (11,693)
Purchase of minority stockholder's interest.................................................. -- -- (5,207)
Purchase of manufacturing facility........................................................... -- -- (4,369)
Purchase of net assets and stock of Elsinore Engineering Services and Elsinore Aerospace
Services, Inc.............................................................................. -- -- (1,300)
Capital expenditures......................................................................... (1,016) (1,203) (1,452)
Other, net................................................................................... 23 (259) 5
--------- --------- ---------
Net cash used for investing activities............................................... (993) (1,462) (24,016)
--------- --------- ---------
Cash flows from financing activities
Financing of acquisitions
Proceeds from issuance of cumulative convertible preferred stock and mandatorily redeemable
common stock warrants, net................................................................ -- -- 8,805
Revolving line of credit borrowings........................................................ -- -- 6,399
Senior term loan borrowings................................................................ -- -- 5,000
Convertible subordinated note borrowings from related parties.............................. -- -- 3,000
Senior and senior subordinated term loan borrowings (including amounts allocated to
mandatorily redeemable common stock warrants).............................................. 23,000 -- --
Senior, senior subordinated and related party debt repaid.................................... (19,769) -- --
Net borrowings under revolving line of credit agreements..................................... 3,167 1,972 1,191
Principal payments on capitalized lease and other long-term obligations...................... (1,024) (1,665) (2,001)
Proceeds from issuance of cumulative convertible preferred stock, net........................ 381 -- 112
Payment of deferred financing costs.......................................................... (2,670) -- (851)
Other, net................................................................................... (57) (266) (604)
--------- --------- ---------
Net cash provided by financing activities............................................ 3,028 41 21,051
--------- --------- ---------
Effect of foreign currency translation on cash................................................. 82 33 22
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........................................... (205) 69 15
Cash and cash equivalents at beginning of period............................................... 441 236 305
--------- --------- ---------
Cash and cash equivalents at end of period..................................................... $ 236 $ 305 $ 320
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
DeCrane Aircraft Holdings, Inc. and subsidiaries (the "Company") is a
manufacturer of avionics components and a provider of avionics systems
integration services in certain niche markets of the commercial aircraft
industry.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and all majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
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 on the consolidated balance
sheets, 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.
RECAPITALIZATION
In January and March 1997, the holders of certain securities agreed to a
plan for the recapitalization of the Company (the "Recapitalization").
Completion of the Recapitalization is a condition to the consummation of the
anticipated initial public offering (the "Offering") and, except for the reverse
stock split described below, would be effective concurrent therewith.
The Recapitalization provides 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 Series B preferred stock warrants
and common stock warrants, respectively, into a total of 16,585 shares of common
stock; (iii) the cashless exercise of 508,497 mandatorily redeemable common
stock warrants (the "Redeemable Warrants") into a total of 507,708 shares of
common stock; (iv) the cancellation of 95,368 Redeemable Warrants; and (v) a
3.53-for-1 reverse stock split (effective March 25, 1997). All common share
information set forth in the consolidated financial statements and notes thereto
has been restated to reflect the reverse stock split.
Redeemable Warrants exercisable into 208,968 common shares would remain
after the Recapitalization. Of this amount, 138,075 Redeemable Warrants would be
cancelled upon the consummation of the Offering and repayment of the Company's
senior subordinated debt and convertible notes in accordance with the terms of
the respective warrant agreements.
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.
INVENTORIES
Inventories are stated at the lower of cost or market, as determined under
the first-in, first-out ("FIFO") method. Costs include materials, labor and
manufacturing overhead.
F-7
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over their estimated useful lives, ranging from two to
twenty 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
cost of 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.
OTHER ASSETS
Goodwill is amortized on a straight-line basis over periods ranging from 15
to 30 years. The covenants not to compete are amortized on a straight-line basis
over five years. Other intangibles are amortized on a straight-line basis over
their estimated useful lives, ranging from ten to twenty years. Revolving credit
agreement deferred financing costs are amortized on a straight-line basis over
the term of the agreement. Term debt deferred financing costs are amortized
using the interest method over the terms of their respective agreements.
The Company periodically evaluates goodwill to assess recoverability based
upon expectations of future non-discounted operating cash flows related to the
acquired businesses. Based upon the most recent analysis, the Company believes
that no impairment of goodwill existed at December 31, 1995 or December 31,
1996.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121"). SFAS
121 requires the Company to review 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. SFAS 121
also requires that long-lived assets and certain intangible assets to be
disposed of be recorded at the lower of carrying value or fair value less
disposal costs.
SFAS 121 is effective for financial statements issued for fiscal years
beginning after December 15, 1995, and must be adopted on a prospective basis.
The Company adopted SFAS 121 prospectively in the first quarter of 1996, the
adoption of which had no impact on the consolidated financial statements.
DERIVATIVES
The premium paid for an interest rate cap agreement is amortized to interest
expense using the interest method of amortization over the term of the cap
assurance period. The unamortized premium is classified as other current and
long-term assets in the consolidated financial statements. Amounts receivable
under the cap agreement are accrued as a reduction of interest expense.
Market value gains and losses on forward foreign exchange contracts are
recognized in the consolidated statements of operations.
F-8
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
FOREIGN CURRENCY TRANSLATION
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 stockholders' equity (deficit).
Realized foreign currency exchange gains (losses) included in other expenses
(income) in the consolidated statements of operations were $(361,000),
$(314,000) and $71,000 for the years ended December 31, 1994, 1995 and 1996,
respectively.
STOCK OPTION PLAN
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). SFAS 123 establishes a "fair value" method of
accounting for the value of grants under stock based compensation plans. As
permitted under SFAS 123, the Company will elect to continue to measure
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 ("APB Opinion No. 25"). However,
beginning in 1996, the Company has included in the notes to its consolidated
financial statements the pro forma effect on its results of operations as if the
fair value method of measuring compensation expense related to the employee
stock option plan was utilized as described in SFAS 123.
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. Unbilled accounts receivable were $81,000
and $465,000 at December 31, 1995 and 1996, respectively. Unbilled accounts
receivable are expected to be billed during the succeeding twelve month period.
PRO FORMA LOSS PER COMMON SHARE (UNAUDITED)
The Company's historical capital structure is not indicative of its
prospective structure due to the Recapitalization that will occur concurrent
with the closing of the Offering. Accordingly, historical loss per common share
is not considered meaningful and has not been presented herein.
F-9
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Pro forma loss per common share reflects the Recapitalization and is
computed using the weighted average number of common shares assumed to have been
outstanding during the periods. The dilutive effect of common equivalent shares,
other than for certain stock options granted in 1996 and Redeemable Warrants and
preferred stock sold in 1996, has not been included because their inclusion
would have decreased the loss per share. Shares issuable for options granted in
1996 and Redeemable Warrants and preferred stock sold in 1996 at prices less
than the anticipated initial public offering price have been included for all
periods presented using the treasury stock method.
The weighted average number of shares assumes that Redeemable Warrants and
preferred stock which will be converted into common stock pursuant to the
Recapitalization had been converted and thus outstanding since the dates of
issuance. As a result, pro forma loss per common share is computed using the
reported net loss of the Company before deductions for the adjustment in
redemption value of Redeemable Warrants and preferred stock dividends.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities ("SFAS 125"). SFAS 125 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. The new standard provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
The Company does not expect that the adoption of SFAS 125 will have a material
effect on the consolidated financial statements.
NOTE 2--ACQUISITIONS
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 (the "Minority Stockholder") for a total purchase price of
$5,748,000, including $334,000 of acquisition related costs and expenses (the
"Minority Interest Acquisition"). 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 (Note 10). The cash portion of the purchase price
was funded with the proceeds from the sale of Series D preferred stock and
Redeemable Warrants (Notes 14 and 15).
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 (Note 6).
F-10
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITIONS (CONTINUED)
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.
For the periods prior to February 20, 1996, the Minority Stockholder, who is
also President of the subsidiary, was compensated pursuant to an employment
agreement. Compensation was the greater of $130,000 per year or 25% of the
subsidiary's earnings before interest, taxes and certain expenses. Compensation
was payable on or before April 15th of each year, although the Minority
Stockholder received a bi-monthly draw amounting to $185,000 per year, plus
additional periodic payments, which were offset against the compensation
payable. The employment agreement was cancelled as of February 20, 1996. For the
years ended December 31, 1994, 1995 and 1996, the Minority Stockholder earned
compensation of $619,000, $851,000 and $22,000, respectively. Accrued
compensation payable of $652,000 as of December 31, 1995 was paid to the
Minority Stockholder on February 20, 1996.
AEROSPACE DISPLAY SYSTEMS
On September 18, 1996, the Company purchased substantially all of the
assets, subject to certain liabilities assumed, of the Aerospace Display Systems
division ("ADS") of Allard Industries, Inc. ("Allard"). 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 Series E
preferred stock, convertible subordinated notes and Redeemable Warrants (Notes
8, 14 and 15), borrowings under the Company's revolving line of credit and a
$2,000,000 non-interest bearing obligation payable to certain Allard
stockholders (Note 10).
The acquisition was accounted for as a purchase and the $7,691,000
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 (Note 6).
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 (collectively, "Elsinore") of
Elsinore, L.P. Elsinore provides engineering services to the commercial aircraft
industry. The total purchase price was $2,550,000, 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 provides 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 (Note 7).
F-11
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITIONS (CONTINUED)
PRO FORMA RESULTS OF OPERATIONS FOR ACQUISITIONS
Unaudited pro forma consolidated results of operations, assuming the
Minority Interest and ADS acquisitions had been consummated on January 1 of each
of the respective years, are as follows (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Revenues............................................................... $ 65,791 $ 72,805
Net loss............................................................... (3,225) (473)
Net loss applicable to common stockholders............................. (3,086) (6,013)
</TABLE>
The above information reflects adjustments for depreciation, amortization,
minority interest and interest expense based on the new cost basis and debt
structure of the Company. The pro forma effect of the Elsinore acquisition is
not material and, accordingly, is not reflected in the above information. In
addition, pro forma per share information is not considered meaningful and has
not been presented above due to the Recapitalization that will occur concurrent
with the closing of the Offering.
NOTE 3--ACCOUNTS RECEIVABLE AND SIGNIFICANT CUSTOMERS
ACCOUNTS RECEIVABLE
Accounts receivable is net of an allowance for doubtful accounts of $259,000
and $379,000 at December 31, 1995 and 1996, 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 aircraft industry. 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,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Customer A............................................................. 11.9% 8.9% 15.8%
Customer B............................................................. 13.7% 25.4% 7.7%
--- --- ---
Total................................................................ 25.6% 34.3% 23.5%
--- --- ---
--- --- ---
</TABLE>
Complete loss of either customer could have a significant adverse impact on
the results of operations expected in future periods. The Company anticipates
that sales to Customer B may further decrease subsequent to December 31, 1996.
However, the Company believes the decrease may be offset by sales to other
customers.
F-12
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--INVENTORIES
Inventories are comprised of the following (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Raw material........................................................... $ 7,857 $ 12,350
Work-in process........................................................ 1,732 2,717
Finished goods......................................................... 4,527 4,506
--------- ---------
Total inventories.................................................... $ 14,116 $ 19,573
--------- ---------
--------- ---------
</TABLE>
Included above are costs relating to long-term contracts recognized on the
percentage of completion method of $1,927,000 and $1,378,000 at December 31,
1995 and 1996, respectively. At December 31, 1995, costs incurred included
$1,457,000 pertaining to a contract which was partially terminated and settled.
The settlement was received in March 1996 with no resulting loss.
NOTE 5--PROPERTY AND EQUIPMENT
Property and equipment includes the following (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Machinery and equipment................................................ $ 11,634 $ 16,637
Tooling................................................................ 2,557 2,944
Computer equipment, furniture and fixtures............................. 1,639 2,462
Leasehold improvements................................................. 1,057 1,676
--------- ---------
Total cost........................................................... 16,887 23,719
Accumulated depreciation and amortization............................ (9,500) (11,532)
--------- ---------
Net property and equipment......................................... $ 7,387 $ 12,187
--------- ---------
--------- ---------
</TABLE>
On December 12, 1996, the Company purchased all of the manufacturing assets
and inventory relating to the cold-heading manufacturing facility of the
Qualitronix Division of AMP, Inc. (the "AMP Facility"). The purchase price of
$6,802,000 (including $2,433,000 of inventory purchased) consisted of $5,399,000
paid in cash at closing with the balance paid in January 1997. The $2,205,000
difference between the purchase price and the fair value of the individual
assets acquired was recorded as an intangible asset and is being amortized over
15 years (Note 6).
Property and equipment under capital leases included above consists of the
following (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Machinery and equipment.................................................... $ 864 $ 920
Computer equipment, furniture and fixtures................................. -- 306
--------- ---------
Total cost............................................................... 864 1,226
Accumulated depreciation................................................. (237) (347)
--------- ---------
Net property and equipment............................................. $ 627 $ 879
--------- ---------
--------- ---------
</TABLE>
F-13
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--PROPERTY AND EQUIPMENT (CONTINUED)
Depreciation of machinery and equipment under capital leases is included in
cost of sales in the consolidated financial statements.
NOTE 6--OTHER ASSETS
Other assets includes the following and is net of accumulated amortization
for the respective periods as parenthetically noted (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Goodwill (net of $445 and $808)......................................... $ 2,140 $ 19,756
Deferred financing costs (net of $708 and $1,368) (Notes 10 and 21)..... 1,926 2,296
Covenants not to compete (net of $2,350 in 1995)........................ 442 --
Other intangibles (net of $173 and $164)................................ 322 274
Other assets............................................................ 537 863
--------- ---------
Other assets, net..................................................... $ 5,367 $ 23,189
--------- ---------
--------- ---------
</TABLE>
As of December 31, 1995, fully amortized covenants not to compete and
goodwill aggregating $2,600,000 were eliminated against the related accumulated
amortization. As of June 25, 1996, the remaining net unamortized balance of
covenants not to compete aggregating $163,000 ($2,792,000 cost and $2,629,000
accumulated amortization) were written off pursuant to the litigation settlement
with the former owner of acquired businesses (Note 17). As of December 31, 1996,
goodwill included $17,979,000, resulting from the Minority Interest Acquisition,
the ADS and Elsinore acquisitions and the intangible asset resulting from the
purchase of the AMP Facility manufacturing assets.
NOTE 7--SHORT-TERM BORROWINGS
Short-term borrowings outstanding as of December 31, 1995 and 1996 includes
the following (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Promissory note, 15% interest and principal payable as described below......................... $ -- $ 1,250
Short-term revolving line of credit............................................................ 911 724
--------- ---------
Total short-term borrowings................................................................ $ 911 $ 1,974
--------- ---------
--------- ---------
</TABLE>
The promissory note was issued on December 5, 1996 in conjunction with the
Elsinore acquisition and is payable to the former owners. The promissory note,
plus accrued interest, is payable on or before February 17, 1997. The purchase
agreement provides for a reduction of the principal balance of the promissory
note should the amount of working capital as of the closing date be less than a
defined amount.
The Company and the former owners of Elsinore disagree on the amount of
working capital as of the closing date. On February 14, 1997, the former owners
were paid $956,000 which reflects the Company's determination of the working
capital adjustment. The Company and the former owners of
F-14
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--SHORT-TERM BORROWINGS (CONTINUED)
Elsinore are attempting to resolve the difference. If the difference is not
resolved, the purchase agreement provides for arbitration of the dispute.
Management believes the ultimate resolution will not have a material adverse
effect on the Company's consolidated financial position, results of operations
or cash flows.
The Company's Swiss subsidiary has a short-term revolving line of credit
with a Swiss bank under which borrowings of $911,000 and $724,000 were
outstanding at December 31, 1995 and 1996, respectively. Interest on the line
accrues at the bank's prime rate (5.25% at December 31, 1996) plus 0.25%. The
line of credit is guaranteed by the Company.
NOTE 8--CONVERTIBLE SUBORDINATED NOTES PAYABLE TO RELATED PARTIES
Convertible subordinated notes payable (the "Convertible Notes") are as
follows (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Convertible Notes, 15% interest and principal payable as described
below.................................................................. $ -- $ 3,000
Unamortized original issue discount...................................... -- (78)
--------- ---------
Convertible Notes, net................................................. $ -- $ 2,922
--------- ---------
--------- ---------
</TABLE>
In conjunction with the ADS acquisition, the Company sold Convertible Notes
and Redeemable Warrants to a group of investors, who are also related parties
(Note 21). As described in Note 14, $124,000 of the aggregate $3,000,000
proceeds was allocated to Redeemable Warrants in the consolidated financial
statements. The corresponding reduction in the recorded principal amount of the
notes is treated as debt discount and is being amortized as interest expense
over the life of the notes resulting in a 20.5% effective interest rate.
The Convertible Notes mature on the earlier of June 30, 1997 or the
occurrence of an initial public offering ("IPO"), as defined. If an IPO does not
occur by June 30, 1997, the $3,000,000 outstanding principal balance will
convert into 750,000 shares of Series E preferred stock at a $4.00 per share
conversion price.
Interest is payable quarterly commencing December 31, 1996. On each
quarterly interest payment date, the Company may elect to either pay the
interest in cash or defer the interest payment until the principal portion of
the Convertible Notes is due and payable (the "Deferred Interest"). The Deferred
Interest is added to the principal balance of the Convertible Notes for the
purpose of computing the interest payable for subsequent quarters. The Company's
senior debt agreements, as described in Note 10, prohibit the Company from
making interest payments in cash until the senior debt is repaid in full.
Deferred Interest aggregates $129,000 as of December 31, 1996 and is included in
accrued expenses.
When the Deferred Interest is payable, each note holder may elect to receive
the amount payable in either cash, in Series E preferred stock at a $4.00 per
share conversion price if an IPO has not occurred or if an IPO has occured in
shares of common stock, the number of which is calculated using the per share
price at which such shares were offered in the IPO.
F-15
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--CONVERTIBLE SUBORDINATED NOTES PAYABLE TO RELATED PARTIES (CONTINUED)
The Convertible Notes are subordinate in right of payment to the senior and
senior subordinated obligations described in Note 10, pari passu with the
acquisition financing payable to sellers described in Note 10 and senior to all
capital shares of the Company.
NOTE 9--ACCRUED EXPENSES
Accrued expenses are comprised of the following (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Salaries, wages, compensated absences and payroll related taxes.......... $ 1,413 $ 2,842
Compensation payable to Minority Stockholder (Note 17)................... 652 --
Due to former owner of acquired businesses (Note 17)..................... 242 --
Interest payable to related parties (Notes 10 and 21).................... -- 129
Other accrued expenses................................................... 739 4,270
--------- ---------
Total accrued expenses................................................. $ 3,046 $ 7,241
--------- ---------
--------- ---------
</TABLE>
NOTE 10--LONG-TERM OBLIGATIONS
Long-term obligations outstanding includes the following (amounts in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
SENIOR DEBT
Senior revolving line of credit.......................................................... $ 4,304 $ 11,982
Senior term notes payable, due in quarterly installments through September 30, 2001 plus
interest............................................................................... 13,178 16,769
SENIOR SUBORDINATED DEBT PAYABLE TO RELATED PARTIES
Senior subordinated notes payable, due on December 31, 2001 plus 12% interest payable
semi-annually.......................................................................... 5,833 6,027
CAPITAL LEASE OBLIGATIONS
Interest at 6.59% to 18.08%, secured by leased equipment (Note 5)........................ 446 662
ACQUISITION FINANCING PAYABLE TO SELLERS
Payable to Allard stockholders, due in monthly installments of $56,000 through August 18,
1999................................................................................... -- 1,531
Payable to Minority Stockholder, due in monthly installments of $33,000 through December
15, 1997............................................................................... -- 383
--------- ---------
Total long-term obligations............................................................ 23,761 37,354
Less current portion payable to unaffiliated lenders................................... (1,612) (3,004)
--------- ---------
Long-term obligations, less current portion.......................................... $ 22,149 $ 34,350
--------- ---------
--------- ---------
</TABLE>
F-16
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--LONG-TERM OBLIGATIONS (CONTINUED)
1994 DEBT REFINANCING
In November 1994, the Company refinanced substantially all of its debt. A
senior revolving line of credit and senior term notes (collectively "Senior
Debt") were provided by two banks (the "Senior Lenders"). Senior subordinated
notes were provided by two institutional lenders (the "Senior Subordinated
Lenders"). Fees and expenses associated with obtaining the financing aggregated
$2,634,000 and are capitalized as deferred financing costs. As described in Note
14, $1,835,000 of the proceeds were allocated to Redeemable Warrants issued to
the lenders. Proceeds from the refinancing were used to repay existing debt
outstanding of $19,769,000, including $960,000 of notes payable to related
parties, and costs incurred in connection with the refinancing.
The Company incurred a $264,000 extraordinary loss in connection with the
debt refinancing related to the write-off of unamortized deferred financing
costs, a charge for unamortized debt discounts and a prepayment penalty.
SENIOR DEBT
The Senior Debt is secured by the Company's assets of $67,380,000 at
December 31, 1996, which excludes equipment under capital lease obligations
(Note 5) and certain accounts receivable and inventory of the Company's Swiss
subsidiary.
During 1996, the Senior Debt agreement was amended to provide a portion of
the funds for the ADS and Elsinore acquisitions and the AMP Facility purchase,
and to accommodate the Minority Interest Acquisition. Maximum borrowings
permitted under the senior revolving line of credit were increased $10,750,000
and the Company issued an additional $5,000,000 of senior term notes. In
addition, the interest rates charged on all borrowings under the Senior Debt
agreement were increased 2% effective September 18, 1996. Fees and expenses
associated with obtaining the financing and amendments aggregated $835,000 and
are capitalized as deferred financing costs. Fees and expenses includes $179,000
ascribed to the value of Redeemable Warrants issued to the Senior Lenders in
conjunction with obtaining the revolving line of credit increase (Note 14).
SENIOR REVOLVING LINE OF CREDIT
At December 31, 1996, the Company had a $15,750,000 senior revolving line of
credit, subject to a defined borrowing base, expiring on September 18, 1999. The
Company is required to pay an annual commitment fee of 0.5% on the unused
portion. At December 31, 1996, additional borrowings of $3,768,000 were
available under the agreement.
At the Company's option, borrowings under the revolving line of credit bear
interest at either the Base Rate plus 3.25% or the Eurodollar Rate plus 4.5% per
annum. The Base Rate is the higher of the Federal Funds rate plus 1.5% or the
prime rate. The Eurodollar Rate is the London Interbank Offered Rate ("LIBOR").
At December 31, 1996, the interest rate charged was 10.0% on $8,000,000 of the
borrowings outstanding and 11.5% on $3,982,000 of the borrowings outstanding.
F-17
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--LONG-TERM OBLIGATIONS (CONTINUED)
SENIOR TERM NOTES
The senior term notes are due in quarterly installments as follows (amounts
in thousands):
<TABLE>
<S> <C>
March 31, 1997 through and including December 31, 1997............. $ 469
March 31, 1998 through and including December 31, 1998............. 874
March 31, 1999 through and including June 30, 2001................. 969
September 30, 2001................................................. 1,938
</TABLE>
At the Company's option, the senior term notes bear interest at either the
Base Rate plus 3.5% or the Eurodollar Rate plus 5.0% per annum. The Base Rate
and Eurodollar Rate are the same rates as under the senior revolving line of
credit. At December 31, 1996, the interest rate charged was 10.5% on $12,000,000
of the term notes and 11.75% on $5,000,000 of the term notes.
As described in Note 14, $442,000 of the proceeds of the senior term notes
issued in 1994 were allocated to Redeemable Warrants in the consolidated
financial statements. The corresponding reduction in the recorded principal
amounts of the notes is treated as debt discount and is being amortized as
interest expense over the life of the notes resulting in a 11.45% effective
interest rate based on the interest rates in effect at December 31, 1996.
Unamortized debt discount was $322,000 and $231,000 at December 31, 1995 and
1996, respectively.
ADMINISTRATIVE AND OTHER FEES
The Senior Lenders receive various administrative fees during the term of
the Senior Debt agreement, payable on a monthly and quarterly basis. These fees
aggregated $49,000 and $146,000 for the years ended December 31, 1995 and 1996,
respectively. Administrative fees for the two month period from the inception of
the debt agreement to December 31, 1994 were not significant.
In conjunction with one of the 1996 amendments, the Company agreed to pay
additional semi-annual fees on May 15 and November 15 each year commencing May
15, 1997 and continuing until the Company receives a firm commitment for an
underwritten public offering with at least $20,000,000 of net cash proceeds to
the Company. The semi-annual fee payable on May 15, 1997 is $67,000 and each
succeeding such semi-annual fee payment increases by $67,000 over the previous
payment amount.
The Senior Lenders will receive a $250,000 success fee upon consummation of
the Offering.
SENIOR SUBORDINATED NOTES PAYABLE TO RELATED PARTIES
The Senior Subordinated Lenders, who are also related parties (Note 21),
provided the Company with unsecured senior subordinated (to Senior Debt) term
loans aggregating $7,000,000 (collectively referred to as "Senior Subordinated
Debt") in conjunction with the Company's 1994 debt refinancing.
As described in Note 14, $1,393,000 of the proceeds of the senior
subordinated notes were allocated to Redeemable Warrants in the consolidated
financial statements. The corresponding reduction in the recorded principal
amounts of the notes is treated as debt discount and is being amortized as
interest expense over the life of the notes resulting in a 14.78% effective
interest rate. Unamortized debt discount was $1,167,000 and $973,000 at December
31, 1995 and 1996, respectively.
One of the Senior Subordinated Lenders receives an advisory fee for as long
as the Senior Subordinated Debt is outstanding. During the years ended December
31, 1994, 1995, and 1996, the
F-18
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--LONG-TERM OBLIGATIONS (CONTINUED)
Company paid advisory fees of $12,000, $72,000 and $100,000, respectively.
During 1996, the Senior Subordinated Lenders received $100,000 in fees and
expenses associated with amendments to their loan agreement to accommodate the
Minority Interest Acquisition, the ADS and Elsinore acquisitions and the AMP
Facility purchase.
SENIOR AND SENIOR SUBORDINATED DEBT RESTRICTIVE COVENANTS
The Senior and Senior Subordinated Debt agreements contain certain
restrictive covenants which require the Company to maintain certain defined
financial ratios such as leverage, EBITDA, fixed charges, interest coverage,
selling, general and administrative expense, accounts payable and current
ratios, establish minimum levels of net worth, limit capital expenditures,
including capital lease obligations, and limit additional indebtedness which may
be incurred. The debt agreements also prohibit the Company from making any
dividend payments on its preferred or common stock.
At December 31, 1995, the Company was in default of the leverage, EBITDA,
fixed charges, interest coverage and net worth restrictive covenants. On
February 20, 1996, the Company received waivers of the defaults from its Senior
and Senior Subordinated Lenders. Since March 31, 1996, the Company has been in
compliance with the restrictive covenants.
ACQUISITION FINANCING PAYABLE TO SELLERS
In conjunction with the Minority Interest Acquisition and the ADS
acquisition, the sellers provided financing that is payable in monthly
installments over an eighteen-month and a three-year period, respectively. The
Minority Stockholder and ADS payment obligations are non-interest bearing;
original issue discounts of 9.75% and 11.5%, respectively, are being amortized
over the payment obligation terms. Unamortized debt discounts were $17,000 and
$247,000 as of December 31, 1996 for the Minority Stockholder and ADS payment
obligations, respectively.
AGGREGATE MATURITIES
The aggregate maturities of long-term obligations are as follows as of
December 31, 1996 (amounts in thousands):
<TABLE>
<S> <C>
Year ending December 31,
1997............................................................ $ 3,194
1998............................................................ 4,404
1999............................................................ 16,442
2000............................................................ 3,902
2001............................................................ 10,880
---------
Total aggregate maturities.................................... 38,822
Less unamortized debt discounts............................... (1,468)
---------
Total long-term obligations................................. $ 37,354
---------
---------
</TABLE>
F-19
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--INCOME TAXES
Loss before income taxes and extraordinary item was taxed under the
following jurisdictions (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
Domestic................................................. $ (1,605) $ (2,534) $ (855)
Foreign.................................................. (211) 166 750
--------- --------- ------
Total.................................................. $ (1,816) $ (2,368) $ (105)
--------- --------- ------
--------- --------- ------
</TABLE>
The provisions for income taxes are as follows (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Current
U.S. federal.................................................. $ 10 $ 60 $ 269
State and local............................................... 42 24 194
Foreign....................................................... 40 127 161
--------- --------- ---------
Total current............................................... 92 211 624
--------- --------- ---------
Deferred
U.S. federal.................................................. 456 751 70
State and local............................................... 137 226 21
Foreign....................................................... (72) (110) (3)
--------- --------- ---------
Total deferred.............................................. 521 867 88
--------- --------- ---------
Total provision
U.S. federal.................................................. 466 811 339
State and local............................................... 179 250 215
Foreign....................................................... (32) 17 158
--------- --------- ---------
Total provision............................................. $ 613 $ 1,078 $ 712
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-20
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--INCOME TAXES (CONTINUED)
Deferred tax liabilities (assets) are comprised of the following (amounts in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Gross deferred tax liabilities
Tax effect on earnings of subsidiary not consolidated for
income tax purposes...................................... $ 1,454 $ 2,431 $ 2,688
Depreciable assets......................................... 1,072 781 1,347
Other...................................................... 298 367 279
--------- --------- ---------
Gross deferred tax liabilities........................... 2,824 3,579 4,314
--------- --------- ---------
Gross deferred tax (assets)
Inventory.................................................. (959) (1,376) (1,798)
Loss carryforwards......................................... (1,226) (1,391) (1,238)
Accrued expenses........................................... (145) (220) (605)
Amortizable assets......................................... -- -- (356)
Allowance for doubtful accounts............................ (39) (41) (68)
Other...................................................... (51) (122) --
--------- --------- ---------
Gross deferred tax (assets).............................. (2,420) (3,150) (4,065)
--------- --------- ---------
Deferred tax assets valuation allowance...................... 1,771 2,681 3,063
--------- --------- ---------
Net deferred tax liability................................. $ 2,175 $ 3,110 $ 3,312
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal rate to the loss
before income taxes and extraordinary item as a result of the following
differences (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Income tax (benefit) at U.S. statutory rates...................... $ (617) $ (805) $ (36)
Increase (decrease) resulting from
Tax on earnings of subsidiary not consolidated for tax
purposes...................................................... 593 977 92
Book benefit not provided for net operating loss
carryforwards................................................. 530 773 172
Amortization of assets and other expenses not deductible for
income tax purposes........................................... 81 68 137
State income taxes, net of federal benefit...................... 27 16 157
Lower tax rates on earnings of foreign subsidiaries............. (2) (11) (65)
Other, net...................................................... 1 60 255
--------- --------- ---------
Income tax at effective rates................................. $ 613 $ 1,078 $ 712
--------- --------- ---------
--------- --------- ---------
</TABLE>
Approximately $3,385,000 and $1,425,000 of the Company's loss carryforwards
remained at December 31, 1996 for federal and state income tax purposes,
respectively. The carryforwards expire in varying amounts through 2011. No
benefit for the remaining loss carryforwards has been recognized in the
consolidated financial statements. The amount of loss carryforwards that may be
utilized in the future
F-21
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--INCOME TAXES (CONTINUED)
are subject to potential limitations upon the occurrence of a change in control
of the Company, as defined in the Internal Revenue Code. A change in control may
have occurred during 1996 as a result of certain equity transactions and/or may
occur upon the Offering.
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 interest and foreign exchange rate
risks.
INTEREST RATE RISK MANAGEMENT
In January 1995, the Company entered into an interest rate cap agreement to
reduce the potential impact of increases in interest rates on the Company's
floating-rate senior term notes. The agreement, with one of the Senior Lenders
(Note 21), provides for a three month LIBOR interest rate cap of 9.375% during
the period December 29, 1995 through December 31, 1998 and entitles the Company
to receive from the Senior Lender on a quarterly basis the amounts, if any, by
which interest payments on its senior term debt, computed using the actual three
month LIBOR rate, exceed the interest payment that would be due if the rate were
fixed at 9.375%. Unamortized premiums were $141,000 and $86,000 as of December
31, 1995 and 1996, respectively, and are classified as other current and
long-term assets in the consolidated financial statements.
FOREIGN EXCHANGE RISK MANAGEMENT
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 net loss of $316,000 for the year ended December 31,
1996 (none in prior periods). No forward exchange contracts were open as of
December 31, 1996.
In January 1997, the Company entered into twelve forward exchange contracts,
with one of its Senior Lenders, to purchase a total of CHF 7,800,000 for
$5,885,000 at rates ranging between 1.3021 and 1.3492 CHF per U.S. dollar.
Settlement of the contracts is to occur in twelve equal monthly amounts of CHF
650,000 from January 15, 1997 through December 15, 1997.
CREDIT RISK
The Company believes exposure to derivative credit losses is minimal in the
event of nonperformance by the Senior Lenders because any amounts due, but not
paid, to the Company by the Senior Lenders could be offset against the Company's
principal and interest payments to the Senior Lenders.
F-22
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes the recorded amounts of financial assets and
liabilities approximates fair values as of December 31, 1995 and 1996, except as
described below (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996
---------------------- ----------------------
RECORDED FAIR RECORDED FAIR
AMOUNT VALUE AMOUNT VALUE
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Financial assets
Other current and long-term assets (interest
rate cap, Note 12)........................ $ 141 $ 20 $ 86 $ 1
Financial liabilities
Long-term obligations....................... 23,761 24,176 37,354 39,491
</TABLE>
The fair value of the interest rate cap is estimated by obtaining current
quotes as of the balance sheet date for a cap agreement of similar terms. The
fair values of financial liabilities are estimated by discounting future cash
flows at rates currently available to the Company for debt with the same
remaining maturities, as advised by the Company's investment bankers.
The recorded amounts shown in the table are included in the consolidated
financial statements under the indicated captions.
F-23
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--MANDATORILY REDEEMABLE COMMON STOCK WARRANTS
Mandatorily redeemable common stock warrants (the "Redeemable Warrants")
were issued in conjunction with various debt and equity transactions during the
three years ended December 31, 1996 and are summarized in the table below
(amounts in thousands):
<TABLE>
<CAPTION>
VALUE OF REDEEMABLE WARRANTS ISSUED IN CONJUNCTION WITH
-------------------------------------------------------------------------------------
SENIOR TOTAL
SENIOR DEBT SENIOR FORMER CONVERTIBLE SERIES D SERIES E REDEEM-
TERM AMEND- SUBORDINATED LENDER SUBORDINATED PREFERRED PREFERRED ABLE
NOTES MENT NOTES DEBT NOTES STOCK STOCK WARRANTS
--------- --------- ----------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993.... $ -- $ -- $ -- $ 650 $ -- $ -- $ -- $ 650
Redeemable Warrants issued
pursuant to anti-dilution
provisions upon the sale of
Preferred Stock............. -- -- -- 33 -- -- -- 33
Redeemable Warrants issued in
conjunction with debt
refinancing................. 442 -- 1,393 -- -- -- -- 1,835
Adjustment to redemption
value....................... -- -- -- (189) -- -- -- (189)
--------- --------- ----------- --------- ----- --------- --------- ---------
Balance, December 31, 1994.... 442 -- 1,393 494 -- -- -- 2,329
Adjustment to redemption
value....................... (132) -- (416) (148) -- -- -- (696)
--------- --------- ----------- --------- ----- --------- --------- ---------
Balance, December 31, 1995.... 310 -- 977 346 -- -- -- 1,633
Redeemable Warrants issued in
conjunction with sale of
Convertible Notes and
Preferred Stock............. -- -- -- -- 124 492 124 740
Redeemable Warrants issued
pursuant to anti-dilution
provisions upon the sale of
Preferred Stock............. -- -- -- 7 -- -- -- 7
Redeemable Warrants issued in
conjunction with Senior Debt
agreement amendment......... -- 179 -- -- -- -- -- 179
Adjustment to redemption
value....................... 455 -- 1,434 527 319 1,266 319 4,320
--------- --------- ----------- --------- ----- --------- --------- ---------
Balance, December 31, 1996.... $ 765 $ 179 $ 2,411 $ 880 $ 443 $ 1,758 $ 443 $ 6,879
--------- --------- ----------- --------- ----- --------- --------- ---------
--------- --------- ----------- --------- ----- --------- --------- ---------
</TABLE>
F-24
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--MANDATORILY REDEEMABLE COMMON STOCK WARRANTS (CONTINUED)
All Redeemable Warrants are subject to adjustment for anti-dilution, have
certain demand registration rights and, in certain instances, are cancellable
upon the occurrence of certain defined events. The table below summarizes the
number of the Company's common shares subject to Redeemable Warrants, the number
of Redeemable Warrants subject to cancellation, Redeemable Warrants exercisable
and other information as of December 31, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
REDEEMABLE WARRANTS ISSUED IN CONJUNCTION WITH
-----------------------------------------------------------------------------------------
SENIOR
SENIOR DEBT SENIOR FORMER CONVERTIBLE SERIES D SERIES E
TERM AMEND- SUBORDINATED LENDER SUBORDINATED PREFERRED PREFERRED
NOTES MENT NOTES DEBT NOTES STOCK STOCK
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Total number of the Company's
common shares subject to
Redeemable Warrants at
December 31, 1994......... 84,748 -- 266,990 94,558 -- -- --
December 31, 1995......... 84,748 -- 266,990 94,558 -- -- --
December 31, 1996......... 84,748 70,893 266,990 97,426 49,079 194,618 49,079
Redeemable Warrants subject to
cancellation at
December 31, 1994......... -- -- 124,595 -- -- -- --
December 31, 1995......... -- -- 124,595 -- -- -- --
December 31, 1996......... -- -- 88,996 -- 49,079 194,618 --
Redeemable Warrants not
subject to cancellation and
exercisable at
December 31, 1994......... 84,748 -- 142,395 94,558 -- -- --
December 31, 1995......... 84,748 -- 142,395 94,558 -- -- --
December 31, 1996......... 84,748 70,893 177,994 97,426 -- -- 49,079
Other information
Exercise price per share.. $ .035 $ 14.11 $ .035 $ .0004 $ .035 $ .035 $ .035
Expiration date........... Nov. 2, Sep. 18, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2004 2006 2004 2004 2006 2003 2006
<CAPTION>
TOTAL
REDEEM-
ABLE
WARRANTS
-----------
<S> <C>
Total number of the Company's
common shares subject to
Redeemable Warrants at
December 31, 1994......... 446,296
December 31, 1995......... 446,296
December 31, 1996......... 812,833
Redeemable Warrants subject to
cancellation at
December 31, 1994......... 124,595
December 31, 1995......... 124,595
December 31, 1996......... 332,693
Redeemable Warrants not
subject to cancellation and
exercisable at
December 31, 1994......... 321,701
December 31, 1995......... 321,701
December 31, 1996......... 480,140
Other information
Exercise price per share..
Expiration date...........
</TABLE>
The warrant holders have the right ("Put Option"), 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, shall be equal
to the greater of either fair market value, book value, or a value based upon a
defined formula which includes, in part, an earnings multiple. During the years
ended December 31, 1994, 1995 and 1996, the Company increased (decreased) by
$(189,000), $(696,000) and $4,320,000, respectively, the amount ascribed to the
Redeemable Warrants to reflect estimated redemption value. The increase
(decrease) was charged (credited) to stockholders' accumulated deficit.
Each warrants' terms and provisions and related Put Options are described
below.
SENIOR TERM NOTE WARRANTS
DESCRIPTION OF REDEEMABLE WARRANTS
All of the Senior Term Note warrants are held by the Senior Lenders. All of
the warrants issued and outstanding are exercisable as of December 31, 1996 and
are not subject to cancellation. The warrant holders are entitled to receive any
common stock dividends, when and if declared, which would have
F-25
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--MANDATORILY REDEEMABLE COMMON STOCK WARRANTS (CONTINUED)
been paid upon the exercise in full of the warrants immediately prior to the
record date for such dividend. The warrants do not have voting rights.
PUT OPTION
The Senior Lenders have the right, if certain "Senior Term Note Put Events",
as defined below, occur prior to November 2, 1999, to require the Company to
redeem all (but not less than all) of the warrants or the stock issued upon
exercise of the warrants. After November 2, 1999, the Senior Lenders have the
unrestricted right to require the Company to redeem all (but not less than all),
of the warrants or the shares issued upon exercise of the warrants.
DEFINITIONS
The following terms are defined in the warrant agreements:
SENIOR TERM NOTE PUT EVENTS--Defined as the occurrence of any of the
following: (i) a defined change in control of the Company; (ii) certain
consolidations or mergers or the sale of substantially all of the assets of the
Company; (iii) repayment in full of all Senior Debt; or (iv) the filing of a
registration statement which relates to a "Qualified Public Offering."
QUALIFIED PUBLIC OFFERING--Defined as a public offering of common stock with
net proceeds of at least $25,000,000 and valuing the total common stock equity
of the Company at $55,000,000 or more at closing.
SENIOR DEBT AMENDMENT WARRANTS
DESCRIPTION OF REDEEMABLE WARRANTS
All of the Senior Debt Amendment warrants are held by the Senior Lenders.
All of the warrants issued and outstanding are exercisable as of December 31,
1996 and, under certain circumstances, the number issued may be reduced. The
warrant holders are entitled to receive any common stock dividends, when and if
declared, which would have been paid upon the exercise in full of the warrants
immediately prior to the record date for such dividend. The warrants do not have
voting rights.
PUT OPTION
The Senior Lenders have the right, if certain put events occur prior to
September 18, 2001, to require the Company to redeem all (but not less than all)
of the warrants or the stock issued upon exercise of the warrants. The put
events are the same as the Senior Term Note Put Events described above. After
September 18, 2001, the Senior Lenders have the unrestricted right to require
the Company to redeem all (but not less than all) of the warrants or the stock
issued upon exercise of the warrants.
The Senior Lenders' Put Option terminates upon the occurrence of a Qualified
Public Offering as described above.
F-26
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--MANDATORILY REDEEMABLE COMMON STOCK WARRANTS (CONTINUED)
SENIOR SUBORDINATED NOTE WARRANTS
DESCRIPTION OF REDEEMABLE WARRANTS
All of the Senior Subordinated Note warrants are held by the Senior
Subordinated Lenders and were issued in several series. The following table
summarizes the warrants issued and outstanding as of December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF
COMMON
SHARES
SUBJECT TO DATE WARRANTS
WARRANTS BECOME EXERCISABLE
----------- -----------------------
<S> <C> <C>
Series of Redeemable Warrants
Series 1.............................................. 142,395 November 2, 1994
Series 2.............................................. 35,599 December 31, 1996
Series 3.............................................. 35,599 December 31, 1997
Series 4.............................................. 53,397 December 31, 1998
-----------
Total issued and outstanding........................ 266,990
-----------
-----------
</TABLE>
The Series 3 and Series 4 Redeemable Warrants are cancellable if certain
"Triggering Events", as defined below, occur prior to the warrants becoming
exercisable. The Series 1 and Series 2 Redeemable Warrants to purchase an
aggregate 177,994 common shares are not cancellable and are exercisable at
December 31, 1996.
The warrant holders are not entitled to receive any common stock cash
dividends. When and if cash dividends are declared, the number of common shares
subject to warrants and the per share exercise price is subject to adjustment.
The warrants have voting rights unless cancelled in accordance with the terms of
the warrant agreements.
PUT OPTION
Until December 31, 2000, the Senior Subordinated Lenders have the right, if
a Triggering Event occurs and if the warrants are then exercisable, to require
the Company to redeem all (or any portion) of the warrants issued and
outstanding. If a Triggering Event does not occur, the Senior Subordinated
Lenders have the right, only if the Senior Lenders elect (and are able) to
exercise their respective Put Options, to require the Company to redeem all (or
any portion) of their warrants as are issued and outstanding. After December 31,
2000, the Senior Subordinated Lenders have the unrestricted right to require the
Company to redeem all (or any portion) of the warrants issued and outstanding.
DEFINITIONS
The following terms are defined in the warrant agreements:
TRIGGERING EVENTS--Defined as payment in full of the Senior Subordinated
Debt and either of the following: (i) the sale of all or substantially all of
the Company's assets or stock for cash in an amount equivalent to a common
stockholder equity valuation of $30,000,000 or more; or (ii) an "Initial Public
Offering."
F-27
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--MANDATORILY REDEEMABLE COMMON STOCK WARRANTS (CONTINUED)
INITIAL PUBLIC OFFERING--Defined as a public offering of common stock with
net proceeds of at least $25,000,000 and valuing the total common stock equity
of the Company at $55,000,000 or more at closing.
FORMER LENDER DEBT WARRANTS
DESCRIPTION OF REDEEMABLE WARRANTS
In 1991, warrants were issued to a former senior subordinated lender (the
"Former Lender") to purchase 18% of a subsidiary's common stock. The warrants
were exchangeable at the option of the Former Lender for warrants to purchase
that number of the Company's common shares which have an equivalent fair market
value on the exchange date to the number of the subsidiary's common shares
subject to the original warrants (subject to adjustment for anti-dilution). The
warrants were recorded at $380,000, the estimated fair market value on the date
of issuance.
On November 2, 1994, the Former Lender exchanged its warrants for Redeemable
Warrants to purchase 88,339 shares of the Company's common stock. In conjunction
with the sales of Preferred Stock during 1994 and 1996 discussed in Note 15, the
Former Lender was issued an additional 6,219 and 2,868 Redeemable Warrants,
respectively, pursuant to the warrant agreement anti-dilution provisions.
The Redeemable Warrants were exercisable as of their respective issuance
dates and are not subject to cancellation. The Former Lender is entitled to
receive common stock dividends, if declared, except such dividends are payable
only upon exercise of the warrants and only with respect to number of shares
exercised. The warrants do not have voting rights.
PUT OPTION
Until December 30, 2000, the Former Lender has the right, only if the Senior
or Senior Subordinated Lenders or Series D Investors elect (and are able) to
exercise their respective Put Options or if a Qualified Public Offering (as
defined in the Senior Lenders' warrant agreements) has occurred, to require the
Company to redeem all (or any portion) of the warrants or the shares issued upon
exercise of the warrants. On December 31, 2000 and thereafter, the Former Lender
has the unrestricted right to require the Company to redeem all (or any portion)
of the warrants or the shares issued upon exercise of the warrants issued and
outstanding.
CONVERTIBLE SUBORDINATED NOTE WARRANTS
DESCRIPTION OF REDEEMABLE WARRANTS
The Convertible Subordinated Note warrants to purchase 49,079 common shares
are held by the Series D Investors and one of the Senior Subordinated Lenders
(67% and 33%, respectively, and collectively referred to as Convertible Note
Warrant Holders). The warrants were issued on September 18, 1996 in conjunction
with the Company's sale of Convertible Notes and become exercisable on June 30,
1997 provided a "Convertible Notes IPO" (as defined below) shall not have
occurred or the Convertible Notes shall not have been repaid in full. None were
exercisable as of December 31, 1996. The warrants are cancelled upon repayment
of the Convertible Notes with the proceeds from a "Registered Public Offering"
(as defined below) or expire on December 31, 2006. The Convertible Note Warrant
F-28
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--MANDATORILY REDEEMABLE COMMON STOCK WARRANTS (CONTINUED)
Holders are not entitled to receive any common stock cash dividends. When and if
cash dividends are declared, the number of common shares subject to warrants and
the per share exercise price is subject to adjustment. The warrants have voting
rights unless cancelled in accordance with the terms of the warrant agreements.
The warrant agreements provide for an increase in the number of common
shares subject to the warrants if certain "Private Financing" (as defined below)
or Registered Public Offering transactions occur after June 30, 1997 but prior
to the exercise date. The amount of the increase is a formula determined value
based on the per share price of the financing transactions. No increase in the
number of common shares is required provided the financing transactions result
in a price in excess of $14.32 per share.
PUT OPTION
Until December 31, 2000, the Convertible Note Warrant Holders have the
right, if a Registered Public Offering occurs and if the warrants are then
exercisable, to require the Company to redeem all (or any portion) of the
warrants issued and outstanding. If a Registered Public Offering does not occur,
the warrant holders have the right, only if the Senior Lenders elect (and are
able) to exercise their respective Put Options, to require the Company to redeem
all (or any portion) of their warrants as are issued and outstanding. After
December 31, 2000, warrant holders have the unrestricted right to require the
Company to redeem all (or any portion) of the warrants issued and outstanding.
DEFINITIONS
The following terms are defined in the warrant agreements:
CONVERTIBLE NOTES IPO--Defined as receipt by the Company from an
underwriter, on or prior to June 30, 1997, of a firm commitment to underwrite a
public offering for shares of the Company's common stock, which underwritten
public offering shall close on or before July 11, 1997.
PRIVATE FINANCING--Defined as any disposition by the Company or any selling
stockholder of any equity security or convertible security of the Company other
than pursuant to a Registered Public Offering.
REGISTERED PUBLIC OFFERING--Defined as the closing of an underwritten public
offering for the common stock of the Company.
SERIES D PREFERRED STOCK WARRANTS
DESCRIPTION OF REDEEMABLE WARRANTS
All of the Series D preferred stock warrants are held by the Series D
Investors. The warrants were issued in several series on February 20, 1996 in
conjunction with the Company's sale of Series D
F-29
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--MANDATORILY REDEEMABLE COMMON STOCK WARRANTS (CONTINUED)
preferred shares. The following table summarizes the warrants issued and
outstanding as of December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF
COMMON
SHARES
SUBJECT TO DATE WARRANTS
WARRANTS BECOME EXERCISABLE
----------- -----------------------
<S> <C> <C>
Series of Redeemable Warrants
Series 1.............................................. 55,605 December 31, 1997
Series 2.............................................. 55,605 December 31, 1998
Series 3.............................................. 83,408 December 31, 1999
-----------
Total issued and outstanding........................ 194,618
-----------
-----------
</TABLE>
All series of Redeemable Warrants are cancellable if certain "Triggering
Events", as defined below, occur prior to the warrants becoming exercisable. In
addition, a portion of the Series 1 warrants are cancellable if one or more
"Registered Public Offerings", as defined below, occurs prior to December 31,
1997 as summarized in the table below.
<TABLE>
<CAPTION>
NUMBER OF
COMMON SHARES
SUBJECT TO WARRANTS
-------------------------
CANCELLABLE REMAINING
------------ -----------
<S> <C> <C>
Provided that before December 31, 1997 no Triggering Events occur and:
No Registered Public Offerings occur................................................. -- 55,605
A Registered Public Offering occurs with a fully diluted common stock equity value of
(amounts subject to adjustment in certain circumstances)
Greater than or equal to $60,000,000 but less than $65,000,000................... 13,901 41,704
Greater than or equal to $65,000,000 but less than $70,000,000................... 27,802 27,803
Greater than or equal to $70,000,000............................................. 41,704 13,901
</TABLE>
The number of common shares subject to warrants is subject to further
reduction when, and if, any portion of the Senior Subordinated Note warrants is
cancelled pursuant to the terms of those warrant agreements. The warrant holders
are not entitled to receive any common stock cash dividends. When and if cash
dividends are declared, the number of common shares subject to warrants and the
per share exercise price is subject to adjustment. The warrants have voting
rights unless cancelled in accordance with the terms of the warrant agreements.
PUT OPTION
Until December 31, 2000, the Series D Investors have the right, only if any
of the other Redeemable Warrant holders elect (and are able) to exercise their
respective Put Options, to require the Company to redeem all (or any portion) of
the warrants issued and outstanding. After December 31, 2000, the Series D
Investors have the unrestricted right to require the Company to redeem all (or
any portion) of the warrants issued and outstanding.
F-30
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--MANDATORILY REDEEMABLE COMMON STOCK WARRANTS (CONTINUED)
DEFINITIONS
The following terms are defined in the warrant agreements:
TRIGGERING EVENTS--Defined as either of the following: (i) the sale of all
or substantially all of the Company's assets or stock for cash in an amount
equivalent to a common stockholder equity valuation of $60,000,000 or more; or
(ii) a Qualified (Series D Investors) Public Offering.
REGISTERED PUBLIC OFFERINGS--Defined as the closing of underwritten public
offerings with gross proceeds of at least $25,000,000 and valuing the fully
diluted total common stock equity at an amount greater than or equal to
$60,000,000 but less than $75,000,000.
QUALIFIED (SERIES D INVESTORS) PUBLIC OFFERING--Defined as the closing of
underwritten public offerings with gross proceeds of at least $25,000,000 and
valuing the fully diluted total common stock equity at an amount equal to or
greater than the "Minimum Equity Market Value", as defined below.
MINIMUM EQUITY MARKET VALUE--Defined as: (i) for the period from February
20, 1996 through December 30, 1997--$75,000,000; (ii) for the period from
December 31, 1997 through December 30, 1998--$95,000,000; (iii) for the period
from December 31, 1998 through December 30, 1999-- $120,000,000. Antidilution
provisions set forth in the warrant agreements require adjustment of the
foregoing amounts. Through December 30, 1997, the adjusted Minimum Equity Market
Value is approximately $86,000,000 to $93,000,000, depending on the impact of
certain transactions.
In March, 1997, the Series D Investors agreed as part of the
Recapilalization to convert warrants to purchase 99,250 common shares into
common stock in exchange for the cancellation of all of the remaining warrants
outstanding.
SERIES E PREFERRED STOCK WARRANTS
DESCRIPTION OF REDEEMABLE WARRANTS
The Series E Preferred Stock warrants to purchase 49,079 common shares are
held by the Series D Investors and one of the Senior Subordinated Lenders (67%
and 33%, respectively, and collectively referred to as Series E Warrant
Holders). The warrants were issued on September 18, 1996 in conjunction with the
Company's sale of Series E Preferred Stock and are exercisable as of December
31, 1996. The Series E Warrant Holders are not entitled to receive any common
stock cash dividends. When and if cash dividends are declared, the number of
common shares subject to warrants and the per share exercise price is subject to
adjustment. The warrants have voting rights.
The warrant agreements provide for an increase in the number of common
shares subject to the warrants if certain "Private Financing" or "Registered
Public Offering" transactions, as defined below, occur prior to the exercise
date. The amount of the increase is a formula determined value based on the per
share price of the financing transactions. No increase in the number of common
shares is required provided the financing transactions result in a price in
excess of $14.32 per share.
PUT OPTION
Until December 31, 2000, the Series E Warrant Holders have the right, if a
Registered Public Offering occurs and if the warrants are then exercisable, to
require the Company to redeem all (or any portion) of the warrants issued and
outstanding. If a Registered Public Offering does not occur, the warrant holders
F-31
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--MANDATORILY REDEEMABLE COMMON STOCK WARRANTS (CONTINUED)
have the right, only if the Senior Lenders elect (and are able) to exercise
their respective Put Options, to require the Company to redeem all (or any
portion) of their warrants as are issued and outstanding. After December 31,
2000, warrant holders have the unrestricted right to require the Company to
redeem all (or any portion) of the warrants issued and outstanding.
DEFINITIONS
The following terms are defined in the warrant agreements:
PRIVATE FINANCING--Defined as any disposition by the Company or any selling
stockholder of any equity security or convertible security of the Company other
than pursuant to a Registered Public Offering.
REGISTERED PUBLIC OFFERING--Defined as the closing of an underwritten public
offering for the common stock of the Company.
NOTE 15--CUMULATIVE CONVERTIBLE PREFERRED STOCK
At December 31, 1993, the Company's preferred shares were mandatorily
redeemable at the option of the holders. In conjunction with the 1994 debt
refinancing the Company's Articles of Incorporation were amended and the
preferred stockholders' mandatory redemption rights were terminated. As a
result, the Company's mandatorily redeemable preferred shares were reclassified
in the consolidated financial statements to stockholders' equity (deficit).
As of December 31, 1995, the number of preferred shares authorized to be
issued included 167,702 Series A shares, 1,636,316 Series B shares, and
3,000,000 Series C shares. On January 31, 1996 and September 15, 1996, the
Company's Articles of Incorporation were further amended to authorize the
issuance of 2,000,000 Series D shares and 1,500,000 Series E shares,
respectively. All preferred shares are without par value and each share is
entitled to one vote for each common share which would be issuable upon
conversion.
F-32
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--CUMULATIVE CONVERTIBLE PREFERRED STOCK (CONTINUED)
The table below summarizes preferred stock issued during the three year
period ended December 31, 1996 (amounts in thousands):
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D SERIES E TOTAL
----------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993................... $ 168 $ 2,000 $ 3,000 $ -- $ -- $ 5,168
Issuance of 271,471 Series C preferred shares
at $1.50 per share, net of issuance costs
of $26,000................................. -- -- 381 -- -- 381
----- ----------- ----------- ----------- ----------- ---------
Balance, December 31, 1994 and December 31,
1995....................................... 168 2,000 3,381 -- -- 5,549
Issuance of 75,000 Series C preferred shares
at $1.50 per share......................... -- -- 112 -- -- 112
Issuance of 2,000,000 Series D preferred
shares as described below, net of issuance
costs of $558,000.......................... -- -- -- 5,450 -- 5,450
Issuance of 750,000 Series E preferred shares
as described below, net of issuance costs
of $137,000................................ -- -- -- -- 2,739 2,739
----- ----------- ----------- ----------- ----------- ---------
Balance, December 31, 1996................... $ 168 $ 2,000 $ 3,493 $ 5,450 $ 2,739 $ 13,850
----- ----------- ----------- ----------- ----------- ---------
----- ----------- ----------- ----------- ----------- ---------
</TABLE>
The following table summarizes the number of preferred shares outstanding as
of the dates indicated:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D SERIES E TOTAL
--------- ----------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Number of shares outstanding as of
December 31, 1993....................... 167,702 1,583,532 2,000,000 -- -- 3,751,234
December 31, 1994....................... 167,702 1,583,532 2,271,471 -- -- 4,022,705
December 31, 1995....................... 167,702 1,583,532 2,271,471 -- -- 4,022,705
December 31, 1996....................... 167,702 1,583,532 2,346,471 2,000,000 750,000 6,847,705
</TABLE>
Concurrent with the 1994 debt refinancing, 271,471 Series C preferred shares
were issued to related parties consisting of 138,995 shares issued to certain
common stockholders ("Investors") and 132,476 shares issued to the Senior
Subordinated Debt Lenders.
On February 9, 1996, certain members of Company management purchased for
$112,000 an aggregate of 75,000 Series C preferred shares. On February 20, 1996,
the Company sold 2,000,000 Series D preferred shares at $3.25 per share and
issued Redeemable Warrants to purchase 194,618 common shares to the Series D
Investors. 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 were used to fund the Minority Interest
Acquisition.
On September 18, 1996, the Company sold 750,000 Series E preferred shares at
$4.00 per share and issued Redeemable Warrants to purchase 49,079 common shares
to the Series D Investors and the Senior Subordinated Lenders. 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 were used to fund the ADS Acquisition.
F-33
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--CUMULATIVE CONVERTIBLE PREFERRED STOCK (CONTINUED)
Dividends are payable quarterly to the holders of preferred stock, when and
if declared by the Board of Directors. Cash dividends at the annual rate of
$.10, $.1263, $.15, $.325 and $.40 per share related to the Series A, Series B,
Series C, Series D and Series E shares, respectively, accumulate from July 1,
1993 for the Series A and Series B shares, from July 1, 1994 for the Series C
shares, from February 15, 1996 for the Series D shares and from September 18,
1996 for the Series E shares. All cumulative, unpaid dividends on the stock are
to be cancelled and eliminated if the Company's common stock becomes registered
in a public offering of common stock with gross proceeds of at least $10,000,000
at a per share price of not less than $15.87 on or before December 31, 1996. In
January 1997, the holders of the preferred stock agreed to extend the
cancellation date to May 5, 1997 and further, agreed to waive their right to
receive all cumulative unpaid dividends, contingent on the consummation of the
Offering. The Senior and Senior Subordinated Debt agreements prohibit the
Company from paying dividends and, as a result, no dividend payments have been
declared since issuance. Series A, Series B, Series C, Series D and Series E
accumulated dividends in arrears aggregate $58,000 ($.350 per share), $700,000
($.442 per share), $862,000 ($.379 per share), $568,000 ($.284 per share) and
$85,000 ($.113 per share), respectively, as of December 31, 1996.
Each share of preferred stock is convertible into .28357 of a share of
common stock, subject to adjustment in certain circumstances. All cumulative
unpaid dividends, if any, are payable upon conversion. Liquidation preference is
equal to $1.00, $1.263, $1.50, $3.25 and $4.00 per share for the Series A,
Series B, Series C, Series D and Series E shares, respectively, plus declared
but unpaid dividends. The aggregate liquidation preference for all preferred
stock, excluding accumulated dividends in arrears, is $15,187,000 as of December
31, 1996. Payment of the Series D and Series E preferred stock per share
liquidation preference, plus declared but unpaid dividends, is senior to the
Series A, Series B and Series C preferred stock. Payment of the Series A, Series
B and Series C preferred stock per share liquidation preference is pari passu to
the Series A, Series B and Series C stockholders as a group; payment of declared
but unpaid dividends are pro rata based on the relative proportion of the
amounts accumulated but unpaid. Payment of the Series D and Series E preferred
stock per share liquidation preference, plus declared but unpaid dividends, is
pari passu to the Series D and Series E stockholders as a group.
At December 31, 1996, the Company had warrants outstanding to purchase a
total of 52,784 Series B shares at an exercise price of $1.263 per share. The
warrants were issued in 1990 and expire on April 15, 2001. At December 31, 1996,
a total of 52,784 authorized and unissued Series B shares were reserved for
issuance upon exercise of the warrants.
NOTE 16--COMMON STOCK
At December 31, 1995 and 1996, the Company was authorized to issue 2,268,560
and 4,253,550 common shares, respectively, without par value. As of December 31,
1996, a total of 3,391,709 common shares were reserved for issuance upon
exercise of all warrants and stock options and the conversion of the preferred
stock and Convertible Notes.
At December 31, 1996, in addition to the Redeemable Warrants, the Company
had issued non-redeemable warrants to purchase a total of 9,355 common shares at
an exercise price of $4.454 per share expiring on February 20, 2001.
F-34
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--COMMON STOCK (CONTINUED)
The Company has a qualified stock option plan for key employees under which
options to purchase common shares may be granted. The plan permits the granting
of incentive stock options, as defined by Section 422 of the Internal Revenue
Code, non-qualified stock options, restricted stock options and stock
appreciation rights. The plan expires in 2003. Options generally vest in equal
installments over five years from the date of grant and remain exercisable until
December 31, 2002.
The following table summarizes stock option activity for the three years
ended December 31, 1996 (the grant date and per share exercise price is
parenthetically noted):
<TABLE>
<CAPTION>
NUMBER OF OPTIONS
------------------------
AVAILABLE
FOR GRANT OUTSTANDING
---------- ------------
<S> <C> <C>
Options available for grant and outstanding, December 31, 1993......................... 145,471 67,915
Granted (February and November 1994 at $.529 per share)................................ (123,211) 123,211
Exercised.............................................................................. -- (2,269)
Expired or cancelled................................................................... 3,828 (3,828)
---------- ------------
Options available for grant and outstanding, December 31, 1994......................... 26,088 185,029
Increase in number of shares authorized................................................ 32,469 --
Granted (February and March 1995 at $.529 per share)................................... (37,573) 37,573
Expired or cancelled................................................................... 14,179 (14,179)
---------- ------------
Options available for grant and outstanding, December 31, 1995......................... 35,163 208,423
Increase in number of shares authorized................................................ 283,570 --
Granted (4,254 shares in February 1996 at $.529 per share, 87,198 and 14,887 shares in
September 1996 at $1.234 and $7.053 per share, respectively, and 40,692 shares in
December 1996 at $7.053 per share)................................................... (147,031) 147,031
Expired or cancelled (at $.529 per share).............................................. 453 (453)
---------- ------------
Options available for grant and outstanding, December 31, 1996......................... 172,155 355,001
---------- ------------
---------- ------------
</TABLE>
Options for 141,845 shares were exercisable as of December 31, 1996 at a
weighted-average exercise price of $.633 per share. The remaining options
outstanding vest each year as follows: 1997-- 53,371 shares; 1998--53,781
shares; 1999--27,353 shares; 2000--35,407 shares; 2001--43,244 shares.
The weighted-average exercise price of options outstanding was $.529 and
$1.724 per share at December 31, 1995 and 1996, respectively. The Company
believes the per share exercise price of options granted through February 1996
approximated the fair market value of the underlying common stock on the grant
date. The exercise price of options granted after February 1996 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
for the year ended December 31, 1996. Compensatory options for 14,025 shares
were exercisable as of December 31, 1996. The remaining compensatory options
outstanding vest each year on December 31 as follows: 1997--15,954 shares;
1998--18,846 shares; 1999--18,988 shares; 2000-- 31,720 shares; 2001--43,244
shares.
F-35
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--COMMON STOCK (CONTINUED)
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 values of the options granted in 1995 and 1996 at the grant
dates consistent with the method of SFAS 123, the Company's net loss applicable
to common stockholders would have been as follows (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Net loss applicable to common stockholders
As reported........................................................... $ (3,307) $ (6,357)
Pro forma............................................................. (3,307) (6,362)
</TABLE>
For purposes of the pro forma presentation, the fair value for options
granted in 1995 and 1996 was estimated at the grant dates using a minimum value
method, assuming a risk-free interest rate of 5.5% with no projected dividend
yields. Unlike other permitted option pricing models, the minimum value method
excludes stock price volatility which cannot be reasonably estimated for the
Company. 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.
Pro forma per share information is not considered meaningful and has not
been presented above due to the Recapitalization that will occur concurrent with
the closing of the Offering.
NOTE 17--COMMITMENTS AND CONTINGENCIES
FORMER OWNER OF ACQUIRED BUSINESSES
In October 1991, a subsidiary of the Company acquired, in a purchase
transaction, the net assets and stock of several companies under common control
from the former owner (the "Former Owner"). The purchase agreements provided
for: (i) purchase price adjustments based on changes in working capital; (ii) a
consulting services agreement; and (iii) contingent consideration in the maximum
amount of $15,000,000 (of which none was ever paid) payable to the Former Owner
based upon the acquired businesses' future attainment of defined performance
criteria. During 1993 and 1994, the Company asserted various claims against the
Former Owner for breach of representation, warranty provisions, and violation of
various covenants set forth in the purchase agreements. The Former Owner
counterclaimed certain of these matters and litigation commenced.
On June 25, 1996, the Company and the Former Owner settled substantially all
claims which were the subject of the above arbitration and litigation. Under the
terms of the settlement, the Former Owner paid $190,000 to the Company as
consideration for both parties agreeing to release each other from all monetary
claims and terminating all agreements and pending arbitration and litigation
proceedings. The consolidated results of operations for the year ended December
31, 1996 include a net gain of $157,000 recorded pursuant to the settlement
agreement. The net gain reflects the write off of the net amount due to the
Former Owner of $242,000 and the $190,000 received in cash, reduced by the write
off of the remaining unamortized balances of non-compete agreements, which were
terminated, and a litigation claim.
F-36
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Both parties also agreed that the Company's claim for injunctive relief from
the Former Owner's alleged violation of various covenants contained in the
purchase agreements related to non-compete and disclosure of confidential
information would be decided by binding arbitration before a single arbitrator.
The arbitrator is empowered to decide only the matter of injunctive relief;
monetary claims for damages were resolved pursuant to the aforementioned
settlement agreement. Management believes the ultimate disposition of the
arbitration will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
MINORITY STOCKHOLDER
In December 1993, the Minority Stockholder filed a stockholders' derivative
suit against the Company, certain wholly owned subsidiaries of the Company, a
75% owned subsidiary of the Company (the "Majority Owned Subsidiary") and
certain current and former officers and directors of the wholly owned and
Majority Owned subsidiaries. The derivative suit was dismissed in conjunction
with the Company's acquisition of the Minority Stockholder's 25% interest on
February 20, 1996 (Note 2).
OTHER LITIGATION
The Company is a party to a license agreement with McDonnell Douglas
pursuant to which the Company may request certain data in order to design and
market modifications to aircraft manufactured by McDonnell Douglas. The
agreement provides that the Company will pay McDonnell Douglas a royalty of five
percent of the net sales price of all modifications sold by the Company for
which the Company has requested data from McDonnell Douglas. The Company has
requested data for a single modification, which modification the Company
believes is exempt from the obligation to pay royalties under the agreement.
McDonnell Douglas has made a demand for $650,000 for royalties. The Company does
not believe that it is obligated to McDonnell Douglas in any amount. However,
there can be no assurance that the Company will not be required to pay royalties
to McDonnell Douglas.
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
matter discussed in the preceding paragraph, 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
F-37
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--COMMITMENTS AND CONTINGENCIES (CONTINUED)
capital and operating lease commitments under non-cancelable leases are as
follows as of December 31, 1996 (amounts in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- -----------
<S> <C> <C>
Year ending December 31,
1997.................................................................. $ 314 $ 1,857
1998.................................................................. 278 1,799
1999.................................................................. 147 1,672
2000.................................................................. 27 1,427
2001.................................................................. 4 985
2002 and thereafter................................................... -- 4,052
----------- -----------
Total minimum payments required....................................... 770 $ 11,792
-----------
-----------
Less: Amount representing future interest cost........................ (108)
-----------
Recorded obligation under capital leases............................ $ 662
-----------
-----------
</TABLE>
Total rental expense charged to operations for the years ended December 31,
1994, 1995 and 1996 was $1,373,000, $1,531,000 and $1,614,000 respectively.
NOTE 18--CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS INFORMATION
During the three years ended December 31, 1996, the Company paid the
following amounts in cash (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Interest....................................................... $ 3,049 $ 3,275 $ 2,983
Income taxes paid.............................................. 33 33 132
</TABLE>
INFORMATION ON NONCASH INVESTING AND FINANCING ACTIVITIES
Certain noncash investing and financing transactions occurred during the
three years ended December 31, 1996, as follows (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Debt incurred for the acquisition of machinery and equipment..... $ 276 $ 33 $ 414
Financing provided by sellers in connection with acquisitions.... -- -- 3,492
Liabilities assumed in conjunction with acquisitions............. -- -- 2,687
</TABLE>
F-38
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19--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 (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues
Gross revenues
United States.................................................... $ 46,207 $ 54,394 $ 64,383
Western Europe................................................... 7,309 9,388 10,882
--------- --------- ---------
Total gross revenues........................................... 53,516 63,782 75,265
--------- --------- ---------
Less interarea transfers
United States.................................................... (721) (814) (1,496)
Western Europe................................................... (5,703) (7,129) (8,670)
--------- --------- ---------
Total interarea transfers...................................... (6,424) (7,943) (10,166)
--------- --------- ---------
Net revenues
United States.................................................... 45,486 53,580 62,887
Western Europe................................................... 1,606 2,259 2,212
--------- --------- ---------
Total net revenues............................................. $ 47,092 $ 55,839 $ 65,099
--------- --------- ---------
--------- --------- ---------
Income from operations
United States...................................................... $ 1,494 $ 1,354 $ 3,727
Western Europe..................................................... 266 501 746
Interarea eliminations............................................. -- (20) (222)
--------- --------- ---------
Total income from operations..................................... $ 1,760 $ 1,835 $ 4,251
--------- --------- ---------
--------- --------- ---------
Consolidated assets
United States...................................................... $ 35,990 $ 34,425 $ 67,889
Western Europe..................................................... 5,713 6,490 6,015
Interarea eliminations............................................. (4,018) (4,586) (4,638)
--------- --------- ---------
Total consolidated assets........................................ $ 37,685 $ 36,329 $ 69,266
--------- --------- ---------
--------- --------- ---------
</TABLE>
Interarea sales are accounted for at prices which the Company believes would
be equivalent to unaffiliated customer sales. Interarea transfers and
eliminations reflect the shipment of raw component parts between areas.
Operating income excludes net interest expense, other income (expense) and
minority interests which are directly attributable to the related operations.
Corporate assets are included with United States assets.
EXPORT REVENUES
Consolidated revenues include export revenues of $2,890,000, $5,161,000 and
$6,484,000 for the years ended December 31, 1994, 1995 and 1996, respectively.
Export revenues are primarily derived from sales to customers located in Western
Europe, the Far East and Canada.
F-39
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20--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 Company and the
employees, are determined as a percentage of each covered employees' salary.
Company contributions and costs associated with the plan were $100,000, $148,000
and $151,000 for the years ended December 31, 1994, 1995 and 1996, 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 make a contribution up
to a maximum amount defined in the Plan. The Company and its subsidiaries may
make periodic discretionary matching contributions to the Plan. No matching
contributions were made to the plan during the years ended December 31, 1994,
1995 and 1996. The costs associated with administering the plan were not
significant for any period presented.
F-40
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21--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>
DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
INVESTORS
14% demand notes
Interest earned during the period................................................ $ 113 $ -- $ --
Amount repaid, including accrued interest, with proceeds from the 1994 debt
refinancing.................................................................... 1,281 -- --
Purchase of 271,471 shares of Series C preferred stock at $1.50 per share.......... 208 -- --
SENIOR SUBORDINATED LENDERS
Interest and advisory fees
Earned during the period......................................................... 150 912 983
Accrued and payable as of period end............................................. 137 -- 43
Purchase of Convertible Notes, Series E preferred stock and Redeemable Warrants in
conjunction with the ADS Acquisition............................................. -- -- 2,000
Fees and expenses earned --
Capitalized as deferred financing costs.......................................... 140 -- 18
Recorded as a reduction of gross proceeds from the sale of preferred shares...... -- -- 18
SERIES D INVESTORS
Purchases of debt and equity securities
Series D preferred stock and Redeemable Warrants in conjunction with Minority
Interest Acquisition........................................................... -- -- 6,500
Convertible Notes, Series E preferred stock and Redeemable Warrants in
conjunction with the ADS Acquisition........................................... -- -- 4,000
Fees and expenses earned --
Capitalized as deferred financing costs.......................................... -- -- 37
Recorded as a reduction of gross proceeds from the sale of preferred shares...... -- -- 37
Convertible Notes interest earned and accrued and payable as of year end........... -- -- 86
</TABLE>
F-41
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21--RELATED PARTY TRANSACTIONS (CONTINUED)
Each related party is described below and their fully diluted equity
securities ownership percentage of the Company, as of December 31, 1996, is
computed based upon the issued and outstanding Convertible Notes (Note 8),
Redeemable Warrants (Note 14), preferred stock and warrants (Note 15) and common
stock and warrants (Note 16):
INVESTORS--Own 32.2% of the Company's issued and outstanding equity
securities and are represented on the Company's Board of Directors (Notes
14, 15 and 16).
SENIOR SUBORDINATED LENDERS--Own 20.6% of the Company's issued and
outstanding equity securities (including 8.1% acquired from an Investor in a
private transaction in 1994), are represented on the Company's Board of
Directors, and provide a portion of the Company's Convertible Notes
financing and the Subordinated Debt (Notes 8, 10, 14, 15 and 16).
SERIES D INVESTORS--Own 36.1% of the Company's issued and outstanding equity
securities, are represented on the Company's Board of Directors, and provide
a portion of the Company's Convertible Notes financing (Notes 8, 14, 15 and
16).
F-42
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Allard Industries, Inc.
In our opinion, the accompanying balance sheets and the related statements
of income and changes in owner's net investment and of cash flows present
fairly, in all material respects, the financial position of Aerospace Display
Systems, a division of Allard Industries, Inc., at December 31, 1994 and 1995
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1995, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
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.
PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
August 2, 1996
F-43
<PAGE>
AEROSPACE DISPLAY SYSTEMS
(A DIVISION OF ALLARD INDUSTRIES, INC.)
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER
1994 1995 18, 1996
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 1 $ 1 $ 1
Accounts receivable, net.................................. 1,347 1,339 1,292
Inventories............................................... 2,520 2,961 3,273
Prepaid expenses.......................................... 15 27 47
---------- ----------- -----------
Total current assets.................................... 3,883 4,328 4,613
Property and equipment, net................................. 221 328 319
Other assets................................................ 27 45 40
---------- ----------- -----------
Total assets............................................ $ 4,131 $ 4,701 $ 4,972
---------- ----------- -----------
---------- ----------- -----------
LIABILITIES AND OWNER'S NET INVESTMENT
Current liabilities
Accounts payable.......................................... $ 409 $ 597 $ 405
Accrued expenses.......................................... 278 281 246
---------- ----------- -----------
Total current liabilities............................... 687 878 651
Commitments and contingencies (Note 9)
Owner's net investment...................................... 3,444 3,823 4,321
---------- ----------- -----------
Total liabilities and owner's net investment............ $ 4,131 $ 4,701 $ 4,972
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-44
<PAGE>
AEROSPACE DISPLAY SYSTEMS
(A DIVISION OF ALLARD INDUSTRIES, INC.)
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED NINE MONTHS JANUARY 1
DECEMBER 31, ENDED TO
------------------------------- SEPTEMBER 30, SEPTEMBER 18,
1993 1994 1995 1995 1996
--------- --------- --------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues......................................... $ 8,859 $ 8,259 $ 9,952 $ 7,649 $ 7,706
Cost of sales.................................... 6,483 6,192 6,594 5,154 4,855
--------- --------- --------- ------- -------
Gross profit................................... 2,376 2,067 3,358 2,495 2,851
Selling, general and administrative expenses..... 1,642 1,516 1,991 1,454 1,286
--------- --------- --------- ------- -------
Income from operations......................... 734 551 1,367 1,041 1,565
Interest expense................................. 209 204 150 122 52
--------- --------- --------- ------- -------
Income before provision for income taxes....... 525 347 1,217 919 1,513
Provision for income taxes....................... 207 141 495 374 615
--------- --------- --------- ------- -------
Net income..................................... $ 318 $ 206 $ 722 $ 545 $ 898
--------- --------- --------- ------- -------
--------- --------- --------- ------- -------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-45
<PAGE>
AEROSPACE DISPLAY SYSTEMS
(A DIVISION OF ALLARD INDUSTRIES, INC.)
STATEMENTS OF CHANGES IN OWNER'S NET INVESTMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
DECEMBER 31, JANUARY 1
------------------------------- TO
1993 1994 1995 SEPTEMBER 18,
--------- --------- --------- 1996
---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Owner's net investment at beginning of period..................... $ 3,438 $ 3,189 $ 3,444 $ 3,823
Net income........................................................ 318 206 722 898
Net change in interdivision payables and other borrowings......... (567) 49 (343) (400)
--------- --------- --------- -------
Owner's net investment at end of period........................... $ 3,189 $ 3,444 $ 3,823 $ 4,321
--------- --------- --------- -------
--------- --------- --------- -------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-46
<PAGE>
AEROSPACE DISPLAY SYSTEMS
(A DIVISION OF ALLARD INDUSTRIES, INC.)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED NINE MONTHS JANUARY 1
DECEMBER 31, ENDED TO
------------------------------- SEPTEMBER 30, SEPTEMBER 18,
1993 1994 1995 1995 1996
--------- --------- --------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income......................................... $ 318 $ 206 $ 722 $ 545 $ 898
Adjustments to reconcile net income to net cash
provided by (used for) operating activities
Depreciation..................................... 16 33 49 35 51
Changes in assets and liabilities
Accounts receivable............................ 277 (71) 8 (177) 47
Inventories.................................... 200 (201) (441) (86) (312)
Prepaid expenses............................... 7 16 (12) (12) (20)
Other assets................................... 15 -- (18) (4) 5
Accounts payable and accrued expenses.......... (193) 86 191 111 (227)
--------- --------- --------- ------ ------
Net cash provided by operating activities.... 640 69 499 412 442
--------- --------- --------- ------ ------
Cash flows from investing activities
Capital expenditures............................... (72) (118) (156) (115) (42)
--------- --------- --------- ------ ------
Net cash used in investing activities........ (72) (118) (156) (115) (42)
--------- --------- --------- ------ ------
Cash flows from financing activities
(Decrease) increase in interdivision payables and
other borrowings................................... (567) 49 (343) (297) (400)
--------- --------- --------- ------ ------
Net cash (used in) provided by financing
activities................................. (567) 49 (343) (297) (400)
--------- --------- --------- ------ ------
Net increase in cash and cash equivalents............ 1 -- -- -- --
Cash and cash equivalents at beginning of the
period............................................. -- 1 1 1 1
--------- --------- --------- ------ ------
Cash and cash equivalents at end of period........... $ 1 $ 1 $ 1 $ 1 $ 1
--------- --------- --------- ------ ------
--------- --------- --------- ------ ------
Supplemental disclosure of cash flow information--
Cash paid during the period for interest........... $ 209 $ 199 $ 157 $ 127 $ 60
--------- --------- --------- ------ ------
--------- --------- --------- ------ ------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-47
<PAGE>
AEROSPACE DISPLAY SYSTEMS
(A DIVISION OF ALLARD INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 18, 1996, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1995 AND FOR THE PERIOD FROM JANUARY 1 TO SEPTEMBER 18, 1996 IS UNAUDITED.)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
Aerospace Display Systems ("ADS" or the "Division") located in Hatfield,
Pennsylvania is a division of Allard Industries, Inc. ("Allard") and was
acquired from the BF Goodrich Company ("BF Goodrich") in a purchase transaction
in December 1992. ADS designs and manufactures dichroic liquid crystal displays
("LCDs") and modules for both military and commercial aerospace applications for
the domestic and foreign aircraft industry, principally in North America and
Europe.
On July 26, 1996 Allard entered into an agreement to sell certain assets and
the business of the Division to a subsidiary of DeCrane Aircraft Holdings, Inc.
(Note 10).
BASIS OF PRESENTATION
Preparation of these financial statements in conformity with generally
accepted accounting principles requires the Division to make estimates and
assumptions that affect the reported amounts on the balance sheets, at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
The statements of income and changes in owner's net investment includes all
charges applicable to the Division. Allard provides certain services to, and
incurs costs on behalf of, the Division. All of the allocations and estimates in
the financial statements are based on assumptions that the Division and Allard
believe are reasonable.
The financial information as of September 18, 1996 and for the nine months
ended September 30, 1995 and for the period from January 1 to September 18, 1996
is unaudited. In the opinion of the Division, the unaudited financial
information is presented on a basis consistent with the audited financial
statements and contain all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for such interim
periods presented. The results of operations for interim periods are not
necessarily indicative of results of operations for the full year.
INVENTORIES
Inventories are stated principally at the lower of cost or market, as
determined under the last-in, first-out ("LIFO") method. Costs include
materials, labor and manufacturing overhead.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using
straight-line and accelerated methods over their estimated useful lives, ranging
from four to fifteen 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 cost of 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-48
<PAGE>
AEROSPACE DISPLAY SYSTEMS
(A DIVISION OF ALLARD INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 18, 1996, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1995 AND FOR THE PERIOD FROM JANUARY 1 TO SEPTEMBER 18, 1996 IS UNAUDITED.)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The taxable income of the Division is included in the consolidated tax
return of Allard. As such, separate income tax returns were not prepared or
filed by the Division. The provision for income taxes included in these
financial statements has been calculated as if the Division was a tax paying
entity, using Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS 109"). Under the liability method specified in SFAS
109, 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 liability for
deferred taxes.
REVENUE RECOGNITION
Revenues from the sale of manufactured products are recorded when products
are shipped.
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, cash equivalents include
short-term, highly liquid investments with original maturities of three months
or less.
ACCOUNTS RECEIVABLE
Accounts receivable is net of an allowance for doubtful accounts of $28,000
at December 31, 1994 and 1995 (none at September 18, 1996).
NOTE 2--INVENTORIES
Inventories are comprised of the following (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- SEPTEMBER 18,
1994 1995 1996
------------ -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Raw material................................. $ 832 $ 977 $ 1,260
Work-in process.............................. 655 533 560
Finished goods............................... 1,033 1,451 1,453
------------ ------- -------
Total inventories.......................... $ 2,520 $ 2,961 $ 3,273
------------ ------- -------
------------ ------- -------
</TABLE>
The division uses the last-in, first-out method ("LIFO") for valuing its
inventory. If the first-in, first-out ("FIFO") method had been used, inventories
would have been higher than reported by $33,000, $29,000 and $29,000 at December
31, 1994 and 1995 and September 18, 1996, respectively.
F-49
<PAGE>
AEROSPACE DISPLAY SYSTEMS
(A DIVISION OF ALLARD INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 18, 1996, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1995 AND FOR THE PERIOD FROM JANUARY 1 TO SEPTEMBER 18, 1996 IS UNAUDITED.)
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment includes the following (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 18,
1994 1995 1996
--------- --------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Machinery and equipment...................................... $ 214 $ 354 $ 380
Computer equipment, furniture and fixtures................... 45 45 61
Leasehold improvements....................................... 12 26 26
--------- --------- ------
Total cost................................................. 271 425 467
Accumulated depreciation................................... (50) (97) (148)
--------- --------- ------
Net property and equipment............................... $ 221 $ 328 $ 319
--------- --------- ------
--------- --------- ------
</TABLE>
The acquisition of the Division in December 1992 from BF Goodrich was a
bargain purchase transaction and as a result, all property and equipment was
recorded at $0 at the date of the acquisition. Depreciation expense related to
capital expenditures subsequent to the purchase transaction amounted to $16,000,
$33,000 and $49,000 for the years ended December 31, 1993, 1994 and 1995,
respectively, and $35,000 and $51,000 for the nine months ended September 30,
1995 and the period from January 1 to September 18, 1996, respectively.
NOTE 4--RELATED PARTY TRANSACTIONS
NOTES PAYABLE
The Division's cash requirements were met by funds generated from
operations, supplemented as necessary by advances or borrowings from Allard.
Borrowings from Allard were made pursuant to unwritten, informal arrangements.
Interest was charged to the Division as the Division's share of Allard interest
expense based on the Division's proportionate share of total Allard borrowings.
Interest expense was $209,000, $204,000 and $150,000 for the years ended
December 31, 1993, 1994 and 1995, respectively, and $122,000 and $52,000 for the
nine months ended September 30, 1995 and the period from January 1 to September
18, 1996, respectively. Amounts payable to Allard are classified with owner's
net investment in the accompanying balance sheets.
CORPORATE EXPENSES
The results of operations include significant transactions with Allard
business units that are outside of the Division's operations. These transactions
involve functions and services (such as executive management, cash management,
tax administration and strategic planning) that were provided to the Division by
these other Allard units. The payroll cost of these functions and services has
been allocated to the Division based on Allard management's estimated
proportionate level of effort in servicing the Division. Other costs of these
functions and services have been allocated to the Division based on its revenues
in proportion to other Allard divisions. Allard and the Division's management
believe this allocation methodology is reasonable. Corporate charges were
$345,000, $264,000 and $360,000 for the years ended December 31, 1993, 1994, and
1995, respectively, and $240,000 and $301,000 for the
F-50
<PAGE>
AEROSPACE DISPLAY SYSTEMS
(A DIVISION OF ALLARD INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 18, 1996, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1995 AND FOR THE PERIOD FROM JANUARY 1 TO SEPTEMBER 18, 1996 IS UNAUDITED.)
NOTE 4--RELATED PARTY TRANSACTIONS (CONTINUED)
nine months ended September 30, 1995 and the period from January 1 to September
18, 1996, respectively.
PURCHASES
Purchases by the Division from other divisions of Allard were $347,000,
$468,000 and $440,000 for the years ended December 31, 1993, 1994 and 1995,
respectively, and $307,000 and $227,000 for the nine months ended September 30,
1995 and the period from January 1 to September 18, 1996, respectively.
NOTE 5--PENSION PLAN
Allard has a defined contribution 401(k) plan in which substantially all
employees of the Division may participate. Under this plan, employees may make
voluntary contributions of their compensation. The Division may make periodic
discretionary matching contributions to the plan. No matching contributions were
made to the plan during the years ended December 31, 1993, 1994 and 1995.
NOTE 6--CONCENTRATION OF CREDIT RISK AND OTHER INFORMATION
The Division's sales are made principally to commercial OEM customers,
airlines and U.S. government subcontractors. Sales to U.S. government
subcontractors amounted to approximately $4,291,000, $3,869,000 and $3,454,000
for the years ended December 31, 1993, 1994 and 1995, respectively, and
$2,962,000 and $2,917,000 for the nine months ended September 30, 1995 and the
period from January 1 to September 18, 1996, respectively.
The Division is potentially subject to concentrations of credit risk as the
Division relies heavily on customers operating in the domestic and foreign
commercial aircraft industry. Generally, the Division 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 Division maintains reserves for potential credit losses.
Certain customers each accounted for more than 10% of the Division's
revenues, as follows:
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED NINE MONTHS JANUARY 1
DECEMBER 31, ENDED TO
------------------------------------- SEPTEMBER 30, SEPTEMBER 18,
1993 1994 1995 1995 1996
----- ----- ----- ------------------- -------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Customer A........................... 16% 12% 10% 11% 7%
Customer B........................... 13% 10% 8% 9% 9%
Customer C........................... 18% 3% 10% 10% 13%
Customer D........................... 6% 10% 9% 9% 6%
-- -- -- -- --
Total.............................. 53% 35% 37% 39% 35%
-- -- -- -- --
-- -- -- -- --
</TABLE>
F-51
<PAGE>
AEROSPACE DISPLAY SYSTEMS
(A DIVISION OF ALLARD INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 18, 1996, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1995 AND FOR THE PERIOD FROM JANUARY 1 TO SEPTEMBER 18, 1996 IS UNAUDITED.)
NOTE 6--CONCENTRATION OF CREDIT RISK AND OTHER INFORMATION (CONTINUED)
Complete loss of any of these customers could have an adverse impact on the
future results of operations.
Revenues include export revenues, principally to Western Europe, of
$1,030,000, $1,930,000 and $1,623,000 for the years ended December 31, 1993,
1994 and 1995, respectively, and $1,513,000 and $1,289,000 for the nine months
ended September 30, 1995 and the period from January 1 to September 18, 1996,
respectively.
NOTE 7--ACCRUED EXPENSES
Accrued expenses are comprised of the following (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 18,
1994 1995 1996
--------- --------- -----------------
(UNAUDITED)
<S> <C> <C> <C>
Salaries, wages and compensated absences and payroll related
taxes...................................................... $ 113 $ 116 $ 171
Commissions.................................................. 43 40 34
Warranty..................................................... 70 82 15
Other accrued expenses....................................... 52 43 26
--------- --------- -----
Total accrued expenses..................................... $ 278 $ 281 $ 246
--------- --------- -----
--------- --------- -----
</TABLE>
NOTE 8--INCOME TAXES
The provisions for income taxes are as follows (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Current
U.S. federal....................................................... $ 119 $ 16 $ 355
State.............................................................. 31 5 116
--------- --------- ---------
Total current.................................................... 150 21 471
--------- --------- ---------
Deferred
U.S. federal....................................................... 43 90 18
State.............................................................. 14 30 6
--------- --------- ---------
Total deferred................................................... 57 120 24
--------- --------- ---------
Total provision................................................ $ 207 $ 141 $ 495
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-52
<PAGE>
AEROSPACE DISPLAY SYSTEMS
(A DIVISION OF ALLARD INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 18, 1996, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1995 AND FOR THE PERIOD FROM JANUARY 1 TO SEPTEMBER 18, 1996 IS UNAUDITED.)
NOTE 8--INCOME TAXES (CONTINUED)
Deferred tax liabilities (assets) are comprised of the following (amounts in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Gross deferred tax liabilities
Inventory........................................................ $ 341 $ 341 $ 341
Other............................................................ 18 18 18
--------- --------- ---------
Gross deferred tax liabilities................................. 359 359 359
--------- --------- ---------
Gross deferred tax (assets)
Fixed assets..................................................... (233) (127) (59)
Accrued expenses................................................. (63) (55) (59)
Other............................................................ (22) (16) (56)
--------- --------- ---------
Gross deferred tax (assets).................................... (318) (198) (174)
--------- --------- ---------
Net deferred tax liability................................... $ 41 $ 161 $ 185
--------- --------- ---------
--------- --------- ---------
</TABLE>
The net deferred tax liability has been included in owner's net investment
in each period. Income taxes currently payable, and deemed remitted by the
Division to Allard, amounted to $150,000, $22,000 and $471,000 for the years
ended December 31, 1993, 1994 and 1995, respectively.
The provision for income tax differs from the amount of income tax
determined by applying the applicable U.S. statutory federal rate to the income
before income taxes as a result of the following differences (amounts in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Income tax at U.S. statutory rates................................... $ 179 $ 118 $ 414
State income taxes, net of federal benefit........................... 28 23 80
Other, net........................................................... -- -- 1
--------- --------- ---------
Income tax at effective rates...................................... $ 207 $ 141 $ 495
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-53
<PAGE>
AEROSPACE DISPLAY SYSTEMS
(A DIVISION OF ALLARD INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 18, 1996, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1995 AND FOR THE PERIOD FROM JANUARY 1 TO SEPTEMBER 18, 1996 IS UNAUDITED.)
NOTE 9--COMMITMENTS AND CONTINGENCIES
The Division has entered into certain operating leases which require minimum
annual payments as follows: 1996--$193,000; 1997--$194,000; 1998--$184,000;
1999--$139,000, and 2000--$15,000. The total rental expense for all operating
leases was $238,000, $166,000 and $181,000 for the years ended December 31,
1993, 1994 and 1995, respectively.
The Division is also subject to legal proceedings and claims which arise in
the ordinary course of its business. In the opinion of management, the amount of
ultimate liability, if any, with respect to these actions will not have a
material adverse effect on the financial position, results of operations or cash
flows of the Division.
NOTE 10--EVENT SUBSEQUENT TO REPORT OF INDEPENDENT ACCOUNTANTS (UNAUDITED)
On September 18, 1996, a subsidiary of DeCrane Aircraft Holdings, Inc.
consummated the purchase from Allard of the assets, subject to the liabilities,
of the Division.
F-54
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING. IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THOSE
COVERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER OR SOLICITATION BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR THE AFFAIRS OF
THE COMPANY SINCE THE DATES AS OF WHICH INFORMATION IS FURNISHED OR THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Recent Developments....................................................... 13
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 16
Capitalization............................................................ 17
Dilution.................................................................. 18
Selected Consolidated Financial Data...................................... 19
Unaudited Pro Forma Consolidated Financial Data........................... 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 24
Business.................................................................. 30
Management................................................................ 47
Principal and Selling Stockholders........................................ 53
Certain Transactions...................................................... 55
Description of Capital Stock.............................................. 57
Shares Eligible for Future Sale........................................... 62
Underwriting.............................................................. 63
Legal Matters............................................................. 65
Experts................................................................... 65
Additional Information.................................................... 65
Index to Financial Statements............................................. F-1
</TABLE>
--------------------------
UNTIL MAY 12, 1997 (25 DAYS AFTER THE DATE HEREOF), ALL DEALERS EFFECTING
TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH THIS RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2,797,423 SHARES
[LOGO]
DECRANE AIRCRAFT
HOLDINGS, INC.
COMMON STOCK
($.01 PAR VALUE)
SCHRODER WERTHEIM & CO.
DILLON, READ & CO. INC.
ING BARINGS
APRIL 16, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
