<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 12, 1997
REGISTRATION NO. 333-19939
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DECRANE AIRCRAFT HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3728 34-1645569
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code No.) Identification
No.)
</TABLE>
155 MONTROSE WEST AVENUE
SUITE 210
COPLEY, OH 44321
(330) 668-3061
(Address, including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
R. JACK DECRANE
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
DECRANE AIRCRAFT HOLDINGS, INC.
155 MONTROSE WEST AVENUE
SUITE 210
COPLEY, OH 44321
(330) 668-3061
(Name, Address, including Zip Code, and Telephone Number,
including Area Code, of Agent for Service)
--------------------------
WITH COPIES TO:
STEPHEN A. SILVERMAN, ESQ. KENNETH J. BARONSKY, ESQ.
SPOLIN & SILVERMAN MILBANK, TWEED, HADLEY & McCLOY
100 Wilshire Boulevard, Suite 940 601 S. Figueroa, 30th Floor
Santa Monica, California 90401 Los Angeles, California 90017
(310) 576-1221 (213) 892-4000
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
--------------------------
If any of the securities being registered on this form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED (1) PER SHARE (2) PRICE (2) REGISTRATION FEE (2)
<S> <C> <C> <C> <C>
Common Stock, Par Value, $.01 2,987,040 Shares $15.00 $44,805,600 $13,577(3)
</TABLE>
(1) Includes 389,614 shares of Common Stock issuable upon exercise of the
Underwriters' over-allotment option.
(2) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457.
(3) $13,068 was previously paid.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 12, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
2,597,426 SHARES
[LOGO]
DECRANE AIRCRAFT HOLDINGS, INC.
COMMON STOCK
($.01 PAR VALUE)
Of the 2,597,426 shares of Common Stock of DeCrane Aircraft Holdings, Inc.
offered hereby, 2,500,000 shares are being sold by the Company and 97,426 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.
It currently is estimated that the initial public offering price will be between
$13.00 and $15.00 per share. See "Underwriting" for information relating to the
factors considered in determining the initial public offering price.
Application has been made for quotation and trading of the Common Stock on
the Nasdaq National Market under the symbol "DAHX." There can be no assurance
that the Common Stock will be quoted and traded on the Nasdaq National Market or
any trading market.
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..................... $ $ $ $
Total (3)..................... $ $ $ $
</TABLE>
(1) See "Underwriting" for indemnification arrangements.
(2) Before deducting estimated expenses of $ 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 389,614 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 87,748 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 $ ,
$ , $ and $ , 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
, 1997 at the offices of Schroder Wertheim & Co. Incorporated, New
York, New York.
SCHRODER WERTHEIM & CO. DILLON, READ & CO. INC.
ING BARINGS
, 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 above.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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
Company conduct electronic signals or which are used within an aircraft to provide
electricity within an aircraft and must be an electronic or electrical link between
precision machined to conform to strict discrete wires or devices. Many of the
design tolerances. The Company manufactures connectors manufactured by the Company
millions of contacts each month. utilize the Company's contacts.
[PHOTOGRAPH OF HARNESS ASSEMBLIES] [PHOTOGRAPH OF INSTALLATION KITS]
The Company manufactures harness assemblies The Company manufactures avionics support
for use with aircraft avionics systems. The structures used to secure avionics systems
harness assemblies depicted utilize contacts within an aircraft. These support structures,
and connectors manufactured by the Company. 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 of the Company's systems integration
many of whom design, engineer and certify projects involve in-flight entertainment and
modifications to existing aircraft as part of passenger telecommunication systems.
the Company's 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. 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 industry. 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 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. 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 1996 through 2000. This compares to
expenditures for new aircraft of approximately $170 billion for the period 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
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 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
3
<PAGE>
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 ("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
4
<PAGE>
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.......................... 2,500,000 shares
The Selling Stockholders............. 97,426 shares (1)
Total.............................. 2,597,426 shares
Common Stock to be Outstanding after
the Offering......................... 5,051,690 shares (2)
Use of Proceeds........................ To repay certain indebtedness. See "Use of
Proceeds."(3)
Proposed Nasdaq National Market
symbol............................... DAHX
</TABLE>
- ------------------------------
(1) Does not include up to 87,748 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) $10 million of the net proceeds will be used to repay indebtedness held by
affiliates and principal stockholders. 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) 4,635
Net income (loss)................................. (2,693) (3,446) (817) 3,519
Net income (loss) applicable to common
stockholders.................................... (2,891) (3,307) (6,357) 3,519
Income (loss) per common share:
Pro forma for the Recapitalization.....................................
$ (.31)
Pro forma as adjusted (3)..............................................
$ .66
Weighted average number of common shares
outstanding:
Pro forma for the Recapitalization.....................................
2,659
Pro forma as adjusted (4)..............................................
5,362
OTHER FINANCIAL DATA:
Depreciation and amortization (net of deferred
financing
cost amortization included in interest
expense)........................................ $ 3,436 $ 3,636 $ 3,351
Bookings (5)...................................... 47,896 50,785 81,914
Backlog at end of period (6)...................... 24,493 19,761 44,433
<CAPTION>
DECEMBER 31, 1996
---------------------
PRO FORMA
AS
ACTUAL ADJUSTED(7)
--------- ---------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.......................................................... $ 10,486 $ 15,673
Total assets............................................................. 69,266 66,707
Total debt............................................................... 42,250 12,818
Mandatorily redeemable common stock warrants............................. 6,879 --
Stockholders' equity..................................................... 1,236 35,451
</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 2,500,000 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 2,500,000 shares of
Common Stock offered hereby by the Company. 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) Bookings represent the total invoice value of purchase orders received
during the period.
(6) 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.
(7) Reflects: (i) the Recapitalization; and (ii) the sale by the Company of
2,500,000 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. 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."
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
7
<PAGE>
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 expects that IFT, a new entrant into the in-flight entertainment
business and a publicly traded company, will be a significant customer in 1997.
The Company entered into a contract with IFT in July 1996 and expects to realize
a substantial portion of the revenues from such contract in 1997. The Company
will account for revenues generated under the IFT contract using the percentage
of completion method of accounting. Pursuant to this contract, which provides
for monthly progress payments, the Company will 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 Swissair
contract is the first large-scale commercial application of the IFT System. Any
delays in installation or problems in implementation of the IFT System may
result in the deferral or loss of potential revenues from IFT. 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 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 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,
8
<PAGE>
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
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 Capital Partners L.P. and NAS Partners I L.L.C.
(collectively, "Nassau"), (ii) DSV Partners, IV ("DSV"), (iii) Electra
Investment Trust P.L.C. and Electra Associates, Inc. (collectively, "Electra")
and (iv) Brantley Venture Partners, II, L.P. ("Brantley") will beneficially own
16.6%, 9.8%, 9.0%, and 9.7%, 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
9
<PAGE>
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
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 will be 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,
10
<PAGE>
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 5,051,690
shares of Common Stock to be outstanding after the Offering and the
Recapitalization, 2,684,233 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."
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
Based upon an assumed public offering price of $14.00 per share, purchasers
in the Offering will incur an immediate and substantial dilution of
approximately $10.95 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 $8.28. Purchasers in the Offering
will pay approximately 63.7% 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 49.5% of the Common Stock which will be outstanding
following the Offering. See "Dilution."
11
<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 in the
commercial aircraft industry, 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.
12
<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 February 28, 1997, the Company had integrated the IFT System into
two 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 expects to realize a
substantial portion of the revenues from such contract in 1997. The Company will
account for revenues generated under the IFT contract using the percentage of
completion method of accounting. See "Risk Factors--Dependence on Key
Customers."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
2,500,000 shares of Common Stock being offered hereby by the Company are
estimated to be $31.3 million, assuming an initial public offering price of
$14.00 per share and 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 $10.1 million of the proceeds from a
new credit facility (the "New Credit Facility") which the Company will enter
into prior to the consummation of this Offering (see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources"), 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 $14.0 million to repay in full amounts
due under the Senior Revolver, plus 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, $10.5 million will be paid to
Internationale Nederlanden (U.S.) Captial Corporation ("ING") and $3.5 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.
14
<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.
15
<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 2,500,000 shares of Common Stock offered hereby and
the application of the net proceeds therefrom as described in "Use of Proceeds"
(assuming an initial public offering price of $14.00 per share), 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)............................................ -- -- 8,268
Senior Subordinated Notes.......................................... 6,027 6,027 --
Other (2).......................................................... 1,421 1,421 1,421
--------- -------- ---------------
Total long-term debt............................................. 34,350 34,350 9,689
--------- -------- ---------------
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 5,051,690 shares Pro Forma as Adjusted
(4).............................................................. -- 26 51
Additional paid-in capital (5)..................................... -- 18,632 51,283
Accumulated deficit (6)............................................ (12,951) (12,090) (16,004)
Foreign currency translation adjustment............................ 121 121 121
--------- -------- ---------------
Total stockholders' equity....................................... 1,236 6,689 35,451
--------- -------- ---------------
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 2,500,000 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 a success
fee.
(7) Total capitalization consists of long-term debt, mandatorily redeemable
common stock warrants and stockholders' equity.
16
<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 2,500,000 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 $5.1 million, or $3.05 per share. This represents an immediate
increase in net tangible book value of $8.28 per share to existing shareholders
and an immediate dilution of $10.95 per share to purchasers of shares of Common
Stock in the Offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $ 14.00
Net tangible book value per share before the Offering (1)........ $ (5.23)
Increase per share attributable to new investors................. 8.28
---------
Net tangible book value per share after the Offering............... 3.05
---------
Dilution per share to new investors................................ $ 10.95
---------
---------
</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 (based on an assumed initial public offering price of $14.00 per
share).
<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 50.5% $ 18,658,000 36.3% $ 7.31
New investors.......................... 2,500,000 49.5 32,676,000 63.7 13.07
----------- ----- -------------- -----
Total................................ 5,051,690 100.0% $ 51,334,000 100.0%
----------- ----- -------------- -----
----------- ----- -------------- -----
</TABLE>
17
<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)....................................................................
$ .66
Weighted average number of common shares
outstanding:
Pro forma for the Recapitalization.............................................................
2,659
Pro forma as adjusted (6).................................................................... 5,362
OTHER FINANCIAL DATA:
Depreciation and amortization (net of
deferred financing cost amortization
included in interest expense)......... $ 2,611 $ 3,258 $ 3,436 $ 3,636 $ 3,351
Bookings (7)............................ 50,325 46,830 47,896 50,785 81,914
Backlog at end of period (8)............ 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>
18
<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 2,500,000 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 2,500,000 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.
(7) Bookings represent the total invoice value of purchase orders received
during the period.
(8) 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.
19
<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 2,500,000 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.
20
<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........................ (4,758)(8) 667
Other expenses.......................... -- 19
----------- -------------
Income (loss) before (provision) benefit
for income taxes...................... 4,558 4,635
(Provision) benefit for income taxes.... (566)(9) (1,116)
----------- -------------
Income (loss)........................... $ 3,992 $ 3,519
----------- -------------
----------- -------------
Income (loss) applicable to common
stockholders.......................... $ 9,532(10) $ 3,519
----------- -------------
----------- -------------
Income (loss) per common share:
Pro forma for the Recapitalization....
Pro forma as adjusted................. $ .66(12)
Weighted average number of common shares
outstanding:
Pro forma for the Recapitalization....
Pro forma as adjusted................. 5,362(13)
</TABLE>
See accompanying notes to the Unaudited Pro Forma Consolidated Financial Data.
21
<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 2,500,000 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.
(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.
22
<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
23
<PAGE>
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.
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) an increase in sales of specialty connectors for cabin management
and in-flight entertainment systems on Boeing's 777 aircraft of $2.4 million;
(ii) an increase in sales of harness assemblies for in-flight entertainment
systems of $2.4 million; (iii) growth in contact sales driven by new aircraft
production rate increases and growth in the Company's private labeling programs
of $6.4 million; (iv) an increase of sales to IFT of $3.0 million in 1996
relating to a major systems integration program for Swissair; and (v) the
inclusion of $2.8 million of revenues from ADS which was acquired on September
18, 1996. Partially offsetting this increase was a
24
<PAGE>
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.
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 and the increase in cumulative convertible
preferred stock dividends of $.7 million, which were offset in part by the
decrease in net loss of $2.6 million.
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.
25
<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, which
was offset in part by a $.5 million adjustment to the redemption value of
mandatory redeemable common stock warrants.
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.
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,
26
<PAGE>
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 for 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.
Contributing to the increase in availability was a $1.5 million increase in the
maximum borrowings permitted under the Senior Revolver, net of the financing for
the ADS acquisition, 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 expects to obtain a commitment
for a new revolving 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 expects to obtain a commitment from a commercial lender to
provide the New Credit Facility. The New Credit Facility is expected to provide
for a $40.0 million senior revolving credit facility. The interest rate under
the New Credit Facility initially will be, 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 (pro forma for
acquisitions) for the 12 month period ending on such date. The maximum interest
rate under the New Credit Facility will be 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 New Credit Facility of approximately $29.9
million. The New Credit Facility will contain 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
27
<PAGE>
years, and 2.50 to 1.0 in the fifth year of the New Credit Facility; (iii) a
minimum Net Worth (as defined); 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 will be guaranteed by each of the Company's subsidiaries and be
secured by substantially all the assets of the Company and its subsidiaries.
There can be no assurance that the Company will enter into the New Credit
Facility; however, it is a condition to the consummation of the Offering that
the Company obtain a new credit facility in the amount of at least $25.0
million.
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 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. 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.
28
<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 industry. 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.
29
<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 industry, 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.
30
<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. 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
31
<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 in commercial aircraft 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. See "Risk Factors--Risks Associated
with Acquisitions."
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.
32
<PAGE>
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 holds four PMAs
from the FAA and 64 supplements to its PMA's authorizing the Company to
manufacture and install numerous parts in many different aircraft. The Company
also has three FAA domestic repair station certificates which authorize it 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 to act as a designee of the
FAA in issuing certain STCs.
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.
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
33
<PAGE>
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."
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
34
<PAGE>
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.
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 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.
35
<PAGE>
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.
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
36
<PAGE>
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 certificate which covers 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 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
37
<PAGE>
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 Company expects
to realize a substantial portion of the revenues from such contract in 1997.
IFT has advised the Company that it may place additional orders with the
Company for the integration of its in-flight entertainment system for other
airlines. Although IFT is not obligated to place such additional orders and
there can be no assurance that IFT will do so, the Company believes that its
relationship with IFT represents a significant opportunity. 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.
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 onto 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 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
38
<PAGE>
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.
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 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.
39
<PAGE>
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 is the preferred systems integrator for IFT, and it expects that
IFT will become a significant customer in 1997. The Company signed a contract
with IFT in July 1996 and the Company expects to realize a substantial portion
of the revenues from such contract in 1997. The Company will account for
revenues generated under the IFT contract using the percentage of completion
method of accounting. Pursuant to this contract, which provides for monthly
progress payments, the Company will provide systems integration services for the
IFT System on 21 Swissair wide-body aircraft. The first installation of the IFT
System onto a Swissair aircraft was certified in January 1997. As of February
28, 1997, the Company had integrated the IFT System into two of the 21 aircraft.
The Swissair contract is the
40
<PAGE>
first large-scale commercial application of the IFT System. Any delays in
installation or problems in implementation of the IFT System may result in the
deferral or a loss of potential revenues from IFT.
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 any of the
Company's rights to manufacture products manufactured 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
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.
41
<PAGE>
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.
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
42
<PAGE>
September 18, 1996. 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 982 employees (including 136
temporary employees), of whom 96 were engineers (including 3 temporary
employees), 24 were in sales, 769 were in manufacturing operations (including
130 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.
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 2004
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
43
<PAGE>
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."
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.
44
<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.
45
<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."
46
<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.
47
<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>
NUMBER OF % OF TOTAL POTENTIAL REALIZABLE VALUE AT ASSUMED
SECURITIES OPTIONS/SARS ANNUAL RATES OF STOCK PRICE
UNDERLYING GRANTED TO EXERCISE OR APPRECIATION FOR OPTION TERM
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 $ 163,500 $ 344,622 $ 622,498
Robert A. Rankin....... 19,850 13.5% 2.89 2006 110,500 215,154 378,249
Roger L. Keller........ 19,850 13.5% 2.89 2006 110,500 215,154 378,249
Charles H. Becker...... 19,850 13.5% 2.89 2006 110,500 215,154 378,249
</TABLE>
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 $ 516,500/378,250
R. G. MacDonald................... -- -- 34,028/22,686 270,000/180,000
Robert A. Rankin.................. -- -- 12,832/21,197 101,013/121,988
Roger L. Keller................... -- -- 5,671/28,357 43,000/180,000
Charles H. Becker................. -- -- 8,507/25,521 67,000/157,500
</TABLE>
- ------------------------
(1) Assuming an initial public offering price of $14.00 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 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
48
<PAGE>
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 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.
49
<PAGE>
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.
50
<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 January 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................................................. 493,439 19.3%
1920 Main St.
Suite 820
Irvine, CA 92614
James R. Bergman................................................. 493,439(3) 19.3%
1920 Main St.
Suite 820
Irvine, CA 92614
Brantley Venture Partners II, L.P................................ 490,927 19.2%
20600 Chagrin Blvd.,
Suite 1150
Cleveland, Ohio 44122
Paul H. Cascio................................................... 490,927(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.................................................. 131,522(6) 5.0%
155 Montrose West Avenue
Suite 210
Copley, Ohio 44321
R. G. MacDonald.................................................. 53,878(7) 2.1%
2201 Rosecrans Avenue
El Segundo, California 90245
Robert A. Rankin................................................. 18,219(8) *
2201 Rosecrans Avenue
El Segundo, California 90245
Charles H. Becker................................................ 14,179(9) *
2201 Rosecrans Avenue
El Segundo, California 90245
Roger L. Keller.................................................. 8,507(10) *
2201 Rosecrans Avenue
El Segundo, California 90245
All directors and executive officers as a group (eight
persons)....................................................... 2,506,200(11) 93.1%
<CAPTION>
PERCENTAGE OF CLASS
NAME AND ADDRESS OF BENEFICIAL OWNER AFTER OFFERING
- ----------------------------------------------------------------- -----------------------
<S> <C>
Nassau Capital Partners L.P...................................... 16.6%
22 Chambers Street
Princeton, NJ 08542
Jonathan A. Sweemer.............................................. 16.6%
22 Chambers Street
Princeton, NJ 08542
DSV Partners, IV................................................. 9.8%
1920 Main St.
Suite 820
Irvine, CA 92614
James R. Bergman................................................. 9.8%
1920 Main St.
Suite 820
Irvine, CA 92614
Brantley Venture Partners II, L.P................................ 9.7%
20600 Chagrin Blvd.,
Suite 1150
Cleveland, Ohio 44122
Paul H. Cascio................................................... 9.7%
20600 Chagrin Blvd.
Suite 1150
Cleveland, OH 44122
Electra Investment Trust P.L.C................................... 9.0%
65 Kings Way
London, England WC2B6QT
R. Jack DeCrane.................................................. 2.6%
155 Montrose West Avenue
Suite 210
Copley, Ohio 44321
R. G. MacDonald.................................................. 1.1%
2201 Rosecrans Avenue
El Segundo, California 90245
Robert A. Rankin................................................. *
2201 Rosecrans Avenue
El Segundo, California 90245
Charles H. Becker................................................ *
2201 Rosecrans Avenue
El Segundo, California 90245
Roger L. Keller.................................................. *
2201 Rosecrans Avenue
El Segundo, California 90245
All directors and executive officers as a group (eight
persons)....................................................... 48.3%
</TABLE>
- --------------------------
* Less than 1%
(1) Includes 5,171 shares held by NAS Partners I L.L.C., an affiliate of Nassau
Capital Partners, L.P.
(2) Represents 835,637 shares held by Nassau Capital Partners, L.P. and 5,171
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
January 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
January 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
January 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
January 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
January 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
January 31, 1997.
51
<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.......................... 97,426 3.8% 97,426 --
<CAPTION>
PERCENTAGE OF
NAME OWNERSHIP
- --------------------------------------------------- -----------------
<S> <C>
Banc One Capital Partners.......................... --
</TABLE>
ING and Provident have granted the underwriters a 30-day option to purchase
up to 87,748 shares solely to cover over-allotments. Prior to the consummation
of the Offering, ING and Provident beneficially owned 116,730 shares (4.4%) and
38,910 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 63,561 and 21,187
shares, respectively, and will beneficially own 53,169 (1.0%) and 17,723 (.3%),
respectively, of the Common Stock (including shares which may be acquired upon
exercise of the Lender Warrants).
52
<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 16.6%, 9.7%, and 9.8%, 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."
53
<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."
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 will effect a 3.53 for
one reverse stock split.
54
<PAGE>
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 POST-RECAPITALIZATION (1)
- --------------------------------------------------- ---------------------------------------------------
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(2)................... 2,649,419 Common Stock.......................... 514,087
Lender Warrants....................... 250,000 Lender Warrants....................... 70,893
</TABLE>
- ------------------------------
(1) 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.
(2) Excludes the Lender Warrants.
Following the Recapitalization, and giving effect to the cancellation of
certain 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."
COMMON STOCK
As of January 31, 1997, after giving effect to the Recapitalization and
giving effect to the cancellation of certain warrants which will be cancelled
upon consummation of the Offering but not giving effect to the sale of Common
Stock by the Company, there were 2,551,690 shares of Common Stock outstanding
and held of record by 15 stockholders. An additional 70,893 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
55
<PAGE>
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 January 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. In each case such rights will expire upon the consummation of this
Offering (although such rights may revive under certain limited circumstances).
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
56
<PAGE>
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 State Street Bank
and Trust Company.
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.
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.
57
<PAGE>
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 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 January
31, 1997 options to purchase an aggregate of 214,575 shares of Common Stock were
unvested and subject to vesting upon a Change of Control, including options to
purchase 62,385, 22,686, 21,197, 28,357 and 25,521 shares of Common Stock, by
Messrs. DeCrane, MacDonald, Rankin, Keller and Becker, respectively.
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Of the 5,051,690 shares of Common Stock to be outstanding after the
Offering, 2,684,233 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.
59
<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........................
Dillon, Read & Co. Inc......................................
-----------
Total................................................... 2,597,426
-----------
-----------
</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 $ per share to certain dealers,
including the Underwriters; that the Underwriters and such dealers may initially
allow a discount of not in excess of $ 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
389,614 shares of Common Stock, at the initial public offering price set 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 87,748 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 $ 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 will be
determined by negotiations between the Company and the Representatives. Among
the factors to be considered in such negotiations are 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.
60
<PAGE>
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.
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 Bearing (U.S.) Securities, Inc. (and also may be deemed to be an affiliate
of Dillon, Read & Co. Inc.), will receive approximately 23.0 million of the net
proceeds of the Offering (giving effect to the Underwriters' overallotment
option) in its capacity as (i) a lender under the Senior Revolver, (ii) a holder
of Senior Notes, (iii) a Selling Stockholder and pursuant to the Success Fee.
Schroder Wertheim & Co. 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.
LEGAL MATTERS
The validity of the Common Stock offered by this Prospectus 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 Web site (http:// www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
61
<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.
The reverse stock split, a part of the Recapitalization described in Note 1
to the consolidated financial statements, has not been consummated at March 12,
1997. When it has been consummated, we will be in a position to furnish the
following report:
"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
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 , 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....................................................... 12
Use of Proceeds........................................................... 14
Dividend Policy........................................................... 15
Capitalization............................................................ 16
Dilution.................................................................. 17
Selected Consolidated Financial Data...................................... 18
Unaudited Pro Forma Consolidated Financial Data........................... 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 23
Business.................................................................. 29
Management................................................................ 45
Principal and Selling Stockholders........................................ 51
Certain Transactions...................................................... 53
Description of Capital Stock.............................................. 54
Shares Eligible for Future Sale........................................... 59
Underwriting.............................................................. 60
Legal Matters............................................................. 61
Experts................................................................... 61
Additional Information.................................................... 61
Index to Financial Statements............................................. F-1
</TABLE>
--------------------------
UNTIL , 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.
2,597,426 SHARES
[LOGO]
DECRANE AIRCRAFT HOLDINGS, INC.
COMMON STOCK
SCHRODER WERTHEIM & CO.
DILLON, READ & CO. INC
ING BARINGS
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all estimated expenses incurred or
expected to be incurred by the Registrant in connection with the issuance and
distribution of the securities being registered hereby, other than underwriting
discounts and commissions.
<TABLE>
<CAPTION>
ITEM AMOUNT
- --------------------------------------------------------------------------------- -----------
<S> <C>
SEC Registration Fee............................................................. $ 13,068
NASD Filing Fee..................................................................
Nasdaq National Marketing Listing Fee............................................
Blue Sky Filing Fees and Expenses................................................
Printing and Engraving Costs.....................................................
Transfer Agent Fees..............................................................
Legal Fees and Expenses..........................................................
Accounting Fees and Expenses.....................................................
Miscellaneous....................................................................
-----------
Total........................................................................ $
-----------
-----------
</TABLE>
- ------------------------
* To be filed by amendment.
All amounts are estimated except for the SEC Registration Fee, the NASD
Filing Fee and the NASDAQ National Market Listing Fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation contains a provision eliminating
or limiting director liability to the Company and its stockholders for monetary
damages arising from acts or omissions in the director's capacity as a director.
The provision does not, however, eliminate or limit the personal liability of a
director: (i) for any breach of such director's duty of loyalty to the Company
or its stockholders; (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; (iii) under the
Delaware statutory provision making directors personally liable, under a
negligence standard, for unlawful dividends or unlawful stock purchases or
redemptions; or (iv) for any transaction from which the director derived an
improper personal benefit. This provision offers persons who serve on the Board
of Directors of the Company protection against awards of monetary damages
resulting from breaches of their duty of care (except as indicated above). As a
result of this provision, the ability of the Company or a stockholder thereof to
successfully prosecute an action against a director for breach of his duty of
care is limited. However, the provision does not affect the availability of
equitable remedies such as an injunction or recision based upon a director's
breach of his duty of care. The Commission has taken the position that the
provision will have no effect on claims arising under the Federal securities
laws.
In addition, the Certificate of Incorporation and the Company's Bylaws
provide for mandatory indemnification rights, subject to limited exceptions, to
any director or executive officer of the Company who by reason of the fact that
he or she is a director or officer of the Company, is involved in a legal
proceeding of any nature. Such indemnification rights include reimbursement for
expenses incurred by such director or officer in advance of the final
disposition of such proceeding in accordance with the applicable provisions of
GCLSD. The Company may from time to time agree to provide similar
indemnifications to certain employees and other agents.
The Company also maintains directors' and officers' liability insurance.
II-1
<PAGE>
In addition, the Underwriting Agreement provides for indemnification by the
Underwriters of the Registrant, its directors and officers against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(1) Pursuant to a Securities Purchase Agreement dated November 2, 1994 and
Electra Investment Trust P.L.C. and Electra Associates, Inc (collectively,
"Electra") and DSV Partners, the Company sold 271,471 shares of Series C
preferred stock for a purchase price of $1.50 per share. The sale of these
securities was exempt from registration pursuant to Section 4(2) of the Act.
(2) Pursuant to an Amended and Restated Credit Agreement dated as of
November 2, 1994 among the Company, Provident Bank ("Provident") and
Internationale Nederlanden (U.S.) Capital Corporation ("ING), the Company issued
warrants to purchase an aggregate of 84,748 shares of Common Stock in connection
with the amendment and restatement of the Company's credit agreement. Also in
connection with the Amended and Restated Credit Agreement the Company issued
warrants to purchase an aggregate of 94,558 shares of Common Stock to a former
lender to the Company. The issuance of these securities was exempt from
registration pursuant to Section 4(2) of the Act.
(3) Pursuant to a Securities Purchase Agreement dated as of November 2,
1994 among the Company and Electra, the Company issued for a purchase price of
$7.0 million (i) 12% Senior Subordinated Notes due December 31, 2001 having an
aggregate principal amount of $7.0 million, and (ii) warrants to purchase
266,990 shares of Common Stock. The issuance of these securities was exempt from
registration pursuant to Section 4(2) of the Act.
(4) Pursuant to a Securities Purchase Agreement dated as of February 20,
1996 among the Company, Nassau Capital Partners, L.P. and NAS Partners I,
L.L.C., the Company issued an aggregate purchase price of $6.5 million (i)
2,000,000 shares of Series D Preferred Stock, and (ii) warrants to purchase
194,618 shares of Common Stock. The issuance of these securities was exempt from
registration pursuant to Section 4(2) of the Act.
(5) On January , 1994 the Company sold 2,269 shares of Common Stock for
$.53 per share to John Schnepf. Such securities were sold pursuant to the
exercise of stock options.
(6) Pursuant to a Securities Purchase Agreement dated February 9, 1996
among the Company, R.G. MacDonald, Charles Becker, Robert Rankin and John Hinson
the Company sold 75,000 shares of Series C preferred stock for a purchase price
of $1.50 per share. The sale of these securities was exempt from registration
pursuant to Section 4(2) of the Act.
(7) Pursuant to a Securities Purchase Agreement dated September 18, 1996
among the Company, Nassau the Company sold (i) $2.0 million aggregate principal
amount of 15% convertible Notes and 49,079 warrants to purchase Common Stock for
a purchase price of $3.0 million, and (ii) 750,000 shares of Series E Preferred
Stock and 49,079 warrants to purchase Common Stock for a purchase price of $3.0
million. The issuance of such securities was exempt from registration under
Section 4(2) of the Act.
(8) Pursuant to an Amended and Restated Credit Agreement dated as of
September 18, 1996 among the Company, Provident and Internationale Nederlanden
(U.S.) Capital Corporation., ING and Provident Bank, the Company issued 70,892
warrants to purchase Common Stock as additional consideration for amendments to
documents governing certain indebtedness of the Company. The issuance of these
securities was exempt from registration pursuant to Section 4(2) of the Act.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement**
1.2 Form of Agreement Among Underwriters*
3.1 Certificate of Incorporation of Registrant*
3.2 Bylaws of Registrant*
4.1 Specimen Certificate*
5.1 Opinion of Spolin & Silverman (re legality)*
10.1 1993 Share Incentive Plan**
10.2 Tax Sharing Agreement dated March 15, 1993 between the Company TSH and Hollingsead
International, Inc.**
10.3 Employment Agreement dated September 1, 1994 between the Company and R. Jack
DeCrane**
10.4 Employment Agreement dated June 28, 1993 between the Company and R. G. MacDonald**
10.5 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and the
Allard Children's Trust f/b/o John R. Allard**
10.6 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and the
Allard Children's Trust f/b/o Michael E. Allard**
10.7 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and Younes
Nazarian**
10.8 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and David
and Angela Nazarian, Trustees of the Nazarian Family Trust**
10.9 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and Gerald
R. Allard, Trustee of the Gerald R. Allard Revocable Trust of 1994**
10.10 Fourth Amended and Restated Registration Rights Agreement dated September 18, 1996
among the Company, Banc One Capital Partners Corporation, Brantley Venture
Partners II, L.P., R. Jack DeCrane, DSV Parnters, IV, Electra Investment Trust,
P.L.C., Internationale Nederlanden (U.S.) Capital Corporation, Electra Associates,
Inc., The Provident Bank, Nassau Capital Partners L.P., NAS Partner I L.L.C.*
10.11 Fourth Amended and Restated Shareholders Agreement dated September 18, 1996 among
the Company, Banc One Capital Partners Corporation, Brantley Venture Partners II,
L.P., R. Jack DeCrane, DSV Partners, IV, Electra Investment Trust, P.L.C.,
Internationale Nederlanden (U.S.) Capital Corporation, Electra Associates, Inc.,
The Provident Bank, Nassau Capital Partners L.P., NAS Partner I L.L.C.
10.12 Lease dated September 1989 as amended on December 15, 1993 among Continental
Development Corporation, Tri-Star Electronics, Inc., and Cory Components, Inc. for
real property in El Segundo, CA**
10.13 Amended and Restated Credit Agreement, dated September 18, 1996, among the Comapny,
ADS Acquisition, Inc., Tri-Star Holdings, Inc., Tri-Star Electronics
International, Inc., Tri-Star Technologies, Inc., Tri-Star Technologies, Tri-Star
Electronics Europe S.A., Mezzovico, Cory Holdings, Inc., Cory Components, Inc.,
Hollingsead International, Inc., Hollingsead International Limited, The Provident
Bank, and Internationale Nederlanden (U.S.) Capital Corporation**
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.14 General Terms Agreement dated July 5, 1995 between the Boeing Company and Cory
Components, Number 6-5752-0002**
10.15 Special Business Provisions dated November 30, 1995 between the Boeing Company and
Cory Components, Number 6-5752-0004**
10.16 Purchase Agreement 9423JC4548 between Boeing Defense & Space-Irving Co. and Cory
Components, January 1, 1995 through December 31, 1999**
10.17 Electrical Contact Procurement Contract Letter of Agreement, dated June 28, 1993
between Boeing Commercial Airplane Group and Tri-Star Electronics International**
10.18 Asset Purchase and Sale Agreement by and among Allard Industries, Inc., Gerald R.
Allard, Trustee of the Gerald R. Allard Revocable Trust of 1994, The Allard
Children's Trust f/b/o John Allard, The Allard Children's Trust f/b/o Michael E.
Allard, Younes Nazarian and David and Angela Nazarian, Trustees of the Nazarian
Family Trust, the principal shareholders of Allard, the Company and ADS
Acquisition, Inc.**
10.19 Assets Purchase and Sale Agreement dated December 4, 1996 among the Company, EE
Acquisition, Inc., William Lyon, and Elsinore LP**
10.20 Asset Purchase and Sale Agreement dated November 25, 1996 among AMP, Incorporated,
the Whitaker Corporation and DeCrane Aircraft Holdings, Inc.**
10.21 Stock Purchase Agreement, dated January 1, 1995, among the Company and Cory
Components, Inc.**
10.22 Securities Purchase Agreement, dated September 18, 1996 among the Company, Nassau
Capital Partners L.P., NAS Partners I L.L.C., and Electra Investment Trust
P.L.C.**
10.23 Securities Purchase Agreement, dated February 20, 1996 among the Company, Nassau
Capital Partners L.P. and NAS Partners I L.L.C.**
10.24 Securities Purchase Agreement dated November 2, 1994, as amended on February 20,
1996, among the Company, Electra Investment Trust P.L.C. and Electra Associates,
Inc.**
10.25 Letter Agreement dated November 24, 1994 between the Company and Charles Becker**
10.26 Warrant Agreement dated November 2, 1994 between the Company and Internationale
Nederlanden (U.S.) Capital Corporation**
10.27 Form of Warrant Agreement relating to the Company's Series E Warrants**
10.28 Form of Warrant Agreement relating to the Company's Series F Warrants**
10.29 Form of Warrant Agreement relating to the Company's Series G Warrants**
10.30 Form of Warrant Agreement relating to the Company's Series H Warrants**
10.31 Share Purchase Agreement dated February 9, 1996 among the Company, R.G. MacDonald,
Charles Becker, Robert Rankin**
10.32 Agreement dated February , 1997 between the Company and Nassau*
10.33 401(k) Salary Reduction Non-Standardized Adoption Agreement dated April 30, 1992
between the Company and The Lincoln National Life Insurance Company
10.34 Agreement dated January 10, 1997 among the Company and its shareholders relating to
the Recapitalization.
11.1 Statement regarding computation of per share earnings of the Company
21.1 List of Subsidiaries of Registrant*
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
23.1 Consent of Price Waterhouse, LLP
23.2 Consent of Spolin & Silverman (included in Exhibit 5.1)*
24.1 Power of Attorney (appears on signature page)
27 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
(b) FINANCIAL STATEMENT SCHEDULE:
Schedule II--Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the Closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act, may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
This Amendment to Registration Statement and Power of Attorney, pursuant to
the requirements of the Securities Act of 1933, as amended, has been signed on
its behalf by the undersigned, thereunto duly authorized, in the State of
California, on this 12th day of March, 1997.
DECRANE AIRCRAFT HOLDINGS, INC.
By: /s/ R. JACK DECRANE
------------------------------------------
Name: R. Jack DeCrane
Title:Chairman of the Board and
Chief Executive
POWER OF ATTORNEY
Pursuant to the requirement of the Securities Act of 1933, as amended, this
Amendment to Registration Statement have been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- --------------------------------------------- ------------------------- --------------------
<C> <S> <C>
/s/ R. JACK DECRANE Chairman of the Board,
------------------------------------------- Chief Executive Officer March 12, 1997
R. Jack DeCrane and Director
R. G. MACDONALD* Vice Chairman of the
------------------------------------------- Board and Director March 12, 1997
R. G. MacDonald
Chief Financial Officer
ROBERT A. RANKIN* and Secretary
------------------------------------------- (principal accounting March 12, 1997
Robert A. Rankin officer)
JAMES R. BERGMAN*
------------------------------------------- Director March 12, 1997
James R. Bergman
PAUL H. CASCIO*
------------------------------------------- Director March 12, 1997
Paul H. Cascio
JONATHAN A. SWEEMER*
------------------------------------------- Director March 12, 1997
Jonathan A. Sweemer
*By: /s/ R. JACK DECRANE
------------------------------------------- Attorney in fact March 12, 1997
R. Jack DeCrane
</TABLE>
II-6
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING OF COST AND CHARGED TO BALANCE AT
CLASSIFICATIONS PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF PERIOD
- ------------------------------------------- ------------- ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Allowance for Doubtful Accounts............ $ 320,000 $ 51,000 $ 3,000(A) $ 131,000 $ 243,000
Reserve for excess, slow moving and
potentially obsolete material............ $ 593,000 $ 300,000 -- -- $ 893,000
YEAR ENDED DECEMBER 31, 1995
Allowance for Doubtful Accounts............ $ 243,000 $ 66,000 $ 62,000(B) $ 112,000 $ 259,000
Reserve for excess, slow moving and
potentially obsolete material............ $ 893,000 $ 416,000 -- $ 155,000 $ 1,154,000
YEAR ENDED DECEMBER 31, 1996
Allowance for Doubtful Accounts............ $ 259,000 $ 68,000 $ 71,000(C) $ 19,000 $ 379,000
Reserve for excess, slow moving and
potentially obsolete material............ $ 1,154,000 $ 1,055,000 $ -- $ 116,000 $ 2,093,000
</TABLE>
- ------------------------
<TABLE>
<C> <S> <C> <C> <C>
(A) Effect of foreign currency translation.
(B) Comprised of the following:
Effect of foreign currency translation; $ 3,000
Recovery of amounts previously written off. 59,000
------------
$ 62,000
------------
------------
(C) Comprised of the following:
Effect of foreign currency translation; $ (4,000)
Recovery of amounts previously written off; 20,000
Attributable to the ADS acquisition; 50,000
Attributable to the Elsinore acquisition. 5,000
------------
$ 71,000
------------
------------
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------------------------------ -----
<C> <S> <C>
1.1 Form of Underwriting Agreement**
1.2 Form of Agreement Among Underwriters*
3.1 Certificate of Incorporation of Registrant*
3.2 Bylaws of Registrant*
4.1 Specimen Certificate*
5.1 Opinion of Spolin & Silverman (re legality)*
10.1 1993 Share Incentive Plan**
10.2 Tax Sharing Agreement dated March 15, 1993 between the Company TSH and Hollingsead
International, Inc.**
10.3 Employment Agreement dated September 1, 1994 between the Company and R. Jack DeCrane**
10.4 Employment Agreement dated June 28, 1993 between the Company and R. G. MacDonald**
10.5 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and the Allard
Children's Trust f/b/o John R. Allard**
10.6 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and the Allard
Children's Trust f/b/o Michael E. Allard**
10.7 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and Younes Nazarian**
10.8 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and David and Angela
Nazarian, Trustees of the Nazarian Family Trust**
10.9 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and Gerald R. Allard,
Trustee of the Gerald R. Allard Revocable Trust of 1994**
10.10 Fourth Amended and Restated Registration Rights Agreement dated September 18, 1996 among the
Company, Banc One Capital Partners Corporation, Brantley Venture Partners II, L.P., R. Jack
DeCrane, DSV Parnters, IV, Electra Investment Trust, P.L.C., Internationale Nederlanden (U.S.)
Capital Corporation, Electra Associates, Inc., The Provident Bank, Nassau Capital Partners
L.P., NAS Partner I L.L.C.*
10.11 Fourth Amended and Restated Shareholders Agreement dated September 18, 1996 among the Company,
Banc One Capital Partners Corporation, Brantley Venture Partners II, L.P., R. Jack DeCrane,
DSV Partners, IV, Electra Investment Trust, P.L.C., Internationale Nederlanden (U.S.) Capital
Corporation, Electra Associates, Inc., The Provident Bank, Nassau Capital Partners L.P., NAS
Partner I L.L.C.
10.12 Lease dated September 1989 as amended on December 15, 1993 among Continental Development
Corporation, Tri-Star Electronics, Inc., and Cory Components, Inc. for real property in El
Segundo, CA**
10.13 Amended and Restated Credit Agreement, dated September 18, 1996, among the Comapny, ADS
Acquisition, Inc., Tri-Star Holdings, Inc., Tri-Star Electronics International, Inc., Tri-Star
Technologies, Inc., Tri-Star Technologies, Tri-Star Electronics Europe S.A., Mezzovico, Cory
Holdings, Inc., Cory Components, Inc., Hollingsead International, Inc., Hollingsead
International Limited, The Provident Bank, and Internationale Nederlanden (U.S.) Capital
Corporation**
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------------------------------ -----
<C> <S> <C>
10.14 General Terms Agreement dated July 5, 1995 between the Boeing Company and Cory Components,
Number 6-5752-0002**
10.15 Special Business Provisions dated November 30, 1995 between the Boeing Company and Cory
Components, Number 6-5752-0004**
10.16 Purchase Agreement 9423JC4548 between Boeing Defense & Space-Irving Co. and Cory Components,
January 1, 1995 through December 31, 1999**
10.17 Electrical Contact Procurement Contract Letter of Agreement, dated June 28, 1993 between Boeing
Commercial Airplane Group and Tri-Star Electronics International**
10.18 Asset Purchase and Sale Agreement by and among Allard Industries, Inc., Gerald R. Allard,
Trustee of the Gerald R. Allard Revocable Trust of 1994, The Allard Children's Trust f/b/o
John Allard, The Allard Children's Trust f/b/o Michael E. Allard, Younes Nazarian and David
and Angela Nazarian, Trustees of the Nazarian Family Trust, the principal shareholders of
Allard, the Company and ADS Acquisition, Inc.**
10.19 Assets Purchase and Sale Agreement dated December 4, 1996 among the Company, EE Acquisition,
Inc., William Lyon, and Elsinore LP**
10.20 Asset Purchase and Sale Agreement dated November 25, 1996 among AMP, Incorporated, the Whitaker
Corporation and DeCrane Aircraft Holdings, Inc.**
10.21 Stock Purchase Agreement, dated January 1, 1995, among the Company and Cory Components, Inc.**
10.22 Securities Purchase Agreement, dated September 18, 1996 among the Company, Nassau Capital
Partners L.P., NAS Partners I L.L.C., and Electra Investment Trust P.L.C.**
10.23 Securities Purchase Agreement, dated February 20, 1996 among the Company, Nassau Capital
Partners L.P. and NAS Partners I L.L.C.**
10.24 Securities Purchase Agreement dated November 2, 1994, as amended on February 20, 1996, among the
Company, Electra Investment Trust P.L.C. and Electra Associates, Inc.**
10.25 Letter Agreement dated November 24, 1994 between the Company and Charles Becker**
10.26 Warrant Agreement dated November 2, 1994 between the Company and Internationale Nederlanden
(U.S.) Capital Corporation**
10.27 Form of Warrant Agreement relating to the Company's Series E Warrants**
10.28 Form of Warrant Agreement relating to the Company's Series F Warrants**
10.29 Form of Warrant Agreement relating to the Company's Series G Warrants**
10.30 Form of Warrant Agreement relating to the Company's Series H Warrants**
10.31 Share Purchase Agreement dated February 9, 1996 among the Company, R.G. MacDonald, Charles
Becker, Robert Rankin**
10.32 Agreement dated February , 1997 between the Company and Nassau*
10.33 401(k) Salary Reduction Non-Standardized Adoption Agreement dated April 30, 1992 between the
Company and The Lincoln National Life Insurance Company.
10.34 Agreement dated January 10, 1997 among the Company and its shareholders relating to the
Recapitalization.
11.1 Statement regarding computation of per share earnings of the Company
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------------------------------ -----
<C> <S> <C>
21.1 List of Subsidiaries of Registrant*
23.1 Consent of Price Waterhouse LLP
23.2 Consent of Spolin & Silverman (included in Exhibit 5.1)*
24.1 Power of Attorney (appears on signature page)
27 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
<PAGE>
EXHIBIT 10.11
FOURTH AMENDED AND RESTATED
SHAREHOLDERS AGREEMENT
THIS FOURTH AMENDED AND RESTATED SHAREHOLDERS AGREEMENT (this
"Agreement"), dated as of September 18, 1996, is made by and among (i) DeCrane
Aircraft Holdings, Inc., an Ohio corporation (the "Company"), and (ii) the
several holders of the Company's securities listed on Schedule I hereto (the
"Shareholders").
PRELIMINARY STATEMENTS:
A. The Shareholders hold the numbers of Common Shares, without par
value ("Common Shares"), Warrants to purchase Common Shares (the "Common
Warrants"), Series A Convertible Preferred Shares, without par value ("Series A
Shares"), Series B Convertible Preferred Shares, without par value ("Series B
Shares"), Warrants to purchase Series B Shares (the "Series B Warrants"), Series
C Convertible Preferred Shares, without par value ("Series C Shares"), the
Series D Convertible Preferred Shares, without par value (the "Series D Shares")
and the Series E Convertible Preferred Shares, without par value (the "Series E
Shares"), (the Series A Shares, Series B Shares, Series C Shares, Series D
Shares, and Series E Shares collectively the "Preferred Shares") (the Common
Warrants and Series B Warrants, collectively the "Warrants").
B. The Company and certain of the Shareholders executed that certain
Amended and Restated Shareholders Agreement dated as of October 15, 1991, as
amended (the "Amended and Restated Shareholders Agreement"), that certain Second
Amended and Restated Shareholders Agreement dated as of November 2, 1994 (the
"Second Amended and Restated Shareholders Agreement") and that certain Third
Amended and Restated Shareholders Agreement dated as of February 20, 1996 (the
"Third Amended and Restated Shareholders Agreement"), governing, among other
things, the disposition and voting of the outstanding securities of the Company.
C. The Company and the Shareholders desire to amend and restate the
Third Amended and Restated Shareholders Agreement in its entirety by the
execution of this Agreement.
AGREEMENT:
SECTION 1. DEFINITIONS. As used herein, the following terms shall
have the following respective meanings:
(a) "COMMON EQUIVALENT SHARES" shall mean, as of any time, the
aggregate number of Common Shares which would be outstanding (i) if all
outstanding Preferred Shares and any other convertible securities were
converted into Common Shares, (ii) the Warrants, if and to the extent then
outstanding, were exercised to purchase Common Shares, all
<PAGE>
2
at the respective conversion and exercise prices then in effect, and (iii) upon
issuance of all Common Shares issuable upon exercise of options to purchase the
same granted by the Company.
(b) "EIT" shall mean Electra Investment Trust P.L.C., a corporation
organized under the laws of the United Kingdom.
(c) "ELECTRA" shall mean, collectively, EIT and
Electra Associates.
(d) "ELECTRA ASSOCIATES" shall mean Electra Associates, Inc., a Delaware
corporation.
(e) "ELIGIBLE SHAREHOLDER" shall mean any Shareholder, other than (i) in
the case of Section 3 below, any Selling Shareholder, and (ii) in the case of
Section 5 below, a Shareholder or member of a group of Shareholders proposing to
effect a disposition subject to said Section 5.
(f) "NAS" shall mean NAS Partners I L.L.C., a Delaware limited liability
company.
(g) "NASSAU" shall mean, collectively, NAS and Nassau Capital.
(h) "NASSAU CAPITAL" shall mean Nassau Capital Partners L.P., a Delaware
limited partnership.
(i) "PROPORTIONATE PERCENTAGE" shall mean the PRO RATA percentage of
Shares that an Eligible Shareholder shall be entitled to purchase pursuant to
Section 3 hereof, as the case may be. Such PRO RATA percentage, as to each
Eligible Shareholder, shall be the percentage which expresses the ratio between
the number of Common Equivalent Shares owned by such Eligible Shareholder and
the number of Common Equivalent Shares owned by all Eligible Shareholders.
(j) "QUALIFIED PUBLIC OFFERING" shall mean the closing of the initial
underwritten public offering for Common Shares of the Company pursuant to a
registration statement under the Securities Act, with proceeds to the Company of
$25,000,000 or more, and valuing the total common equity of the Company upon
completion of such offering at $55,000,000 or more.
(k) "SECURITIES ACT" shall mean the United States Securities Act of 1933,
as amended from time to time.
(l) "SELLING SHAREHOLDER" shall mean any Shareholder, proposing to sell,
transfer, assign, distribute, encumber or otherwise dispose of in any manner all
or any portion of Shares, or any Shareholder who or which has delivered a
<PAGE>
3
Notice of Intention to Sell with respect to all or any portion of his or
its Shares pursuant to Section 3 hereof.
(m) "SHARES" shall mean Common Shares, Preferred Shares and
Warrants, now or hereafter outstanding.
(n) "SHAREHOLDER" shall mean (i) each holder of Shares listed on
Schedule I hereto and (ii) each other person who becomes bound by this
Agreement, as contemplated by Sections 2 and 7 below.
SECTION 2. RESTRICTIONS ON TRANSFER. Except for the exercise of
certain put and call options set forth in the Common Shares Purchase Warrants
granted by the Company to Internationale Nederlanden (U.S.) Capital Corporation,
a Delaware corporation ("ING"), and The Provident Bank, a banking association
organized under the laws of the State of Ohio ("Provident"), the exercise of a
certain put option set forth in the Securities Purchase Agreement dated as of
November 2, 1994 among the Company and Electra and certain affiliates of the
Company (the "Electra Securities Agreement"), the exercise of a certain put
option set forth in the Senior Subordinate Loan and Warrant Purchase Agreement
as amended, by and among the Company, Banc One Capital Partners, L.P., an Ohio
limited partnership, as successor by merger to Banc One Capital Partners
Corporation, a Texas corporation, and certain affiliates of the Company (the
"Loan Agreement"), the exercise of a certain put option set forth in the
Securities Purchase Agreement dated as of February 20, 1996 between the Company
and Nassau, and the exercise of a certain put option set forth in the Securities
Purchase Agreement of even date herewith among the Company, Nassau and EIT, no
Shareholder shall at any time during the term of this Agreement sell, transfer,
assign, distribute, encumber or otherwise dispose of any Shares except:
(a) by sale in accordance with Sections 3 or 5 (other than Nassau
with respect to Section 5) below;
(b) by transfer to an affiliate (as defined in Rule 405 under the
Securities Act as of the date hereof) or distribution by a Shareholder
which is a partnership to its partners or to the general partners of such
partners; or
(c) in the case of a Shareholder who is an individual, by transfer
to the spouse or lineal descendants of such Shareholder, including, without
limitation, transfers by bequest or devise or to a trust or trusts for the
benefit of any of the foregoing that is managed by professional trustees
acting in the ordinary course of their business.
SECTION 3. RIGHT OF FIRST REFUSAL. (a) Subject to the terms and
conditions of the Fourth Amended and Restated Registration Rights Agreement,
dated as of the date hereof, among the Company and the other parties thereto
(the "Fourth Amended
<PAGE>
4
and Restated Registration Rights Agreement"), if a Shareholder wishes to sell
all or any portion of the Shares owned by such Shareholder (other than a
distribution pursuant to paragraph (b) or (c) of Section 2 hereof), such
Shareholder (or the legal representative of such Shareholder, as the case may
be), (the "Selling Shareholder"), shall promptly deliver a notice of intention
to sell (a "Notice of Intention to Sell") to the Company, which notice shall set
forth, in such Shareholder's good faith belief, the number of Shares to be sold
and the proposed purchase price per Share and terms of sale. Upon receipt of a
Notice of Intention to Sell, the Company shall have the right and option to
elect to purchase all or part of said Shares, at the purchase price and on the
terms stated in the Notice of Intention to .Sell, such election to be made by
the Company. by written notice to the Selling Shareholder within 20 business
days after receipt by the Company of such Notice of Intention to Sell from the
Selling Shareholder (the "Acceptance Period") . If the terms stated in the
Notice of Intention to Sell involve consideration other than cash, the value of
the non-cash consideration shall be determined by agreement of the Company and
the Selling Shareholder. or, absent such agreement, by an appraiser mutually
acceptable to the Company and the Selling Shareholder, in which event the
Company and the Selling Shareholder each shall bear one-half of the costs of
compensating such appraiser.
(b) If the Company fails to elect to purchase all of the Shares
pursuant to paragraph (a) above, the Company shall immediately deliver to each
Eligible Shareholder a copy of the Notice of Intention to Sell and a statement
indicating the number of Shares not purchased by the Company and remaining
available for purchase by the Eligible Shareholders, whereupon each Eligible
Shareholder shall have the right and option to elect to purchase up to its
Proportionate Percentage of said Shares not purchased by the Company, at the
purchase price and on the terms stated in the Notice of Intention to Sell, such
election to be made by such Eligible Shareholder by written notice to the
Company within 20 business days after receipt by such Eligible Shareholders of
such Notice of Intention to Sell from the Company (the "Eligible Shareholder
Acceptance Period").
(c) If any Eligible Shareholder fails-to elect to purchase all of
such Proportionate Percentage of Shares pursuant to paragraph (b) above on a
timely basis, or elects in writing not to do so, then within ten business days
after the earlier to occur of (i) the expiration of the Eligible Shareholder
Acceptance Period and (ii) receipt by the Company of either. written notices of
election or nonelection from each Eligible Shareholder, the Company shall give
written notice to the Eligible Shareholders, if any, that have accepted such
offer with respect to all of their Proportionate Percentages of the Shares
described in the Notice of Intention to Sell, setting forth the number of Shares
remaining available for purchase pursuant to the Notice of Intention to Sell.
Said Eligible Shareholders shall then have the right and option to elect to
purchase the Shares so
<PAGE>
5
remaining available, in proportion to the respective numbers of Common
Equivalent Shares owned by them, or in such other proportions as they may agree,
at the purchase price and on the terms stated in the Notice of Intention to
Sell, by delivery of a further written notice to the Company within ten business
days after receipt of notice from the Company as aforesaid. Said Eligible
Shareholders shall also have the right and option, exercisable by so specifying
in such further written notice, to purchase any of such remaining Shares not
purchased by such other Eligible Shareholders, in proportion to the respective
numbers of Common Equivalent Shares owned by them, or in such other proportions
as they may agree. The Company shall promptly notify the Selling Shareholder in
writing of each notice of election received from Eligible Shareholders pursuant
to paragraph (b) above or this paragraph (c).
(d) If effective acceptances shall not be received pursuant to
paragraphs (a), (b) and (c) above in respect of all he Shares subject thereto,
then the Selling Shareholder may, at its election, either (i) rescind its
original Notice of Intention o Sell, which rescission shall be effected by
notice in writing delivered to each Eligible Shareholder which shall have
elected to purchase and to the Company within five business days after the last
date on which any Eligible Shareholder shall be entitled to make any election
pursuant to paragraph (b) or (c) above, and sell all (but not less than all) of
the Shares as originally proposed to be sold, or (ii) sell to the Company and
the Eligible Shareholders such Shares which the Company and the Eligible
Shareholders have elected to purchase pursuant to the foregoing provisions of
this Section 3, and sell all (but not less than all) of the remaining Shares
which were the subject of the Notice of Intention to Sell to an outside
purchaser, at a purchase price and upon terms not more favorable to such
purchaser than those stated in the original Notice of Intention to Sell, at any
time within 60 business days after the last date on which any Eligible
Shareholder shall be entitled to make any election pursuant to paragraph (b) or
(c) above. In the event any such remaining Shares are not sold by the Selling
Shareholder during such 60 business-day period, the right of the Selling
Shareholder to sell such Shares shall expire and such Shares shall again be
subject to the restrictions contained in this Agreement and shall not
thereafter be sold,, transferred, assigned, distributed, encumbered or otherwise
disposed of except in compliance with the applicable provisions of this
Agreement. Notwithstanding .the foregoing provisions of this Section 3, no
Selling Shareholder shall have the right to sell to any outside purchaser any
Shares which are included in a Notice of Intention to Sell if such Selling
Shareholder did not at the time of giving such Notice of Intention to Sell have
a good faith belief that the outside purchaser would purchase all of such
Shares, at the price and on the terms contained in the Notice of Intention to
Sell.
SECTION 4. PAYMENT FOR SHARES. The closing of the sale and delivery
of instruments representing Shares purchased
<PAGE>
6
and sold pursuant to Section 3 hereof, and payment therefor (the "Closing"),
shall be held at a time and place designated by (i) the Company, if the Company
has elected to purchase all of the Shares eligible to be purchased by the
Company, then on the tenth business day after the date on which the Selling
Shareholder receives notification that the Company intends to purchase all of
such Shares, and (ii) in all other cases, on the tenth business day after the
last day upon which Eligible Shareholders can elect to purchase Shares pursuant
to Section 3. Any payment shall be made by certified or official bank check,
payable to the order of the Selling Shareholder (or such Shareholder's legal
representative, as the case may be), against delivery to the party purchasing
such Shares of a certificate or instrument representing the Shares so sold, duly
endorsed for transfer to such party or accompanied by a stock transfer power
duly endorsed for transfer, with all signatures guaranteed and all requisite
stock transfer taxes paid and stamps affixed.
SECTION 5. RIGHT TO PARTICIPATE IN CO-SALE.
(a) Subject to the terms and conditions of the Fourth Amended and Restated
Registration Rights Agreement, if any Shareholder, other than Nassau, (or group
of Shareholders in a substantially simultaneous transaction) proposes to sell,
exchange or in any other manner dispose of Shares (other than in a manner
permitted by paragraph (b) or (c) of Section 2 above), then such Share holder or
Shareholders, other than Nassau (the "Transferring Shareholder(s)"), shall give
written notice (a "Co-Sale Notice") to the Company setting forth the terms and
conditions of such proposed transaction. The Co-Sale Notice may be provided
concurrently with or as part of the Notice of Intention to Sell. Upon receipt of
such Co-Sale Notice, the Company shall promptly provide a copy of the Co-Sale
Notice to each person or entity who or which was an Eligible Shareholder as of
the date of the Company's receipt of such Co Sale Notice.
(b) Each such Eligible Shareholder shall have the right, exercisable
upon written notice to the Company within 20 business days after receipt by such
Eligible Shareholder of such copy of the Co-Sale Notice, to participate in the
proposed disposition of Shares with respect to those Shares as to which rights
of the Company and the Eligible Shareholders pursuant to Section 3 hereof have
not been exercised (the "Eligible Shares"), on the terms and conditions set
forth in the Co-Sale Notice. Each Eligible Shareholder may participate with
respect to all or any part of that number of the Common Equivalent Shares into
which the Eligible Shares could then be converted or exercised, in an amount
equal to the product obtained by multiplying (i) such number of Common
Equivalent Shares, by (ii) a fraction, the numerator of which is the number of
Common Equivalent Shares at the time owned by such Eligible Shareholder and the
denominator of which is the total number of Common Equivalent Shares at the time
owned by all persons or entities who or which were Shareholders as of the
Company's receipt of the Co-Sale Notice.
<PAGE>
7
(c) If the proposed disposition is of Common Shares or referred
Shares, then each Eligible Shareholder shall be entitled to (i) sell Common
Shares or Preferred Shares, (ii) exercise the option under any Common Warrant to
purchase Common Shares and sell such Common Shares, or (iii) exercise the option
under any Series B Warrant to purchase Series B Shares and sell Common Shares
issued upon conversion of such Series B Shares. If the Transferring Shareholder
proposes to dispose of a Warrant, then each Eligible Shareholder shall be
entitled, to sell, at such Shareholder's option, any form of Shares.
(d) If the Eligible Shares are in a form different from the Shares as
to which an Eligible Shareholder has properly exercised its co-sale rights
pursuant to this Section 5 (the "Co-Sale Shares"), then, if the proposed
purchaser does not agree to purchase such Co-Sale Shares in accordance herewith,
as a condition to the transfer of the Eligible Shares by the Transferring
Shareholder, the Transferring Shareholder shall purchase the Co-Sale Shares from
the Eligible Shareholder. The price per Co-Sale Share at which the Co-Sale
Shares shall be purchased shall be mutually agreed to by the Transferring
Shareholder and the Eligible Shareholder. In the event that the parties cannot
so agree, then the price for the Co-Sale Shares shall be the fair market value
of the Co-Sale Shares determined by an independent investment banker appointed
by the mutual agreement of the Transferring Shareholder and the Eligible
Shareholder, and the costs of compensating such independent investment banker
shall be borne equally by the Eligible Shareholder and the Transferring
Shareholder; PROVIDED, HOWEVER, that if the Shares proposed, to be sold by the
Transferring Shareholder are Preferred Shares, and the proposed purchase price
for such Preferred Shares is less than the Liquidation Payment (as defined in
the Amended and Restated Articles of Incorporation of the Company) that would
then be payable with respect to such Preferred Shares if an event triggering the
payment thereof were then to occur, then, notwithstanding any other provision
contained herein, the Eligible Shareholder shall have no right to require the
Transferring Shareholder to purchase the Co-Sale Shares, and the Transferring
Shareholder shall have no obligation to purchase the Co-Sale Shares.
(e) Each Eligible Shareholder participating in the proposed
disposition shall deliver to the Company, as agent for such Eligible
Shareholder, for delivery to the proposed acquiror, one or more certificates,
properly endorsed for transfer or accompanied by stock transfer powers duly
endorsed for transfer, with all stock transfer taxes paid and stamps affixed,
which represent the number of Shares of Common Shares or Preferred, Shares that
such Eligible Shareholder elects to dispose of pursuant to this Section 5.
Except as expressly provided in this Section 5, the consummation of such
proposed disposition shall be subject to the sole discretion of the Transferring
Shareholder or Transferring Shareholders which shall have initially proposed the
same, and such Transferring Shareholder or Transferring
<PAGE>
8
Shareholders shall have no liability whatsoever to any Eligible Shareholder
participating therein other than to obtain for such Eligible Shareholder the
same terms and conditions as those obtained by such Transferring Shareholder or
Transferring Shareholders, as set forth in the Co-Sale Notice or any amendment
thereof communicated in the manner provided for in paragraph (a) above.
(f) The stock certificate or certificates delivered by an Eligible
Shareholder to the Company pursuant to Section 5(e) shall be delivered by the
Company to the acquiror on behalf of such Eligible Shareholder in consummation
of the disposition of Common Shares or Preferred Shares pursuant to the terms
and conditions specified in Section 5, as the case may be, and the Company shall
promptly thereafter remit to such Eligible Shareholder that portion of the
proceeds of disposition to which such Eligible Shareholder is entitled by reason
of its participation.
(g) For purposes of this Section 5 only, "Eligible Shareholder" shall
not include Nassau Capital or NAS; PROVIDED, HOWEVER, that if any proposed sale,
exchange or other disposition by any Transferring Shareholder(s) and/or Nassau
would result in a Change in Control (hereinafter defined) of the Company, then
notwithstanding anything herein to the contrary, "Eligible Shareholder" and
"Transferring Shareholder" shall he construed to include Nassau Capital and NAS.
For purposes hereof, "Change in Control" shall mean any sale, exchange or other
disposition of Shares by any Shareholder(s) in accordance with this Section 5
which results, or would result, in the transfer of ownership of more than fifty
percent (50%) of the Common Shares on a Fully Diluted basis. For purposes
hereof "Fully Diluted" shall mean, when used with reference to the Common
Shares, at any date as of which the number of shares thereof is to be
determined, all shares of Common Shares outstanding at such date increased by
all common equivalent shares issuable at any time pursuant to any stock options,
warrants, convertible securities, and any other security or instrument that
could result in additional common shares being issued at any time in the future,
outstanding on such date.
SECTION 6. NASSAU RIGHT OF FIRST OFFER; (a) The Company hereby grants to
Nassau and each of the permitted transferees of Nassau under Section 2(b) hereof
the right to purchase all or any part of any future offering or placement (an
"Eligible Offering") of any Common Shares or of any security convertible into or
exchangeable for, or carrying rights or options to purchase or otherwise
acquire, any Common Shares, or options to purchase any such security convertible
into or exchangeable for, or carrying rights to purchase or otherwise acquire,
Common Shares {the "Offered Securities"), other than in a Qualified Public
Offering, or other than as provided in paragraph (c) below, in the manner and
pursuant to the procedures set forth in paragraph (b) of this Section 6.
<PAGE>
9
(b) (i) The Company shall, before issuing or selling any Offered
Securities pursuant to an Eligible Offering, give written notice thereof to
Nassau specifying the type of security or securities (or rights or options in
respect thereof) the Company desires to issue and/or sell and the aggregate
proceeds that the Company desires to obtain therefrom. Nassau shall within 30
business days thereafter be entitled to offer to purchase all or any part of the
Offered Securities at such price per share and pursuant to such other terms and
conditions as specified in a written notice from Nassau to the Company (the
"Nassau Offer"). The Company shall have 20 business days following receipt of
the Nassau Offer to elect to accept the Nassau Offer in a written notice to
Nassau. In the event that any such Nassau Offer is accepted by the Company, the
Company shall sell to Nassau, and Nassau shall purchase from the Company, for
the price per share and on such other terms set forth in the Nassau Offer, the
Offered Securities that Nassau shall have offered to purchase (the "Nassau First
Offer Purchase").
(ii) Notwithstanding the foregoing, and subject to paragraph (iii)
below, Nassau shall consult with Electra during the course of preparation of the
Nassau Offer with respect to the terms and provisions of the Nassau Offer and
shall provide at least 5 business days prior written notice to Electra of the
closing of any Nassau First Offer Purchase and Electra shall be entitled to
purchase from the Company, in lieu of Nassau, up to but not more than one-third
(1/3) of the aggregate number of Offered Securities scheduled to be purchased by
Nassau pursuant to the Nassau First Offer Purchase at the price per share and
pursuant to all other terms applicable to the Nassau First Offer Purchase.
(iii) If at any time the aggregate amount of consideration paid by
Nassau and Electra for Offered Securities pursuant to Nassau First Offer
Purchases equals or exceeds $10,000,000 (the "Cap"), then Nassau and Electra
shall participate thereafter in any Nassau First Offer Purchase pro rata, based
upon the percentage ownership of Shares after giving effect to all Nassau First
Offer Purchases consummated prior to such date which do not in the aggregate
exceed the Cap. If a Nassau First Offer Purchase is proposed to be consummated
and the aggregate of all Nassau First Offer Purchases consummated prior to such
date does not exceed the Cap but the consummation of such proposed Nassau First
Offer Purchase would cause the Cap to be exceeded, then Nassau and, Electra
shall purchase the Offered Securities in accordance with paragraph (ii) hereof
until the Cap shall have been reached and shall purchase the remaining Offered.
Securities subject to such Nassau First Offer Purchase pro rata in accordance
with this paragraph (iii).
(iv) If the Company rejects the Nassau Offer, then the Company shall
have 60 business days from the date of the written rejection of the Nassau Offer
within which to issue or sell all of the Offered Securities to any person or
entity other
<PAGE>
10
than Nassau (a "Third Party") upon terms not more favorable to such Third Party
and at a purchase price not less than 110% of the purchase price proposed in the
Nassau Offer. In the event the Offered Securities are not sold by the Company
during such 60 business-day period, the right of the Company to sell such
Offered Securities to a Third Party shall expire and such Offered Securities
shall again be subject to the restrictions contained in this Section 6 and shall
not thereafter be issued or sold except in compliance with the provisions of
this Section 6.
(v) If the terms stated in the Nassau Offer involve consideration
other than cash, the value of the non-cash consideration shall be determined by
agreement of the Company and Nassau or, absent such agreement, by an appraiser
mutually acceptable to the Company and Nassau, in which event the Company shall
bear the entire costs of compensating such appraiser.
(c) CERTAIN ISSUES OF SECURITIES EXCEPTED. Anything herein to the
contrary notwithstanding, the Company shall not be required to grant to Nassau
the right to purchase any securities described in Section 6(a) in connection
with the issuance by the Company of:
(i) up to an aggregate of [953,700] Common Equivalent Shares, or
options to purchase the same, pursuant to the 1993 Decrane Aircraft
Holdings, Inc. Share Incentive Plan;
(ii) up to an aggregate of [205,000] of the Common Equivalent
Shares, or options to purchase the same, for key employees of businesses
acquired by the Company;
(iii) Common Shares upon exercise of any presently outstanding
Common Warrants, Series B Shares upon exercise of the Series B Warrants (or
Common Shares upon conversion of such Series B Shares), or Common Shares
upon conversion of presently outstanding Preferred Shares;
(iv) up to an aggregate of 41,000 of the Common Equivalent Shares,
or options to purchase the same, to directors (other than the directors
elected pursuant to this Agreement); or
(v) up to an aggregate of 2,500,000 Common Equivalent Shares, or
options to purchase the same, in any merger or acquisition transaction to
which the Company or any subsidiary is a party and in which such Common
Equivalent Shares, or options to purchase the same, are issued only as a
form of consideration to the third party engaged in such merger or
acquisition transaction with the Company.
<PAGE>
11
SECTION 7. ADDITIONAL TRANSFER RESTRICTIONS. (a) Notwithstanding
any provision in this Agreement to the contrary, (i) no Shareholder shall
transfer, sell, assign, distribute, encumber, or otherwise dispose of any Shares
(A) to any third party in reliance on Section 2 hereof, if such third party. or
any affiliate of such third party is engaged, directly or indirectly, whether as
an owner or an employee, in a business that is similar to or in competition with
the business of the Company, (B) if such transfer is prohibited by or is an
event which constitutes, or with the passage of time or notice or both would
constitute, an event of default under the Electra Securities Agreement, the
Credit Agreement (as defined in the Electra Securities Agreement) or the Loan
Agreement,. or any other loan agreement to which the Company may be a party from
time to time, (C) unless the transferor provides, if required by the Company, an
opinion of counsel satisfactory to the Company that such transfer is made in
compliance with all applicable federal and state securities laws and
regulations, and (D) unless the transferee and the Company (on behalf of itself
and the other parties hereunto) execute and deliver a written instrument, in
form and substance satisfactory to the Company, acknowledging the receipt of a
copy of the provisions and restrictions contained in this Agreement and agreeing
to comply herewith and he bound hereby, and (ii) without the consent of Electra,
R. Jack DeCrane ("DeCrane") shall not sell any Shares in reliance on Sections 3
or 5 of this Agreement until such time as the Company has paid the Notes (as
defined in the Electra Securities Agreement) in full.
(b) Any transfer, sale, assignment, distribution, encumbrance or
other disposition, or any attempt to consummate the same, of any Shares in
violation of any provision of this Agreement shall be void (a "Voided
Transfer"), and the Company shall not record any such Voided Transfer on its
books or treat any holder of such Shares as the owner of such Shares for any
purpose.
SECTION 8. BOARD OF DIRECTORS. (a) The Board of Directors of the
Company as of the date hereof shall consist of six members and at no time shall
exceed nine members. With respect to each of Brantley Venture Partners II,
L.P., a Delaware limited partnership ("Brantley"), DSV Partners IV, a New Jersey
limited partnership ("DSV") and Nassau, as long as each of Brantley, DSV or
Nassau owns not less than 5% of the Common Equivalent Shares, each shall be
entitled to appoint one director. As long as DeCrane owns any Shares and is
employed by the Company as its Chief Executive Officer, DeCrane shall be
entitled to appoint one director. As long as Electra owns not less than 5% of
the outstanding Common Equivalent Shares or holds any Notes (as defined in the
Electra Securities Agreement), then Electra shall be entitled to appoint one
director.
(b) Directors not appointed by Brantley, DSV, Nassau, Electra or
DeCrane as provided in Section 8(a) may be appointed only in accordance with
this Section 8(b). Each of Brantley,
<PAGE>
12
DSV, Nassau, Electra and DeCrane shall be entitled to vote for the appointment
of additional directors pursuant to this Section 8(b), but only if such
Shareholder would be entitled to appoint a director pursuant to Section 8(a)
(i.e., only so long as they satisfy the ownership requirement and employment
requirement, as applicable), and then only as follows:
(i) if all five of such Shareholders are entitled to vote for the
appointment of additional directors pursuant to this Section 8(b), then any
such appointment shall require the affirmative votes of at least four of
the five Shareholders;
(ii) if four of the five such Shareholders are entitled to vote for
the appointment of additional directors pursuant to this Section 8(b), then
any such appointment shall require the affirmative votes of at least three
of the four Shareholders entitled to vote;
(iii) if three of the five such Shareholders are entitled to vote for
the appointment of additional directors pursuant to this Section 8(b), then
any such appointment shall require the affirmative votes of at least two of
the three Shareholders entitled to vote;
(iv) if one or two of the five such Shareholders are entitled to vote
for the appointment of additional directors pursuant to this Section 8(b),
then such appointment will require the affirmative votes of all of such
Shareholders entitled to vote.
(c) Each of the Shareholders of the Company shall take such actions
as may be necessary or appropriate, including, without limitation, the voting of
its or his Shares or any other voting securities of the Company, to give effect
to the foregoing. For purposes of this Section 8, Shares of the Company held by
individuals or entities which obtained such Shares pursuant to transfer from
Brantley, DSV, Nassau or Electra pursuant to Section 2(b) or 2(c) hereof shall
be deemed to he held by Brantley, DSV, Nassau or Electra, as the case may be.
Notwithstanding the foregoing, if any of Brantley, DSV or Nassau no longer owns
any Common Equivalent Shares, or Electra.no longer satisfies the ownership
retirements of Section 8(a), as the result of a transfer permitted pursuant to
Sections 2(b) or 2(c), the transferee(s) collectively shall be entitled to
exercise any rights or powers granted to Brantley, DSV, Nassau or Electra in
this Section 8 in the place and stead of Brantley, DSV, Nassau or Electra, as
the case may be.
(d) Subject to the applicable provisions of the Credit Agreement and
the Electra Securities Agreement, the following matters shall be subject to the
prior approval of each of the directors appointed individually by Electra and
Nassau and one of the two directors appointed individually by Brantley and DSV
<PAGE>
13
pursuant to Section 8(a), and the Company shall take no action with respect to
such matters without their approval; provided, that if less than four directors
are entitled to be appointed individually by Brantley, DSV, Nassau and Electra
pursuant to Section 8(a), then the unanimous consent of all directors so
individually appointed shall be required for:
(i) the acquisition of any assets, capital stock or other
interest in another business or company,
(ii) the disposition of any division or subsidiary of the
Company,
(iii) the sale, lease, transfer, mortgage, pledge or encumbrance
of any assets of the Company which exceeds $500,000.00 in
any fiscal year;
(iv) the incurrence of debt by the Company which exceeds
$500,000.00 in any fiscal year (to the extent not
inconsistent with his or her fiduciary duties as a director,
the director appointed individually by Electra shall not
withhold his or her consent to the incurrence of any debt
described in clause (ii) or clause (iii) of Section 7B of
the Electra Securities Agreement),
(v) the merger or consolidation of the Company with or into
another entity;
(vi) any amendment to the Company's Amended and Restated Articles
of Incorporation, Code of Regulations or this Agreement; and
(vii) the issuance of any of the Company's stock (except as a
result of the exercise or conversion of currently
outstanding warrants, convertible securities or options,
including options currently outstanding under the Company's
employee stock option plan).
(e) Subject to the applicable provisions of the Credit Agreement and
the Electra Securities Agreement, the following matters shall be subject to the
prior approval of three of the four directors appointed individually by
Brantley, DSV, Nassau and Electra pursuant to Section 8(a), and the Company
shall take no action with respect to such matters without their approval;
provided, that if less than four directors are entitled to be appointed
individually by Brantley, DSV, Nassau and Electra pursuant to Section 8(a), then
the unanimous consent of all directors so individually appointed shall be
required for:
(i) except as set forth above, the election or appointment of any
director of the Company, or any wholly owned subsidiary; and
<PAGE>
14
(ii) the election, appointment or hiring of officers of the Company
and chief operating officers of the Company's subsidiaries and
the terms of their service in such position, including but not
limited to their compensation and term of service.
SECTION 9. VOTING RIGHTS. To the extent permitted by applicable
law, each Shareholder shall be entitled to vote all Common Equivalent Shares
held by such Shareholder on any matters upon which the holders of Common Shares
are entitled to vote.
SECTION 10. LEGEND ON STOCK CERTIFICATES. All certificates
representing Shares now or hereafter held by any Shareholder shall be endorsed
with a legend reading as follows until such time as the Shares represented
thereby are no longer subject to the provisions hereof:
"THE SALE, TRANSFER, ASSIGNMENT, PLEDGE, OR ENCUMBRANCE OF
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
TO THE TERMS AND CONDITIONS OF THE FOURTH AMENDED AND
RESTATED SHAREHOLDERS AGREEMENT DATED AS OF SEPTEMBER 18,
1996 AMONG DECRANE AIRCRAFT HOLDINGS, INC. AND CERTAIN
HOLDERS OF THE THEN OUTSTANDING CAPITAL STOCK OF SUCH
CORPORATION. COPIES OF SUCH AGREEMENT MAY BE OBTAINED AT NO
COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS
CERTIFICATE TO THE SECRETARY OF DECRANE AIRCRAFT HOLDINGS,
INC."
Upon execution of this Agreement, instruments for Shares presently held by
Shareholders shall be surrendered to the Company, and such instruments shall be
endorsed with said legend and returned to the appropriate shareholder.
SECTION 11. DURATION OF AGREEMENT. This Agreement shall terminate
upon the first to occur of (i) a Qualified Public Offering and (ii) with respect
to each Shareholder, when such Shareholder ceases to own any Shares; PROVIDED,
HOWEVER, that notwithstanding the occurrence of a Qualified Public Offering, the
provisions of Section 6 and Sections 8(a) and 8(c) hereof shall continue in full
force and effect with respect to each Shareholder for so long as such
Shareholder continues to own 5% or more of the Common Equivalent Shares.
SECTION 12. REPRESENTATIONS AND WARRANTIES. Each Shareholder
severally represents and warrants to the Company and the other parties hereto as
follows:
(a) The execution, delivery and performance of this Agreement by
such party will not violate any provision of law, any order of any court or
other agency of government, or any provision of any indenture, agreement or
other instrument to
<PAGE>
15
which such party or any of such party's properties or assets is bound, or
conflict with, result in a breach of or constitute (with due notice or lapse of
time or both) a default under any such indenture, agreement or other instrument,
or result in the creation or imposition of any lien, charge or encumbrance of
any nature whatsoever upon any of the properties or assets of such party, except
as contemplated hereby, by the Credit Agreement and by the Electra Securities
Agreement.
(b) This Agreement has been duly executed and delivered by such
party and constitutes the legal, valid and binding obligation of such party,
enforceable in accordance with its terms, subject to applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation, fraudulent conveyance and
other similar laws and principles of equity affecting creditors' rights and
remedies generally.
SECTION 13. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California, without regard
to its conflicts of law rules.
SECTION 14. BENEFITS OF AGREEMENT. This Agreement shall be binding
upon and inure to the benefit of the parties and their respective successors,
assigns, heirs, executors, administrators and legal representatives, whether so
expressed or not. All or any portion of the rights of Eligible Shareholders to
purchase Shares in accordance with the provisions of this Agreement may be
transferred to the Company, if the affected Eligible Shareholder shall so
consent and if the Company may legally exercise such rights and the Board of
Directors of the Company shall approve the transfer of such rights as being in
the best interests of the Company and its shareholders.
SECTION 15. NOTICES. All notices, requests, consents and other
communications shall be in writing delivered in person or by facsimile or duly
sent by first class registered or certified mail, postage prepaid, addressed as
follows:
(a) if to the Company, at 155 Montrose West Avenue, Suite, 210,
Copley, Ohio 44321, facsimile number: (216) 668-2518, Attention: Chief
Executive Officer; and
(b) if to any other party, to such other party at his or its
respective addresses and facsimile numbers set forth in Schedule I attached
hereto, or, in any such case, at such other address, addresses, facsimile number
or numbers as shall have been designated by notice in writing by such party to
the others. Each party agrees to have at all times an address and a facsimile
number for notices hereunder.
All such notices and communications shall be deemed to have been received (i)
in the case of personal or facsimile delivery, on
<PAGE>
16
the date of such delivery and (ii) in the case of mailing, on the fifth business
day following such mailing.
SECTION 16. MODIFICATION. Except as otherwise provided herein,
neither this Agreement nor any provision hereof can be modified, changed,
discharged or terminated except by an instrument in writing signed by the party
against whom the enforcement of any modification, change, discharge or
termination is sought.
SECTION 17. ENTIRE AGREEMENT. This Agreement, together with the
Fourth Amended and Restated Registration Rights agreement, constitutes the
entire agreement among the undersigned with respect to matters or understandings
involving the ownership, control or disposition of their Shares and supersedes
in its entirety any and all prior agreements or understandings, oral or written,
among any or all of the undersigned relating to such ownership, control or
disposition, including, without limitation, the Amended and Restated
Shareholders Agreement, the Second Amended and Restated Shareholders Agreement
and the Third Amended and Restated Shareholders Agreement.
SECTION 18. COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be in original, but all of
which taken together shall constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the Company and the parties hereto have executed
this Fourth Amended and Restated Shareholders Agreement as of the day and year
first above written.
DeCRANE AIRCRAFT HOLDINGS, INC.
By: /s/ R. Jack DeCrane
-----------------------------------------
R. Jack DeCrane, Chief Executive 0fficer
BANC ONE CAPITAL PARTNERS, L.P.
By:
-----------------------------------------
BRANTLEY VENTURE PARTNERS II, L.P.
By: Brantley Venture Management II,
L.P., its general partner
By: Pinkas Family Partners, L.P., its general
partner
By: /s/ Robert P. Pinkas
-----------------------------------------
Robert P. Pinkas General Partner
/s/ R. Jack DeCrane
-----------------------------------------
R. JACK DeCRANE, in his individual capacity
DSV PARTNERS, IV
By: DSV Management, Ltd.
By: /s/ John K. Clarke
-----------------------------------------
John K. Clarke General Partner
<PAGE>
ELECTRA INVESTMENT TRUST, P.L.C.
By:
---------------------------------
Its:
---------------------------------
INTERNATIONALE NEDERLANDEN (U.S.)
CAPITAL CORPORATION
By: /s/ [ILLEGIBLE]
---------------------------------
Its: Senior Associate
---------------------------------
ELECTRA ASSOCIATES, INC.
By:
---------------------------------
Its:
---------------------------------
THE PROVIDENT BANK
By: /s/ [ILLEGIBLE]
---------------------------------
Its: Vice President
---------------------------------
NASSAU CAPITAL PARTNERS L.P.
By: NASSAU CAPITAL L.L.C.
General Partner
By: /s/ [ILLEGIBLE]
---------------------------------
Its: Member
---------------------------------
NAS PARTNERS I L.L.C.
By: /s/ [ILLEGIBLE]
---------------------------------
Its: Member
---------------------------------
<PAGE>
401(k) SALARY REDUCTION
----------------------
NON-STANDARDIZED
----------------------
ADOPTION AGREEMENT
----------------------
IRS Serial #D359971a
Approved April 30, 1992
[LOGO]
1300 South Clinton Street Fort Wayne, IN 46801
<PAGE>
Internal Revenue Service Department of the Treasury
Plan Description: Prototype Non-standardized Profit Sharing Plan with CODA
FFN: 50337598001-007 Case: 9100610 EIN: 35-0472300
GFD: 01 Plan: 007 Letter Serial No:
0359971a Washington DC 20224
LINCOLN NATIONAL LIFE INSURANCE CO Person to Contact Mr. Wolf
Telephone Number (202) 566-6421
1300 SOUTH CLINTON STREET
PO BOX 2340 Refer Reply to: E:EP:Q:1
FORT WAYNE IN 46801
Date 04/30/92
Dear Applicant:
In our opinion, the form of the plan identified above is acceptable under
section 401 of the Internal Revenue Code for use by employers for the benefit of
their employees. This opinion relates only to the acceptability of the form of
the plan under the Internal Revenue Code. It is not an opinion of the effect of
other Federal or local statutes.
You must furnish a copy of this letter to each employer who adopts this plan.
You are also required to send a copy of the approved Form of the plan, any
approved amendments and related documents to each Key District Director of
Internal Revenue Service in whose jurisdiction there are adopting employers.
Our opinion on the acceptability of the form of the plan is not a ruling or
determination as to whether an employer's plan qualifies under Code section
401(a). Therefore, an employer adopting the form of the plan should apply for a
determination letter by filing an application with the Key District Director of
Internal Revenue Service on Form 5307, Short Form Application for Determination
for Employee Benefit Plan.
If you, the sponsoring organization, have any questions concerning the IRS
processing of this case, please call the above telephone number. This number is
only for use of the sponsoring organization. Individual participants and/or
adopting employers with questions concerning the plan should contact the
sponsoring organization. The plan's adoption agreement must include the
sponsoring organization's address and telephone number for inquiries by adopting
employers.
If you write to the IRS regarding this plan, please provide your telephone
number and the most convenient time for us to call in case we need more
information. Whether you call or write, please refer to the Letter Serial
Number and File Folder Number shown in the heading of this letter.
You should keep this letter as a permanent record. Please notify us if you
modify or discontinue sponsorship of this plan.
Sincerely yours,
/s/ John Diveca
Chief, Employee Plans Qualifications Branch
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NON-STANDARDIZED
401(k) SALARY REDUCTION PLAN AND TRUST PROTOTYPE PLAN
ADOPTION AGREEMENT
PLAN #007
IRS SERIAL #D359971A DATE APRIL 30, 1992
The De Crane Aircraft Holdings, Inc. oka DAH, Inc.
---------------------------------------------------------------------------
(exact legal name of Employer)
(hereinafter referred to as the Employer), having its principal place of
business in El Segundo, California
-------------------------------------------------------------------
(City) (State)
hereby adopts The Lincoln National Life Insurance Company Non-Standardized
401(k) Salary Reduction Plan and Trust Prototype Plan, and further appoints as:
Trustee(s), Robert A. Rankin
-------------------------------------------------------------------
------------------------------------------------------------------;
Named Fiduciary*, Same
------------------------------------------------------------;
Plan Administrator*, Same
------------------------------------------------------; and
Agent for Legal Service of Process*, Same
-----------------------------------------;
* If same as Employer, write 'Same'.
The Employer's Tax Year begins January 1 and ends December 31 .
-------------------- --------------------
Employer Telephone Number (310) 536-0444 .
-------------------------
Business Code Number (same as shown on 1120) 3725 .
-------------------
Date Business Commenced December 15, 1989 .
------------------------
In connection herewith, the Employer makes the following statements and
selections:
This Plan shall be known as DAR Retirement Plan
-----------------------------------------
(name of Employer)
401(k) Salary Reduction Plan and
-----------------------------------
Trust which shall be identified by Employer I.D. # 34-1645569
-------------------
and Plan Serial # 001 (001, 002, etc. - assign sequentially).
--------------
<PAGE>
The employer maintains, or has maintained, the following qualified plans: (List
all plans, including this Plan, ever maintained by the Employer starting with
Plan Serial #001.)
Status
Plan ------
Serial # Type of Plan In Force Terminated
--------- ------------ -------- ----------
001 401(k) [X] [ ]
--------- ------------------------------------
002 [ ] [ ]
--------- ------------------------------------
003 [ ] [ ]
--------- ------------------------------------
004 [ ] [ ]
--------- ------------------------------------
005 [ ] [ ]
--------- ------------------------------------
This Employer is: Sole Proprietor
----
Partnership
----
X Corporation
----
S Corporation
----
Professional Corporation
----
Non Profit Corporation
[X] Yes [ ] No Is the Employer a member of a Controlled Group of
Corporations, a group of businesses under common control, or
an Affiliated Service Group as defined below. This question
must be answered "yes" or "no". If yes, complete the rest
of this section.
In the case of a group of employers which constitutes a Controlled Group of
Corporations, or an Affiliated Service Group [as defined in Sections 414(b) and
414(m), respectively, of the Internal Revenue Code], or which constitutes one or
more trades or businesses whether or not incorporated which are under common
control [as defined in Section 414(c)], all such employers shall be considered a
single employer for purposes of determining plan qualification, minimum
participation, benefit accrual, vesting standards, and limitations on benefits
and contributions. The employers listed below are required to be aggregated
with the adopting employer under Code Sections 414(b), (c), (m) or (o), and
shall participate in this Plan to the extent indicated as evidenced by written
resolution adopting this Plan. (If there are no affiliated employers, indicate
None.)
- ----
Employer Employer Participating Participation
Name I.D. # Employer Effective Date
-------- -------- ------------- --------------
Tri-Star Electronics
International, Inc. 34-1687242 [X] Yes [ ] No
- ----------------------------- ---------- --------------
Cory Components 95-3938746 [X] Yes [ ] No
- ----------------------------- ---------- --------------
Hollingsead International 95-2500766 [X] Yes [ ] No
- ----------------------------- ---------- --------------
- ----------------------------- ---------- --------------
- ----------------------------- ---------- --------------
If this Plan and Trust is adopted by more than one member of the aggregation
group, this Plan
[X] (a) shall be administered as one plan (i.e., contributions, and
forfeitures shall not be separated for each participating Employer).
[ ] (b) shall be administered as a single employer plan for each participating
Employer [i.e., contributions shall be made by each Employer only for
those Participants employed by such Employer and forfeitures shall be
used to reduce the contribution made by the applicable Employer - each
asset pool shall be considered a separate plan which must
independently satisfy Code Section 401(a) (26)].
[ ] (c) N/A
2
<PAGE>
Any Employee of a participating Employer must receive credit for service while
employed by any member of the aggregation group (including non-participating
employers) for purposes of vesting and eligibility under this Plan from the date
such Employer became a member of the aggregation group.
A-1.22 The adoption of this Plan constitutes: (check appropriate statement
and provide information)
[ ] (a) The initial adoption of this Plan and Trust by the
Employer. The Effective Date of this Plan is
--------------
-----------------------------------------.
(month/day/year)
[X] (b) An [X] amendment and restatement, or [ ] merger of the
following Plan(s) known as DAH Retirement Plan ,
------------------------------
---------------------------------------------------------
---------------------------------------------------------
(name of Plans and Trusts)
with the original effective date(s) of
January 1, 1993
---------------------------------------------------------
(month/day/year)
The effective date of this amendment and restatement is
January 1, 1996
---------------------------------------------------------
(month/day/year)
I. DEFINITIONS
A-1.38 Hours of Service: Hours of Service shall be determined on the
basis of the method selected below. The method selected shall be
applied to all Employees. If the Elapsed Time Method is selected
in A-1.74, Hours of Service as designated below shall be
applicable for eligibility purposes only. (Select one)
[X] (a) On the basis of actual hours for which an Employee is
paid or entitled to payment.
[ ] (b) On the basis of days worked. An Employee shall be
credited with ten (10) Hours of Service if, under
Section 1.38 of the Plan, such Employee would be
credited with at least one (1) Hour of Service during
such day.
[ ] (c) On the basis of weeks worked. An Employee shall be
credited with 45 Hours of Service if, under Section
1.38 of the Plan, such Employee would be credited with
at least one (1) Hour of Service during such week.
3
<PAGE>
[ ] (d) On the basis of semi-monthly payroll periods. An Employee
shall be credited with 95 Hours of Service if, under Section
1.38 of the Plan, such Employee would be credited with at
least one (1) Hour of Service during such semi-monthly
period.
[ ] (e) On the basis of months worked. An Employee shall be
credited with 190 Hours of Service if under Section 1.38 of
the Plan such Employee would be credited with at least one
(1) Hour of Service during such month.
A-1.54 Plan Year: (Select one and complete)
[X] (a) Shall be the consecutive 12 month period for which records
for this Plan shall be maintained beginning each
January 1 and ending each December 31.
[ ] (b) There shall be a short Plan Year beginning and
ending . (The Plan must retain its qualified
status during this period.)
All subsequent Plan Years shall begin each and
end each .
The previous Plan Year prior to this amendment began
and ended each .
Adjustments for eligibility and vesting shall be made as
required by Section 11.04 if the Plan Year is changed.
A-1.55 For purposes of establishing Present Value to compute the Top-Heavy
Ratio, any benefit (under a Defined Benefit Plan) shall be discounted
for mortality and interest based on the following: (If the Employer
maintains a Defined Benefit plan, this section must be completed.)
Interest Rate % Mortality Table
[X] N/A The Employer has no Defined Benefit plan.
A-1.64 Years of Service with predecessor employer:
Years of Service with , for whom
this Employer does not maintain a predecessor plan shall be considered
under the Plan for purposes of: (select as desired)
[ ] (a) Vesting
[ ] (b) Eligibility
[X] (c) None of the above
A-1.71 For purposes of computing the Top-Heavy Ratio, the Valuation Date
shall be 12-31 of each year.
4
<PAGE>
A-1.73 Vesting Years of Service: Years of Service credited for vesting shall
exclude the years checked below subject to Section 11.03: (select as
desired)
[ ] (a) Years of Service before the Employee's (cannot exceed
18) birthday. (If Regular Method is used, the Plan Year in
which the Employee attains age 18 shall not be excluded.)
[ ] (b) Years of Service prior to the original Effective Date of
this Plan or a predecessor plan.
[ ] (c) Years of Service prior to . (Date selected
may not be later than the original effective date of this
Plan or a predecessor plan.)
[ ] (d) Years of Service during a period for which the Employee
declined to contribute to a plan requiring Employee
Contributions. In the case of a plan using the elapsed time
method, the Service which shall be disregarded is the period
with respect to which the mandatory contribution is not
made.
[X] (e) No exclusions.
Note: In general, a predecessor plan is a plan which terminates
within the five (5) year period immediately preceding or
following the establishment of this Plan.
A-1.74 Years of Service shall be computed under the following method:
(select one)
[X] (a) Regular Method--based on Hours of Service credited under the
method selected in A-1.38.
[ ] (b) Elapsed Time Method--based on total time an Employee is
employed without regard to actual hours credited as
explained in Section 1.74 of this Plan.
II. ELIGIBILITY
A-2.01 (a) For purposes of plan coverage and benefits, employees of
affiliated employers required to be aggregated with the Employer
under Section 414(b), (c), (m) or (o) of the Code shall NOT be
treated as Employees of the Employer unless such affiliated
employers are identified as Participating Employers on page 2 of
this Adoption Agreement.
For purposes of plan coverage and benefits, the term "Employee"
[ ] (1) shall include
[X] (2) shall not include
[ ] (3) N/A (Employer has no "leased employees.")
"leased employees" who are required to be considered employees
of the Employer under Code Section 414(n) or (o).
5
<PAGE>
(b) The following classes of Employees of the Employer shall be
eligible to participate in the Plan:
[X] (1) All Employees
[ ] (2) Hourly paid Employees
[ ] (3) Salaried Employees
[ ] (4) All Employees except Employees included in a unit of
Employees covered by a collective bargaining
agreement between the Employer and Employee
representatives, if retirement benefits were the
subject of good faith bargaining and if two percent
or less of the Employees of the Employer who are
covered pursuant to that agreement are professionals
as defined in Section 1.410(b)-9(g) of the
Regulations. For this purpose, the term "employee
representatives" does not include any organization
more than half of whose members are Employees who are
owners, officers, or executives of the Employer.
[ ] (5) Other
-------------------------------------------
-------------------------------------------
The above classes of Employees
[ ] (6) shall
[X] (7) shall not
include Employees who are non-resident aliens
[within the meaning of Section 7701(b)(1)(B)] and who receive
no earned income (within the meaning of Section 911(d)(2)] from
the Employer which constitutes income from sources within the
United States (within the meaning of Section 861(a)(3)].
(c) Minimum age and service requirements: (select one)
[X] (1) An Employee shall become a Participant on the Entry
Date coincident with or next following Age 21 (cannot
exceed 21) and the completion of 3 MOS. (cannot
exceed 1 year) Eligibility Year of Service. MUST HAVE
AT LEAST 2 ENTRY DATES, I.E., CANNOT ELECT (e)(1)
BELOW.
If the Eligibility Year of Service includes a
fractional year, an Employee shall not be required to
complete any specified number of Hours of Service to
receive credit for such fractional year.
[X] (2) An Employee shall become a Participant on the Entry
Date coincident with or next following Age _____ (cannot
exceed 20 1/2) and the completion of _____ [cannot
exceed 1/2 year (6 months)] Eligibility Year of
Service. USE THIS PROVISION ONLY WHEN (e)(1) (ONE
ENTRY DATE) IS ELECTED BELOW.
6
<PAGE>
If the Eligibility Year of Service includes a
fractional year, an Employee shall not be required to
complete any specified number of Hours of Service to
receive credit for such fractional year.
(d) The preceding election in A-2.01(o) notwithstanding, Employees
who are actively employed on shall be deemed to
have satisfied the
[ ] (1) Age requirement as of the Effective Date.
[ ] (2) Service requirement as of the Effective Date.
[ ] (3) Age and service requirements as of the Effective Date.
[X] (4) N/A (Age and Service requirements in A-2.01(c) apply
to all Employees.)
(e) Entry Date: Shall mean: (select one)
[ ] (1) First day of Plan Year.
[X] (2) First day of Plan Year and the date 6 months after the
first day of the Plan Year.
[ ] (3) The first day of the Plan Year and the dates which
are 3, 6 and 9 months after the first day of the
Plan Year. (Not Recommended)
[ ] (4) First day of each month. (Not recommended.)
III. PROFIT SHARING CONTRIBUTIONS AND ALLOCATIONS
A-3.01 Contributions
(a) The Employer shall contribute [select (1), (2) or (3)]
[ ] (1) out of current or accumulated profits.
[X] (2) without regard to current or accumulated profits.
[ ] (3) N/A [A-3.01(a)(6) is elected]
The amount of such contribution shall be: [select (4),(5) or (6)]
[X] (4) As determined by the Board of Directors each year.
[ ] (5) Other
-----------------------------------------------
-----------------------------------------------
[ ] (6) The Employer will make no contribution under this
Section A-3.01(a). [Do not complete Sections
A-3.01(b), (d) and (e). Section A-3.01(c) must still
be completed.]
7
<PAGE>
(b) Allocation of contributions under A-3.01(a), above, shall be made
for all Participants who are credited with at least [select (1),
(2), or (3)]
[X] (1) 1,000 Hours of Service
[ ] (2) 500 Hours of Service
[ ] (3) one Hour of Service
during the Plan Year and [select (4) or (5)]
[ ] (4) regardless of employment on the last day of the Plan
Year.
[X] (5) who is employed with the Employer on the last day of
the Plan Year.
The preceding notwithstanding, for Plan Years beginning after
December 31, 1989, if the Plan would otherwise fail to satisfy
the requirements of Code Sections 401(a)(26) or 410(b) because
the Employer contributions have not been allocated to a
sufficient number of percentage of Participants for a Plan Year,
then the following rules shall apply:
(6) The group of Participants eligible to share in the
Employer's contribution shall be expanded to include
all Participants who are employed on the last day of
the Plan Year and who are credited with at least 500
Hours of Service.
(7) If after the application of paragraph (6) above, the
applicable test is still not satisfied, then the group
of Participants eligible to share in the Employer's
contribution shall be further expanded to include all
Participants who are credited with at least 500 Hours
of Service regardless of employment on the last day of
the Plan year.
Note: Employer includes all employers who are required to
be aggregated with the Employer under Code Sections
414(b), (c), (m) or (o)
(c) If a participant dies, retires, or becomes disabled during the
Plan Year and does not complete the hours requirement for a
contribution, an allocation
[X] (1) shall not be made on such Participant's behalf for
such Plan Year.
[ ] (2) shall be made on such Participant's behalf for such
Plan Year regardless of any last day requirement
elected under A-301(b)(5).
Note: The above election applies to Profit Sharing
Contributions under Section A-3.01(a), Matching
Contributions under A-4.02 and Qualified Non-elective
Contributions under A-4.03.
8
<PAGE>
(d) Employer contributions under this Section and forfeitures, if
applicable, shall be allocated to Participant's Accounts as
follows:
[X] (1) NON-INTEGRATED FORMULA
On a pro-rata basis to all Participants in the
proportion that a Participant's Compensation bears to
the total of all Participant's Compensation.
[ ] (2) INTEGRATED FORMULA (INTEGRATED WITH SOCIAL SECURITY)
Note: This Plan may not provide for permitted
disparity (integration with Social Security) if the
Employer maintains any other plan that provides for
permitted disparity and benefits any of the same
Participants.
STEP ONE: In any Plan Year the Plan is Top-Heavy
contributions and forfeitures (if applicable) shall be
allocated to all Participants in the ratio that each
Participant's Compensation bears to all Participant's
Compensation, but not in excess of 3% of such
compensation.
(If the plan is not top-heavy, proceed to step two.)
STEP TWO: Any contributions and forfeitures not
allocated in STEP ONE shall be allocated to each
Participant's Account in the ratio that the sum of each
Participant's total Compensation plus Compensation in
excess of the integration level bears to the sum of all
Participants total Compensation plus Compensation in
excess of the integration level, but not in excess of
the maximum disparity rate.
STEP THREE: Any remaining Employer contributions or
forfeitures shall be allocated to each Participant's
Account in the ratio that each Participant's total
Compensation for the Plan Year bears to all
Participants' total Compensation for that year.
For the purpose of this Section, Compensation shall
mean Compensation as defined in Section 1.13 of the
Plan.
The integration level shall be:
[ ] (i) The Taxable Wage Base [The maximum amount of
earnings which may be considered wages for a
year under Section 3121(a)(1) of the Code in
effect as of the first day of the Plan Year.]
[ ] (ii) $____________(Must be less than the Taxable
Wage Base.)
9
<PAGE>
The maximum profit sharing disparity rate is equal to
the lesser of:
(a) 5.7%, or
(b) The applicable percentage determined in accordance
with the table below:
If the integration level:
Is more But not more The applicable
than than percentage is
------- ------------ --------------
$0.00 $X* 5.7%
X* 80% of TWB*** 4.3%
80% of TWB*** Y** 5.4%
* X = the greater of $10,000 or 20% of the
TWB.
** Y = any amount more than 80% of the TWB but
less than 100% of the TWB.
***TWB = Taxable Wage Base at the beginning of the
Plan Year. The TWB for 1989 is $48,000.
The TWB for 1990 is $51,300.
(e) Is any Employee who is eligible to participate under this Plan
covered by any other plan [including plans of non-participating
employers required to be aggregated under Section 414(b), (c),
(m) or (o) of the Code] which is integrated with Social Security?
[X] (1) No
[ ] (2) Yes [may not elect A-3.01(d)(2)]
A-3.03 (a) Rollover contributions:
[ ] (1) shall not be permitted under this Plan.
[X] (2) shall be permitted under this Plan.
(b) Rollover contributions shall be accepted from:
[ ] (1) Participants only.
[X] (2) Participants and non-Participants (otherwise eligible
Employee who have not yet satisfied the age and/or service
requirements for participation).
A-3.07 ALLOCATION OF EARNINGS shall be based on the Account balance as of the
beginning of the allocation period plus 1/2 of the contribution
allocated at the end of the allocation period, less all withdrawals,
plus investment transfers in, and less investment transfers out,
unless otherwise specified.
This plan utilizes daily accounting.
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
10
<PAGE>
A-3.08 ALL FORFEITURES occurring at the end of Plan Year: (select one)
[X] (a) shall be used to reduce the Employer's contribution for the
current Plan Year. If the Employer does not make a
contribution for a Plan Year, any available forfeitures
shall be treated as Employer Contributions.
[ ] (b) shall be allocated in the same manner as Employer
contributions under Section 3.01 for the current Plan Year.
However, forfeitures shall not be allocated to Participants
who are not employed on the last day of the Plan Year unless
such allocation is required to satisfy the requirements of
Code Sections 401(a) (26) and/or 410(b). (Do not elect if no
Profit Sharing contribution is specified in A-3.01).
IV. CASH OR DEFERRED ARRANGEMENT (CODA)
A-4.01 ELECTIVE DEFERRALS
(a) An eligible Employee may elect to have his or her annual
Compensation reduced by
[X] (1) from 1 % to 20 %
---------- ------------
[ ] (2)
-------------------------------------------------------
(Specify)
Such election shall be in writing and in a form and manner
specified by the Plan Administrator.
(b) A participant may elect to commence, or to modify the amount of,
Elective Deferrals as of:
[ ] (1) the first day of each Plan Year.
[X] (2) the first day of each Plan Year and the date 6
months after the first day of each Plan Year.
[ ] (3) the first day of each Plan Year quarter.
The Plan Administrator may permit an additional election in the
event an Actual Deferral Percentage Test, performed during the
Plan Year, permits or requires an adjustment in the deferral
percentages.
A-4.02 MATCHING CONTRIBUTIONS
(a) The Employer [select (1) or (2)]
[X] (1) shall
[ ] (2) shall not
make Matching Contributions to the Plan on behalf of all
Participants who elect to have Elective Deferrals made under the
Plan and who are credited with at least [select (3), (4) or (5)]
[X] (3) 1,000 Hours of Service
11
<PAGE>
[ ] (4) 500 Hours of Service
[ ] (5) one Hour of Service
during the Plan Year and [select (6) or (7)]
[ ] (6) regardless of employment on the last day of the Plan
Year.
[X] (7) who is employed with the Employer on the last day of
the Plan Year.
The preceding notwithstanding, for Plan Years beginning after
December 31, 1989, if the Plan would otherwise fail to satisfy
the requirements of Code Section 401(a)(26) or 410(b) because the
Employer contributions have not been allocated to a sufficient
number or percentage of Participants for a Plan Year, then the
following rules shall apply:
(1) The group of Participants eligible to share in the
Employer's contribution shall be expanded to include
all Participants who are employed on the last day of
the Plan Year and who are credited with at least 500
Hours of Service.
(2) If after the application of paragraph (1) above, the
applicable test is still not satisfied, then the group
of Participants eligible to share in the Employer's
contribution shall be further expanded to include all
Participants who are credited with at least 500 Hours
of Service regardless of employment on the last day of
the Plan year.
Note: Employer includes all employers which are required to
be aggregated with the Employer under Code Sections
414(b), (c), (m) or (o).
(b) The employer shall contribute and allocate to each Participant's
Matching Contribution Account:
[ ] (1) an amount equal to ___________ percent of the
Participant's Elective Deferrals.
[X] (2) a discretionary matching contribution equal to a
percentage (to be determined each year by the Employer)
of each Participant's Elective Deferrals.
(c) The Employer shall not match Elective Deferrals in excess of
6.0 percent of a Participant's
-----------
[ ] (1) compensation per pay period.
[X] (2) annual compensation.
(d) The Matching Contribution allocated to any Participant's account
for the Plan Year shall not exceed
[ ] (1) $
--------------
[X] (2) N/A
12
<PAGE>
(e) Matching Contributions shall be vested in accordance with the
following schedule:
[ ] (1) 100% vested at all times.
[X] (2) The vesting schedule as elected in A-11.02 of the
Adoption Agreement.
(f) Matching contributions shall be made
[ ] (1) only from current or accumulated profits.
[X] (2) without regard to current or accumulated profits.
A-4.03 (a) Qualified Non-elective Contributions shall be allocated to the
accounts of Non-highly Compensated Participants who are credited
with at least [select (1), (2) or (3)]
[X] (1) 1,000 Hours of Service
[ ] (2) 500 Hours of Service
[ ] (3) one Hour of Service
during the Plan Year and [select (4) or (5)]
[ ] (4) regardless of employment on the last day of
the Plan Year.
[X] (5) who is employed with the Employer on the last day of
the Plan Year.
The preceding notwithstanding, for Plan Years beginning after
December 31, 1989, if the Plan would otherwise fail to satisfy
the requirements of Code Sections 401(a)(26) or 410(b) because
the Employer contributions have not been allocated to a
sufficient number or percentage of Participants for a Plan Year,
then the following rules shall apply:
(1) The group of Participants eligible to share in the
Employer's contribution shall be expanded to include
all Participants who are employed on the last day of
the Plan Year and who are credited with at least 500
Hours of Service.
(2) If after the application of paragraph (1) above, the
applicable test is still not satisfied, then the group
of Participants eligible to share in the Employer's
contribution shall be further expanded to include all
Participants who are credited with at least 500 Hours
of Service regardless of employment on the last day of
the Plan year.
Note: Employer includes all employers required to be
aggregated with the Employer under Code Sections
414(b), (c), (m) or (o).
13
<PAGE>
A-4.13 Pre-retirement distributions of a Participant's entire Account
balance, including Elective Deferrals and Qualified Non-elective
Contributions, upon attainment of age 59 1/2 (may not be less than 59
1/2)
[X] (a) shall
[ ] (b) shall not
be permitted provided the Participant is 100% vested, and the balance
in the Participant's Account has accumulated for at least two (2)
years or the Participant has completed five (5) years of participation
in the Plan.
A-4.14 Distributions on account of financial hardship
[X] (a) shall
[ ] (b) shall not
be permitted to the extent provided in Section 4.14, and subject to
applicable regulations.
Distributions on account of financial hardship shall be made only
from:
[X] (c) Elective Deferrals (and any earnings credited to a
Participant's Elective Deferral account as of the end of the
last Plan Year ending before July 1, 1989.) The amount
available for distribution shall include the amount credited
to the Participant's Qualified Matching Contribution and
Qualified Non-elective Contribution accounts as of the end
of the last Plan Year ending before July 1, 1989.
[X] (d) Account balances which are not subject to the withdrawal
restrictions of Section 4.13 provided the Participant is
100% vested, and the funds have accumulated for at least two
(2) years or the Participant has completed five (5) years of
participation in the Plan.
Note: Hardship withdrawal provisions for funds described in (d)
above, are protected benefits under Code Section 411(d)(6).
If the conditions described in Section 4.14 are more
restrictive than those in effect immediately prior to the
adoption of this Plan, the prior conditions shall continue
to apply to all such funds including those which have
accrued after the date this Plan is adopted, and the
Employer should attach to this Adoption Agreement a hardship
withdrawal policy statement fully describing the objective
and nondiscriminatory conditions applicable to such
withdrawals.
14
<PAGE>
V. LIMITATIONS ON ALLOCATIONS
If the Employer maintains or ever maintained another qualified plan in which any
Participant in this Plan is (or was) a Participant or could become a
Participant, the Employer must complete this Section. The Employer must also
complete this Section if it maintains a welfare benefit fund, as defined in
Section 419(e) of the Code, or an individual medical account, as defined in
Section 415(l)(2) of the Code, under which amounts are treated as Annual
Additions with respect to any Participant in this Plan.
A-5.11 If the Participant is covered under another qualified Defined
Contribution plan maintained by the Employer, other than a Master or
Prototype plan:
[ ] (a) The provisions of Sections 5.05 through 5.10 of Article V
shall apply as if the other plan were a Master or Prototype
plan.
[ ] (b) Provide the method under which the plans shall limit total
Annual Additions to the Maximum Permissible Amount, and
shall properly reduce any excess amounts, in a manner that
precludes Employer discretion.
----------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------
[X] (c) N/A The Employer maintains no other plan which provides an
Annual Addition as defined under Section 5.13(a).
A-5.12 If the participant is or has ever been a participant in a Defined
Benefit plan maintained by the Employer:
[ ] (a) The Annual Additions which may be credited to the
Participant's Account under this Plan shall not be limited
other than by the Maximum Permissible Amount as defined in
Section 5.13(k). If the sum of the Defined Benefit Fraction
and the Defined Contribution Fraction would otherwise exceed
1.0, such sum shall be reduced to not exceed 1.0 by
adjusting the Participant's Projected Annual Benefit under
the Defined Benefit plan.
[ ] (b) Provide language which shall satisfy the 1.0 limitation of
Section 415(e) of the Code. Such language must preclude
Employer discretion.
----------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------
[X] (c) N/A The Employer does not and has never maintained a Defined
Benefit plan.
15
<PAGE>
VI. INVESTMENT OF CONTRIBUTIONS
A-6.02 Life Insurance: The Trustee may, at the direction of the Participant
and subject to the requirements of Section 6.02, use a portion of each
contribution to purchase life insurance.
[ ] (a) Yes, subject to the guidelines outlined below, if any.
----------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------
[X] (b) No
A-6.03 Participants may direct the Trustee as to the investment of their
individual Account balances which are attributable to: (check all
which apply)
[ ] (a) Elective Deferrals
[ ] (b) Employer Matching Contributions
[ ] (c) Rollovers
[X] (d) All contributions regardless of source
[ ] (e) None of the above--Participants may not direct the
investment of their accounts
A-6.05 Participant Loans
[X} (a) shall be permitted in accordance with the Employer's written
loan policy.
[ ] (b) shall not be permitted.
VIII. BENEFITS
A-8.01 Normal Retirement Date: (select one)
[X] (a) The later of the first day of the month (select one)
[ ] nearest
[X] on or following
a Participant's 65th (cannot be less than 55) birthday
or the first day of the month on or following the 5th
(1st - 7th or N/A) anniversary in which (select one)
[ ] participation commenced
[X] the Employee first performed an Hour of Service
but in no event later than the first day of the month
on or following a Participant's N/A birthday.
16
<PAGE>
[ ] (b) The later of the first day of the Plan Year nearest a
Participant's _________________ (cannot be less than 55)
birthday, or the first day of the Plan Year nearest the
________________ (1st-7th or N/A) anniversary in which
(select one)
[ ] participation commenced
[ ] the Employee first performed an Hour of Service
but in no event later than the first day of the Plan Year
nearest a Participant's _____________________ birthday.
A-8.02 (a) Early Retirement Date: Shall mean: (select one)
[ ] (1) None--no Early Retirement Date.
[X] (2) First day of any [X] month [ ] Plan Year on or
following a Participant's 55th (cannot be less than 55)
birthday or after 57 (1-7 or N/A) [X] Vesting Years of
Service [ ] years of participation in the Plan,
whichever date is later.
(b) Early Retirement Benefit: Upon satisfaction of the age and
service requirements for Early Retirement, a Participant shall:
(select one)
[ ] (1) automatically become 100% vested in the Account.
[X] (2) be entitled to the vested Account based on the vesting
schedule designated in the Adoption Agreement.
A-8.04 Disability Retirement Benefit:
(a) In the event of total and permanent disability, a Participant
shall: (select one)
[ ] (1) automatically become 100% vested in the Account.
[ ] (2) be entitled to the vested Account based on the vesting
schedule designated in the Adoption Agreement.
(b) Disability shall mean a physical or mental impairment which is
expected to result in death or blindness or which can be expected
to last for a continuous period of not less than 12 months
resulting in: (select one)
[X] (1) an inability to engage in any substantial gainful
activity for which the Participant is reasonably suited
by reason of training, education and experience as
determined by the Plan Administrator. The Plan
Administrator may require that the Participant be
examined by physician(s) selected by the Plan
Administrator.
[ ] (2) the Participant being entitled to Social Security
Disability Benefits. In the event a Participant has
applied for Social Security Disability Benefits, the
disability benefits provided by this Plan shall
commence upon qualifying for Social Security Disability
Benefits.
17
<PAGE>
[ ] (3) an inability to perform the normal duties for the
Employer as determined by the Plan Administrator. The
Plan Administrator may require that the Participant be
examined by physician(s) selected by the Plan
Administrator.
A-8.09 Benefits shall be distributed:
[ ] (a) only in the form of a single lump-sum payment. (May not
elect if other forms were available immediately preceding
the adoption of this Plan.)
[X] (b) in accordance with the provisions of Section 8.08.
XI. TERMINATION OF SERVICE
A-11.02 The vesting schedule for benefits (derived from the Employer's
contributions pursuant to Article III) upon termination of employment
shall be determined according to the selection based on Vesting Years
of Service as credited in accordance with A-1.73: (select one)
[ ] (a) 100% vested at all times
[ ] (b) 100% vested after ______ (not to exceed 5) years of service.
[ ] (c) 20% vested after 2 years of service
40% vested after 3 years of service
60% vested after 4 years of service
80% vested after 5 years of service
100% vested after 6 years of service
[ ] (d) 20% vested after 3 years of service
40% vested after 4 years of service
60% vested after 5 years of service
80% vested after 6 years of service
100% vested after 7 years of service
[X] (e) Specify: (Must in all years be as favorable as the schedule
in (b) above, or as favorable as the schedule in (d) above.)
20 % vested after 1 years of service
---- ---
40 % vested after 2 years of service
---- ---
60 % vested after 3 years of service
---- ---
80 % vested after 4 years of service
---- ---
100 % vested after 5 years of service
---- ---
% vested after years of service
---- ---
% vested after years of service
---- ---
Note: If this is a restated plan and the vesting schedule has been
amended, enter the pre-amended schedule below:
[X] (f) 20 % vested after 3 years of service
---- ---
40 % vested after 4 years of service
---- ---
60 % vested after 5 years of service
---- ---
80 % vested after 6 years of service
---- ---
100 % vested after 7 years of service
---- ---
% vested after years of service
---- ---
% vested after years of service
---- ---
[ ] (g) Vesting schedule has not been amended.
18
<PAGE>
A-11.05 Distributions upon termination of Service shall be made as soon as
administratively feasible following:
[X] (a) Termination of employment.
[ ] (b) The end of the Plan Year following termination of
employment.
[ ] (c) The end of the Plan Year during which a One-Year Break in
Service occurs.
[ ] (d) Early or Normal Retirement Date, Death, or Disability.
Note: May not be more restrictive than the provision in effect
immediately preceding the adoption of this Plan.
A-11.09 Benefits which are no longer immediately distributable
[ ] (a) shall not be distributed without the consent of the
Participant and/or Beneficiary prior to the time required by
Article X.
[X] (b) shall, subject to the requirements of Article IX, be
distributed as soon as administratively feasible following
the date on which they cease to be immediately
distributable.
Note: An Account balance is immediately distributable if any
part of the Account balance could be distributed to the
Participant (or Surviving Spouse) before the Participant
attains (or would have attained if not deceased) the later
of Normal Retirement Age or age 62.
XV. TOP-HEAVY
Before completing this Section of the Adoption Agreement, the Employer should
carefully read Article XV of the Basic Plan Document paying particular attention
to Sections 15.03 thru 15.05.
A-15.02 Minimum Top-heavy Allocations: The purpose of this Section A-15.02 is
to coordinate Top-Heavy minimum contributions or benefits when two or
more plans of the Employer are involved. If the Employer maintains
only this plan, and has never maintained a Defined Benefit plan, the
Employer is required to complete only Section (d). If the Employer
maintains (or has maintained) a Defined Benefit plan, this Section
should be completed only with the advice of that plan's actuary. If
the Employer maintains two Defined Contribution plans, and has never
maintained a Defined Benefit plan, the Employer is required to
complete only Sections (c) or (d).
(a) If the Employer maintains a Defined Benefit plan, this Section or
--------- - ------- ------- ----
Section (d) below must be completed.
If a non-key Employee participates in both a Defined Benefit plan
and a Defined Contribution plan which are part of a Required
Aggregation Group or a Permissive Aggregation Group and the
Top-Heavy Ratio exceeds 60% (but does not exceed 90%), Top-Heavy
minimum benefits shall be provided as follows:
19
<PAGE>
[ ] (1) In the Defined Contribution Plan, with a minimum
allocation of:
[ ] (i) 5% of total compensation (Defined Benefit
and Defined Contribution Fractions
computed using 100% of the dollar
limitation)
[ ] (ii) 7.5% of total compensation (Defined Benefit
and Defined Contribution Fractions
computed using 125% of the dollar
limitation)
[ ] (2) In the Defined Benefit Plan, with a minimum annual
accrual of:
[ ] (i) 2% of the highest 5 consecutive year
average compensation (Defined Benefit
and Defined Contribution fractions
computed using 100% of the dollar
limitation)
[ ] (ii) 3% of the highest 5 consecutive year
average compensation (Defined Benefit
and Defined Contribution Fractions
computed using 125% of the dollar
limitation)
If the Top-Heavy Ratio exceeds 90%, the minimum benefit shall be
provided in:
[ ] (3) the Defined Contribution plan with a minimum allocation
of 5% of total compensation.
[ ] (4) the Defined Benefit plan with a minimum accrual of 2%
of the highest 5 consecutive year average compensation
Note: When the Top-Heavy Ratio exceeds 90%, the Defined
Benefit and Defined Contribution Fractions shall be
computed using 100% of the dollar limitation.
(b) If the Employer maintains (or has maintained) a Defined Benefit
--------- -- --- ---------- - ------- -------
plan, this Section or Section (d) below must be completed.
If the Employer maintains both a Defined Benefit plan and a
Defined Contribution plan which are part of a Required
Aggregation Group or a Permissive Aggregation Group and the
Top-Heavy Ratio exceeds 60% (but does not exceed 90%), a non-key
Employee who participates only in the Defined Contribution plan
shall receive a minimum allocation of:
[ ] (1) 3% of total compensation (Defined Benefit and Defined
Contribution Fractions computed using 100% of the
dollar limitation)
[ ] (2) 4% of total compensation (Defined Benefit and Defined
Contribution Fractions computed using 125% of the
dollar limitation)
If the Top-Heavy Ratio exceeds 90% each non-key Employee who
participates only in the Defined Contribution plan shall receive
20
<PAGE>
a minimum allocation of 3% of total compensation.
(c) If the Employer maintains two Defined Contribution plans, this
--------- --- ------- ------------
Section or Section (d) below must be completed.
If a non-key Employee participates in two Defined Contribution
plans maintained by the Employer, the Defined Contribution
minimum allocation requirement shall be met
[ ] (1) in this plan.
[ ] (2) in the other plan.
----------------------------------
(Name of Plan)
(d) Complete this Section only if (a), (b) and/or (c) have not been
-------- ---- ------- ---- -- --- --- ------ --- ---- --- ----
completed.
---------
[ ] (1) Specify how the plans shall provide Top-Heavy minimum
benefits for non-key Employees precluding Employer
discretion and avoiding inadvertent omissions.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
[X] (2) The Employer maintains only this Plan and has never
maintained a Defined Benefit Plan.
A-15.06 TOP HEAVY VESTING...If this Plan becomes a Top-Heavy Plan, the
following vesting schedule for such Plan Year and each succeeding Plan
Year, whether or not Top-Heavy, shall be effective and shall be
treated as a Plan amendment pursuant to this Agreement.
[ ] (a) 100% vested after (not to exceed 3) years of service.
-------
[ ] (b) 20% vested after 2 years of service
40% vested after 3 years of service
60% vested after 4 years of service
80% vested after 5 years of service
100% vested after 6 years of service
[ ] (c) Specify: (Must in all years be as favorable as the schedule
in (a) above, or as favorable as the schedule in (b) above.)
% vested after years of service
------ -----
% vested after years of service
------ -----
% vested after years of service
------ -----
% vested after years of service
------ -----
% vested after years of service
------ -----
% vested after years of service
------ -----
[X] (d) N/A, Vesting schedule in A-11.02 is equal to or more
favorable than (a) or (b) above.
However, this Section does not apply to the Account balances of any
Participant who does not have an Hour of Service after the Plan has
initially become Top-Heavy. Such Participant's Account balance
attributable to Employer contributions and forfeitures shall be
determined without regard to this section.
21
<PAGE>
The adopting Employer may not rely on an Opinion Letter issued by the National
Office of the Internal Revenue Service as evidence that the Plan is qualified
under Section 401 of the Internal Revenue Code. In order to obtain reliance
with respect to plan qualification, the Employer must apply to the appropriate
key district office for a Determination Letter.
This adoption agreement may not be used only in conjunction with basic plan
document #01.
Provided the adoption of this Plan is properly registered with the Prototype
Sponsor, the Prototype Sponsor shall inform the adopting Employer of any
amendments made to the Plan or of the discontinuance or abandonment of the
Plan. The adoption of the Plan is not properly registered unless the attached
registration form along with the applicable registration fee is returned to:
Lincoln National Life Insurance Company
1300 South Clinton Street
P.O. Box #2248
Ft. Wayne, IN 46801-2248
Inquiries by adopting Employers regarding the adoption of this Plan, the
intended meaning of any Plan provisions, or the effect of the Opinion Letter may
be directed to the Prototype Sponsor at the above address or phone
(219) 455-4940.
22
<PAGE>
Use of this Plan Document without proper registration and payment of the
applicable registration fee constitutes an unauthorized use.
The Employer represents that it has consulted with its attorney with respect to
its adoption of this Plan, and agrees to the provisions of the Plan and Trust.
IN WITNESS HEREOF, the Employer has caused this Agreement to be signed by its
duly authorized Officer and the Trustee(s) have accepted the appointment and
signed this Agreement.
De Crane Aircraft Holdings, Inc. oka
---------------------------------
(Legal Name of Employer) DAH, Inc.
BY:
/s/ Robert A. Rankin
---------------------------------
(Signature of Officer)
3-29-96 Robert A. Rankin, CFO
- ----------------------------------- ---------------------------------
(Date) (Typed or Printed Name
and Title of Officer)
Accepted By:
- ----------------------------------- ---------------------------------
(Date) (Signature of Trustee) Robert A. Rankin
- ----------------------------------- ---------------------------------
(Date) (Signature of Trustee)
- ----------------------------------- ---------------------------------
(Date) (Signature of Trustee)
Participating Employer Authorized Signature Date
- ---------------------- -------------------- ----
Tri-Star Electronics, Int'l, Inc. /s/ Robert A. Rankin 3/29/96
- ------------------------------- ------------------------ ---------------
Cory Components /s/ Robert A. Rankin 3/29/96
- ------------------------------- ------------------------ ---------------
Hollingsead, Int'l. /s/ Robert A. Rankin 3/29/96
- ------------------------------- ------------------------ ---------------
- ------------------------------- ------------------------ ---------------
Failure to properly complete this Adoption Agreement may result in
disqualification of the Plan.
23
<PAGE>
REGISTRATION
OF
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NON-STANDARDIZED
401(k) SALARY REDUCTION PLAN AND TRUST PROTOTYPE PLAN
PLAN #007 IRS SERIAL #D359971a
Adopting Employer: De Crane Aircraft Holdings, Inc. oka DAH, Inc.
------------------------------------------------------------
Address: 2201 Rosecrans Avenue
------------------------------------------------------------
El Sequndo, CA 90245
------------------------------------------------------------
------------------------------------------------------------
Telephone: (310) 536-0444 FAX (310) 536-9322
---------------------
List all investment contract and plan numbers assigned by Lincoln, if any:
GSA #52212 PL-45374
- --------------------------------------------------------------------------------
The Adopting Employer agrees to provide Lincoln with any changes to its current
mailing address and to give Lincoln written notification of any plan amendment
(as outlined in Section 12.02 of the Defined Contribution Prototype Plan Basic
Plan #01), restatement or termination.
In consideration of the above, and of the registration fee of $150, Lincoln
agrees to:
*provide the Adopting Employer with a copy of the current Defined
Contribution Prototype Plan Basic Plan #01 and Adoption Agreement; and
*advise the Adopting Employer of any amendments made to the Prototype
Plan; and
*inform the Adopting Employer of any changes in the Prototype Plan's
qualified status; and
*inform the Adopting Employer of any discontinuance or abandonment of
the Prototype Plan.
This registration does not effect the rights and obligations of Lincoln or the
Adopting Employer under any other arrangement, including (but not limited to)
Lincoln's right to charge an additional fee for providing an updated Prototype
Plan and/or Adoption Agreement.
Continued reliance by the Adopting Employer upon the Prototype Plan's favorable
Opinion Letter from the IRS is dependant upon the Adopting Employer adopting the
current version of the Prototype Plan.
Please sign and return this registration form, together with the registration
fee, to:
Lincoln National Life Insurance Company
1300 South Clinton Street
P.O. Box 2248
Fort Wayne, IN 46801-2248
Attention: Kathy Spillson
/s/ Robert A. Rankin CFO 3/29/96
- --------------------------------------------------------------------------------
(Signature of Adopting Employer) (Title) (Date)
Robert A. Rankin CFO
24
<PAGE>
LOAN POLICY
Plan # PS-45374 Plan Name DAH Retirement Plan
------------ --------------------------------------------------
1) Name of fiduciary responsible for the loan program
------------------------
(Specific person or position responsible for overseeing program)
2) Loan application procedures:
(*) Participation must fill out appropriate loan application (Lincoln
National form #223598) including required spousal consent.
(*) Participant must sign promissory note (SAMPLE attached).
(*) Trustee or fiduciary must sign application, assign reasonable rate and
keep promissory note on file.
(*) Application must be submitted to Lincoln National for processing.
Loans will be funded first from the source of money containing the
largest dollar balance in the participant's account.
3) Basis for approval or denial of loans:
(*) Loans will be approved if all policy specifications are met and
requested loan amount is available.
(*) Loans will be denied if any policy specifications are not met. It
is the Trustee's responsibility to notify the participant if a loan
is denied.
4) Limitations on types and amounts of loans:
a. Loans will be granted for the following reasons:
Financial Hardship
-----
Purchase of a Primary Residence
-----
Other (please specify):
----- -------------------------------------
------------------------------------------------------------
b. Loan amounts will be limited as follows:
(*) 1,000 minimum loan amount.
50% Maximum loan amount is 50% of vested account balance unless
--- otherwise specified below. Please note: if over 50%, it is
the responsibility of the fiduciary named in #1 above to
obtain collateral, process foreclosures (as necessary), and
make the participant aware of possible immediate taxation
penalties.
-------------------------------------------------
------------------------------------------------------------
c. Other loan provisions:
(*) Participant may have one loan outstanding at any time.
Exception: a second loan may be granted provided one of the
loans is a home mortgage.
(*) A period of one month from the date the original loan is
repaid in full is required before applying for a subsequent
loan.
(*) Loans may not be renegotiated (e.g. loan amount, interest
rate or repayment period).
(*) Length of loan may not exceed 5 years (except for purchase
of primary residence).
Page 5
<PAGE>
(*) Loans for active participants must be repaid through payroll
deduction at least monthly.
(*) Loans for participants on leave of absence must be repaid by
personal check at least monthly.
(*) Loans for terminated participants or beneficiaries with
deferred vested balances must be paid by personal check at
least monthly.
Other (i.e. administrative fees, higher rates, credit
--- reports, etc.):
---------------------------------------------
5) Procedure for determining a reasonable rate of interest:
(*) Rate must be commensurate with interest rates currently charges at
commercial institutions for similar loans at that time.
--- Rate of interest charged will take into effect "appropriate regional
factors" and reflect rates of local or regional commercial
institutions (i.e. banks, credit unions, savings & loan associations,
etc.).
--- Other (list any specific formulas for determining reasonable rate):
----------------------------------------------------------------------
----------------------------------------------------------------------
6) Types of collateral acceptable for a loan:
(*) Up to 50% of the participant's vested account balance.
Other (please specify type of collateral acceptable and required
---
paperwork, i.e. home mortgages, certificates of deposit, etc.).
Fiduciaries are responsible for obtaining and holding all collateral
other than vested account balances.
-----------------------------------
----------------------------------------------------------------------
7) Events constituting default of a loan and procedures which will be taken to
preserve plan assets in the event of default:
(*) For loans collateralized by vested account balances: if three (3)
months transpire and a loan payment remains due and unpaid, the loan
is in default and a taxable event occurs. The outstanding loan
balance will be reported as income on Form 1099R to the participant
and the IRS. No interest will be accrued following the default. The
defaulted loan remains an obligation of the participant and still
needs to be repaid.
(*) If a participant has a defaulted loan, another loan will not be
granted.
For loans collateralized by other means of collateral: if three (3)
---
months transpire and a loan payment remains due and unpaid, the loan
is in default and the trustee will (please specify steps to be taken):
----------------------------------------------------------------------
----------------------------------------------------------------------
Other (please specify):
--- -----------------------------------------------
----------------------------------------------------------------------
Page 6
<PAGE>
Please note, if you are using the Defined Contribution Prototype Plan Document
sponsored by the Lincoln National Life Insurance Company, a 5% or more owner-
employee of an S corporation, a sole proprietor, a more than 10% owner of a
partnership, and a 10% or more stockholder owner in a corporation, unless the
stockholder is also a plan participant, (and their spouses and certain other
relatives) are ineligible to receive loans from this qualified plan.
The above policy is designed to meet DOL requirements as specified under Section
2550.408b-1, as modified by DOL Advisory Opinion 89-30A, regarding written loan
policies. Any changes in this policy must be submitted in writing prior to
being considered for the approval of a loan.
Effective Date: (first day of the current Plan Year
-------------------------
unless otherwise specified)
Date 3/29/96 Trustee(s) signature(s) /s/ Robert A. Rankin
-------------- -----------------------------------
-----------------------------------
Page 7
<PAGE>
AGREEMENT #1 AMENDING
DAH Retirement Plan
401(k) Salary Reduction Plan and Trust
THIS AGREEMENT, made and entered into this 25th day of September, 1996, by and
---- ----------
between DeCrane Aircraft Holdings, Inc. oka DAH, Inc. organized under the laws
of California with principal offices at El Segundo, California (hereinafter
called the "Employer" or the "Company") and Robert A. Rankin (hereinafter
referred to as the Trustee);
W I T N E S S E T H:
- - - - - - - - - -
That at a meeting of the Board of Directors of the Company held on the 25th
day of September, 1996, certain amendments to the 401(k) Salary Reduction
Prototype Plan were authorized and directed;
Now, therefore, it is agreed by and between the parties hereto that the
aforementioned 401(k) Salary Reduction Plan and Trust Agreement be and it is
hereby amended effective September 19, 1996 as follows:
Section A-1.64 shall be amended to read as follows:
"Years of Service with a predecessor employer: Years of Service with
any Company acquired by DeCrane Aircraft Holdings, Inc. through
acquisition, for whom this Employer does not maintain a predecessor
plan shall be considered under the Plan for purposes of vesting and
eligibility."
Section A-2.01(e) shall be amended to read as follows:
"Entry Date: Shall mean: The first day of the Plan Year and the dates
which are 3, 6 and 9 months after the Plan Year."
IN WITNESS WHEREOF, the employer has caused this agreement to be signed by its
duly authorized officer and the Trustees have also signed this amendment.
DeCrane Aircraft Holdings, Inc. oka DAH, Inc.
---------------------------------------------
Name of Employer
BY: /s/ Robert Rankin
--------------------------------------
Signature of Officer
9-25-96
- -------- --------------------------------------
Date Typed or Printed Name and
Title of Officer
Accepted By:
9-25-96 /s/ Robert Rankin
- ------- ----------------------------------------
Date Signature of Trustee
Participating Employer Authorized Signature Date
- ----------------------- --------------------- -----
Tri-Star Electronics
- --------------------
International, Inc. /s/ Robert Rankin 9-25-96
- -------------------- --------------------- -------
Cory Components /s/ Robert Rankin 9-25-96
- -------------------- --------------------- --------
Hollingsead International /s/ Robert Rankin 9-25-96
- -------------------------- ----------------------- --------
<PAGE>
EXHIBIT 10.34
AGREEMENT
This Agreement (the "Agreement") is dated as of January 10, 1997, is made
by and among DeCrane Aircraft Holdings, Inc., an Ohio corporation (the
"Company"), and the several parties named on the signature page to this
Agreement (the "Shareholders").
PRELIMINARY STATEMENTS
A. The Shareholders and the Company are parties to (i) that certain
Fourth Amended and Restated Shareholders Agreement (the "Shareholders
Agreement") and (ii) that certain Fourth Amended and Restated Registration
Rights Agreement (the "Registration Rights Agreement"), each dated as of
September 18, 1996.
B. The shareholders are concurrently herewith approving a merger of the
Company with and into DAHX, Inc. (the name of which will become DeCrane
Aircraft Holdings, Inc. upon the effectiveness of the merger), a Delaware
Corporation ("Newco").
C. The Shareholders and the Company are entering into this Agreement
for the purposes of (i) continuing the provisions of the Shareholders
Agreement and the Registration Rights Agreement with respect to securities of
Newco to be received by the Shareholders and (ii) to provide for the
modifications of the rights of the Shareholders pursuant to the Shareholders
Agreement and the Registration Rights Agreement if on or before May 5, 1997
the following occur: (a) the effectiveness of a registration statement on
form S-1 for common stock by Newco (the "IPO"), (b) Newco receiving funds in
such IPO an amount not less than $25 million as the net proceeds of the
offering, and (c) in which the Company has an equity value of not less than
$55 million. The events referred to in clauses (a) and (b) of the foregoing
sentence are referred to herein as "Funding of the IPO."
D. To enable the Company to complete the IPO, the Shareholders will
agree to waive the rights to dividends if the IPO is effective by May 5, 1997.
Based on the foregoing facts and circumstances, the parties hereby agree
as follows:
1. INCORPORATION OF THE TERMS OF THE REGISTRATION RIGHTS AGREEMENT.
Upon the effectiveness of the merger of the Company with and into
Newco, each of the Shareholders and Newco agree to be bound by the provisions
of the Registration Rights Agreement as if "Newco" were the "Company" named
therein.
2. INCORPORATION OF THE TERMS OF THE SHAREHOLDERS AGREEMENT.
Upon the effectiveness of the merger of the Company with and into
Newco, each of the Shareholders and Newco agree to be bound by the provisions
of the Shareholders Agreement as if "Newco" were the "Company" named therein.
1
<PAGE>
3. AMENDMENTS TO SHAREHOLDERS AGREEMENT
CONDITIONED UPON FUNDING OF THE IPO.
Upon the Funding of the IPO and repayment in full of all
indebtedness of the Company due or owing to Electra and Nassau, including
without limitation interest thereon, and payment of all expenses owning in
connection therewith (collectively, the "Debt Repayment"), the following
provision of the Shareholders Agreement shall be amended as set forth in this
Section 3:
3.1 Section 8(a) shall be deleted and the following provision
substituted in its place: "With respect to each Brantley, DSV and Nassau, so
long as such owns 5% of the Common Equivalent Shares of the Company, the then
existing Board of Directors of the Company shall nominate a designee named by
each such entity as a company nominee to the Board of Directors and use its
reasonable efforts to solicit proxies voting for the Company's nominees."
3.2 Section 8(c) shall be of no further force or effect.
4. AMENDMENTS TO REGISTRATION RIGHTS AGREEMENT.
Upon the funding of the IPO and the Debt Repayment, the parties
agree to the terms of the Fifth Amended and Restated Registration Rights
Agreement, a copy of which is attached hereto as Exhibit A (for the purposes
of the fax transmission of this Agreement, only pages 1, 3, 5, 8 and the
Rider to the Fifth Amended and Restated Registration Rights Agreement are
attached). Except for the handwritten changes on pages 1, 3, 6, 8 and the
Rider to the Fifth Amended and Restated Registration Rights Agreement, all
other pages are unchanged from the Fourth Amended and Restated Registration
Rights Agreement.
5. WAIVER OF RIGHT OF DIVIDENDS.
Notwithstanding the provisions of the Articles of Incorporation, so
long as the registration statement for the IPO becomes effective on or before
May 6, 1997, each Shareholder does hereby waive the right to any dividends
which accrue on or before May 5, 1997 on any class of any security owned by
such Shareholder.
6. CONVERSION OF PREFERRED STOCK AND
EXERCISE OF WARRANTS TO PURCHASE COMMON STOCK.
Concurrent with the Funding of the IPO and the Debt Repayment,
except for the E, F and G Warrants issued to Nassau which Warrants will not
be exercised at this time, each of the Shareholders shall have converted its
shares of Preferred Stock into Common Stock and, except for ING and Provident
with respect to the "$4 warrants". In any manner specified in any such
warrant, shall have exercised all of its warrants to purchase common stock.
2
<PAGE>
7. COUNTERPARTS.
This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original, but all of which together shall
constitute one and the same instrument, and for all purposes; facsimile
signatures shall be deemed to be originals. This Agreement shall be effective
only when executed by all parties.
DeCRANE AIRCRAFT HOLDINGS, INC.
a Ohio corporation
By: /s/ R. Jack DeCrane
R. Jack DeCrane, Chief Executive Officer
DAHX, INC.,
a Delaware corporation
By: /s/ R. Jack DeCrane
R. Jack DeCrane, Chief Executive Officer
BANC ONE CAPITAL PARTNERS, L.P.
By: /s/ illegible
----------------------------------
BOCP Corporation, General Partner,
By Authorized Signatory
BRANTLEY VENTURE PARTNERS II, L.P.
By: /s/ Paul H. Cascio
----------------------------------
Paul H. Cascio, General Partner
/s/ R. Jack DeCrane
--------------------------------------
R. JACK DeCRANE, In his Individual
capacity
DSV PARTNERS, IV
By: DSV Management, Ltd.
By: /s/ James R. Bergman
---------------------------
James R. Bergman, General Partner
3
<PAGE>
INTERNATIONALE NEDERLANDEN (U.S.)
CAPITAL CORPORATION
By: /s/ illegible
--------------------------------
Its: Senior Associate
--------------------------------
THE PROVIDENT BANK
By: /s/ illegible
--------------------------------
Its: Vice President
--------------------------------
NASSAU CAPITAL PARTNERS L.P.
By: NASSAU CAPITAL L.L.C.,
General Partner
By: /s/ illegible
-----------------------------
Its: Member
-----------------------------
NAS PARTNERS LLC.
By: /s/ illegible
--------------------------------
Its: Member
--------------------------------
ELECTRA INVESTMENT TRUST, P.L.C.
By: /s/ illegible
--------------------------------
Its:
--------------------------------
ELECTRA ASSOCIATES, INC.
By: /s/ illegible
--------------------------------
Its:
--------------------------------
4
<PAGE>
DECRANE AIRCRAFT HOLDINGS, INC.
CALCULATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Year Ended December 31, 1996 (1)
------------------------------------
Pro Forma Pro Forma
for as
Recapitalization Adjusted
<S> <C> <C>
Shares outstanding at beginning of the year
Common shares 85,593 85,593
Common equivalent shares
Series A, B and C convertible preferred shares 1,140,718 1,140,718
Redeemable warrants (2) 356,635 356,635
Other warrants not subject to mandatory redemption (2) 16,585 16,585
Stock options, other than compensatory options (3) 200,549
Impact of cheap stock issued during 1996
Series C, D and E preferred stock 801,085 801,085
Redeemable warrants 151,073 151,073
Compensatory stock options 107,090 107,090
Common stock equivalents issued during 1996
Common stock warrants (4)
Stock options, other than compensatory options (3) 3,205
Sale of common shares in the Offering 2,500,000
------------------------------------
Pro forma weighted average number of shares outstanding 2,658,779 5,362,533
------------------------------------
------------------------------------
Net income (loss) (5) $ (817,000) $3,519,000
Pro forma net loss per common share $ (0.31) $ 0.66
(1) All share data reflects the effect of the 3.53 for 1 reverse stock split.
(2) Represents warrants exercised and converted to common stock pursuant to the
Recapitalization, net of shares assumed to be repurchased under the treasury stock method.
(3) Not included in the pro forma for recapitalization computation as they are anti-dilutive.
(4) Not included in the computations as they are anti-dilutive.
(5) The weighted average number of shares assumes that the 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.
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our reports dated (i) March 7, 1997,
relating to the consolidated financial statements of DeCrane Aircraft Holdings,
Inc. ("DeCrane") and (ii) August 2, 1996, relating to the financial statements
of Aerospace Display Systems, which appear in such Prospectus. We also consent
to the application of the DeCrane report to the Financial Statement Schedule for
the three years ended December 31, 1996 listed under Item 16(b) of this
Registration Statement when such schedule is read in conjunction with the
consolidated financial statements referred to in our report. The audits referred
to in such report also included this schedule. We also consent to the reference
to us under the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Cleveland, Ohio
March 12, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 320
<SECURITIES> 0
<RECEIVABLES> 13,564
<ALLOWANCES> (379)
<INVENTORY> 19,573
<CURRENT-ASSETS> 33,890
<PP&E> 23,719
<DEPRECIATION> (11,532)
<TOTAL-ASSETS> 69,266
<CURRENT-LIABILITIES> 23,404
<BONDS> 0
6,879
13,850
<COMMON> 216
<OTHER-SE> (12,830)
<TOTAL-LIABILITY-AND-EQUITY> 69,266
<SALES> 65,099
<TOTAL-REVENUES> 65,099
<CGS> 49,392
<TOTAL-COSTS> 49,392
<OTHER-EXPENSES> 11,456
<LOSS-PROVISION> 68
<INTEREST-EXPENSE> 4,248
<INCOME-PRETAX> (105)
<INCOME-TAX> 712
<INCOME-CONTINUING> (817)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (817)
<EPS-PRIMARY> 0
<EPS-DILUTED> (.31)
<FN>
<F1> PRO FORMA FOR THE RECAPITALIZATION
</FN>
</TABLE>
